Week 1 Flashcards
What is the advantage of stocks and treasury bills relative to each other? What would happen if we had perfect foresight and no trading fees and could have our money in whichever performed greatest each day?
Treasury bills are more stable, but as such have lower returns. If we had perfect foresight we would be able to earn far more money than either could individually.
What is the return difference of stocks compared to bonds due to?
They are different as a result of the equity market risk premium on stocks.
What do investors in stocks typically turn to in the event of stock market downturns? What can this do to the yield curve and what is this possibly a sign of?
They will go to medium term treasury bonds typically (10 years) this will lead to an inversion of the yield curve as the price of these bonds will go up, and therefore their yield will go down. This is sometimes considered a sign of imminent recession.
How often would we need perfect foresight roughly to get an increase of 1% per annum?
If we could perfectly predict whether treasury bills would outperform stocks on a given day and be invested in the right one then we would only need perfect foresight on 1% of trading days, once every 5 months roughly.
What are the main dividend payment periods?
March/september cycle and June/December cycle.
What does TTM mean with regards to stocks?
Trailing twelve months.
What is a basis point?
A bp (basis point) represents 0.01%.
What is the bid price and ask price with regards to stocks?
The bid price is the price a person has attempted to buy a stock at, the asking price is the price people are willing to accept to sell a stock.
What is an important thing said about fund managers?
Nobody knows nothing.
Are transaction costs more problematic for short term or long term investments?
Short term, as there will be more frequent investments.
What is the dividend yield?
The summation of the trailing twelve month dollar dividends divided by the dollar value of the stocks held.
Do U.S active portfolio managers typically succeed in outperforming their benchmarks?
Not after fees have been considered.
What is the exponential function? What is its inverse?
e^x, is the limit of (1+x/n)^n as n approaches infinity. The ln(e^x) log function is the inverse of this, and gives the mirror image on the line y =x.
What are APR and EAR?
APR is the annual percentage rate, EAR is the effective annual return.
Our interest = (1+APR/n)^n = 1 + EAR, where n is the compounding frequency. If n approaches infinity we begin to engage in continuous compounding. In this case e^n = 1 + R, where n is the continuous compounding return, R is the simple net return and 1+R is the simple gross return, and en is known as the compounding factor. Each of therse terms represent the same economic growth. n should be a bit lower than R.
What is a matrix? What is it good for?
A matrix is a way to hold an array of data in one place. We can save space from multiple equations by seperating our variables and using them to populate a column vector, a matrix can then hold their coefficients.
