Subject
Finance
Program
Master of Science (MSc)
Location
Côte-des-Neiges
Instruction mode
Credits
3
Description
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