...Summary of “A random walk down Wall Street” Written by Burton G. Malkiel Chapter 1: Firm Foundations and Castles in the air A random walk means that future steps or directions cannot be predicted on the basis of past history. In the stock market, this concept means short-term changes of stock prices are unpredictable. Burton, writer of the book, distinguishes between “investing” and “speculating” and I agree this conceptual difference. Investing is purchasing assets to acquire profit in the form of reasonably predictable income such as dividend, interest, rentals over the long term. On the other hand, speculator buys stocks hoping for a short-term gain over the next days or weeks. Traditionally, investment experts have used one of two approaches for asset valuation. One is “the firm-foundation theory”, and the other is “the castle-in-the-air theory”. The interesting point is, two theories appear to be mutually exclusive. The firm-foundation theory insists that each investment instrument has a firm anchor of something called “intrinsic value”, which can be determined by careful analysis of present conditions and future prospects. Williams, writer of “The Theory of Investment Value”, went on to argue that the intrinsic value of stock was equal to the present value of its entire future dividend. The theory is reasonable, because the greater present dividends and increasing rate, the greater the value of the stock. The castle-in-the-air-theory focuses on psychic...
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..."A Random Walk Down Wall Street" There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book "A Random Walk Down Wall Street". What does a random walk mean? The random walk means in terms of the stock market that, "short term changes in stock prices cannot be predicted". So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of "purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term". Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by the investment community to determine asset valuation: "the firm-foundation theory" and the "castle in the air theory". The firm foundation theory argues that each investment instrument has something called...
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...MARKETS / MODELS / CRISIS … WHO IS THE WINNER? Walid BEHAR Founder of TBS Finance Entrepreneur, Investment Analyst, Accelero Capital a.walidbehar@gmail.com Since the Great Depression*, History has shown us how important it is to understand the rationale behind those 3 key elements that will rule the future of Financial markets. Understanding the synergy and link between them is like trying to know who has been engendered first, the egg or the chicken. Every story has its beginning, let us begin by the foundation. It seems to be that markets are driven by a simple rule « the rule of bid and ask ». After a bloody battle between classics and Keynesians, the little child has grown up to become what economists call «The Efficient Market». But as me you are wondering: is it so efficient? Not so much! A market is efficient if every relevant information is perfectly and at a time reflected on coted assets prices In fact, there are three versions of the efficient market hypothesis. In weak-form hypothesis futures prices cannot be forecasted by analyzing past trends from historical data. In other words, technical analysis will not be consistent and will not produce excess return. In semi-strong efficiency, share prices should adjust to the available new information very rapidly. Thus, it implies that neither fundamental nor technical analysis methods will be able to reliably produce interesting returns. Finally, the strong form of efficient market stipulates that...
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...Econometrics of Random Walk Hypothesis ABSTRACT The random walk hypothesis is a key instrument used in the analysis of forecasting in the economic and financial market. It is used primarily in the forecasting of the prices of stocks. This is useful to determine and forecast the prices of stocks given previous stock prices. This paper discusses the basis of the hypothesis, the two types of random walk hypothesis, its framework, methodologies and the analysis of its repercussions. INTRODUCTION The random walk hypothesis states that stock price changes have the same distribution and are independent of one another, so the past movement or trend of a stock price or of the market as a whole cannot be used to predict its future price or any possible future trends. The concept originated in the late 1800s from Jules Regnault, a French broker, and Louis Bachelier, a French mathematician, whose Ph.D. dissertation titled "The Theory of Speculation". The same ideas were later developed and studied further by Paul Cootner, an MIT Sloan School of Management professor, in his 1964 book The Random Character of Stock Market Prices. The term was popularized by the 1973 book, A Random Walk Down Wall Street, by Burton Malkiel, a professor of economics at Princeton University, and was used earlier in Eugene Fama's 1965 article "Random Walks In Stock Market Prices”. The theory that stock prices move randomly was earlier proposed by Maurice Kendall in his 1953 paper, “The Analytics of Economic Time...
