ECON90034 Economics of Finance
The Complete Exam Bible · S2 2026ECON90034 Overview
- Postgraduate
- University of Melbourne
- Semester 2, 2026
- Two-hour end-of-semester exam
- Exam hurdle applies
- Casio FX-82 only
ECON90034 Economics of Finance is a postgraduate subject at the University of Melbourne that applies microeconomic reasoning to financial decisions.
- Assessed by Three assignments plus an end-of-semester examination that must be passed.
- Hardest step Setting up the incentive constraint in a moral hazard contract and solving it in square roots.
- How to prepare Redo every tutorial problem with fresh numbers and write each method as a routine.
How ECON90034 is assessed
| Component | Weight | Format |
|---|---|---|
| Assignment 1 | 7.5% | Individual: an online quiz (Part A) and a written problem set submitted to Gradescope (Part B); listed in the handbook as 750 words, week 6 |
| Assignment 2 | 15% | Group investment game, up to four students per team, ending in a final report; listed in the handbook as 1500 words, week 10 |
| Assignment 3 | 7.5% | Individual: an online quiz (Part A) and a written problem set (Part B) on Topics 5 to 7; listed in the handbook as 750 words, week 12 |
| End-of-semester examination · hurdle | 70% | 2 hours during the examination period, with 15 minutes reading time; hurdle: a pass (50%) in the final exam is required to pass the subject |
Current ECON90034 dates
| Date | Item | Control |
|---|---|---|
| A | s | s |
| A | s | s |
Dates are as published in the current course materials. Confirm exact deadlines and submission settings in the live LMS.
What ECON90034 covers
The nine examinable topics as eleven chapters, from markets and risk to games, contracts and the macroeconomy. Each chapter links to its free guide.
Markets, Efficiency and the Home Loan Market
Topics 1 and 2: opportunity and sunk cost, supply and demand, comparative statics, a home loan market with two borrower groups, a rate ceiling with rationing, borrower and lender surplus, deadweight loss and exchange-rate shifts.02Consumption and Investment Under Certainty
Topic 3: ranking real projects, the investment frontier, the capital market line, borrowers and lenders, the Fisher separation theorem and the Lagrange method.03Expected Utility and Risk Aversion
Topic 4a: expected value and variance, expected utility, concave and convex utility, absolute and relative risk aversion, certainty equivalent, risk premium, insurance and the equity premium puzzle.04Mean-Variance Portfolio Theory
Topic 4b: portfolio return and variance, correlation cases, the minimum variance portfolio, the efficient frontier, the market portfolio, the capital market line and placing lenders and borrowers.05Simultaneous Games and Nash Equilibrium
Topic 5a: dominant and weakly dominant strategies, best responses, Nash equilibrium, the prisoners' dilemma and coordination games such as the battle of the sexes.06Sequential Games and Subgame Perfection
Topic 5: game trees, backward induction, complete strategies, counting strategies, strategic form, subgames, incredible threats, entry deterrence and first-mover advantage.07Repeated Games and Bank Runs
Topic 5b: finitely and infinitely repeated prisoners' dilemma, grim trigger, the discount factor condition, tacit collusion and bank runs as a coordination game.08Auctions and the NASDAQ Quote Case
Topic 5b: English, Dutch, first-price and second-price auctions, bid shading, truthful bidding, revenue equivalence, the winner's curse and collusive NASDAQ dealer quotes.09Moral Hazard and Optimal Contracts
Topic 6a: hidden action, principal and agent, participation and incentive constraints, first-best and second-best contracts, effort choice and welfare loss.10Adverse Selection, Signalling and Fund Fees
Topic 6b: the market for lemons, equilibrium price ranges, signalling, screening and reputation, and the VGI Partners fee case with a high water mark.11GDP, Growth, Business Cycles and Inflation
Topics 7 to 9: measuring GDP three ways, real and nominal GDP, Laspeyres and Paasche indexes, growth accounting, Keynesian and real business cycle views, and the Phillips curve.It starts from markets and efficiency, using the home loan market as its running case, then moves to saving and investing across time, choice under uncertainty and portfolio selection. The second half turns to strategy: simultaneous and sequential games, repeated play, auctions and bank runs, followed by the economics of information, where moral hazard and adverse selection shape contracts and fund fees.
The final weeks cover GDP, growth, business cycles and inflation.
The subject has no single textbook; readings are set for each topic and the tutorials carry most of the method. Its lecturer advises that most exam questions resemble the tutorial and assignment problems, so this guide rebuilds every method with fresh numbers, one step at a time.
The final mark comes from three assignments worth 30% together and an end-of-semester examination worth 70%, which you must pass to pass the subject. The exam has a short-answer part marked on the answer alone and a long-answer part that rewards full working, and there is no formula sheet.
