Class 02 Notes


Individual preferences relevant to finance are typically identified as:

More return over less return
Early return over later return
Likely return over unlikely return

Quantification methodology


Relative – percentage

Time frame

Discrete vs continuous
Annual vs other interval

Likelihood uncertainty certainty probability

Assumption of persisting characteristics.

Law of one price

When two or more markets are open to each other, any item trades at but one price.

Law of least preferred alternative

Given a market with prices characterized by a spread, i.e. bid and ask prices exist or borrowing and lending rates exist, any action you wish to take is only guaranteed possible at the least preferred rate. Furthermore, whenever a party to a contract has acceptable alternatives they can be expected to deliver the cheapest.

Non sustainability of arbitrage

When simultaneous transactions allow profit without requiring risk acceptance, natural forces act to eliminate the profit.

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