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Foundation of Finance is an introduction to the foundations of modern financial economics. The focus throughout will be on the development and interpretation of discrete-time models of asset pricing and capital markets. After developing and studying the details of consumer decision-making under uncertainty, it uses that general framework as a basis for understanding both equilibrium and no-arbitrage theories of securities pricing, including traditional models like the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT), newer Arrow-Debreu theories, the Consumption Capital Asset Pricing Model (CCAPM), and martingale pricing methods. The course is primarily theoretical. However, I will discuss some empirical puzzles in finance.
This course is intended for second-year undergraduate students in finance and economics. While there are no formal prerequisites for enrolling in this course, a working knowledge of calculus, linear algebra, and probability plus statistics is especially useful.
Targeting readers with backgrounds in economics, the book includes new material on the asset pricing implications of behavioral finance perspectives, recent developments in portfolio choice, derivatives-risk neutral pricing research, and implications of the 2008 financial crisis. Each chapter concludes with questions, and for the first time a freely accessible website presents complementary and supplementary material for every chapter.
The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross-section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
In the book, Kerry E. Back offers a concise yet comprehensive introduction to and overview of asset pricing. Intended as a textbook for asset pricing theory courses at the Ph.D. or Masters in Quantitative Finance level with extensive exercises and a solutions manual available for professors, the book is also an essential reference for financial researchers and professionals, as it includes detailed proofs and calculations as section appendices.
Based on courses developed by the author over several years, this book provides access to a broad area of research that is not available in separate articles or books of readings. Topics covered include the meaning and measurement of risk, general single-period portfolio problems, mean-variance analysis and the Capital Asset Pricing Model, the Arbitrage Pricing Theory, complete markets, multiperiod portfolio problems and the Intertemporal Capital Asset Pricing Model, the Black-Scholes option pricing model and contingent claims analysis, and others.
