Spring

This module reviews the building blocks of modern finance theory and introduces the workings of financial markets at the graduate level. It begins with an analysis of rrational investor choice under uncertainty, which forms the basis for the theory of asset allocation and pricing of risk in equilibrium. The module next covers the efficient market hypothesis and, finally, encompasses theoretical and applied aspects of the operation of the foreign exchange market, as well as the financial futures and options markets

None

The aim of the module is to present the building blocks of modern finance theory and offer relevant application on the operation of financial markets

On successful completion of this module you should be able to

• Display a sound grasp of the concepts of risk aversion and risk premium
• Discuss how modern asset pricing theory builds on optimal choice under uncertainty
• Demonstrate a deep understanding of the pricing methods for risky assets
• Evaluate the rationale underlying the construction of portfolios
• Offer a balanced argument on the efficiency of capital markets
• Exhibit a clear perception of the workings of the foreign exchange and derivatives markets and the pricing of securities traded in them

The following is an indication of the likely topics to be covered: 

Lectures (20 hrs)

Blake,D. (2000), Financial Market Analysis, 2nd edition, Wiley. 
Copeland T. E., Weston J. F. And Shastri K., (2005), Financial Theory and Corporate Policy, Addison Wesley.
Eichberger J., and Harper I.R. (1997), Financial Economics, Oxford . 
Elton E. J. and Gruber M. J. (2003), Modern Portfolio Theory and Investment Analysis, 6th edition, Wiley.
Hull John C. (2006), Options, Futures, and Other Derivatives, 6th edition, Prentice Hall. 
Jackson M., and Staunton Mike. (2001), Advanced Modelling in Finance Using Excel and VBA, Wiley.
Journal articles: 
1.       Black F, Jensen MC and Scholes M (1972). The Capital Asset Pricing Model: Some Empirical Tests. In Jensen (ed.) Studies in the Theory of Capital Markets, Praeger, pp 79-124. 
2.       Black F and Scholes M (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, Vol 81, pp 637-659. 
3.       Fama EF and French K (1992). The Cross-section of Expected Stock Returns. Journal of Finance, 47, pp 427-466. 
4.       Fama EF and MacBeth JD (1973). Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy, May-June, pp 607-636. 
5.       Friend I and Blume M (1970). Measurement of Portfolio Performance Under Uncertainty. American Economic Review, September, pp 561-575. 
6.       Lintner J (1965) Security Prices, Risk and Maximal Gains from Diversification. Journal of Finance, Vol 20, pp 587-615. 
7.       Malkiel BG (2003). The Efficient Market Hypothesis and its Critics. Journal of Economic Perspectives, Vol 17, Number 1, pp 59-82. 
8.       Pratt JW (1964). Risk Aversion in the Small and in the Large. Econometrica, Vol 32, No 1-2, pp 122-36. 
9.       Roll R and Ross SA (1980). An Empirical Investigation of the Arbitrage Pricing Theory. Journal of Finance, December, pp 1073-1103. 
10.   Sharpe W (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, Vol 19, pp 425-442 
11.    Tobin J (1958). Liquidity Preference as Behaviour Towards Risk. Review of Economic Studies, Vol 25, pp 65-86.

28 September 2010