Chapter 12- (3Qs) Methods of Quantitative Analysis

Question 1

Time Value of Money

Answer 1

Difference between present and future value

Question 2

Future Value

Answer 2

What an amount invested today at a given rate will be worth in the future

PV x (1+r)^N

Question 3

Present Value

Answer 3

Value today of future cash flows of an investor discounted back at a specific rate of return

PV = FV / (1+r)^n

200,000 / (1+5%)^10= 122782

Question 4

The rule of 72

Answer 4

72 divided by the interest rate will give you the amount of years it will take to double your money

If kid is going to college in 9 years, what rate of return do you need?

72/x=9 x=8

Question 5

Net Present Value

Answer 5

Difference between Investors present value and its cost

PV= 110 Initial Investment =100 NPV=10

Always expressed in dollar amount

Used to see if expected cash flows outweigh the cost of investment

Question 6

IRR

Answer 6

Discount rate that make the future value = the present value

Method of computing long-term returns that takes into consideration TCM

YTM reflects IRR in a bond

Question 7

Geometric Mean

Answer 7

Multiplying all the number together and taking the nth root of the numbers

10,5,15,8,12

10x5x15x8x12= 72,000 taken to the 5th root = 9.36

Question 8

Income in Perpetuity

Answer 8

Income that can be provided forever

Can be found by dividing the yearly amount needed by the yearly rate

IF you want 1,000 a month forever and expect a 5% return, have to have a base of:

12,000/5%= 240,000

Question 9

Exhausting the Principal

Answer 9

100,000 at 5% wants to take out 12,000

100,000/12000= 8.33 and choose next highest number due to 5% return

Question 10

Beta or beta coefficient

Answer 10

Measure of volatility against an index

Multiple of return that can be expected

Stock w/Beta of 1.5 and S&P up 10%
1.5 x 10%= 15%
Stock w/ Beta of -.2 and S&P up 10%
-.2 x 10% = -2%

Conservative

Question 11

Alpha

Answer 11

Either negative, positive or zero

Measures performance achieved on risk weighted basis

(Portfolio return - risk free) - (Portfolio beta x (market return - risk free))

Question 12

Standard Deviation

Answer 12

Measure of volatility based on historical performance of the specific investment

Dispersion around an average

Higher standard deviation would be worse, expressed in %

1 standard deviation 66%, 2 95%

Question 13

Correlation

Answer 13

Correlations is between -1 to +1

Correlated means they move together

0 means they are unrelated

0. 8-1 is highly correlated
   - 1 means they are opposites

Index funds try to achieve perfect correlation

Question 14

Price to earnings ratio

Answer 14

Current market price
/
Earnings per share (NI/Shares)

Cyclical companies have lower PE ratios than growth

Speculative companies either have very high or very low P/E ratios

Question 15

Price to book ratio

Answer 15

Price of shares
/
(Tangible assets - liabilities - preferred stock
/
Common shares)