🔑 Core Terms from Lecture 9 Flashcards
🧮 DCF (Discounted Cash Flow)
👉 Something is worth what it will pay you in the future, but adjusted for how far away that money is.
➡️ The further away the cash is, the less it’s worth today.
💰 Cash Flow (CF)
Just means money you get (like dividends, profits, or interest payments).
→ In stock valuation, this is usually dividends or free cash flow.
📉 Discount Rate (r or k)
The % return you want to make the investment worth it.
→ If the investment doesn’t meet this bar, it’s not a good deal.
📈 Fundamental Analysis
Looking at real company info to decide if a stock is worth buying.
Examples:
- Revenue
- Profit
- Growth
- Interest rates
- Industry trends
📉 Technical Analysis
Focuses only on price charts and trends, not company info.
→ Used for short-term trading.
🧮 Gordon Growth Model (GGM)
A formula that gives you the value of a stock based on:
- Last dividend paid (D₀)
- Expected growth (g)
- Discount rate (k)
✅ Works best for mature companies with steady growth.
📉 Required Return (k or r)
The % return you want based on how risky the investment is.
🧮 DPS (Dividend per Share)
How much money the company gives you per share, usually every year.
🔁 Moving Average (MA)
A line that shows the average price of a stock over the last X days.
- MA(50) = average over last 50 days
- Used in technical analysis
🚨 Condition for GGM to work
k > g → The required return must be bigger than growth.
→ Otherwise, the price goes to infinity or becomes negative.
📊 Momentum Strategy
You:
- Buy recent winners
- Sell recent losers→ Based on past 12-month returns→ Hold for 3 months
🔍 Top-Down Approach (EmIC)
Start big, narrow down:
- Economy → is GDP growing? Inflation?
- Market → is money flowing in or out?
- Industry → is this sector doing well?
- Company → how is this business specifically doing?
🔍 Bottom-Up Approach
Start with the company itself, and then see how the industry/economy affect it.
Used by stock pickers who believe in “finding winners” first.
📉 Business Cycle
The natural rise and fall of the economy:
- Early cycle = recovery
- Mid = strong growth
- Late = slowing down
- Recession = economy shrinks
📊 Cyclical Industries
Do well when the economy is good.
Do badly during a recession.
→ High beta
🛡️ Defensive Industries
Do okay even when the economy is bad.
→ Low beta
🧪 Factors (Quant Investing)
Patterns that explain long-term stock performance:
- Size = small companies tend to do better
- Value = cheap stocks outperform expensive ones
- Momentum = winners keep winning (for a while)
- Quality = more profitable companies do better
- Low Volatility = less risky stocks tend to beat the market
