Fundamental Models in Financial Theory
496 pp., 6 x 9 in, 115 figures, 86 tables
- Published: March 27, 2014
- Publisher: The MIT Press
Understanding and applying complex modern financial models in real life scenarios, including the Black-Litterman model for constructing an optimal portfolio while incorporating personal views.
This book provides an innovative, integrated, and methodical approach to understanding complex financial models, integrating topics usually presented separately into a comprehensive whole. The book brings together financial models and high-level mathematics, reviewing the mathematical background necessary for understanding these models organically and in context. It begins with underlying assumptions and progresses logically through increasingly complex models to operative conclusions. Readers who have mastered the material will gain the tools needed to put theory into practice and incorporate financial models into real-life investment, financial, and business scenarios.
Modern finance's most bothersome shortcoming is that the two basic models for building an optimal investment portfolio, Markowitz's mean-variance model and Sharpe and Treynor's Capital Asset Pricing Model (CAPM), fall short when we try to apply them using Excel Solver. This book explores these two models in detail, and for the first time in a textbook the Black-Litterman model for building an optimal portfolio constructed from a small number of assets (developed at Goldman Sachs) is thoroughly presented. The model's integration of personal views and its application using Excel templates are demonstrated. The book also offers innovative presentations of the Modigliani–Miller model and the Consumption-Based Capital Asset Pricing Model (CCAPM). Problems at the end of each chapter invite the reader to put the models into immediate use. Fundamental Models in Financial Theory is suitable for classroom use or as a reference for finance practitioners.
Doron Peleg's Fundamental Models in Financial Theory is unique in that it combines a thorough exposition of theory with questions as to how this theory is to be used in the field. Many other texts on financial theory explain relationships between securities and portfolios yet leave the reader to somehow make estimates concerning the parameters that characterize the joint distributions of individual security returns. Dr. Peleg's book faces up to this problem of making estimates—particularly estimates of expected returns for securities or asset classes—while delivering on its promise to cover from everything from theory to practice. It would not surprise me if Fundamental Models in Financial Theory becomes one of the best-selling textbooks in finance.
Harry Markowitz, 1990 Nobel Laureate, Economics
Doron Peleg's Fundamental Models in Financial Theory provides a thorough understanding of finance models, combined with the tools needed to apply the theory in day-to-day financial decisions. While other texts in this field emphasize the theory, Peleg's book will be useful to students because it actually tells them how to apply the theory in practice.
Eli Amir, Professor of Accounting, Tel Aviv University and City University of London
Fundamental Models in Financial Theory by Doron Peleg incorporates a mathematical and systematic approach to key issues in finance. The theoretical models are simplified, making it possible and straightforward both to comprehend and apply them to real-life financial problems. The incorporation of Excel and end-of-chapter problems are excellent tools for understanding the issues analyzed in the textbook. Dr. Peleg's book can serve as an excellent source of knowledge for both academia and practitioners.
Yossi Yagil, Professor of Finance, Dean of the Faculty of Management, University of Haifa