Theory of Finance

Credits: 20

Introduction and module objectives:

This module is designed to introduce students to the fundamentals of financial markets, theories of asset pricing and the basic elements of a firm’s pay-out policy and capital structure. It will begin by presenting the main mathematical methods used in modelling financial relationships. There will be an examination of asset pricing under certainty, which forms the basis for determining the prices of fixed income securities. The focus of the module will then switch to individual decision making under uncertainty, which provides the foundation for modern portfolio theory and determining the prices of risky assets. Alternative asset pricing theories will be investigated, including the capital asset pricing model, arbitrage pricing theory and state preference theory.

Learning outcomes:

By the end of the module students should be able to:

  • Demonstrate a systematic and critical understanding of how firms and individual investors evaluate investment projects, using rules regarding the time value of money;
  • Critically analyse the theoretical setup of the risk and return relationship of an investment decision and use this to price financial assets, for example equities and bonds;
  • Justify conclusions using appropriate methodological and financial arguments with appropriate rigour;
  • Apply advanced modelling techniques to the area of finance;
  • Evaluate critically the complexity and contradictions of the current academic literature and its implications for professional practice, and be able to identify key questions for their own research.

Method of assessment:

  • Class test (20%)
  • Presentation (20%)
  • Unseen written exam (60%)