Course: Asset Pricing Fundamentals
Modules:
Welcome to the course!, Introduction to Financial Markets, Structure of Financial Markets, Asset classes, Presence or absence of intermediaries, Functions of financial markets, Intemporal reallocation of resources, Efficient allocation of investment, Risk pooling and risk sharing, Information transmission, Introduction to consumption and investment in autarky, Assumptions, Robinson Crusoe's problem, The model solution, Heterogeneous preferences, Heterogeneous endowments, Heterogeneous technologies, Assumptions, The problem of households, The model solution, The equilibrium interest rate, Consumption and investment with financial markets and production, The problem of households, The optimal saving of households, The problem of firms, The equilibrium of the model, Comparison with the autarky case, Fisher separation theorem, Imperfect capital markets, Transaction costs, Borrowing constraints
Introduction, What is a lottery?, Risk aversion, Compound lotteries, Expected utility, Expected utility: an example, Axioms, Attitude towards risk, Risk aversion, Risk neutrality, Risk loving, Measuring risk aversion, Example, Hara utility, Markowitz risk premium, Comparing risks, First Order Stochastic Dominance, FOSD with discrete distributions, Second Order Stochastic Dominance, Mean-variance criterion, Expected utility and mean-variance criterion
The market for contingent claims, Law of one price, Arbitrage, How to construct an arbitrage portfolio, LOP and Arbitrage, No arbitrage and the price of Arrow securities, No arbitrage and optimal portfolios, State prices, Determining state prices, Risk-free assets, Risk-neutral probabilties, Determining asset prices, Pricing a risky asset with state prices, Example
Introduction to Portfolio choices, Hypotheses, The investor's problem, The demand for stocks, An example with log utility, What if the investor is risk-neutral?, The partecipation principle, Example, An example with power utility, The partecipation puzzle, Risk aversion and the demand for stocks, Wealth and the demand for stocks, Expected return, risk and the demand for stocks (part 1), Expected return, risk and the demand for stocks (part 2), Special case of increasing absolute risk aversion
Motivation, Properties of expectation, variance and covariance operators, Indifferent curves with quadratic utility, Indifference curves with CARA and normally distributed payoffs, Two risky assets, Case 1: perfectly correlated returns, Case 2: inversely correlated returns, The general case, Driving the shape of the frontier, The frontier with N risky assets, The frontier with a riskless asset, Optimal portfolios with only risky assets, Optimal portfolios with a riskless asset, Implications, Sharpe ratio, The market portfolio
Introduction, The demand side: mean-variance preferences, MRS between expected return and risk, Portfolio choice with 1 safe and 2 risky assets, Example, Market equilibrium, Market clearing, Equilibrium returns, Asset betas, Market risk premium, The security market line, Example, The capital market line, General solution of the CAPM, Recap and main properties of the CAPM, Additivity of betas, Systematic vs. Idiosyncratic risk