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3 Types of Risk a security can experience
Default Risk, liquidity risk, maturity risk
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Effective Annual Rate Definition and Formula
Annual rate of return being earned after adjustments have been made for different compounding periods.
(1+Periodic Rate)^m)-1
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PV=Equation
PV=FV/(1+I)^N
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FV=Equation
FV=PV(1+I/R)^N
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Diff Between Ordinary Anuity and Annuity Due
Annuity due pays at Beg of year
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PV of a perpetuity?
PV=PMT/Interest
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Required Rate of return =?
= Default+Liquidity+Maturity risk premiums +Risk Free+Expected Inflation
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How Do you Calculate Time Weighted rate of return?
Break down into periods, get HPR for each holding period, Find compound rate of return using geometric mean. Which is (1+HPRRate1)x(1+Rate2)^1/N
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Bank Discount Yield Formula and Negatives
(Face Value - Price Bought)/Face Value times 360/t(time left until maturity)
(P/F)x(360/t)
- -Uses Simple Interest, Not Compound
- -Based only 360 days
- -Based on Face Value of Bond, not purchase price
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Holding Period Yield
F-P+D/P
(Price Received at Maturity - Intitial Price)+Dividends/Price bought at
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Effective Annual Yield
(1+HPY)^(360/t)-1
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Money Market Yield
HPY*360/t
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Characteristic of population called?
Parameter
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What are 4 measurable scales?
NOIR
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Descriptive v. Inferential
Descriptive summarize a data set, inferential use probabilities about a population based on a sample
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Geometric Mean
NSquare root X1(1+Rate)*X2(1+Rate)*X3
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Harmonic mean
N/Sum of 1/xi
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Mean Absolute Deveiation Formula
Sum of absolute value of (xi-Mean)/N
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Population Variance
(Xi-mean)^2/N
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Sample Variance
(Xi-Mean)^2/N-1
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Chebyshev's inequality
1-1/K^2 k= number of deviations away
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Coefficient of Variation. Better if # increasing or decreasing.
CV=S/mean , Closer to 0 the better.
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Sharpe Ratio increase better or worse? Formula?
- Rate-Risk Free/ Standard Deviation
- Larger the $ the better you get premium per unit.
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Skew Formula What is normal #. How much over standard is excessive?
Sum of (1/n)*((Xi-Mean)^3/S^3). Normal is 0. .5 or more is excessive
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Kurtosis Formula What is normal # and what's it called. How much over standard is excessive and what does it look like? Over is called, and description. Under is called.
Sum of (1/n)*((Xi-Mean)^4/S^4). Normal is 3 Over 1 is excessive. Under is called Platykurtik less peaked thinner tail. Leptokurtic is over has fat tail more peaked. Mesokurtic is normal.
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Arithmetic Mean appropriate for forecasting single period returns or multiple periods?
Single Period Returns, while geometric is good for comopound returns over multiple periods
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