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Lorenzo Pandolfi

The course Asset Pricing I will provide students with the main theoretical and analytical tools to study and understand the economics of financial markets and portfolio choices. After learning the different structure that financial markets can take and the key functions that these perform, learners will analyze how financial markets affect saving and investment decisions in an economy with no uncertainty.

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The course Asset Pricing I will provide students with the main theoretical and analytical tools to study and understand the economics of financial markets and portfolio choices. After learning the different structure that financial markets can take and the key functions that these perform, learners will analyze how financial markets affect saving and investment decisions in an economy with no uncertainty.

Then, learners will be introduced to expected utility theory, which will provide them with the key analytical tools to study choices under uncertainty. These tools will then be used to model and analyze portfolio choices: first, learners will study the so-called canonical portfolio problem, that is, the problem of an investor who has to choose how to allocate their wealth between a safe and a risky asset; then, they will study portfolio choices that involve multiple risky assets.

The analysis of portfolio choices will allow learners to characterize and determine investors’ optimal demand for risky assets, which will lay the foundation for the analysis of the Capital Asset Pricing Model, a milestone for asset pricing and financial economics.

The analysis of the CAPM will finally teach learners how to characterize equilibrium returns and asset prices in financial markets, also understanding the key forces that govern these key variables.

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What's inside

Syllabus

Week 1 - Functions of financial markets
By the end of this week, you will learn the various structures financial markets can adopt and comprehend their primary functions. You'll also be able to assess how the establishment of financial markets influences households' choices regarding saving and borrowing, along with companies' decisions regarding investment, all within an economy devoid of uncertainty.
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Week 2 - Choice under uncertainty
This week you will learn the theoretical principles that underlie individual choices under uncertainty, that is, in the presence of risk, in light of expected utility theory. Additionally, you will examine how to characterize agents' attitudes towards risk and the primary criteria for comparing risky prospects. These criteria include first- and second-order stochastic dominance, as well as the mean-variance criterion.
Week 3 - Contingent claim markets
By the end of this week you will understand how to analyze contingent claim markets and the risk neutral evaluation.
Week 4 - Canonical portfolio problem
By the end of this week you will learn the principles underlying investors' portfolio choice and to analyze, in particular, how stock market participation depends on individual preferences and stocks' fundamentals (expected return and riskiness).
Week 5 - Mean-Variance analysis
By the end of this week you will be able to identify the set of efficient portfolios in an economy with many risky assets and to analyze, in this economy, the portfolio choices of investors with mean-variance preferences, so as to characterize stocks' aggregate demand.
Week 6 - The Capital Asset Pricing Model (CAPM)
By the end of this week, you will learn the concept of equilibrium in financial markets. You'll apply this understanding to an economy featuring numerous risky assets and a riskless asset, all within a framework of risk-averse investors with mean-variance preferences. Additionally, you'll gain the ability to calculate equilibrium prices and expected excess returns. Furthermore, you'll recognize that these values are contingent upon the covariance risk of assets, which is quantified by asset betas.

Good to know

Know what's good
, what to watch for
, and possible dealbreakers
Strong fit for intermediate learners and above as it builds on Expected Utility Theory studied in previous econ courses
Taught by Lorenzo Pandolfi, who is recognized for work in economics
Suitable for those in finance or looking to enter finance

