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Two primary assumptions underlie the preparation of F-S are

1) accrual basis 2) going concern assumption

Financial rations should be evaluated based on:

1) company goals and strategy 2) industry norms 3) economic conditions (current phase of the business cycle)

Sampling error: the difference between the sample statistic and the population parameter **inevitable e.g. sampling error of the mean = sample mean - population mean

1) data mining bias 2) sample selection bias 3) survivorship bias 4) look ahead bias: using information that was not available on the test date 5) time period bias

F-S Features IAS

1) fair presentation 2)going concern 3)accrual accounting 4)consistency 5)aggregation: aggregate similar items and separate dissimilar items 6)no offsetting 7)reporting frequency 8)comparative information

Lognormal distribution: X is normally distributed, then e^x is lognormal distributed **postitive skewed ***used to model asset prices

Continuously compounded return: The stock price may be well described by the lognormal distribution, and a stock's continuously compounded return is normally distributed

Convertible bond: 1) conversion price = bond par value / conversion ratio 2) conversion value = market price of stock * conversion ratio

Conversion parity at parity - conversion value = convertible bond price

One dimensional array: new data can be added without affecting existing data. *Time series

Two dimensional array: panel data

Type 1 error: Rejecting the null hypothesis when it is true P (Type 1 error) = significance level **try to avoid

Type 2 error: failing to reject the null hypothesis when it is false

Perpetual inventory system: inventory values and COGS are updated continuously; purchase account not necessary

Under FIFO & Specific identification method: it is the same under periodic or perpetual system But LIFO & Weighted average: different

In certain industries, reporting inventory above the historical cost is permitted under IFRS and GAAP. **Producers: agricultural, forest products, mineral ores, precious metals.

Under this exception, inventory will be reported at NRV

Identifiable intangible assets: 1) can be acquired separately - patents, trademarks and copyrights

Unidentifiable intangible assets: cannot be acquired separately; such as goodwill

Margin call - a request to bring the equity % in the account back to the maintenance margin % **If the margin call cannot be met, the broker must sell the position

p(1-inital margin)/(1-maintenance margin)

Recessionary: caused by a decrease in AD -price level decreases -Actual GDP < Potential GDP -unemployment rate > natural rate

policy choice: 1) do nothing - self correcting 2) fiscal and monetary

Interval estimate: a range for which a given percentage (1-a, degree of confidence) of all observations will lie based on a particular probability distribution

a: significance level; the probability that the observations will not fall in a specific range;

A factor that most likely measures a client's ability to bear risk is his or her: time horizon. inclination to independent thinking. personality type.

a: time horizon

Defensive interval ratio: how long company can pay its daily cash expenditures using only its existing liquid assets, without cash flow coming in

an ratio of 50 would indicate that the company can continue to pay its operating expenses for 50 days before running out of quick assets, assuming no additional cash inflow

Converting LIFO to FIFO 1) B-S: INVL + LIFO reserve 2) Inventory will be increased by LIFO reserve, cash will be decreased by (LIFO Reserve * tax rate) 3) Retained earnings will be increased

I-S: 1) COGS will be lowered by the change in LIFO reserve (LIFO COGS - reserve changes) 2) the changes in COGS also impact tax expenses, so as NI

USGAAP FIFO & Average cost & LIFO

IFRS LIFO is prohibited

Joint probability: the probability of event A and event B both happen. P(AB)

If A and B are mutually exclusive events, P(AB) = 0

Option adjusted spread: OAS = Z-Spread - option value callable bond: option value > 0 (Z spread > OAS) Putable bond: option value < 0

If no embedded option, Z spread = OAS

Multiplication rule: P(AB) = P(A|B)*P(B) P(A|B) = P(AB)/ P(B)

If the events are independent: P(AB) = P(A) * P(B)

Modified duration: percentage change in a bond's price for 1% change in YTM

Mod = Mar Dur / (1+r)

Univariate distribution: describes a single random variable;

Multivariate distribution: specifies the probabilities for a group of related random variables; ***correlation is the feature that distinguishes multivariate distribution from a univariate normal distribution

Mutually exclusive: two events can't happen the same time Exhaustive events: include all possible outcomes Independent event: the occurrence of event A does not influence the occurrence of event B; P(a/b) = P(a)

Mutually exclusive is a dependent event; however dependent event is not necessarily mutually exclusive event

Parametric tests: rely on assumptions regarding the distribution of the population.

