FIN 3320 Valuation & Investing

Bobby Merriman Finance 3320 Valuation and Investing

valuation

estimating future cash flows from an investment and determining their value today based on a required rate of return (which compensates you for delay and uncertainty); the process of estimating what an asset is worth today based on the cash you expect the asset to distribute in the future​

investment

a reduction of wealth today with the expectation of receiving greater wealth in the future​

intrinsic value

what an investment is worth based on the cash it can produce in the future

market price

what an investor is willing to pay for an investment (driven by supply and demand)

valuation formula

the present value of the cash flows an investment is expected to produced discounted at a rate of return that reflects (1) the postponement of using the cash today (delay) and (2) the risk of realizing those cash flows (uncertainty)

investing

purchasing an asset with the view that the asset itself will pay more cash in the future than what you bought it for

speculating

purchasing an asset with the view that you can sell the asset for a higher price to another investor in the future

bias

a tendency or inclination that affects judgment and decision-making; all valuation and investing decisions have some degree of bias

uncertainty

a situation where the outcomes or future events are unknown and cannot be predicted with complete confidence; no valuation or investing decision can be known with 100% certainty (this is why you are compensated with a rate of return)

complexity

the state of having multiple interconnected parts or factors, making understanding or solving problems more difficult; more complex models do not imply a better valuation or investment decision