Course details
Capital Market Theory
FINA 60204A
This course surveys models of asset pricing and portfolio allocation that are the building blocks of modern Finance.
It reviews the microeconomic foundations of decision-making under uncertainty and as well as the basic mathematical and statistical techniques used to derive key results. Students will learn about measures of risk aversion, financial decision-making under uncertainty, empirical asset pricing puzzles, equilibrium risk-sharing and savings behaviour, the role of asymmetric information, models of inefficient equilibria as well as arbitrage and market completeness.
Themes covered
Risk aversion and choice under uncertainty: Risk and lotteries The expected utility criterion The risk premium Risk aversion
Risk preferences and stochastic dominance: The mean-variance criterion First-order stochastic dominance Second-order stochastic dominance Downside risk Multiple risks
Portfolio choice: The standard portfolio problem The CARA-normal case Mean-variance efficient portfolios The mean-variance frontier
The stochastic discount factor and the CAPM: The stochastic discount factor The price of risk The Hansen-Jagannathan bounds The CAPM
The market risk premium and the riskfree rate: The equity premium puzzle The level of the riskfree rateThe riskfree rate puzzle Explanations and solutions
Intertemporal consumption and present-value relations: Precautionary savings The Dividend-Discount-Model Excess volatility Campbell-Shiller decomposition Return predictability Stock return decomposition
Complete markets and Arrow-Debreu assets: State prices Contingent claims Risk-neutral probabilities Optimal risk-sharing Fixed income pricing
Arbitrage and pricing by replication: Absence of arbitrage opportunities Pricing by replication Dynamically complete markets Completing markets with options
Important notes
Course in French : FINA 60204
Course code
FINA 60204A
Subject
Finance
Program
Master of Science (MSc)
Location
Côte-des-Neiges
Instruction mode
On-site learning
Credits
3