Non parametric test: used when 1) concerns about quantities 2) assumptions not met 3) outliers exist 4) data are ranks (ordinal)

Sampling Methods: Probability sampling: every member of the population has the equal chance of being selected *More accuracy and reliability

Non-probability sampling: depends on factors other than probability considerations, such as sampler's judgement

Probability Sampling: 1) simple random sample 2) systematic sampling 3) stratified random sampling 4) cluster sampling

Nonprobability sampling: 1) convenience sampling (Accuracy is limited; but low cost) 2)judgmental sampling (based on researchers' knowledge, which could be biased)

Yield enhancement instrument: Credit linked note

Participation instrument: Floating rate bonds

Product costs are capitalized in the inventory 1) purchase cost - discounts - rebates 2) conversion costs 3) necessary costs that bring inventory to the location

Period costs are expensed as incurred: 1) abnormal waste of material 2) storage costs (unless required as part of production) 3) admin overhead 4) selling costs

Skewness: measures the degree to which a distribution lacks symmetry A symmetrical distribution has skew = 0; the mean median and mode are equal

Positively right skewed: mean > median > mode Negatively left skewed: mean < median < mode

The sustainable growth rate is best estimated as: growth in the labor force plus growth of labor productivity. **output per worker is observable

Potential GDP growth rate (sustainable growth rate) = LT growth rate of labor force + LT productivity growth rate

Qualitative Characteristics 1) Relevance 2) Faithful representation

The four elements that enhance relevance and FR 1) comparability 2) verifiability 3) timeliness 4)understandability

Monte Carlo Simulation: use randomly generated values for risk factors, based on the assumed distributions, to produce a distribution of possible outcome

Limitations: complex no precise insights

Financial intermediaries: 1)brokers 2)investment banks - provide advice to corporate client and help them arrange transactions (Underwriting) 3)Exchange - regulatory 4) alternative trading system - same trading function as exchange but no regulatory authority 5)Block brokers

6) dealers: buy an asset for its inventory in the hopes of reselling it later at a higher price 7) securitizers: pool large amounts of securities or other assets then sell interests in the pool to others 8) depository institutions - banks, credit unions 9) insurance company 10) arbitrageurs: trade in the same security simultaneously in different market

A probability function, denoted p(x), specifies the probability that a random variable is equal to a specific value. More formally, p(x) is the probability that random variable X takes on the value x, or p(x) = P(X = x). (Discrete) The two key properties of a probability function are: 0 ≤ p(x) ≤ 1. ∑p(x) = 1, the sum of the probabilities for all possible outcomes, x, for a random variable, X, equals 1.

A probability function gives the probability that a discrete random variable will equal x

If the yield to maturity on an annual-pay bond is 7.75%, the bond-equivalent yield is closest to: 8.05%. 7.90%. 7.61%.

c (1+0.0775)^1/2 - 1 *2

how to construct a frequency distribution: 1) Define intervals 2) Tally the observations 3) Count the observations

*Interval with the greatest frequency is modal interval **Relative frequency: frequency/total #of observations

Hypothesis testing concerning correlation: Pearson 1) a measure of the linear relationship between two variables 2) use t - test; the df is n-2

**TRY TO MEMORIZE ITS FORMULA

Under GAAP, issuance costs can be recorded as an asset, then be amortized on a straight-line basis over the life of the bonds;

**Usually under IFRS & GAAP, the initial bond liability on B-S is reduced by the amount of issuance costs

Types of probability: Empirical: based on analysis of data Subjective: based on personal judgment A prior: based on reasoning, not experience

3.2

A data set has 100 observations. Which of the following measures of central tendency will be calculated using a denominator of 100? A)The winsorized mean, but not the trimmed mean. B)Both the trimmed mean and the winsorized mean. C)Neither the trimmed mean nor the winsorized mean.

