Chapter 12- (3Qs) Methods of Quantitative Analysis Flashcards

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1
Q

Time Value of Money

A

Difference between present and future value

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2
Q

Future Value

A

What an amount invested today at a given rate will be worth in the future

PV x (1+r)^N

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3
Q

Present Value

A

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

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4
Q

The rule of 72

A

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

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5
Q

Net Present Value

A

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

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6
Q

IRR

A

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

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7
Q

Geometric Mean

A

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

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8
Q

Income in Perpetuity

A

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

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9
Q

Exhausting the Principal

A

100,000 at 5% wants to take out 12,000

100,000/12000= 8.33 and choose next highest number due to 5% return

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10
Q

Beta or beta coefficient

A

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

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11
Q

Alpha

A

Either negative, positive or zero

Measures performance achieved on risk weighted basis

(Portfolio return - risk free) - (Portfolio beta x (market return - risk free))

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12
Q

Standard Deviation

A

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%

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13
Q

Correlation

A

Correlations is between -1 to +1

Correlated means they move together

0 means they are unrelated

  1. 8-1 is highly correlated
    - 1 means they are opposites

Index funds try to achieve perfect correlation

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14
Q

Price to earnings ratio

A

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

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15
Q

Price to book ratio

A
Price of shares
/
(Tangible assets - liabilities - preferred stock
/
Common shares)
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