The course carefully examines the basic building blocks of modern finance theory and focuses on the theoretical and analytical cornerstones on which the building blocks are placed. We study how these building blocks can, in certain cases, help us identify potentially optimal decisions now, even though the future consequences of those decisions are yet uncertain.
A common feature of finance is the need to make good use of and where possible best use of limited resources; constrained optimization techniques can often guide us in this need. Basic concepts in probability are used in finance to describe the inevitable uncertainty regarding the future. Most of us dislike risk and prefer to avoid risk, though only if the price for avoiding that risk is acceptable. We study how expected utility theory helps us measure how averse we are to taking such risks.
We then proceed to use these building blocks to examine several concepts: choice under uncertainty, maximizing returns and minimizing risk subject to constraints, mean-variance analysis and net present value.
Module Aims
The aim of this course is to familiarize you with the basic mathematical tools and the analytical skills necessary to understand modern finance theory.
Learning Outcomes
On completion of the course you should be able to
1. Apply basic mathematical techniques and tools used in modern finance.
2. Describe and evaluate measures of risk aversion using expected utility theory.
3. Understand the concept of 'efficient frontier' when investing in risky assets.
4. Evaluate choices using the net present value approach.
