T-distribution
The student’s T-distribution is a bell-shaped probability distribution symmetrical about its mean. It is considered the best distribution to use for the construction of confidence intervals when:
Calculation and Interpretation of Confidence Intervals
Confidence interval (CI) refers to a range of values within which statisticians believe the actual value of a certain population parameter lies. It differs from a point estimate which is a single, specific numerical value.
Portfolio Approach to Investing
Investors have to ensure their investments achieve their future needs. A portfolio approach to investment decision-making is important regardless of future financial goals. It enables an investor to create a diversified investment portfolio. Portfolio Diversification The benefits of a diversified portfolio…
Types of Investors
The needs of investment clients vary widely, but we can group investors into two broad categories – individual and institutional investors. Different investors will have varying investment time horizons, tolerance for portfolio risk, income, and liquidity needs. Individual Investors Individual…
DC and DB Pension Plans
Employees of both private and public companies often save and invest for retirement via defined contribution (DC) pension plans in which they assume the investment risk. In the case of a defined benefit (DB) pension plan, the responsibility and investment…
Portfolio Management Process
Upon determining the type of investment client and their financial goals, a portfolio manager takes a series of steps to ensure the client meets their goals and needs. 1. The Planning Step Once a portfolio manager has established a client’s…
Using a Timeline to Model Cash Flows and Solve Time Value of Money Problems
A timeline is a physical illustration of the amounts and timing of cash flows associated with an investment project. Cash flows that are regular and of equal amounts can be modeled as annuities. In such exam problems, all you have…
The Internal Rate of Return
The internal rate of return is the discount rate that sets the present value of all cash inflows of a project equal to the present value of all cash outflows of the same project. In other words, it is the…
Money-weighted vs. Time-weighted Rates of Return
Money-weighted Rate of Return The money-weighted rate of return (MWRR) refers to a portfolio’s internal rate of return. It is the rate of discount, r, at which: $$ \text{PV of cash outflows} = \text{PV of cash inflows} $$ The money-weighted…
Asset-based Valuation Models
An asset-based valuation of a company uses estimates of the market or fair value of the company’s assets and liabilities and, thus, is most appropriate for companies with a high proportion of current assets and current liabilities and few/insignificant intangible…
