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Handbook of Quantitative Finance and Risk Management pp 3–22Cite as

Theoretical Framework of Finance

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Abstract

The main purpose of this chapter is to explore important finance theories. First, we discuss discounted cash-flow valuation theory (classical financial theory). Second, we discuss the Modigliani and Miller (M and M) valuation theory. Third, we examine Markowitz portfolio theory. We then move on to the capital asset pricing model (CAPM), followed by the arbitrage pricing theory. Finally, we will look at the option pricing theory and futures valuation and hedging.

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Notes

  1. 1.

    This is true because foregoing interest puts the firm into default, while missing dividend payments does not.

  2. 2.

    In 1985 Franco Modigliani won the Nobel Prize for his work on the life cycle of savings and his contribution to what has become known as the M and M theory, discussed in this section.

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Author information

Authors and Affiliations

  1. Department of Finance, Shih Hsin University, Taipei, Taiwan

    Wei-Peng Chen

  2. Graduate Institute of Finance, National Chiao Tung University, Hsinchu, Taiwan

    Huimin Chung & Keng-Yu Ho

  3. Department of Finance, National Taiwan University, Taipei, Taiwan

    Tsui-Ling Hsu

Authors
  1. Wei-Peng Chen
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  2. Huimin Chung
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  3. Keng-Yu Ho
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  4. Tsui-Ling Hsu
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Corresponding author

Correspondence to Wei-Peng Chen .

Editor information

Editors and Affiliations

  1. Department of Finance and Economics, Rutgers University, 94 Rockafeller Road, Janice H. Levin Bldg., New Brunswick, NJ, 08854-8054, USA

    Cheng-Few Lee

  2. State Street Corp., Boston, MA, 94132, USA

    Alice C. Lee

  3. Center for PBBEF Research, North Brunswick, NJ, USA

    John Lee

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Chen, WP., Chung, H., Ho, KY., Hsu, TL. (2010). Theoretical Framework of Finance. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_1

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