Course overview
This course is designed to provide both a self contained study of the principles of financial economics, and a bridge to higher level courses in economics and finance, including third year international finance. It typically includes a critical discussion of the efficient markets theory, an overview of quantitative methods in finance, considers risk aversion in the context of utility theory, examines portfolio theory, the Capital Asset Pricing Model and multi-factor asset pricing models, covers bond pricing, duration and convexity, behavioural finance theory, an introduction to the economics of financial crises, and introduces the top down approach to investment decisions. The emphasis is on a thorough coverage of modern finance theory as applied to investment analysis, balanced with a consideration of new developments in the discipline, and of the application of both old and new theoretical perspectives to understand the current environment for financial investment decisions.
Course learning outcomes
- Apply utility theory to describe and analyze investment or saving decisions under risk aversion
- Describe the role of contingent claims in providing insurance against risky returns
- Describe the concept of equilibrium asset pricing
- Describe examples of how informational asymmetries between market participants can result in inefficient market outcomes
- Appreciate how economic models are used as caricatures of economic realities in order to reduce complexity and permit transparent theories to be built that help people think about how they can affect their environment in a positive manner
- Explain why mathematics can be useful in communicating economic thoughts with peers and colleagues
- Be empathetic towards economic policymakers who are doing their best to bring about, what they feel to be, positive change in the world