Secret Sauce Flashcards
Ordinary annuity
Cash flows occur at the end of each compounding period
Annuity due
Cash flows occur at the beginning of each period
Which return best measure manager’s performance?
Time-weighted return
Kurtosis of normal distribution
3
Excess kurtosis
Kurtosis excess of that of normal distribution (3)
Leptokurtic
Positive excess kurtosis, more peaked at center
Platykurtic
Negative excess kurtosis, flatter
Total probability rule
P(Y) = P(Y|X) * P(X) + P(Y|Xc) * P(Xc)
Probability of r successes in n trials of binomial distribution, with each independent trial has p probability of success
nCr * p^r * (1-p)^(n-r)
Continuously compounded returns
Increase compounding periods to infinity.
CCRS = ln(1 + HPR)
Historical simulation
Randomly selecting changes in prices or risk factors from historical past changes.
Result have limitations since future changes may not be necessarily be distributed as past changes are
Monte Carlo simulation
Making assumptions about distributions of prices or risk factors and using a large number of random numbers for the risk factors to generate a distribution of possible outcomes.
Can only be as accurate as the assumption about the distribution and correlation
Stratified random sampling
Take a random sample from each group
Student’s t-distribution
Apply for small samples (n<30)
DOF, (n-1) defines the distribution
t-distribution is fatter tail than normal distribution
Bar chart
Vertical lines from high to low price. Mark on the left of the line indicates opening price, mark on the right indicates closing price
Candlestick chart
Bar char that draw a box from opening price to closing price. Box is empty is close is higher than open, filled if close is lower than open
Change in polarity principle
Breached support levels become resistance levels, and breached resistance levels become support levels
Overbought and oversold market
Overbought, prices have increased too rapidly and are likely to decrease in the near term
Oversold, prices have decreased too rapidly and are likely to increase in the near term
Short interest ratio
High short interest ratio indicates bearish market
Kondratieff wave
54 year cycle
Elliott wave theory
In an uptrend the upward moves in prices consist of five waves and downward moves occur in three waves.
Vice versa for downtrend
Factor market
markets for factors of production
Substitution effect
It is the change in consumption due tot he change in relative prices. It is always positive. Shifts along the indifference curve
Income effect
Might be positive of negative depending on whether the good is a normal good or inferior good. Move to another indifference curve
Giffen good
Decrease in price results in a decrease of quantity demanded
Economic rent
Payment to a factor of production in excess of the amount necessary to retain it in its current use.
Payment for land is all economic profit because land is totally fixed.
If a supply is perfectly elastic, then there is no economic rent
Profit maximization
Produce at MP1/P1 = MP2/P2
Or MRP1/P1 = 1
Is it possible that monopoly have zero economic profit?
Yes, maybe they need to spend to preserve monopoly
Limitation on concentration measure
Barriers to entry are not considered
Supply curve for different market structure
For perfect competition, it is MC above AVC or ATC
For monopolistic competition, oligopoly, and monopoly, they do not have well defined supply curves
N-firm concentration ratio
Sum of the percentage market of the largest N firms in the market
Herfindahl-Hirschman Index (HHI)
Sum of the squares of the market shares of the largest firms in the market. Accounts for merges
Kinked demand curve model
Based on an assumption that a firm’s competitors will not follow a price increase but will follow price decrease.
Thus demand is more elastic above current price and less elastic below current price
Cournot model
Assumes that the firms in a two-firm oligopoly have identical cost structures and react only to the price charged by the other firm in the prior period
Dominant firm model
One firm is assumed to have the lowest cost structure and a significant portion of the market. Dominant firm set the price for the industry and competitors set their output quantities taking price as given
GDP, income approach
Total income earned by households and businesses in the country during a period
Expenditure approach
Total amount spent on good and services produced in the country during a time period
Sum-of-value-added method
Under the expenditure approach of GDP calculation.
Summing the addition to value created at each stage of product and distribution
Value-of-final-output method
Under the expenditure approach of GDP calculation.
