FINANCIAL ECONOMICS, ADVANCED COURSE | TEK103 |

**Aim**

The objective of this course is to give the students an understanding of well known ideas and theories within financial economics.

*Knowledge and understanding*

For a passing grade the student must

- Understand the separation between investment and finance
- Explain the relation between expected utility, stochastic dominance and the MV-criterion
- Explain the difference between complete and incomplete markets
- Explain the difference between diversifiable and non-diversifiable risk within a portfolio context.
- Understand the derivation of CAPM
- Understand the role of arbitrage in pricing derivatives
- Understand the use of options in investment analysis
- Understand the role of information in the price process

*Skills and abilities*

For a passing grade the student must

- be able to calculate the risk premium, certainty equivalent, absolute and relative risk aversion
- be able to calculate state prices
- be able to understand the use of CAPM in equilibrium pricing
- be able to price derivative securities
- be able to price some simple real options

*Judgement and approach*

For a passing grade the student must

**Contents**

The course takes up the following building blocks of financial economics

Investment decision under certainty: Fisher separation.

Expected utility. Risk Aversion and certainty equivalent. The degree of absolute and relative risk aversion. Stochastic Dominance, the MV-criterion and the efficient set.

Pure securities (Arrow Debreu securities). Complete markets.

Mean-Variance portfolio theory. Construction of the portfolio frontier. Diversifiable risk.

Market equilibrium. CAPM, APT and multi factor equilibrium models.

Pricing contingent claims. Put-Call parity. The binomial approach. Black-Scholes.

Term structure of interest rates.

Real option analysis.

Efficient capital markets. Theory and evidence.

Information asymmetry and agency theory.

**Literature**

Campbell J & Lo A & MacKinlay A: The Econometrics of Financial Markets, Princeton 1998.

Danthine, J.-P. and J. Donaldson: Intermediate Financial Theory, Prentice-Hall, 2001.

Compendium from lectures.