Critically evaluate the roles and origins of the global financial markets and the main theories as to how they work

Assignment Brief

Submission details

• The deadline for submission into registry is on the Hand in Date shown on the Feedback sheet

• Students are to submit via Moodle before the due date/time

• Students must submit before due date. Any assessments brought after will not be accepted

• THE UNIVERSITY`S REGULATIONS CONCERNING CHEATING, COLLUSION AND PLAGIARISM APPLY TO THIS EXAMINATION

Key Skills: Investment management; financial analysis.

Harvard Referencing: Complete reference list which MUST conform to the Harvard System of Referencing must be included at the end of your assignment and in text citations where appropriate.

Learning Outcomes covered (based on Module Specification):

On completion of the module the student should be able to:

• Critically evaluate the roles and origins of the global financial markets and the main theories as to how they work

• Analyse the financial needs and decision making processes

• Critically evaluate the role and functions of  funds managers

• Have an appreciation of the major issues in investment today

INVESTMENT MANAGEMENT: COURSE WORK

1. Discuss and analyse the assumptions and techniques of the technical analysis and fundamental analysis. (30)

2. Discuss the behavioural finance concept and how it creates market anomalies in the stock market. (25) 

3. Explain how you can exploit other people irrationality and biases to earn excess profits. (15)

4. Define and discuss the index funds and actively managed funds. (10)

5. Discuss and compare the historical performance of three major actively managed funds with index funds in the US for the past decade. (20)

Your essay must be approximately 3000 words in length (+/- 10%) and be well presented. You are free to use articles on the net, publications, reports and books as a source of information.

The essay should represent your own effort. Plagiarism is strictly forbidden. Students found guilty of plagiarism may face serious consequences. Sanctions may include, but are not limited to, failure on the assignment, course failure, or an exclusion from all further examinations of SIST.

Plagiarism includes, but not limited to:

• Presenting someone else’s work as your own
• Copying words or ideas without giving credit to the source
• Giving incorrect information about the source of a quotation

If in doubt, students should consult their personal tutor or another appropriate teacher

Marking Scheme

90  -  100 A quite exceptional and outstanding answer, providing insights which would not be available publicly, and would, with some editing, be publishable.  In addition to the features of the next section, this range is distinguished by superior organisation, economic use of language and totally comprehensive, given the conditions of the exercise.

80  -  89 An answer which demonstrates an excellent understanding of the question and of the complexity of the issues involved.  There is a sound basis of relevant factual knowledge and/or the theoretical issues involved.  Most of the important issues are dealt with in a detailed, specific and systematic way.  There is either some measure of original thinking in the answer or an accurate and comprehensive account is given in a way which demonstrates understanding, for example by structuring the material such that it could not have been based just on reproduction of lecture notes and programme material.  Evidence of creativity, critical approach, and wide reading beyond the core subject matter.

70  -  79 As above but a slightly less consistently excellent level.  Alternatively, this range of mark may be given for an answer which, while not having original insights, gives comprehensive and accurate coverage of the issues at a high level throughout the answer, without significant omissions or errors.

60  - 69 An answer which demonstrates a clear understanding of the question and grasp of the complexity of the issues involved.  There is a sound basis of relevant factual knowledge and/or of theoretical issues involved, with few significant errors.  The issues involved are dealt with in a systematic way.  Some of the issues may be limited in critical approach, but organised to display a comprehensive understanding and factual information essentially complete.

50  -  59 An answer which demonstrates an understanding of the major or basic issues in the question.  There is a basis of factual knowledge and/or of relevant theoretical issues.  Although some errors may be present, the overall framework of the answer is sensible and accurate.  Most of all the issues may be dealt with at the level of obviously available programme material given to the student.  The answer shows planning in its construction, with a clear train of thought or development of argument present. Average competent performance, well presented, demonstrating understanding of most of the essential issues.

40  -  49 An answer which demonstrates a limited understanding of the major or basic issues in the question.  There is some relevant factual knowledge and/or awareness of theoretical issues, but it is patchy.  A few significant errors may be present.  The answer is not well planned, with little development of argument, and often much irrelevant material is present.  Lacks clarity of expression.

The lower range (40-45) would include an answer where relevant factual knowledge and/or awareness of theoretical issues is poor and confused, but not absent.  Many significant errors may be present.  The answer is poorly planned, with little clear train of thought or development of argument, and much of the answer may be irrelevant.

38  -  39 An answer which fails to demonstrate any appreciable understanding of the major issues or basic issues of the question.  Relevant factual knowledge and/or awareness of theoretical issues, if present at all, is very poor and confused and very limited.  Many significant errors may be present.  Much or all of the answer may be irrelevant.  Poorly organised and very limited in scope.

30  -  37 Attempts an answer, but relevant factual knowledge and/or awareness of theoretical issues is very poor and confused, and very limited with many significant errors.

10  -  29 Not clear that an answer is properly attempted.  Only a few minor points made at all relevant to the answer and these may be superficial.  Most material is irrelevant or incorrect.

1  -  9  An answer that is so short or irrelevant that only a few marks are justified.  For example, one or two points may be made which show some peripheral awareness of certain possibly relevant issues.

