Economic Modelling (CM2) Exam
Learn how economic and financial theory is used to value assets and liabilities, measure risk and price options.
Learning Objectives
5 objectivesExplain rational expectations and rational choice theory.
Identify the properties of risk measures and use them to compare investment opportunities.
Apply mean-variance portfolio theory, the Capital Asset Pricing Model and factor models, and describe models of security prices, interest rates and credit risk.
Apply ruin theory, use run-off triangles to estimate claims, and value benefit guarantees by simulation.
Explain option pricing, including the binomial and Black-Scholes models.
Programme Outline
5 topicsRational Economic Theory
Rational expectations theory and rational choice theory.
Measures of Investment Risk
The properties of risk measures, using them to compare investments, and the role of insurance in reducing or removing risk.
Asset Valuations
Mean-variance portfolio theory, the Capital Asset Pricing Model, single and multifactor models, stochastic models for security prices, models of the term structure of interest rates, and simple credit risk models.
Liability Valuations
Ruin theory, run-off triangles for estimating claims, and simulation to value basic benefit guarantees.
Option Theory
The principles of option pricing, the binomial model and the Black-Scholes model.
Hands-On Resources
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