Description
This is a course about money, the basic principles of investment, and the impact of technological innovation on money and the investment industry. The course is divided into two main parts: • First, it will seek to clarify the nature of money and the role played by both central banks and commercial banks in the money creation process. It will pay special attention to understanding this process from a balance-sheet perspective. It should thus shed light on recent controversies in monetary policy, such as quantitative easing, the expansion in central bank balance sheets, and exceptionally low interest rates. It will also seek to provide students with the knowledge to better assess the connections between monetary policy and the real economy, inflation and deflation, and the value of financial assets. • Second, the course will provide an overview of investment in the main financial alternatives to money, namely stocks and bonds, and explore the main principles of portfolio construction. This part of the course will have a practical focus, with students required to simulate investment portfolios online and present investment strategies to the class. It will review the main elements and conclusions of modern portfolio theory – the definition and measurement of risk, the risk-return trade-off and the historical record, the efficient frontier and optimal portfolio, the efficient market hypothesis and a comparison of passive and active investing. The main aim will be to familiarise students with both the language and fundamental principles of investment. • The course will also provide an overview of how innovation is affecting money, banking and investment.
Type Subject
Optativa
Semester
Second
Credits
5.00
Previous Knowledge

Principals of Finance and Statistics

Objectives

On the completion of this course students should have gained the following competences:
• An understanding of the nature of modern money, credit and debt.
• An understanding of how monetary policy works and the role of both the central bank and commercial banks in money creation and destruction.
• An overall picture and understanding of the investment industry
• An understanding of the nature of the different asset choices facing investors
• An understanding of the main theories of portfolio construction and the empirical record of different investment strategies
• An understanding of the main methods of valuation and the ability to participate in debates about market pricing and trends.
• Hands-on experience of constructing investment portfolios and designing and executing investment strategies (using online simulation).
• An ability to make sound investment decisions in the real world.
• The basic knowledge to assess how technological innovation might affect money, banking and investment in the future

Contents

Introduction.
• Portfolio setup
• How, where and in what to invest
• Real versus financial assets
• Exchange -traded funds (ETFs)
• Financial markets and trading costs
• The historical record of returns and volatility
• International diversification and exchange rates

Money: measurement, creation and destruction
• Defining money
• Measuring the quantity of money
• Growth in the quantity of money
• The role of commercial banks in money creation and destruction
• The central bank’s balance sheet
• Commercial banks’ balance sheets (aggregated)

Monetary Policy: interest rates and quantitative easing
• The role of reserves at the central bank
• Interest rate policy
• Quantitative easing and tightening

Monetary policy and the banking system, stability and regulation
• Exogenous versus endogenous money
• The fractional reserve system and money multiplier
• Banking liquidity, solvency and capital (equity)

Money and economic growth, inflation and deflation, interest rates
• Quantity theory
• Velocity of money
• Liquidity traps
• The interest rate: loanable funds versus Keynesian view

Financial Innovation and money

• Cryptocurrencies
• Central bank digital money and payment system
• The future of cash

Financial markets

• Linking global liquidity, yield curves and equity prices

Valuation review
• Stocks, bonds and bills
• Derivatives
• Financial markets

Risk and Return
• Probability distributions
• The standard deviation as a measure of risk
• The historical record of returns and volatility
• International diversification and exchange rates

Modern portfolio theory
• Risky and risk-free portfolios
• The capital allocation line
• The efficient frontier and the optimal risky portfolio
• Idiosyncratic versus systematic risk
• Passive versus active investment
• Beta and CAPM
• The efficient market hypothesis and stock market prediction

Portfolio work and presentations

Methodology

The course will combine lectures with discussion- and projected-based learning. I will distribute lecture notes and readings each week. There will be no required textbook.
The readings will include articles from financial newspapers, magazines or online media, including relevant blogs of interest. Students should be ready to discuss in class the issues raised in these articles.
We shall also create working groups to design an investment strategy and build virtual investment portfolios, thereby providing students with an opportunity to get some hands-on experience with investment decision-making, implementation and outcomes.

Evaluation

Attendance & participation 10%
Mid-term exam 30%
Course Project 1 – Investment simulation 15%
Course Project 2 – Investment strategy 15%
Final exam 30%

Evaluation Criteria
Basic Bibliography

Reference Textbooks

• Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, Pearson.
• Zvi Bodie, Alex Kane and Alan J. Marcus, Essentials of Investments, McGraw-Hill.

Further selected readings, mainly from financial newspapers, magazines and blogs will be distributed during the course.

Additional Material