AECO 25A18 - Principles of Finance

This course provides an introduction to finance. It begins with a brief overview (lecture 1) of the functions of financial systems, along with an examination of financial assets (loans, bonds, stocks), intermediaries, and markets. The first part of the course (lectures 2-5) addresses the time value of money and its applications, including understanding interest rates, valuing risk-free bonds, and the foundations of firms’ investment decisions (capital budgeting). The second part (lectures 6-8) outlines the standard theory of investment decisions in portfolios of risky assets, such as stocks. Using a simple static framework, it highlights the benefits and limitations of diversification, followed by the presentation of Markowitz’s modern portfolio theory. The third part (lectures 9-10) introduces the benchmark model of equilibrium asset pricing -the CAPM- applied to stock returns, before exploring some of its key applications and limitations. We conclude with an introduction to the market efficiency hypothesis and behavioral finance.

Learning the foundations of finance involves mastering a number of mathematical formulas and performing calculations to apply them effectively. The required math level corresponds at minimum to Sciences Po’s first year course “Mathematics for social sciences: introductory level”. A prior knowledge of basic notions of probability and statistics is also useful (mean, variance, standard deviation, probability distribution, etc).

The lectures are based on slides shared on the Moodle-page of the course. On-the-run training will notably take the form of quizzes (MCQ) taken on Moodle at the beginning of some classes.

The course will be assessed through a mid-term exam and a final exam in class. Internet connections and the use of AI are forbidden during exams. Solving the problems will require a basic (scientific) pocket calculator.

2 hours a week at home. Students commit to read at home the slides of each session and work through the numerical examples seen in class before coming to the next session.