FINA 4160 A Intermediate Financial Theory
(Foundations for Financial Economics)
Chow Ying-Foon, Ph.D.
Department of Finance
The Chinese University of Hong Kong
2020–21 Second Term
Y. F. Chow (CUHK)
Financial Economics
2020–21 Second Term
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Contact Information
Room 1215, Cheng Yu Tung Building
Phone: 3943 7638
Fax: 2603 6586
Email: yfchow@baf.cuhk.edu.hk
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Two working-day reply policy
https://blackboard.cuhk.edu.hk/
O¢ ce hours:
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Wednesday (3:30 p.m. to 5:30 p.m.)
By appointment
Y. F. Chow (CUHK)
Financial Economics
2020–21 Second Term
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Course Objective
Aim of this course is to provide students with a broad overview of
…nance as a natural extension of microeconomic and general
equilibrium theory.
Major focus is on discrete-time models of …nancial markets and the
valuation of simple …nancial claims traded in those markets.
Discussion topics include but not limited to:
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models of choice under uncertainty, risk aversion, and stochastic
dominance;
single-period portfolio optimization problems and equilibrium models of
asset markets;
mutual fund separation theorems and aggregation theorems;
introduction to asset markets and portfolio choice in a multi-period
context;
…nancial equilibrium with di¤erential information;
…nancial decisions of …rms and the Modigliani–Miller theorems.
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Financial Economics
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Prerequisites
FINA3080 (Investment Analysis and Portfolio Management)
Advised to take FINA3070 (Corporate Finance: Theory and Practice)
or equivalent prior to this course as well.
Expected to have some familiarity with calculus, matrix algebra,
probability theory, and good knowledge in microeconomics.
Remark
In spite of the economic nature of the course, ECON3011 (Intermediate
Microeconomic Theory) or ECON4110 (Introductory Mathematical
Economics) is NOT an o¢ cial prerequisite.
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Learning Outcomes
Upon completion of the course, students should be able to:
understand how mathematical methods and rigorous analysis are used
to formalize concepts and techniques of optimization and equilibrium
in economics and other related disciplines;
apply these techniques to derive optimal choice(s) for economic
agents, especially in environments involving uncertain outcomes;
develop ability to apply economic theories that underlie the
foundations of modern …nancial economics;
apply basic …nancial theories and understand the operations of
…nancial markets;
develop, implement, and present a research project on formulation and
manipulation of models involving economic problems and phenomena.
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Indicative Course Syllabus
The Time Dimension in Isolation:
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Investment decisions
Asset pricing under certainty
The Risk Dimension in Isolation:
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Utility theory under uncertainty
Risk and risk aversion
Stochastic dominance
Mean–variance analysis and e¢ cient portfolios
The Capital Asset Pricing Model (CAPM)
Factor models and Arbitrage Pricing Theory (APT)
Empirical evidence regarding CAPM and APT
Combining the Time and Risk Dimensions:
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State preference theory and Arrow–Debreu pricing
Consumption-Based Capital Asset Pricing Model (CCAPM)
Stochastic discount factor
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Financial Economics
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Indicative Course Syllabus (cont.)
E¢ ciency and Equilibrium in Financial Markets
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E¢ cient capital markets
Firm valuation in incomplete security markets
Agency cost theory and signaling
Contingent Claims and Arbitrage Pricing Methods
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Option pricing models
Fixed income securities
Introduction to martingale pricing
Introduction to continuous time …nance
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Course Components (Learning Activities)
Course Teaching and Learning Activities
Lectures
Assignments, tests, and project
Preparation for lectures, self-study and review
Expected
Hours
30
60
60
Work Load
(% of study)
20%
40%
40%
Slides of related topics will be uploaded to the course website before
classes. You should not only study the slides as they serve only a guideline
on topics to be covered. Lectures and in-class examples will sometimes
depart from the slides. You are responsible for reading the related
materials. Assignments and case studies will be used to illustrate the
application of the ideas, and to encourage independent learning skills.
These discussions would play a critical role in achieving the learning
objectives.
