Chapter 12- (3Qs) Methods of Quantitative Analysis Flashcards
Time Value of Money
Difference between present and future value
Future Value
What an amount invested today at a given rate will be worth in the future
PV x (1+r)^N
Present Value
Value today of future cash flows of an investor discounted back at a specific rate of return
PV = FV / (1+r)^n
200,000 / (1+5%)^10= 122782
The rule of 72
72 divided by the interest rate will give you the amount of years it will take to double your money
If kid is going to college in 9 years, what rate of return do you need?
72/x=9 x=8
Net Present Value
Difference between Investors present value and its cost
PV= 110 Initial Investment =100 NPV=10
Always expressed in dollar amount
Used to see if expected cash flows outweigh the cost of investment
IRR
Discount rate that make the future value = the present value
Method of computing long-term returns that takes into consideration TCM
YTM reflects IRR in a bond
Geometric Mean
Multiplying all the number together and taking the nth root of the numbers
10,5,15,8,12
10x5x15x8x12= 72,000 taken to the 5th root = 9.36
Income in Perpetuity
Income that can be provided forever
Can be found by dividing the yearly amount needed by the yearly rate
IF you want 1,000 a month forever and expect a 5% return, have to have a base of:
12,000/5%= 240,000
Exhausting the Principal
100,000 at 5% wants to take out 12,000
100,000/12000= 8.33 and choose next highest number due to 5% return
Beta or beta coefficient
Measure of volatility against an index
Multiple of return that can be expected
Stock w/Beta of 1.5 and S&P up 10%
1.5 x 10%= 15%
Stock w/ Beta of -.2 and S&P up 10%
-.2 x 10% = -2%
Conservative
Alpha
Either negative, positive or zero
Measures performance achieved on risk weighted basis
(Portfolio return - risk free) - (Portfolio beta x (market return - risk free))
Standard Deviation
Measure of volatility based on historical performance of the specific investment
Dispersion around an average
Higher standard deviation would be worse, expressed in %
1 standard deviation 66%, 2 95%
Correlation
Correlations is between -1 to +1
Correlated means they move together
0 means they are unrelated
- 8-1 is highly correlated
- 1 means they are opposites
Index funds try to achieve perfect correlation
Price to earnings ratio
Current market price
/
Earnings per share (NI/Shares)
Cyclical companies have lower PE ratios than growth
Speculative companies either have very high or very low P/E ratios
Price to book ratio
Price of shares / (Tangible assets - liabilities - preferred stock / Common shares)