Investment management FN3023

This course is designed to introduce students to the investment environment in the role of a private or professional investor.

Prerequisites / Exemptions

If taken as part of a BSc degree courses which must be passed before this course can be attempted:

  • FN1024 Principles of banking and finance.


Students can only take FN3023 Investment management at the same time as or after one of FN3092 Corporate finance, FN2190 Asset pricing and financial markets or AC3059 Financial management, not before.

Topics covered

Financial markets and instruments

  • money and bond markets
  • equity markets
  • derivative markets
  • managed funds
  • margin trading
  • regulation of markets.

History of financial markets

  • historical and recent financial innovation
  • historical equity and bond market returns
  • equity premium puzzle.

Fund management and investment

  • historical mutual fund performance
  • market efficiency and behavioural finance
  • return based trading strategies
  • hedge funds.

Market microstructure

  • types of markets
  • bid-ask bounce – the Roll model
  • Glosten-Milgrom model
  • Kyle model
  • discrete version of the Kyle model
  • limit order markets
  • statistical arbitrage (algorithmic trading, program trading)
  • why market microstructure matters.


  • expected portfolio return and variance
  • definition of risk premium
  • asset allocation – two assets: mean-variance preferences
  • optimal asset allocation with a risk free asset
  • CARA utility and normal returns
  • portfolio frontier
  • expected return relationships
  • estimation issues
  • diversification – the single index model
  • Treynor-Black model
  • factor models
  • statistics of asset allocation.

Portfolio immunisation

  • bond math
  • term structure
  • duration
  • numerical examples
  • immunisation of bond portfolios
  • convexity and immunisation
  • immunisation of equity portfolios.

Risk and performance management

  • types of risk
  • risk decomposition
  • hedge ratios
  • Value-at-Risk
  • Sharpe ratio
  • Treynor’s ratio
  • more portfolio performance measures
  • Sharpe vs Treynor
  • portfolios with changing risk
  • market timing
  • non-linear payoffs
  • extreme risk.

Risk management

  • risk management for investors
  • risk management for corporations
  • risk management for banks
  • delta hedging
  • put option protection
  • put protection vs VaR
  • portfolio insurance with calls
  • hedging credit risk
  • hedging volatility
  • risk capital allocation.

Learning outcomes

If you complete the course successfully, you should be able to:

  • List given types of financial instruments and explain how they work in detail
  • Contrast key characteristics of given financial instruments
  • Briefly recall important historical trends in the innovation of markets, trading and financial instruments
  • Name key facts related to the historical return and risk of bond and equity markets
  • Relate key facts of the managed fund industry
  • Define market microstructure and evaluate its importance to investors
  • Explain the fundamental drivers of diversification as an investment strategy for investors
  • Aptly define immunisation strategies and highlight their main applications in detail
  • Discuss measures of portfolio risk-adjusted performance in detail and critically analyse the key challenges in employing them
  • Competently identify established risk management techniques used.


Unseen written exam (3 hrs).

Essential reading

  • Bodie, Z., A. Kane and A.J. Marcus Investments. Boston, Mass.; London: McGraw-Hill Irwin
  • Fabozzi, F. J. and H. M. Markowitz (eds) The Theory and Practice of Investment Management. Hoboken, NJ: John Wiley & Sons.

Course information sheets

Download the course information sheets from the LSE website.