Worked example · free
Certainty equivalent and risk premium of a 50:50 bet
- 1Expected wealth = 0.5 × 16,900 + 0.5 × 4,900 = 10,900, so the bet adds $900 on average.
- 2Expected utility = 0.5 × √16,900 + 0.5 × √4,900 = 0.5 × 130 + 0.5 × 70 = 100.
- 2Certainty equivalent: solve √w = 100, so the sure wealth worth the same is $10,000.
- 1Risk premium = 10,900 − 10,000 = $900. The certainty equivalent equals current wealth, so the investor is exactly indifferent about accepting.
Key terms
- Opportunity cost
- The value of the best alternative given up when a scarce resource is used. In a financial decision it includes the return the money could have earned elsewhere, not only the cash spent.
- Deadweight loss
- The fall in total surplus, borrowers plus lenders, caused by an intervention such as a rate ceiling. It is easiest to measure by comparing total surplus before and after the intervention.
- Fisher separation theorem
- The result that, when capital markets are perfect and complete, the best production decision maximises the present value of wealth and does not depend on anyone's preferences; preferences only decide how that wealth is consumed over time.
- Certainty equivalent
- The sure amount that gives a person the same utility as a risky lottery. For a risk-averse person it is below the lottery's expected value, and the gap is the risk premium.
- Capital market line
- The straight line from the risk-free rate that touches the efficient frontier at the market portfolio. Every portfolio on it mixes the market portfolio with lending or borrowing at the risk-free rate.
- Nash equilibrium
- A strategy profile in which every player's strategy is a best response to the others', so no single player gains by deviating alone. A game can have several, or none in pure strategies.
- Subgame perfect equilibrium
- A Nash equilibrium that remains a Nash equilibrium in every subgame of a sequential game, so it contains no incredible threats. Backward induction finds it.
- Moral hazard
- A hidden-action problem: after a contract is signed, one party takes an action the other cannot observe, such as effort, so pay must be tied to verifiable outcomes at some cost in risk sharing.
ECON90034 FAQ
How is Economics of Finance assessed at the University of Melbourne?
Three assignments make up 30% of the final mark: Assignment 1 and Assignment 3 are individual and worth 7.5% each, and Assignment 2, a group investment game, is worth 15%. The end-of-semester examination, two hours long, is worth 70%.
Is the final exam a hurdle?
Yes. The handbook states that passing the subject requires a pass, 50%, in the final exam. A student who fails the exam but has enough marks overall receives 49 and an NH grade; without enough marks overall the grade is N with the student's own mark.
What does the exam paper look like?
The posted format, from Semester 1, 2025, has fifteen minutes of reading and two hours of writing for 80 points. Part A has ten short questions worth 2 points each, marked on the answer alone. Part B has three questions worth 20 points each, where full working earns partial credit.
Can I bring a calculator or a formula sheet?
Only the Casio FX-82, in any suffixed version, is allowed; the FX8200 model is not. No formula sheet is provided, so formulas such as the risk-aversion coefficients and the capital market line must be memorised.
Which topics are examined?
The review lecture lists nine: microeconomic concepts, markets and efficiency, consumption and investment under certainty, choice under uncertainty, game theory, economics of information, GDP and growth, the business cycle, and inflation. It names a few items, such as monetary policy and all-pay auctions, as not examined.
How much mathematics does the subject need?
Calculus at the level of derivatives of power functions and simple optimisation, including the Lagrange method, plus probability for expected values and variances. Most marks come from setting up the problem correctly and explaining the result, often with a labelled graph.
Are past exams and tutorial problems good preparation?
Tutorial and assignment questions are the best guide: the lecturer says the exam has many questions similar to them. Older exams are useful for practice, but the subject has become more advanced, so treat decade-old papers as a supplement, not a template.
How to study for the exam
Work the subject as a set of methods rather than a set of facts. For each topic, write the method as a short routine you can run on new numbers: rank projects and find the capital market line; compute expected utility, the certainty equivalent and the premium; find the minimum variance and market portfolios; mark best responses; solve a tree backwards; check a grim-trigger condition; set up IR and IC and solve in square roots.
Then redo every tutorial problem without the solution, timing yourself at about a minute and a half per exam point. Because Part A is marked on the answer alone, practise arithmetic accuracy and write one clean answer; because Part B rewards method, practise writing each step and drawing labelled graphs. Keep a single page of formulas from week 1 and rewrite it from memory each week, since no formula sheet is provided.
In the last fortnight, spend most time on the topics with the longest calculations, moral hazard contracts and portfolios, and on explaining results in clear English.
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