Chapter 2

The Challenges of Asset Pricing

A Road Map

Chapter 2 introduces the main question to be considered in the text: viewing financial assets as claims to uncertain (risky) future income streams, how should these claims be valued? The four available approaches to this question are reviewed in anticipation of their detailed consideration in the chapters to follow. Several historical stylized facts of asset prices and their rates of return are presented as benchmarks for judging the validity of our asset pricing perspectives.

Keywords

present value (PV); arbitrage pricing theory; Arrow–Debreu (AD) pricing; Modigliani–Miller theorem; BE/ME ratio; the equity premium; stylized facts of the financial markets

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