UNIVERSITY OF MANITOBA Alex Paseka

I.H. ASPER SCHOOL OF BUSINESS Winter 2010

FACULTY OF MANAGEMENT
DEPARTMENT OF ACCOUNTING AND FINANCE

FIN 7500 - Financial Theory and Corporate Policy

Office Hours: Open door policy
Office Phone: 474-8353
Email: paseka@cc.umanitoba.ca
Internet: http://home.cc.umanitoba.ca/~paseka
Class hours: Thursdays 1 p.m. 4:00 p.m., room 537

OBJECTIVE
The objective of this course is to introduce incoming Ph.D. students to financial economics. The course will
focus on a variety of topics, including: inter-temporal choice of consumption and investment under certainty,
utility theory and investor's choice under uncertainty, state-preference theory, asset-pricing models, the term
structure of interest rates and fixed-income securities, valuation of options, market efficiency, and the cost of
capital and capital structure of the firm. This material is a requisite for advanced study of financial economics.
Students will acquire a broad theoretical understanding of financial economics. Students must have good
knowledge of microeconomics, probability and statistics, and calculus. In addition to the required textbooks,
students will be expected to read journal articles and present in class summaries of these papers. The intent is
to enhance students ability to read and comprehend finance literature, while building a solid foundation for
the advanced Ph.D. seminars.

REQUIRED MATERIAL
1. John H, Cochrane. Asset Pricing, First or Revised Edition (Princeton University Press 2001 or 2005).
2. Copeland, T. E. J.F. Weston, and K. Shastri. Financial Theory and Corporate Policy, 4th Edition
(Addison-Wesley 2005).
3. Ingersoll, Jonathan E., 1987, Theory of Financial Decision Making, Rowman & Littlefield, Savage,
Maryland.
4. A list of journal papers may be distributed in class.

PREPARING FOR THE COURSE

In preparation for the course, students must review Appendices B (pp.893-907), D (pp.925-955), and E
(pp.957-965) in Copeland and Weston, and the Mathematical Introduction in Ingersol (pp.1-18). There is also
a nice review of Stochastic Calculus by John Cochrane at:
http://faculty.chicagobooth.edu/john.cochrane/teaching/35904_Asset_Pricing/continuous_time_review.pdf

GRADING
Grades will be assigned according to the following schedule:
Three Take-Home Assignments 20%
Participation and Presentations 30%
Final Exam 50%
Maximum Grade 100%
 Tentative Course Outline

Texts: C: Cochrane
CW: Copeland and Weston
Ing: Ingersoll

Week Topics Readings

1 Utility Theory and Investor's Choice CW - Chapter 3

under Uncertainty Ing - Chapter 1 (pp. 35-44), Chapter 3
(pp.71-73), Chapter 5 (pp.122-124), and
Appendix to Chapter 5 (pp.137-138)

2 Basic Model, Equity Premium C Chapter 1, 2.1, 2.3, 2.4

3 State-preference theory, Contingent C Chapter 3-4; CW - Chapter 4

Claims, and Discount Factor

4-5 Mean-Variance Theory, Beta C Chapter 5-8; CW - Chapter 5

Representations, and Relation between Ing - Chapter 3 (pp.65-71), Chapter 4
Discount Factors and Betas (pp.82-90), and Appendix A to Chapter 4

6-7 Factor Models, The Capital Asset Pricing C Chapter 9; CW - Chapter 6

Model (CAPM) and the Arbitrage Pricing Ing - Chapter 4 (pp.90-92), 7
Theory (APT)

8 Students Presentation Assigned Articles

9 Option Pricing Theory and Futures, Black CW Chapter 7

Scholes Option Pricing Model (OPM) Ing - Chapter 14 (pp.298-324)

10-11 Fixed-Income Securities and Term Lecture Notes;

Structure of Interest Rates C Chapter 19 (pp. 349 362)
CW Chapter 8 (A)
Ing - Chapter 18 (optional)

12 Capital Structure and the Cost of Capital CW Chapter 15.A 15.G

(if time permits !!!) Ing - Chapter 19 (optional)

13 Final Exam

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 - IMPORTANT NOTICE -

What is Academic Integrity and

what does it have to do with you?
AS A STUDENT AT THE UNIVERSITY OF MANITOBA IT IS YOUR RESPONSIBILITY TO
UNDERSTAND THE MEANING OF ACADEMIC INTEGRITY AND ENSURE THAT YOU APPLY THIS
CONCEPT TO ALL YOUR WORK AT THE UNIVERSITY.

