I am creating ‘that thread’ where everyone posts notes, phrases, acronyms, tips on topics and so forth. The goal of this thread is to be ‘that thread’ that you print out and take with you to the exam center or read on your phone prior to entering. Let’s get it started right now. Please keep off topic comments off this thread as well. Starting tomorrow, I’ll begin with equity items. Contribute as you see fit.
Minsky Framework: Stable econ moves to greater instability in 3 steps HSP Hedge Unit (30 yr fixed mortgages – safest) Speculative Unit (Int only mort w/ balloon = to original principal – riskier than a 30 yr fixed) Ponzi Unit (neg amort loans – riskiest) Think: The U.S. is currently in the Ponzi/Madoff unit phase (both riskiest and neg amort loans).
planner: Great post… had completely forgotten about Minsky.
Two central questions provide the basis for the firm’s choice of a competitive strategy: Industry attractiveness: Is the industry attractive in terms of long-term profitability potential? (barriers to entry via regulation, high start up costs, etc) Competitive advantage: What determines a firm’s relative competitive position within an industry? (low cost leader ie walmart or brand loyalty ie Harley, etc) These can be analyzed through Porter’s Five Forces: 1. Threat of new entrants. (competition from copycats as rapid growth becomes visible) 2. Threat of substitutes. (generic crap) 3. Bargaining power of buyers. (Many sellers, 1 buyers = lowest bid) 4. Bargaining power of suppliers. (1 supplier, many companies needing supplies = highest bidder) 5. Rivalry among existing competitors. (especially copycat’s who make generic products to the good idea your firm had, example Rollerblades) NON PORTER FORCES 1. Gov Policies 2. Complement products 3. Innovation/techonology 4. Industry Growth
**Economic Income = after tax operating cash flow - econ depreciation (ec depr = decline in inv’s value) **Economic Profit = NOPAT - $WACC (NOPAT = EBIT (1- tax rate)) and $WACC is WACC x capital)
Few notes I took. RMSE - Lower is better. Square root of MSE, one wants low amount of errors. This is to compare the predictive accuracy of two separate autoregressive models. This is tested with in sample data. Random Walk - Unit root - b1 = 1 which makes the mean reverting level undefined. b0/1-b1 and you can’t divide by zero. Random walk, like a drunk dude stumbling after bar close, past stumbles are no indication of future stumbles. He won’t revert to a straight line when ordered to on a dwi stop either. With no mean reverting level, time series is nonstationary. Unit Root Random Walk’s cure is First Differencing. New dependent variable is difference of x1 and x2. Other In AR Model coefficient must be <1 If coefficient = 1 or is greater, you get a random walk and model does not work. Use this AR Model rule to test seasonality. If seasonality is present, one needs to incorporate lags and use the AR2 Model. After including lagged variables, check the T stats to be sure they are LESS THAN 2 which means they are not significant. Nonstationarity - Critical assumption of time series is violated. Test- Plot data, run AR model and test correlations, Perform Dickey Fuller test BEFORE running AR model. Check for Unit Roots Both covariance stationary - OKAY Only independent or dependent variable covariance stationary - NOT OKAY Neither time series is covariance stationary - Probably OK, check cointegration Cointegration - two time series are related to macro variables that follow same trend and relationship is constant. These were my rough notes I took late last night. Hopefully it helps clear up some of the convoluted quant talk that is in the curriculum and notes.
Swaption Payoffs: 1. Enter at the market rate 2. Enter into a pay fixed (payer swaption) or receive fixed (receiver swaption) at the strike rate. 3. Receive the netted values of 1 and 2 above 4. Cash Settlement which is Number 3 discounted to the present value.
Yoinked from Dear LOS 43b., I hate you. Long story short for this LOS: Your job is to calculate both FCF in nominal and real terms: FCF = NOPLAT + Depr - WCInv - FCInv and then discount it using the appropriate discount rate using DCF model. Depr does not need any adjustment. (So you compute nominal Depr from nominal terms, real Depr from real terms.) Begin with FCInv, which is given by: FCInv = Change in gross PP&E + Depr Calculate real FCInv first. Nominal FCInv = real FCInv x Inflation Index. Inflation Index = (1+I_{1}) x (1+I_{2}) … x (1+I_{k}), where I_{j} is the inflation for the j-th period. Then calculate NOPLAT: NOPLAT = EBITA - Tax Expense The key here is that real tax depends on nominal tax: real tax = nominal tax / Inflation Index At last, calculate WCInv: WCInv = Change in NWC Similar to tax expense, real WCInv is dependent on nominal WCInv: real WCInv = nominal WCInv / Inflation Index Calculate FCF for each period into your calculator using CF function, enter the appropriate discount rate (real WACC for real FCF, nominal WACC for nominal FCF). One vignette down on the exam!
