Theory of Finance 2600-LFBRz2TF
Elements of financial theory (assumptions and conditions for applying theory; models in financial theory; hypotheses, predictions, and implications; examples of empirical research in financial theory; practical applications of theory).
Concepts, issues, and tools used in financial theory: including the concept of the time value of money, the concept of risk and rate of return, the concept of the term structure of interest rates and its application in the valuation of debt instruments, and the fundamentals of equity instrument valuation.
Thematic Issues:
(1) Classical Financial Theories
- Theories of the cost of equity: discounted cash flow theory; economic value added (EVA) theory.
- Capital structure theories: Modigliani and Miller capital structure theory (1958); Jensen and Meckling agency costs theory (1976); Donaldson (1961) and Myers & Majluf (1984) pecking-order theory of capital structure under asymmetric information; Kraus and Litzenberger static trade-off theory of capital structure (1971).
- Portfolio theories: Markowitz portfolio selection, Sharpe's single-index model, Capital Asset Pricing Model (CAPM).
- Asset pricing theories: Fama's efficient market hypothesis (1965) and its modifications by Brown (1968, 1978); Black-Scholes option pricing theory (1973).
- Behavioral financial theories: Meckling (1976) theory, REMM (Resourceful, Evaluative, Maximizing Model) model of human behavior.
- International financial theories
(2) Behavioral Finance Theories:
- Theory of limits to arbitrage strategies.
- Cognitive psychology theory (cognitive biases) in finance.
(3) The concept of risk and its measurement, including objective and subjective concepts of risk; measures relating to risk (standard risk, extreme risk, subjective approach in risk analysis).
Course coordinators
Type of course
Mode
Learning outcomes
- K_W01: Knows and understands the research methodology and terminology within the discipline of Economics and Finance and complementary disciplines (Management and Quality Sciences, Legal Sciences), particularly for financial management and accounting.
- K_W02: Knows and understands to an advanced degree the principles, procedures, and practices regarding the financial activities of various types of organizations and uses the theory of Economics and Finance and complementary disciplines to identify, diagnose, and solve problems related to financial management in organizations, accounting, financial institution management, and financial institution strategies.
- K_W03: Knows and understands to an advanced degree economic theories and models concerning the functioning of organizations and the economy as a whole.
- K_W05: Knows and understands technological, social, political, legal, economic, and ecological processes and phenomena and their impact on financial decisions in organizations, the functioning of organizations, and the economy as a whole, including the principles of industrial property and copyright protection.
- K_U01: Can use the theory of Economics and Finance and complementary disciplines to identify, diagnose, and solve problems related to financial decisions in an organization and the management of financial institutions, applying an appropriate choice of sources and adapting existing methods.
- K_U02: Can correctly interpret technological, social, political, legal, economic, and ecological processes and phenomena and their impact on financial decisions in organizations, the functioning of organizations, and the economy as a whole, applying an appropriate choice of sources.
- K_U03: Is able to independently and collaboratively prepare analyses, diagnoses, and reports regarding financial management in organizations, accounting, management of financial institutions, and strategies of financial institutions and present them communicatively, also in English, using information and communication tools.
- K_U07: Can plan and organize individual and team work.
- K_U08: Possesses the capacity for self-education and enhancing acquired qualifications.
- K_K01: Is ready to evaluate and apply a critical approach to situations and phenomena related to financial management in organizations, accounting, management of financial institutions, and strategies of financial institutions.
Assessment criteria
LECTURE: The final grade for the lecture is based on a graded written exam (various question formats are possible, including open-ended questions, definitions, tasks, as well as a multiple-choice test).
TUTORIALS: The tutorial grade covers the following criteria for evaluating student performance:
- homework assignments, including projects, presentations, and press reviews
- class participation and activity
- group work
- written test (kolokwium)
Attendance is mandatory – a maximum of 1 absence is permitted.
The written test and exam will be conducted on-site in the classroom.
Practical placement
Professional internships are not required for the completion of this course
Bibliography
PRIMARY:
Books:
- Brigham, E. F., Houston, J. F. 2021. Zarządzanie finansami. Warszawa: Wydawnictwo Naukowe PWN.
- Jajuga K. (ed.) 2019. Zarządzanie ryzykiem, PWN.
- Hull, J. C. 2021. Zarządzanie ryzykiem instytucji finansowych. Warszawa: Wydawnictwo Naukowe PWN.
- Baker, H. K., Filbeck, G., Nofsinger, J. R. 2021. Finanse behawioralne, PWN, OXFORD.
Publications:
- Fama, E. F. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383–417.
- Markowitz, H. 1952. Portfolio Selection. The Journal of Finance, 7(1), 77–91.
- Sharpe, W. F. 1963. A Simplified Model for Portfolio Analysis. Management Science, 9(2), 277–293.
- Sharpe, W. F. 1964. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425–442.
- Kahneman, D., Tversky, A. 1979. Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291.
SUPPLEMENTARY:
- Mishkin, F. 2004. The economics of money, banking and financial markets, Pearson, Addison Wesley. (accessible online).
- Myers, S. C. 2001. Capital structure. Journal of Economic Perspectives—Vol. 15, Number 2—Spring 2001—pp. 81–102.
- Tirole, J. 2006. The Theory of Corporate Finance, Princeton University Press. (accessible online).
- Other materials recommended by the instructors.
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Term 2025L:
PRIMARY: Books: Publications: SUPPLEMENTARY: - Mishkin, F. 2004. The economics of money, banking and financial markets, Pearson, Addison Wesley. (accessible online). |