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I: Introduction 1: Introduction to Financial Markets.

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1 I: Introduction 1: Introduction to Financial Markets

2 Chapter 1: Introduction to Financial Markets Dow Jones Industrial Average © Oltheten & Waspi 2012

3 Chapter 1: Introduction to Financial Markets Circular Flow © Oltheten & Waspi 2012 H OUSEHOLDS F INANCIAL M ARKETS L ABOR M ARKETS G OVERNMENT G OODS M ARKETS F IRMS F ACTORS OF P RODUCTION C APITAL L ABOR C ONSUMPTION P RODUCTION

4 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Markets Exist to bring buyers and sellers together

5 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Markets Labor markets. February 4 & 5, 2014

6 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Markets Primary market Secondary market

7 Chapter 1: Introduction to Financial Markets Circular Flow © Oltheten & Waspi 2012

8 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Financial Markets Facilitate optimal allocation of. through.

9 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Returns Mechanism Normal Return. Abnormal Return..

10 Chapter 1: Introduction to Financial Markets Returns Mechanism Normal Return Abnormal Return © Oltheten & Waspi 2012 The beginning of a bubble

11 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Efficient Markets Hypothesis Weak Form. Semistrong Form. Strong Form.

12 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Technical Analysis Double Bottom (shaped like a W) [A] Breakout #1 [B] Breakout #2 [C] New Trend

13 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Fundamental Analysis Earnings Per Share (EPS) Price/Earnings Ratio (P/E)

14 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Fundamental Analysis Current Ratio Quick Ratio availability of working capital liquidity

15 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Fundamental Analysis Return on Assets (RoA) Return on Equity (RoE) Gross Profit Margin on Sales efficient use of factors of production profitability efficient use of assets

16 Chapter 1: Introduction to Financial Markets Practice Questions © Oltheten & Waspi 2012

17 Chapter 1: Introduction to Financial Markets © Oltheten & Waspi 2012 Q&P 1-1: I use my computer and Internet link to chart the movement of all 30 Dow Jones Industrial stocks. I buy and sell according to my analysis of these price movements. If I can generate consistent abnormal returns in this manner then this is a failure of Charles is a member of the Board of Directors of the Royal Bank. If he can generate consistent abnormal returns in trading Royal Bank shares then this is a failure of Varya checks out all the Value Line publications and buys everything that Value Line recommends. If she can generate consistent abnormal returns then this is a failure of I watch Wall Street Week every week. Then when it's over I throw a dart at the Wall Street Journal. I buy whatever the dart hits. If I can generate consistent abnormal returns in this manner then this is a failure of John Q. Investor analyses the quarterly earnings statements of some fifty obscure small-cap stocks. He then buys according to the earnings pattern disclosed. If he can generate consistent abnormal returns in this manner then this is a failure of

18 1: Financial Markets in the Economy


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