FINM7008 Applied Investments
The Complete Exam Bible · S2 2026FINM7008 Overview
- Semester 2, 2026
- Postgraduate course
- In person
- Three-hour final exam
- Redeemable Week 6 midterm
What the course is about
Applied Investments at the Australian National University is a postgraduate course in how investors measure return and risk, build portfolios and price risky assets.
- Assessed by Two Excel portfolio assignments, a redeemable midterm on Weeks 1 to 5, and a three-hour final exam on the whole course that carries half or more of the grade.
- Hardest step Moving from two risky assets to the tangency portfolio and then to the CAPM, where the relevant risk switches from standard deviation to beta.
- How to prepare Rebuild each formula from one worked example, practise the tutorial-style calculations by hand, and plan the A4 note sheet around the relations you would otherwise rederive.
How FINM7008 is assessed
| Component | Weight | Format |
|---|---|---|
| Quiz | 0% | Self-assessment only and does not count towards the final grade; solutions are shown on completion |
| Assignment 1 | 10% | Excel: find the optimal portfolio of five assets by Sharpe ratio; individually or in pairs; due 29 August 2026 |
| Assignment 2 | 15% | Excel: six stocks and a market index fund, using the Single-Index and Markowitz models; individually or in pairs; due 30 September 2026 |
| Midterm Exam | 25% | Weeks 1 to 5; Week 6 during lecture time; on campus; optional and redeemable |
| Final Exam | 50% | Weeks 1 to 12; 3 hours in the final exam block; on campus; counts 75% when the midterm does not |
The five values in the Semester 2, 2026 class summary total 100%. The midterm counts for 25% only if your midterm mark is higher than your final exam mark; if you skip it or the final is at least as good, the final counts for 75%. The class summary dates the midterm in June 2026 in its table but places it in Week 6 in the task description, and dates the quiz 15 August in the table but 17 to 24 August in the text, so check Canvas for both. Late work, where permitted, loses 5% of the possible marks per working day.
Current FINM7008 dates
| Date | Item | Control |
|---|---|---|
| 29 August 2026 | Assignment 1 due | released in Week 4 |
| 30 September 2026 | Assignment 2 due | released in Week 6 |
| 5 November 2026 | Final Exam | date in the assessment summary; the exam is centrally timetabled, so check ANU Timetabling |
Dates are as published in the Semester 2, 2026 class summary for the course. Confirm exact deadlines and submission settings in the live LMS.
What FINM7008 covers
Twelve chapters follow the lectures of Weeks 1 to 5, from the investment environment and return measurement through utility, capital allocation and diversification to the CAPM, APT and the factor models.
The Investment Environment and Asset Classes
Real, financial and intangible assets · money and capital markets · equities · index weightingInvestments as claims on the future
The course defines an investment as committing money or other resources now in the expectation of future benefits, and separates a good decision from a lucky outcome.
- Expectation, luck and survivorship bias
- Real, financial and intangible assets
- Roles of financial markets
- Asset allocation and security selection
- Money market securities
- Bonds and equities
Measuring Return and Risk From Scenarios
Real returns · holding-period return · effective annual rate · scenario mean and varianceFrom prices to rates of return
Before risk and return can be weighed, a price path has to become a rate.
- Holding-period return with dividends
- Nominal and real rates
- Effective annual rate
- Expected return from scenarios
- Variance and standard deviation
- Excess return and risk premium
Forecasting Markets and Reading Return Distributions
Market timing · failed predictors · square-root-of-time risk · skewness, kurtosis and tail measuresThe forecasting record
Can anyone predict the market? The lecture reviews market timing, professional forecasts and the academic record of predictors, and explains why competition removes any public signal.
- Market timing and the historical average
- Why public predictors stop working
- Scaling mean and risk with time
- Sample standard deviation
- Implied volatility indices
- Skewness and kurtosis
Utility, Risk Aversion and Indifference Curves
Expected utility · the mean-variance score · risk attitudes · indifference curvesChoosing when dominance fails
When two portfolios differ in both mean and risk, a preference model is needed.
- Dominance and its limits
- Utility theory axioms
- Expected utility
- The mean-variance utility score
- Risk-averse, neutral and loving investors
- Indifference curves
Capital Allocation and the Capital Allocation Line
Risky and risk-free mixes · the optimal weight y* · leverage · kinked lines and fund feesHow much to put at risk
Capital allocation decides how wealth is divided between one risky portfolio and the risk-free asset.
