Chapter 8: Quantitative Concepts Flashcards
The cost to the borrower or the rate of return to the lender, per period, on the original principal (the amount borrowed).
Simple interest rate
Often referred to as “ Interest on interest”. Interest is assumed to be reinvested so future interest is earned on principal and reinvested interest, not just on the original principal.
Compound interest
The rate quoted, which is a simple interest rate that does not involve compounding.
Annual percentage rate (APR)
This rate involves annualising, through compounding, a rate that is paid more than once a year — usually monthly, quarterly, or semi-annually.
Effective annual rate (EAR)
The present value of future cash flows or returns minus the present value of the cost of the investment.
Net present value (NPV)
Involves the initial payment of an amount, usually to an insurance company, in exchange for a fixed number of future payments of a certain amount.
Annuity
The most commonly used measure of central tendency and is familiar to most people. You add all the numbers in the data set together and divide by the number of observations.
Arithmetic mean
An alternative average to the arithmetic mean. The average return assuming that returns are compounding.
Geometric average or geometric mean
Data that can take on an infinite number of values between whole numbers (weights of people).
Continuous data
Data showing observations only as distinct values — for example, the number of people employed at different companies.
Discrete data
It measures the variability or volatility of a data set around the average value (arithmetic mean) of that data set.
Standard deviation
A bar chart with bars that are proportional to the frequency of occurrence of each group of observations.
Histogram
The strength of a relationship between two variables, such as gross domestic product (GDP) and stock market returns, can be measured by using…
Correlation
The practice of combining securities in a portfolio to reduce risk
Diversification