A The winsorized mean substitutes a value for some of the largest and smallest observations. The trimmed mean removes some of the largest and smallest observations. (LOS 2.g).

Test of independence using contingency table 1) whether there is a relationship between row and column -- use non-parametric chi-square distributed 2) df = (r-1)(c-1) (#of rows and columns)

A continence table is used to determine whether two characteristics of a group are independent

Credit related risks 1) spread risk 2) credit migration risk: a bond issuer's creditworthiness deteriorates 3) liquidity risk: the risk that the price at which investors can actually transact may differ from the price indicated in the market

A good measure is expected loss Expected loss = Default probability × Loss severity given default.

Financial leverage: ROE/ROA

A/E

Null hypothesis: hypothesis to be tested; and wants to reject 1) the "=" sign will only show in null hypothesis

Alternative hypothesis: the opposite side of null hypothesis

An exchange rate between two currencies has decreased to 1.3500. If the base currency has depreciated by 7% against the price currency, the initial exchange rate between the two currencies was closest to: 1.2617. 1.4445. 1.4516.

An exchange rate between two currencies has decreased to 1.3500. If the base currency has depreciated by 7% against the price currency, the initial exchange rate between the two currencies was closest to: 1.2617. 1.4445. 1.4516.

Discontinued operation: Measurement date; phaseout period actual disposal date

Any income/loss from this category is reported net of tax.

Assets: expected remaining life = Ending net PPE / Annual depreciation Total Useful life = historical cost / annual dep

Average age is equal to accumulated depreciation/depreciation expense

A scatter plot is best interpreted as displaying the: A)behavior of a variable over time. B)paired observations of two variables. C)relationship of a dependent variable with an independent variable.

B Scatter plots display paired observations of two variables. They do not require the two variables to have a dependent relationship, but they can be a tool for analyzing whether one of the variables is dependent on the other.

The distinction between investment - grade and non investment grade debt relates to differences in credit quality

BBB

Classification of market: Based on delivery date 1) spot market 2) future market

Based on Maturity: Money market: debt securities with maturities of one year or less Capital markets: longer term debt securities and equity securities with no specific maturity date

-Continued based on position 1) traditional markets - debts/equities & pooled investment vehicles 2) alternative markets - hedge funds, private equity, commodities, real estate, collectible

Based on capital flow 1) primary market - newly issued securities are sold by issuers to investors 2) secondary market - investors trade to each other

Which of the following statements regarding frequency distributions is least accurate? Frequency distributions: A)summarize data into a relatively small number of intervals. B)work with all types of measurement scales. C)organize data into overlapping groups.

C Data in a frequency distribution must belong to only one group or interval. Intervals are mutually exclusive and non-overlapping.

Which commercial mortgage-backed security characteristic causes a CMBS to trade more like a corporate bond than a residential mortgage-backed security? Call protection Internal credit enhancement Debt-service-coverage ratio level

CMBS investors have considerable call protection, which results in CMBS trading more like corporate bonds than RMBS. The call protection comes either at the structure level or at the loan level. Structural call protection is achieved when CMBS are structured to have sequential-pay tranches, by credit rating

Inventory turnover: Can used to measure inventory management effectiveness

COGS / INVENTORY

Convexity: the more convex bond outperforms the less convex bond 1) for the same decrease in YTM, the more convex bond appreciates more in price

Call option bonds - negative convex

Trading restriction (on importing) **protect domestic jobs/industries; national security; infant industry **Tariffs, Quotas, Export subsidies, Voluntary Export Restraint

Capital restriction

Which of the following situations will most likely promote an increase in market efficiency? An increase in arbitrage opportunities A decrease in trading activity An increase in information availability

Correct - An increase in information availability Why 1) is incorrect; Arbitrage is a set of transactions that produces riskless profits. Arbitrageurs are traders who engage in such trades to benefit from pricing discrepancies (inefficiencies) in markets. Such trading activity contributes to market efficiency. If arbitrage opportunities increase, it means that there are either more pricing discrepancies or fewer arbitrageurs (or both), and this situation will lead to a reduction in market efficiency.

