COVER

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Title Page, Copyright

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pp. i-iv

CONTENTS

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p. v

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PREFACE

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pp. vii-viii

THIS BOOK IS based on the Princeton University Lectures in Finance that I gave in May 2004. The invitation to present these lectures provided me a chance to address old issues in new ways and to bring together a number of interrelated topics in financial economics...

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ONE: Introduction

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pp. 1-7

THIS IS A BOOK about the effects of investors interacting in capital markets and the implications for those who advise individuals concerning savings and investment decisions. The subjects are often considered separately under titles such as portfolio choice and asset pricing....

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TWO: Equilibrium

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pp. 9-33

THIS CHAPTER SHOWS how equilibrium can be reached in a capital market and describes the characteristics of such an equilibrium. We present a series of cases, each of which assumes agreement among investors concerning the chances of alternative future outcomes...

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THREE: Preferences

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pp. 35-61

THE TRADING PROCESS used in Case 1 involved a number of markets. In each, the market maker asked Mario and Hue to indicate their reservation prices for a specific security, and then to denote the number of shares they would be willing to buy or sell at...

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FOUR: Prices

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pp. 63-110

THIS CHAPTER FOCUSES on prices—the prices of both securities and the state claims introduced in Chapter 3. Of particular interest are the relationships among expected returns, various measures of risk, and measures of responsiveness to changes in market-wide...

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FIVE: Positions

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pp. 111-128

IN THE CASES that we have analyzed thus far, investors exhibited substantial diversity. They held different initial portfolios and had different marginal utility functions. On the other hand, they were alike in a number of respects. Most important, they all agreed on the...

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SIX: Predictions

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pp. 129-147

ALL OUR PREVIOUS CASES had one common aspect: investors agreed on the probabilities of future states. While people chose to hold different portfolios, in an important sense all their actions were based on the same predictions. There was no distinction...

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SEVEN: Protection

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pp. 149-183

SHOULD ONE INVEST in stocks or in bonds? Stocks have upside potential, generating higher returns if markets go up. But they can generate losses if markets go down. Bonds offer downside protection, providing interest and principal repayment if held to maturity...

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EIGHT: Advice

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pp. 185-212

MOST OF THIS BOOK has focused on positive economics. We have created investors; given them preferences, predictions, and positions; let them trade with a set of available securities until they would trade no more; and then examined the relationships among...

REFERENCES

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pp. 213-214

INDEX

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pp. 215-221