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169 Cards in this Set
- Front
- Back
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Binomial Probability mean and variance
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np and np(1-p)
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Joint Probability Rule P(AB)
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P(AB) = P(A) x P(BIA)
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Continuously compounded stock price returns
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r = ln(St/So)
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Bayes Formula
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P(Event I Information) =
(P(Event)P(Information I Event)) / P(Information) |
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Technical Analysis Reversal Patterns
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Head and Shoulders, Double/Triple Tops
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Technical Analysis Continuation Patterns
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Triangles, Pennants, flags, Rectangles
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Bollinger Bands
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moving average +/- 2SD
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Diversification Ratio
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Risk of equally weighted portfolio / Risk of single security selected at random
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Beta fomula
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COVi,m/(variance of market)
or correlation * SDsec/SDmkt |
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Msquared
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(Rp-Rf) x (SDm/SDp) - (Rm-Rf)
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What makes up the Monetary Base
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Fed notes, coins, and bank reserves at Fed
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Quantity Theory of Money
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Money Supply x Velocity = Price x Real Output
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Margin Trigger Formul
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Po * (1-MARo)/(1-MARm)
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Degree of Operating Leverage based on changes
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% change in operating income
------------------------------------------- % change in units sold |
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Degree of Financial Leverage based on changes
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% change in net income
------------------------------------------- % change in operating income |
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Degree of Total Leverage based on changes
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% change in net income
------------------------------------------- % change in units sold |
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Breakeven Quantity
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Fixed Cost - Fixed Financial Cost / Price - Variable Cost
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Dupont ROA
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Profit Margin x Asset Turnover
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Dupont ROE
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Profit Margin x Asset Turnover x Financial Leverage
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Sutainable Growth Rate
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(1-dividend payout) * ROE
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FIFO Inventory from LIFO
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LIFO Inventory + LIFO reserve
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FIFO COGS from LIFO
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LIFO COGS + Change in LIFO Reserve
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Code of Ethics
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1 Act with integrity, competence, diligence, respect
2 Place integrity of profession and clients above person interest 3 use reasonable care and exercise independent professional judgement 4 Practice and encourange others to practice in an ethical manner 5 Promote the integrity of and uphold rules of capital markets 6 Maintain and improve competence of yourself and others |
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ROE calculation from financial statement
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Net Income / BVavg
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Porters 5 forces
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threat of substitutes
bargaining power of customers bargaining power of suppliers threat of new entrants intensity of rivalry |
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Industry Life Cycle
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Embryonic
Growth Shakeout Maturity Decline |
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Valuation for comparing companies with different capital structures
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EV
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4 C's of credit analysis
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Character
Capacity Collateral Covenants |
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Negative Pledge Clause
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Can't issue secured debt without securing unsecured
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4 Goals of IASB
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Develop Global Standards
Promote Global Standards Account for small firms and emerging markets Converge national standards with global |
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IOSCO Objectives
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Protect Investors
Ensure fairness and transparency of markets Reduce systemic risk |
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IFRS Framework 2 primary assumptions
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Accruals and going concern
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IAS1 Principals for preparing financial statements
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1. Fair presentation
2. Going Concern Basis 3. Accrual Basis 4. Consistency between periods 5. Materiality |
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IAS1 Principals for presenting financial statements
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Aggregation
No Offsetting Classified Balance Sheet Minimum Required Information Comparative Information |
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EPS calculation
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(Net income - preferred dividends) / Wgt Avg # of shares
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US GAAP Dividends Paid Cash Flow
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Financing
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US GAAP Dividends Recieved Cash Flow
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Operating
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US GAAP Interest Paid Cash Flow
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Operating
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US GAAP Interest Received Cash Flow
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Operating
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Free Cash Flow to the Firm
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FCFF = CFO + (interest (1-T)) - Fixed Capital Investment
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Free Cash Flow to Equity Holders
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FCFE = CFO - Fixed Capital Investment + Net Debt Increase
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Horizontal Financial Statements
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Indexed to Base Year
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Vertical Financial Statements
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Indexed to Total Assets (Balance Sheet) or Total Revenue (Income Statement)
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Fraud Triangle
