Relationship Among Firms, Underwriters, and Public PDF

Relationship among a Firm Issuing Securities, the Underwriters, and the Public  Q. DEFINE ? - Bonds: a loan paid by you to a company that will be paid back with interest - Stocks: ownership in a company and rise in value with the company - Mutual funds: shared access of diversified investmen...

Relationship among a Firm Issuing Securities, the Underwriters, and the Public  Q. DEFINE ? - Bonds: a loan paid by you to a company that will be paid back with interest - Stocks: ownership in a company and rise in value with the company - Mutual funds: shared access of diversified investment mediums, may include fees - Portfolios should be diversified to combat risk - The Efficient Market Hypothesis ? The Semi-Strong-Form Efficient Market Hypothesis asserts that all publicly available information is fully reflected in security prices. This is a stronger statement as it includes all public information (such as firm’s financial statements, analysts’ estimates, announcements about the economy, industry, or company.) Q. Portfolios and Diversification, investment , trade , factor of production ? Important for long-term goals such as retirement Portfolio: a conglomerate of different financial assets which balances risk and return Diversification: a risk management tool that mixes a large amount of investment mediums within a portfolio Portfolios and diversification go hand-in-hand Q. Investment – trade ? Updated factor of production ? The difference is in the timeline. Stock trading is about buying and selling shares for short-term profit, such as within a week or a day. Investing refers to buying and selling stocks for long-term gains, such as within months or years. investing. The biggest difference between stock trading and investing is that traders invest for the short-term, whereas investors hold onto assets for the long-term. Both are styles of investing, and oftentimes, the two terms are used interchangeably..  Q. D.Types of Investments - ETFs Do We Definition: exchange-traded funds (ETFs) are an alternative to mutual funds that allow for more flexibility. Trade on exchanges Priced and available for trading throughout the business day Generally have a slightly lower expense ratio than their mutual fund equal xpect Financial Markets To Be Perfectly Efficient? We would not expect financial markets to be strong-form efficient. We expect the markets to partially, but not perfectly, reflect information that is privately collected. The markets will be inefficient enough to provide some investors with an opportunity to recoup their costs of obtaining information, but not so inefficient that there is easy money to be made in the stock market. Do We Expect Financial Markets To Be Perfectly Efficient? In general, markets are expected to be at least weak form and semi-strong form efficient. If there did exist simple profitable strategies, then the strategies would attract the attention of investors, who by implementing their strategies would compete away the profits.  Advantage of mutual funds: Give small investors access to professional investment help by allowing them to invest in diversified portfolios Disadvantage of mutual funds Fees, which can limit profit The geometric average rate of return answers the question, “What was the growth rate of your investment?” The arithmetic average rate of return answers the question, “what was the average of the yearly rates of return?  Both arithmetic average geometric average are important and correct. The following grid provides some guidance as to which average is appropriate and when: Question being addressed: Appropriate Average Calculation: What annual rate of return can we expect for The arithmetic average calculated using next year? annual rates of return. What annual rate of return can we expect The geometric average calculated over a over a multi-year horizon? similar past period.  What Determines Stock Prices? In short, stock prices tend to go up when there is good news about future profits, and they go down when there is bad news about future profits. Since A.R.E businesses have generally done well over the past 100 years, the stock returns have also been favorable. Market Efficiency – What does the Evidence Show? 1- The degree of efficiency of financial markets is an important question and has generated extensive research. 2 - Historically, there has been some evidence of inefficiencies in the financial markets  Do We Expect Financial Markets To Be Perfectly Efficient? We would not expect financial markets to be strong-form efficient. We expect the markets to partially, but not perfectly, reflect information that is privately collected. The markets will be inefficient enough to provide some investors with an opportunity to recoup their costs of obtaining information, but not so inefficient that there is easy money to be made in the stock market. Q. If equity markets are inefficient, it means that investors can earn returns that are greater than the risk of their investment by taking advantage of mispricing in the market. Market Efficiency – What does the Evidence Show? Looking forward, we can probably assume that the financial markets are efficient, at least in the semi-strong form. market prices will reflect public information fairly accurately. Q. Following the publication of academic research on market inefficiencies, institutional investors set up quantitative hedge funds to exploit these return patterns. …. By trading aggressively on these patterns, the hedge funds have largely eliminated the inefficiencies.