Journaling of Chapter 27: The Basic Tools of Finance

Chapter 27 covers the basic tools of finance. It teaches us about some of the tools people and firms use when choosing capital projects in which to invest. Specifically focusing on how people compare different sums of money at different points in time, how they manage risk, and how these concepts combine to help determine the value of a financial asset. The present value of any future value is the amount today that would be needed, at current interest rates, to produce that future sum. The future value is the amount of money in the future that an amount of money today will yield, given prevailing interest rates. Most people are risk averse, which means that they dislike bad things more than they like comparable good things. People can reduce risk by buying insurance, diversifying their risk, and accepting a lower return on their assets. According to the efficient markets hypothesis, asset prices reflect all publicly available information about the value of an asset. According to this theory, the stock market is informationally efficient, which means that prices in the stock market reflect all available information in a rational way.

Overall, I would give this chapter a difficulty rating of 1 out of 3 because it just builds off of what Chapter 26 said. Many things were simply reiterated or applied during this new chapter. Something I would like to go over is the controversy surrounding asset valuation and why stock prices may or may not be a rational estimate of a company’s true value.