- P-U-F-E Other Comprehensive Income Pensions: additional minimum pension liability Unrealized: gains or losses on available-for-sale securities Foreign: currency exchange translations, gain or losses on foreign currency hedges Effective: portion of cash flow hedges, unrealized gain or losses Phrase to remember - “Puffy wants to comprehend his income, yo!” --------------------------------------------------------------------- FRAT and ELF ELF (not any elf, but one holding a wad of cash in his hands) eLF’s live in temprate climates and are of small measure (Remeasure) FRAT= Functional to Reporting is All Current (Temporal Method) Also, the FRAT reminds me of CTA since FRAT and CTA have similar letters eLF= Local to Functional (Reporting) The wad of cash in the elf’s hand represents monetary assets that are recorded at Current Rates and non-monetary at historical ------------------------------------------------------------------------------ remembering contango vs backwardation it takes two to (con)tango, so the joy in your “futures” are “higher” than what it is now as you’re dancing in the "spot"light -------------------------------------------------------------------------------- “Bullsh*t IS your Current Average.” All current method BS = current rate, temporal = avg. rate. stupid but works for me. ------------------------------------------------ for int’l ops going down the line, from b/s to i/s like the schweser powerpoint temporal = Call Her Hillary Manchester, And Hear Her Mother all current = Can Christie Hear Colin, About Another Anniversary Altogether? -------------------------------------------------------------------------------------------------- I had been struggling with the Forward valuation on equity indexes and currency: “Spot the foriegner when in DC” - for denominator on Currency val…leaving Forward/DC “(risk) Free the Forwards!” - for denominator on Equity index val…leaving Spot over div yield ----------------------------------------------------------------------- call minus put = SKIRT c - p = S - K / (1+R)^T ------------------------------------- For unanticipated expansion in fiscal policy - FADS Fiscal = Appreciating currency, Deficit current account, Surplus financial account For unanticipated expansion in monetary - opposite of all of the above ------------------------------------------------------------------------------------------ FMV of Planned Asset = Beg FMV of Plan asset + A, B , C Actual return -Benefits paid + Contributions. ------------------------------------------------------------------------ Ending PBO Beg PBO + (SIP No Beer) Beg PBO + SerCost + Int Exp +/-Prior Scost +/_ Nett Actual G/L -Benefits Paid ------------------------------- =Ending PBO ------------------------------------------------------------------------------ Bid / Ask confusion… Schweser way… Up the bid and down the ask AFers Way … Up the BO*BS and down the AS* ---------------------------------------------------------------- For the prudent rule: CLICS - Caution, Loyalty, Impartiality, Care, Skill ------------------------------------------------------------------------ Courtesy Stalla : Investment policy statement PEF - Planning Execution and Feedback in Planning COPES - Constraint, Objectivity, Policy stmt, Expectation (of capital market - Mean/Variance analysis), Strategic Asset Allocation. Objectivity R&R - Risk and Return Constraints - TURTL - Time horizon, Unique Needs, Regulatory/legal req, Tax and Liquidity constraint ---------------------------------------------------------------------------------------------------------------- Built up Method (Real Estate): RRRL = Risk Free, Risk Prem, Recapture Prem, Liquidity Prem ----------------------------------------------------------------------------------------------------------------- heterodastictiy - detect with bush pagan, correct with white h bp w = high blood pressure in white men autocorrelation - detect with durbin watson correct with hansen ac dw h = air conditioner, dishwasher heater (all appliances) Multicollineality - detect f test significant, t test insignificant - correct with drop X variable mc fs ti drop x = mc hammer’s fist dropping X (that’s a bit strained but the best i could come up with. ---------------------------------------------------------------
Dupont… NI/EBT * EBT/EBIT * EBIT/SALES * SALES/ASSETS * ASSETS/EQUITY Since each denominator is the next numerator, you only need to remember NI and the denominators… I remember by using the phrase “Never Ever Eat Sour Apples, Ever” There are two E’s, so just remember, “taxes always come first” ie ebT before ebit sustainable growth rate is: g= ROE * RR pronounce “ROE * RR” as “rower”… so you want to find the “grower” you need the “rower” I don’t know if those will help you guys, but if they do let me know I have loads more
Nice job on the EM, eltia.
to remember porters five forces: Every Stock Buyer Sells Rights Entrants Substitutions competition among Buyers competition among Suppliers Rivalry among firms
How to remember the “Greeks” in option pricing. Part of this is attributed to another poster on this forum (who I have forgotten his name). There are five input to BSM: asset price, exercise price, risk free rate, volatility and time horizon. Of these inputs, eXercise price is not related to the Greeks (remember the “X” for crossing it out on the list). The rest can be associated as follows: Volatility = V for Vega Time = T for Theta risk free Rate = R for Rho The remaining input is asset price, which can only be associated with Delta. Gamma is the first derivative of Delta.
CFO = 0 Current Acct + Financial Acct + Official Reserve = 0
from SS 18 International Asset Pricing AIDE: Appreciation helps Importers; Depreciation helps Exporters
To evaluate the capacity to pay for high yield corporate bond issuer, one should use equity valuation framework as yield on corporate bond is highly correlated with stock dividend returns. Note: this is not in SchweserNotes but can be found in CFAI text.
Multicollinearty The “ll”'s in the word look like Type II. Remember that Multicollienarity increases the probability of a Type II error. The others increase Type 1
Actually, autocorrelation can cause both Type I and Type II errors (depending on whether it is positive or negative autocorrelation). The same to heteroskedasticity (small residual errors cause Type I; large residual errors cause Type II).
yikes. i need to make some adjustments to my flash cards. thanks for the clarification eltia. autocorrelation positive is type 1 and negative type 2 no?