FINS4776 Asset Pricing Theory - 2020

Term 2
6 Units of Credit
Banking & Finance
The course outline is not available for current semester. To view outlines from other year and/or semesters visit the archives

1. Course Details

Summary of Course

​This course is offered as part of and is required for the PhD, MPhil, Pre-Doctoral Studies Master, and Finance Honors programs. The course constructs the main theoretical foundations of finance, including investment decision making, utility theory, portfolio theory, equilibrium asset pricing, arbitrage asset pricing, the term structure of interest rates, option pricing theory, derivatives pricing, asset prices informational efficiency, asymmetric and incomplete information, agency theory, and performance measurement. The course emphasizes applications of mathematical and probabilistic tools/methods to provide a rigorous development of each topic. The course investigates current gaps in finance practices and investigates the need for future developments.

Teaching Times and Locations

Please note that teaching times and locations are subject to change. Students are strongly advised to refer to the Class Timetable website for the most up-to-date teaching times and locations.

View course timetable

Course Policies & Support

Course Aims and Relationship to Other Courses

​This course is offered as part of and is required for the PhD, MPhil, Master in Financial Economics, and Finance Honors programs. The goal of the course is to establish perspectives, approaches, tools and methods of independent thinking, analysis, and problem solving. We will apply these to essential asset pricing topics, most of them conceived by Nobel Laureates. Topics include utility theory, portfolio theory, arbitrage pricing, equilibrium pricing, derivatives pricing, security prices’ informational efficiency, and performance measurement. The course is related to FINS5574, Financial Decision Making Under Uncertainty.

2. Staff Contact Details

Position Title Name Email Location Phone Consultation Times
Lecturer-in-chargeProfDavid FeldmanRoom 335, UNSW Business School building - Ref E12 +61-2-9385-5748

3. Learning and Teaching Activities

Approach to Learning and Teaching in the Course

The course provides the theoretical underpinnings of modern finance and its applications. The course emphasizes fundamental understanding and full construction of methods and result of finance theory. This will be done in class and with students as an integral part of this process. The course can be viewed as a series of questions to which students will give answers.

In order to obtain the potential benefit from the course, fulfill the course requirements, and succeed in the exams, assignments, and projects, students are required to follow the points below.
  1. Read the respective textbook chapters and other related readings before class lectures. This will make the class material easier to follow and comprehend.
  2. Attend class lectures (arrive on time).
  3. Actively participate in class: answer the instructors’ questions, and ask your own questions.
  4. After class lectures, study the lecture material, preferably in groups, and solve the homework problems.
  5. If issues from last lectures are still not clear, ask your questions or email them to the tutors or instructor.
The rational for the above suggestions and requirements is following the above points
is necessary to achieve the learning outcomes specified in Section Student Learning Outcomes.

Learning Activities and Teaching Strategies

​Readings will introduce students to issues and subject matters. Class lectures will define, analyze and resolve issues and raise subsequent ones. Students will study the book and other readings, attend lectures, participate in class lectures, solve problems from the book, perform other assignments, do projects individually and in groups, and make presentations individually and in groups. Students will study book sections and articles that will not be covered in class lectures. Class discourse will play an essential role.

5. Course Resources


  • Copeland, T. E., J. F. Weston, and K. Shastri, 2005, Financial Theory and Corporate Policy, 4th edition, Pearson Addison Wesley. (CWS)
  • Copeland, T. E., J. F. Weston, and K. Shastri, 2005, Financial Theory and Corporate Policy, 4th edition, Student Solutions Manual, Pearson Addison Wesley.

*It is required that students to give reading these books a try.

Additional readings will be assigned in class lectures.



