Financial Economics

risk
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Risk

Risk is the uncertainty of an asset’s return over a given period of time. Risk perception is the subjective judgment people make about the severity of a risk, and may generally varies from person to person. There are three types of people when it comes to risk: 1. Risk Averse They hate to lose more than...
financial markets
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Financial Markets

In financial markets, people trade financial securities, commodities, and instruments at prices that reflect supply and demand. There are two types of Financial Markets - the primary market and the secondary market. All well developed financial markets have standardized financial instruments. Financial Instruments are assets (claim) for people who hold them and liabilities (obligation) for the...
Efficient Market Hypothesis
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Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) is an application of ‘Rational Expectations Theory’ where people who enter the market, use all available & relevant information to make decisions. The only caveat is that information is costly and difficult to get. This Efficient Market Hypothesis implies that stock prices reflect all available and relevant information, so you can’t out guess the...
bonds
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Bonds

A bond is a type of financial instrument. Bonds are debt that firms and governments can issue to raise money and they earn interest. Characteristics of Bonds 1. Inverse Relationship There is an inverse relationship between the price of a bond and the market interest rate. Bonds have a resale (or secondary) market. A bond's secondary market...
yield curve
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Yield Curve

A Yield Curve is a graph of the yields (interest rates) of bonds with different maturities. Short terms bonds generally have a lower yield because they are most liquid. Three Basic Facts about Yield Curves Interest rates on bonds of different maturities tend to move together over time. This means that yield curves from different dates...
pricing stocks
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Pricing Stocks

The intrinsic value approach or the fundamental analysis of stocks prices is equal to the dividend over the interest rate. This is based on predictions of future cash flows and profitability. Present Discount Value is one of the popular methods used in pricing stocks. The main use pricing stocks is to predict future market prices, and...

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