COMMERCE 4FF3 Lecture Notes - Lecture 1: Risk-Free Interest Rate, Risk-Seeking, Arbitrage

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 4FF3
• Professor: Andrew Aziz

Document Summary

Portfolio theory & management: course overview and introduction sept. 12. Axioms of consumer preference: consumer knows what he/she likes, transitive preferences, non-satiation (prefer more to less, more units of x the consumer has, the lower the mrs of x for y. Investor would like to be at the point where mrt = mrs. Do not want to invest more because are not getting enough return for amount invested. Shareholders have different indifference curves based on preferences (risk seeking vs. risk-averse) Can move up to a" by taking dividends and reinvesting them in the firm. Can move to b" if borrow at risk free rate. If we have a lot today we do not have to be enticed to invest more for tomorrow. If we do not have much today we have to be enticed more to invest tomorrow (higher rate) The opportunity set is the boundary (based on market interest rate and consumer budget)