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Money has a time value. This means a dollar received today has more value to us than a dollar received far in the future. Other than a desire for instant gratification, there is a very rational reason for this phenomenon. If we have a dollar today, we can put it to work by making an investment and have more than a dollar at some future date. This concept of putting the money to work has important implications later in this section when discount rates are discussed.
Portfolio analysis is based on the Nobel Prize-winning work of Harry Markowitz in the early 1950s in which he showed that the variance in results from a portfolio of stocks could be reduced by choosing stocks with a negative correlation. If two stocks are correlated negatively, when one stock is down the other stock will be up, and the portfolio will grow with very few wild swings.
In the last quarter-century, financial options such as "calls" and "puts" on publicly traded stocks have become an integral part of managing stock portfolios. The seminal work on financial options was done by Black and Scholes, published in 1973, and Merton, also published in 1973. Merton and Scholes shared the 1997 Nobel Prize in economics for their work. Black, Scholes, and Merton all worked on attempting to determine the value of an option. In recent years, the concepts of valuing options have been expanded from financial options to what are called "real" options in project evaluation.