Discount model is in terms of conditional moments The first order condition is,u'( BE, [u'(c )x 1] The expectation is conditional expectation on investor's time t information; The basic pricing equation is P, =E, (m +1X1+)
Predictions and applications CAPM: in market equilibrium, investors are only rewarded for bearing the market risk; APT: in the absence of arbitrage, investors are only rewarded for bearing the factor risk Applications: ---professional portfolio managers: evaluating security returns and
Consumption-Based Model and Basic Pricing model Basic question to decide for an investor: (1) how much to save; (2)how much to consume; (3)what portfolio of assets to hold. Pricing equation come from the first order condition for this decision
Introduction Overview of investment styles; Empirical evidence on returns of small capitalization firms and value stocks; How to identify investment styles of a mutual fund Characteristic-based style analysis Return-based style analysis Style benchmarks
INVESTMENTS Fourth Edition Efficient Market Hypothesis (EMHD Do security prices reflect information Why look at market efficiency Implications for business and corporate finance Implications for investment
Arbitrage Pricing Theory Arbitrage-arises if an investor can construct a zero investment portfolio with a sure profit Since no investment is required, an investor can create large positions to secure large levels of profit