If you have ever:

cheated on an exam,
used the ideas and words of another person without acknowledging their contribution,
fabricated or falsified data, or
conducted yourself in a manner contrary to the ethical standards of the university,
you have compromised your Academic Integrity. These matters are serious offenses and if found guilty of such an offense, a student
is subject to serious academic penalty, up to and including expulsion from the university.

Academic Dishonesty has many facets. Some examples and definitions of the most common aspects of Academic Dishonesty are
as follows:

Plagiarism using the words or ideas that were created by another person, without properly crediting that person. If you
present someone elses ideas or words without acknowledging them, you are stealing their work and presenting it as your
own. For information on how to avoid plagiarism and how to cite your sources properly, please refer to the following web
sites:

http://www.umanitoba.ca/libraries/use_it/plagiarism.shtml

http://www.academicintegrity.org/pdf/plagiarism.pdf

http://www.lib.duke.edu/libguide/citing.htm

Cheating obtaining the answers to an exam or assignment from a prohibited source. Copying the answer from another
student and bringing unauthorized notes to an exam are examples of cheating.

Data Manipulation creating the data used in a paper or presentation without performing the needed experimental work to
produce the data, or changing the data so that your results are what you were hoping for are two examples of data
manipulation.

Inappropriate Collaboration working with other persons (including students) on an assignment when this has not been
approved by the instructor constitutes inappropriate collaboration. If the assignment is meant to be done individually and you
need help, talk to your instructor!

Transcript Fraud and Manipulation submitting documents in support of your application that are in any way different
from your true academic record. This includes such things as changing grades, adding or omitting courses, or translating
course titles or grades incorrectly.

A full description of these terms and other matters relating to plagiarism and cheating can be found in Section 7 of the General
Academic Regulations and Requirements of the University of Manitoba. This is available at
http://webapps.cc.umanitoba.ca/calendar10/ and can also be found in the 2009-2010 Graduate Calendar.

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Additional information on Academic Integrity can be found on the web at the following addresses:

http://www.umanitoba.ca/student/resource/student_advocacy/index.shtml

http://www.academicintegrity.org/pdf/Letter_To_My_Students.pdf

When you choose to study at the University of Manitoba, it is YOUR responsibility as a student to understand what constitutes
Academic Integrity in order to ensure a successful career as a graduate student.

If you have questions about information in this document:

If you have any questions or concerns regarding the definitions of plagiarism, how to write an assignment without cheating, or any
issue relating to Academic Integrity, please discuss the matter with your assigned supervisor, departmental graduate chairperson or
contact one of the following offices for an appointment:

The Faculty of Graduate Studies, 500 University Centre, ph. 474-9377

Student Advocacy Office, 519 University Centre, ph. 474-7423.

REMEMBER:
THE REPUTATION OF THE UNIVERSITY OF MANITOBA, AND THE VALUE OF THE
DEGREE YOU RECEIVE FROM OUR INSTITUTION, IS AFFECTED BY THE ACTIONS AND
REPUTATIONS OF OUR MEMBERS, INCLUDING PROFESSORS, STAFF AND STUDENTS,
BOTH PRESENT AND PAST. THE FAILURE OF EVEN ONE INDIVIDUAL TO MAINTAIN A
HIGH DEGREE OF ACADEMIC INTEGRITY HAS AN IMPACT ON THE ENTIRE UNIVERSITY
COMMUNITY.