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By Michel VERLAINE, ICN Business School
The typical neo-classical capital market theory is beautiful and elegant. The fundamental story goes like this. There are decision makers that maximize their welfare taking into account their own risk aversion as formulated by a nice mathematical function, called a utility function. Even if such a description is not realistic, decision makers act as if they were maximizing such a mathematical function. It is sufficient that the choices of decision makers respect some fundamental axioms for such a function to be reflecting such choices. If individuals correctly expect future outcomes of their respective decision problems, in financial economics mostly states relevant to future asset prices, they can evaluate the expected...
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