BUSI 521
Rice University
Spring 2025
Instructor
Kerry Back
J. Howard Creekmore Professor of Finance and Professor of Economics
kerryback@gmail.com
Meeting Schedule
TTh 2:30 – 3:45
1/14/2024 – 4/24/2024
Textbook
Asset Pricing and Portfolio Choice Theory, Oxford University Press, 2nd Edition, 2017.
Course Description
This course is an introduction to asset pricing and portfolio choice theory. This is the foundation for the ‘investments’ branch of finance. Understanding how assets are priced is also important for issuing entities, like corporations, so asset pricing is also part of the foundation for corporate finance. Of course, prices are determined by supply and demand. We take supply (a topic in corporate finance) as given in this course and study demand (portfolio choice).
Uncertainty and time are the two key elements of portfolio choice. We will start with single-period models and then move to dynamic models in both discrete and continuous time. We’ll develop the theory of dynamic programming in continuous time and use it to study portfolio choice and some corporate investment decisions. Dynamic programming and other aspects of the mathematics of uncertainty in continuous time are useful in other areas of economics and finance as well.
The middle part of the course will cover various topics that are of continuing research interest, and students will make presentations.
Course Calendar
This is a cross-listed course between the Jones School and the School of Social Sciences. We will follow the School of Social Sciences academic calendar. We meet TTh from 2:30-3:45 commencing January 14. The last class day is April 24. Per the university calendar, there will be no class on February 13 or on March 18 and March 20 (spring break). The final exam will be during exam week.
Course Schedule
- Fundamentals of asset pricing (Jan 14 - Feb 25)
- Preferences, FOC, and discount factors (Chapters 1–3)
- Mean-variance analysis and factor picing (Chapters 5 & 6)
- Equilibrium, efficiency, and representative investors (Chapters 4 & 7)
- Topics (student presentations, Feb 27 - Mar 13)
- Heterogenous beliefs and short sale constraints (Chapter 21)
- Bubbles (Chapter 21)
- Bayesian learning (Chapter 22)
- Rational expectations equilibria (Chapter 22)
- Glosten-Milgrom and Kyle models (Chapter 24)
- Glosten model of limit-order markets (Chapter 24)
- Common value auctions (Chapter 24)
- Allais paradox and betweenness preferences (Chapter 25)
- Generalized disappointment aversion (Chapter 25)
- Ellsberg paradox and ambiguity aversion (Chapter 25)
- Continuous time methods and applications (Mar 25 - Apr 24)
- Brownian motion and stochastic calculus (Chapter 12)
- Dynamic programming (Chapters 9, 14, & 20)
- Optimal timing problems (Chapters 15 & 19)
- Bayesian learning in continuous time (Chapter 23)
Class Presentations
The topics listed above will be assigned to students one-to-one. In addition to the textbook material, each student should draw heavily from at least one published paper, either a seminal paper on the topic or an application. Presentations should be roughly 20 minutes plus Q&A.
Grading
Grades will be based on class participation, individual homework assignments, class presentations, and a final exam. Late homeworks will not be accepted, but I will drop the lowest homework score.
Honor Code
The Rice University Honor Code applies to all work in this course. The intent of the Honor Code in general and specifically in this course is to ensure that each student claims and receives credit for their own efforts. The intent is not to limit the valuable exchange of ideas through discussion among fellow students. The atmosphere at Rice University must be one of academic and personal integrity. Any suspected violations of the Honor Code are submitted to the Rice University Honor Council.
Disability Accommodations
Any student with a disability requiring accommodations in this class should contact me after contacting the Disabled Student Services office