The articles on “The Firm Foundation Theory” and “Castles in the air Theory” in the book “A Random Walk down Wall Street” by Burton Malkiel discuss two very components of investments and financial theory (Malkiel, 2000)
In the article, “the Firm Foundation Theory” the author says that any “investment instrument” can be said to have “intrinsic value” which is calculated by taking a historical perspective, that is taking into account past performance and the present situation and analyzing these to project future position.
An example of the firm foundation theory can be best seen through the analysis of stock prices. The main idea is that the value of a stock should be based on the constant flow of earnings that a firm will be able to give out in the form of dividends.
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