FIN 7809 – Finance Theory Joel R. Barber BA 205A 348-2027 [email protected] www.fiu.edu/~barberj/ Office Hours: Monday 1:30 to 3:30 p.m. by appointment and after class Course Description This course examines the theory of investment and portfolio decisions under uncertainty. We will study investor behavior under uncertainty, mathematical properties of the efficient frontier, portfolio separation, multifactor models, capital market theory, and the arbitrage pricing theory. We will also examine recent developments in portfolio management strategy and performance measurement. Textbook Theory of Financial Decision Making, Jonathan E. Ingersoll, 1987 Grading Midterm Final Class Presentations Paper 30 30 10 30 Topics 1. 2. 3. 4. 5. 6. 7. 8. 9. Investor’s Attitude Towards Risk Stochastic Dominance Mathematics of the Efficient Frontier Portfolio Separation Capital Asset Pricing Model (CAPM) Arbitrage Pricing Theory (APT) Valuation of State of State Contingent Securities Multiperiod Valuation Econometric Issues in Testing CAPM and APT Reading List Arrow, K. J., Essays in the Theory of Risk-Bearing, North-Holland, Amsterdam, 1971; Chapter 3. ____________ "The Role of Securities in the Optimal Allocation of Risk Bearing," Review of Economic Studies, 1964, pp. 91-96 Black, F and M. Jensen, and M Scholes, "The Capital Asset Pricing Model: Some Empirical Tests," In Studies in the Theory of Capital Markets, Edited by M. Jensen, Praeger, New York, 1972. Campbell, J. Y and L. M. Viceira, Strategic Asset Allocation, Oxford University Press, 2002. Cass, D. and J. E. Stiglitz, “The Structure of Investor Preferences and Asset Returns, and Separability in Portfolio Allocation: A Contribution to the Pure Theory of Mutual Funds, Journal of Economic Theory 2, 1970, 122-160. Fama, E. F. and Kenneth French, "The Cross Section of Expected Stock Returns," Journal of Finance, vol. 47, 1992, pp. 427-466. Fama, E.F. and J. MacBeth, "Risk, Return and Equilibrium: Empirical Tests," Journal of Political Economy, vol. 81, 1973, pp. 607-636. Fama, E. 1972, ''Components of Investment Performance,'' Journal of Finance, vol. 17, no. 3: 551-567. Gibbons, M., "Multivariate Test of Financial Models: A New Approach," Journal of Financial Economics, vol. 10, 1982, pp. 3-27. Goodwin, T., ''The Information Ratio.'' Financial Analysts Journal, vol. 54, 1998, 3443 Hadar, J. and W. Russell, "Rules for Ordering Uncertain Prospects," American Economic Review, vol. 59, pp. 25-34. Lintner, J, "Security Prices and Maximal Gains from Diversification," Journal of Finance, 1965. __________, "The Valuation of Risky Assets and the Selection of Risky Investments in stock Portfolios and Capital Budgets," Review of Economics and Statistics, 1965. Merton, R.C., "An Analytical Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, vol. 7, 1972, pp. 1851-1872 Mossin J., "Equilibrium in a Capital Asset Market," Econometrica, 1966, 768-783 Roll, R., "A Critique of the Asset Pricing Theory's Tests. Journal of Financial Economics," vol. 4, 1977, pp. 129-176 Ross, Stephen A, "The Arbitrage Theory of Capital Asset Pricing," Journal of Economic Theory, vol. 13, 1976, pp. 341-360 ________________, "The Current Status of the Capital Asset Pricing Model (CAPM)," Journal of Finance, Vol. 33, 1978. Schaefer, Steven, "Taxes and Security Market Equilibrium," in Financial Economics: Essays in Honor of Paul Cootner, William Sharpe and Cathryn Cootner (eds.), Prentice Hall, Englewood Cliffs, NJ, 1982 Sharpe, W., ''Asset Allocation: Management Style and Performance Measurement.'' Journal of Portfolio Management, vol. 21, 1992, 7-19. Sharpe, W.F., "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk," Journal of Finance, vol. 19, 1964, pp. 425-442. Shanken, J., "Arbitrage Pricing Theory: Is It Testable?" Journal of Finance, vol. 37, 1982, 1129-40 Shanken, Jay. "The Current State of the Arbitrage Pricing Theory," Journal of Finance, 47, 1992, pp. 1569-1574.