"In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles..."
The theory that attempts to explain how the prices of financial assets are determined in a market.
Risk and return: This topic covers the relationship between the risk associated with an asset and the return realized by the investor who owns the asset. Understanding this relationship is crucial to asset pricing theory.
Time value of money: The time value of money refers to the concept that money today is worth more than the same amount of money in the future due to the ability to invest or earn interest.
Capital Asset Pricing Model (CAPM): The CAPM is a model that explains the expected return on an asset based on the risk-free rate, the expected market return, and the asset’s beta or sensitivity to market risk.
Arbitrage pricing theory: This is an alternative asset pricing model to the CAPM that considers the role of multiple factors in determining an asset’s expected return.
Efficient market hypothesis: This hypothesis posits that financial markets are efficient and that asset prices reflect all available information.
Capital structure: The capital structure of a company refers to the mix of debt and equity that it uses to finance its operations. This topic is relevant to asset pricing theory because it affects the risk and expected return of investments in that company.
Dividend policy: Dividend policy refers to the decision-making process behind how much and how frequently a company pays out dividends to its shareholders.
Stock valuation: Stock valuation involves determining the intrinsic value of a company’s stock based on its financial fundamentals, such as earnings, growth prospects, and dividend payouts.
Bond valuation: Bond valuation involves determining the intrinsic value of a bond based on its coupon rate, maturity, and credit risk.
Option pricing: Option pricing involves determining the value of an option to buy or sell an underlying asset.
Forward and futures contracts: Forward and futures contracts are agreements to buy or sell an asset at a specified price and time in the future.
Mean-variance analysis: Mean-variance analysis is a tool used to determine the optimal portfolio allocation of assets based on the investor’s risk tolerance and return objectives.
Black-Scholes model: The Black-Scholes model is a mathematical model used to price options based on their underlying asset’s price, time to expiration, volatility, and interest rates.
Monte Carlo simulation: Monte Carlo simulation is a computational technique used to evaluate a range of possible outcomes for an investment by simulating random variables.
Capital Asset Pricing Model (CAPM): CAPM is a theory that defines the relationship between risk and expected return in financial markets. It is widely used to determine the appropriate rate of return for an investment.
Arbitrage Pricing Theory (APT): APT is another asset pricing theory that aims to explain the relationship between risk and expected return in financial markets. APT differs from CAPM in that it assumes multiple factors determine an asset's expected return.
Fama-French Three-Factor Model: This model is an extension of the CAPM and APT in that it adds size and value as factors that determine a stock's expected return.
Intertemporal Capital Asset Pricing Model (ICAPM): ICAPM is an asset pricing theory that accounts for intertemporal risk preferences and time-varying market factor exposures.
Consumption-Based Asset Pricing Model: This theory assumes that agents choose their consumption patterns based on their expectations of future income and future asset returns.
General Equilibrium Asset Pricing Model: This framework suggests that asset prices are determined by the equilibrium outcomes of all market participants, taking into account all relevant economic conditions.
Conditional Asset Pricing Model: This model considers the impact of conditioned market states on asset prices.
Expected Utility Theory: This theory explains how investors make decisions based on expected utility, or the expected value of the satisfaction or desirability of an outcome.
Prospect Theory: This theory suggests that investors evaluate gains and losses differently and behaviorally are more sensitive to losses than gains.
Behavioral Asset Pricing Model: This theory suggests that investor behavior has a significant impact on asset prices and market outcomes. It takes into account investors' emotions, biases, and heuristics.
"...general equilibrium asset pricing or rational asset pricing..."
"...the resultant models."
"...the latter corresponding to risk neutral pricing."
"Investment theory... encompasses the body of knowledge... and the asset pricing models are then applied in determining the asset-specific required rate of return on the investment in question..."
"...determining the asset-specific required rate of return on the investment in question..."
"...pricing derivatives... for trading..."
"...pricing derivatives... for hedging."
"...the latter corresponding to risk neutral pricing."
"Investment theory... supports the decision-making process of choosing investments."
"Investment theory... supports the decision-making process of choosing investments."
"Investment theory encompasses the body of knowledge used to support the decision-making process of choosing investments..."
"There have been many models developed for different situations..."
"...determining the asset-specific required rate of return on the investment in question..."
"...pricing derivatives on these, for trading or hedging."
"Rational asset pricing, the latter corresponding to risk neutral pricing."
"General equilibrium asset pricing or rational asset pricing..."
"...pricing derivatives on these, for trading or hedging."
"...pricing derivatives on these, for trading or hedging."
"...in determining the asset-specific required rate of return on the investment in question..."