Test 2 (BUSA 110)

What is PV?

-Stands for present value

-Represents the idea that money changes value over time

What causes PV to change to FV?

Inflation/deflation

Opportunity cost

What is discount rate?

The rate that converts FV to PV; the rate at which money changes value

What is risk-free rate?

The baseline return of zero-risk assets (ie. US Treasuries); what you know you will grow by (aka the absolute floor)

PV= ???

FV/(1+discount rate)^time

What is IRR?

-Internal Rate of Return

-The discount rate that makes the net present value (NPV) equal to 0

How do you interpret IRR?

-You must compare it to something else, like the risk free return/discount rate or a hurdle rate

-It is used when you have two options you want to compare

-Look at whether it’s more than, equal to, or less than (more than means the investment is a good idea)

What is CAGR?

-Compound average growth rate

-The interest rate at which an investment grows

-Ignores all in-between values and volatility

-Best for long-term comparison (aka think in years, not quarters or months)

CAGR= ???

(finial value/initial value)^(1/time)-1

What is AAPC?

-Average annual percentage change

-Compares the returns year by year

-Used to compare yearly averages and their volatility

AAPC= ???

AVERAGE(final value-initial value/initial value)

What’s the rule of 70?

-The time it takes to double

-70/growth rate

Monte Carlo Simulations (MC Sims) are used when and are made up of what two steps?

-Solve problems where there is a chance process (stochastic)

1. Data generating process (DGP)

2. Repeated random sampling

What is Adam Smith known for?

-Invisible hand and free market

-Supply and demand

-The Wealth of Nations (book)

What is Karl Marx known for?

-Communism

-Inequality leads to a class struggle which causes instability that hurts the economy

-Tradeoff between efficiency and equity; incentives and innovation

What is John Meynard Keynes known for?

-Visible hand

-Fiscal and monetary policy

Compare Robert Lucas’ economic theory with Paul Samuelson’s

-Lucas believes the invisible hand and free market are still the best solution to a recession because people are too smart to invest in a bad economy

-Samuelson believes that a combination of both invisible hand (Smith, Lucas) and visible hand (Keynes) is best for the health of economy