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
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
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
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
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
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,
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
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