This course enables students to develop analytical and quantitative skills in the Economics of Finance whose analysis is broader and deeper than that of Corporate Finance. After this course, students are expected to understand concepts such as Expected Utility, State Preference, Stochastic Dominance in Financial Economics. Topics to be covered include a review of probability and statistics, expected utility theory, the capital asset pricing model (CAPM), consumption-based asset pricing theory, arbitrage pricing theory (APT), state preference theory, option pricing theory, market efficiency, the term structure of interest rates, forward contracts and futures contracts.

CILO-1: Describe how the optimal choice is made under uncertainty and, especially, to explain how a proper combination of return and risk is chosen for financial investment. CILO-2: Describe how an optimal portfolio is selected through a tradeoff between risk and return, to illustrate how expected return is determined by the underlying risk that is cov-risk not var itself. CILO-3: Recognize why the capital asset pricing model (CAPM) fails to fit real-world data and indicate why the APT is superior to the CAPM in pricing financial risk and simulating actual portfolio choice. CILO-4: Explain why the state preference theory provides a good explanation for short selling and other financial investment choice. CILO-5: Identify what is meant by various forms of market efficiency and illustrate how the value of information is determined.