# Questions tagged [asset-pricing]

The branch of Finance that studies and models how specific assets (such as options, bonds and stocks) are priced.

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### Why is the portfolio weight of the risk-free asset capped at 1?

I am reading Investment Science by David Luenberger, and in it he creates a portfolio with a risk-free asset and a risky asset. α is the weight of the risk-free asset, and he sets α ≤ 1. Why is that? ...
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### Does the payoff in a future option contract include the price of the future contract?

This website has this diagram which shows the payoff as $0$ for $S_T\leq X$ or $S_T\geq X$ (depending on the position-option combination). But isn't the buyer/seller of the position down/up the ...
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### Finding the market portfolio in a two-asset market under CAPM

I'm working on an unassessed course problem, Consider a market with risk-free return $5\%$ and two risky investment $A$ and $B$. We are given the following data: \begin{matrix} \text{Investment} &...
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### Calculating the value of this asset

calculate the cash value of a financed asset that is paid in the following way: an initial payment of 500,000, in month 2 a payment equal to half its value, in month 7 a payment equal to a third of ...
48 views

### Is there a type financial instrument that can realistically increase its value 100 fold

Is there a type of financial instrument with extreme volatility, which could realistically grow in value by 10 000% over less than a year? If there isn't one that's commonly traded, could I craft one ...
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1 vote
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### Price discrepancy between the same company's stock on two exchanges

The graph shows a company's stock prices on two exchanges: New York Stock Exchange (NYSE) and Oslo Stock Exchange (OSE). Since these prices are denominated in different currencies, the NYSE price is ...
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### Does the near-zero value of Fannie and Freddie shares indicate the validity of the Discount Dividend Model?

The Discount Dividend Model posits that the value of equities is equal to the discounted value of future dividend payments of a firm; for a firm that doesn't pay a dividend, you presume that they are ...
71 views

### When could value functions in Bellman equations be calculated explicitly?

Given the simplest form of a Lucas model, i.e., a Bellman equation given by \begin{align} J(x_t) & = \max_{c_t, x_{t+1}} \{ u(c_t) + \beta E_{\pi} [ J(x_{t+1})] \} \\ & \textrm{ s.t. } ...
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### What are the theoretical approaches to ambiguity?

I'm trying to understand the different approaches that economists took to investigate ambiguity. Two approaches particularly caught my eyes: the model by Klibanoff, Marinacci and Mukerji (2009), and ...
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### Stochastic discount factor derivation

What are the intermediate steps to arrive at equation (4) in Lettau and Wachter 2007? Here is the paper: https://drive.google.com/file/d/1Bc0oOqKGm0otYbywf5gdfwzpRpA-D11p/view I am confused why there ...
55 views

### Habit formation ala Constantinides (1990)

Consider the following problem, from Constantinides (1990). \begin{align} V(W_0, x_0) \equiv \max_{c, \alpha} \mathrm{E}_0 \int_0^\infty e^{-\rho s}\gamma^{-1}[c(s) - x(s)]^\gamma \mathrm{d}s, \end{...
1 vote
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### Why do people think a stock should have a certain price based on the company's revenue?

Stock investment comes part and parcel with discussions about quarterly earnings, P/E ratios, and a host of other considerations designed to measure the "intrinsic value" of a stock and ...
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1 vote
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### How is equilibrium reached in CAPM such that the tangency portfolio = market portfolio?

From my research online, when learning CAPM with $n$ risky assets and a risk free asset with return $r_f$, I always see the conclusion that in equilibrium, the market portfolio = tangency portfolio ...
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### To profit from rolling, mustn't you be much more bullish or bearish than before? [closed]

Aren't you likelier to lose money from rolling, e.g. scenarios 3-5 below? How exactly can rolling profit you? What if you aren't more bullish or bearish than before? What if you surmise that the ...
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### How is the cost of equity for a specific stock calculated using the Fama-French 5 factor model?

The Fama-French 5 factor model is as follows: $$R_a = R_f + \beta_m \left( R_m - R_f\right) + \beta_s\text{SMB} + \beta_v\text{HML} + \beta_p\text{RMW} + + \beta_i\text{CMA}$$ It is quite easy to find ...
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