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Financial Theory - Copeland

In: Business and Management

Submitted By mimer12004
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Financial Theoryand Corporate Policy / ~~i~I~N
THOMAS E. COPELAND
Professor of Finance University of California at Los Angeles Firm Consultan!, Finance MeKinsey & Company, Ine.

J. FRED WESTON
Cordner Professor of Managerial Economies and Finanee University of California al Los Angeles

ADDISON-WESLEY PUBLlSHING COMPANY
Reading, Massachusetts ' Menlo Park, California' New York Don Mills. Ontario ' Wokingham. England . Amsterdam B0'm ' Sydney , Singapore ' Tokvo . Madrid, San Juan

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Addison Wesley Longlnan

11

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enaose. enapter I extenos me smoy 01 cnOlee mm a ffiarKel equlllDnum lrameworK, thereby c\osing the cyc\e of logic. Chapter I shows why capital markets exist and assumes that alI outcomes are known with certainty. Chapter 7 extends the theory of capital markets to inc\ude equilibrium with uncertain outcomes and, even more important, describes the appropriate concept of risk and shows how it will be priced in equilibrium, inc\uding the very general arbitrage pricing theory. Chapter 8 on the option pricing model includes a treatment of the equilibrium prices of contingent c1aim assets that depend on the outcome of another risky asset. Therefore these materials provide a framework for decision making under uncertainty that can be applied by financial managers throughout the economy. Chapter 9 introduces commodity and financial futures contracts and how they are priced in equilibrium. Chapter 10. the last chapter in Part 1, discusses the concept of efficient capital markets. It serves as a bridge between theory and reality. Most ofthe theory aSSumes that markets are perfectly frictionless, i.e., free of transactions costs and other "market imperfections" that cannot be easily modeled. The questions arise: What assumptions are needed to have efficient (but not necessarily frietionless) capital markets?...

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