Global bond market: national bond market & eurobond market National bond market: includes all the bonds that are issued and traded in a specific country and are denominated in the currency of that country

Euro bond: bonds issued and traded on the Eurobond market

Bonds: 1) domestic bond 2) foreign bond 3) Eurobonds 4) Global bonds

Eurobond: A Eurobond is a bond that is issued internationally, outside the jurisdiction of any single country. Thus, a bond issued by Sony from Japan, denominated in US dollars but not registered with the SEC, is an example of a Eurobond

Fiscal policy 1) spending tools -transfer payment, current government spending, capital expenditure 2) revenue tools -direct tax, indirect tax **indirect tax can be adjusted immediately, but direct tax is not

Fiscal spending multiplier: 1/ (1 - MPC (1-t))

Geometric mean: often used when calculating investment returns over multiple periods or when measuring compound growth rates *GM is always less than or equal to arithmetic mean (Equal = no variability in the observations)

For the last three years, the returns for Acme Corporation common stock have been -9.34%, 23.45%, and 8.92%. Compute the compound annual rate of return over the three-year period. Answer: 1+RG=3√(1−0.0934)×(1+0.2345)×(1+0.0892) RG=1.06825 −1 = 6.825%

Brownfield investments: Investments in infrastructure assets that are already constructed **stable cash flows and high yield but little growth potential

Greenfield investments: are to be constructed ** More uncertainty and lower yield but greater growth potential

Value stock: low P/E ratio; low market to book ratio, high dividend yield

Growth stock: Low dividend yield; high P/E ratio; high market/book ratio

Footnotes: 1) discuss the basis of presentation 2) provide information about accounting method, assumptions and estimates used by MGMT 3)Provide additional information e.g. biz acquisition, employee benefit plans, significant customers

MD&A: 1) discuss trends and identify significant events and uncertainties that affect the firm's liquidity. capital resources, and results of operation 2) effects of inflation and changing price 3) impact of off balance sheet obligation 3) accounting policies that require significant judgment by MGMT 4) forward looking expenses and divestitures

Unlike open-end funds in which new shares are created and sold at the current net asset value per share, closed-end funds can sell for a premium or discount to net asset value depending on the demand for the shares.

Open end fund: easy to grow in size; tend not to be fully invested Close - end: limited ability to grow

Standard setting bodies: 1) FASB 2) IASB

Regulatory authorities: 1) SEC 2) Financial conduct authority

Securities: fixed income or equity securities & pooled investment vehicles 1) fixed income: Bills, notes, bonds, commercial paper, CDs, Repo, convertible debts 2) equities: common share, preferred share, warrant 3) pooled investment: asset backed securities, ETFs, mutual funds, depositories

Public securities/private (Illiquid)

Call option value at expiration is the greater of 1) zero or 2)underlying price - exercise price

Put value at expiration is greater of 1) 0 or exercise price - underlying price

Position of the observation at a given percentile L = (n+1) y/100

Quantiles and measures of central tendency are known as measures of location

Quantile: a value at or below which a stated proportion of the data in a distribution lies: As the sample size increases, the percentile location calculation becomes more accurate

Quartile: divided into quarters Quintile: Fifths Decile: Tenths Percentile: hundredths

Normal GDP: measured by current prices Pcurrent year * Qcurrent year

Real GDP: measured by constant prices Pbase year * Qcurrent year

Line chart: a graphical representation that connects a series of data points with a continuous line; It facilitates showing changes in the data and underlying trends

Scatter plot: display how two variables tend to change in relation to each other; Joint variation

Primary source of liquidity 1) ready cash balance 2) ST funds 3) effective cash flow management

Secondary source 1) renegotiating debt contracts 2) liquidating assets 3) bankruptcy/reorg

