Chapter 7: Stocks and Other Assets
Stock index: a number that represents the avg. price of a collection of stocks. Ex. DOW
Mutual funds: an investment company that pools the funds of many investors and buys a
large number of different stocks.
Index fund: a mutual fund that tries to mimic a stock index, such as S&P500
know Div yield, cap gains yield, total dollar return, total % return
Realized capital gains: profits that an investor receives from selling a stock.
Implicit capital gains: are those profits accrued but not yet realized(paper profits)
LockIn effect: the idea that investors who own stock has appreciated feel locked into
holding that stock forever to avoid paying capitalgains taxes.
prevents stocks from being priced efficiently as it reduces trading volume due to longer
After tax real income= after tax income loss of principal value to inflation.
After tax real return= after tax real income/principal
investors can boost returns by minimizing transaction costs and avoiding taxes
avoid selling(hold longer), contribute money to a tax favored account such as RRSP or
How Can an investor profit in the Stock Market
Efficient markets hypothesis: the idea that stock prices fully reflect all available
information. Assumes market has a lot of buyers/sellers, and liquid
Random walk: the idea that movements of stocks prices from day to day, year to year are
1. there is a significant relationship between return on stocks in one week and their
return the following week
2. the movement of stock prices over time is much greater than changes in the
earnings of those companies
3. high returns to a particular stock in one period generally are associated with lower
returns in a later period Anomalies: incidents of predictable pa