- The complete portfolio
- The capital allocation line and its slope
- Deriving the optimal weight
- Leverage when y* exceeds one
- Target returns and risk caps
- Borrowing rates and the kinked line
Two Risky Assets and the Optimal Risky Portfolio
Correlation and portfolio variance · minimum-variance mix · tangency portfolio · complete portfolioCorrelation decides the shape
With two risky funds, the portfolio mean is a weighted average but the variance includes a covariance term.
- Portfolio mean and variance
- Correlation between minus one and one
- Perfect positive correlation
- Perfect negative correlation and zero risk
- The minimum-variance portfolio
- Tangency weights in excess returns
The Markowitz Frontier and the Power of Diversification
Systematic and firm-specific risk · equal-weight variance · efficient frontier · separation propertyWhat diversification removes
Adding stocks to an equally weighted portfolio shrinks the average-variance term towards zero, leaving the average covariance.
- Household under-diversification
- Single stocks against the market
- Equal-weight portfolio variance
- Systematic and idiosyncratic risk
- Why cherry-picking fails
- The minimum-variance frontier
International Diversification and Its Risks
World market weights · home-country bias · currency-adjusted returns · political riskDiversifying across countries
International diversification applies the same logic at the country level.
- World market capitalisation by country
- Benefits and costs of investing abroad
- Home-country bias
- Currency-adjusted returns
- Hedging exchange-rate risk
- Political and geopolitical risk
The Capital Asset Pricing Model, Beta and Alpha
Market portfolio · beta · security market line · alpha · estimating betaFrom the market portfolio to beta
If every investor holds the same optimal risky portfolio, it must be the market portfolio.
- Homogeneous expectations and the market portfolio
- The CAPM equation
- Beta as systematic risk
- Portfolio beta
- The equilibrium argument
- Alpha and mispricing
Mutual Funds, ETFs and Passive Versus Active Investing
Investment companies · loads and expense ratios · fee drag · active versus passive evidenceWhat funds offer and cost
Investment companies pool investors' money for diversification, management, record keeping and lower costs.
- Services of investment companies
- Types of investment company
- Operating expenses and loads
- The expense ratio and net return
- Exchange-traded funds
- Fee drag over long horizons
Arbitrage Pricing Theory and Factor Models
One-factor model · diversifying firm-specific risk · no-arbitrage line · multifactor APTPricing from no arbitrage
Arbitrage pricing theory needs only a factor model, the absence of persistent arbitrage and enough securities to diversify.
- CAPM assumptions against APT propositions
- The one-factor model
- Diversifying away firm-specific risk
- What counts as arbitrage
- The no-arbitrage line
- Building an arbitrage trade
Fama-French Factors, Momentum and Fund Benchmarks
Anomalies · building SMB and HML · benchmark alphas · momentum and the Carhart modelFactors from anomalies
When the one-factor model left significant alphas, such as on high book-to-market portfolios, Fama and French added size and value factors.
- Cross-section versus time-series prediction
- Alphas as anomalies
- The three-factor model
- Building SMB and HML
- Factor loadings of small, big, value and growth firms
- Benchmarks that change rankings
The lectures begin with the investment environment and the main asset classes, then measure expected return, variance and the shape of return distributions, and explain why the long-run historical average is still the hard-to-beat forecast of the market.
Utility and risk aversion turn those measures into choices, capital allocation decides how much to hold in a risky portfolio, and Markowitz diversification decides what that portfolio should contain.
From portfolios to pricing
The second half of the opening block asks what return each asset should offer.
The capital asset pricing model answers with beta and the security market line, arbitrage pricing theory reaches a similar relation from weaker assumptions, and the Fama-French and Carhart factor models extend it to size, value and momentum. Along the way the course covers international diversification, mutual funds and ETFs, and the evidence on passive versus active management.
Later weeks turn to market efficiency, behavioural finance, bonds and the term structure, and alternative assets.
What the assessment rewards
Two Excel assignments ask for optimal portfolios, first by Sharpe ratio and then with the Single-Index and Markowitz models. The midterm in Week 6 covers Weeks 1 to 5 and is redeemable, so it counts only if it beats the final. The three-hour final covers all twelve weeks.