Sample Answer

Investment Management Essay

Introduction

Investment management has become an essential part of modern financial systems, enabling individuals and institutions to allocate resources efficiently while balancing risk and return. Investors and fund managers rely on different methods to evaluate securities and markets, ranging from quantitative models to behavioural insights that account for human biases. This essay provides a critical analysis of the assumptions and techniques used in technical and fundamental analysis, explores the role of behavioural finance in creating market anomalies, and examines how irrationality can be exploited for profit. It further discusses index funds and actively managed funds before presenting a comparison of their performance over the past decade in the United States. By integrating theoretical approaches with real market evidence, the essay highlights the complexity of investment management and the evolving strategies that shape it.

Assumptions and Techniques of Technical and Fundamental Analysis

Technical and fundamental analysis represent two dominant schools of thought in evaluating financial securities. Technical analysis relies on the assumption that market prices reflect all relevant information and that price movements follow identifiable patterns that can be used to forecast future trends. Central to this approach is the idea that history repeats itself and that investors can make decisions based on charts, trading volumes, and momentum indicators. Tools such as moving averages, relative strength indexes, and candlestick patterns are widely used to detect support and resistance levels. However, critics argue that technical analysis suffers from data mining and self-fulfilling prophecies, where patterns appear significant because enough traders believe in them rather than because of underlying fundamentals (Malkiel, 2019).

In contrast, fundamental analysis focuses on the intrinsic value of securities by evaluating economic conditions, industry dynamics, and company-specific financial data. The assumption here is that markets may misprice assets in the short term but will converge towards true value in the long run. Analysts examine earnings, cash flows, balance sheets, and broader macroeconomic indicators such as interest rates and inflation. Valuation models like discounted cash flow (DCF) and price-to-earnings ratios provide structured approaches to determining whether an asset is undervalued or overvalued. While fundamental analysis is more rigorous in linking investment decisions to measurable business performance, it is limited by the unpredictability of future earnings and the subjective assumptions underlying valuation models (Damodaran, 2020).

Both approaches have strengths and weaknesses. Technical analysis can be valuable in highly liquid markets where investor psychology drives short-term price swings, whereas fundamental analysis is more useful for long-term investors seeking stable returns. In practice, many fund managers adopt a blended strategy, using technical indicators to time entry and exit points while relying on fundamentals to guide security selection.

Behavioural Finance and Market Anomalies

Traditional finance assumes that investors are rational actors who seek to maximise utility. However, behavioural finance challenges this by demonstrating how cognitive biases and emotional factors influence decisions, often leading to market anomalies. Biases such as overconfidence, herd behaviour, loss aversion, and anchoring can drive mispricing in financial markets (Shiller, 2017).

For example, overconfidence may lead investors to overestimate their ability to predict price movements, resulting in excessive trading and inflated asset prices. Herd behaviour, seen in bubbles such as the dot-com boom of the late 1990s, can push prices far beyond intrinsic values before eventually correcting. Loss aversion causes investors to hold on to losing stocks for too long, hoping to recover losses, which delays price adjustments and creates inefficiencies. Anchoring, where investors rely too heavily on initial information such as past prices, further distorts rational decision-making.

These behavioural patterns create predictable anomalies in stock markets, such as momentum effects where past winners continue to perform well in the short term, or value effects where undervalued stocks generate higher returns than growth stocks over the long run. Such anomalies challenge the efficient market hypothesis, which claims that all available information is already reflected in prices.

Exploiting Irrationality and Biases for Excess Profits

While behavioural biases introduce inefficiencies, they also create opportunities for informed investors to exploit. Traders who recognise patterns of irrationality can position themselves to benefit from corrections in mispriced assets. For example, contrarian investors deliberately buy undervalued stocks that are overlooked due to herd-driven pessimism, capturing gains when the market realigns with fundamentals. Similarly, momentum strategies exploit short-term overreactions by riding upward or downward price trends until they eventually reverse.

Another approach is arbitrage, where investors take advantage of discrepancies between related securities or markets. For instance, mispricing between an exchange-traded fund and its underlying assets may allow investors to profit from temporary divergences. Behavioural hedge funds specifically design strategies to capitalise on irrational investor behaviour, although they also carry higher risks due to the unpredictability of sentiment-driven markets (Thaler, 2016).

It is important to note, however, that exploiting irrationality requires resources, discipline, and careful risk management. Market inefficiencies may persist longer than expected, leading to potential losses before corrections occur. Thus, while opportunities exist, they are not guaranteed and must be approached with caution.

Index Funds and Actively Managed Funds

Index funds and actively managed funds represent two competing approaches to portfolio management. Index funds are designed to replicate the performance of a specific market index, such as the S&P 500, by holding a basket of securities that mirrors its composition. The philosophy behind index investing is rooted in the efficient market hypothesis, suggesting that consistently outperforming the market is difficult once costs are considered. Index funds therefore provide broad diversification, low fees, and transparency, making them particularly attractive for long-term investors (Bogle, 2017).

Actively managed funds, on the other hand, involve fund managers selecting securities with the aim of beating the market. This requires detailed research, market forecasting, and tactical allocation decisions. Advocates argue that skilled managers can identify undervalued opportunities, manage risk dynamically, and adapt strategies to changing market conditions. However, active funds usually charge higher fees and may underperform benchmarks due to costs and incorrect forecasts.

The debate between passive and active management has intensified over the past decade, with evidence showing that many active funds struggle to deliver superior returns net of fees. Nevertheless, some niches such as small-cap stocks or emerging markets may still offer opportunities where active management can add value.

Continued...