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Regular version of the site
Bachelor 2019/2020

Asset Pricing and Financial Markets

Area of studies: Economics
When: 3 year, 1-4 module
Mode of studies: Full time
Language: English
ECTS credits: 8

Course Syllabus


This course is aimed at students who wish to understand how financial markets work and how securities are priced. Using present value techniques, it gives a theoretical treatment of bond and stock valuation including portfolio theory and a development of the Capital Asset Pricing Model. The concept of financial market efficiency is introduced, and evidence for efficiency evaluated. Finally, there is a presentation of derivative pricing using absence of arbitrage arguments. The course is based on lectures, seminars, team work and self-study. “Asset pricing and Financial markets” is a two-semester course designed to prepare students for UOL examination.
Learning Objectives

Learning Objectives

  • The main objective of the course is to provide the conceptual background for valuation of individual financial assets and professional discussion of asset pricing approaches.
  • The course is focused on developing skills in analyzing valuation and pricing behavior on financial markets.
Expected Learning Outcomes

Expected Learning Outcomes

  • define the EMH and explain what it means in practice
  • explain under which conditions efficiency may not fully hold
  • Outline the purpose of derivative products; know the most common ones
  • be able to put the notion of pricing by replication under absence of arbitrage in practice for simple contracts like forwards and in the binomial tree model
  • apply Black-Scholes formula
  • Describe the important differences between stock, bond and derivative securities.
  • Explain how to price assets using both present value and absence of arbitrage methods.
  • Apply present value techniques to price stocks and bonds
  • Employ mathematical tools to compute risk and return for portfolios of securities.
  • Evaluate portfolio choice problems.
  • Present, explain and apply the Capital Asset Pricing model for computing expected stock returns.
Course Contents

Course Contents

  • Introduction to the Course. No arbitrage condition as a basic valuation principle
    No arbitrage rule and the principle of tracking (replicating) portfolio. Net present value rule of corporate analysis. The sources of NPV. The consumption choice and the first Fisher separation theorem.
  • Fundamentals of Bond Valuation
    The yield curve. Spot rates and forward rates. Defining forward rate from the yield curve. The term structure of interest rates: theoretical explanation. The role of term structure of interest rates in constructing tracking (replicating) portfolio for Corporate Bonds. Intrinsic value of stand-alone bond. Discounted cash flow valuation of corporate bonds. Corporate bond's types. Bond’s covenants: assets covenants, dividend covenants, financing covenants. The influence of covenants over bond’s valuation. Bond's yields: promised yield to maturity, realized (horizon yield), promised yield to call. Theorems of bond's pricing. Bond’s rating and yields to maturity.
  • Fundamentals of Stock Valuation
    Types of preferred stock by voting rights, dividend rates and dividend payments. Discounted dividend model (DDM) for preferred (preference) shares. Discounted dividend model for common stock (ordinary shares): the criteria for stable growing company, Gordon constant growth dividend rate model. Multistage DDM: 2 stages dividend growth, negative rate of dividend growth. Growth opportunities value. The limitations of DCF valuation.
  • Risk and Expected Return: Principles of Portfolio Analysis
    Principles and assumptions of mean-variance analysis. Mean and variance of returns of a risky asset. Portfolio expected returns. Portfolio risk and assets’s covariances. Feasible set of assets and the efficient frontier. Capital market line. Two-fund separation.
  • Asset Pricing Approaches: CAPM, APT and alternatives
    Assumptions for capital asset pricing model. Market portfolio and its derivation. Security market line. Stocks' beta. Empirical evidence and critiques of CAPM. Understanding singlefactor and multi-factor model representation. Systematic risk and diversification. Arbitrage price theory. Empirical evidence of multi-factor models and applications in practice.
  • The role of Efficient Market Hypothesis in Corporate Analysis: Theory and Evidence
    Types of information for investor’s decision-making. The value of information for the investor. The efficient market hypothesis. Weak, semi-strong, strong form efficiency. Implications of Efficient Market Hypothesis.
  • Derivatives Valuation Models
    The definition of a derivative contract; how to price derivatives using absence of arbitrage; forwards and futures contracts; pricing forwards on stocks, currencies and commodities; option contracts; practical uses of options contracts; bounds on option premia; option pricing via binomial models and Black-Scholes
Assessment Elements

Assessment Elements

  • non-blocking Exam
  • non-blocking Class Participation
    Class participation includes class activity and attendance
  • non-blocking Home assignments
    Includes written and online home assignments weighted with similar weights and one large assignment on the literature that has a weight of 5 small ones.
  • non-blocking Midterm exam
  • blocking Final Exam (UoL or HSE)
  • non-blocking Group assignment
Interim Assessment

Interim Assessment

  • Interim assessment (2 module)
    0.1 * Class Participation + 0.45 * Exam + 0.25 * Home assignments + 0.2 * Midterm exam
  • Interim assessment (4 module)
    0.1 * Class Participation + 0.5 * Final Exam (UoL or HSE) + 0.05 * Group assignment + 0.05 * Home assignments + 0.3 * Interim assessment (2 module)


Recommended Core Bibliography

  • Vernimmen, P. (2011). Corporate Finance : Theory and Practice (Vol. 3rd ed). Chichester, West Sussex: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=398584

Recommended Additional Bibliography

  • Financial markets and corporate strategy, Grinblatt M., Titman S., 2002