CFA Level 1 Prep

Rate of Return

Zero Coupon Bonds

These are bonds with no payments during the term and are issued at a discount to their face value (Future value), providing profit at maturity when the bond is redeemed at full value.

Fixed Coupon Bonds

Unlike zero coupon bonds, payments are made at regular periods and aat maturity, you get paid the face value

Amortizing bond

You make payments to principal at some level

Discounted Cash Flows

Suggests that FV = PV(1+r)^t

Real Return

It is the return after inflation is removed. How much did my purchasing power actually increase? 1+ real return = (1+nominal_return)/(1+inflation_premium)

Gross return

Is what is left after fees related to generating the return is deducted

Net Return

return after management and commission fees removed

Nominal return

Return after adjusting for inflation

Nominal risk-free rate

Return on an investment with no default risk and before inflation eg T-bills

Real risk -ree rate

Risk-free return after inflation

Leveraged Return

Borrowed money to invest more than your capital = [R_T(V_o+V_b)-(R_b*V_b)]/V_o where R_T is total return on investment, V_o is money you own and put into the investment, V_b is money you borrowed to put into the investment, R_b is the interest on the borrowed money

Money-Weighted Return

it is IRR taking into account all cash inflows and outflows. PV_inflows = PV_outflows

Holding Period Return

How much did i lose or gain whilst holding the investment

Central tendency

Measure of reward

Dispersion

Measure of risk

mean absolute deviation

is the average of the absolute values of the deviations of individual observations from the arithmetic mean

Relative dispersion

is the amount of variability in a distribution around a reference point or benchmark. Relative dispersion is commonly measured with the coefficient of variation (CV)

CV

standard deviation of x / average value of x

target downside deviation

measure of downside risk also known as target semideviation

Sample skewness

is equal to the sum of the cubed deviations from the mean divided by the cubed standard deviation and by the number of observations

Kurtosis

measure of the degree to which a distribution is more or less peaked than a normal distribution.

Leptokurtic

describes a distribution that is more peaked than a normal distribution

platykurtic

refers to a distribution that is less peaked, or flatter than a normal one.

mesokurtic

if it has the same kurtosis as a normal distribution

excess kurtosis

A distribution that has either more or less kurtosis than the normal distribution

Covariance

Measure of how two variables move together

correlation coefficient

Measure of the linear relationship between two variables

Spurious correlation

refers to correlation that is either the result of chance or present due to changes in both variables over time that is caused by their association with a third variable

Skewness

Refers to degree which a distribution is not symmetrical

expected value of a random variable

It is the weighted average of the possible outcomes for the variable

volatility of a random variable

It is the Variance and standard deviation measure the dispersion of a random variable around its expected value

Bayes' formula

It is used to update a given set of prior probabilities for a given event in response to the arrival of new information

jackknife

calculates multiple sample means, each with one of the observations removed from the sample.

Simple Random Sampling

method of selecting a sample in such a way that each item or person in the population being studied has the same likelihood of being included in the sample

Stratified random sampling

uses a classification system to separate the population into smaller groups based on one or more distinguishing characteristics

Cluster sampling

based on subsets of a population, but in this case, we are assuming that each subset (cluster) is representative of the overall population with respect to the item we are sampling

one-stage cluster sampling

a random sample of clusters is selected, and all the data in those clusters comprise the sample

two-stage cluster sampling

random samples from each of the selected clusters comprise the sample.

Type I error

This is the rejection of the null hypothesis when it is actually true

Type II error

This is the failure to reject the null hypothesis when it is actually false

Significance level

Probability of making a type I error

Power of a Test

Probability of accurately rejecting a null hypothesis when false = 1- P(type II error)

p-value

probability of obtaining a test statistic that would lead to a rejection of the null hypothesis, assuming the null hypothesis is true.

F- test

Used when comparing the equality of two population variances

Chi-squared

Used concerning the value of a population variance

T-test

Used when comparing the equality of two population means. Use paired when dependent or pooled when independent

Z-test

Used concerning the value of population mean when sample size is large enough

short run

time period over which some factors of production are fixed like equipment

long run

time period over which some factors of production are fixed like cost of production

short-run shutdown point

if average revenue is less than average variable cost in the short run, the firm should shut down

long-run shutdown point

if average revenue is less than average total cost

Breakeven point

If average revenue is just equal to average total cost, total revenue is just equal to total (economic) cost

kinked demand curve model

based on the assumption that competitors are unlikely to match a price increase by a competitor, but very likely to match a price decrease by a competitor

Cournot's duopoly model

two firms with identical MC curves each choose their preferred selling price based on the price the other firm chose in the previous period. Firms assume that the competitor's price will not change.

