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30 Cards in this Set
- Front
- Back
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Finance
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the field that studies how people make decisions regarding the allocation of resources per time and the handling of risk
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the field that studies how people make decisions regarding the allocation of resources per time and the handling of risk
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Finance
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Present value
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The amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money.
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The amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money.
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Present value
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Future Value
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the amount of money in the future that an amount of money today will yield, given prevailing interest rates.
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the amount of money in the future that an amount of money today will yield, given prevailing interest rates.
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Future Value
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Compounding
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the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future.
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the accumulation of a sum of money in, say, a bank account, where the interest earned in the account to earn additional interest in the future.
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Compounding
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adverse selection
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a high risk person is more likely to apply for insurance that a low risk person, because the high risk person stands to benefit more.
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a high risk person is more likely to apply for insurance than a low risk person, because the high risk person stands to benefit more.
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adverse selection
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moral hazard
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after buying insurance, people have less incentive to be careful about their risky behavior because the insurance company will cover much of the loss.
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after buying insurance, people have less incentive to be careful about their risky behavior because the insurance company will cover much of the loss.
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moral hazard
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Standard Deviation
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reduces risk: the standard deviation measures the volatility of a variable—that is, how much the variable is likely to fluctuate. (higher deviation: more volatile (more risk)).
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reduces risk: the standard deviation measures the volatility of a variable—that is, how much the variable is likely to fluctuate. (higher deviation: more volatile (more risk)).
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Standard Deviation
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the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks.
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Diversification
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Diversification
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the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks.
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Firm-specific risk
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risk that affects only a single company
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risk that affects only a single company
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Firm-specific risk
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Market risk
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that affects all companies in the stock market.
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that affects all companies in the stock market.
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Market risk
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Fundamental Analysis
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the study of a company’s accounting statements and future prospects to determine its value.
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the study of a company’s accounting statements and future prospects to determine its value.
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Fundamental Analysis
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Efficient Markets Hypothesis
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the theory that asset prices reflect all publically available information about the value of an asset.
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the theory that asset prices reflect all publically available information about the value of an asset.
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Efficient Markets Hypothesis
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Informational efficiency
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the description of asset prices that rationally reflect all available information. (Good news/bad news).
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the description of asset prices that rationally reflect all available information. (Good news/bad news).
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Informational efficiency
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Random Walk
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The path of a variable whose changes are impossible to predict. (Stock prices are impossible to predict from available information).
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The path of a variable whose changes are impossible to predict. (Stock prices are impossible to predict from available information).
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Random Walk
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speculative bubble
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Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing this
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Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing this
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speculative bubble
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