Answers to Short Legal Questions - Essay Example

The disposition effect refers to the tendency of given investors to sell their shares when prices rise, and still retain their assets when the stock value drops.

People value those things which they own more in the divestiture aversion as evidenced by the fact that someone will pay more to have what he initially owned compared to them purchasing another person’s item.

Financial debt and devaluation of the currency. Countries that have huge financial debts and fail to their debt completely to another country usually face a risk of investors pulling away from it. A lack of investors denotes a loss of the county's GDP. This in turn results in an economic recession. Another cause is the devaluation of one currency when other countries’ currencies become stronger. This means a country would not be able to attract enough investors to boost the economy.

A downward treasury yield curve denotes less confidence on the side of investors in the given economy. Such investors would rather buy treasury notes, to get a lower yield. A sloping curve implies that investors hold on to bonds that go for a long term.

A U.S treasury bond refers to the government’s borrowing from the people. The U.S is a stable economy and hence the risk involved is low during investment, hence valuation is easy. One can know the likely returns through bond investment compared to stocks. Stocks are always changing based on fluctuating of the U.S dollar about other currencies, hence having a higher risk of losses if one does not predict property. It is hence difficult to value stocks since they are always changing every minute based on currency change.

The dividend discount model works through the valuation of stock price by using predicted dividends plus discounting them to present value. This is to give an idea of the value obtained in the model to be much higher compared to the shares currently trading, hence undervaluing the given stock.

Winners Curse theory refers to the tendency of an item to be purchased at a higher value than what it was purchased, through the provision of incomplete information, or giving speculations of its value to rise. Bidders usually have a hard time getting the actual intrinsic value and hence overestimate its price. The term has good use in initial public offerings by making it underpriced as it comes to the primary market. The purpose of the price is to make people speculate that its price would rise in the long run hence making them profits.

When IPOs open, the stock valuation is always low, hence tricking a lot of demand. Many people buy the stock, liquifying it in the long run. IPO prices usually shoot up days later, creating confidence in people, but in the long run, fetch poor returns due to fluctuation in stock prices.

A bubble is an economic cycle that is usually characterized by very rapid expansions followed by contractions. For a bubble to occur, we have precipitating plus amplifying factors. Precipitating factors are those which are associated with ac actual onset of a bubble. Amplifying factors are those which make it blow into proportion.

Market efficiency usually breaks down over 20-25 years due to the elimination or reduction of government power. Reduction of government power usually results in competition in the given industry resulting in devaluation.