FIN42000 Financial Theory

Academic Year 2023/2024

The course offers an in depth introduction to the theoretical foundations of modern financial economics, with a focus on investments and capital markets, along with how to apply these results in practice.
The course will cover the central themes of modern investment finance including individual investment choice theory, equilibrium asset pricing, basic option pricing (time permitting) and the practical application of the methods corresponding to these areas.
Upon completion of this course, students are expected to have a clear understanding of established thinking concerning individuals’ consumption and portfolio decisions under uncertainty and the implications of these for the valuation of securities, plus the ability to formulate and numerically optimise basic problems in Financial Decisionmaking
Some discussion of the Socio-Political impacts of applying this theory directly with little regulation (i.e. 'Neo-Liberalism') to the 'real world' will be included, particularly the important work of Thomas Piketty on Wealth Inequality, as well as the foundational work of John F. Nash in Game Theory.

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Curricular information is subject to change

What will I learn?

Learning Outcomes:

Upon completion of this module, students should be able to:

Describe and apply fundamental principles and concepts in Investment Finance
Use key skills in financial decision making, including knowing how to use 'hands-on' computational optimisation tools
Contrast fundamental asset pricing theories and understand the crucial role of Information Sets
Critically assess financial theories and models of Investment
Appraise the tradeoff between risk and return.
Demonstrate research skills such as the use of computational optimisation tools and the understanding of published research, both practical and theoretical.
Recognise potential pitfalls of applying methods based on this theory too literally in real markets, both at the Agent level and the Regulation level.

Indicative Module Content:

Topic 1: An Introduction to Mean-Variance Portfolio Theory in Investments and
Computational Methods for Constrained Optimisation (in Julia), plus the CAPM
and APT.

Topic 2: Review of the Microeconomic Foundations of Financial Economics
Consumption and Investment without and with Capital Markets

Topic 3: Investment Decisions: The Certainty Case
Fisher Separation Theorem
Shareholder Wealth Maximisation

Topic 4: Making Choices in Risky Situations
Utility Theory
Risk Aversion
Stochastic Dominance
State Preference Theory
Mean Variance Portfolio Theory (Revisited)

Topic 5: Equilibrium Pricing
Capital Asset Pricing Model (Revisited)
Arbitrage Pricing Theory (Revisited)

Topic 6: Applying Market Theory too Literally: Pitfalls
Wealth Inequality (Piketty)
Cooperative and Non-cooperative games (Nash)

Topric 7: (time permitting, TBC)
Fundamentals of Derivatives Pricing

How will I learn?

Student Effort Type	Hours
Specified Learning Activities	18
Autonomous Student Learning	68
Lectures	18
Tutorial	6
Total	110

Am I eligible to take this module?

Requirements, Exclusions and Recommendations

Not applicable to this module.

Module Requisites and Incompatibles

Not applicable to this module.

How will I be assessed?

Assessment Strategy

Description	Timing	Open Book Exam	Component Scale	Must Pass Component	% of Final Grade
Class Test: Midterm Quiz - Timing and Format TBA [Likely will include MCQ]	Unspecified	n/a	Alternative non-linear conversion grade scale 50%	No	20
Group Project: A set of 3 separate assignments, each of which must be satisfactorily submitted in draft form individually by students for eligibility to receive the Group mark. Group submission will be a Consensus	Varies over the Trimester	n/a	Alternative linear conversion grade scale 40%	No	30
Examination: Combined Multiple Choice and Short essay. Students are required to show that they understand and are able to apply as well as critically evaluate materials and theory presented in the module.	2 hour End of Trimester Exam	No	Alternative linear conversion grade scale 40%	No	50

Carry forward of passed components
Yes

What happens if I fail?

Resit In	Terminal Exam
Spring	Yes - 1 Hour

Assessment feedback

Feedback Strategy/Strategies

• Group/class feedback, post-assessment

How will my Feedback be Delivered?

After each assessment the lecturer will provide group feedback to students.

Reading List

Required Text:

Financial Theory and Corporate Policy: Pearson New International Edition, 4/E
Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri, (CWS) (ISBN: 9781292021584)

Required Software

Before the first class, students should download and install the Julia programming language (current stable release v 1.9.3 as of Aug 2023):
https://julialang.org/downloads/

We will begin using Julia as a standalone package, but most of our computer work will be in Notebook format [Visual Studio Code (VSCode) or JupyterLab installation required]

https://code.visualstudio.com/download

No prior programming or language is assumed, but students with experience with Python and Jupyter Notebooks should notice considerable similarity. Students should bring laptops to class.
The basics of Getting Started with Julia will be demonstrated in class, and there is a very helpful dedicated chatbot for Julia (though GPT4, Bard, or Claude are fairly good)

Associated Staff

Name	Role
Xiaomeng Wang	Tutor
Martyn Zeman	Tutor

When is this module offered?


Autumn
Lecture	Offering 1	Week(s) - 9, 10, 11, 12, 13	Mon 13:30 - 15:20
Lecture	Offering 1	Week(s) - 8, 9, 10, 11, 12, 13	Tues 14:00 - 14:50
Tutorial	Offering 1	Week(s) - 8, 9, 10, 11, 12, 13	Tues 15:00 - 15:50
Lecture	Offering 1	Week(s) - 13	Wed 11:00 - 12:50
Lecture	Offering 2	Week(s) - 9, 10, 11, 12, 13	Mon 11:00 - 12:50
Lecture	Offering 2	Week(s) - 8, 9, 10, 11, 12, 13	Tues 11:30 - 12:20
Tutorial	Offering 2	Week(s) - 8, 9, 10, 11, 12, 13	Tues 12:30 - 13:20
Lecture	Offering 2	Week(s) - 13	Wed 11:00 - 12:50
Autumn