Finance 1 (Fin1)

Learning Objectives for Finance 1

Knowledge

• Deterministic cash flows: Understand arbitrage and the existence of discount factors.

• Interest rate concepts: Know the term structure of interest rates, zero-coupon rates, and forward rates.

• Bond market concepts: Be familiar with bond types, effective interest rates (yields) and other conventions, and duration.

• The NPV criterion: Understand the Net Present Value rule for investment decisions.

• Single-period models with uncertainty: Grasp optimal portfolio choice and expected utility maximization.

• Mean-variance analysis: Understand the principles of portfolio optimization.

• CAPM: Know and apply the Capital Asset Pricing Model.

• Stochastic multi-period models: Understand dynamically adjusted portfolios.

• Arbitrage pricing: Know the concept of the absence of arbitrage, the existence of martingale measures, and the 1st and 2nd fundamental theorems of asset pricing. Be able to apply these concepts to the pricing of derivative assets.

Skills

• Calculate present values and key figures for deterministic cash flows and perform simple calculations with them, including interest rate calculations and applying the NPV criterion.

• Calculate mean-variance optimal portfolios in single-period models.

• Calculate arbitrage-free prices of derivative assets in simple stochastic multi-period models, and carry out basic probability-theoretic reasoning (specifically involving conditional expectation) in such models.

Competencies

• Formulate consumption and (especially) investment problems that involve the time value of money and meaningful trade-offs between risk and expected return.

• Assess the prices of different financial assets in relation to each other using considerations of both the absence of arbitrage and market equilibrium.

• Examine how the financial assets (analyzed under the second competency) can be used to solve the problems formulated under the first competency.