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...strong form states that market efficiency takes into account all publicly available information, past and present, such as financial reports, public announcements * Strong form states that all information, including that of insiders is reflected in prices and therefore cannot be useful in price forecasting * Early tests which focus on the performance of investment analysts and mutual funds tend to support the EMH in that past good performance does not indicate that an advisor or mutual fund will perform well in the future. For example – Jensen (1967) measures the predictive abilty of 115 mutual fund managers in period 1945-64 and finds that on average they were not able to beat the buy and hold set. * Furthermore the Wall Street Journal used to have a feature called “Investment dartboard” and it turned out that the dartboard beat advisers just as much as they beat the dartboard * Tests for the weak form of EMH normally consist of testing the...
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...The Strange Case of Dr. Jekyll and Mr. Hyde MR. UTTERSON the lawyer was a man of a rugged countenance, that was never lighted by a smile; cold, scanty and embarrassed in discourse; backward in sentiment; lean, long, dusty, dreary, and yet somehow lovable. At friendly meetings, and when the wine was to his taste, something eminently human beaconed from his eye; something indeed which never found its way into his talk, but which spoke not only in these silent symbols of the after-dinner face, but more often and loudly in the acts of his life. He was austere with himself; drank gin when he was alone, to mortify a taste for vintages; and though he enjoyed the theatre, had not crossed the doors of one for twenty years. But he had an approved tolerance for others; sometimes wondering, almost with envy, at the high pressure of spirits involved in their misdeeds; and in any extremity inclined to help rather than to reprove. 'I incline to, Cain's heresy,' he used to say. 'I let my brother go to the devil in his quaintly: 'own way.' In this character, it was frequently his fortune to be the last reputable acquaintance and the last good influence in the lives of down-going men. And to such as these, so long as they came about his chambers, he never marked a shade of change in his demeanour. No doubt the feat was easy to Mr. Utterson; for he was undemonstrative at the best, and even his friendship seemed to be founded in a similar catholicity of good-nature. It is the mark of a modest...
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...The house on maple street Two little kids were invited to a haunted house the night before Halloween. The two kids were Jake and Landon, they were best of friends until they went to the haunted house. It all started when Jake got a phone call. A strange man was outside of our house on the phone with us. He was wearing a big black coat and we couldn't see his face. Then he said,” to come to a haunted house tonight” and we said,” why not”. At 10pm we snuck out to the haunted house on maple street. We thought there would be a lot of people there cause it sounded cool and because he said there would be a lot of people. But when we arrived there was no one there. Then we saw that guy at the window he, he tilted his head and there was steam outside. When the steam went away then there were two guys at the window. We got a call from a phone number and it said Jimmy Eithan. They said come in or else. So there was steam again and they disappeared....
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...I decided to attend the ASU (Arizona State University) Art Museum. It is located on Mill Avenue and 10th Street. I had actually expected the museum to be much larger. It consisted of three main levels made up of five different exhibits. Also, on top of the museum was a roof gallery which held the sculpture part of the museum. When I walked into the museum, the first gallery I visited was called the Lower Level South Gallery. This gallery was very unique and contained many beautiful Japanese paintings. When I read about them, I found out these paintings were inspired by the Japanese-American movement. The next gallery I visited was the Turk Gallery. This gallery was mostly filled with paintings as well. However, there were two figures in the middle of the gallery as well as a wooden stamp. The first figure that caught my attention was a bicycle made solely of woven-together straw. The next figure was a large horse made entirely of scrap pieces of metal. I continued on upstairs and found the Americas gallery which was filled with paintings that reflected how America developed over time. Each painting seemed to reflect on specific important times in American history. One wall was covered with paintings of significant leaders in American history. The next gallery was the Kresge Gallery. These walls were covered with pictures of tires that helped advertise certain products. Covering the floor of the gallery were a bunch of bicycles with strange objects (such as plants) connected to...