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Incentives
Opportunities Rationalization |
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Magnitude of Elasticity of Demand Depends on
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Closeness of Substitutes
Proportion of Income spent Elapsed time since a price change |
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Factors affecting Elasticity of Supply
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Resource Substitutions
Time Frame for Supply Decision |
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Limitations on a Firm's maximum profit
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Technology
Information Market |
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Remedies for Principal/Agent problem
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Ownership
Incentive Pay Long-Term Contracts |
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Reasons Firms are more efficient
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Lower transactions costs
Economies of Scale Economies of Scope Economies of Team Production |
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Minimum Efficient Scale
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Smallest quantity of output where LRAC reaches it lowest level
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Currency Drain Ratio
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Ratio of Currency Held to Deposits
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Money Multiplier formula
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(1+ currency drain ratio) / (currency drain ratio + required reserve ratio)
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Stagflation
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Rapid Inflation + Recession
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Demand Pull Inflation
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Aggregate Demand Increases
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Cost Push Inflation
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Caused by Increase in Cost possibly due to decreased supply
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Ricardo Barro Equivalence
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Taxes are the same as Gov't borrowing. Deficits have no effect on interest rates or investment
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Classical MacroEconomics
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Economy is self-regulating and always at full employment. Wages are flexible and taxes create inefficiencies
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Keynesian Macroeconomics
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Economy needs help from monetary and fiscal policy to stay at full employment. Wages are downward sticky
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Monetarist Macroeconomics
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Economy is self-regulating and quanity of money is most significant influence on aggregate demand. Must grow at a steady pace. Taxes should be low.
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Mainstream Business Cycle Theory
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Potential GDP grows at a steady rate and aggregate demand grows at a fluctuating rate.
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Keynsian Cycle Theory
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fluctuations in aggregate demand come from fluctuations in business confidence
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Monetarist cycle Theory
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Fluctuations in the growth rate of the quanity of money cause flucuations in both investment and consumption causing fluctuation in aggregate demand
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New Classical Cycle Theory
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Only unexpected fluctuations in AD bring fluctuations in real GDP around potential GDP
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New Keynsian Cycle Theory
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Both expected and unexpected fluctuations in AD bring fluctuations in real GDP around Potential GDP
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Real Business Cycle Theory
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Random fluctuations in productivity are main source of economic fluctuations.
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Macroeconomic Long Run
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Time frame long enough for the real wage rate to adjust to achieve full employment, Real GDP = Potential GDP
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3 Reasons for Potential GDP increase
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Full employment quantity of labor increases
Quantity of Capital Increases Technology Advances |
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2 Reasons Aggregate Demand Curve Slopes Downward
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Wealth Effects (decreases)
Subsitution Effects (delay) |
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Short-run macroeconomic equilibrium
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SAS = AD
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Phillips Curve
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Inflation vs. Unemployment
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Biases in CPI
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new goods
quality improvements consumers’ decisions to make substitutions among goods and seek lower-priced shopping outlets |
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Calculation for Change in Quantity of Money
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Monetary Base x Money Multiplier
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Effect of increase in tax rate on DTL, DTA and income tax expense
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Increase DTL, Increase DTA, Effect on Income tax expense is dependent on size of DTL's and DTA's
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Effect of Capitalization on Cash Flows
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CFO Higher
CFI Lower |
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Revaluation of impaired asset above historic cost (IFRS)
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increase above original cost to equity (comprehensive income)
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Held to maturity value on balance sheet and unrealized gains and losses
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amortized cost, unrealized not considered
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Available for Sale on Balance Sheet and unrealized gains/losses
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at market value
unrealized to equity (OCI) |
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Trading Securities on Balance Sheet and unrealized gains/losses
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Market Value
Income Statement |
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Deferred Tax Asset Valuation Allowance
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Used to account for reduction in asset value. Lowers Assets and Net Income
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4 types of measurement scales
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Nominal
Ordinal Interval Ratio |
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Country Equity Risk Premium
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= Sovereign Spread x (Annualized SD of equity index/Annualized SD of Bond market in developed currency)
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Effective Annual Yield
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(1+HPY)^(365/t)-1
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Bond Discount Yield
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D/F * 360/t
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Money Market Yield
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HPR x (360/t)
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Bond Equivalent Yield for an Annual Pay Bond