*Back, K., 2010, Asset Pricing and Portfolio Choice Theory, Oxford University Press. (B)

*Huang, C-F. and R. Litzenberger, 1988, Foundations for Financial Economics, North- Holland, New York. (HL)

*Pennacchi, G., 2008, Theory of Asset Pricing, Pearson Addison Wesley. (P)

  • Benninga, S., 2014, Financial Modeling, 3rd Edition, MIT Press.
  • Berk J. and P. DeMarzo, 2011, Corporate Finance, 2nd Edition, Prentice Hall, Boston.
  • Bodie, Z., Kane, A. and A. Marcus, 2008, Investments, 8th Edition, McGraw-Hill, New York.
  • Brealey, R., Myers, S. and F. Allen, 2010, Principles of Corporate Finance, 10th
  • Edition, McGraw-Hill, New York, New York.
  • Duffie, D., 2001, Dynamic Asset Pricing Theory, 3rd Edition, Princeton University Press, New Jersey.
  • Ingersoll, J. E., 1987, Theory of Financial Decision Making, Rowman & Littlefield, Maryland.
  • Mas-Colell, A., Whinston, M. D. and J. R. Green, 1995, Microeconomic Theory, Oxford University Press.
  • Merton, R. C., 1992, Continuous Time Finance, Blackwell Publishing, Boston.
  • Ross, S., Westerfield, R. and J. Jaffe, 2009, Corporate Finance, 9th Edition, McGraw- Hill, New York.
  • Varian, H., 1993, Microeconomic Analysis, 3rd Edition, W. W. Norton and Company.


  • Bick, A., 2004, “The Mathematics of the Portfolio Frontier: A Geometry-Based
  • Approach,”The Quarterly Review of Economics and Finance, 44, 337-361.
  • Black, F., 1972, “Capital Market Equilibrium with Restricted Borrowing,”Journal of Business, 45, 444-455.
  • Black, F., Jensen, M. C. and Scholes, M, 1972, “The Capital Asset Pricing Model: Some Empirical Tests,”in Studies in the Theory of Capital Markets, Jensen, M. C., editor, Praeger Publishers.
  • Bodie, Z., Kane, A. and Marcus A., 2005, Investments, 6th Edition, McGraw-Hill, New York.
  • Colwell, D., Feldman, D. and Hu, W., 2015, “Non-Transferable Non-Hedgeable Executive Stock Option Pricing,” with D. Colwell and W. Hu, Journal of Economic Dynamics and Control, forthcoming. DOI:10.1016/j.jedc.2015.02.002,            
  • Diacogiannis, G. and Feldman, D., 2010, “Linear Beta pricing with Inefficient Benchmarks,”Quarterly Journal of Finance, forthcoming.
  • Fama, E. F. and Macbeth, J. D., 1973, “Risk, Return, and Equilibrium - Empirical
  • Tests,” Journal of Political Economy, 81, 607-636.
  • Fama, E. F. and French, K. R., 1992, “The Cross-Section of Expected Stock Returns,”
  • The Journal of Finance, 67, 427-465.
  • Feldman, D. and Reisman, H., 2003, “Simple Construction of the Efficient Frontier,”
  • European Financial Management, 9, 251-259.
  • Gibbons, M. R. and Ferson, W., 1985, “Testing Asset Pricing Models With Changing
  • Expectations and an Unobservable Market Portfolio,” Journal of Financial Economics, 14, 217-236.
  • Green, R., 1986, “Benchmark Portfolio Inefficiency and Deviations from the Security
  • Market Line,”Journal of Finance, 41, 295-312.
  • Jagannathan, R. and Wang, Z., 1996, "The Conditional CAPM and the Cross-section of
  • Expected Returns,"Journal of Finance, 51, 3-53
  • Kandel, S. and Stambaugh, R. F., 1995, “Portfolio Inefficiency and the Cross-section of
  • Expected Returns,”The Journal of Finance, 50, 157-184.
  • Lintner, J, 1965, “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economics and Statistics, 47, 13- 37.
  • Markowitz, H., 1952, “Portfolio Selection,” Journal of Finance, 7, 77-91.
  • Merton, R., 1972, “An Analytical Derivation of the Efficient Portfolio Frontier,” Journal of
  • Financial and Quantitative Analysis, 7, 1851-1872.
  • Mossin, J., 1966, “Equilibrium in a Capital Asset Market,” Econometrica, 34, 768-783. Roll, R., 1977, “A Critique of the Asset Pricing Theory’s Tests,”Journal of Financial Economics, 4, 129-176.
  • Roll, R., 1980, “Orthogonal Portfolios,”Journal of Financial and Quantitative Analysis 15, 1005-1023.
  • Roll, R. and Ross, S. A., 1994, “On the Cross-sectional Relation between Expected
  • Returns and Betas,”The Journal of Finance, 49, 101-121.
  • Ross, S. A., 1981, “Some Stronger Measures of Risk Aversion in the Small and the
  • Large with Applications,”Econometrica, 49, 621-638.
  • Shanken, J., 1987, "Multivariate Proxies and Asset Pricing Relations: Living with the
  • Roll Critique,"Journal of Financial Economics, 18, 91-110.
  • Sharpe, W., 1963, “A Simplified Model for Portfolio Analysis,”Management Science, 9, 277-293.
  • Sharpe, W. F., 1964, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,”            Journal of Finance, 19, 425-442.
  • Ukhov, A., 2005, “Expanding the Frontier One Asset at a Time,” Working Paper, Indiana University.

