Chapter 27The Basic Tools of Finance

• Finance is the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk.

27.1 PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY

• Present value refers to the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money.

27.1 PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY

• The concept of present value demonstrates the following:

• Receiving a given sum of money in the present is preferred to receiving the same sum in the future.

• In order to compare values at different points in time, compare their present values.

• Firms undertake investment projects if the present value of the project exceeds the cost.

27.1 PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY

• If r is the interest rate, then an amount X to be received in N years has present value of:

X/(1 + r)N

27.1 PRESENT VALUE: MEASURING THE TIME VALUE OF MONEY

• Future Value

– The amount of money in the future that an amount of money today will yield, given prevailing interest rates, is called the future value.

FYI: Rule of 70

• According to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately 70/x years.

27.2 MANAGING RISK

• A person is said to be risk averse if she exhibits a dislike of uncertainty.

27.2 MANAGING RISK

• Individuals can reduce risk choosing any of the following:

– Buy insurance

– Diversify

– Accept a lower return on their investments

Figure 1 Risk Aversion

Wealth0

Utility

Currentwealth $1,000

gain$1,000loss

Utility lossfrom losing$1,000

Utility gainfrom winning$1,000

27.2.2 The Markets for Insurance

• One way to deal with risk is to buy insurance.

• The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return agrees to accept all or part of the risk.

27.2.3 Diversification of Idiosyncratic Risk

• Diversification refers to the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks.

27.2.3 Diversification of Idiosyncratic Risk

• Idiosyncratic risk is the risk that affects only a single person. The uncertainty associated with specific companies.

27.2.3 Diversification of Idiosyncratic Risk

• Aggregate risk is the risk that affects all economic actors at once, the uncertainty associated with the entire economy.

• Diversification cannot remove aggregate risk.

Figure 2 Diversification

Number ofStocks inPortfolio

49

(More risk)

(Less risk)

20

0 1 4 6 8 10 20 40

Risk (standarddeviation of

portfolio return)

Aggregaterisk

Idiosyncraticrisk

30

27.2.3 Diversification of Idiosyncratic Risk

• People can reduce risk by accepting a lower rate of return.

Figure 3 The Tradeoff between Risk and Return

Risk(standarddeviation)

0 5 10 15 20

8.3

3.1

Return(percentper year)

50%stocks

25%stocks

Nostocks

100%stocks

75%stocks

27.3 ASSET VALUATION

• 27.3.1 Fundamental analysis is the study of a company’s accounting statements and future prospects to determine its value.

27.3 ASSET VALUATION

• People can employ fundamental analysis to try to determine if a stock is undervalued, overvalued, or fairly valued.

• The goal is to buy undervalued stock.

27.3.2 Efficient Markets Hypothesis

• The efficient markets hypothesis is the theory that asset prices reflect all publicly available information about the value of an asset.

27.3.2 Efficient Markets Hypothesis

• A market is informationally efficient when it reflects all available information in a rational way.

• If markets are efficient, the only thing an investor can do is buy a diversified portfolio

CASE STUDY: Random Walks and Index Funds

• Random walk refers to the path of a variable whose changes are impossible to predict.

• If markets are efficient, all stocks are fairly valued and no stock is more likely to appreciate than another. Thus stock prices follow a random walk.

23

FIGURE 27-4 RELATIONSHIP OF CANADIAN STOCK PRICES TO THEIR PAST VALUES

Source: DRI/McGraw-Hill Macroeconomic Database

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Figure3. Log of ShangHai Stock Price Month-closed index(1990.12--2008.4)

