Titlebook: Mathematical Financial Economics; A Basic Introduction Igor V. Evstigneev,Thorsten Hens,Klaus Reiner Sche Textbook 2015 The Editor(s) (if a

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Capital Asset Pricing Model (CAPM)ollowed by a proof based on an explicit formula for the efficient portfolios. It then outlines an equilibrium model for the CAPM, defines the concepts of the market portfolio and capitalization weights and establishes the efficiency of the market portfolio. The highlight of the chapter is the Sharpe

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CAPM Continuedxplains how to interpret the CAPM as a pricing formula and as a (single) factor model. The reader will learn about systematic and specific risk and the role of portfolio diversification as a means for reducing the latter. The chapter concludes with a description of Jensen’s and Sharpe’s tests for th

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Problems and Exercises Ihe form of questions and answers. The others represent numerical examples on Mean-Variance Portfolio Analysis. Exercises of this kind can be used for tutorials, take-home tests and examinations. Detailed answers for all the questions are provided.

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Dynamic Securities Market Modelart I of the book. It states a multi-period version of the no-arbitrage hypothesis and discusses the concepts of market scenarios (histories), contingent portfolios, trading strategies, self-financing trading strategies, contingent claims and derivative securities. It presents one of the highlights

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The Cox–Ross–Rubinstein Binomial Models the construction of the risk-neutral probability measure, which is used for the pricing of a whole range of derivative securities. The examples considered include European put and call options, Asian average strike call and put, Asian average price call and put, and lookback call and put options.

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American Derivative Securities an exercise strategy defined in terms of the property of non-anticipativity. The main result is a backward induction algorithm for computing the upper (seller’s) price of an American derivative security.

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From Binomial Model to Black–Scholes Formulae limit from the binomial model. The chapter begins with introducing some relevant notions: drift and volatility, continuous compounding, geometric random walk, etc. It then shows how to approximate the observed continuous-time price process with constant drift and volatility by price processes gene