Question

application of financial concepts in daily life. (e.g. CAPM)

Answer 1

Application of financial concepts in everyday life

To succeed in today's fast-changing world, each person should have a financial goal. To achieve this goal, early financial planning becomes necessary. Since each and every financial concept is developed with careful analysis of the market, its participants and operations, some of the basic concepts can definitely be used in an individual's daily life. Some of the examples are:

(a) Compounding: If a person needs $100,000 after 10 years, he can use compounding to find out how much he needs to invest at present in the current rate.

(b)CAPM and valuation models: WIth other variables present, an individual can manage his risk and returns using the formulas. He also finds out the intrinsic value of a particular stock or the value of the particular project. Thus he can make buy or sell decisions.

(c) NPV and PI: These formulas help an investor in comparing the different alternatives available and also help him/her choose the most profitable one.  

(d) Portfolio Management formulas: These formulas help the investor in choosing the right mix of securities.

(e) Ratio Analysis: Ratio analysis of an entity helps identify many aspects of the financial health of the entity. Using this, the person in charge can bring about the necessary changes.