Lecture Note Asset Prices Contains material thru Feb 8 2007 CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT Asset Prices Econ 497F Lecture Barry W Ickes The Pennsylvania State University Spring 2007 Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Start by asking how an individual values a stream of uncertain cash ows Let U ct ct 1 u ct Et u ct 1 be the utility function de ned over present and future consumption 11 Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Start by asking how an individual values a stream of uncertain cash ows Let U ct ct 1 u ct Et u ct 1 be the utility function de ned over present and future consumption E is expectations operator uncertainty 11 Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Start by asking how an individual values a stream of uncertain cash ows Let U ct ct 1 u ct Et u ct 1 11 be the utility function de ned over present and future consumption E is expectations operator uncertainty future is not the present we discount it by 1 Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Start by asking how an individual values a stream of uncertain cash ows Let U ct ct 1 u ct Et u ct 1 11 be the utility function de ned over present and future consumption E is expectations operator uncertainty future is not the present we discount it by 1 With concave utility we have diminishing marginal utility which gives the desire to smooth consumption Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Start by asking how an individual values a stream of uncertain cash ows Let U ct ct 1 u ct Et u ct 1 11 be the utility function de ned over present and future consumption E is expectations operator uncertainty future is not the present we discount it by 1 With concave utility we have diminishing marginal utility which gives the desire to smooth consumption We have not just impatience but risk aversion Basic Framework Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT We consider a simple case that turns out to be powerful Why do people hold assets To smooth consumption in order to maximize utility We have a basic choice problem Start by asking how an individual values a stream of uncertain cash ows Let U ct ct 1 u ct Et u ct 1 11 be the utility function de ned over present and future consumption E is expectations operator uncertainty future is not the present we discount it by 1 With concave utility we have diminishing marginal utility which gives the desire to smooth consumption We have not just impatience but risk aversion Investors prefer a consumption stream that is steady over time and across states of nature Basic Framework Lecture Note Asset Prices De nition De ne xt 1 as the payo of an investment CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT E G equity the payo tomorrow xt 1 pt 1 dt 1 not rate of return but value of investment in t 1 Basic Framework Lecture Note Asset Prices De nition De ne xt 1 as the payo of an investment CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT E G equity the payo tomorrow xt 1 pt 1 dt 1 not rate of return but value of investment in t 1 Agent is a price taker in the asset Let et et 1 be the current and future endowments and be the amount of the asset he chooses to buy Basic Framework Lecture Note Asset Prices De nition De ne xt 1 as the payo of an investment CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT E G equity the payo tomorrow xt 1 pt 1 dt 1 not rate of return but value of investment in t 1 Agent is a price taker in the asset Let et et 1 be the current and future endowments and be the amount of the asset he chooses to buy Then the consumer s problem is to
View Full Document
Unlocking...