GOODMAN SCHOOL OF BUSINESS
Department of Finance, Operations, and Information
Systems (FOIS)
Course Number: FNCE 3P96
Course Title: Financial Theory
Times and Locations:
Lectures, discussion, 3 hours per week, S1: Wednesday/Friday 15:30-17:00/14:30-16:00
Problem 1: _. . .
Your father donated you a famous painting by the well knowu artist Picallo. Its current
value is estimated at 2,000,000 dollars.
a. If the value of the painting grows according to the formula: ,
V = 1,000,000x (22 + 1/3)2, then when is t
Chapter 2: State Preference Theory
1
State Preference Theory
A. Firms borrow capital for investment in real assets by
selling securities; individuals obtain claims to firm's assets
by investing in securities.
Thus, securities present opportunities for in
Chapter 3: Decision Making Under
Uncertainty
Our Main Question:
How do individuals behave when they are dealing with uncertainty?
In real life, almost every decision we make involves uncertainty
Example:
Uncertainty from product quality. (e.g., used veh
Chapter 3: Decision Making Under
Uncertainty
Our Main Question:
How do individuals behave when they are dealing with uncertainty?
In real life, almost every decision we make involves uncertainty
Example:
Uncertainty from product quality. (e.g., used veh
Chapter 23 Mergers and Acquisitions Key
1.
In a typical merger, only the target firm retains its individual identity.
FALSE
Difficulty: Basic
Learning Objective: 23-01 The different types of mergers and acquisitions; why they should (or shouldnt) take pla
Problem Set 69
The information in both frames is exactly the same, yet when presented with the survival frame,
18 percent preferred radiation, and when presented with the mortality frame, 44 percent preferred
radiationa signicant difference. The framing e
Binomial trees and risk neutral valuation
Moty Katzman
September 19, 2014
Derivatives in a simple world
A derivative is an asset whose value depends on the value of
another asset.
Call/Put European/American options are examples of derivatives.
We want to
CHAPTER 12
Introduction to Binomial Trees
Practice Questions
Problem 12.8.
Consider the situation in which stock price movements during the life of a European option
are governed by a two-step binomial tree. Explain why it is not possible to set up a posi
FNCE 3P96: Financial Theory
1. Capital Markets, Consumption, and
Investment
Text book: Chapter 1
Dr. Walid Ben Omrane
1
1-B-Consumption and Investment without
Capital Markets
Assumptions
Certainty
No Transaction Costs
No Taxes
Decisions Made in one period
FNCE 3P96: Financial Theory
3. Investment Decisions Under Certainty
Class notes
Dr. Walid Ben Omrane
1
Present Value
2
Present value of an ordinary annuity
The present value of an ordinary annuity (PVAN0) is the
sum of the present value of a series of eq
FNCE 3P96: Financial Theory
2. State preference theory and arbitrage
principle
Text book: Chapter 2
Dr. Walid Ben Omrane
1
7-B-Definition of pure security: Arrow-Debreu Security
A pure or primitive (also called Arrow-Debreu) security is defined as a
secur
Chapter 2
Perfect market assumptions: (also known as pure and arrow-Debrea and
primitive)
1.
2.
3.
4.
Law of one price
Frictionless markets (no transaction costs)
Rational investor
Equal access to market prices and information
Derivation of pure security
Chapter 5
Probability
0.1
End of period prices
20
Return
-20%
0.2
0.4
0.2
0.1
22.5
25
30
40
-10%
0%
+20%
+60%
Initial investment = $1, wealth is W = return
R=
W I
w=RI + I Future Value
I
measure of location: mean or expectation
N
E (~x )= Pi X i
i=1
E (~
Problem 1:
Figure S1.1 Fisher separation for the lender case
W0 y0
y1
1 rf
The individual will take on investment up to the point where the marginal rate of return on investment
equals the market rate of interest at point B. This determines the optimal i
Chapter 3
The Theory of Choice: Utility
Theory Given Uncertainty
1. The minimum set of conditions includes
(a)
The five axioms of cardinal utility
complete ordering and comparability
transitivity
strong independence
measurability
ranking
(b) Individuals h
Brock University
Faculty of Business
FNCE 3P96 Financial Theory
Mid-term examination 2, Winter 2012
Friday March 16,2012
7cl
This examination booklet contains 12 pages including one spare page. Show all details of
calculations.
For the numerical answers,
Decision making under Uncertainty
Our Main Question
How do individuals behave when they are dealing with uncertainty?
2
Why care about uncertainty?
Simple answer: Because in real life, almost every decision we make involves uncertainty
Example:
Uncertain
FNCE 3P96: Financial Theory
6. Security market line (SML) and the
capital asset pricing model (CAPM)
Text book: Chapter 6
Dr. Walid Ben Omrane
1
6-A-Introduction
The aim of this chapter is to extend the concept of market equilibrium to
determine the appro
FNCE 3P96
Financial Theory
Spring 2016
Brock University
Faculty of Business
Department of Finance, Operations and Information Systems
Instructor:
Office:
Phone:
Email:
Class Time:
Office Hours:
Onem Ozocak
Taro Hall 324
(905) 688-5550 ext. 4188
[email protected]
Thursday February 2nd Chapter 3
First order stochastic dominance:
F first order stochastic dominance (FOSD) G.
Probability
Gx(w)
Fx(w)
Xo
W
F(x)G(x) this is how FOSD is shown. It means that CDF of F is less than the CDF of G.
Here G is above F; CDF tellin
Cardinal and ordinal utility
1. Cardinal utility: U(A) is a cardinal utility that is, U: consumption bundle: R measured in
utility
2. Ordinal utility: is a more general concept than cardinal utility function, U provides a
ranking or preference ordering ov
Markowitz Theory
1. Determine if the question has W0 (Current Wealth)
2. Calculate the expected wealth E(W)
a. E ( W )= Pi (W i)
b. If you have W0, make sure you add it with E(W)
3. Calculate the utility of expected wealth U[E(W)] if question asks for it
Midterm Solutions
1b)
(P1,P2)
Set MRT = (1+ r)
Intuition is to invest until your marginal return from marginal investment is the same as the cost
of capital (C1, C2)
Set MRs = (1+r)
Intuition is to borrow or lend until your subjective time preference is e
Chapter 3:
UTILITY FUNCTIONS CAN DIFFER FROM QUESTION TO QUESTION
Example: Problem 3
You have a logarithmic utility function U(W)=ln(W) and your current level of wealth is $5000.
Suppose you are exposed to a situation that results in a 50/50 chance of win
Chapter 6
market equilibrium, capital asset pricing model
*Concepts of market equilibrium to determine the market price for risk
* appropriate measure of risk for a single asset.
The basis of CAPM which is developed by Markowitz, traynor, mossin, and blac