Chapter 27 - The Basic Tools of Finance

Vocabulary
Finance


 * Definition: The field that studies how people make decisions regarding the allocation of resources over time and the handling of risk.


 * What It Means:

Present Value


 * Definition: The amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money.


 * What It Means:

Future Value


 * Definition: The amount of money in the future that an amount of money today will yield, given prevailing interest rates.


 * What It Means:

Compounding


 * Definition: 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
 * What It Means:


 * Definition: A dislike of uncertainty.


 * What It Means:

Diversification


 * Definition: The reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks.


 * What It Means:

Firm-Specific Risk


 * Definition: Risk that affects only a single company.


 * What It Means:

Market Risk


 * Definition: Risk that affects all companies in the stock together.


 * What It Means:

Fundamental Analysis


 * Definition: The study of a company's accounting statements and future prospects to determine its value.


 * What It Means:

Efficient Markets Hypothesis


 * Definition: The theory that asset prices reflect all publicly available information about the value of an asset.


 * What It Means:

Informational Efficiency


 * Definition: The description of asset prices that rationally reflect all available information.


 * What It Means:

Random Walk


 * Definition: The path of a variable whose changes are impossible to predict.


 * What It Means:

Videos
thumb|500px|right|Simple and Compound Interest, as seen in class.thumb|500px|right|Invest sooner rather than later.thumb|500px|right|The Rule of 70, as seen in class.thumb|500px|right|Rule of 70 Part 2: Doubling Time. As seen in class.