# Why is there a lot of focus on derivatives pricing and much less on stock pricing?

I am a quantitative finance student, and during the first year of this Master’s Degree I couldn’t help but notice that there’s a lot of focus on derivatives pricing and little or none on stock pricing. Shouldn’t stock pricing be important, for example to help determine a fair value?

• Welcome to QSE. There is a ton of literature on company valuation see e.g. discounted cashflow models (DCF) or dividend discount models (DDM). Perhaps they are more frequently taught in classic Finance programs or MBA's and not in an MFE. Jun 23 at 7:10
• A "revolution" occurred in modern finance in the 1970s and 1980s after Black Scholes applied stochastic calculus to finance. The field of derivative pricing developed enormously and soon became the major focus of research and teaching in academia. The banks were happy to hire such MFE graduates for their derivs business. The older subjects such as stock valuation underwent no such development, perhaps because stock pricing involves estimates of future cash flows which are necessarily judgemental and imprecise, not subject to rigorous math techniques. Expertise rather than maths is involved. Jun 23 at 7:54
• Stock pricing models are well known, well understood and relatively simplistic (i.e. the Gordon Growth Model, DCF, CAPM, etc...): therefore due to their relative simplicity, they don't require as much time to learn. On the other hand, derivative pricing models are relatively difficult to learn: therefore they get dedicated more time. Finally, I have never come across a job advert requiring someone to be proficient at stock pricing, however I have come across many job adverts asking for derivative pricing skills => demand for skills also drives the course content. Jun 23 at 14:11
• It's a general principle that, the harder something is to do or think about with precision, the simpler our mathematics for it must be. Determining the "right" price for a stock is so difficult that our associated math is near trivial. On the other hand, derivatives prices are so constrained (by arbitrage or sometimes portfolio reasoning) that the mathematics can become significantly complex. Jun 23 at 17:49