Rutgers Business School--Newark & New Brunswick MQF 22:839:571:40, Financial Modeling I Spring 2011 (January 4, 2011) Professor

Yangru Wu Phone: 973-353-1146 Email: yangruwu@andromeda.rutgers.edu; Homepage: http://andromeda.rutgers.edu/~yangruwu Office: 1WP-1170; Classroom: 1WP-120; Class Time: M, 6:00pm; Office Hrs: by appointment

Academic Integrity All students are expected to know, understand and live up to the standards of academic integrity explained at http://academicintegrity.rutgers.edu/integrity.shtml. Computer Policy in the Classroom The Trading Room has computers connected to the internet and many students come to school with their own laptop computer. Some instructors have complained that some students use computers to chat via the internet, do emails, or simply surf the internet all the time without paying attention to their classes. I find such behavior a huge distraction and disrespect of the instructor and other class participants. Therefore, I ask you to kindly refrain from doing any of those at all in class. Violators will be politely asked to leave the classroom. None of our exams requires a computer, so the usage of a computer during an exam will be considered cheating. Course Description This is a quantitatively-oriented financial economics course for the Master of Quantitative Finance (MQF) students. The course covers the basic concepts and analytical techniques of modern portfolio theory and asset pricing. Topics include Fisher separation, risk analysis using expected utility theory, mean-variance analysis, capital asset pricing model, arbitrage pricing theory, state preference theory, consumption-based asset pricing, market efficiency, empirical tests of asset pricing models, and introduction to continuous-time finance and option pricing. Main References 1. Copeland, Thomas E. and J. Fred Weston, 2005, Financial Theory and Corporate Policy, 4th ed., Addison-Wesley Publishing Company, ISBN 0-321-12721-8. 2. Huang, Chi-fu and Robert Litzenberger, 1988, Foundations for Financial Economics, Prentice-Hall, ISBN 0-13-500653-8. Other Useful References 3. Shreve, Steven, Stochastic Calculus for Finance I & II, Springer, ISBN 978-0-387-24968-1, 978-0-387-40101-0. 4. Cochrane, John, 2005, Asset Pricing, second edition, Princeton University Press, ISBN 9780-691-12137-6. 5. Campbell, John Y., Andrew W. Lo and A. Craig MacKinlay, 1997, The Econometrics of Financial Markets, Princeton University Press, ISBN 0-691-04301-9. 6. Duffie, Darrell, 2001, Dynamic Asset Pricing Theory, third edition, Princeton University Press, ISBN 13: 978-0-691-09022-1.

7. Ingersoll, Jonathan, 1987, Theory of Financial Decision Marking, Rowman & Littlefield. 8. Pennacchi, George, 2008, Theory of Asset Pricing, Pearson Addison-Wesley, ISBN 13-9780-321-127720-4. Grading Policy 1. Exam I, Monday, March 8, 2010, 30% 2. Exam II, Monday, May 3, 2010, 30% 3. Problem sets, 40% All exams are closed-book, closed-notes. Homework must be submitted in hardcopy. Class participation is important and can affect your grade in border-line cases. I may take class attendance from time to time. Topics Covered (tentative, subject to change) I. Review of Expected Utility Theory and Portfolio Decision Problem Copeland-Weston, 3; Huang-Litzernberger, 1 II. Generalized Risk and Asset Pricing Huang-Litzernberger, 2; Copeland-Weston, 3 III. The Mean-Variance Frontier Huang-Litzernberger, 3; Copeland-Weston, 5; Cochrane, 5 IV. Market Equilibrium and the CAPM Huang-Litzernberger, 4; Copeland-Weston, 6 V. Linear Valuation and Factor Models Huang-Litzernberger, 4; Copeland-Weston, 6; Cochrane, 9 VI. State Preference Theory and Equilibrium under Complete Markets Huang-Litzernberger, 5; Copeland-Weston, 4; Shreve I, 3 VII. Testing Asset Pricing Models and Market Anomalies Campbell, et al, 5, 6; Huang-Litzernberger, 10; Cochrane, 12, 15; Copeland-Weston, 6 VIII. Consumption-Based Asset Pricing Cochrane, 1; Campbell, Lo and MacKinlay, 8 IX. No Arbitrage Pricing, the Binomial Tree Shreve I, 1 X. Brownian Motion and Itos Lemma Shreve II, 3.2, 3.3, 4.2., 4.3, 4.4; Cochrane, A1, A2, A3 XI. The Black-Scholes-Merton Model Shreve II, 4.5