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Activities

Be better prepared before your course. Deepen your understanding during and after it. Supplement your coursework and achieve mastery of the topics covered in Asset Pricing Fundamentals with these activities:
Review calculus
Refresh your calculus skills, which are essential for understanding the mathematical foundations of asset pricing models.
Browse courses on Calculus
Show steps
  • Review fundamental calculus concepts like derivatives, integrals, and optimization
  • Practice applying calculus to solve financial problems, such as calculating the expected return and risk of an asset
  • Ensure you are comfortable with using calculus to analyze functions and equations related to asset pricing
Review fundamental probability and statistics
Refresh your knowledge of probability and statistics, which are foundational for understanding asset pricing models.
Browse courses on Probability
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  • Review basic probability concepts like probability distributions, expected value, and variance
  • Brush up on statistical concepts like hypothesis testing and regression analysis
  • Practice applying these concepts to financial data analysis
Compile a glossary of asset pricing terms
Build a personalized resource by compiling a glossary of key terms and concepts related to asset pricing.
Show steps
  • Identify and collect relevant terms from course materials, textbooks, and online sources
  • Define each term clearly and concisely
  • Organize the glossary alphabetically or by topic
Six other activities
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Attend finance industry webinars
Connect with industry professionals and gain insights into current trends in asset pricing through webinars.
Show steps
  • Identify relevant finance webinars hosted by reputable organizations
  • Register and attend the webinars
  • Engage in Q&A sessions to ask questions and learn from experts
Explore CAPM simulations
Reinforce your understanding of the Capital Asset Pricing Model (CAPM) through guided tutorials and simulations.
Browse courses on CAPM
Show steps
  • Follow tutorials on CAPM, equilibrium returns, and asset prices
  • Utilize CAPM simulations to visualize the relationship between beta and expected returns
  • Experiment with different risk-free rates and market risk premiums to see their effects on CAPM
Practice creating efficient portfolios
Engage in practice drills to strengthen your understanding of portfolio theory and the concepts of efficient portfolios.
Show steps
  • Review the concept of efficient portfolios
  • Practice constructing efficient portfolios using different expected returns and risk levels
  • Analyze the impact of changes in expected returns and risk levels on portfolio efficiency
Develop a risk assessment tool
Create a risk assessment tool to apply the principles of choice under uncertainty and expected utility theory.
Browse courses on Risk and Return
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  • Identify the necessary criteria for assessing risk
  • Design a questionnaire or tool to gather relevant data from investors
  • Develop an algorithm or model to quantify risk levels based on the collected data
  • Test and refine the risk assessment tool using real-world data
Prepare a white paper on portfolio optimization
Synthesize your knowledge of portfolio optimization into a comprehensive white paper, demonstrating your grasp of asset pricing concepts.
Show steps
  • Review and analyze existing literature on portfolio optimization
  • Develop a framework or model for optimizing portfolios
  • Apply the framework to different scenarios and case studies
  • Present the results in a clear and concise white paper, including key takeaways and implications
Participate in financial literacy programs
Share your knowledge of asset pricing and contribute to financial literacy by volunteering in programs.
Show steps
  • Research and identify financial literacy programs in your area
  • Contact the organizations and offer your services as a volunteer
  • Contribute to the programs by teaching basic asset pricing concepts or assisting participants with financial planning

