Has anyone started one that they might be willing to send out?
My buddy Schweser did, talk to him.
what’s that?
Here’s some random things that I’ve done… Quant: Correlation = covariance/(SD1 x SD2) T-statistic = (correlation x sqrt(n-2))/(sqrt(1-correlation^2)) T-statistic = (actual – test)/SEE Linear Regression assumptions : Linear relationship exists between dependent and independent variables Independent uncorrelated with residuals Expected value of residuals is zero Variance of the residuals is constant Residual is independently distributed (not correlated) Residual is normally distributed There is no linear relation between two or more independent variables Error terms are uncorrelated SEE = sqrt(MSE) = sqrt(SSE/(n-2)) R^2 = (SST – SSE)/SST MSR = RSS/k (k=number of variables) MSE = SSE/(n-k-1) F-Stat = MSR/MSE p-value = smallest level of significance for which the null hypothesis can be rejected = if greater than the significance level, the null can not be rejected Adjusted R^2 = 1-[[n-1)/(n-k-1)] x (1-R^2)] Heteroskedasticity = variance of residuals is not constant across observations Unconditional not a problem, conditional is Standard errors are usually smaller, making t-tests too large, F-tests also unreliable Serial correlation = residuals are correlated with each other Standard errors too small for positive serial correlation, same results as heteroskadasticity (negative serial correlation has reverse effect) Multicollinearity = independent variables are correlated with each other Significant F-statistics but insignificant t-tests Time series must be covariance stationary Expected value of the time series is constant over time Volatility around its mean does not change over time Covariance of the times series with leading or lagged variables of itself is constant Autoregressive model = dependent variable is regressed against lagged values of itself Test that residuals are not serially correlated – calculate the autocorrelations and test whether they are significant Mean reversion = bo/(1-b1) – 0 equals covariance stationarity Root Mean Squared Error (RMSE) = used to forecast accuracy of out-of-sample (low better) Random walk = predicted value in one period equals predicted in another plus random error (not covariance stationary) – unit root is solved by using the first differencing process (models the change in the value of the dependent variable rather than the value of the dependent variable) – Dickey Fuller tests for covariance stationarity Seasonality = requires examination of residual autocorrelations (if monthly, estimate AR(1) model and test 12th autocorrelation) - to correct for seasonality, add an additional lagged variable ARCH = residuals in one time series are dependent on residuals in another time period – to test, regress squared residuals from one period on first lag of squared residuals from another period Cointegration = two times series are economically linked (no problemo) Econ: Rule of 70 = how many years it will take GDP to double = 70/growth rate in GDP Sources of economic growth = land, capital goods, labor, entrepreneurial ability Incentive system = markets, property rights, monetary exchange 1/3 Rule = at a given level of technology, a 1% increase in capital results in 1/3% increase in real GDP Faster economic growth = savings and investment in new capital, investment in human capital, discovery of new technologies Classical growth theory = real GDP growth is temporary – GDP goes above subsistence level, population explosion occurs, and GDP goes back down to subsistence level Neoclassical = without technological change no growth in real GDP will occur – pop. growth is indep. of econ. growth New growth theory = economic growth continues indefinitely as technology advances because decreases in the real rate intensify the incentive to discover new products Creative response = conforming to the letter but not intent of the law Feedback effect = consumer’s behavior is changed as a result of new regulation Deregulation = bad short term, positive long-term Comparative advantage = trading partners should produce (and trade) goods for which they are the low-opportunity-cost producer Trade restriction = only developing industries, to stop dumping, and national defense is acceptable Nominal exchange rate = real exchange rate multiplied by ratio of two price levels Currency demand increases when = demand for that country’s exports increase, nominal interest rates increase, expected future value of the currency increases (supply is opposite, which explains why rates are so volatile) Purchasing power parity = same goods should cost the same in different countries; requires that exchange rate adjust so that prices stay even Interest rate parity = exchange rates must change so that return on investments with identical risk will be the same worldwide, i.e. exchange rate differences should offset interest rate differences Spot x [(1+counter currency(n/360))]/(1+base currency(n/360)) BOP = current accounts + capital account + official reserves equals 0 Current account = IM/EX, net income, and net gifts, and unilateral transfers Capital account = international investments Official reserve = government held foreign currencies Triangular arbitrage = “up the bid and down the ask” (blow me) Forward premium = (forward – spot)/(spot) x (360/t) Covered interest arbitrage = trading strategy that exploits currency positions when interest rate parity is not satisfied Currency appreciates when = income grows slower, inflation is lower, real interest rates re higher, and the investment climate is better (all factors are relative to trading partners) The impacts of expansionary monetary policy are = currency depreciates, current account deficit, and a financial account deficit The impacts of expansionary fiscal policy are = currency is mixed, current account deficit, and a financial account surplus Absolute PPP = price of a basket of similar goods between two countries (prices should be the same after adjusting for the exchange rate) Relative PPP = exchange rate between two countries will adjust to offset inflation rates (exchange rate is proportional to the ratio of the two price indexes) = spot rate x (1 + counter currency)/(1 + base currency) International Fisher Relation = interest rate differential should be equal to the expected inflation differential (countries with higher expected inflation will have higher nominal interest rates); real interest rates are stable over time and equal across international boundaries; the nominal rate = the real rate multiplied by the expected inflation Uncovered interest rate parity = combination of PPP and International Fisher; links spot exchange rates, expected spot exchange rates, and nominal interest rates; spot rate times (1+counter)/(1+domestic) = expected spot exchange rate *this equation uses nominal rates* Foreign exchange expectation relation = forward rate is an unbiased predictor of expected future spot rate; forward discount is unbiased predictor of expected change in the spot rate GDP – total market value of all final goods and services produced in a country; need to subtract out indirect taxes and add government subsidies GNI – measure of the total goods and services produced by citizens of a country NNI – equal to GNI less depreciation GDP + net property income from abroad = GNI GNI – depreciation = NNI Output data = collected in both current and constant prices Expenditure data = measured in current prices and then adjusted in a manner similar to output data Income data = gathered in current prices and converted into constant prices using the price index FSA: Intercorporate Investments Minority passive = less than 20% ownership without significant influence – comprises held to maturity, held for trading, and available for sale Held-to-maturity = dividends and interest income are recognized in the income statement and securities are reported on the balance sheet at amortized cost (fair value changes are ignored) Held-for-trading = reported on balance sheet at fair value and unrealized gains and losses are reported in income statement Available-for-sale = reported at fair value, but unrealized gains and losses are reported in stockholder’s equity Minority active = 20-50% and significant influence, uses equity method – pro-rata share of earnings increase the investment account on the balance sheet and are recognized in the income statement – NOT DIVIDENDS, THEY ARE SIMPLY BACKED OUT OF THE BALANCE SHEET ACCOUNT Controlling = more than 50%, uses consolidation method – all assets, liabilities, revenues, and expenses are combined with the parent – if less than 100% ownership, minority interest account is necessary for the pro-rata share of assets and earnings not owned by parent Joint venture = 50/50 split, used proportionate consolidation for IFRS and equity method under GAAP – pro rata share of assets, liabilities, et.al Purchase method = assets and liabilites are recorded at fair value, with excess of purchase price recorded as goodwill – prior results not restated; results in higher assets because they’re restated at fair market value, and the higher depreciation leads to lower net income, although equity is generally higher because book value is replaced with purchase price Pooling method = firms are combined using book values and prior results are restated – no goodwill is created, and pooling generally results in more favorable results than purchase (higher NI, profit, ROA, and ROE) VIE’s = must be consolidated by primary beneficiary if it receives the majority of the rewards or assumes the majority of the risks – GAAP allows QSPE; VIE’s allow lower cost of capital, financed primarily with debt – equity investors have limited risk FSA: Pensions and Share-based Compensation Defined contribution = firm contributes a certain sum to the retirement account; very straightforward Defined benefit = promises to make periodic payments to employee after retirement, usually based on years of service and salary at retirement; employer assumes investment risk PBO = actuarial PV of future pension benefits earned to date, based on expected future salary levels, firms need to provide a reconciliation between this and plan assets ABO = PBO but ignoring future salary increases, used to determine whether a minimum liability allowance must be reported VBO = amount of the ABO to which employees are entitled based on the company’s vesting schedule Current service cost = PV of benefits earned by employees during the current period Interest cost = increase in the PBO due to the passage of time Expected return on plan assets = reduces pension expense Amort. Of deferred gains and losses = allocation based on changes in actuarial assumptions and differences in the expected return and actual return on plan assets Amort. Of prior service cost = allocation of plan amendment that provided retroactive benefits If economic pension expense > firm’s contribution, viewed as a source of borrowing; the reverse is also true; if significant, reclassify these activities from operating to financing cash flow Net pension or asset is reported on balance sheet (funded status for GAAP; IFRS reports funded status after eliminating unrecognized past service cost and deferred gains and losses) Economic pension expense is calculated by summing all the changes in a PBO for the period and then subtracting the actual return on assets; also equal to the change in funded status excluding the firm’s contributions For analytical purposes, service cost should be reported as operating expense, and interest cost and actual return on assets should be reported as nonoperating items Share-based comp = based on fair value at grant date Local currency = currency of the country that the subsidiary operates in Functional currency = currency of the primary economic environment in which the entity operates (generates and expends cash) Reporting currency = currency that financial statements are prepared in All-current method = functional and pres differ; subsidiary is relatively independent of the parent; translation gains and losses are reported in equity in the CTA account (makes equation balance) All assets and liabilities are translates at current