Fina 3001

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Last updated 3:55 AM on 2/26/25
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20 Terms

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Real Option
The right, but not the obligation, to undertake certain business decisions, such as deferring, expanding, contracting, or abandoning a project.
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Binomial Framework
One of the two main frameworks used to value real options.
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Black-Scholes Framework
The second framework used to value real options.
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Risk-Neutral Probabilities
Probabilities adjusted for risk, used in option valuation to discount expected cash flows at the risk-free rate.
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Opaque Framing
A situation where the decision-making process and outcomes are not intuitively clear.
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Excessive Optimism
A behavioral bias where managers overestimate future cash flows, potentially leading to overinvestment.
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Put Option Concept
Equity holders can 'put' the firm to debt holders by defaulting when the firm's value falls below debt obligations.
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Sunk Cost Fallacy
The psychological bias that prevents managers from abandoning failing projects due to prior investments.
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Decision Tree Analysis
A simpler analysis method some firms prefer over real-option techniques as it does not require complex calculations.
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Abandonment Option
The ability to cease a project to cut losses if it becomes unprofitable.
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Efficient Market Hypothesis (EMH)
The theory that asset prices fully reflect all available information.
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Extrapolation Bias
The tendency to assume recent trends will continue into the future.
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Baker-Wurgler Sentiment Index
A measure of investor sentiment and its impact on market behavior.
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Post-Earnings-Announcement Drift
The tendency for stock prices to drift in the direction of an earnings surprise after the announcement.
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Disposition Effect
Investors' tendency to sell winning stocks too early and hold losing stocks too long.
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Fama-French Three-Factor Model
A model that attempts to address anomalies unexplained by the Capital Asset Pricing Model (CAPM).
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Herd Behavior
The psychological phenomenon where investors mimic each other's actions, affecting market volatility.
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Asset Substitution
A situation where equity holders prefer riskier projects because they benefit from upside gains while debt holders bear downside risk.
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Limits to Arbitrage
Factors that prevent rational investors from correcting mispricings caused by irrational behavior.
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Behavioral Bias
Systematic errors in judgment that can affect investment decisions.