intrinsic value (also called fundamental value) and b) modern portfolio theory (
- Paper instructions:
Please answer the following questions: (
1. Compare and contrast the a) intrinsic value (also called fundamental value) and b) modern portfolio theory (CAPM and its extensions) approaches to determining the value of a security, company, or investment. How would you summarize the conclusions from the vast empirical literature about the usefulness and applicability of modern portfolio theory in practice?
2. Which key assumptions from modern portfolio theory are challenged by behavioral finance? How would you summarize the key conclusions, or results, from behavioral finance? Choose one of the “anomalies” uncovered by behavioral finance writers; which theoretical concepts from behavioral finance can be used to explain it.?
3. What set of characteristics, or metrics, would you use to identify the existence of a bubble in asset prices and subsequent financial crisis? What does modern portfolio theory have to say about the causes of the recent financial crisis? How would the “complexity” approach (network theory, complex systems, self-organized criticality) help us understand the causes and consequences of bubbles and financial crises? Does the complexity approach offer any policy insights on how to prevent or manage bubbles and financial crises? What is the most promising area of research in identifying statistical “signatures” or early warning signals of an impending financial crisis