Given its scope, as above, financial economics tends to deal with the workings of financial markets, such as the stock market, and the financing of companies, and includes the following subject areas: Budgeting, saving, investing, borrowing, lending, insuring, hedging, diversifying, and asset management. Because the future is never known with certainty, a central concern of financial economics is the impact of uncertainty on resource allocation.
Financial economics thus attempts to answer questions such as:
- How are the prices of financial assets determined (stocks, bonds, currencies, and commodities)?
- What are the effects of a company choosing different methods of financing its operations, such as issuing shares or borrowing?
- What portfolio of assets should an investor hold in order to best meet his/her objectives?
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