Embryonic: slow growth, high prices; high risk Growth: increasing demand; falling prices; low competition

Shakeout: Slowing growth; intense competition; Mature: little or no growth; high barriers to entry decline: negative growth; excess capacity; high competition

A top-down process that offers guidance and directs activities that seek to maximize the value of an enterprise is most likely an element of: risk governance. risk infrastructure. risk monitoring and mitigation. Solution

Solution A is correct. Risk governance is the top-down process and guidance that directs risk management activities to align with and support the overall enterprise. B is incorrect. Risk infrastructure refers to the people and systems required to track risk exposures and to perform quantitative risk analysis to allow assessment of a risk profile. C is incorrect. Active risk monitoring and mitigation requires pulling together risk governance, identification, measurement, infrastructure, policies, and procedures and continually reevaluating in the face of changing risk exposures and risk drivers.

Depository receipts: ownership in a foreign firm and are traded in the market of other countries in local market currencies.

Sponsored DR: greater reporting requirements; must register with SEC unsponsored DR: bank retains the voting rights

Issue rating considers a bond's seniority ranking (e.g., secured or subordinated).

The issuer credit rating usually applies to its senior unsecured debt.

Trimmed mean: Excludes a stated % of the lowest and highest value

Winsorized mean: substitute a value for the highest and lowest observations - Decrease the effect of outliers on the mean

Given the following observations: 2, 4, 5, 6, 7, 9, 10, 11 The 65th percentile is closest to:

With eight observations, the location of the 65th percentile is: (8+1)×65/100 = 5.85 observations The fifth observation is 7 and the sixth observation is 9, so the value at 5.85 observations is 7 + 0.85(9 - 7) = 8.7. (LOS 2.i).

If mutually exclusive event, P(AB) would equal 0

LOS 3.g

Cognitive error: -belief perseverance "RICCH" Representativeness bias Illusion of control bias conservatism bias confirmation bias hindsight bias

-processing error: "FAMA" Anchoring & adjustment mental accounting bias framing bias availability bias

The correlation between two variables is +0.25. The most appropriate way to interpret this value is to say: 1: a scatter plot of the two variables is likely to show a strong linear relationship. 2: when one variable is above its mean, the other variable tends to be above its mean as well. 3: a change in one of the variables usually causes the other variable to change in the same direction.

2 Correlation of +0.25 indicates a positive linear relationship between the variables—one tends to be above its mean when the other is above its mean. The value 0.25 indicates that the linear relationship is not particularly strong. Correlation does not imply causation. (LOS 2.n).

Industry concentration measures: 1) CRn: sum of the market shares of the largest N firms in a market --doesnt show potential threat; less affected by mergers; doesn't consider elasticity of demand

2) HH index ---doesnt show potential threat; doesn't consider elasticity of demand

Private capital 1) private equity: established profitable and cash generating companies a) leverage buyouts b) developmental capital/minority equity investing: less than controlling interest for mature companies c) venture capital (portfolio companies) - at the seed stage

2) private debt a)direct lending b) venture debt: often convertible c) Mezzanine loans - subordinate debt d) distressed debt

Oligopoly: 1) kinked demand curve --demand curve is more elastic above a given price than it is below the given price 2) Cournot: two firms (duopoly) both sell same amounts and same quantity ---perfect comp < its equilibrium price < monopoly

3) stackelberg: one firm is the leader, which charges higher price 4) Nash equilibrium - collusive agreement

Covariance: a measure of how two assets are move together; A positive covariance indicates that when one random variable is above its mean, the other random variable tends to above its mean as well

3.3 COV = 0, two variables have no linear relationship

The covariance of a random variable with itself is its variance of Ra; that is Cov(Ra,Ra)= Var(Ra) **The cov between the returns on two assets does not depend on order Cov(Ra,Rb)=Cov(Rb,Ra)

3.3 Covariance may range from negative infinity to positive infinity

Heat map is used to visualize the values of joint frequencies among categorical variables; degree of correlation between different variables

Bubble line chart: Visualizing trends in three or more variables over time

Q. One of the reasons aggregate demand curve is downward sloping is because a lower price level means that the real exchange rate: depreciates, making domestic goods cheaper in other countries and imports less competitive, resulting in a higher level of net exports. appreciates, making domestic goods more expensive in other countries and imports more competitive, resulting in a higher level of net exports. appreciates, making the country's exports and imports less competitive and leading to lower net exports.

