1. Investments Thu Apr 23 (8-12): Finish Sharpe’s Chapter 4. Highly relevant for Hand-In #2, which has now posted. Fri Apr 24 (8-(if need be)12): Sharpe’s Chapter 5 on ”outside positions”. –Reasons young people should more stock. –Why bankruptcy protection hurts all. Hand-back of and comments to Hand-In #1.

2. Sharpe 4.11++: The basic pricing equation and how that leads to various (CAPM-like) pricing equations; something that explains expected returns on assets. Generally: Note the order at which we do things: First we find the equlibrium (”run the experiment”), then we analyze the outcome. We don’t force things on in advance.

3. Assuming quadratic utility (individual and hence aggregate; or approximate on aggregate) we get the usual CAPM where

4. Assuming constant relative risk aversion b we get a similar equation, except we have to use a ”power beta” Note that this model –is new to you – has empirically testable differences to usual CAPM (at least in theory)

5. For the rest of today we will circle around these pricing equations: Security market line & alpha; Sec. 4.17-18 Capital market line & Sharpe ratio; S. 4.19 Representative agents; Sec. 4.20 ”Ex ante” vs. ”ex post”. Or: This stuff is imprecisely estimated. Sec. 4.21