Reference no: EM131915867 , Length: word count:4000

Theories of Finance and Management Assignment

Coursework Essay questions - The aim of the coursework is to allow you to investigate a topic in the theory of finance. The essay that you write should consist of a summary of the topic and a critical investigation into some of the research questions and the issues that arise.

Some key references are given for each topic. You are expected to find and read other articles which are relevant.

For this course work, you should imagine that that you are working in the research group of an investment bank. The CEO wants to have a report which is academically rigorous but which relates research to the real world.

Choose one of the following topics only.

1. Portfolio Theory And Asset Pricing With Skewness

The conventional theory of portfolio selection and asset pricing based on the CAPM rely on the assumption that asset returns, even if not normal, have a symmetric distribution. There is a substantial body of evidence which points to the existence of asymmetry in asset returns. There is a corresponding body of the theory which is concerned with portfolio selection with skewness and with the implications for the CAPM. Two key references are to the papers by Cass and Stiglitz (1970) and Kraus and Litzenberger (1976). There are more modern works, for example the paper by Harvey and Siddique (2000).

2. The Fama and French Three factor model and the Death of Beta

Since its introduction in the mid 1960s, the capital asset pricing model and its empirical counterpart, the market model, have been the starting point for both theoretical and empirical work that involves equities and similar securities. In 1992, Fama and French published a now famous paper in which they proposed that "beta was dead". The implication of this statement is that models based on the CAPM no longer work and that therefore other models are required. In their paper they proposed a new model which is now known as the "Fama and French three factor model", henceforth F&F3M. This model and the contention that beta was dead provoked a lively and important debate in the finance community and lead quickly to the publication of several important papers.

3. The Equity Risk Premium

This is defined as the expected return on the stock market minus the return on the risk free rate. The definition is simple, but there is a debate about its value. Write an essay that investigates the current debate on the Equity Risk Premium. The essay should contain both relevant theory and examples. Starting points for your research are the books by Cornell(1999) and Dimson et al(2002), as well as papers by Fama and French(2002), Ibbotson and Chen(2003), Mehra and Prescott(1985), Welch(2001), Siegel(1999) and Zhou(1999).

4. Prospect Theory

Portfolio selection is based on utility theory. A rival approach is prospect theory which is credited Kahneman & Tversky (1979). Write an essay in which you compare and contrast the two approaches. The essay should include theory and examples and contain an assessment of the strength and weaknesses of the two approaches. Note that this essay requires you to find the references.

Specific Instructions For Essay Questions and References

• References: focus on quality rather than quantity.
• Pick 5 -10 references for your essay and read them thoroughly!
• Essay with too many references are penalised. Your time is limited and you do not have the time to study too many.
• The topics are all LARGE! Do not try to cover everything. Do some research and reading and then pick an interesting part of the area to focus on.
• Make it clear in the introduction what you are doing.
• Structure your essay. It should have an introduction and conclusions and several sections in between. Always number the sections and sub-sections. Sub-sub-sections are rarely necessary.
• Always put in page numbers. This makes it easy for me to write comments. Essays with no page numbers get zero!
• If you use tables or charts from a source, always give the source details.
• Always use the equation editor for equations.

Attachment:- Assignment File.rar