Stackelberg model

While the Cournot model assumes the competitors choose price simultaneously each period, the Stackelberg model assumes pricing decisions are made sequentially. One firm, the "leader," chooses its price first, and the other firm chooses a price based on the leader's price. In long-run equilibrium, under these rules, the leader charges a higher price and receives a greater proportion of the firms' total profits.

Nash equilibrium

s reached when the choices of all firms are such that there is no other choice that makes any firm better off (increases profits or decreases losses).

dominant firm model

a single firm has a significantly large market share because of its greater scale and lower cost structure—the dominant firm (DF).

Business Cycle

Characterized by four phases: Expansion, Peak, Contraction/Recession and Trough

growth cycle

Refers to changes in the percentage difference between real GDP and its longer-term trend or potential value

growth rate cycle

refers to changes in the annualized percentage growth rate from one period to the next

Credit cycles

refer to cyclical fluctuations in interest rates and the availability of loans (credit)

leading indicators

have been known to change direction before peaks or troughs in the business cycle

coincident indicators

they change direction at roughly the same time as peaks or troughs

lagging indicators

They tend not to change direction until after expansions or contractions are already underway

Fiscal policy

refers to a government's use of spending and taxation to influence economic activity.

Balanced Budget

When expenditure equals revenue

Deficit

When expenditure exceeds revenue

Surplus

When revenue exceeds expenditure

Monetary policy

refers to the central bank's actions that affect the quantity of money and credit in an economy to influence economic activity

Discretionary fiscal policy

refers to the spending and taxing decisions of a national government that are intended to stabilize the economy

automatic stabilizers

built-in fiscal devices triggered by the state of the economy

country's debt ratio

ratio of agggregate debt to GDP

Ricardian equivalence

private-sector savings in anticipation of future tax liabilities just offset the government deficit

Fiscal policy tools

Includes spending tools and revenue tools

Transfer payments

Also known as entitlement programs redistribute wealth, taxing some and making payments to others

Current spending

refers to government spending on an ongoing basis

Capital spending

refers to government spending on infrastructure

Direct taxes

Levied on income

Indirect taxes

levied on goods and services

Horizontal equality

People in similar situations should pay similar taxes

Vertical equality

Rich people should pay higher taxes

fiscal multiplier

Determines the potential increase in aggregate demand resulting from an increase in government spending

discretionary fiscal policy

It is when fiscal policy is implemented through changes in taxes and spending

Recognition lag

Discretionary fiscal policy decisions are made by a political process

Action lag

Governments take time to discuss, vote on, and enact fiscal policy changes

Impact lag

Time elapses between the enactment of fiscal policy changes and when the impact of the changes on the economy actually takes place.

structural budget deficit

This is the deficit that would occur based on current policies if the economy were at full employment.

Fiat Money

Money not backed by any tangible value

menu costs

cost to businesses of constantly having to change their prices

shoe leather costs

costs to individuals of making frequent trips to the bank so as to minimize their holdings of cash that are depreciating in value due to inflation

Federal funds rate

rate that banks charge each other on overnight loans of reserves

monetary transmission mechanism

refers to the ways in which a change in monetary policy, specifically the central bank's policy rate, affects the price level and inflation

interest rate targeting

increasing the money supply when specific interest rates rose above the target band and decreasing the money supply (or the rate of money supply growth) when interest rates fell below the target band

Geopolitics

efers to interactions among nations, including the actions of state actors (national governments) and nonstate actors (corporations, nongovernment organizations, and individuals).

Globalization

refers to the long-term trend toward worldwide integration of economic activity and cultures

nationalism

refers to a nation pursuing its own economic interests independently of, or in competition with, the economic interests of other countries

soft power

ability to influence other countries without using or threatening force.

Hegemony

noncooperation and globalization refers to countries that are open to globalization but have the size and scale to influence other countries without necessarily cooperating

Autarky

(noncooperation and nationalism) refers to a goal of national self-reliance, including producing most or all necessary goods and services domestically. often associated with a state-dominated society in general, with attributes such as government control of industry and media

Bilateralism

(cooperation and nationalism) refers to cooperation between two countries