Finance

• Cash (dividends)
• Capital Gains

• Cash (Coupons)
• Capital Gains

• 1. Stocks have the highest return over the long run
• The most profitable have been small cap stocks
• 2. Stocks have the highest risk
• The riskiest have been small cap stocks again
• The least risky investment:Treasury bills are considered risk free investments because they have backing of govt.
• 2nd Lesson
• 3. Higher returns come with higher risk
• risk premium is the extra return a risky investment offers over the risk-free rate

(Proxy for risk) How comfortable will you be if you invest in something in which the price chances every day - sometimes not the way you want it to change

• Investor prefer more to less
• Financial markets are competitive

• Also called "Price is Right"
• A market in which stock prices fully reflect all available info
• EMH argues that info is immediatly incorporated into prices. Once info becomes available analyze it
• Misconception: doesnt mean that it doesnt make a difference how you invest, since the risk/return trade-off still applies, but rather that you can't expect to consistently "beat the market" on a risk-adjusted basis using costless trading strategies
• Price fluctuations are evidence that the market is efficient since new info is constantly arriving-prices that dont change are evidence of inefficiency

collection of assets(combination of stocks, bonds, cash, etc.)

• Firm Specific + Market
• 1. Firm-Specific risk (unsystematic): also called diversifiable risk
• These are company specific
• 2. Market risk (systematic): also called non diversifiable risk
• Affects all securities in the market. changes in interest rates and unemployment, terrist attack, hurricane, etc.

• A measurement of systematic risk
• Beta is a number that measures the systematic (market) risk in a stock. It is related to how the stock's return in correlated with the return on the market
• Beta of the market is assumed to be 1
• B>1 indicates the company is riskier
• B=1 indicates equal risk
• B<1 indicates less risky

• Reward-to-Risk ratio that us a measure of how much return is obtained by bearing one unit of risk (variability)
• E(R)-Risk free rate/Beta

• CAPM
• In equilibrium, we can formulate a relation between systematic risk and expected returns
• E(R)=Rf+Bi(E(Rm)-Rf)
• Risk-free rate- the pure time value of money
• Market risk premium- the reward for bearing systematic risk
• The beta coefficient- a measure of the amount of systematic risk present in a particular asset

• SML
• 

• Finance deals withhow corporations raise funds (capital structure) andhow they use these funds to make profits and maximize shareholders' worth (capital budgeting)
• The following all mean the same thing
• Required return
• Appropriate discout rate
• Cost of capital

• Dividend Yield= D_(t+1)/P_t
• Capital Gains Yield= (P_t+1P_t)/P_t

• Weak form efficiency: A form of the theory that suggests you can't beat the market by knowing past prices.
• Semi-strong form efficiency: Perhaps the most controversial form of the theory, it suggests you can't consistently beat the market using publicly available information. That is, you can't win knowing what everyone else knows.
• Strong form efficiency: The form of the theory that states no information of any kind can be used to beat the market. Evidence shows this form does not hold.

• Casual evidence and empirical observation suggest the following statements are true.
• Prices respond very rapidly to new information.
• Future prices are difficult to predict.
• Mispriced stocks (those whose future price level can be predicted accurately) are difficult to identify and exploit on a consistent basis. (Note: the key here is consistency: anyone can "get lucky" at stock-picking, just as anyone can get lucky at the craps table. The important question is: can they do it time and time again?)