Economics 434: The Theory of Financial Markets Professor Burton Fall 2016 Sept 6, 2016

Additional Readings for This Week Read Chapters Six and Seven which are available at Collab under “Resources” tab. The first five chapters were assigned for the first two weeks Worth reading on a daily basis – the Wall Street Journal and the Financial Times Sept 6, 2016

The Main Takeaway from Last Week’s Arbitrage Lecture: Assume that there are no arbitrage possibilities (the most widespread assumption in finance) An investment that is risk free must earn “the” risk free rate Sept 6, 2016

Calculating Returns on Equity Bankruptcy Debt versus Equity Balance Sheets Calculating Returns on Equity Bankruptcy Chapter 7 Chapter 11 Sept 6, 2016

Balance Sheet for Ajax Company As Of December 31, 2020 Balance Sheets Balance Sheet for Ajax Company As Of December 31, 2020 Assets Liabilities New Worth Sept 6, 2016

Equity - Private vs Public Public equity: common stocks, transact anonymously, governed by Securities Exchange Commission Private companies: transact privately, no requirements for disclosure, not governed by Securities Exchange Commission (but there are rules) Private goes public by doing an IPO (Initial Public Offering) Sept 6, 2016

Calculating Stock Returns Specify the period: quarterly, annual, etc. Two components: Capital gains (price difference) Dividends (typically paid quarterly, dates fixed, rarely changed) Why dividends? Modigiliani-Miller irrelevance theorem Sept 6, 2016

The History of Stock Ideas Jessie Livermore – “Reminiscences of a Stock Operator” by Edwin LeFevre Benjamin Graham – “Security Analysis” –birth of “value” investing Not much interest in diversification until Harry Markowitz in early 1950s Then comes CAPM (and APT) Sept 6, 2016

Sept 6, 2016