Per the fundamental theorem of asset pricing, the existence of a variable named for these two words is equivalent to the law of one price. For 10 points each:
[10h] Give these two words, which name a “factor” in finance that is used to compute the price of an asset based on a stream of nondeterministic future cash flows.
ANSWER: stochastic discount factor [prompt on SDF]
[10e] The stochastic discount factor can be derived from an equation named for this mathematician, which captures an intertemporal first-order condition. Jacob Bernoulli’s work on interest rates that compound more than once a year inspired this mathematician to develop an eponymous number.
ANSWER: Leonhard Euler [accept Euler equation; accept Euler’s number; reject “Euler’s constant”]
[10m] The Hansen–Jagannathan bound states that the stochastic discount factor must be at least as volatile as this other measure, which compares the excess return of an asset to the asset’s standard deviation of returns.
ANSWER: Sharpe ratio [accept Sharpe index or Sharpe measure; prompt on reward-to-variability ratio]
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