6. Course Evaluation & Development

Feedback is regularly sought from students and continual improvements are made based on this feedback. At the end of this course, you will be asked to complete the myExperience survey, which provides a key source of student evaluative feedback. Your input into this quality enhancement process is extremely valuable in assisting us to meet the needs of our students and provide an effective and enriching learning experience. The results of all surveys are carefully considered and do lead to action towards enhancing educational quality.

7. Course Schedule

Note: for more information on the UNSW academic calendar and key dates including study period, exam, supplementary exam and result release, please visit:
Week Activity Topic Assessment/Other
Week 1: 1 JuneLecture

Asset Pricing Intelligence; What is Finance? Introduction to Capital Markets; The Two-Period Model: Consumption, Production, Capital Markets, Investments; Separation

CWS1-2, HL1

Week 2 : 8 JuneLecture

The Two-Period Model, Time value of money analytics, Continuous compounding mappings; Historical Returns, Security Indices; Expected Utility Theory

CWS1-2, HL1, CWS3, HL1, B1, P1 CWS3

Week 3: 15 JuneLecture

Historical Returns, Security Indices; Expected Utility Theory; Stochastic Dominance; Mean Variance Portfolio Theory

CWS3, HL1, B1, P1, HL2; Feldman & Reisman (2003)

Week 4: 22 JuneLecture

Expected Utility; Stochastic Dominance; Mean Variance Portfolio Theory; Simple Construction; Pricing Models

CWS3, CWS5, HL1-3, B2-5, P2; Feldman & Reisman (2003) Diacogiannis & Feldman (2013)

Week 5: 29 JuneLecture

Linear Beta Pricing; CAPM, APT, State Preference Theory; Simple Construction of the Efficient Frontier; Linear Beta Pricing with Inefficient Benchmarks

CWS4,6, HL4,5, B6,7, P3,4; Feldman & Reisman (2003); Diacogiannis & Feldman (2013)

Week 6: 6 JulyLecture

State Preference Theory; The Term Structure of Interest Rates

CWS8, 9, 10,12,13, HL9, B8-11, P5-6; Feldman & Reisman (2003); Diacogiannis & Feldman (2013)

Midterm Exam (on Friday)

Week 7: 13 JulyLecture

The Term Structure of Interest Rates; Informational Efficiency; Portfolio Performance; Agency and Information

CWS10-11, CWS7; CWS9; CWS13; CWS12 HL7-8, B8-11, P5-7;

Week 8: 20 JulyLecture

Informational Efficiency; Portfolio Performance; Agency and Information; Presentations

CWS10-11, CWS7; CWS9; CWS13; CWS12

Week 9: 27 JulyLecture

Presentations; Derivatives, Real Options; Portfolio performance; Asymmetric Information; Agency Theory; Multiperiod Models

