Financial theory examines how the buyer and seller agree on the financial price contracts to exchange money at the time and risk profiles. Rules with agent behavior theory generated financial models that try to predict the financial markets, the fair price of the securities. The models simple enough to be used in practice, theorists make simplifying assumptions about the characteristics of markets and market participants. The simplifying assumptions used to model agent … Read more »

Financial theory examines how the buyer and seller agree on the financial price contracts to exchange money at the time and risk profiles. Rules with agent behavior theory generated financial models that try to predict the financial markets, the fair price of the securities. The models simple enough to be used in practice, theorists make simplifying assumptions about the characteristics of markets and market participants. The simplifying assumptions for modeling agent behavior are hotly debated among theorists and practitioners. The argument is that the practical application of the models proves useful only to the extent that the simplifying assumptions on which the models built in the area of ​​market approaches represent reality. This note examines the simplifying assumptions that form the basis of classical finance models.
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Michael J. Schill
4 pages.
Release Date: 28, August 2008. Prod #: UV1196-PDF-ENG
Financial Theory Foundations HBR case solution

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