This week you will learn the theoretical principles that underlie individual choices under uncertainty, that is, in the presence of risk, in light of expected utility theory. Additionally, you will examine how to characterize agents' attitudes towards risk and the primary criteria for comparing risky prospects. These criteria include first- and second-order stochastic dominance, as well as the mean-variance criterion.

By the end of this week you will understand how to analyze contingent claim markets and the risk neutral evaluation.

By the end of this week you will learn the principles underlying investors' portfolio choice and to analyze, in particular, how stock market participation depends on individual preferences and stocks' fundamentals (expected return and riskiness).

By the end of this week you will be able to identify the set of efficient portfolios in an economy with many risky assets and to analyze, in this economy, the portfolio choices of investors with mean-variance preferences, so as to characterize stocks' aggregate demand.

By the end of this week, you will learn the concept of equilibrium in financial markets. You'll apply this understanding to an economy featuring numerous risky assets and a riskless asset, all within a framework of risk-averse investors with mean-variance preferences. Additionally, you'll gain the ability to calculate equilibrium prices and expected excess returns. Furthermore, you'll recognize that these values are contingent upon the covariance risk of assets, which is quantified by asset betas.