Introductory Math: Asset Pricing

TABLE OF CONTENT

Table Of Content        1

Summary        2

Introduction        3

Asset Pricing Theories        4, 5, 6, 7

Basic Concepts Used For Pricing And Analyzing Financial Securities         8, 9, 10

Fundamental versus Technical Analysis        11

Credit Risk                        12,13,14,15

Conclusion         16

Bibliography        17

Summary

This report is mainly focusing on Asset Pricing Theories and the basic concepts used for pricing and analyzing financial securities. According to our research, we decided to present the two most leading Asset Pricing Theories, Capital Asset Pricing Theory and Arbitrage Asset Pricing. Furthermore, the other two most widely studied and applied concepts, for instance, Fundamental Analysis and Technical Analysis. In this report, will be point of the limitation of different models of assets pricing and their illustration of mathematics. With the comparison of both different theories and concepts to figure out and understand how it works in the business world. Last but not least, credit risks is discussed at the end of this report too.

Introduction

What is Asset pricing? Asset pricing has to do with the relationship between the pricing, risks, and expected returns. Asset pricing is just a theoretical estimation of the value and prices of claims to uncertain payments. With a lower cost and expecting a higher return, therefore, that’s the reason why some assets have an average higher expected market return than the others. To value an assets, first we have to take into accounts of it's risk and expected return of the payment. However, in asset pricing, the risk taking value is way more important than the assets value^[1]. In addition, uncertainties and corrections are the main factors that make Asset pricing interesting and challenging. Asset pricing is used to observe prices or returns of many assets, and to understand theoretically why prices or return, is what they are supposed to be. There's a number of criticisms for all the Asset Pricing Theory such as, mispriced and present trading opportunities for experienced investors, ignoring many assets or claim to uncertain cash flow, for instance, potential future business activities, buyout prospects, complex derivatives and new financial securities. We can apply Asset Pricing Theory, to identify what the value and the prices of these claims supposed to be, and be an important guidance for public and private sector. This report will be comparing two most well known and leading theories of asset pricing, which is Capital Asset Pricing Theory (CAPT) and Arbitrage Pricing Theory (APT). Asset pricing is a guideline and it is very helpful for investors to suggest future business activities.