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DRPS : Course Catalogue : Business School : Common Courses (Management School)

Postgraduate Course: Advanced Finance Theory (CMSE11103)

Course Outline
SchoolBusiness School CollegeCollege of Humanities and Social Science
Course typeStandard AvailabilityAvailable to all students
Credit level (Normal year taken)SCQF Level 11 (Postgraduate) Credits15
Home subject areaCommon Courses (Management School) Other subject areaNone
Course website None Taught in Gaelic?No
Course descriptionThe aim of the course is to provide a detailed treatment of the theoretical foundations of the modern financial economics. It should help the students understand the mechanism and economic intuition behind financial decisions. A particular emphasis is placed on the derivation of the theoretical asset pricing models and a rigorous mathematical argumentation. Empirical performance of the theoretical models is additionally presented.
Students will built on the knowledge gained from the Foundations of Finance Theory core course in semester one. The course partially covers the topics already introduced in the Foundations of Finance Theory course (e.g. capital asset pricing model or arbitrage pricing theory). However these concepts will be extended and treated in a detailed way. Additionally the emphasis will be put on rigorous mathematical argumentation.
Students are expected to have a background in mathematics, statistics and microeconomics, however one class will be devoted to revise and complete the students& knowledge in this area.
Entry Requirements (not applicable to Visiting Students)
Pre-requisites Co-requisites
Prohibited Combinations Other requirements Finance PGs only
Additional Costs None
Information for Visiting Students
Pre-requisitesBusiness School postgraduate students only.
Displayed in Visiting Students Prospectus?No
Course Delivery Information
Delivery period: 2011/12 Semester 2, Available to all students (SV1) WebCT enabled:  Yes Quota:  None
Location Activity Description Weeks Monday Tuesday Wednesday Thursday Friday
No Classes have been defined for this Course
First Class First class information not currently available
Exam Information
Exam Diet Paper Name Hours:Minutes
Main Exam Diet S2 (April/May)Advanced Finance Theory2:00
Summary of Intended Learning Outcomes
(1) Knowledge and Understanding:

On completion of the course students will have learned the following:
Building Block Skills
> Understand the concept of preferences and a utility function as their representation; understand the notion of expected utility and risk aversion and their role in modern finance.
> Be familiarized with the principles of the choice under uncertainty both in one-period and multi-period setup, understand the concept of Arrow-Debreu economy and state contingent claims.
> Have a detailed knowledge of the Modern Portfolio Theory of Markowitz; understand the assumptions of the theory, be able to provide a mathematical derivation of the efficient frontier, be able to rigorously prove important properties of the efficient portfolios.
> Have a thorough and deep understanding of main asset pricing models (the capital asset pricing model, the arbitrage pricing theory, the consumption capital asset pricing model); know the basic assumptions; be able to derive them, to give a rigorous mathematical justification and to explain their economic intuition.
> Be aware of the weaknesses and limitations of the models; be familiarized with their empirical performance and evidence that are useful for investment decisions.
> Be able to answer what the equity premium puzzle is and why it is a puzzle.

Advanced Topics
> Expected Utility and Risk Aversion
> Choice Under Uncertainty and Arrow-Debreu Economy
> Modern Portfolio Theory of Markowitz
> Capital Asset Pricing Model
> The Arbitrage Pricing Theory
> Consumption Capital Asset Pricing Model
> Equity Premium Puzzle

(2) Intellectual Skills and Personal Development:

The course will develop analytical and problem-solving skills.

Cognitive Skills
On completion of the course students should have demonstrated that they are able to:
> Evaluate competing theoretical explanations for the assets& price determination.
> Develop rigorous theoretical argument based on mathematical reasoning.
> Express the investors& problems in the language of mathematics.
> Analyse quantitative problems in finance.
> Use evidence to assess the validity of the theoretical asset pricing models.
> Access a wide body of research literature and critically appraise the articles from economic and financial journals.

Key Skills
On completion of the course students should have demonstrated that they are able to:
> Analyse and evaluate quantitative problems in finance.
> Implement solutions to these problems using mathematical reasoning.
> Use evidence to assess the validity of the theoretical asset pricing models.
> Integrate research material into a coherent argument.
> Communicate clearly and critically review research.
> Work independently.

Subject Specific Skills
Students will gain an ability to understand, speak and write the language of financial economics. Students will also become familiar with the most important theoretical models for asset pricing.
Assessment Information
There will be a two hour, closed-book exam that will count for the 100% of the final mark.

There is no assessed coursework. However students are expected to actively participate in the lectures and in-class discussions. Moreover students are expected to solve the problem sets and deliver the solutions to the Lecturer.

Special Arrangements
Additional Information
Academic description Not entered
Syllabus Not entered
Transferable skills Not entered
Reading list Not entered
Study Abroad Not entered
Study Pattern Not entered
Course organiserProf Abhay Abhyankar
Tel: (0131 6)50 8075
Course secretaryMs Sarah Jack
Tel: (0131 6)51 3854
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