Podcast
Questions and Answers
In the one-period valuation model, how do changes in the expected sales price and dividends impact the current value of a stock?
In the one-period valuation model, how do changes in the expected sales price and dividends impact the current value of a stock?
- The current value depends only on the actual value of the dividends and expected sales price received in one year.
- The current value depends upon the present value of both the dividends and the expected sales price. (correct)
- The current value depends only on the present value of future dividends.
- The current value depends only on the future value of dividends and the actual sales price.
According to the one-period valuation model, what is the effect of an increase in the required rate of return on equity investments on the current stock price?
According to the one-period valuation model, what is the effect of an increase in the required rate of return on equity investments on the current stock price?
- It reduces the expected sales price of the stock.
- It increases the current price of the stock.
- It increases the expected sales price of the stock.
- It reduces the current price of the stock. (correct)
Using the one-period valuation model, what is the current price of a stock with a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%?
Using the one-period valuation model, what is the current price of a stock with a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%?
- $121.12.
- $110.11.
- $100.10. (correct)
- $100.11
With the Gordon growth formula, what is the current stock price if D1 is $2.00, ke is 12% (0.12), and g is 10% (0.10)?
With the Gordon growth formula, what is the current stock price if D1 is $2.00, ke is 12% (0.12), and g is 10% (0.10)?
What key assumption does the Gordon Growth Model make about the rate at which dividends will grow?
What key assumption does the Gordon Growth Model make about the rate at which dividends will grow?
How is an asset's price determined in asset markets?
How is an asset's price determined in asset markets?
Which factor would most likely lead to a decrease in a stock's price?
Which factor would most likely lead to a decrease in a stock's price?
What financial variable changes when there is a change in the perceived risk of a stock?
What financial variable changes when there is a change in the perceived risk of a stock?
How does monetary expansion generally affect stock prices, with all other factors held constant?
How does monetary expansion generally affect stock prices, with all other factors held constant?
What is the economic term for the view that expectations evolve gradually over time based on past information?
What is the economic term for the view that expectations evolve gradually over time based on past information?
What is the most significant criticism of the adaptive expectations theory?
What is the most significant criticism of the adaptive expectations theory?
In the context of economics, what characterizes expectation formation when a forecast incorporates all available information?
In the context of economics, what characterizes expectation formation when a forecast incorporates all available information?
If information isn't available when an optimal forecast is made, how are these expectations classified under rational expectations theory?
If information isn't available when an optimal forecast is made, how are these expectations classified under rational expectations theory?
According to rational expectations theory, what are the properties of forecast errors on average?
According to rational expectations theory, what are the properties of forecast errors on average?
According to the efficient markets hypothesis, what best describes the current price of a financial security?
According to the efficient markets hypothesis, what best describes the current price of a financial security?
What does the efficient markets hypothesis suggest will happen if an unexploited profit opportunity arises in an efficient market?
What does the efficient markets hypothesis suggest will happen if an unexploited profit opportunity arises in an efficient market?
In what scenario is a company's stock price decline after announcing favorable earnings consistent with the efficient markets hypothesis?
In what scenario is a company's stock price decline after announcing favorable earnings consistent with the efficient markets hypothesis?
According to the efficient markets hypothesis, what investment strategy is generally most beneficial for investors?
According to the efficient markets hypothesis, what investment strategy is generally most beneficial for investors?
What is the recommended method for small investors to implement a 'buy and hold' investment strategy?
What is the recommended method for small investors to implement a 'buy and hold' investment strategy?
In an efficient market, if all prices correctly reflect market fundamentals, which statement is FALSE?
In an efficient market, if all prices correctly reflect market fundamentals, which statement is FALSE?
Flashcards
One-Period Valuation Model
One-Period Valuation Model
The value of a share of stock today, based on the present value of future dividends and the expected sales price.
Required Return on Equity
Required Return on Equity
The rate of return required by an investor to compensate for the risk of investing in a stock.
Gordon Growth Formula
Gordon Growth Formula
A formula that calculates the intrinsic value of a stock based on future dividends that grow at a constant rate.
Asset Pricing in Markets
Asset Pricing in Markets
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Impact of Decreased Dividends
Impact of Decreased Dividends
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Risk and Required Rate of Return
Risk and Required Rate of Return
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Adaptive Expectations
Adaptive Expectations
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Rational Expectations
Rational Expectations
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Rational Expectations Errors
Rational Expectations Errors
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Efficient Markets Hypothesis
Efficient Markets Hypothesis
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Market Efficiency Dynamics
Market Efficiency Dynamics
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Buy and Hold Strategy
Buy and Hold Strategy
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Efficient Market Investment
Efficient Market Investment
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Market Sentiment
Market Sentiment
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Loss Aversion
Loss Aversion
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Overconfidence Bias
Overconfidence Bias
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Uncertainty and Equity Returns
Uncertainty and Equity Returns
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Study Notes
- In the one-period valuation model, a stock's value today is the present value of both dividends and expected sales price.
- In the one-period valuation model, an increase in the required return on equity investments decreases the current stock price.
- Using the one-period valuation model, with a year-end dividend of $0.11, an expected sales price of $110, and a required return rate of 10%, the current stock price would be $100.10.
- Using the Gordon growth formula, if D1 is $2.00, ke is 12% (0.12), and g is 10% (0.10), the current stock price is $100.
- The Gordon Growth Model assumes dividends grow at a constant rate.
- In asset markets, an asset's price is set by the buyer willing to pay the highest price.
- An expected decrease in future dividends may lead to a stock's price decrease.
- A change in the perceived risk of a stock changes the required rate of return.
- Monetary expansion increases stock prices due to a decrease in the required return rate and an increase in the dividend growth rate, everything else held constant.
- Adaptive expectations suggest expectations change slowly over time in response to new information.
- A major criticism of adaptive expectations is that it ignores that people use more information than just past data to form their expectations.
- If a forecast is made using all available information, then expectations are rational.
- If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are still considered to be formed rationally.
- When using rational expectations, forecast errors will, on average, be zero and cannot be predicted ahead of time.
- If someone doesn't use all available information when forming expectations, their prediction is not rational.
- According to the efficient markets hypothesis, the current price of a financial security fully reflects all available relevant information.
- According to the efficient markets hypothesis, if an unexploited profit opportunity arises in an efficient market it will be quickly eliminated.
- The efficient markets hypothesis suggests that if earnings were not as high as anticipated, the price of a company's stock falls after the announcement of favorable earnings.
- The efficient markets hypothesis indicates that investors do better on average if they adopt a "buy and hold" strategy.
- For small investors, the best way to pursue a "buy and hold" strategy is to buy no-load mutual funds with low management fees.
- It is false that a stock that has done poorly in the past is more likely to do well in the future, because if in an efficient market all prices are correct and reflect market fundamentals one investment is as good as any other because the securities' prices are correct.
- Stock market crashes lead us to believe that factors other than market fundamentals have an effect on asset prices.
- Loss aversion means people are more unhappy when they suffer losses than they are happy when they achieve gains.
- Psychologists have found that people tend to be overconfident in their own judgments.
- Increased uncertainty resulting from the global financial crisis raised the required return on investment in equity.
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