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Lecture

Asset Pricing: Utility Functions and Risk Management

In course

FIN-609: Asset Pricing (2011 - 2024)

This course provides an overview of the theory of asset pricing and portfolio choice theory following historical developments in the field and putting emphasis on theoretical models that help our understanding of financial decision making and financial mar ...

Description

This lecture covers the concept of utility functions in asset pricing, focusing on risk management and portfolio choice under uncertainty. It discusses the historical background of expected utility theory, different utility functions, and their implications for decision-making under risk. The lecture also explores the relationship between risk aversion and the resolution of uncertainty, highlighting the impact on asset pricing models.

Instructor

Semyon Malamud

Official source

Ontological neighbourhood

Economics

Microeconomics: Financial economics

Related concepts (32)

Fundamental theorem of asset pricing

The fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage-free, and for a market to be complete. An arbitrage opportunity is a way of making money with no initial investment without any possibility of loss. Though arbitrage opportunities do exist briefly in real life, it has been said that any sensible market model must avoid this type of profit.

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Lecture

A lecture (from lēctūra ) is an oral presentation intended to present information or teach people about a particular subject, for example by a university or college teacher. Lectures are used to convey critical information, history, background, theories, and equations. A politician's speech, a minister's sermon, or even a business person's sales presentation may be similar in form to a lecture. Usually the lecturer will stand at the front of the room and recite information relevant to the lecture's content.

Risk aversion

In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome. Risk aversion explains the inclination to agree to a situation with a more predictable, but possibly lower payoff, rather than another situation with a highly unpredictable, but possibly higher payoff.

Related lectures (38)

Expected Utility and Risk-Aversion: Theoretical Foundations

Explores expected utility, risk-aversion, insurance premiums, and portfolio choice in asset pricing.

Equilibrium State Prices Determination

Explains the determination of equilibrium state prices in asset pricing through consumption market clearing and budget constraints.

Dynamic Portfolio Choice: Wealth Dynamics and HJB Equation

Covers dynamic portfolio choice, wealth dynamics, HJB equation, and asset pricing puzzles.

Asset Pricing Theory: Risk Aversion and Utility Functions

Explores risk aversion, utility functions, and asset pricing theory, including classic models and the Kreps-Porteus-Epstein-Zin utility function.

Asset Pricing: Risk-Neutral Measure and State Prices

Covers risk-neutral measure, state prices, utility functions, and risk aversion in asset pricing.

Related concepts (32)

Fundamental theorem of asset pricing

Asset pricing

Capital asset pricing model

Lecture

Risk aversion