1. Financial Concepts: Introduction
  2. Financial Concepts: The Risk/Return Tradeoff
  3. Financial Concepts: Diversification
  4. Financial Concepts: Dollar Cost Averaging
  5. Financial Concepts: Asset Allocation
  6. Financial Concepts: Random Walk Theory
  7. Financial Concepts: Efficient Market Hypothesis
  8. Financial Concepts: The Optimal Portfolio
  9. Financial Concepts: Capital Asset Pricing Model (CAPM)
  10. Financial Concepts: Conclusion

This tutorial has aimed to provide you with some fundamental concepts relating to investors, including some terminology and several important theories that have shaped the way investors have moved their money for decades. It must be said that there are many other similar terms and theories that we have been unable to cover in, given the breadth of this tutorial, and that each of the concepts covered in the previous chapter is significantly more complicated than it may appear on first glance. Still, armed with these basics, you’ll be able to begin to make more confident investment decisions. Let’s recap what we’ve covered in the preceding chapters:

  • The risk/return tradeoff refers to an investor’s balancing the lowest possible risk and the highest possible return in any investment decision
  • Higher risk equals greater potential return, but it does not guarantee those return levels.
  • Diversification is a tool to lower the risk of a portfolio by spacing investments out across different areas.
  • Dollar cost averaging is a technique allowing investors to find an average pricing for a stock or other security. It is achieved by purchasing a given dollar amount of a particular security periodically, regardless of the price point of that security at each purchase.
  • Asset allocation is a means of dividing assets across major categories, achieving diversification and reducing risk.
  • The random walk theory suggests that stocks and markets move randomly, and that past price changes and activity do not have an impact on future activity.
  • The efficient market hypothesis (EMH) suggests that it is impossible for an investor to beat the market, assuming that the market already incorporates and reflects all necessary information into stock prices.
  • The concept of the optimal portfolio holds that rational investors will make decisions which maximize returns at a given and comfortable level of risk.
  • Capital asset pricing model (CAPM) suggests that risky investments should be associated with particular levels of return based on factors including risk-free rate, beta, and more. It provides a means of calculating the required (or expected) return.

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