General Flashcards
DCA (Dollar-cost averaging)
is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time.
This method is suitable for assets with high intrinsic value and, normal for big inventing companies.
Covariance and correlation differences
Covariance indicates the direction of the linear relationship between variables while correlation measures both strength and direction of the linear relationship between two variables.
Covariance and correlation differences 2
Is the process of studying the cause and effect relationship that exists between two variables.
Is covariance better or correlation?
Correlation is preferred over covariance because it remains unaffected by the change in location and scale.
Correlation formula
Cov (x, y) / Variance(x) * Variance(y)
rate of return
Ending price - beginning price/begging price
or
Ending price + possible dividend - beginning price/beginning price
rate of return
P1 - P0/P0
or
P1/P0 -1
Logarithmic return
Log Ending p / Beginning p
Annual return formula
[(daily return +1) ^365] * 100 - 1
Expected return
Act as a proxy for future return
Related to future
Historical return
Past behavior of securities (Historical return) gives us a suitable help to the expected future.
Historical return & Expected return
(Historical return) (Rate of return) (Expected return)
Past Future
Compound interest
Interest increases exponentially, calculate both capital interest and interest of interest.
Suitable for long-term
Law of one price
Absence of arbitrage:
an investment that offers the same return must have the same price
MM assumptions
- Market is competitive and efficient
- absence of taxation
- Absence of bankruptcy costs
