Course description

Introduction to Asset Pricing

Introduction

The course provides an introduction to financial economics at the MSc level. The course will begin by introducing asset pricing theory. The classical results in portfolio selection and asset pricing theory with the mean-variance paradigm are presented. These results will be challenged and thus further theoretical developments based in the Arbitrage Pricing Theory and Consumption CAPM will be considered. Issues in market efficiency and behavioral finance will be discussed. Finally, application of the theory to option pricing will be considered. This course will provide students with an understanding of the underlying theories used in other courses and some of the empirical approaches to testing these theories.

Course content

1. Arbitrage and Optimality
a) Consumption and investment decisions
b) Utility theory given uncertainty
c) State preference theory

2. Asset Pricing
a) Portfolio theory
b) The Capital Asset Pricing Model
c) The Arbitrage Pricing Theory
d) Risk-Neutral Valuation
e) The Consumption CAPM

3. Market Efficiency
a) Active vs. Passive Management
b) Behavioral Finance
4. Derivative Pricing

Learning outcome knowledge

After taking the course, the students shall understand how economists build economic models of asset prices, what the key implications and predictions of these models are and how they help us to understand why and how asset prices move. Furthermore, student should know how to test asset pricing models and interpret tests of asset pricing models using real world data.

  • Examples of concepts that students shall be able to explain: utility maximization, optimal investment and consumption decisions, risk aversion, decision making under risk, choices between risky alternatives, choices between risk free and risk alternatives, optimal portfolio allocation, determination of expected returns, risk-neutral pricing, and market efficiency.

Exam organisation

  • Written exam: 30%
  • Written exam: 70%