RANDOM WALKS AND INDEX FUNDS

RANDOM WALKS AND INDEX FUNDS The efficient markets hypothesis is a theory about how financial markets work. The theory is probably not completely true As we discuss in the next section, there is reason to doubt that stockholders are always rational and that stock...

THE EFFICIENT MARKETS HYPOTHESIS

THE EFFICIENT MARKETS HYPOTHESIS There is another way to choose 20 stocks for your portfolio: Pick them randomly by, for instance, putting the stock pages on your bulletin board and throwing darts at the page. This may sound crazy, but there is reason to believe that...

FUNDAMENTAL ANALYSIS

FUNDAMENTAL ANALYSIS Let’s imagine that you have decided to put 60 percent of your savings into stock, and to achieve diversification, you have decided to buy 20 different stocks. If you open up the newspaper, you will find thousands of stocks listed. How should...

ASSET VALUATION

ASSET VALUATION Now that we have developed a basic understanding of the two building blocks of finance-time and risk let’s apply this knowledge. This section considers a simple question: What determines the price of a share of stock? Like most prices, the answer...

THE TRADE-OFF BETWEEN RISK AND RETURN

THE TRADE-OFF BETWEEN RISK AND RETURN One of the Ten Principles of Economics in Chapter 1 is that people face trade-offs, The trade-off that is most relevant for understanding financial decisions is the trade-off between risk and return As we have seen, there are...

DIVERSIFICATION OF FIRM-SPECIFIC RISK

DIVERSIFICATION OF FIRM-SPECIFIC RISK In 2002, Enron, a large and once widely respected company, went bankrupt amid accusations of fraud and accounting irregularities. Several of the company’s top executives were prosecuted and ended up going to prison. The...