Unit 10: Analytic Methods Flashcards
How do you calculate Future value?
FV=PV x (1 + r) ^n
FV=Future Value
PV=Present Value
r=rate of return
n=number of years invested
(1 + r) ^n= discount rate
What is the rule of 72?
The time it takes for an investment’s value to double
72/r=years
72/years to double=r
r=rate of return
How do you calculate Net Present value?
NPV= PV-price paid
Positive NPV is good, Negative NPV is bad
NPV generally considered more important than IRR
What is Internal Rate of Return?
IRR : The discount rate that makes NPV =0
IRR is the method of computing long-term returns that takes into consideration the time value of money.
The Yield to maturity of a bond reflects its IRR
Shown as a %
What is Mean?
average - take all values and divide by number of values
What is Median?
Midpoint of all values
What is Mode?
most common value (number that occurs most often)
What is the Geometric Mean?
Doesn’t matter, but know that it is always lower than arithmetic mean
What is Beta?
A stock’s risk compared to market
What is Alpha?
Performance compared to market
A= (portfolio return - risk free rate)- (beta x (market return-risk free rate))
What is most commonly considered to be the risk free rate?
The rate of return for a 90 day T bill
What is standard deviation?
Measurement of Volatility
Investments generally stay within 1 Standard deviation 2/3 of the time and 2 standard deviations 95% of the time
What is a correlation coefficient?
Number between -1 and +1 representing relationships between investments
-1 prices move opposite of each other
0 prices unrelated to each other
1 prices move in tandem
Goal of index funds are to perfectly correlate with the index (+1)
What is working capital?
current assets-current liabilities
How do companies increase their working capital?
issuing securities, profits from business operations
