The course covers several advanced topics in asset pricing, trading-off risks and return, and portfolio optimization. More precisely, students will first analyze two relevant extensions of the Capital Asset Pricing Model (CAPM) and learn how to determine the corresponding equilibrium in financial markets.
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Next, they will learn how to estimate empirically the risk-return relationship predicted by the Capital Asset Pricing Model. Students will also analyze two pricing models alternative to the CAPM.
In the Arbitrage Pricing Theory, they will learn how to determine assets expected returns based on multiple risk factors and absence of arbitrage opportunities.
In the Consumption Capital Asset Pricing Model, instead, they will learn how to solve the investors' joint consumption/investment decision problem and how to compute the equilibrium asset prices and expected returns in a dynamic pure exchange economy.
Finally, the course concludes with a focus on the pricing of fixed income instruments.
This course is part of the Finance Specialization.
What you'll learn
- Understand the principles connected to investors' portfolio choices and the criteria that determine the prices of financial instruments
- Understand the main functions performed by the financial markets
- Analyzing how their introduction influences the households' savings choices and companies' investment in an economy without uncertainty
Syllabus
Week 1 - Capital Asset Pricing Model (CAPM) Extensions
By the end of this week you will learn: how to determine the equilibrium in financial markets under two distinct scenarios within the Capital Asset Pricing Model framework. First, you'll explore equilibrium determination when there is an absence of a riskless security. Second, you'll delve into the complexities of equilibrium determination when investors' preferences are dynamic, and stock returns follow a normal distribution.
Week 2 - Testing the Capital Asset Pricing Model (CAPM)
By the end of this week you will learn how to estimate empirically the risk-return relationship predicted by the Capital Asset Pricing Model
Week 3 - The Arbitrage Pricing Theory (APT)
By the end of this week you will learn how to determine assets expected returns based on multiple risk factors and absence of arbitrage opportunities
Week 4 - The Consumption Capital Asset Pricing Model (CCAPM)
By the end of this week, you will acquire a comprehensive understanding of determining equilibrium in a collaborative exchange economy, where agents make joint decisions on consumption and financial asset investment. Additionally, you will learn how to compute equilibrium asset prices and expected returns.
Week 5 - Bond Pricing
By the end of this week, you will gain a comprehensive knowledge of fixed income securities, including an understanding of their diverse characteristics, and the ability to assess their pricing and implied returns
