1. Fin2: Sharpe Wed' April 22, 2009 Practical: Tutorials Wed's 10-12 in Aud. 7. (Effective now.) APSIM experience? Scientific contents: More on the results of Case 1 where Hue and Mario trade ’till equilibrium. And on Sharpe's concepts (equilibrium, market pf/risk), returns and risk premia.The rest of Sharpe Ch. 2.Case 1 Expected utility maximization and ”nitty grutty details” of trading. Sharpe Ch. 3 up to ~3.8. Useful for Hand-In #1.

2. How? –Sharpe’s Case 1 Excel-file –”Old school” i.e. blackboard –My Case1ByHand Excel-file supported w/ a note on Section 3.7Case1ByHanda note on Section 3.7

3. In Equilibrium in Case 1 Hue and Marie completely diversify non- market risk away. (In this case, ”non- market risk” has a clear-cut interpretation: whether the fish go North or South.) Market risk cannot be diversifed away. The less risk-averse Mario bears more of that. As compensation, his expected returns are higher (as we shall see).

4. Gains from Trade ”Ex-ante” (i.e. beforehand) trading makes both Hue and Mario better off. ”Ex-post”: Yeah, well, we don’t know exactly what happens. Sharpe says this in Section 2.9.3. Sounds perfectly reasonable. In this week's tuturials you (or Cathrine) get to work on how (and how not) to quantify it.

5. Concepts and Quantitative Ceveats The market portfolio: The total of risky assets. In Case 1 the portfolio w/ 10 shares of MFC and 10 shares of HFC. (Some sources define portfolios via the security weights, not the #securities.) Return: Sharpe’s ”returns” are ”gross rates”, i.e. price(time 1)/price (time 0). (Some sources use ”net rates” or ”profit and loss”.)