Overview
Capital Asset Pricing Model (CAPM)
We need Financial system to allow desynchronization of income and consumption.
Time (Continues spending vs discrete income)
Risk (Hedge, Insurance)
Riskless assets
Always have risks (risk of default, inflation)
Discounting:
$p_{0}= \frac{p_{n}}{\prod (1+r_{i})}$
Compounding:
Present Value:
$PV(r)=\sum_{n=1}^{\infty}\frac{return\:of\:year\:n}{(1+r)^{n}}$