(Created 2011-09-01.)

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

- · the construction of the notion of expected utility,
· the difference between complete and incomplete markets,

· the difference between diversifiable and non-diversifiable risk within a portfolio context,

· the derivation of CAPM,

· the role of arbitrage in the price determination of derivatives,

· the role of options in calculating net present values of investments,

· the role of information in price determination.

*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 option
- analyse finance-related problems in the real-world and to incorporate adequate methods and theories to analyse these problems.

*Judgement and approach*

For a passing grade the student must

**Contents**

The course contains the following building blocks

· investment decision under certainty: the risk free rate and Fisher-separability;

· risk aversion and expected utility;

· Arrow-Debreu securities;

· portfolio theory

· market equilibrium: CAPM and multi-factor equilibrium models;

· derivatives

· term structure of the interest rates;

· real options;

· efficient markets;

· information asymmetry and agent theory;

**Literature**

Thomas E. Copeland, Kuldeep Shastri and J.Fred Weston, (2004): Financial Theory and Corporate Policy, Addison Wesley

Supplementary material.