Efficient Markets, PV, NPV Flashcards
weak market efficiency
prices reflect the information
contained in the record of past prices.
semistrong market efficiency
prices reflect not just past prices but all other
public information, for example, from the Internet or the financial press.
strong-market efficiency
prices reflect all the information that can be acquired by painstaking analysis of the company and the economy.
Alpha
states how much on average the stock price changed when the market index was
unchanged
Beta
tells us how much extra the stock price moved for each 1% change in
the market index
arbitrage
investment strategy that guarantees superior returns without any risk
How to sell a stock short
To sell a stock short, you borrow shares from another investor’s portfolio, sell them, and
then wait hopefully until the price falls and you can buy the stock back for less than you
sold it for. If you’re wrong and the stock price increases, then sooner or later you will be
forced to repurchase the stock at a higher price (therefore at a loss) to return the borrowed
shares to the lender. But if you’re right and the price does fall, you repurchase, pocket the
difference between the sale and repurchase prices, and return the borrowed shares
Equity financing
giving out stocks
Debt financing
lenders giving money in hopes of interest
Sarbanes Oxley Act
requires that corp place more independent directors on the board
net present value
PV - intital investment
amortizating loan
part of payment goes to interest and rest goes to reduce the loan
Conditions for market efficiency (4) from lecture notes
1) there should be a large number of profit maximization participants
2) widely publicly and cheaply available information to all investors
3) new info should be rapidly flowing
4) transactions cost must be low
Goal of financial manager
To maximize market value of corporation by maxing stock price
Market information
Everyone has access to w/o doing any math
Example prices