A is correct. A lower price level results in a weaker real exchange rate, making domestic goods cheaper to people in other countries and imports less competitive, resulting in a higher level of net exports.

If a government increases its spending on domestically produced goods by an amount that is financed by an equivalent increase in taxes, the aggregate demand will most likely: increase. decrease. remain unchanged.

A is correct. Aggregate demand rises when the government increases spending by the same amount as it raises taxes because the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by $c (where c is the marginal propensity to consume). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.

According to the industry life-cycle model, companies in a mature industry are most likely to experience: high barriers to entry. fierce competition. low dividend yields.

A is correct. In the mature stage of the industry life-cycle model, brand loyalty and efficient cost structures will create barriers to entry. Fierce competition is a characteristic of the shakeout phase: Demand approaches market saturation levels because few new customers are left to enter the market. Because few growth opportunities are available in the mature phase, there is little need for capital investment, and thus greater amounts of earnings are paid out as dividends, increasing dividend yields. B is incorrect. Fierce competition is a characteristic of the shakeout phase, not the mature stage. In the mature stage, the remaining companies in the industry aggressively fight for market share. C is incorrect. Dividends increase in the mature stage, as there are little in the way of growth opportunities, and not much need for capital investment—a greater proportion of earnings are paid out as dividends, increasing dividend yields.

Q. Risk budgeting includes all of the following except: determining the target return. quantifying tolerable risk by specific metrics. allocating a portfolio by some risk characteristics of the investments.

A is correct. Risk budgeting does not include determining the target return. Risk budgeting quantifies and allocates the tolerable risk by specific metrics.

Sharpe ratio: the ration of mean excess return on portfolio P to the standard deviation of the returns of portfolio P SR = Rp-Rf / SDp

A measure of excess return per unit of risk, the higher the better (only valid for positive sharpe ratio)

When valuing a call option using the binomial model, an increase in the probability that the underlying will go up most likely implies that the current price of the call option: increases. remains unchanged. decreases.

B is correct. The probability that the underlying will go up is not part of the binomial model for pricing options. This probability is irrelevant because the options are priced using risk-neutral probabilities. These are derived by constructing a hedged portfolio in the absence of arbitrage opportunities.

Which of the following statements about kurtosis is least accurate? Kurtosis: A)is used to reflect the probability of extreme outcomes for a return distribution. B)measures the peakedness of a distribution reflecting a greater or lesser concentration of returns around the mean. C)describes the degree to which a distribution is not symmetric about its mean.

C The degree to which a distribution is not symmetric about its mean is measured by skewness

Q. Status quo bias is least similar to which of the following behavioral biases? Endowment Regret aversion Confirmation

C is correct. Both endowment bias and regret-aversion bias often result in indecision or inertia—a typical outcome of status quo bias, in which people prefer to not make changes even when changes are warranted.

Q. The characteristic of national consumer price indexes that is most likely shared across major economies worldwide is: 1 the geographic areas covered in their surveys. 2 the weights they place on covered goods and services. 3 their use in the determination of macroeconomic policy.

C is correct. Central banks typically use consumer price indexes to monitor inflation and evaluate their monetary policies.

In an inverted head and shoulders pattern, if the neckline is at €100, the shoulders at €90, and the head at €75, the price target is closest to which of the following? €50. €110. €125.

C is correct. Target = Neckline + (Neckline − Head): €100 + (€100 − €75) = €125

Q. Over the past month, the Swiss Franc (CHF) has depreciated 12 percent against pound sterling (GBP). How much has the pound sterling appreciated against the Swiss Franc? 12% Less than 12% More than 12%

C is correct. The appreciation of sterling against the Swiss franc is simply the inverse of the 12% depreciation of the Swiss franc against Sterling: [1/(1 − 0.12)] − 1 = (1/0.88) − 1 = 0.1364, or 13.64%.

Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price? Opportunity cost Lack of dividends Convenience yield

C is correct. The convenience yield is a benefit of holding the asset and generally exists when a commodity is in short supply. The future value of the convenience yield is subtracted from the compounded spot price and reduces the commodity's forward price relative to it spot price. The opportunity cost is the risk-free rate. In the absence of carry costs, the forward price is the spot price compounded at the risk-free rate and will exceed the spot price. Dividends are benefits that reduce the forward price but the lack of dividends has no effect on the spot price relative to the forward price of a commodity in short supply.

Q. A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the borrowed amount and the transaction costs, what was the return to the trader during the six-month period? 20 percent. 33.33 percent. 50 percent.

C is correct. The return is 50 percent. If the position had been unleveraged, the return would be 20% = (60 − 50)/50. Because of leverage, the return is 50% = 2.5 × 20%.

Numerical Data = Quantitative date: counted or measured *Discrete or continuous Discrete: countable units Continuous: take on any fractional value

Categorical Data = qualitative data *Nominal or ordinal 1: Nominal: labels that cannot placed in order logically 2: Ordinal: can be ranked in a logical order

Headline inflation: Price indexes that include all goods and services

Core inflation: Price indexes that exclude food and energy (subject to larger ST fluctuation) **relied on to determine public economic policy

PPE valuation: IFRS: Cost model or revaluation model GAAP: Cost model

Cost model: at amortized cost (historical cost - A/D - Impairment) Historical cost: Purchase price + shipping + delivery etc Revaluation model: at fair value - A/D

Floating rate notes: do not have a fixed coupon, and the rate is linked to an external reference rate - LIBOR **Almost all FRNs have quarterly coupons ***Less interest rate risk

Coupon rate = reference rate + quoted margin **coupon payments are paid in arrears. Coupon rate is based on the previous period's reference rate ***the rate must match the frequency with which the coupon rate on the bond is reset

Time tranching - Redistribute the prepayment risk 1) contraction risk: receiving principal payments sooner than expected 2) extension risk: later than expected

Credit Tranching - Redistribute the credit risk

Credit enhancement: Internal: 1) overcollateralization 2) cash reserve fund 3) excess spread account

External: 1) surety bonds (Insurance company) 2) bank guarantees 3) letters of credit: promise to lend money to the issuing entity if not enough cash to make the promised payment 4) cash collateral account

Flat price = Full price - accrued interest **Flat P also called clean price; full price = dirty price ** flat price - quotation

Full price = PV * (1 + r) ^(day/180)

Technical analysis: Projection on trading value -assess - price & volume - focus on supply demand -price reaction low -

Fundamental analysis: -intrinsic value -assess F/S -focus on value -quick price reaction

Inventory valuation: IFRS: Lower of cost or NRV NRV = SP - Completion costs - selling costs If market or NRV is less than carrying value, write down

GAAP: LIFO/Retail: Lower of cost or market Market = replacement cost (Market cost cannot be greater than NRV or NRV - PM) *No write up is allowed

Capitalized interest: interest that accrues during the construction of an asset

GAAP: reported as an outflow from investing activity IFRS: Can be operating, financing or investing cash flow

GDP Expenditure Approach GDP = C + I + G + (X - M) GDP = Consumer spending on goods and services + Business gross fixed investment + Change in inventories + Government spending on goods and services + Government gross fixed investment + Exports - Imports + Statistical discrepancy0

GDP Income approach GDP = C + S + T

Cash flow statement: GAAP Operating activity: interest/dividend received; Purchase/selling trading securities; taxes paid Investing: Purchase/selling equity/debt investments; loan inflows/outflows Financing: Dividends paid; proceeds from issuing stock; treasury stock purchase

IFRS is more flexible; Income tax is reported as operating activities unless the expense is associated with investing or financing transaction