CWS10-11, CWS7; CWS9; CWS13; CWS12 HL7-8, B8-11, P5-7;

Week 10: 3 AugustLecture

Derivatives, Real Options; Portfolio performance; Asymmetric Information; Agency Theory; Multiperiod Models; Multiperiod Models

CWS10-11, CWS7; CWS9; CWS13; CWS12 HL7-8, B8-11, P5-7;

Final Exam Review (on Friday)

Term Break: 10 August
Exams: 17 August
Exams: 24 August

8. Policies and Support

Information about UNSW Business School protocols, University policies, student responsibilities and education quality and support.

Program Learning Outcomes

The Business School places knowledge and capabilities at the core of its curriculum via seven Program Learning Outcomes (PLOs). These PLOs are systematically embedded and developed across the duration of all coursework programs in the Business School.

PLOs embody the knowledge, skills and capabilities that are taught, practised and assessed within each Business School program. They articulate what you should know and be able to do upon successful completion of your degree.

Upon graduation, you should have a high level of specialised business knowledge and capacity for responsible business thinking, underpinned by ethical professional practice. You should be able to harness, manage and communicate business information effectively and work collaboratively with others. You should be an experienced problem-solver and critical thinker, with a global perspective, cultural competence and the potential for innovative leadership.

All UNSW programs and courses are designed to assess the attainment of program and/or course level learning outcomes, as required by the UNSW Assessment Design Procedure. It is important that you become familiar with the Business School PLOs, as they constitute the framework which informs and shapes the components and assessments of the courses within your program of study.

PLO 1: Business knowledge

Students will make informed and effective selection and application of knowledge in a discipline or profession, in the contexts of local and global business.

PLO 2: Problem solving

Students will define and address business problems, and propose effective evidence-based solutions, through the application of rigorous analysis and critical thinking.

PLO 3: Business communication

Students will harness, manage and communicate business information effectively using multiple forms of communication across different channels.

PLO 4: Teamwork

Students will interact and collaborate effectively with others to achieve a common business purpose or fulfil a common business project, and reflect critically on the process and the outcomes.

PLO 5: Responsible business practice

Students will develop and be committed to responsible business thinking and approaches, which are underpinned by ethical professional practice and sustainability considerations.

PLO 6: Global and cultural competence

Students will be aware of business systems in the wider world and actively committed to recognise and respect the cultural norms, beliefs and values of others, and will apply this knowledge to interact, communicate and work effectively in diverse environments.

PLO 7: Leadership development

Students will develop the capacity to take initiative, encourage forward thinking and bring about innovation, while effectively influencing others to achieve desired results.

These PLOs relate to undergraduate and postgraduate coursework programs.  Separate PLOs for honours and postgraduate research programs are included under 'Related Documents'.

Business School course outlines provide detailed information for students on how the course learning outcomes, learning activities, and assessment/s contribute to the development of Program Learning Outcomes.



UNSW Graduate Capabilities

The Business School PLOs also incorporate UNSW graduate capabilities, a set of generic abilities and skills that all students are expected to achieve by graduation. These capabilities articulate the University’s institutional values, as well as future employer expectations.

UNSW Graduate CapabilitiesBusiness School PLOs
Scholars capable of independent and collaborative enquiry, rigorous in their analysis, critique and reflection, and able to innovate by applying their knowledge and skills to the solution of novel as well as routine problems.
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 7: Leadership development

Entrepreneurial leaders capable of initiating and embracing innovation and change, as well as engaging and enabling others to contribute to change
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 6: Global and cultural competence
  • PLO 7: Leadership development

Professionals capable of ethical, self-directed practice and independent lifelong learning
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 5: Responsible business practice

Global citizens who are culturally adept and capable of respecting diversity and acting in a socially just and responsible way.
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 5: Responsible business practice
  • PLO 6: Global and cultural competence

While our programs are designed to provide coverage of all PLOs and graduate capabilities, they also provide you with a great deal of choice and flexibility.  The Business School strongly advises you to choose a range of courses that assist your development against the seven PLOs and four graduate capabilities, and to keep a record of your achievements as part of your portfolio. You can use a portfolio as evidence in employment applications as well as a reference for work or further study. For support with selecting your courses contact the UNSW Business School Student Centre.

