- NPV: Net Present Value - If you could buy cash flows in the capital markets cheaper than you can generate them through your own operations and investments, you should do so. Net Present Value is a way of making sure that you engage in only those investments that cover their opportunity cost.
- CAPM: Capital Asset Pricing Model : Beta: Only undiversifiable risk is priced
- Effiicent Capital Markets / Efficient Market Hypothesis- there are no money machines
- Value Additivity
- Capital Structure and M&M (Modigliani Miller)
- Options Pricing Theory - replicating portfolios
- Risk / Return trade-off
- Diversification
- Dollar Cost Averaging
- Asset Allocation
- Random Walk Theory
- Optimal Portfolio - the efficient frontier
Useful Links:
- http://www.investopedia.com/university/concepts/#axzz2Cc3jok7S
- http://www.examville.com/examville/Six%20important%20concepts%20in%20finance-ID3781
Notes from Investopedia
- The risk/return trade-off is the balance between the desire for the lowest possible risk and the highest possible return.
- Higher risk equals greater possible return.
- Diversification lowers the risk of your portfolio.
- Dollar cost averaging is a technique by which, regardless of the share price, a fixed dollar amount is invested on a regular schedule.
- Asset allocation divides assets among major categories in order to create diversification and balance the risk.
- Random walk theory says that stocks take a random and unpredictable path.
- Efficient Market Hypothesis (EMH) says it is impossible to beat the market because prices already incorporate and reflect all relevant information.
- The concept of the optimal portfolio attempts to show how rational investors will maximize their returns for the level of risk that is acceptable to them.
- Capital asset pricing model (CAPM) describes the relationship between risk and expected return and serves as a model for the pricing of risky securities.
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