Kerry Back Jones Graduate School of Business at Rice University

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In
the 2nd edition of Asset Pricing and portfolio Choice Theory, Kerry
E. Back offers a concise yet comprehensive introduction to and overview of
asset pricing. The first two parts of the book explain portfolio choice and asset
pricing theory in single-period, discrete-time, and continuous-time models. For
valuation, the focus throughout is on stochastic discount factors and their
properties. A section on derivative securities covers the usual derivatives
(options, forwards and futures, and term structure models) and also
applications of perpetual options to corporate debt, real options, and optimal
irreversible investment.

Asset Pricing and Portfolio Choice Theory

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• For valuation, the focus throughout is on stochastic discount factors and their properties.
• The first two parts of the book explain portfolio choice and asset
  pricing theory in single-period, discrete-time, and continuous-time models.
• Grades will be based 20% on biweekly individual homework assignments, 20% on the midterm exam, 10% on class participation, and 50% on the final exam.
• According to the board, “this represents an individual price of €619.50 for every co-op share”.

This course is an introduction to asset pricing and portfolio choice theory. Understanding how assets are priced is also important for issuing entities, like corporations, so asset pricing is also part of the foundation for corporate finance. We take supply (a topic in corporate finance) as given in this course and study demand (portfolio choice). For librarians and administrators, your personal account also provides access to institutional account management.

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Each chapter
includes a “Notes and References” section providing additional
pathways to the literature. This book is intended as a textbook for asset pricing theory courses at the Ph.D. or Masters in Quantitative Finance level and as a reference for financial researchers. The first two parts of the book explain asset pricing and portfolio choice theory portfolio choice and asset pricing theory in single‐period, discrete‐time, and continuous‐time models. For valuation, the focus throughout is on stochastic discount factors and their properties. Traditional factor models, including the CAPM, are related to or derived from stochastic discount factors.

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A Pricing Theory under a Finite Number of Securities Issued: A Synthesis of “Market Microstructure” and “Mathematical Finance”

A chapter on stochastic calculus provides the needed tools for analyzing continuous‐time models. Each chapter includes a “Notes and References” section and exercises for students. Topics covered include the classical results on single-period, discrete-time, and continuous-time models, as well as various proposed explanations for the equity premium and risk-free rate puzzles and chapters on heterogeneous beliefs, asymmetric information, non-expected utility preferences, and production models. The book includes numerous exercises designed to provide practice with the concepts and to introduce additional results. Each chapter concludes with a notes and references section that supplies pathways to additional developments in the field.

The intent is not to limit the valuable exchange of ideas through discussion among fellow students. The atmosphere at Rice University must be one of academic and personal integrity. Any suspected violations of the Honor Code are submitted to the Rice University Honor Council. As stated previously, the scheme is the first step that the board has taken to allow shareholders to unlock the true value of their shares. For members applying for a partial redemption, new share certificates will be issued by August 10, 2019. According to the board, “this represents an individual price of €619.50 for every co-op share”.

We will start with single-period models and then move to dynamic models in both discrete and continuous time. We’ll develop the theory of dynamic programming in continuous time and use it to study portfolio choice and some corporate investment decisions. Dynamic programming and other aspects of the mathematics of uncertainty in continuous time are useful in other areas of economics and finance as well.