What moves inversely?
Price and yeilds
Expected return:
Div/price + g
Calculate price/equity ratio if all earnings paid out:
Price/div
Growth using churn:
ROE * b = g
Ttotal Return =
Dividend + changestock/origrpice
MIRR:
PV(outflows) = FV(inflows)
The efficient market hypothesis
Competition among investors drives prices to their true levels
Implication: no consistent, abornomal profits, can be had based on available
information
Consistent: are the gains repeatable?
Abnormal, over and above risk
Financial Statements
Net income v. Cash Flow:
o Can spend money or save it:
If you spend it, dividends (tobacco companies)
If you save it, add to retained earnings
o Four ways in which net income differ:
Net income includes non-cash expenses such as de
US firms that export, with a stronger dollar, get crushed because their costs
are so high
Foreign firms trading with the US, win, because they have lower expenses
because their currency is weaker
Consider Honda making most cars in Japan and selling them
Low interest rates good for borrowers, not for savers
Sources and Uses of Funds:
o Sources bring money in
o Uses take money out
Interested Parties:
o Creditors
o Management for future decisions
o Analysts
Examples:
o Ex: If current liabilities are fallin
Capital Budgeting:
3. Internal Rate of Return (IRR)
o This is the rate that forces the NPV to be zero. What rate makes the
NPV 0?
Estimate an appropriate required return. Well call this a
hurdle rate.
Forecast the cash flows
Set up the NPV equation, s
Cash Management: you can have too little, or too much (under pressure to do
something with the money)
Two Models
o The Baumol Model (constant depleciation of inventory/cash)
Treats $1 of cash as 1 unit of inventory
F = fixed cost of buying or selling m
Capital Structure (Right Hand Side of Balance Sheet):
o Debt / equity mix
o Modigliani and Miller (1958 M&M)
Assume investment decision has been made (buy land, later on is how
we figure out how to pay for it)
Assume perfect capital markets
No taxes,
What about the future value of an annuity?
o FV = c[(1+r)^n 1)/r]
o Find FV of a 10,000 annuity for 30 years at 8%
FV = [(1.08^30 1)/.08] = 1, 132, 832
Inflation:
o Two ways to address inflation
Project future cash flows and discount at the nominal rat
Intro
What is finance?
o What does a CEO do with investors money? Examples: FB: server size,
Apple: R&D
Invest in real assets (tangible or intangible):
Tangible: property, plant, equipment, employers,
inventory, land, firms
Intangible: intellectual pro
Time Value of Money: Compare cash flows over time
o A dollar today is worth more than a dollar tomorrow
o Start with the future value (FV) or a lump sum
A lump sum is a one-time cash flow
If you must invest $1,000 today for one year at 5%, how
much wil
News
Danger of deflation: prices are falling, people wait for lower prices and stop
consuming.
Class Notes
Principal/Agent relationship
o Principle: shareholders (s/h)
o Agent: management
If management doesnt act in the shareholders best interest agency
Our existing staff can handle another project. Thus labor costs are not
incremental. (wrong!)
o Opportunity cost
o Work on new project may affect work on existing projects
What is a cash flow?
o Adjust for depreciation tax shields (depreciation is a non-
CAPM Formula: E(r) = rf + B(rm rf)
Rm = market return
Rm - rf = market risk premium (rm is average, rf is risk return rate of a treasury)
Historical average market risk premium
o Arithmetic = 8%
o Geometric = 5%
o Somewhere in this range
Example: B =
Electronic Funds Transfer
Let daily rate be 0.015%
An electronic transfer can save 2 days of float (good part about this if you save
float, your money gets to a bank account more quickly, if it gets there more
quickly, more interest is earned.
Fee is $
Risk/Return:
Plot Risk(sigma) and Return E(r): efficient frontier
Top part of the curve refers to: highest return given a risk, and lowest risk
given a specific return
Include a risk-free asset: treasury
o E(Rp) = Wa * E(Ra) + Wf*Rf
o A = risk asset , R
For markets to be efficient, they must be competitive
o Ex. Car Dealerships, pit one against the other to get a competitive choice (Montana v.
Boston)
Anamolies:
o Small firm effect in January
o Small firms > large firms most of it in January
o Informati
Risk/Reward trade-off via the coefficient of variation cv = return / standard dev.
Bigger this is, the bigger your return
Cva = 12 / 9 = 1.33, 12% return, 9% standard dev
CVb = 14.5 / 12.34 = 1.175,
A would be better, better risk/reward profile
Portfo
FIN41340: Quantitative Methods in Finance
Tutorial: Linear Regression
Lecturer:
Darragh ODowd
Tutorial Questions
1. You are given the following data on two random variables X and Y .
Y
X
-6
1
1
4
-2
6
8
7
15
11
(a) Calculate the OLS coefficient estimates
FIN41340: Quantitative Methods in Finance
Tutorial: Linear Regression
Lecturer:
Darragh ODowd
Tutorial Questions
1. You are given the following data on two random variables X and Y .
Y
X
-6
1
1
4
-2
6
8
7
15
11
(a) Calculate the OLS coefficient estimates
FIN41340: Quantitative Methods in Finance
Tutorial: Probability and Statistics
Lecturer:
Darragh ODowd
Tutorial Questions
1. You own two bonds. Bond A has a 20% probability of default within
the next year. Bond B has a 30% probability of default within th
FIN41340: Quantitative Methods in Finance
Mr. Darragh ODowd
Introduction to Bloomberg
Bloomberg is a powerful, command driven platform for financial professionals,
providing real time, historical and financial information
FIN41340: Quantitative Methods in Finance
Tutorial: Calculus
Lecturer:
Darragh ODowd
Tutorial Questions
1. Calculate the first derivative of y with respect to x of the following:
(a)
y=
3x
x+2
(b)
y=
ln(x)
x2 (x + 2)3
(c)
y = (3x2 + 5)4
2. Find the turnin
FIN41340: Quantitative Methods in Finance
Tutorial: Time Value of Money
Lecturer:
Darragh ODowd
Tutorial Questions
1. What is the present value of a 3-year annuity of $100 if the interest rate
is 6%? What is the present value of this annuity, if you have
FIN41340: Quantitative Methods in Finance
Tutorial: Calculus
Lecturer:
Darragh ODowd
Tutorial Questions
1. Calculate the first derivative of y with respect to x of the following:
(a)
y=
3x
x+2
(b)
y=
ln(x)
x2 (x + 2)3
(c)
y = (3x2 + 5)4
2. Find the turnin
FIN41340: Quantitative Methods in Finance
Tutorial: Probability and Statistics
Lecturer:
Darragh ODowd
Tutorial Questions
1. You own two bonds. Bond A has a 20% probability of default within
the next year. Bond B has a 30% probability of default within th
FIN41340: Quantitative Methods in Finance
Tutorial: Time Value of Money
Lecturer:
Darragh ODowd
Tutorial Questions
1. What is the present value of a 3-year annuity of $100 if the interest rate
is 6%? What is the present value of this annuity, if you have
Introduction
Financial Returns
Time Value of Money
Introduction to Quantitative Methods
and Time Value of Money
Darragh ODowd
September 1, 2015
Introduction to Quantitative Methods and Time Value of Money
Darragh ODowd
Introduction
Financial Returns
Time
Linear Regression - Theory Linear Regression - Evaluation Multivariate Regression OLS Assumptions Applications
Quantitative Methods in Finance
- Linear Regression
Darragh ODowd
August 10, 2015
Linear Regression
1/97
Darragh ODowd
Linear Regression - Theor