27

FIGURE 27-5 RELATIONSHIP OF S&P 500 INDEX TO PAST VALUES

Source: Haver Analytics Macroeconomic Database

t1t LnP001.10014.0LnP

开盘 收盘 涨跌幅 开盘 收盘 涨跌幅1990.6.28 6‰ - - - - - -1990.11.23 3‰ - - - - - -1991.10.10 3‰ 3‰ 190.71 191.01 ↑ 1% 717.04 641.41 ↓ 10.02%1992.6.12 3‰ 3‰ 1164.11 1171.71 ↓ 0.56% 2369.58 2389.57 ↑ 0.94%1997.5.12 5‰ 5‰ 1490.78 1500.4 ↑ 2.26% 5991.89 6026.88 ↑ 2.76%1998.6.12 4‰ 4‰ 1373.11 1383.39 ↑ 2.65% 4047.06 4056.52 ↑ 2.52%1999.6.1 3‰(B股) 3‰(B股) 1283.3 1311.59 ↑ 2.52% 3277.55 3377.71 ↑ 3.28%2001.11.6 2‰ 2‰ 1678.17 1671.28 ↓ 0.49% 3390.47 3373.87 ↓ 0.15%2005.1.23 1‰ 1‰ 1258.02 1255.78 ↑ 1.73% 3114.3 3111.4 ↑ 1.82%2007.5.30 3‰ 3‰ 4087.41 4053.09 ↓ 6.50% 12651.2 12627.15 ↓ 6.61%2008.4.24 1‰ 1‰ 3539.87 3633.83 ↑ 9.29% 12787.38 12914.76 ↑ 9.59%

调整时间调整后税率 调整当天情况

沪市 深市沪市 深市

一、流转税，包括印花税、证券交易税。近年来，因为证券税收中的印花税、证券交易税其收入占全部税收的比重小，同时注重资本的流动性，所以现已取消此税。二、收益税，对个人证券投资所得的征税，将其所得并入普通所得，征收个

;人所得税 对公司证券投资所得的征税，将其并入公司所得，征收公司所得税。对个人投资所得和公司投资所得分开征税，则存在重复征税的现象。三、资本利得税。资本利得并入普通利得征税。对长期资本利得和短期资本

28%利得，采取差别税率，最高达 。资本损失区分个人和公司，采取两种办法。对个人资本损失可允许扣除，并规定短期资本损失先扣除，长期资本损

3000失后扣除，但每年的扣除额不得超过 美元，当年没有扣完的，可结转以后年度继续扣除。四、遗产和赠与税。一、流转税：包括印花税、证券登记许可税、证券交易税、证券交易所税。

;二、收益税：对个人单独设立资本收益税，但可允许个人选择申报 法人资本收益并入普通所得征税，不单独征税。

;三、资本利得税，对个人单独设资本利得税 而法人并入普通所得征税，不;单设资本利得税，但资本利得税只对法人和个人居民征收 四、遗产和赠与

税。一、流转税，主要是印花税。对股票等证券的交易，按成交金额向买卖双方征收印花税。二、收益税，对证券的股息、债息等资本收益，征收利息税。三、资本利得税。对资本增值不征税，但如果投资者在短期内频繁炒作而获利，其所得可被税务局裁定为经营性所得，并入其他所得计征薪俸税。四、遗产和赠与税。

美国

日本

香港

海外证券税收体系一览

上海证券家数 深圳证券家数

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截止： 2008年 4月 18日

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Summary

• Because savings can earn interest, a sum of money today is more valuable than the same sum of money in the future.

• A person can compare sums from different times using the concept of present value.

• The present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce the future sum.

Summary

• Because of diminishing marginal utility, most people are risk averse.

• Risk-averse people can reduce risk using insurance, through diversification, and by choosing a portfolio with lower risk and lower returns.

• The value of an asset, such as a share of stock, equals the present value of the cash flows the owner of the share will receive, including the stream of dividends and the final sale price.

Summary

• According to the efficient markets hypothesis, financial markets process available information rationally, so a stock price always equals the best estimate of the value of the underlying business.

• Some economists question the efficient markets hypothesis, however, and believe that irrational psychological factors also influence asset prices.

Questions for reviews

1. present value, future value?

2. Risk averse?

3. The efficient markets hypothesis?

4. Random walk? ( Random walk means that the changes in stock prices are impossible to predict from available information.)

5. Market irrationality? (Assets markets are driven by the “animal spirits” 本能冲动　of investors—irrational waves of optimism and pessimism.)

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答：

2. 人们从保险市场中得到了什么利益？阻碍保险公司完全发生作用的两个问题是什么？3. 什么是多元化？股东从 1 ～ 10 种股票中多元化还是从 l00 ～ l20 种股票中多元化？4. 比较股票和政府债券，哪一种风险更大？哪一种能够带来更高的平均收益？5. 股票分析师在确定一股股票的价值时应该考虑哪些因素？6. 叙述有效市场假说，并给出一个与这种理论一致的证据。 7. 解释那些怀疑有效市场假说的经济学家的观点。