This course examines the economic principles that determine the allocation of resources through time in market economies. It uses supply and demand relationships to value capital assets (or projects more generally). There is a detailed treatment of the effects of risk and taxes on capital asset prices, and the Modigliani-Miller financial policy irrelevance theorems are derived and examined in detail.

In addition to the learning outcomes for the pass component of this course graduate students will:

• be introduced to the role played by assymetric information in insurance markets;
• identify the effects of moral hazard and adverse selection in insurance markets;
• examine the Modigliani-Miller financial policy irrelevance theorms in atwo-period Arrow-Debreu state preference model fo the capital market.

Two examinable tutorials will be held during the semester, they are both fully redeemable.  The first one, which can contribute 10 per cent to the final grade, will be held just prior to the mid-semester break, while the second one, which can contribute 15 per cent, will be completed just after the mid-semester break.  The dates will be set two weeks in advance and will be announced in lectures and posted on WATTLE.  A three (3) hour exam is held at the end of semester.

10-12 hours per week

At least an average of 65% (or equivalent) in the final two years of an Australian undergraduate degree with introductory level courses in Economics, Statistics and Econometrics

Jones, C.M., (2008), Financial Economics, Routledge, Oxon.

Lengwiler, Y., (2004), Microfoundations of Financial Economics: An Introduction to General Equilibrium Asset Pricing, Princeton University Press, Oxfordshire and Princeton.

Please see Course Website