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2 x ((1+APY)^(0.5)-1)
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All possible combinations of the risk free asset and any risky portfolio
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Capital Allocation Line
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All combinations of the risk free asset and the market portfolio
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Capital Market Line
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Risk that cannot be diversified Away
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Systematic Risk
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Jensen's Alpha
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Rp - (Rf + Bp(Rm-Rf)
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4 factors in 4 factor model
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Relative Size
Relative Book to Market Beta Relative Past Returns (momentum) |
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Main functions of the financial system
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achievement of purposes for which people use the financial system
discovery of rates of return to equate aggregate savings with aggregate borrowings Allocation of capital to best uses |
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Municipal bonds with non-binding state backing
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Appropriations backed obligations
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Municipal bonds secured with revenue from project being financed
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Revenue bonds
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Bankruptcy - Restructuring
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Chapter 11
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Bankruptcy - Liquidiation
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Chapter 7
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Term structure is based on expectations about future spot rates
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Pure Expectations Theory
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Term structure is explained by expectations on future interest rates and a yield premium for interest rate risk
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Liquidity preference theory
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Supply and demand within different maturity sectors determine the term structure
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market segmentation theory
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Where does amoritization of a bond discount or premium appear on the cash flow statement
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This is a non-cash charge and would only be used to adjust net income which would affect taxes that would affect cash flow
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Calculate bond Option cost
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Z-spread - OAS
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2 year forward rate 3 years from now
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4f6 = [ (1+z10)^10/(1+z6)^6]^(1/4) - 1
need to double to get BEY |
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Numerator for hypothesis test
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sample mean - hypothesized mean
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test for equality of 2 means from independent samples
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t-test - used pooled variance if the variances are assumed to be equal. df = n1+n2-2
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hypothesis test for the mean of the differences between 2 dependent samples
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paired comparison using a t-statistic. df = n-1, n = # of paired observations
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Test for the variance of a single population
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Chi-squared
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Test for the equality of variances for 2 populations
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F-test
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Effect of increasing sample size on Type I and Type II errors
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Increasing sample size lowers both Type I and Type II
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How is a forward rate agreement settled
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(market rate - contract rate) x (rate period/360) discounted back over the period at the market rate (1/(1+market ratex(rate period/360)
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notation for a FRA that expires in 3 months for 180day Libor
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3x6 - expires in 3 months and 3 months later interest is paid
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intrinsic value of an option
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The amount that the option is in the money
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Type of option that is worth less as time to maturity increases
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Deep in the money Europrean Put
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minimum values for American and European calls
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> of 0 or (S-(X/(1+RFR)^t)))
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Put call parity formula
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c+X/(1+RFR)^T = S + p
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Fiduciary Call
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Call + riskless bond that pays exercise price at maturity
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Protective Put
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Underlying + Put
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Early exercise of American Put
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Only if underlying is at or near 0
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Early exercise of American Call
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Only if underlying will pay a dividend
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Effect of higher interest rates on call option prices and put option prices
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"call options cost more
put options cost less" |
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Effect of Price Celings below the Equilibrium Price
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Excess Demand and Black Market
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Effect of Quotas
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Underproduction and MSB > MSC
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Effect of Subsidies
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Overproduction and MSB < MSC
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Effect of Taxes
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"Demand less elastic - buyers bear higher burden
Supply less elastic - sellers bear higher burden" |
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Perfect Competition SR supply curve for a firm
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marginal cost curve above AVC
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Relationship with MRP to maximize profit
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MRP = Price of Labor
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Quantity of Financial Capital Demanded with Decreasing Interest Rate
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Increases
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Types of Unemployment that can still exist at full employment
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"Structural
Frictional" |
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Shifts in LRAS are caused by changes in
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"Amount of Labor
Technology Amount of Capital" |
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Shifts in SRAS
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Decreases with Rising Wages or expected inflation
