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12 terms

chapter 9

STUDY
PLAY
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 interesting rates to produce a given future amount of money (1+r)^n = 100
future value
the amount of money in the future that an amount of money today will yield, given prevailing interest rates x/(1-r)^n
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
a dislike of uncertainty
diversification
the reduction risk achieved by replacing a single risk with a large number of smaller, unrelated risks
firm-specific risk
risk that affects only a single company
market risk
risk that affects all companies in the stock market
fundamental analysis
the study of a company's accounting statements and future prospects to determine its value
efficient markets hypothesis
the theory that asset prices reflect all publicly available information about the value of an asset
informational efficiency
the description of asset prices that rationally reflect all available information
random walk
the path of a variable whose changes are impossible to predict