Investor

Dividend yield is calculated as dividend divided by price. If the price falls sharply because the business is deteriorating, yield rises mechanically. This is called a "value trap." High yield without strong earnings coverage is a warning sign, not a buy signal.

A low P/E can mean the stock is cheap or that the market expects lower growth or higher risk. A lower P/E is genuinely attractive only when the business quality and growth prospects justify a higher multiple than the market is assigning. The P/E ratio alone tells you very little.

Adverse selection is a pre-contract problem: high-risk individuals are more motivated to seek insurance than low-risk ones. This differs from moral hazard, which is a post-contract problem where people take more risk because they are insured.

Book value records assets at historical cost. Market value reflects what investors believe the business is worth today, including intangibles like brand strength, competitive position, and expected future earnings. The gap between the two is often called Tobin's Q and reflects growth expectations and intangible value.

Duration measures a bond's price sensitivity to interest rate changes. Long-term bonds have high duration and therefore the largest price moves when rates change. Low-coupon long-term bonds have the highest duration. When rates fall, these benefit the most.

A callable bond benefits the issuer: when rates fall, the issuer can refinance at lower cost by calling the bond. The investor loses the high coupon just when they would want to keep it. This is called reinvestment risk and callable bonds must pay a higher initial yield to compensate.

Operating leverage measures how sensitive profits are to changes in revenue. A high fixed-cost business sees large swings in profit from small changes in revenue. Software companies: once built, each additional sale has near-zero marginal cost. A 10% revenue increase can produce a 30% profit increase.

This is the core insight of Modern Portfolio Theory. Adding a volatile asset with negative correlation to your portfolio can actually reduce total portfolio volatility. The magic of diversification is not in holding low-risk assets individually, but in combining assets that do not move together.

Present value calculations discount future amounts back to today using a discount rate. When interest rates rise, the discount rate rises, and the present value of any fixed future sum falls. This is why pension fund liabilities appear to shrink when rates rise.

During a crisis, investors flee risky debt and rush to safe government bonds. Government bond yields fall (prices rise) and risky bond yields spike (prices fall). The spread between them widens dramatically. Widening spreads are both an indicator of economic stress and a cause of further tightening in credit conditions.