Intro to Chapter 8
A stock is:
• A security that may be purchased on margin.
• Publicly or privately traded.
• Representative of an equity interest in a company.
• A security traded on both the primary and secondary markets.
- In a long position the investor hopes that the price will rise, in short, fall.
- The value of a stock is inversely related to its required return
- the first dividend in the constant growth phase is at Year 4. If you use the constant growth model
(P = D/(k-g)) to value the dividends starting in Year 4, then you get the present value of the
infinite series as of year 3.
- The total payout model (with constant growth) calculates the stock price as of today
- The video states that efficient markets are ones with fast changing prices that accurately value
stocks. The reason the video gives for why markets are efficient is competition among investors
Hard question type: Calculating Fair Value:
Understanding Arbitrage Opportunities Intro: Chapter 6
- To lower the risk of your portfolio, you should add stocks that have a low correlation with those in
- When the correlation is minus one (-1) the graph is shaped like a sideways V
- When the correlation is zero (0) the graph is shaped like a curve
- When the correlation is plus one (+1) the graph is shaped like a straight line
- From that video we learn that the percentage change in a value-weighted index is equal to The
return on a portfolio including the same stocks (as the index) where the portfolio weight on each
stock equals the stock’s relative value.
- Portfolio possibility line: A line that shows all of the return and beta combinations that are possible
by combining a given risky asset with the risk-free asset
- The slope of the security market line is equal to [E(km)-kf]
Capital Gain= (Ending price- beginning price)/beginning price
Dividend Yield = Dividends/Price Paid
Standard Deviation of a Portfolio Modern Portfolio Theory:
- The lower the correlation between two stocks, the more diversification you get when you combine
them into a portfolio.
- The SML implies that, if you could find an investment with a negative be