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[Pages:21]15.401
15.401 Finance Theory
MIT Sloan MBA Program
Andrew W. Lo Harris & Harris Group Professor, MIT Sloan School
Lecture 1: Introduction and Course Overview
? 2007?2008 by Andrew W. Lo
Critical Concepts
Motivation Dramatis Personae Fundamental Challenges of Finance Framework for Financial Analysis Importance of Time and Risk Six Principles of Finance Course Overview How to Get the Most Out of This Course
Readings: Brealey, Myers, and Allen Chapters 1?2
Lecture 1: Intro and Overview
? 2007?2008 by Andrew W. Lo
15.401 Slide 2
Motivation Mathematics + $$$ = Finance
Photographs removed due to copyright restrictions.
15.401
James Simons Renaissance Technologies
Lecture 1: Intro and Overview
Jack Welch General Electric
Warren Buffett Berkshire Hathaway
? 2007?2008 by Andrew W. Lo
Slide 3
Dramatis Personae
15.401
A Flow Model of the Economy
Households
Labor Product Markets Markets
Financial Intermediaries
Capital Markets
Lecture 1: Intro and Overview
Nonfinancial Corporations
The Financial System
? 2007?2008 by Andrew W. Lo
Slide 4
Fundamental Challenges of Finance
All Business Activities Reduce To Two Functions: Valuation of assets (real/financial, tangible/intangible) Management of assets (acquiring/selling)
Business Decisions Involve Valuation and Management "You cannot manage what you cannot measure" Valuation is the starting point for management Once value is established, management is easier
Objectives + Valuations Decisions
Valuation is generally independent of objectives (why?) Role of financial markets and the "price discovery" process
Lecture 1: Intro and Overview
? 2007?2008 by Andrew W. Lo
15.401 Slide 5
Fundamental Challenges of Finance
15.401
Valuation How are financial assets valued? How should financial assets be valued? How do financial markets determine asset values? How well do financial markets work?
Management How much should I save/spend? What should I buy/sell? When should I buy/sell? How should I finance the transaction?
Applies To Both Personal and Corporate Financial Decisions (How?)
Lecture 1: Intro and Overview
? 2007?2008 by Andrew W. Lo
Slide 6
The Framework of Financial Analysis
Accounting The language of finance Vocabulary, syntax, grammar, prose, and poetry! Language frames and circumscribes the analysis Basic concepts should be familiar to you by now "Stock" (not equities) vs. "flow" variables
Balance Sheet and Income Statement Perspectives Balance sheet: snapshot of financial status quo (stock) Income statement: rate of change of the status quo (flow) Financial status balance sheet Financial decisions income statement What about the "rate of change of the rate of change"?
Lecture 1: Intro and Overview
? 2007?2008 by Andrew W. Lo
15.401 Slide 7
The Framework of Financial Analysis
Balance Sheet
Assets
Liabilities
Cash Capital Intangibles
Equity Debt
Income Statement
Value
Value
Lecture 1: Intro and Overview
? 2007?2008 by Andrew W. Lo
15.401 Slide 8
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