Warwick Business School

MSc Finance and Economics MSc Accounting and Finance MSc Finance MSc Finance and Information Technology MSc Finance with Behavioural Science

Asset Pricing IB9Y8

Course synopsis

The course provides an introduction to financial markets and to techniques for the valuation of risky assets. The skills acquired in this course are used in other modules on the masters programme and are essential for a financial economist.

Organization

There is a 2 hour lecture for this course in weeks 1 to 10 of the Autumn term. In addition, in weeks 2 to 10 there is a 1 hour problem session (seminar). The problem sets will relate to the material covered in the previous week, to give you adequate time to prepare the problem set after the lecture. Each student will be allocated to a seminar stream. There is a problem set for each session. It is important that you prepare the problems fully before each session, so that you can then use the sessions to deal with any issues you cannot solve yourselves. Sonny Biswas is the Tutor for the module. He will be available to assist you as necessary, and will hold regular office hours see below under Contact and Support. You may well find it helpful to work on the problem sets with other people; that is to be encouraged. You can learn as much by helping your fellow students through the problems as by solving them yourself.

Textbooks

The material covered in the course is mainly contained in the following two texts: [CWS] Copeland, Weston, Shastri, Financial Theory and Corporate Policy, AddisonWesley, 4th edition, 2005 (Part I, i.e. chapters 1 to 12 only). [DD] Danthine and Donaldson, Intermediate Financial Theory, 2nd edition, PrenticeHall, 2005. We will also use some chapters of: [EGBG] Elton, Gruber, Brown, Goetzmann, Modern Portfolio Theory and Investment Analysis, Wiley, 8th edition, 2010.

[H] Hull, Options, Futures and Other Derivatives, Pearson, 6th edition, 2006. [P] Prigent, Portfolio Optimization and Performance Analysis, Chapman & Hall/CRC, 2007. Background material can be found in: Bodie, Kane, Marcus, Investments, 7th edition, Prentice-Hall, 2008. More advanced textbooks for students who want to study specific topics more deeply are: Duffie, Dynamic Asset Pricing Theory, 3rd edition, Princeton, 2001. Huang and Litzenberger, Foundations for Financial Economics, Prentice-Hall, 1988. Leroy and Werner, Principles of Financial Economics, Cambridge University Press, 2001. Pennacchi, Theory of Asset Pricing, Pearson, 2008. Lengwiler, Microfoundations of Financial Economics: An Introduction to General Equilibrium Asset Pricing, Princeton, 2006.

Course schedule

Week 1: Financial markets and instruments. [CWS] chapter 1 and Appendix A, [DD] chapters 1 and 2. Week 2: Pricing under certainty: bond markets [CWS] chapter 8 A-B, [DD] chapter 10 (DDs coverage is not bond specific). Week 3: Utility and Mean-variance portfolio theory [CWS] chapter 3, [DD] chapters 3 and 4. [CWS] chapter 5, [DD] chapter 6. Week 4: Equilibrium in capital markets. [CWS] chapter 6, [DD] chapter 7. Week 5: Testing the CAPM. [CWS] chapter 6 H-I, K. Week 6: CAPM variants: APT and Consumption CAPM. [DD] chapters 9 and 13. Week 7: Efficient capital markets. [CWS] chapters 10 and 11, [EGBG] chapter 17. Week 8: State preference theory. [CWS] chapter 4, [DD] chapters 8 and 11.

Week 9: Introduction to derivatives. [H] chapters 5, 8, 9, 11 and 13. Week 10: Options. [CWS] chapter 7.

Assessment

The course assessment consists of three online tests during the Autumn term, together worth 20%, and an examination in the first week of the Spring term worth 80% of the final mark.

Contact and support

Please make use of the problem sessions to raise issues that you have difficulties that you are finding are probably common to a number of students, and you would be doing everyone a service by raising them. Otherwise please do feel free to make use of my office hours (10-12 on Wednesdays, in room B2.15a) or those of the Tutor, Sonny Biswas (4-5 on Tuesdays, 12-1 on Wednesdays, in room B2.22), or email us. If you do email me and do not receive a reply within a few days, please do feel free to remind me (politely of course).

Anthony Neuberger Room B2.15a Warwick Business School anthony.neuberger@wbs.ac.uk 024 7652 2955