Fundamental theorem of asset pricingThe fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage-free, and for a market to be complete. An arbitrage opportunity is a way of making money with no initial investment without any possibility of loss. Though arbitrage opportunities do exist briefly in real life, it has been said that any sensible market model must avoid this type of profit.
Asset pricingIn financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.
Capital asset pricing modelIn finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
Commutative algebraCommutative algebra, first known as ideal theory, is the branch of algebra that studies commutative rings, their ideals, and modules over such rings. Both algebraic geometry and algebraic number theory build on commutative algebra. Prominent examples of commutative rings include polynomial rings; rings of algebraic integers, including the ordinary integers ; and p-adic integers. Commutative algebra is the main technical tool in the local study of schemes.
Commutative ringIn mathematics, a commutative ring is a ring in which the multiplication operation is commutative. The study of commutative rings is called commutative algebra. Complementarily, noncommutative algebra is the study of ring properties that are not specific to commutative rings. This distinction results from the high number of fundamental properties of commutative rings that do not extend to noncommutative rings. A ring is a set equipped with two binary operations, i.e. operations combining any two elements of the ring to a third.
Ring (mathematics)In mathematics, rings are algebraic structures that generalize fields: multiplication need not be commutative and multiplicative inverses need not exist. In other words, a ring is a set equipped with two binary operations satisfying properties analogous to those of addition and multiplication of integers. Ring elements may be numbers such as integers or complex numbers, but they may also be non-numerical objects such as polynomials, square matrices, functions, and power series.
Bézout domainIn mathematics, a Bézout domain is a form of a Prüfer domain. It is an integral domain in which the sum of two principal ideals is again a principal ideal. This means that for every pair of elements a Bézout identity holds, and that every finitely generated ideal is principal. Any principal ideal domain (PID) is a Bézout domain, but a Bézout domain need not be a Noetherian ring, so it could have non-finitely generated ideals (which obviously excludes being a PID); if so, it is not a unique factorization domain (UFD), but still is a GCD domain.
Principal ideal ringIn mathematics, a principal right (left) ideal ring is a ring R in which every right (left) ideal is of the form xR (Rx) for some element x of R. (The right and left ideals of this form, generated by one element, are called principal ideals.) When this is satisfied for both left and right ideals, such as the case when R is a commutative ring, R can be called a principal ideal ring, or simply principal ring. If only the finitely generated right ideals of R are principal, then R is called a right Bézout ring.
Rational pricingRational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets. Where this mismatch can be exploited (i.
Probability amplitudeIn quantum mechanics, a probability amplitude is a complex number used for describing the behaviour of systems. The modulus squared of this quantity represents a probability density. Probability amplitudes provide a relationship between the quantum state vector of a system and the results of observations of that system, a link was first proposed by Max Born, in 1926. Interpretation of values of a wave function as the probability amplitude is a pillar of the Copenhagen interpretation of quantum mechanics.
