2024/2025

Theory of Finance

Type: Mago-Lego

Delivered by: School of Finance

When: 3 module

Online hours: 8

Open to: students of all HSE University campuses

Instructors: Ilya Dergunov, Nikita Pirogov

Language: English

ECTS credits: 3

Course Syllabus

Abstract

The aim of the course is to guide through the basic building blocks of classical finance and to discuss fundamentals of the capital markets theory in discrete time. The first lectures will be devoted to the bond markets. Then we will cover equity markets and pricing of the contingent claims. Afterwards we are going to consider mean-variance portfolio optimization, CAPM and APT models with empirical testing of those models.The course assumes a sound command of calculus, linear algebra (matrix manupulation and etc.) and optimization (method of Lagrange multipliers). These topics will be used and it is highly recommended that students refresh their knowledge about them.Multiple textbooks can be used to study for this course. References will be provided for each topic.

Learning Objectives

• To introduce students with fundamentals of financial markets and theories of asset pricing
• To familiarize students with various techniques for setting fair pricing and detecting arbitrage mispricing in bond and equity markets

Expected Learning Outcomes

• Be able to apply basic financial models, understand their features and limitations
• Be able to clearly articulate on most important finance issues in valuation of bonds and equities
• Be able to justify conclusions using appropriate methodological and financial arguments with appropriate rigour
• Be able to analyze and evaluate quantitative problems in finance
• Gain an ability to understand, speak and write the language of financial economics and also become familiar with the most important theoretical models for asset pricing

Course Contents

• Bonds
• Utility Theory
• Portfolio Theory
• Beta-pricing models
• Testing Factor Models
• Valuation of Contingent Claims

Assessment Elements

• Home Assignment 1
• Home Assignment 2
• Home Assignment 3
• Home Assignment 4
• Home Assignment 5
• Home Assignment 6
• Home Assignment 7
• Home Assignment 8
• Practice test 1
  Bonds and interest rates
• Practice test 2
  Mean-variance portfolio problems and factor models
• Practice test 3
  Factor models and/or Valuation of contigent cliams
• Final test
  Final test: Bonds, Utility theory, Mean-variance analysis, CAPM & APT

Interim Assessment

• 2024/2025 3rd module
  0.35 * Final test + 0.06 * Home Assignment 1 + 0.06 * Home Assignment 2 + 0.06 * Home Assignment 3 + 0.06 * Home Assignment 4 + 0.06 * Home Assignment 5 + 0.06 * Home Assignment 6 + 0.06 * Home Assignment 7 + 0.06 * Home Assignment 8 + 0.06 * Practice test 1 + 0.06 * Practice test 2 + 0.05 * Practice test 3

Bibliography

Recommended Core Bibliography

• Asset pricing, Cochrane, J. H., 2005
• Back, K. E. (2017). Asset Pricing and Portfolio Choice Theory. Oxford University Press.
• Cochrane, J. H. (2005). Asset Pricing (Vol. Rev. ed). Princeton, N.J.: Princeton University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=329716

Recommended Additional Bibliography

• Elton, E. J. (2014). Modern Portfolio Theory and Investment Analysis (Vol. Ninth edition). Hoboken, NJ: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1639379

Authors

• DERGUNOV ILYA EVGENEVICH