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Questions and Answers
What does the Efficient Market Hypothesis (EMH) suggest?
What does the Efficient Market Hypothesis (EMH) suggest?
- Investors can consistently achieve higher returns than the market average
- All relevant information is already reflected in asset prices (correct)
- Asset prices do not reflect relevant information
- Asset prices are unpredictable
What does the Dividend Discount Model (DDM) value a stock based on?
What does the Dividend Discount Model (DDM) value a stock based on?
- The present value of its future dividends (correct)
- The company's revenue growth
- The company's market share
- Historical stock prices
What does Discounted Cash Flow (DCF) evaluate an investment's worth by estimating?
What does Discounted Cash Flow (DCF) evaluate an investment's worth by estimating?
- The company's current market value
- The company's historical performance
- The present value of its future cash flows (correct)
- The company's debt-to-equity ratio
What does Technical Analysis focus on to predict future price movements?
What does Technical Analysis focus on to predict future price movements?
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What does Quantitative Analysis involve to assess investment opportunities?
What does Quantitative Analysis involve to assess investment opportunities?
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Study Notes
Efficient Market Hypothesis (EMH)
- Suggests that financial markets are informationally efficient, meaning that prices reflect all available information at any given time.
- Implies that it is impossible to consistently achieve returns in excess of the market's average, without taking on additional risk.
Stock Valuation Models
- The Dividend Discount Model (DDM) values a stock based on the sum of the present value of its expected future dividends.
- Discounted Cash Flow (DCF) evaluates an investment's worth by estimating the present value of its expected future cash flows.
Investment Analysis
- Technical Analysis focuses on identifying patterns and trends in stock prices and trading volumes to predict future price movements.
- Quantitative Analysis involves the use of mathematical and statistical techniques to assess investment opportunities, and to identify mispriced securities.
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