List of Frequently Used Symbols and Notation

A text such as Intermediate Financial Theory is, by nature, relatively nota-

tion intensive. We have adopted a strategy to minimize the notational burden
within each individual chapter at the cost of being, at times, inconsistent in our
use of symbols across chapters. We list here a set of symbols regularly used
with their specic meaning. At times, however, we have found it more practical
to use some of the listed symbols to represent a dierent concept. In other in-
stances, clarity required making the symbolic representation more precise (e.g.,
by being more specic as to the time dimension of an interest rate).
Roman Alphabet
a Amount invested in the risky asset;
in Chapter 14, fraction of wealth invested in the risky asset or portfolio
A
T
Transpose of the matrix (or vector)A
c Consumption; in Chapter 14 only, consumption is represented by C,
while c represents lnC
c
k

Consumption of agent k in state of nature

CE Certainty equivalent
C
A
Price of an American call option
C
E
Price of a European call option
d Dividend rate or amount
Number of shares in the replicating portfolio (Chapter xx
E The expectations operator
e
k

Endowment of agent k in state of nature

f Futures position (Chapter 16);
p
f
Price of a futures contract (Chapter 16)
F, G Cumulative distribution functions associated with densities:
f, g Probability density functions
K The strike or exercise price of an option
K( x) Kurtosis of the random variable x
L A lottery
L Lagrangian
m Pricing kernel
M The market portfolio
MU
k

Marginal utility of agent k in state

p Price of an arbitrary asset
P Measure of Absolute Prudence
q Arrow-Debreu price
q
b
Price of risk-free discount bond, occasionally denoted p
r
f
q
e
Price of equity
r
f
Rate of return on a risk-free asset
R
f
Gross rate of return on a risk-free asset
r Rate of return on a risky asset

R Gross rate of return on a risky asset

1
R
A
Absolute risk aversion coecient
R
R
Relative risk aversion coecient
s Usually denotes the amount saved
S In the context of discussing options, used to denote the price of the underlying stock
S( x) Skewness of the random variable x
T Transition matrix
U Utility function
U von Neuman-Morgenstern utility function
V Usually denotes variance-covariance matrix of asset returns;
occasionally is used as another utility function symbol; may also signify value as in
V
p
The value of portfolio P or
V
F
The value of the rm
w
i
Portfolio weight of asset i in a given portfolio
Y
0
Initial wealth
Greek Alphabet
Intercept coecient in the market model (alpha)
The slope coecient in the market model (beta)
Time discount factor
Elasticity
Lagrange multiplier
Mean

State probability of state

RN

Risk-neutral probability of state

Risk premium
( x, y) Correlation of random variables x and y
Elasticity of intertemporal substitution (Chapter 14)
Standard deviation

ij
Covariance between random variables i and j
Index for state of nature
Rate of depreciation of physical capital
Compensating precautionary premium
Numerals and Other Terms
1 Vector of ones
Is strictly preferred to
Is preferred to (non strictly, that is allowing for indierence)
GBM Geometric Brownian Motion stochastic process
FSD First-order stochastic dominance
SSD Second-order stochastic dominance
2