Career center

Learners who complete Asset Pricing Fundamentals will develop knowledge and skills that may be useful to these careers:
Quantitative Analyst
The Quantitative Analyst is responsible for using mathematical and statistical models to analyze financial data. A course like this would be helpful because it provides a strong foundation in the theory and practice of financial modeling. This knowledge would help the Quantitative Analyst to develop and implement models to support investment decisions.
Actuary
The Actuary is responsible for using mathematical and statistical methods to assess and manage financial risk. A course like this would be helpful because it provides a strong foundation in the theory and practice of risk management. This knowledge would help the Actuary to develop and implement models to assess and manage financial risk.
Hedge Fund Manager
The Hedge Fund Manager is responsible for managing a hedge fund, which is a type of investment fund that uses sophisticated investment strategies to generate high returns. A course like this would be helpful because it provides a strong foundation in the theory and practice of investment management. This knowledge would help the Hedge Fund Manager to develop and implement investment strategies that generate high returns.
Insurance Analyst
The Insurance Analyst is responsible for analyzing and evaluating insurance risks. A course like this would be helpful because it provides a strong foundation in the theory and practice of insurance risk management. This knowledge would help the Insurance Analyst to assess and manage insurance risk.
Portfolio Manager
The Portfolio Manager is responsible for managing the investments of individuals, families, or institutions. A course like this would be helpful because it provides a foundation in the theory and practice of investment management. This knowledge would help the Portfolio Manager to make informed decisions about how to allocate assets and manage risk.
Risk Manager
The Risk Manager is responsible for identifying, assessing, and managing risks for an organization. A course like this would be helpful because it provides a comprehensive overview of the risk management process. This knowledge would help the Risk Manager to develop and implement effective risk management strategies.
Financial Economist
The Financial Economist is responsible for using economic theory and data to analyze financial markets and make investment decisions. A course like this would be helpful because it provides a strong foundation in the theory and practice of financial economics. This knowledge would help the Financial Economist to develop and implement investment strategies.
Data Scientist
The Data Scientist is responsible for using data to solve business problems. A course like this would be helpful because it provides a strong foundation in the theory and practice of data science. This knowledge would help the Data Scientist to develop and implement data-driven solutions to financial problems.
Financial Risk Analyst
The Financial Risk Analyst is responsible for implementing and maintaining risk management policies and procedures for a financial institution. A course like this would be useful because it teaches how to assess the risk and return of financial assets. This knowledge would help the Financial Risk Analyst to recommend appropriate strategies for managing financial risk.
Financial Planner
The Financial Planner is responsible for providing financial advice to individuals and families. A course like this would be useful because it provides a broad overview of the financial planning process. This knowledge would help the Financial Planner to develop and implement comprehensive financial plans for their clients.
Investment Banker
The Investment Banker is responsible for advising companies on mergers and acquisitions, capital raising, and other financial transactions. A course like this would be helpful because it provides a broad overview of the financial markets and the investment banking industry. This knowledge would help the Investment Banker to develop and execute financial transactions.
Private Equity Associate
The Private Equity Associate is responsible for identifying and evaluating potential investment opportunities for a private equity firm. A course like this would be helpful because it provides a broad overview of the private equity industry and the investment process. This knowledge would help the Private Equity Associate to identify and evaluate investment opportunities.
Auditor
The Auditor is responsible for examining and evaluating the financial records of an organization. A course like this would be useful because it provides a strong foundation in the theory and practice of accounting and auditing. This knowledge would help the Auditor to identify and assess financial risks.
Compliance Officer
The Compliance Officer is responsible for ensuring that an organization complies with all applicable laws and regulations. A course like this would be helpful because it provides a broad overview of the regulatory environment for financial institutions. This knowledge would help the Compliance Officer to develop and implement effective compliance programs.
Investment Analyst
The Investment Analyst is responsible for researching and evaluating potential investments. A course like this may be useful because it provides a framework for analyzing financial markets and making investment decisions. This knowledge would help the Investment Analyst to identify and recommend attractive investment opportunities.

Reading list

We've selected 21 books that we think will supplement your learning. Use these to develop background knowledge, enrich your coursework, and gain a deeper understanding of the topics covered in Asset Pricing Fundamentals.
Provides a comprehensive overview of investment analysis and portfolio management. It could be used as an alternative textbook for this course, providing more depth and breadth to the existing course material.
Provides a comprehensive overview of asset pricing and portfolio choice. It classic textbook in the field and is widely used in academic institutions.
This handbook provides a comprehensive overview of the latest research in asset pricing. It valuable reference for researchers and practitioners.
Provides a comprehensive overview of econometrics, including asset pricing. It valuable reference for researchers and practitioners.
Provides a rigorous mathematical treatment of investment science. It valuable reference for those who want to understand the theoretical foundations of asset pricing.
Provides a comprehensive overview of asset pricing. It valuable textbook for students and a useful reference for practitioners.
Provides a comprehensive overview of options, futures, and derivatives, including asset pricing. It valuable reference for practitioners.
Provides a comprehensive overview of statistics and data analysis for financial engineering, including asset pricing. It valuable reference for practitioners.
Provides a comprehensive overview of corporate finance, including asset pricing. It widely used textbook in academic institutions and is accessible to a broad audience.
Provides a comprehensive overview of investments, including asset pricing. It widely used textbook in academic institutions and is accessible to a broad audience.
Provides a comprehensive treatment of expected utility theory, which key tool for understanding portfolio choices under uncertainty. It provides background and prerequisite knowledge for this course.
Classic work on investment theory. It offers a valuable perspective on the topics covered in this course.
Provides an introduction to the emerging field of behavioral finance. It would be a useful reference for those who want to understand how psychological factors influence investment decisions.
Provides a comprehensive overview of risk management and financial institutions. It could be used as an alternative textbook for this course, providing more depth and breadth to the existing course material.
Provides a comprehensive overview of corporate finance. It could be used as an alternative textbook for this course, providing more depth and breadth to the existing course material.
Classic work on investing. It valuable resource for those who want to learn how to invest wisely.
Provides a comprehensive overview of the principles of finance. It could be used as an alternative textbook for this course, providing more depth and breadth to the existing course material.

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