Academic Integrity and Plagiarism

Academic Integrity is honest and responsible scholarship. This form of ethical scholarship is highly valued at UNSW. Terms like Academic Integrity, misconduct, referencing, conventions, plagiarism, academic practices, citations and evidence based learning are all considered basic concepts that successful university students understand. Learning how to communicate original ideas, refer sources, work independently, and report results accurately and honestly are skills that you will be able to carry beyond your studies.

The definition of academic misconduct is broad. It covers practices such as cheating, copying and using another person’s work without appropriate acknowledgement. Incidents of academic misconduct may have serious consequences for students.


UNSW regards plagiarism as a form of academic misconduct. UNSW has very strict rules regarding plagiarism. Plagiarism at UNSW is using the words or ideas of others and passing them off as your own. All Schools in the Business School have a Student Ethics Officer who will investigate incidents of plagiarism and may result in a student’s name being placed on the Plagiarism and Student Misconduct Registers.

Below are examples of plagiarism including self-plagiarism:

Copying: Using the same or very similar words to the original text or idea without acknowledging the source or using quotation marks. This includes copying materials, ideas or concepts from a book, article, report or other written document, presentation, composition, artwork, design, drawing, circuitry, computer program or software, website, internet, other electronic resource, or another person's assignment, without appropriate acknowledgement of authorship.

Inappropriate Paraphrasing: Changing a few words and phrases while mostly retaining the original structure and/or progression of ideas of the original, and information without acknowledgement. This also applies in presentations where someone paraphrases another’s ideas or words without credit and to piecing together quotes and paraphrases into a new whole, without appropriate referencing.

Collusion: Presenting work as independent work when it has been produced in whole or part in collusion with other people. Collusion includes:

  • Students providing their work to another student before the due date, or for the purpose of them plagiarising at any time
  • Paying another person to perform an academic task and passing it off as your own
  • Stealing or acquiring another person’s academic work and copying it
  • Offering to complete another person’s work or seeking payment for completing academic work

Collusion should not be confused with academic collaboration (i.e., shared contribution towards a group task).

Inappropriate Citation: Citing sources which have not been read, without acknowledging the 'secondary' source from which knowledge of them has been obtained.

Self-Plagiarism: ‘Self-plagiarism’ occurs where an author republishes their own previously written work and presents it as new findings without referencing the earlier work, either in its entirety or partially. Self-plagiarism is also referred to as 'recycling', 'duplication', or 'multiple submissions of research findings' without disclosure. In the student context, self-plagiarism includes re-using parts of, or all of, a body of work that has already been submitted for assessment without proper citation.

To see if you understand plagiarism, do this short quiz:


The University also regards cheating as a form of academic misconduct. Cheating is knowingly submitting the work of others as their own and includes contract cheating (work produced by an external agent or third party that is submitted under the pretences of being a student’s original piece of work). Cheating is not acceptable at UNSW.

If you need to revise or clarify any terms associated with academic integrity you should explore the 'Working with Academic Integrity' self-paced lessons available at:

For UNSW policies, penalties, and information to help you avoid plagiarism see: as well as the guidelines in the online ELISE tutorials for all new UNSW students: For information on student conduct see:

For information on how to acknowledge your sources and reference correctly, see: If you are unsure what referencing style to use in this course, you should ask the lecturer in charge.

Student Responsibilities and Conduct

​Students are expected to be familiar with and adhere to university policies in relation to class attendance and general conduct and behaviour, including maintaining a safe, respectful environment; and to understand their obligations in relation to workload, assessment and keeping informed.

