Finance Theory I

Filmed live during the Autumn 2008 financial crisis: Andrew Lo reduces all of quantitative finance to two primitives—valuing cash flows across time and across uncertain states of nature.

Derives net present value from no-arbitrage laws of one price across intertemporal markets, compounding conventions, annuities, and perpetuities.

Professor Andrew Lo extends the foundational analysis of present value, examining multi-period asset pricing models and their implications for valuation under various interest rate structures. This session builds on core concepts in financial economics.

Connects real vs. nominal interest rates (Fisher equation) to zero-coupon bond pricing, bootstrapping spot yield curves, and forward rates.

Shows how linear algebra (replicating portfolios of coupon bonds) exposes riskless arbitrage when market prices violate spot-rate consistency.

This lecture, part of MIT's advanced finance theory course, delves into the pricing and risk management of fixed-income securities. It covers arbitrage-free valuation models and interest rate sensitivity.

This lecture from MIT's Finance Theory I course delves into advanced topics in fixed-income securities, building upon prior sessions to model interest rate dynamics and valuation of complex debt instruments.

This lecture segment from MIT's advanced Finance Theory I course delves into the fundamental principles of equity valuation, exploring models for stock pricing, market efficiency, and the role of derivatives in managing equity risk.

This lecture introduces the foundational concepts of forward and futures contracts, exploring their characteristics, pricing mechanisms, and roles in hedging and speculation.

The session continues the discussion on futures contracts, analyzing their valuation and market dynamics, and then introduces the fundamental concepts and types of options.

This lecture delves deeper into options, examining their payoff structures, intrinsic and time values, and the factors influencing option premiums.

The lecture concludes the options discussion with advanced strategies and then transitions to the core concepts of risk and return in financial markets, including expected return and variance.

Building on risk and return fundamentals, this session introduces the principles of portfolio theory, focusing on diversification and the risk-return trade-off for multiple assets.

This lecture expands on portfolio theory, exploring the efficient frontier, optimal portfolio selection, and the role of risk-free assets in constructing diversified portfolios.

The session concludes portfolio theory with advanced topics and introduces the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) as frameworks for asset pricing.

This lecture deeply examines the CAPM, including its assumptions, implications for expected returns, the security market line, and the relationship between systemic risk and return.

The session concludes the discussion on CAPM and APT, then transitions to capital budgeting, introducing discounted cash flow (DCF) methods for project evaluation.

This lecture further explores capital budgeting techniques, including NPV and IRR criteria, and then introduces the concept of efficient markets and its various forms.

The lecture examines the empirical evidence for and against the efficient market hypothesis, discussing anomalies and behavioral finance challenges to traditional theory.

This session concludes the analysis of efficient markets and offers a comprehensive summary of key financial theories and models covered throughout the 15.401 course.