Chapter 27

This chapter talks about present value, the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money. It also talks about future value, the amount of money in the future that n amount of money today will yield, given prevailing interest rates. compounding is the accumulation of sum of money in, say, a bank account, where the interest earned remains in the account of earn additional interest in the future. Annuity is a regular income every year until you die. When owning stocks one must be aware of diversification, the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks. Deviation is the volatility of a variable (how likely it is to fluctuate). Firm-specific risk is the risk that affects only a single company. Market risk is risk that affects all companies in the stock market. Fundamental analysis is the study of a company's accounting statements and future prospects to determine its value undervalued: price is less than value, however, overvalued is price is more than value. Efficient markets hypothesis is a the theory that asset prices reflect all publicly available information about the value of an asset. Informational efficiency is the description of asset prices that rationally reflect all available information. Random walk is the path of a variable whose changes are impossible to predict. And because of diminishing marginal utility, most people are risk averse. People can avoid risk by buying insurance, diversifying their holdings, and choosing a portfolio with lower risk and lower return.