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...6- 1 6- 2 Topics Covered Stocks and the Stock Market Book Values, Liquidation Values and Market Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks Market Efficiency (i.e., no free lunches on Wall Street) Market Anomalies and Behavioral Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Terminology of Stocks Public Common Stock - Ownership shares in a publicly held corporation. Primary Market - Place where the sale of new stock first occurs. Secondary Market - market in which already issued securities are traded by investors. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a firm that has already been through an IPO McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 3 6- 4 Value of a Stock Book Value - Net worth of the firm according to the balance sheet under GAAP. Market Value Balance Sheet - Financial statement that uses market value of assets and liabilities. Liquidation Value - Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. (i.e., S/H get what’s left over). McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Simple Models 1. Stock Price = discounted future stream of dividends paid to Shareholders (where dividend = periodic cash distribution from...
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...The High Life In high school peer pressure is stronger then ever. Students are critically judged by their peers and are forced to either compromise one’s own moral values to fit into the group or face being ostracized and out casted. Students sometimes feel backed against a wall and following the group is sometimes easier than going against the grain. It all started a few years ago on a blistering summer day towards the end of the school year. Class was, like usual, long, boring and unbelievably tiresome. All day long I had been thanking God, more than usual, that it was Friday; earlier that day I ran it an old friend, Deiondre Howard, we made plans to hangout; he said he wanted to introduce me to a few friends and chill with a few girls. So with the possibility of meeting and flirting with a couple hot girls, I droned through last period, counting the seconds go by on my English teacher’s old handmade wooden clock. Suddenly the bell rings, I sighed with instant relief, “Finally”. I darted out of class like a bat out of hell, excited, I immediately ran into the jam packed grid-lock traffic of Bayside High School’s hallways. As I pushed, shoved, and fought my way through the human blockade I slowly but surely made it closer to the courtyard. Bayside’s courtyard is like a crucible filled with every type of spice you could imagine mixed together. With that said, like any other high school, Bayside still had its moments of segregation based on popularity. For instance, there’s...
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...10 GREAT WALKS IN OUR FAVORITE CITIES THERE’S NO BETTER WAY TO EXPLORE A CITY than wandering its streets and alleys, from terracotta-hued palaces, picturesque squares, and baroque architectural showstoppers in Rome, to the modern glass towers, 19th-century limestone man ions, and secret, pocket-size parks of s Manhattan. We’ve gathered 10 fabulous walks in our favorite cities in the United States and Europe, so put on your comfy shoes and hit the streets. 1/4 mile W. Wacker Drive S. Water Street Lake Street Clark St. James R. Thompson Center END CLARK River Chicago Union Station The Great Fire of 1871 could have been the death of Chicago, but instead it proved to be a grand rebirth, as renowned architects rebuilt the city’s skyline. Today it’s Chicago’s most aweinspiring attribute. Start with the Willis Tower, a 1,454-foot giant that was the world’s tallest building when completed in 1973. Next, head to South LaSalle St. and the Rookery Building. This 12-story stunner, completed in 1888 ADAMS L Jackson Blvd. JACKSON Monadnock Building L L LIBRARY Van Buren Street LASALLE 224 S. Michigan Ave. Auditorium Theatre LaSalle St. Station Harrison St. in 1889 that still hosts performances. Double back to Jackson and Dearborn to see the geometric, 4.6-acre Federal Center, completed in the early 1970s by Mies van der Rohe. Don’t miss the graceful slopes of Chase Tower, built in 1969 as the First...
