Efficient_Market_Theory

Efficient_Market_Theory - Efficient Market Theory A Guide...

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Efficient Market Theory A Guide to Investing
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Investment Alternatives Savings accounts and Certificates of Deposit Money markets Housing Bonds – Federal, State and Corporate Stocks Mutual funds – managed and indexed Derivatives
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Characteristics of Assets Expected Returns Liquidity Tax Advantage Risk Diversifiable Non-diversifiable
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Trade-offs Savings accounts vs. Certificates of Deposit (fixed rate) Liquidity Inflation risk i = r + π Inflation expectations are built into interest rates Unexpectedly high inflation = lender loses Unexpectedly low inflation = borrower loses Default risk – FDIC, FSLIC, NCUA, etc.
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Bonds vs. Stocks Default risk – bondholders paid first Return risk – bond interest is fixed Inflation risk – stock prices and dividends rise with inflation Fundamental Stock price = present expected value of future profits
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Present Value $100 next year @ 10% interest What’s it worth today?
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Efficient_Market_Theory - Efficient Market Theory A Guide...

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