14.1: Present Value: Measuring the Time Value of Money
Finance- the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
Present value- the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Future value- the amount of money in the future that an amount of money today will yield, given prevailing interest rates
Compounding- the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
Risk Aversion:
The Markets for Insurance:
Buying insurance is one way to deal with risk
Diversification of Firm-Specific Risk:
Diversification- The reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks
Firm-specific risk- the risk that affects only a single company
Market risk- the risk that affects all companies in the stock market
The Trade-off between Risk and Return:
Fundamental Analysis:
The Efficient Markets Hypothesis:
Market Irrationality:
Fluctuating stock prices
It is impossible to know the correct, rational valuation of a company