12 terms

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