Lecture 1

  1. Financial markets channel resources to efficient use:
    • Allocate capital
    • Shift consumption over different periods
    • Allocate risk
    • Aggregate information
  2. What are the fundamental forces that operate (efficient) financial markets?
    • 1. Arbitrage (law of one price)
    • 2. Risk-return trade-off
  3. Efficient markets: what to pursuit? What is the formula of components to the asset price?
    • Pursuit beta.
    • P = PV of cashflows

    Investors are compensated for non-diversifiable risk (Beta-risk)
  4. Inefficient markets: what to pursuit? What is the formula of components to the asset price?
    Pursuit alpha (exploit mispricings in the market). 

    P = PV of cashflows + mispricing
  5. Capital allocation
    Capital allocation: the choice between risky and risk-free assets
Author
maskenjao
ID
342009
Card Set
Lecture 1
Description
L1 - Basics of Portfolio Choice and Asset Pricing
Updated