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Assessment Type
Your …nal course grade will be based on the following four components:
Brief Description
Participation
Assignments
Tests (mid-term and post mid-term)
Project (proposal and …nal report; possible presentation)
Percentage
5%
15% = 3 5%
60% = 2 30%
20%
If on-campus teaching is prohibited by March 1, we will adopt the
following assessment scheme:
Brief Description
Participation
Assignments
Exam
Project (proposal and …nal report; possible presentation)
Percentage
5%
15% = 3 5%
50%
30%
Note: You are required to attend test/exam in person on campus as
scheduled unless that is prohibited by CUHK and/or HKSAR
government, in which case I shall have the authority to revise the
format of the test/exam and the assessment scheme without your
consent.
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Financial Economics
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Grade Descriptors
Grade
A / AB+ / B / B-
C+ / C / CD+ / D
F
Overall performance in the course
Outstanding performance on all learning outcomes.
Substantial performance on all learning outcomes,
OR high performance on some learning outcomes
which compensates for less satisfactory performance
on others, resulting in overall substantial performance.
Satisfactory performance on the majority of learning
outcomes, possibly with a few weaknesses.
Barely satisfactory performance on a number of
learning outcomes.
Unsatisfactory performance on a number of learning
outcomes, OR failure to meet speci…ed assessment
requirements.
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Required and Recommended Readings
Main textbooks:
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Copeland, Thomas E., J. Fred Weston, and Kuldeep Shastri, 2005,
Financial Theory and Corporate Policy , fourth edition
(Addison-Wesley). (CWS)
Danthine, Jean-Pierre, and John B. Donaldson, 2014, Intermediate
Financial Theory , third edition (Elsevier). (DD)
Fabozzi, Frank J., Edwin H. Neave, and Guofu Zhou, 2012, Financial
Economics (Wiley). (FNZ)
Recommended advanced texts for reference:
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Cuthbertson, Keith, and Dirk Nitzsche, 2004, Quantitative Financial
Economics: Stocks, Bonds and Foreign Exchange, second edition
(Wiley). (CN)
Back, Kerry E., 2017, Asset Pricing and Portfolio Choice Theory,
second edition (Oxford University Press).
Additional readings may be assigned in class.
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Feedback for Evaluation
Early Feedback Collection System (EFCS) in the middle of the study
term
Course and Teaching Evaluation (CTE) exercise at the end of term
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Honesty in Academic Work
Attention is drawn to University policy and regulations on honesty in
academic work, and to the disciplinary guidelines and procedures
applicable to breaches of such policy and regulations. Details may be
found at http://www.cuhk.edu.hk/policy/academichonesty/.
With each assignment, students will be required to submit a signed
declaration that they are aware of these policies, regulations,
guidelines and procedures.
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In the case of group projects, all students of the same group should be
asked to sign the declaration, each of whom is responsible and liable to
disciplinary actions should there be any plagiarized contents in the
group project, irrespective of whether he/she has signed the declaration
and whether he/she has contributed directly or indirectly to the
plagiarized contents.
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Honesty in Academic Work (cont.)
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For assignments in the form of a computer-generated document that is
principally text-based and submitted via VeriGuide, the statement, in
the form of a receipt, will be issued by the system upon students’
uploading of the soft copy of the assignment.
Assignments without the properly signed declaration will not be
graded by teachers.
Only the …nal version of the assignment should be submitted via
VeriGuide.
The submission of a piece of work, or a part of a piece of work, for
more than one purpose (e.g. to satisfy the requirements in two
di¤erent courses) without declaration to this e¤ect shall be regarded
as having committed undeclared multiple submission. It is common
and acceptable to reuse a turn of phrase or a sentence or two from
one’s own work; but wholesale reuse is problematic. In any case,
agreement from the course teacher(s) concerned should be obtained
prior to the submission of the piece of work.
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Course Policy
Switch all your sound making devices to silent mode when class
begins.
Visit the course website regularly for announcements, teaching
materials, etc.
I am responsible for evaluating your participation during class
sessions. However, the course participation may also be based on peer
evaluation among team members, as I may distribute a peer
evaluation for your use at the end of the course.
Everyone in the class is encouraged to have at least a study partner,
so you can work on the assignments with your partner(s) and to
submit your work as a team e¤ort. Or course, you can do your work
individually if you prefer. Note that teams of more than TWO
people are possible only in rare instances and require special
permission.
