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Category: Level I
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…
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…
Free Cash Flow to the Firm (FCFF)
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…
Interest Rate Parity
The idea of interest rate parity (IRP) is pretty simple. In a nutshell, it says that if you hold a particular currency – say, GBP – and you want to to make a risk-free investment of that currency, you should earn the risk-free interest rate for that currency for the length of time of your…
Roll Yield (Roll Return)
The idea of roll yield – or roll return, same thing – is relatively straightforward: it’s part of the increase or decrease in the value of your portfolio that arises specifically when you roll over an expiring futures or forward contract into a new contract. The other parts of that increase or decrease are the…
Sloppy Language, Sloppy Thinking: Don’t Try This at Home
As a mathematician, I’ve been trained to write and speak (and, consequently, to think) using precise, accurate terminology. There are, of course, occasions when even mathematicians abbreviate the things that they write or say, but on those occasions: We know that we’re abbreviating, and All mathematicians have agreed to the abbreviations used. As an educator,…
Absolute Advantage vs. Comparative Advantage
Absolute Advantage Absolute advantage is quite easy to understand: if it costs less in country A to make a product than it costs in country B, then country A has an absolute advantage over country B in the production of that product. Easy-peasy. Comparative Advantage Comparative advantage is a bit more complicated. It depends not…
Conservative Accounting Methods vs. Aggressive Accounting Methods
No discussion of conservative methods vs. aggressive methods would be complete without a clear definition of what we mean by these two categories of methods. Therefore, let’s start there: Conservative accounting methods are those that report lower net income in the current period, and (potentially) higher net income in future periods. Aggressive accounting methods are…