Lecture10_student

Lecture10_student - Ahistoryofrisk conditionstaughtus Willt

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    A history of risk What have previous market  conditions taught us? Some math tools to help us
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Who can predict the future? Many people try to predict the future Will the stock market go up or down today? Who will win the NBA championship? Will it ever be a California team again except the Lakers? Will tomorrow’s temperature be higher than  today’s? What color will be on the roulette wheel next time?
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Many people try to predict the  future Some people pick “just for fun” Some people claim “expert” status Some people try to predict the future to  earn money Sports betting Stock and bond market transactions
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Who’s an expert? Many people claim to be experts Some triumph their claims “I predicted the stock market crash” However, be careful who and what you  believe Someone may have predicted the stock market  crash five times before it actually happened
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Who do you believe? When you hear somebody’s prediction,  listen to the argument behind it Good predictions often have good reasons  behind those predictions… …but there may be reasons that the  prediction does not happen
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Why can’t we just get good  advise to get ahead of others? Because everyone else knows if it’s on  the news! The market reacts to revealed information People that can interpret information better  than others can benefit Of course, never act on news in an  illegal way Example: Insider trading
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What will happen to the stock  market? I get this question quite often when I  reveal that I am an economist You will probably get this question at some  point in the future if you reveal your Econ  background My answer often includes… Your guess is probably about as good as  mine
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What if I knew what would  happen? I would always make the right  investment and make millions of dollars Even if I had a slight edge (Say 60-40 for  an even money bet), I could start with  small investments and gradually increase  them as I started to gain money
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Getting back to the stock  market In the previous lecture, we looked at  simple ways to try to come up with  stock value Perpetuity Growing perpetuity High growth rate, followed by growing  perpetuity ( properly discounted )
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The real stock market In reality, stocks go up and down in  value on a daily basis Market conditions change constantly Companies regularly distribute information  to the public Sales Earnings and dividends Forecasts
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Calculating yearly returns in  stocks Assume that we buy a stock 
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