This course is designed to serve as a transition between the method-oriented courses in the early phase of the QFin-program to the core finance courses that will follow. In this sense, the goal of the course is to introduce students to some of the main concepts in finance in order to prepare them for the specialized courses, such as asset and risk management and corporate finance. En route to this goal, we build on the skills and tools that students have acquired in preceding QFin-courses, in particular microeconomics, mathematics, and statistics.

The sections of the course are organized based on the following topics:   

• Preferences, financial decisions, and prices. This section shows how we can derive asset prices in simple equilibrium models under certainty as well as under uncertainty. 

• Capital Asset Pricing Model (CAPM). In the second section, we derive the CAPM (i) as a special case of the general pricing formula derived in the first section and (ii) from mean-variance preferences using portfolio theory. Additionally, we discuss empirical evidence on the validity and failure of the CAPM.    

• Arbitrage Pricing Theory (APT). With arbitrage pricing theory, we sacrifice some of the economic appeal provided by equilibrium models for the benefit of weaker assumptions and flexibility of empirical models inspired by APT. Additionally, we discuss some prominent factor models that appear to work quite well empirically, e.g. those proposed by Fama and French.

• Multiperiod economies: Interest rates and derivatives. In this section, we extend arbitrage pricing to a multiperiod setup. In this setup, we discuss the pricing of default-free bonds using no-arbitrage buy-and-hold strategies and derivatives using no-arbitrage dynamic strategies. The discussion will be complemented by material on recent developments around derivatives and practical applications.

After completing this course students will have the ability to:

• Understand the principles of decision making under certainty and uncertainty. 

• Understand the basics of and differences between equilibrium pricing and arbitrage pricing.

• Understand the role of diversification and optimal portfolio choice for asset pricing. 

Full attendance is compulsory. This means that students should attend at least 80% of all lectures, at most one lecture can be missed.

Lectures, with examples and applications.

Two midterm exams (each worth 30% of the grade) and one final exam (40% of the grade).

Students in the MAQFIN-22 curriculum who have not obtained a positive grade for Principles of Finance, can re-register for this respective course and attend it once again.

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Communication via course platform with lecturer and teaching assistants.

See lecture notes