The tutorial solutions show the style these build on: a calculation carried through to a number, followed by a sentence that says what the number means.
Worked example · free
Mixing two funds into a riskless portfolio
- 1With a correlation of minus one, portfolio risk is the absolute value of 10wD minus 24(1 − wD), in percent.
- 1Setting it to zero: 10wD = 24 − 24wD, so wD = 24/34 = 70.6% in bonds and 29.4% in stocks.
- 1Expected return: 0.706 × 6% + 0.294 × 14% = 8.35%.
- 1A riskless portfolio earning 8.35% must earn the risk-free rate, so if bills paid less, borrowing at the bill rate to buy this mix would be an arbitrage.
Key terms
- Holding-Period Return
- The price change plus any income over a holding period, divided by the price at the start.
- Risk Premium
- The expected return on a risky portfolio minus the risk-free rate.
- Sharpe Ratio
- A portfolio's risk premium divided by the standard deviation of its excess return.
- Risk Aversion Coefficient
- The parameter A that sets how heavily an investor's utility score penalises variance.
- Indifference Curve
- The set of mean and standard deviation pairs that give one investor the same utility.
- Capital Allocation Line
- The straight line of all mixes of one risky portfolio with the risk-free asset, whose slope is the Sharpe ratio.
- Complete Portfolio
- The investor's whole holding, made of the risky portfolio and the risk-free asset in chosen proportions.
- Minimum-Variance Frontier
- The curve of portfolios with the lowest variance attainable for each level of expected return.
- Systematic Risk
- Market-wide risk, such as recessions or interest-rate changes, that diversification cannot remove.
- Security Market Line
- The CAPM line relating every asset's expected return to its beta.
- Jensen's Alpha
- The gap between an asset's expected or average return and the return its benchmark model implies.
- Arbitrage Opportunity
- A mispricing that yields a riskless profit without any net investment.
- Expense Ratio
- A fund's total annual operating expenses divided by its total assets.
FINM7008 FAQ
What is the format of the final exam?
The final exam lasts three hours, is held on campus in the centrally scheduled final exam block, and covers the course from Week 1 to Week 12. Dictionaries are not allowed. The class summary promises more detail on the paper's structure after timetabling, so check Canvas and ANU Timetabling closer to the date.
How does the redeemable midterm work?
The midterm in Week 6 covers Weeks 1 to 5 and is optional. It counts for 25% of the grade only if your midterm mark is higher than your final exam mark, and the final then counts for 50%. If you skip it, or do at least as well in the final, the final carries 75% instead.
What can I take into the exams?
The class summary lists a non-programmable calculator and an A4 page of handwritten or typed notes, which may use both sides. Dictionaries are not allowed in either the midterm or the final, so a well-planned note sheet with the key formulas and one example of each method is the main aid you can bring.
What do the two assignments involve?
Both are Excel spreadsheets that can be done alone or in pairs. Assignment 1, worth 10%, finds the optimal portfolio of five assets such as an S&P 500 index and a US bond index by Sharpe ratio. Assignment 2, worth 15%, uses six stocks and a market index fund with the Single-Index and Markowitz models.
Which ideas do students find hardest in the first five weeks?
The chain from two risky assets to the tangency portfolio is the longest calculation, and it changes the question twice: first from what to hold to how much, then in the CAPM from standard deviation to beta as the relevant risk. Keeping the order of steps fixed, and checking each Sharpe ratio, prevents most errors.
Which textbook does the course use?
The set text is Bodie, Kane and Marcus, Investments. The class summary names the 12th edition of 2020, while the Week 1 lecture slides name the 13th edition of 2023 and mark the required sections in red, so check which edition your tutorial questions are numbered from.
What happens if an assignment is submitted late?
Where late submission is permitted, the penalty is 5% of the possible marks per working day or part of a day, and work is not accepted more than 10 working days after the due date. Where it is not permitted, late work receives zero. Any extension has to be asked for in writing by the due date.
Questions students ask in each FINM7008 chapter
- Why do financial assets not count in national wealth?
- Every financial asset is also someone's liability: your bond is the issuer's debt. When all balance sheets in an economy are combined, these claims cancel, leaving the real assets that actually produce goods and services. Chapter 01 · The Investment Environment and Asset Classes
- When is subtracting inflation from the nominal rate good enough?
