Chapter 1: The role of Finance: To ensuring a well function capital market. Effective financial system promotes economic growth.

Well-developed financial markets: 1. Facilitate Inter-temporal matching of consumption and productivity (demand & supply) inflow and outflow. 2. Separation of management and ownership 3. Allocation of risk to those who can bear it a. Risk Adverse b. Risk Tolerant c. Risk Neutral Key competencies required: To become efficient (competencies) in the finance industry one must have the ability to 1. Assess risk & Accept risk 2. Ability to Enforce contracts 3. Recognize opportunity for intermediation Markets are competitive

This is a way to earn superior returns without having to take on added risk. Risk is the uncertainty of a return. Arbitrage Under the law of one price: similar goods in the market are sold at different prices, and benefit from the difference in prices. Chapter 2 In an Efficient Market -> Expected Returns = Risk; Higher expected returns = Higher Risk Two kinds of market errors: 1. False Positive project is seen as more risky than it is 2. False Negative project is seen as less risky than it is Market Efficiency High returns = amount of risk taken. Without barriers to entry, high returns are possible Difficult to misprice assets and profit from the mispricing (arbitrage is close to impossible)

Variance is the Single relationship from the covariance Covariance is the relationship between the returns of 2 assets, co-vary Correlation coefficient is the unit-less measure of the covariance = -1 ~ 1