Information and policies on these topics can be found on the 'Managing your Program' website.


It is expected that you will spend at least ten to twelve hours per week studying for a course except for Summer Term courses which have a minimum weekly workload of twenty to twenty four hours. This time should be made up of reading, research, working on exercises and problems, online activities and attending classes. In periods where you need to complete assignments or prepare for examinations, the workload may be greater. Over-commitment has been a cause of failure for many students. You should take the required workload into account when planning how to balance study with employment and other activities.

We strongly encourage you to connect with your Moodle course websites in the first week of semester. Local and international research indicates that students who engage early and often with their course website are more likely to pass their course.

View more information on expected workload


Your regular and punctual attendance at lectures and seminars or in online learning activities is expected in this course. The Business School reserves the right to refuse final assessment to those students who attend less than 80% of scheduled classes where attendance and participation is required as part of the learning process (e.g., tutorials, flipped classroom sessions, seminars, labs, etc.).

View more information on attendance

General Conduct and Behaviour

You are expected to conduct yourself with consideration and respect for the needs of your fellow students and teaching staff. Conduct which unduly disrupts or interferes with a class, such as ringing or talking on mobile phones, is not acceptable and students may be asked to leave the class.

View more information on student conduct

Health and Safety

UNSW Policy requires each person to work safely and responsibly, in order to avoid personal injury and to protect the safety of others.

View more information on Health and Safety

Keeping Informed

You should take note of all announcements made in lectures, tutorials or on the course web site. From time to time, the University will send important announcements to your university e-mail address without providing you with a paper copy. You will be deemed to have received this information. It is also your responsibility to keep the University informed of all changes to your contact details.

Student Support and Resources

​The University and the Business School provide a wide range of support services and resources for students, including:

Business School EQS Consultation Program
The Consultation Program offers academic writing, literacy and numeracy consultations, study skills, exam preparation for Business students. Services include workshops, online resources, individual and group consultations. 
Level 1, Room 1035, Quadrangle Building.
02 9385 4508

Communication Resources
The Business School Communication and Academic Support programs provide online modules, communication workshops and additional online resources to assist you in developing your academic writing.

Business School Student Centre
The Business School Student Centre provides advice and direction on all aspects of admission, enrolment and graduation.
Level 1, Room 1028 in the Quadrangle Building
02 9385 3189

UNSW Learning & Careers Hub
The UNSW Learning & Careers Hub provides academic skills and careers support services—including workshops, individual consultations and a range of online resources—for all UNSW students. See their website for details.
Lower Ground Floor, North Wing Chancellery Building.
02 9385 2060

Student Support Advisors
Student Support Advisors work with all students to promote the development of skills needed to succeed at university, whilst also providing personal support throughout the process.
John Goodsell Building, Ground Floor.
02 9385 4734

International Student Support
The International Student Experience Unit (ISEU) is the first point of contact for international students. ISEU staff are always here to help with personalised advice and information about all aspects of university life and life in Australia.
Advisors can support you with your student visa, health and wellbeing, making friends, accommodation and academic performance.
02 9385 4734

Equitable Learning Services
Equitable Learning Services (formerly Disability Support Services) is a free and confidential service that provides practical support to ensure that your health condition doesn't adversely affect your studies. Register with the service to receive educational adjustments.
Ground Floor, John Goodsell Building.
02 9385 4734

UNSW Counselling and Psychological Services
Provides support and services if you need help with your personal life, getting your academic life back on track or just want to know how to stay safe, including free, confidential counselling.
Level 2, East Wing, Quadrangle Building.
02 9385 5418

Library services and facilities for students
The UNSW Library offers a range of collections, services and facilities both on-campus and online.
Main Library, F21.
02 9385 2650

Moodle eLearning Support
Moodle is the University’s learning management system. You should ensure that you log into Moodle regularly.
02 9385 3331

UNSW IT provides support and services for students such as password access, email services, wireless services and technical support.
UNSW Library Annexe (Ground floor).
02 9385 1333

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