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040168 KU Foundation of Financial Economics (MA) (2020W)

4.00 ECTS (2.00 SWS), SPL 4 - Wirtschaftswissenschaften
Continuous assessment of course work

Registration/Deregistration

Note: The time of your registration within the registration period has no effect on the allocation of places (no first come, first served).

Details

max. 50 participants
Language: English

Lecturers

Classes (iCal) - next class is marked with N

Midterm am 19.11.2020 im HS 6, OMP, 1. OG.

Thursday 01.10. 13:15 - 14:45 Digital
Thursday 08.10. 13:15 - 14:45 Digital
Thursday 15.10. 13:15 - 14:45 Digital
Thursday 22.10. 13:15 - 14:45 Digital
Thursday 29.10. 13:15 - 14:45 Digital
Thursday 05.11. 13:15 - 14:45 Digital
Thursday 12.11. 13:15 - 14:45 Digital
Thursday 19.11. 13:15 - 14:45 Hörsaal 6 Oskar-Morgenstern-Platz 1 1.Stock
Thursday 26.11. 13:15 - 14:45 Digital
Thursday 03.12. 13:15 - 14:45 Digital
Thursday 10.12. 13:15 - 14:45 Digital
Thursday 17.12. 13:15 - 14:45 Digital
Thursday 07.01. 13:15 - 14:45 Digital
Thursday 14.01. 13:15 - 14:45 Digital
Thursday 28.01. 13:15 - 14:45 Digital

Information

Aims, contents and method of the course

The course ‘Foundations in Finance’ aims at a thorough understanding of the fundamental concepts in Finance. It is designed to provide a solid foundation and skillset for specialised studies in finance and financial economics.
In this course, we are starting with preferences and decision making as the underlying force driving individuals’ interaction with the market. We introduce the utility function and its maximization under constraints in portfolio optimization problems. We also explore deviations from rationality in the decision-making process through behavioral preferences and perceptions.
In the second part of the course we evaluate the investment opportunity set with respect to the mean return and the variance of returns. We first examine the potential mean-variance-combinations we can achieve by changing portfolio weights in a portfolio of two assets. Then, we extend the model to multiple assets and introduce a risk-free asset. The mean-variance optimization in the market leads to the CAPM (with risk-free asset) and the Zero-beta-CAPM (without risk-free asset).
In the third part of the course we introduce state-contingent claims, which offer us the opportunity to price a payment at one specific time and state in the future. We discuss the relationship between the assets available for trade and market completeness. Additionally, we discuss how to complete the market through the introduction of additional assets (such as options).
Finally, we are going to cover factor models, in which specific factors are used to explain the return generating process. The assumption of quasi-completeness of the market leads to the APT (Arbitrage Pricing Theory).
The topics of the course follow are summarized below:
PART 1: Decisions under Uncertainty
• Preferences under certainty
• Expected utility theory
• Risk aversion and stochastic dominance
• Portfolio optimization problems
• Behavioral Biases in preferences and perceptions
o Allais paradox
o Prospect theory
o Epstein-Zin preferences
PART 2: Capital Asset Pricing Model
• Investment opportunities in the mean-variance space
o Two assets without risk-free asset
o Multiple assets without risk-free asset
o Multiple assets with risk-free asset
• CAPM
• Zero-beta CAPM
PART 3: Complete Markets and Arrow Debreu Pricing
• Arrow-Debreu setup and state-contingent claims
• Market completeness
• Pareto-optimality
• Completing the market with options
PART 4: Arbitrage Pricing
• Factor models
• Arbitrage Pricing Model (APT)

Assessment and permitted materials

The evaluation in this course will be based on four components:
The first component is a group presentation. In each week, starting week 3, a group of students presents the solution to a specified problem on the problem set at the beginning of the lecture.
The second component is a participation-based grade. The hand-in of a problem set is required for at least 8 weeks in the semester (out of 10 possible dates). When the problem set scores half of the possible points and minimum standards of lecture participation are met, full points are assigned.
The third and fourth components are a midterm exam in the eighth session and a final exam at the end of the course.

Minimum requirements and assessment criteria

7% Group Presentation

8% Problem Set Hand-in

40% Mid-term Exam

45% Final Exam

Examination topics

The midterm exam covers weeks 1-6 and the final exam covers all course content, with a focus on the course content not covered in the midterm.

Reading list

Danthine, Jean-Pierre, and John B. Donaldson. Intermediate Financial Theory. Third Edition, Academic Press, 2014.

Hens, Thorsten; Rieger, Marc Oliver. Financial Economics: A Concise Introduction to Classical and Behavioral Finance. Springer (New York), 2016.

Association in the course directory

Last modified: Th 21.01.2021 12:47