FIN 7809 – Finance Theory
Joel R. Barber
BA 205A
348-2027
barberj@fiu.edu
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.