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...tests such as the Augmented Dickey Fuller test and a panel unit root test. Additionally the existence of random walk for these stock markets has also been examined through the Jarque-Bera statistic. The results indicate information inefficiency in the time period under study for all indices. Investors can therefore predict future prices on the basis of historical information, and receive excessive returns. The results have implications for developing economies wherein the government has to ensure that all asset related information be made public, to curb state interference. Introduction The concept of Efficient Market Hypothesis (EMH) holds special importance in the field of Finance, especially Capital markets. This hypothesis postulates that markets are informationally efficient. This asserts that the price of any security will fully reflect all the information that is available to the investors. That being said, one cannot consistently achieve returns that are excess of the average market returns on a risk-adjusted basis, with information available at the time of investment. First developed separately by Eugene F. Fama and Paul A. Samuelson, the concept assumes that the investors need not be rational. In an efficient market, investors may either overreact or under react to newly available information. The investor’s reactions are random, such that the price changes are random as well....
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...(Title) Advantages to a Total Rewards Approach There are several advantages to using a total rewards approach to compensating the workforce. The top five are described in the succeeding paragraphs. The first of the top five advantages is increased flexibility. A total rewards program should have room for error as nothing in this world is one size fits all. A good program has the ability to adjust to employee’s specific need within reason. The second of the top five advantages is improved recruitment and retention. The third of the top five advantages is reduced labor costs and costs of turn over. The fourth of the top five advantages is heighten visibility in a tight labor market. The fifth of the top five advantages is enhanced profitability. Total Rewards Strategy Gone Astray There are many ways a total rewards strategy can go astray. Five of the common ways are described in the succeeding paragraphs. The first way the strategy can go astray is trying to re-engineer programs in pieces. When approaching the redesign of a total rewards program it is imperative that the right things are changed at the right time. Taking away certain aspects of a program or even all aspects of a great total rewards program makes for unhappy, unsatisfied employees who, depending on their employability, will began to look elsewhere to find the same if not better rewards package. The second way the strategy can go astray...
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...see him perched in his recliner in the dim room only being lit by the television playing The Simpson's. His bulky hands are near knocked over beers. He probably smacked them in his sleep. There are about ten beers and a bottle of scotch sat atop the table to his right, one more beer by his feet. Well at least he won't hit me if he wakes up. He's always in a better mood when drunk. After, I turn to my right and start up the stairs. The house is relatively big compared to where we lived last year. Living in a yellow trailer near a railroad and across the street from a racetrack was hell. We moved after around four months of living there due to the fact that he got kicked out for not paying the bills, after that, we stayed at my aunt's house when he robbed a bank and bought this place. My room is two doors down on the right and David's is the room on the left, he doesn't need it seeing as he's always asleep in the living room. I walk in and see two bags sat on my bare bed and a pile of clothes meant to be put in the last bag. I had started last week with packing anything useful, even packing canned foods or anything you don't have to cook, but I got interrupted by my father and his knife being cut into my back. Then again today. He's asleep now so I can hurry up and leave, but first I need money. Then, I head to my father's room to get left over cash from the robbery and unlock the door. I step inside to smell a clean room since he has been in here maybe three times. I tiptoe over...
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...Moore, Kurtsberg, Fox, and Bazerman had 80 business students make decisions in a computer-based, mutual-fund-investing simulation. Each student performed the simulation by him/herself. The goal was to better understand why investors spend so much time and money on actively managed mutual funds despite the majority of those funds being outperformed by passively managed index funds (at least in recent years). The researchers hypothesized that the illusion of control would lead students to overestimate their future portfolio returns from actively selecting mutual funds and that anchoring and adjustment would influence investment decisions. (Recall that illusion of control suggests that decision makers value choice even when predicting random events outcomes for which they have no valid cues.) Most participants consistently overestimated the future performance of their investments consistent with the illusion of control. The researchers hypothesized that anchoring and adjustment would influence portfolio allocation decisions. The students were more likely to change their portfolio allocation following poorer fund performance than better fund performance, a tendency which had a negative impact on portfolio returns. The researchers attributed this to students anchoring on past performance (expecting both poor and good fund performances to continue) as they made allocation decisions. The students reported that they had an average of $20,500 of their own money...
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