Random Walk Theory
According to this theory, stock price movements are not dependant on any factors and so the historical movements should be not used as an indicator to predict the future growth.
Arbitrage Pricing Theory
Arbitrage Pricing Theory is one of the most popular finance theories of the world. The theory talks about the asset pricing principles and thereby helps and influences the pricing of shares. Arbitrage Pricing Theory is also popularly known as the APT model of finance theory. The APT model says that the expected return from any financial asset can be represented in the form of a liner function. The linear function is modeled on the factors like various theoretical market indices and macro-economic factors.
Prospect Theory
The prospect theory of economics describes how the investors can choose the right alternatives involving risks. The theory helps people to opt for the right financial decision. Interestingly, the model even considers empirical evidence in order to describe how people evaluate potential gains and losses.
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Financial theories are the building blocks of today’s corporate world. “The basic building blocks of finance theory lay the foundation for many modern tools used in areas such asset pricing and investment. Many of these theoretical concepts such as general equilibrium analysis, information economics and theory of contracts are firmly rooted in classical Microeconomics
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