Summing the values of all final goods and services produced during the period
GDP deflator
A price index that can be used to convert nominal GDP into real GDP by removing the effects of change in price
Four components of GDP
GDP = C + I + G + (X-M)
Underemployed
A person who is employed part time but would prefer to work full time. A person employed at a low-paying job despite being qualified for a significantly higher-paying one
Discouraged workers
Those who are available for work but are neither employed nor seeking for employment. It cause unemployment to be a lagging indicator of the business cycle.
Early in expansion when hiring begin to improve, number of discourage worker re-enter the labor force is greater than the number hired, thus increase unemployment rate although employment is expanding.
Laspeyres price index
Based on the cost of a specific basket of goods and services that represents actual consumption in a base period
Paasche price index
Use current consumption weights for the basket of good and services for both periods
Fisher price index
Geometric mean of Laspeyres index and Paasche index. Term as “chained index”
Cost-push inflation
Results from a decrease in aggregate supply caused by an increase in the real price of an important factor of production, such as labor or energy.
Demand-pull infaltion
Results from persistent increase in aggregate demand, which increase price level. Could result from expansionary fiscal policy.
Non-accelerating inflation rate of unemployment (NAIRU)
Unemployment rate below which upward pressure on wages is likely to develop
Factors that influence money demand
Transaction demand
Precautionary demand, to meet unforeseen future needs
Speculative demand, to take advantage of investment opportunities
Real trend rate
Long term sustainable real growth rate of an economy
Neutral interest rate
Sum of real trend rate and target inflation
Absolute advantage
If a country can produce the good at a lower cost
Comparative advantage
If it can produce a good at a lower opportunity cost of producing another good
International Monetary Fund (IMF)
Facilitates trade by promoting international monetary cooperation and exchange rate stability. Make resources available to member countries with balance of payment problems
World Bank
Provide low-interest rate loans, interest-free credits for developing countries. Fight poverty
World Trade Organization (WTO)
Goal: ensure trade flows freely and works smoothly. Focus on instituting, interpreting, and enforcing a number of multilateral trade agreements.
Absorption approach
National income must increase relative to national expenditure in order to decrease a trade deficit
Unqualified opinion
Auditor believes that the statements are free from material omissions and errors
Qualified opionion
There is an exception in the audit statement
Adverse opinion
The audit are not presented fairly or are materially nonconforming with GAAP
Disclaimer of opinion (audit)
Auditor is unable to express an opinion
Retained earnings
Cumulative income that has not been distributed as dividends
Equity components
- Capital, par value of common stock
- Additional paid-in capital,
- Retained earnings
- Other comprehensive income
Express expand form of accounting equation
Assets = Liabilities + Equity Assets = Liabilities + contributed capital + ending retained earnings Assets = Liabilities + contributed capital + beginning retained earnings + revenue - expenses - dividends
Ending retained earning and beginning
Ending = beginning retained earnings + revenue - expenses - dividends
Accrued expenses
The firm owes cash for expenses it has incurred. It is a liability
Barrier to developing one universally accepted accounting standard
- Standard setting bodies and regulatory authorities disagree on what the best treatment of item is
- Political pressures that regulatory bodies face from business groups who will be affected by change in the standard
Two fundamental characteristics to make financial information useful
Relevance
Faithful representation
Four characteristics enhance relevance and faithful representation
Comparability
Verifiability
Timeliness
Understandability
Income statement preparation equation
Net income = revenue - expenses
Barter transaction
Two party exchange good/services without cash payment.
Under GAAP, revenue can be recognized at fair value only if the firm has historically received cash payments and can use historical experience to determine fair value.
Under IFRS, revenue must be measured based on the fair value of similar non-barter transaction with unrelated parties
Items that are excleded from the income statement that affect owner’s equity
- Transaction with owners (issuing stock)
- Other comprehensive income statement
Goodwill
Created when a business is purchased for more than the fair value of its assets net of liabilities
Goodwill is not amortized, but must be tested for impairment at least annually
Treasury stock
Stock that has been reacquired by the firm but not yet retired. Treasury stock has no voting rights and does not receive dividends
