Lecture_6

Present Value

The amount needed today to produce a future amount of money given prevailing interest rates.

Future Value

The amount in the future that an amount of money today will yield, given prevailing interest rates.

Compounding

The process where interest is earned not only on the principal but also on the interest.

Discounting

Determining how much to invest today to yield a specific amount in the future at a given interest rate.

Risk Averse

Dislikes uncertainty; prefers certainty in investment outcomes.

Risk Seeking

Has a preference for uncertainty; eager or inclined to take risks.

Risk Neutral

Insensitive to or indifferent towards risk.

Utility

A person’s subjective measure of well-being or satisfaction.

Diversification

Allocating capital in a way that reduces exposure to any one particular asset or risk class.

Efficient Market Hypothesis

The theory that asset prices reflect all publicly available information about the value of an asset.

Market Irrationality

The phenomenon where asset markets are driven by the emotional behaviors of investors, leading to irrational waves of optimism and pessimism.

Bubbles

Economic cycles characterized by the rapid escalation of asset prices followed by a contraction.

Geometric Mean

A mean that indicates the central tendency of a set of numbers by using the product of their values, especially for growth rates.

Rule of 70

A formula to estimate the number of years for an amount to double given a specific annual growth rate.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents.

Standard Deviation

A statistical measure that indicates the dispersion or variability of a set of values.

Asset Valuation

Determining the price of a share of stock based on supply and demand.

Fundamental Analysis

The study of a company’s accounting statements and future prospects to determine its value.

Technical Analysis

The study of asset prices looking for patterns in market data to identify trends and make predictions.

Insurance

A way to manage risk by transferring risks from individuals or businesses to an insurance company.

Compound Interest Formula

Future Value = Present Value × (1 + r/100)^N, where r is the interest rate and N is the number of years.

Risk-return trade-off

The principle that potential return rises with an increase in risk.

Current Asset

An asset that is expected to be converted into cash or used up within one year.

Speculative Bubble

When the price of an asset rises significantly above its fundamental market value.