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Effect on SRAS for changes in price level
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movement along the SRAS
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Changes bringing increases in AD
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"Expected Inflation increases
Expected income levels increase Expected Profits increase Foreign Incomes increase Domestic Exchange Rate decreases" |
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Effect of Leverage on Net Income
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Lower because of interest cost
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Effect of Leverage on ROE
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Increases if ROA is higher than debt cost. Variability increases
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Effect of Stock Dividends on shareholder value
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No change
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Difference between share repurchases and cash dividends to shareholder value
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they are the same as long as tax treatment is the same but they have different effects on share price
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Effect of share repurchases on Book Value per share
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If repurchase price is > original book value per share then BVPS will be lower
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trade discount cost
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(1+(discount/(1-discount))^(365/days past discount)
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Duration Formula
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Vlow - Vhigh / 2Vo(Delta y)
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Convexity Formula
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(Vlow+Vhigh - 2*Vo)/(2Vo*(Delta y)^2)
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Convexity Adjustment
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C x (Delta y)^2 x 100
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9 sections of GIPS standards
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Fundamentals of Compliance
Input Data Calculation Methodology Composite Construction Disclosure Presentation and Reporting Real Estate Private Equity Wrap Free/Separately Managed Account (SMA) Portfolios |
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Degree of Operating Leverage formula from costs and revenues
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(Q(P-V)) / (Q(P-V)-F)
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Degree of Financial Leverage formula from costs and revenues
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(Q(P-V)-F) / (Q(P-V)-F-I)
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Degree of Total Leverage formula from costs and revenues
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(Q(P-V)) / (Q(P-V)-F-I)
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Treynor Ratio
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(Rp-Rf)/Bp
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P(A or B)
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P(A) + P(B) - P(AB)
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Margin requirement in futures market if it drops below maintenance
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Have to bring back up to initial margin
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Maximum leverage ratio for a security bought on margin
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1 / maintenance margin
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Under the IFRS Framework, changes in the elements of financial statements are most likely portrayed in the:
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Statement of Cash Flows or statement of changes in equity
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Qualitative Characteristics specified by IASB
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Relevance
Predictive Value Faithful Representation Neutrality Verifiability |
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Where are financial gains from interest and dividends on Held to maturity securities reported
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One Income statement. This is true for all types of securities
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IFRS accounting for joint ventures
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equity or proportionate consolidation
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GAAP accounting for join ventures
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equity method only
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Upward revaluation of identifiable intangible assets under IFRS
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goes to income statment P&L to reverse a prior decrease but to equity if an increase vs. original cost
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Full Dupont breakout for ROE
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EBIT/ Revenue x
EBT/EBIT - interest burden x NI/EBT - tax burden x Revenue/Assets - asset turn x Assets/Equity - financial leverage |
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Deferred Tax Liability
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Tax Return expenses > Accounting expenses
Tax Return taxes < Accounting taxes |
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FASB Hierarchy
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Relevance + Reliability
Comparability Understandability |
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Causes change in short-run and long-run Phillips curve
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Shift in natural unemployment rate
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Causes change in SR Phillips curve but not LR
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Shift in expected inflation
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Causes move along the SR Phillips curve
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Shift in actual inflation
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Causes shift in SR and LR Aggregate Supply
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Change in Potential GDP from change in labor supply, change in capital supply or change in technology
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Causes shift in SR Aggregate Supply but not LR
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Changes in money wage rate or cost of other factors of production
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Causes movement along the SRAS
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Changes in Price level with money wage rate unchanged
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Quanity of Real GDP demanded (Aggregate Demand)
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Consumption Expenditure + Investment + Government Expenditure + Exports
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Movement along the AD curve
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Caused by changes in the price level
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Shifts in the AD curve
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caused by shifts in AD which are caused by changes in expectations, changes in fiscal and monetary policy, and changes in the World Economy
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5 financial statement elements
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assets
liabilities owners equity Revenue Expenses |
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How often must assets be tested for impairment
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Only when there is an indication that impairment has occurred
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IFRS impairment cost
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higher of
fair value - cost to sell or value in use (DPV) |
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GAAP impairment cost
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Fair value
or DPV |
