1. Introduction - Quantitative Methods for Corporate Finance

Question 1

What are the three key principles of financial mathematics (or Quantitative Methods)?

Answer 1

1) Diversification - a portfolio with many different types of investment is less risky than a portfolio with only one type
2) The Time Value of Money - a pound today is worth more than the promise of a pound in the future
3) Risk Vs Reward - To earn a higher investment, you have to accept a higher level of risk

Each of these principles can be applied using a Quantitative Methodology, or series of formulae, to derive conclusions on investment decisions

Question 2

What are the main quantitative tools for corporate finance?

Answer 2

1. Correlation and covariance – measuring the degree and strength of the relationship between the
   returns on two different investments
2. Discounting – to calculate the value in today’s terms of cash flows expected in the future
3. Variance and standard deviation – to calculate the variability of returns on investments based on
   historical data