Coefficient of variation: Measure the relative dispersion of the samples CV = SD / MEAN **The lower the less the risk ***CV has no units of measurement

LOS 2.J

Dispersion: The variability around the central tendency Dispersion usually used to address the risk: Range; mean absolute deviation (MAD); Variance; standard deviation

LOS 2.J

Mean absolute deviation (MAD): Average distance between each data point and the mean *Interpret: individual return will deviate % from the mean return of % |xi - Xmean| / n

LOS 2.J

Sample variance: (xn-xmean)^2 / (n-1) Standard deviation: square root of the sample variance

LOS 2.J

The common theme in finance and investments is the tradeoff between reward and variability, where the central tendency is the measure of the reward and dispersion is a measure of risk

LOS 2.J

For values that are not all equal, harmonic mean < geometric mean < arithmetic mean. *Cost averaging

LOS 2.g

Harmonic mean: average cost of shares purchased over time.

LOS 2.g

A probability is the fraction you expect an event to occur, and the odds for an event is the probability that an event will occur divided by the probability that the event will not occur Given probability P(E): Odds for E = PE/(1-PE)

LOS 3 Odds against: (1-PE)/PE

Confusion Matrix: two possible outcomes - display the number of occurrences predicted and the number actually observed

LOS2d

Contingency Table: two dimensional array - analyze two variables at the same time Joint frequencies & Marginal frequency

LOS2d JF: the data displayed in the cells MF: The corresponding sums

Kurtosis: measure of degree to which a distribution is more or less peaked than a normal distribution Lep: more peaked - have more returns clustered around the mean and more returns with large deviation from the mean; Excess Kurtosis > 0; kurtosis > 3 Plat: Less peaked Meso: Same

Lep: A large deviation from the mean return is an increase in risk

Liquidity risk: two main issuer-specific factors that affect this risk 1) size of the issuer (the amount of publicly traded debt an issuer has outstanding) 2) credit quality of the issuer

Market liquidity risk refers to a widening of the bid-ask spread on an issuer's bonds. Lower-quality bonds tend to have greater market liquidity risk than higher-quality bonds, and during times of market or financial stress, market liquidity risk rises.

Inventory valuation: 1) specific identification: each unit sold is matched with the unit's actual cost; this method is used when inventory items are not interchangeable and costly (e.g., jewelry)

Periodic inventory: no detailed records of inventory are maintained; inventory acquired is reported in a purchases account

Which of the following errors would most likely be a result of overfitting a machine learning model? Inability to recognize relationships within the training data A predictive model that treats true parameters as if they are noise The discovery of unsubstantiated patterns that lead to prediction errors

Solution C is correct. Overfitting a model can lead to the discovery of unsubstantiated patterns that lead to prediction errors and incorrect output forecasts. A is incorrect. The inability to recognize relationships within the training data most likely results from underfitting the model. B is incorrect. The development of a predictive model that treats true parameters as if they are noise is most likely a result of underfitting the model.

Excess kurtosis = Kurtosis minus three If excess kurtosis > 0 - lep if < 0 plat

The greater positive kurtosis and more negative skew in returns distributions indicates increased risk

Execution instructions 1) market order 2) limit orders 3)all or nothing 4) hidden orders 5) iceberg order

Validity 1) day order 2) good till cancelled 3) immediate or cancel 4) good on close 5) stop orders

Quantity theory of money MV = PV M: nominal money supply V: velocity of money in transaction P: average price level Y: Real GDP

Velocity of money and real GDP change only slowly Change of money supply cause fluctuation of price level, but doesn't affect the real output in long run

An investor sells a bond at the quoted price of $98.00. In addition, she receives accrued interest of $4.40. The flat price of the bond is equal to the: par value plus accrued interest. agreed-on bond price excluding accrued interest. accrued interest plus the agreed-on bond price.

b

Q. Which of the following best describes activities that are supported by a risk management infrastructure? Risk tolerance, budgeting, and reporting Risk tolerance, measurement, and monitoring Risk identification, measurement, and monitoring

c