Concepts and Topics of Financial Economics

What are the Concepts and Topics of Financial Economics?

What it is: Financial economics is a branch of economics that focuses on money. It is the intersection between financial research, financial markets and economics. In other words, this research pays greater attention to the monetary side of an economy.

Some of the basic knowledge you will need to study financial economics are:

  • Microeconomics
  • Accountancy
  • Bottom probability as well as statistics,

For the latter, it means to measure and evaluate the rate of return and risk.

This field of research is important to you because it provides a knowledge base for making decisions about money. You want to learn a lot about:

  • Option to allocate money
  • Calculating the return and risk of money allocation
  • Aspects of risk attached to each allocation
  • The normal value of the relic you want to obtain
Concepts and Topics of Financial Economics

Comparison between financial economics and economics

In economics, goods and services are objects of transactions. My intention, supply and demand is for goods and services. Money only functions as a means of payment and only arises from one party when the other party delivers goods or provides services.

However, in financial economics research, money is the object of demand and supply. On the other hand, interest represents the price of money. Next, you may want to often make broader terms of money, such as capital, cash, funds, and financial capital.

The supply of money does not only come from the business zone, but also from the household (people) zone and the government zone. For suppliers of funds, interest is the return when they lend money. The term money supply can take various names such as investors, bondholders, shareholders, lenders and creditors.

Next, the demand for money also comes from these three areas (people, businesses, and the government). People borrow for some expenses such as buying a house and paying for education. The industry borrows to buy capital equipment or as working capital. The government borrows money to cover the budget deficit. Financial economics topics

Financial economics concentrates on making decisions based on two main considerations: risk and return. The subject is generally applied to investment decisions, especially in financial markets such as the stock market, forex market and debt messaging market. It is a discipline that continues to be meaningful, considering the financial market's ever-large contribution to the economy.

In this area of research you learn about making investment decisions, recognizing risk, and taking into account valuable messages and other financial legacies. You will also explore how economic indicators such as inflation and interest rates affect financial outcomes.

Analysis of the normal value of an inheritance and and the amount of cash that can be made from an inheritance is another part of financial economics research. Time value of money (time price of cash)

The real value of money keeps changing over time. The Rp60 money you hold in 2020 will not share the same purchasing power in 2030. If you can currently get a sneaker for Rp60, up to 2030, you may not want to get it for the same amount of money.

Risks such as inflation, can erode your buying energy. Therefore, to calculate the energy to buy your IDR 60 in 2030, you must calculate the future value (future cost). In this case, you can calculate it using compound interest (compound hobby).

Now, we turn to the question. What is the present cost of the Rp60 you have in 2030? You can use the discount rate to calculate it.

Basically, compound interest and discount rates are interest rates attached to your money. To convert the future value of money (cash) into its present value, we call it the discount rate. On the other hand, when you convert the current value to the future value, we call it compound interest.

As I said earlier, interest is the price of money. Also, the interest rate is determined by:

  • The minimum return you may have (risk free). Another name for this is the real interest rate.
  • risk premium. It is a bonus return to compensate for bonus risks such as inflation, liquidity risk, default risk, and risk of falling pace.

Portfolio management

Risk and return are attached to every financial legacy. For example, you can see stock returns are sometimes high and sometimes low. Likewise with bonds, the cost sometimes goes up and sometimes down.

To maximize returns and minimize risk, the concept of portfolio management emerged. Broadly speaking, it tells you how to diversify and allocate your money to various financial assets.

Present day portfolio theory comments that you should not observe the nature of risk and return on investment individually, but you must assess it in the context of a total portfolio. This theory suggests that you can build a portfolio of multiple legacies that will optimize returns for a given level of risk. Likewise, with an expected rate of return, you can build a portfolio with the lowest possible risk. Capital Asset Pricing Model( CAPM)

Capital Pricing Asset Pricing Model (CAPM) is a model for evaluating the risk and return of risky inheritance. It is useful for determining benchmarks (benchmarks) in evaluating the rate of return of an investment.

The formula is as follows:


  • Hospital= Expected return on an asset
  • Rfr= Risk-free rate of return (danger-loose charge)
  • Beta= Beta of the asset
  • Rm= Expected market return

Let's take a simple example. Say, a 10-year government bond represents a risk-free legacy and shares yields near 6%. An industry A stock has a beta near zero, 5. In contrast, the stock market rate of return is near 12%.

Plugging this information into the formula, we find that the expected return for industry A's stock is 9%[6%+zero, five x( 12%- 6%)]. Related