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- The value of any investable assets is the present value of expected future income (cash flow) generated from the particular assets for an investor. The cash flow (returns) could originate from cash dividends, stock dividends, stock splits and special dividends declared by the firm from time to time to reward investors.
- Discount rate is determined to calculate the present value of expected future cash flows. It is the weighted average cost of capital which a firm should earn.
- Required rate of return calculation is the combination of nominal risk free rate adjusted to inflation and risk premium required by the investors.
- Investment decision process suggests the benefit arises of an investment in particular security is based on determination of security price and comparing it with its intrinsic value.
- The Efficient Market Hypothesis is based on the assumption that the market comprises rational investors. In a nutshell, EMH states that successive absolute price changes are independent in the short run as per the assumption that the market comprises rational investors. However, investors are not always rational in that, they consider factors other than risk and returns for selecting securities.
- On the basis of the level of information considered, the EMH can be divided into three namely, Weak form, Semi-Strong Form and Strong Form.
- In the Indian stock market, sentiments play a major role in price behavior of stocks.