{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# Lecture 1 - ACTL3004 Week 1 Financial Economics for...

This preview shows pages 1–8. Sign up to view the full content.

ACTL3004: Week 1 Financial Economics for Insurance and Superannuation: Week 1 Introduction, Utility Theory and Pricing Fundamentals

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
ACTL3004: Week 1 Course Introduction About the lecturer – Brian W.B. CHU I Graduated from Macquarie University with BCom (Act Std)/BApp Fin in 2005 and MCom (Act Std) by Thesis in 2008 I Currently a PhD candidate at UNSW I Former Associate Lecturer in Macquarie University (2006-2007) I 8 years of university teaching experience I Industry experience in corporate finance, executive remuneration consulting, workers’ compensation research and superannuation consulting I Lecturer of Part III Course 1 (Investments) and Course 5A (Finance)
ACTL3004: Week 1 Course Introduction Motivation for Financial Economics I Aim to understand the financial markets, its behaviour and how financial instruments are priced I Recognise financial instruments as packaged cash flows of varying size and timing I Understand pricing involves discounting cash flows to present I Recognise discount rate depends on certain risks, and employ the right approach to quantify such risks I Appreciate investor behaviour both individually and collectively in order to adjust these discount rates

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
ACTL3004: Week 1 Introduction to Utility Theory The Utility Axioms The Four Axioms Let w be wealth and let u ( w ) denote the utility function of wealth. This function will be used to denote or represent individual preferences. Axioms 1. Complete/Comparable: Can state for all alternative outcomes. ie.that A is preferred to B . ( A B ) or otherwise. 2. Transitive: If A B , and B C , then A C 3. Independent: If A B , and consider some D . The person is indifferent between a gamble that gives A wp p and D wp 1-p B wp p and D wp 1-p 4. Certainty Equivalent: Everything (gamble) has a price. An investor whose risk preferences are consistent with these four axioms will always make decisions according to the expected utility theorem.
ACTL3004: Week 1 Introduction to Utility Theory Expected Utility Theorem Expected Utility Theorem Definition Suppose that an individual is subject to a random wealth W with den- sity function f W ( · ) . Then the expected utility of wealth is defined to be E [ u ( W )] = Z 0 u ( w ) f W ( w ) dw , assuming, of course, that the wealth is a continuous random variable. In the case of discrete, the expected utility can be similarly defined.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
ACTL3004: Week 1 Introduction to Utility Theory Expected Utility Theorem Expected Utility Theorem Expected Utility Theorem Consider two random wealths W 1 and W 2 . An individual’s preferences have an expected utility representation if there exists a function u so that W 1 is preferred to W 2 , that is we write it as W 1 < W 2 if and only if E [ u ( W 1 )] E [ u ( W 2 )] . Note: For strict preference, we shall write W 1 W 2 , and for indifference, we shall write W 1 W 2 .
ACTL3004: Week 1 Introduction to Utility Theory Expected Utility Theorem Example 1 Consider a decision maker with utility function u ( w ) = 1 - e - cw for some constant c > 0 . He has a choice between two losses X 1 and X 2 where X 1 Gamma ( α, β 1 ) and X 2 Gamma ( α, β 2 ) . Assume both

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 45

Lecture 1 - ACTL3004 Week 1 Financial Economics for...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online