Learning Objectives
5 objectives- Understand foundational principles and concepts of financial economics and the interplay between finance and economics.
- Analyze key financial concepts such as time value of money, risk and return, and capital budgeting techniques.
- Evaluate asset pricing models, market efficiency theories, and the role of financial derivatives in risk management.
- Examine corporate finance decisions and behavioral finance influences on financial markets.
- Explore international finance principles, including exchange rates and the effects of globalization on financial markets.
Content Outline
PreviewUnit 2510 - Financial Economics
1. Introduction to Financial Economics
1.1 Principles and Concepts
- Definition and scope of financial economics
- Relationship between finance and economics
- Overview of financial markets: primary vs secondary markets
- Role and types of financial institutions
2. Time Value of Money
2.1 Conceptual Understanding
- Explanation of time value of money (TVM)
- Present value (PV) and future value (FV) calculations
- Impact of different interest rates (simple vs compound interest)
- Annuities and perpetuities
- Applications in investment and financing decisions
3. Risk and Return
3.1 Fundamentals
- Defining risk and return
- Measuring risk: variance and standard deviation
- Diversification and portfolio risk reduction
- Risk-return tradeoff and investor preferences
4. Capital Budgeting
4.1 Investment Decision Techniques
- Net Present Value (NPV) method
- Internal Rate of Return (IRR)
- Payback period
- Profitability index
- Comparing and interpreting different capital budgeting outcomes
5. Asset Pricing Models
5.1 Theories and Applications
- Capital Asset Pricing Model (CAPM)
- Assumptions and formula
- Beta coefficient and systematic risk
- Arbitrage Pricing Theory (APT)
- Multifactor model overview
- Comparison of CAPM and APT
- Limitations and practical considerations
6. Market Efficiency
6.1 Efficient Market Hypothesis (EMH)
- Forms of market efficiency: weak, semi-strong, strong
- Implications for investment strategies
- Empirical evidence and challenges
- Anomalies and critiques of EMH
7. Financial Derivatives
7.1 Types and Uses
- Definition and characteristics of derivatives
- Options: call and put options, payoff structures
- Futures and forwards: contract features and settlement
- Swaps: interest rate and currency swaps
- Uses in hedging, speculation, and risk management
8. Corporate Finance
8.1 Financial Decision-Making
- Capital structure theories and considerations
- Dividend policy: types and determinants
- Working capital management: liquidity and operational efficiency
- Corporate governance: principles and impact on firm value
9. Behavioral Finance
9.1 Psychological Influences
- Behavioral biases: overconfidence, loss aversion, herding behavior
- Heuristics in financial decision-making
- Impact of behavioral biases on markets and asset prices
- Behavioral finance vs traditional finance perspectives
10. International Finance
10.1 Global Financial Principles
- Exchange rates and currency markets
- Balance of payments overview
- International capital flows and foreign investment
- Effects of globalization on financial markets and institutions
- Risk management in international finance
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