Course summary:

This module offers a comprehensive introduction to asset pricing, providing students with the theoretical knowledge and practical skills required to understand how financial assets are valued in financial markets. It begins by exploring decision-making under uncertainty, risk aversion, and utility functions, highlighting how individuals make financial decisions in the presence of risk. The module then examines portfolio theory, introducing the fundamental relationship between risk and return through real-world examples of historical returns on risky portfolios. Students will develop an understanding of the key principles of portfolio construction, including minimum-variance portfolios, the mean-variance frontier, and efficient portfolios comprising both risky and risk-free assets. The module also provides an in-depth analysis of the Capital Asset Pricing Model (CAPM) and its application in estimating expected asset returns. Building on this foundation, students will explore more advanced asset pricing frameworks, including Arbitrage Pricing Theory (APT) and the Fama-French multifactor model. Finally, the module considers methods for evaluating the performance of fund management companies and assessing the persistence of their investment performance over time.

Topics:

1. Utility Functions and Risk Aversion

2. Consumption-Based Asset Pricing; No-Arbitrage, Market Completeness, Risk-Neutral Pricing

3. Measuring Risk and Return; Efficient Market Hypothesis

4. Portfolio Formation and Mean-Variance Efficiency

5. CAPM and APT

6. Fama-French Factors and Factor Investing

7. Introduction to the Fund Management Industry

8. Fund Management and Performance Persistence

9. Cryptocurrency Funds