Share
Explore BrainMass

Behavioral Finance

Read the following statements in italic and answer the two questions that follow.

â??On the one hand, sound traditional valuation models like the DCF method require well-functioning capital and products markets. On the other hand, it is no secret that the recent financial and economic crises have caused the collapse or near collapse of such markets and have consequently rendered traditional valuation techniques useless. Recent financial problems and the resultant failure of traditional valuation tools may also be discussed in the context of the â??chicken-or-eggâ?? dilemma. That is, we can not have working markets unless assets can be valued soundly; but assets can not be valued soundly if we do not have well-functioning capital markets.â?

A. Do you agree with the above statements? Explain why yes or why no.
B. Given the recent financial downturn and regardless of your answers to part A in above, and especially based on what you may have learned so far in this class, do you have any guidelines and/or advice for a typical investor- individual or institutional or both? Be specific in your analysis and make sure to draw upon the materials from your two textbooks, the assigned readings, and other content from the course.

Solution Preview

Read the following statements in italic and answer the two questions that follow.

â??On the one hand, sound traditional valuation models like the DCF method require well-functioning capital and products markets. On the other hand, it is no secret that the recent financial and economic crises have caused the collapse or near collapse of such markets and have consequently rendered traditional valuation techniques useless. Recent financial problems and the resultant failure of traditional valuation tools may also be discussed in the context of the â??chicken-or-eggâ?? dilemma. That is, we can not have working markets unless assets can be valued soundly; but assets can not be valued soundly if we do not have well-functioning capital markets.â?

A. Do you agree with the above statements? Explain why yes or why no.
B. Given the recent financial downturn and regardless of your answers to part A in above, and especially based on what you may have learned so far in this class, do you have any guidelines and/or advice for a typical investor- individual or institutional or both? Be specific in your analysis and make sure to draw upon the materials from your two textbooks, the assigned readings, and other content from the course
I do not agree with the above statement because the financial and economic crises that caused near collapse of the market did not take into account the valuation models like DCF methods. Factors like momentum distort capital and products market. There is speculation that pushes up or down the prices. Further, expectations of future earning drive capital and product markets. When investors expect ...

Solution Summary

This answer provides you an excellent discussion on Behavioral Finance

$2.19