Asset Pricing Lecturer: Prof. Dr. M.A. van Dijk Credits: 3.

5 ECTS Course Objectives: Financial markets serve many purposes in the economy. First, they allocate capital across economic investment opportunities. Second, they allow individuals to reallocate consumption across time by investing for the future at an appropriate expected return. Third, they allow investors to optimize their reward to risk ratios based on their preferences. Fourth, financial market prices serve as proxies for aggregate investor beliefs and thus convey important information to financial managers, investors, and policy-makers. The pricing of assets traded on financial markets plays a crucial role for each of these purposes. The goal of this course is to understand what determines the price of financial assets. To that end, we will discuss the role and functioning of financial markets, the attributes of different financial securities, the preferences of investors, the fundamental principles of risk and return and diversification, portfolio theory and asset allocation, the Capital Asset Pricing Model (CAPM), the Arbitrage Pricing Theory (APT) and other multifactor asset pricing models, asset pricing anomalies, market efficiency, behavioral finance and the limits to arbitrage, and performance evaluation. Learning Outcomes: At the end of this course students are able to: • Clarify how financial markets work and what their role is in the economy; • Reproduce the main arguments, mechanics, and implications of portfolio theory, the CAPM, and multifactor asset pricing models; • Analyze real-life and stylized investment decisions based on the insights from portfolio theory, the CAPM, and multifactor asset pricing models; • Evaluate theoretical arguments and empirical evidence on the validity of Portfolio Theory, the CAPM, and multifactor asset pricing models; • Apply insights on behavioral finance and the limits to arbitrage to explain empirical regularities on financial markets; • Describe, apply, and compare alternative performance evaluation methods; • Apply the knowledge of financial markets and asset pricing to analyze events in actual financial markets, such as the recent financial crisis. • Execute empirical asset pricing tests based on portfolio sorts and Fama-MacBeth regressions. • Maintain a critical attitude towards the limitations of our understanding of asset pricing. Teaching Format: The course has 7 sessions. During the course, students are challenged to engage in discussions about the key concepts and apply the material in a set of assignments. Assessment Method: The course grade will be based on three assignments (in total 50% of the final grade) and a written closed-book exam (50% of the final grade). Literature: • Course notes. • Select articles. • Zvi Bodie, Alex Kane, and Alan J. Marcus (BKM), 2011, Investments and Portfolio Management, 9th (global) edition, McGraw-Hill / Irwin, ISBN 9780077134501.

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