Welcome toInvestments, Tue. Mar. 31,

1
Welcome toInvestments, Tue. Mar. 31, 09

• Todays plan
• Practical info text-book, APSIM, hand-ins,
  lectures, exam,
• Scientific content the big picture and Sharpes
  Chapter 1.
• Trading and equilibrium in a simple
  state-preference model Sharpes Chapter 2.

2
Practical Matters, I

• Text-book W. Sharpe (2006-7-8), Investors and
  Markets, Princeton (and just that).
• Important tool The APSIM-program which is a
  (C-based) Excel plug-in. Get that working on
  your computer. (Installation problem-free on my
  XP-laptop. C-drive-acces Excel security-level.
  FinLab-computers, Vista, Linux, Mac ?)

3
Practical Matters, II

• Use Kursportalen and this frequently.
• The lecture plan is irregular for a number of
  reasons.
• Lectures will be a mixture of slides, Excel and
  blackboard. And I will try to mix it up with some
  tutorial-like parts.

4
Practical Matters, III

• This week 3 hours of me talking on Tuesday
  (March 31) and Thursday (April 2) to get the ball
  rolling. Then 1st hand-in exercise is posted, and
  you work on that on Friday (i.e. no lectures on
  March 3).

5
Practical Matters, IV Evaluation

• Of me Standard procedure, but running feedback
  is appreciated.
• Of you Two mandatory Hand-Ins and a final
  written exam on May 29. The Hand-In deadlines
  will be April 17 and May 8. Groups of up to three
  are allowed.

6
Scientific Contents, I

• You have
• had courses in microeconomics. Did you think that
  the dicussion of general equlibrium was too
  abstract?
• seen CAPM. Did you think that the equilibirum
  considerations were partial at best?
• seen (binomial-model) option-pricing. Did you
  ever wonder why there are markets for options?

7
Scientific Contents, II

• Well, that is what we going to fix.
• The more dull version is that we study portfolio
  choice, asset prices and equilibrium in
  state-preference models.
• One period, finite outcomes makes the math
  (although not necessarily the algebra) simple.
• Our approach Experimental or simulation as
  Sharpe says.(Numerical, empirical could be
  used too.)

8
Scientific Contents, III Sharpe

• Ch. 2 Trade-to-equilibrium in a simple model.
• Ch. 3 (Preferences) and 4 (Prices) is standard
  text-book stuff, but with twists. We uncover
  details of the trading process.
• Ch. 5 (Positions) Standard texts mention wealth
  and utility heterogeneity but usually dont do
  anything about it.

9
Scinetific Contenst, IV Sharpe

• Ch. 6 (Predictions) What if people differ in
  their the assesments of probabilities? Theory is
  tricky, experiments are easy.
• Ch. 7 (Protection) Introducing option-like
  structures and finding both buyers and
  sellers.(Meaningful financial engineering.)
• Ch. 8 (Advice) Uncovering peoples preferences.

10
Sharpes Chapter 2

• Market Risk-Reward Theorem (MRRT)
• Only market risk is rewarded with a higher
  expected return.
• You are not rewarded for taking risk that could
  be diversified away. A very sobering principle.
• If you think market risk is vague fair enough,
  just hang on for a little while.
• CAPM is one case where MRRT holds. (Here, the
  expected return relation is linear it neednt be)