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Questions tagged [theory]

The tag has no usage guidance.

4
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4answers
605 views

When investing, is the risk/reward tradeoff linear?

Rule 1 of investing is that the more risk you're willing to take, the higher your potential for reward. Bonds are low-risk and come with maybe 1-2% returns, stocks much higher risk and maybe 5-15% ...
5
votes
5answers
533 views

Diversification reduces risk, but does this base on the assumption that expected return of each asset is always in proportion to its risk?

College teachers showed that diversification is free lunch for getting rid of part of the risk, but does this argument based on the assumption that expected return of each asset is always in ...
1
vote
5answers
14k views

Is the stock market a zero-sum game? [closed]

In the stock market, over both the short and long-term, does someone necessary need to lose in order for someone else to make a profit? If not, then more fundamentally does something — in the most ...
2
votes
1answer
111 views

A question on Random Walk Hypothesis [closed]

If random walk hypothesis is true wouldn't that imply that bear and bull markets, the internet boom and dot-com bubble, the Great Recession, the Great Depression, etc were the results of random ...
-4
votes
1answer
106 views

Market Relativity Theory?

Would it be fair to assume this: High market-cap securities will usually perform influenced to some extent by the market/Index fund they are currently traded on. For example; the Turkish Borsa ...
1
vote
1answer
819 views

Could one person with a card with no spending limit pay off everyone's debt? [closed]

In the season 13 South Park episode Margaritaville, Kyle uses a Platinum American Express card with no spending limit to pay off everyone else's personal debt so they're free to spend again, thus ...
4
votes
3answers
5k views

How is the Efficient Frontier drawn?

I know efficient frontier is the collection of expected return on a portfolio and the level of risk(e.g. standard deviation). What I don't understand is that is the efficient frontier really drawn ...
2
votes
2answers
4k views

Understanding the concepts of market maker and broker

Wikipedia says: A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the ...
10
votes
3answers
2k views

Who creates money? Central banks or commercial banks? [closed]

Which of these is a better description of money creation: Scenario 1: Central bank creates money Customer A deposits $10 at his bank. Customer B wants to borrow $100. The bank is in good standing ...
1
vote
1answer
987 views

Deriving the put-call parity

I am looking at the proof of the put-call parity, $P+S=C+Ee^{-rT}$ The proof begins by defining two portfolios with same strike price $E$ and time to expiry $T$: 1. A call $C(E,T)$ plus cash $Ee^{-rT}...
6
votes
3answers
1k views

Option Theta: What conditions are needed for Theta > P/N, where P = option price, and N = days to expiration?

The wikipedia definition for Theta is: And people frequently refer to the picture below, to show what typically happens with an option's value as a function of time; we can note this is non-...
11
votes
4answers
1k views

Why is a stock that pays a dividend preferrable to one that doesn't?

I understand that a dividend is a way for a company to return money to shareholders. But I'm not quite understanding why it is preferable to capital appreciation and putting the money to work ...