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Author: Bill Campbell
Singer-Terhaar Model
So . . . you woke up this morning and said to yourself, “I feel like estimating the risk premium for an equity market. But not just any old equity market. I want to estimate the risk premium for an equity market that is only partially integrated with global markets.” Deep down, you’re a thrill…
Probability Distributions
In the Level I CFA curriculum there are, at the moment, these probability distributions that candidates must understand and be able to use: Discrete distributions Binomial Uniform Continuous distributions Chi-square (χ2) F Lognormal Normal Student’s t Uniform This article will describe discrete and continuous distributions in general and how to use them; the links, above,…
Continuous Uniform Distribution
Before reading this article, make sure that you have read the article on probability distributions in general. The continuous uniform distribution is almost as easy to understand as the discrete uniform distribution: although it has an infinite number of possible values that it can take – it is continuous, after all – those values comprise…
Discrete Uniform Distribution
Before reading this article, make sure that you have read the article on probability distributions in general. The discrete uniform distribution is arguably one of the easiest to understand: it has only a finite number of possible values that it can take, and the probability of taking on any value is the same as the…
Binomial Distribution
Before reading this article, make sure that you have read the article on probability distributions in general. The binomial probability distribution is a discrete distribution: it has only a finite number of possible values that it can take. To understand the binomial distribution, you first have to understand the idea of a Bernoulli trial. A…
Chebyshev’s Inequality
The first thing I’d like to say about Chebyshev’s inequality is that it’s a good thing for most CFA candidates that these exams are written, not oral. If they were oral, most would fail simply because they cannot pronounce “Chebyshev” (or, for that matter, at Level II, “Modigliani” or “heteroskedasticity”). The first part is pronounced…
Delta Hedging
There are two applications of delta hedging presented in the CFA curriculum: You have an existing position in the underlying security and you want to hedge that position with options. You have an existing position in options and you want to hedge that position either with the underlying security or with options. I’ll cover both…
Implementation Shortfall
I recently wrote a question for a mock exam about implementation shortfall, and it occurred to me that an article on the subject was long overdue. Implementation shortfall has been the bane of Level III CFA candidates for a few decades now, and for good reason: in the curriculum, there isn’t a straightforward, comprehensive example…
FCFF vs. FCFE
Occasionally, you will need to know how to compute free cash flow to equity (FCFE) given free cash flow to the firm (FCFF), or how to compute FCFF given FCFE. The formulae are relatively easy, but for sake of completeness I thought that I’d write a short article on them Recall that the formula for…
Free Cash Flow to Equity (FCFE)
The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here). There are several types of (and, consequently, definitions for) free cash flow. In this article, I’ll describe one of those: free…