FNCE 239 Study Guide - Midterm Guide: Value Investing, Zero-Coupon Bond, Prospect Theory

• School: UPenn
• Department: Finance
• Course: FNCE 239
• Professor: N I K O L A I R O U S S A N O V

Document Summary

Emh- the price of inancial markets adjusts to incorporate all available informaion. P = e[p*], where e[p*] = fundamental value = the pv of all cf that investors raionally expect to receive. E [cf t] ( 1+ e[ r])t t =1. Yield bubble- stocks that pay high dividend yields are overpriced. Law of one price- value (security a + b) = value of a + value of b. Limits to arbitrage- market fricions prevent compeiive forces from counteracing the efect of systemaic mistakes. Joint hypothesis problem exists within emh- usually impossible to test (a) without also tesing (b). To know fundamental value, we need a model. In eicient markets, only new info afects expected cf and the discount rate since known informaion reduces risk (b becomes 0) Supply is ixed in the sr, so it doesn"t mater if price moves up or down. As soon as the price drops below e(p*), demand becomes ininite.