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

2. 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

3. 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

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

5. 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

6. 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

7. 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

8. 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

9. Sept 6, 2016