Forecasting Flashcards
What is the random walk hypothesis?
It states that stock price changes are as unpredictable as a flip of a coin
What is 1st order autoregressive model?
Model that specifies that its output depends linearly on its previous values and a stochastic, or imperfectly predictable term
What is weak form market efficiency?
Prices incorporate information about past prices
What is the semi-strong form of market efficiency?
The market incorporates all publicly available information
What is the strong form of market efficiency?
Prices incorporate all information, public and private
What is Present Discounted Value? Or Present Value? Ie, PDV
A dollar today is worth more than a dollar tomorrow— can be invested to earn more than a dollar by tomorrow
What is price-earnings, or P/E ratio?
Ratio of company’s share price to its earnings per share
How is P/E used?
Investors use it to judge whether a company is cheap or expensive to buy
What does low P/E mean?
It does not mean the stock is a bargain, but that earnings are rationally forecasted to decrease in future
What are reasons to say markets should be efficient?
Survival of the fittest
Smart money dominates trading
Marginal investor determines stock price
What is a Marginal Investor?
A representative investor whose actions reflect the beliefs of those people who are currently trading a stock. It is the marginal investor who determines a stock’s price.
What is the Gordon Growth, or Dividend Discount Model?
is a method of valuing a company’s stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value.
What is the GGM equation ?
The variables are:
P: is the current stock price.
g: is the constant growth rate in perpetuity expected for the dividends.
r: is the constant cost of equity capital for that company.
D_1: is the value of the next year’s dividends.
P = D1 / (r - g)