- Only when inflation is small. The exact real return divides one plus the nominal rate by one plus inflation; the shortcut drops a cross term that becomes large when inflation is high, so it overstates the real return in high-inflation periods. Chapter 02 · Measuring Return and Risk From Scenarios
- Why do most market predictors fail out of sample?
- Once a public variable is known to predict high returns, traders buy as soon as it signals, lifting the price today and removing the high return. Welch and Goyal found that the proposed predictors forecast poorly and that the historical average usually did better. Chapter 03 · Forecasting Markets and Reading Return Distributions
- What does the coefficient A measure?
- A measures how strongly an investor dislikes variance. A positive A marks a risk-averse investor, zero a risk-neutral one and a negative value a risk lover. Typical estimates lie between 1 and 5, with 2 or 3 the usual benchmark. Chapter 04 · Utility, Risk Aversion and Indifference Curves
- Why is the capital allocation line straight?
- Both the expected return and the standard deviation of the complete portfolio change in proportion to y, because the risk-free asset adds no variance or covariance. Plotting a quantity that is linear in y against another linear in y gives a straight line. Chapter 05 · Capital Allocation and the Capital Allocation Line
- Why does a lower correlation reduce portfolio risk?
- Portfolio variance includes twice the weights times the covariance, and the covariance equals correlation times the two standard deviations. A lower correlation shrinks that term, so the same holdings produce less variation in the combined return. Chapter 06 · Two Risky Assets and the Optimal Risky Portfolio
- How many stocks make a well-diversified portfolio?
- The lecture cites Statman's 1987 study, which found that a random selection of stocks needs at least thirty to forty names to count as well diversified. Most of the risk reduction comes from the first few additions. Chapter 07 · The Markowitz Frontier and the Power of Diversification
- Do currency movements make foreign shares much riskier?
- Generally not for diversified equity holdings. The lecture's data for 2017 to 2021 show average monthly standard deviations of 4.5% in local currency and 4.9% in US dollars, a small difference, although currency can dominate a low-risk foreign asset. Chapter 08 · International Diversification and Its Risks
- Why is beta, not standard deviation, the risk that is priced?
- Inside a diversified portfolio, a security's firm-specific risk washes out, and what it adds to portfolio risk is its covariance with the market. Only that systematic part cannot be avoided, so only beta earns a premium in equilibrium. Chapter 09 · The Capital Asset Pricing Model, Beta and Alpha
- Do active funds beat index funds after fees?
- On the lecture's evidence, generally not. From 1971 to 2020 the US equity index beat the average active fund in 30 of 50 years and by 0.96% a year after fees, and Australian active funds trailed passive ones by 1.70 points a year over five-year periods. Chapter 10 · Mutual Funds, ETFs and Passive Versus Active Investing
- How does APT differ from the CAPM?
- The CAPM relies on a long list of idealised assumptions about investors and markets. APT, developed by Stephen Ross in 1976, needs only a factor model, no persistent arbitrage and enough securities, and allows several factors rather than the market alone. Chapter 11 · Arbitrage Pricing Theory and Factor Models
- Why did Fama and French add size and value factors?
- Research in the 1980s found significant CAPM alphas for some portfolios, notably those of high book-to-market stocks. Adding factors for size and value in 1993 explained those alphas, so the three-factor model fitted the data better than the CAPM. Chapter 12 · Fama-French Factors, Momentum and Fund Benchmarks
How to study for the exam
Treat the first five weeks as one argument and learn it in order, because each chapter uses the one before. Start each topic by reproducing a worked example with the book closed: a scenario mean and standard deviation, a utility score, an optimal weight y*, a two-asset tangency portfolio, a CAPM alpha and an APT arbitrage.
Then rework the tutorial questions for the same week by hand, writing the formula before the numbers, since the exams are on paper with a non-programmable calculator. Keep a running error log of unit slips, squared percentages and confused r and R notation. In the fortnight before the midterm, practise mixed sets without chapter headings so you learn to recognise which method a question wants.
Build the A4 note sheet as you go rather than the night before, and use the assignments as rehearsal: the Excel optimisations are the same Sharpe-ratio and Markowitz problems that the exams test by hand. For the final, give the later weeks their own schedule, since they carry new topics beyond this foundation.
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