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Course Policy (cont.)
Assignments and project must be submitted through the course
website as typewritten work, but only the …nal version of the
project should be submitted via VeriGuide. Only those students
whose names appear on the submitted work will receive credit. Late
assignment will NOT be accepted.
There will be no makeup test/exam. If you do not show up for the
test/exam, you will receive a score of zero for that test. The only
exception will be for a documented medical illness or family
emergency. If this should happen, contact me prior to the test by
phone or by email. Note that booking a ‡ight to leave Hong Kong
before a test does not constitute a serious emergency.
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Course Policy (cont.)
I will try to be prompt in returning assignments and tests. I will
also be as careful as possible in assigning grades. If you believe
a grading mistake has been made, you may submit a written
request for a re-grade, carefully explaining why you believe a
mistake has been made. Be forewarned, however, this will be
done on the entire work so that your grade may go up or down
as a result of a re-grade.
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Financial Economics
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Attendance Requirement
As the Faculty of Business Administration regards student attendance
to be an integral element in quality teaching and learning, the
Committee on Undergraduate Studies in Business had at its meeting
held on February 8, 1999, decided that student attendance taking is
required for all Business Administration undergraduate courses
starting from 1999–2000 and students are required to have 70% of
attendance rate in all classes.
On the other hand, many students in the class are seniors, and they
may need to miss a class or two for graduate school or job interviews.
Interviewing is an important process, and such absences do not
require advanced permission. If you do miss a class, you are still
responsible for learning the material that was covered and for
submitting your homework on time. Since the lecture material is
essential for learning, you should coordinate with your partner(s) to
learn any material that was missed.
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Important Dates
January 11 to April 24: Second Term.
January 24: Last day for withdrawal from this course.
February 11 to February 17: Lunar New Year Vacation.
March 29 to April 7: Reading Week.
May 4: Project due.
Dates for assignments and tests/exam will be announced in class.
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Tentative Schedule (and I do mean TENTATIVE)
January
12
19
26
February
2
9
16
23
March
2
9
Y. F. Chow (CUHK)
Time Dimension in Isolation
CWS Ch. 1–2; DD Ch. 1–2; FNZ Ch. 1–6
Time Dimension in Isolation
CWS Ch. 1–2; DD Ch. 1–2; FNZ Ch. 1–6
Risk Dimension in Isolation; Assignment 1 due
CWS Ch. 3, 5–6; DD Ch. 3–8, 14; FNZ Ch. 9, 13–15
Risk Dimension in Isolation
CWS Ch. 3, 5–6; DD Ch. 3–8, 14; FNZ Ch. 9, 13–15
Risk Dimension in Isolation
CWS Ch. 3, 5–6; DD Ch. 3–8, 14; FNZ Ch. 9, 13–15
Lunar New Year Vacation
Risk Dimension in Isolation; Assignment 2 due
CWS Ch. 3, 5–6; DD Ch. 3–8, 14; FNZ Ch. 9, 13–15
Test 1 (in class)
Combining Time and Risk Dimensions
CWS Ch. 4; DD Ch. 9–11, 16; FNZ Ch. 10, 16–17
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Tentative Schedule (and I do mean TENTATIVE, cont.)
March
16
23
30
April
6
13
20
May
27
4
Combining Time and Risk Dimensions; Project proposal due
CWS Ch. 4; DD Ch. 9–11, 16; FNZ Ch. 10, 16–17
Combining Time and Risk Dimensions
CWS Ch. 4; DD Ch. 9–11, 16; FNZ Ch. 10, 16–17
Combining Time and Risk Dimensions
CWS Ch. 4; DD Ch. 9–11, 16; FNZ Ch. 10, 16–17
Reading Week
E¢ ciency and Equilibrium; Assignment 3 due
CWS Ch. 10–12; DD Ch. 10, 17–18; FNZ Ch. 7–8, 20–21
Contingent Claims & Arbitrage Pricing; Review (time permit)
CWS Ch. 7–9; DD Ch. 11–13, 15; FNZ Ch. 18–19
Class Make-up; Test 2 (in class)
Project due
Note: The presentation order of topics may be changed and
some topics may be canceled due to time constraints.
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