Lecture 1

Financial markets channel resources to efficient use:
- Allocate capital
- Shift consumption over different periods
- Allocate risk
- Aggregate information
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?
- Pursuit beta.
- 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

Capital allocation: the choice between risky and risk-free assets

Author

maskenjao

342009

Card Set

Lecture 1

Description

L1 - Basics of Portfolio Choice and Asset Pricing

Updated

2018-08-27T14:31:57Z

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