This course has three goals:
1. To introduce the principles of asset valuation from an applied perspective. The majority of the class is concerned with the valuation of financial securities. The valuation issues to be discussed are heavily used in portfolio management and risk management applications.
2. To develop the following concepts: arbitrage, the term structure of interest rates, diversification, the Capital Asset Pricing Model (CAPM), efficient and inefficient markets, performance evaluation, and derivative securities, particularly options.
3. To provide sufficient background knowledge for students seeking an overview of capital markets and an introduction to advanced finance courses.
The main topics can be summarized in seven groups:
1. 2 classes: Introductory Concepts
2. 4 classes: Valuation of Fixed Income Securities
3. 2 classes: Valuation of Securities with Risky Payoffs
4. 4 classes: Portfolio Choice
5. 3 classes: Evaluating Investment Performance
6. 3 classes: Behavioral Finance
7. 6 classes: Valuation of Options
Throughout the course, we will address two basic questions:
1. Which methods do we use to value securities?
2. How do we choose securities to maximize expected return for a given amount of risk?
A. Barton Hepburn Professor of Economics in the Faculty of Business
Professor Tetlock's research interests include behavioral finance, asset pricing, and prediction markets. One area of his research examines how firms' stock market prices respond to the content of news stories. His 2007 Journal of Finance study on the impact of negative words, such as "flaw" and "ruin", won the Smith-Breeden Prize for the best article in asset pricing. His research...