Lecture14

Lecture14 - situations EndofUnit3 BeginUnit4...

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    How efficient are markets? We apply tools we have learned  throughout the quarter to real-life  situations
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End of Unit 3… Begin Unit 4 In the last lecture, we finished learning our  core principles for this class So far, some of the topics we have covered Perpetuities, annuities, and their many  applications Investment strategies The world of risk, including in the stock and bond  markets Covariance, correlation, and ß
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End of Unit 3… Begin Unit 4 Today, we start to apply these concepts to  real-life situations How efficient are markets? Are people always rational? How does debt (the issuing of bonds) affect a  company? Volatility and the option pricing model Can we make a lot of money if we think that a stock’s  price is going to go up or down a lot in the near future?
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We address the first issue in  this lecture How efficient are markets? Are people always rational? Bubbles Response time The efficient market hypothesis Different types of efficiency Challenges to market efficiency If you want to  stay after the  lecture, I can  answer  general  questions for  Test 2
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Recall previous drops in inflation- adjusted housing prices Source: http://mysite.verizon.net/vzeqrguz/housingbubble/
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Changes in housing prices Some changes in housing prices can  occur due to changes in market  conditions Boom times Recessions Temporary situations of high or low supply Remember that houses cannot be built  instantaneously Changes in the cost of building a house
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Bubble? Sometimes, a euphoria is created  when prices start to go up The euphoria feeds off of itself When prices go up for a few years  without a drop in recent memory,  some people may expect prices to  continue to go up for no good  reason 1992 to 2001: No substantial price  drops As prices continue to go up, the  euphoria is created
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Euphoria! ~2002 to 2006 Prices are now well above the  pre-bubble trend Enough people are continuing  to buy to drastically increase  housing prices Note that you only need a small  fraction of more affluent people to  create this jump in housing prices Shows like “Flip This House”  and “Flip That House” showed  all of the glamour and tears  involved with the potential  gains of making $$$$$ During this time,  there appears to be  no good reason for  this rapid of an  increase in prices
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By 2006, prices were about 60% 
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Lecture14 - situations EndofUnit3 BeginUnit4...

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