CDZ A bit of Stock Market Math

[william the wie]

The Capital Asset Pricing Model (CAPM) used to price stocks, bonds, options and so on has some really unrealistic assumptions:

That opening prices never have a gap up or down as they do in fact have.

That the roughly 7.4% gains due to reinvested earnings and dividends can be ignored.

What are some of the other fantasy assumptions that you think are worth looking at?

 

[320 Years of History]

The Capital Asset Pricing Model (CAPM) used to price stocks, bonds, options and so on has some really unrealistic assumptions:

1. That opening prices never have a gap up or down as they do in fact have.
2. That the roughly 7.4% gains due to reinvested earnings and dividends can be ignored.

What are some of the other fantasy assumptions that you think are worth looking at?

The details of things stock and commodities markets are two areas where I just don't know much about the gory details, and, quite frankly, I don't want to. I do want to understand what you are on about, however, albeit only to get a sense of whether it's something I should as my advisor about. (I suspect it's not, because I'm pleased with the results he gets for me, but all the same....)

1. What is the "gap?" Isn't a price (opening or otherwise) a discrete point rather than a range?

The fantastic assumption I make is that most folks have questioning minds and a natural curiosity that they indulge by routinely questioning and seeking input about the verity of their own beliefs as well as those articulated by others.

 

[william the wie]

The Capital Asset Pricing Model (CAPM) used to price stocks, bonds, options and so on has some really unrealistic assumptions:

1. That opening prices never have a gap up or down as they do in fact have.
2. That the roughly 7.4% gains due to reinvested earnings and dividends can be ignored.

What are some of the other fantasy assumptions that you think are worth looking at?

The details of things stock and commodities markets are two areas where I just don't know much about the gory details, and, quite frankly, I don't want to. I do want to understand what you are on about, however, albeit only to get a sense of whether it's something I should as my advisor about. (I suspect it's not, because I'm pleased with the results he gets for me, but all the same....)

1. What is the "gap?" Isn't a price (opening or otherwise) a discrete point rather than a range?

The fantastic assumption I make is that most folks have questioning minds and a natural curiosity that they indulge by routinely questioning and seeking input about the verity of their own beliefs as well as those articulated by others.

You're right in fact about discrete point but not in theory, You would make at best a C in class but it is a good thing to keep in mind. For example, Value Line is probably cheaper than your advisor and has a much better, volatility adjusted, track record than Berkshire Hathaway. They concentrate on minimizing losses, which is the right call for your financial safety because you don't know when you will need the money. However CAPM took the 1997 Nobel prize so your advisor is an idiot if he can't justify everything he says to you with quotes from CAPM and modern portfolio theory, so be careful out there.