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Financial markets channel resources to efficient use:
Shift consumption over different periods
What are the fundamental forces that operate (efficient) financial markets?
1. Arbitrage (law of one price)
2. Risk-return trade-off
Efficient markets: what to pursuit? What is the formula of components to the asset price?
P = PV of cashflows
Investors are compensated for non-diversifiable risk (Beta-risk)
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
Capital allocation: the choice between risky and risk-free assets
L1 - Basics of Portfolio Choice and Asset Pricing