ICMF473_FinancialTheory_T1_InvestmentDecisionswith

BachelorofBusinessAdministrationProgramMahidolUniversityInternationalCollegeCourseCodeICMF473CourseTitleFinancialTheoryNumberofCredits4(4-0-4)Prerequisite(s)ICMF471FinancialInvestmentTypeofCourseFinanceMajorRequiredCourseTrimester/AcademicYearTerm3/Yr2010-11InstructorDr.JunJiangCourseDescriptionThiscourseintroducestheclassicalideasinfinance.Itwillcoverexpectedutility,riskaversion,mean-varianceportfolioanalysis,separationtheorem,statedpricesandriskneutralvaluation,efficientmarket,coretheoryofcapitalmarketsandcorporatefinance.CourseObjective(s)Thefocusofthiscoursewillbeonthetheoryandempiricalresearchofcorporatefinance,investment,financialeconomics,assetpricing,andbankruptcymodel.Thecourseseeksto:Providestudentswiththeadvanceandcomprehensivetheoriesandapplicationsin“CorporateFinance”,“Investment”,“FinancialEconomics”,“AssetPricing”and“RiskManagementModels”,Encouragestudentstostudytheclassicliteratureinthesefields,andMotivatestudentstopracticeresearchtechniques.ICMF473FinancialTheoryCourseOutlineWeekTopicHours1Ch.1Introduction:CapitalMarkets,Consumption,andInvestmentCh.2:InvestmentDecisions:TheCertaintyCase42Ch.3:TheTheoryofChoice:UtilityTheoryGivenUncertainty43Ch.4:StatePreferenceTheory44Ch.5:ObjectsofChoice:Mean-VariancePortfolioTheory45Ch.6:MarketEquilibrium:CAPMandAPT46MidtermExam27Ch.7:PricingContingentClaims:OptionPricingTheoryandEvidence48Ch.8:TheTermStructureofInterestRates,ForwardContracts,andFutures49Ch.9:MultiperiodCapitalBudgetingunderUncertainty:RealOptionsAnalysis410Ch.10-11:EfficientCapitalMarkets:TheoryandEvidence411GroupPresentation(25minutesforeachgroup,includingQ&A)412FinalExam2ICMF473FinancialTheoryMeasurementandEvaluationofStudentAchievementEvaluationMethods/activitiesWeekPercentage1MidtermExamination630%2FinalExamination1240%3GroupProject10-1125%4AttendanceEveryclass5%ReferencesMainTextbooks:ThomasE.Copeland,J.FredWestonandKuldeepShastri(2004),FinancialTheoryandCorporatePolicy,4thEdition,AddisonWesleyJeanTirole(2005),TheTheoryofCorporateFinance,PrincetonUniversityPressRecommendSupplementaryReadings(Optional):JürgenEichbergerandIanR.Harper(1997),FinancialEconomics,OxfordUniversityPressChrisJones(2008),FinancialEconomics,RoutledgeJohnH.Cochrane(2005),AssetPricing,PrincetonUniversityPressE-mail:[e-mail]@gmail.comMobile:081-173-1836OfficeHours:TuesdaytoFriday,1-2pmDr.JunJiangICMF473FinancialTheoryTopic1InvestmentDecisionswithCertainty…Throughthealterationsintheincomestreamsprovidedbyloansorsales,themarginaldegreeofimpatienceforallindividualsinthemarketarebroughtintoequalitywitheachotherandwiththemarketrateofinterest.----IrvingFisher,TheTheoryofInterest,Macmillan,NewYork,1930Dr.Jiang,[e-mail]®MahidolUniversity1.1ConsumptionandInvestmentwithoutCapitalMarketsStartwithsimpleAlloutcomesfrominvestmentareknownwithcertaintyNotransactioncostsNotaxesOne-periodcontextIncomeatthebeggingofperiod:Incomeattheendoftheperiod:Actuallyconsumptionnow:End-of-periodconsumption:0c1c0y1yMarginalUtilityofconsumptionispositiveanddecreasingINDIFFERENCECURVESC1C0ConsumptionInperiod1ConsumptionInPeriod0U0U1U2RepresenthigherlevelsofutilityU0U1U2Whathappensifweintroduceproductiveopportunitiesthatallowaunitofcurrentsavings/investmenttobeturnedintomorethanoneunitoffutureconsumption?Themoreanindividualinvests,thelowertherateofreturnonthemarginalinvestmentAnindividualwillmakeallinvestmentsinproductiveopportunitiesthathaveratesofreturnhigherthanhisorhersubjectiverateoftimepreferenceTheProductionOpportunitySetTheslopeofalinetangenttocurveABX:therateatwhichadollarofconsumptionforegonetodayistransformedbyproductiveinvestmentintoadollarofconsumptionTheslopeofalinetangenttotheinvestmentopportunitysetatpointB,i.e.MRT,isexactlyequaltotheinvestors’subjectivetimepreference.i.e.MRSMRS=MRTIntertemporalexchangeofconsumptionbundleswillberepresentedbytheopportunitytoborroworlendunlimitedamountsatr,amarket-determinedrateofinterestFinancialmarketsfacilitatethetransferoffundsbetweenlendersandborrowers1.2ConsumptionandInvestmentwithCapitalMarkets001rXXX)1(100ryyWWhathappensiftheproduction/consumptiondecisiontakesplaceinaworldwherecapitalmarketsfacilitatetheexchangeoffundsatthemarketrateofinterest?ProductionandConsumptionwithCapitalMarketsWhathappensiftheproduction/consumptiondecisiontakesplaceinaworldwherecapitalmarketsfacilitatetheexchangeoffundsatthemarketrateofinterest?Theseparationoftheinvestment(step1)andconsumption(step2)isknownastheFisherSeparationTheorem:GivenperfectandcompleteCapitalMarkets,theproductiondecisionisgovernedsolelybyanobjectivemarketcriterion(representedbymaximizingattainedwealth)withoutregardtoindividuals’subjectivepreferencethatenterintotheirconsumptiondecisions(1)Choosetheoptimalproductiondecisionopportunitiesbytakingonprojectsuntilthemarginalrateofreturnoninvestmentequalstheobjectivemarketrate(2)ChoosetheoptimalconsumptionpatternbyborrowingorlendingalongthecapitalmarketlinetoequateyoursubjectivetimepreferencewiththemarketrateofreturnThedecisionprocesswithproductio