Professional Documents
Culture Documents
Lecture 06
Lecture 06
Topic 6
The Stock Market
[Background]
A. Common Stock and Stockholders
i. Equity capital, dividends
ii. Residual claimant
[Background]
A. Common Stock and Stockholders
i. Equity capital, dividends
ii. Residual claimant
B. Basic Principle of Finance
o The value of any investment is found by computing
the present value of all cash flows the investment
will generate over its life.
[Background]
A. Common Stock and Stockholders
i. Equity capital, dividends
ii. Residual claimant
B. Basic Principle of Finance
o The value of any investment is found by computing
the present value of all cash flows the investment
will generate over its life.
C. Common stock is valued as the value in today’s dollars of
all future cash flows
o The cash flows a stockholder might earn from stock
are---
Department of Economics, SUNY ECO350 • Money and Banking
Topic 6, page 5
[Background]
A. Common Stock and Stockholders
i. Equity capital, dividends
ii. Residual claimant
B. Basic Principle of Finance
o The value of any investment is found by computing
the present value of all cash flows the investment
will generate over its life.
C. Common stock is valued as the value in today’s dollars of
all future cash flows
o The cash flows a stockholder might earn from stock
are---dividends, the sales price, or both.
Department of Economics, SUNY ECO350 • Money and Banking
Topic 6, page 6
2. Rational Expectations
A. Rational expectations: Expectations (predictions) are
statistically optimal forecasts using all available
information.
2. Rational Expectations
A. Rational expectations: Expectations (predictions) are
statistically optimal forecasts using all available
information.
• Best possible given the available information
• The forecast does not have to be perfectly
accurate to be rational.
4. Speculative Bubbles
A. Speculative Bubble: the price of an asset differs from its
fundamental (intrinsic) market value.
i. Prices rise today because investors expect them to
rise tomorrow, regardless of fundamentals.
(overconfidence and social contagion)
• Pt is high because investors expect Pt+1 to be even
higher.
• Pt+1 is expected to be high because investors
expect Pt+2 to be even higher.
250
225.54
200
150
123.93
100
62.82
50
0
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_122622.xls