rate, stock and dividends at historic rates, and revenues and expenses at average rate Pure BS and pure IS are unchanged under all-current method; mixed ratios are changed Temporal method = functional currency is same as reporting currency; subsidiary is well-integrated with parent Monetary assets and liabilites are at current rate Nonmonetary assets and liabilities, common stock, dividends, COGS, depreciation, and amortization are remeasured at historical rate All other revenues and expenses are remeasured as average rate Gains and losses are reported in income statement Needed to use in a hyperinflationary environment (more than 100% every three years) under GAAP; under IFRS the statements are first restated for inflation and then translated using all-current) FSA: Ratio Analysis Operating cash flow = more reliable than earnings because it’s less subject to estimates and judgments; over time there should be a fairly stable relationship between the growth of operating and cash flow and earnings; if not, earnings manipulation is a possibility; earnings growth is not sustainable without the support of operating cash flow over the long-run Fair value hedge = offset exposure to changes in fair value of an asset; gains and losses are recognized in the income statement Cash flow hedge = offset exposure to variable cash flows; gains and losses are reported in equity, and then in the income statement once the transaction affects earnings Net investment hedge = offset exposure from a foreign subsidiary; gains and losses are recognized in equity along with translation gains and losses ALL THREE HEDGES RECOGNIZE INEFFECTIVE PORTIONS IN THE INCOME STATEMENT Cash basis of accounting = revenues and expenses recognized when cash comes in or leaves Accrual basis = revenues are recognized when earned and expenses are recognized when incurred; provides more timely and relevant information to users There’s an accrual component and a cash component; there should be a lower weighting applied to the accrual component (because of lower persistency) Mechanisms to prevent manipulation = audits, board of directors, certification by senior management, class action litigation, regulators, general market scrutiny Balance sheet accruals ratio = (NOAe - NOAb)/[(NOAe+NOAb/2] Cash flow ratio = (NI-CFO-CFI)/[(NOAe+NOAb)/2] Earnings tend to revert to the mean; larger accrual component means mean reversion happens faster Manipulation techniques = revenue recognition, expense recognition, balance sheet manipulation, cash flow statement manipulation Revenue recognition = large change in receiveables and unearned revenue; increasing DSO, and compare revenue to actual cash collected Expense recognition = large changes in fixed assets and inventory, increasing DOH, LIFO liquidation, abnormal depreciation expense, core operating margin (sale-COGS-SG&A)/sales Balance sheet = capitalize operating leases, look for lack of goodwill impairment Cash flow statement = compare growth of operating leases with asset growth, be alert for a decrease in discretionary spending, especially near year end 7.27.a FCF: FCF is for control perspective, DDM is minority FCFE is FCFF less the interest shield and with any debt borrowings / paybacks (don’t forget to add back accrued taxes in both cases) Dividends, share repurchases, and share issues have no effect on either – changes in leverage have only a minor effect on FCFE and none on FCFF (decrease in current year and increase forecasted FCFE in future years) FCFE is better for a stable capital structure and easier to use, FCFF is for levered companies Market Based Valuation: P/E: Earnings power is primary determinant of investment value P/E significantly related to stock returns Increases as g increases or r decreases Justified Trailing P/E = Po/Eo = (RRxg)/(r-g) Justified Leading P/E = Po/E1 = (RR)/(r-g) P/B: Positive even if company has negative earnings More stable than EPS Good for liquidation Misleading when there’s significant difference in asset size Increases as ROE increases or the spread between ROE and r increases Justified P/B = Po/Bo = (ROE-g)/(r-g) P/S: Revenue’s always positive Not easy to distort Not as volatile as P/E multiples Doesn’t capture changes in cost structure Increases as profit margin increases or g increases Justified P/S = Po/So = [(Eo/So)(1-b)(1+g)]/(r-g) P/CF: Harder to manipulate than earnings More stable than earnings Increases as g increases or r decreases (same as P/E) Lease affected by differences in accounting standards CFO: Addback interest tax shield to make it adjusted CFO PEG Ratio: (P/E)/g – measures the trade-off between P/E and the dividend growth rate Low PEG = cheap, high = expensive General rule is that they fall in the range of one to two Can not be used for companies with negative or 0 growth (undefined) Residual Income: NI – equity charge (stockholder’s opportunity cost of capital) BV + discounted RI each year Good because current BV makes up large amount of future value Not as sensitive to growth and cost of capital assumptions Recognizes value earlier Vo = Bo +[[(ROE-r) x Bo]/(r-g)] If ROE = r, market value = book value G = r – [[Bo x (ROE – r)]/(Vo-Bo)] Higher persistence – low payout ratio, historical persistence Lower persistence – high ROE, nonrecurring items, accounting accruals For multistage, RI/(1+ r – persistence factor) Economic Value Added: EVA = NOPAT – (WACC x Invested Capital) Capitalize and amortize R&D charges and add back to earnings Add back charges on strategic investments Capitalize goodwill and amortization Eliminate deferred taxes and only include cash taxes Treat operating as capital leases and adjust non-recurring Market Value Added: Difference between market value of a firm’s long-term debt and equity and the book value of invested capital MVA = market value – invested capital
yes we need one thread, where ppl only post formulas, no explanation.
Schweser Quicksheet
thanks skillionaire
bump
care to explain your triangular arbitrage comment? Is that a big F-you to the CFA? or some special way to remember the phrase… haha. either way I laughed out loud.
bump