Principles of asset pricing FN2203

Principles of asset pricing builds on concepts covered in FN1024 Introduction to Finance, putting more emphasis on the underlying statistical theory and the use of mathematical methods.

In this course time discounting and the theory of present value are reviewed. Equity and fixed income valuation techniques are covered separately. Equity valuation is approached under the constant growth model. Under the fixed income valuation topic particular attention is given to the term structure of interest rates and the bond price sensitivity to changes in that term structure. The course also covers portfolio diversification theory and the impact of portfolio risk on asset pricing equilibrium. The theory of efficient markets is introduced and discussed. Derivative pricing techniques are introduced, including the risk neutral probability method and the replicating portfolio approach.

Learning outcomes

If you complete the course successfully, you should be able to:

  • Identify and explain the modern theories of asset valuation.
  • Calculate financial returns, their expected value and volatility.
  • Calculate the price of equity, listing and describing the underlying assumptions.
  • Summarize bond pricing models and the term structure of interest rate.
  • Identify and critically assess the optimal portfolio choice.
  • Derive mathematically equilibrium asset pricing models.
  • Apply valuation by arbitrage, option pricing and risk-neutral valuation.


Unseen written exam (3 hrs).

Essential reading

  • Principles of Corporate Finance by Richard Brealey, Stewart Myers, and Franklin Allen, McGraw-Hill.

Course information sheets

Download the course information sheets from the LSE website.