Concordia University - FINA 385: Theory of Finance I (Solutions)

- FINA 385: Theory of Finance I at Concordia University examines a broad range of investment topics, including risk and return, portfolio management, asset pricing, bond valuation, and financial options. The course delves into the connection between risk and return in investments, and how investors can use utility theory to make investment decisions. Students will explore how to build diversified portfolios to manage risk and optimize returns using the Markowitz model. The course also introduces the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) to estimate expected return based on risk and market factors. Additionally, students will learn about bond yields, duration, and how financial options are used for various purposes such as hedging, speculation, and income generation.

✔ (Summary) Key Areas of Focus -

• Risk, Return, & Utility: The course examines the connection between risk and return in investments, as well as the concept of utility, which quantifies the satisfaction or happiness gained from consuming goods and services. Utility theory is applied to analyze consumer behavior and decision-making within the realm of finance.
• Portfolio Selection: The focus is on the process of selecting a diversified portfolio of investments to optimize returns and minimize risk. Key concepts include efficient diversification and the Markowitz portfolio optimization model.
• CAPM (Capital Asset Pricing Model): The course introduces the CAPM, a financial model that estimates the expected rate of return for an asset or investment based on its risk, the expected return on the market, and a risk-free asset. This model aids in determining the suitable price for financial assets according to their risk and expected return.
• Index Models & APT (Arbitrage Pricing Theory): The course delves into the APT, a multi-factor asset pricing model that forecasts the expected return of an asset using the linear relationship between the asset's expected return and various macroeconomic factors. This model offers more flexibility and complexity than the CAPM, as it accounts for multiple risk factors.
• Bond (Yields & Duration): The course explores the concepts of bond yields, which signify the return on investment for bondholders, and duration, which gauges the sensitivity of a bond's price to fluctuations in interest rates.
• Derivatives (Options & Put-Call Parity): The course investigates financial options, which are contracts granting the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date. Options serve various purposes, such as hedging, speculation, and income generation.