Quantitative Methods

Accept proj w IRR > than firms reqd IRR; When NPV contradicts IRR -> Choose proj. w higher NPV!
NPV method assumes cfs are reinvested @ Opportunity cost of capital; this approach represents mkt
based cost of capital and is reqd rate of return for shareholders of the firm.
IRR method assumes cfs reinvestment rate is IRR.
HPR = end-beg / beg (or end/beg-1)
Money Weighted = IRR of portfolio (use the CF calc method)
Time weighted -> measures compound growth rate (break it down into periods *geometric return)
Money weighted gives more weight to period w more money in account. If funds added to portfolio just
before period of poor performance, MW < TM. If funds added just before period of high returns,
MW>TW. TW is a better measure of managers ability to select investments. MW is better measure if
manager has complete control over inflows and outflows of money into account.

Band Discount Yield: BDY = Discount/face value X 360/days (simple interest; FACE V not purch price)
HPY: end beg / beg OR (end/beg) 1 maybe?
% discount = fv-price / FV*
EAY: [(1 + HPY)365/t ]- 1 (annualized valueaccount for compound interest. )
MMY: = HPY X (360/days)
BEY: 2 X effective semi-annual yield OR HPY X (365/days) .* Double check this for certain
EAR = (1 + Periodic Rate) m - 1
Geometric Mean Return:

Harmonic Mean =

Harmonic Mean < Geometric Mean < Arithmetic Mean

Population Variance:

Pop Stnd. Deviation

Sample Variance:

Sample Stnd. Deviation

Mean Abs deviation =

Chebyshevs inquality: 1 1/k2 = % of distribution that lies within

Coefficient of Variation = CV = sx / x

= of x / avg value of x

Measures risk per unit of return

Nominal Risk Free Rate = real rate + expected inflation

Required rate = nominal risk free rate + default premium + liquidity premium + maturity risk premium
Scales:
Nominal = Random; Ordinal = ordered; Interval = Relative ranking; Ratio = ranking w equal differences
Sharpe Ratio = rp rf / p (bigger is better)

Distributions:
Symmetry -> deviations of ive and +ive are just as likely (mean = median = mode)
Skewness refers to the extent that distribution is not symmetrical.

+ive skewed : mean> median > mode

-ive skew: mean < median < mode

Kurtosis measures peak

Leptokurtic = more peaked; platykurtic = less peaked; meso = same as normal
Sample skewness & Kurtosis = (same as variance except each deviation is 3 and 4 instead of 2)

Covariance = measure of how 2 assets move together (range ive to +ive infinity)
Correlation coefficient = measures strength of linear relationship (ranges from 1 to +1); = covariance /
product of two s (NOT Variances 2)

Port Return:

CoVariance

Portfolio Variance:

Probability:
Empirical probability = past data; priori = formal reasoning/inspection; subjective = personal judgement
Odds = p occurring / (1-p occurring)
Multiplication rule (A and B)

Addition rule (A or B)

Pg 205 onwards important stuff!!!

Bayes Formula (pg 220*)

Order Patters:

Order does not matter:

nPr = n! / (n-r)!

nCr = n! / (n-r)! r!

binomial distribution:
p(x) = [ n! / (n x)! x!] * p x * (1-p) n x

probability distribution = sum of the prob. of all outcomes add to 1

discrete random variable = outcomes can be counted
continuous random variable = cannot be counted (virtually infinite and p of any one = 0)
tracking error = difference between portfolio return and a benchmark
time-series data = over a period of time; cross sectional data = at a single point in time
Normal Distribution pg 253:
U +/- z

z = (observation pop mean) /

Standard error = x = /

=xu/

Confidence intervals: z/ /

OR

Normal Dist. w known variance

Normal Dist. w unknown variance
Non - Normal Dist. w known variance
Non - Normal Dist. w unknown variance

z/ S/
Z
T
n/a
n/a

Z
T
Z
T

Test statistic = (sample statistic hypothesized value ) / standard error of sample statistic
Type 1 error = rejecting null when its actually true : p (type 1) = signif level (eg. 5%)
Type 2 error = not rejecting the null when its actually false: Power of a test = 1- P (type 2 error)

Confidence Intervals
{ sample stat (crit. value) (std. error)} pop. parameter { sample stat (critical v) (/ )}
- critical value test statistic + critical value
T-test: difference of means; must be independent; must be normally distributed
Paired comparisons: test whether means of differences between observations between two
samples are different
T = - d2 / 2
Chi-Squared (X2): test concerning variances of 2 Normally distributed populations
X2 = (n-1)2 / 2
F-Distribution: testing equality of Variances of 2 normally distributed populations based on 2
independent random samples.
F = S12 / S22 (S12 is the larger one, numerator is larger)

Technical Analysis:
Downtrend: lower lows and lower highs

Up trend : higher lows and higher highs

Breakout and breakdown

Support and resistance

Change in polarity -> breached resistance becomes support and vice versa
Reversal Patterns
Head and Shoulders and Inverse Head and Shoulders
Double and Triple Tops and bottoms
Moving averages; short-term crosses long term.
Bollinger Bands;

Contrarians

Oscillators: Rate of change: diff. between latest closing and N periods

Relative Strength: rate of increases to decreases
Moving averages; Stochastic Oscillation
Put Call Ratio: Put / Call Volume increases are negative for value????
Elliot Wave Theory: up 5 waves, down 3 waves
Fibonacci Numbers: add the previous two numbers to produce the next. Ratios higher over lower?