<aside> 💡 Coursera Equivalent: MOOC 1 - Module 1

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<aside> 💡 Also based from live lecture recordings and extra materials (if any)

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Lesson 1-2: Investments Toolkit

Learning Objectives:

LO#1: Why discount

LO#2: Different return measures

LO#3: Firm Characteristics Relevant for Investments

LO#4: Zero-Cost Portfolio (long-short strategies)

LO#5: Statistical Techniques and Excel (refer to Excel Sheet)

Recall

Assumptions of Classical Finance

Why discount?

LO#1

Discount Rate

Notes

• Investors prefer more to less

• Investors are risk-averse

• Money paid in the future is worth less than the same amount today

• Financial markets are competitive: no arbitrage opportunities

• Cash flows tomorrow worth less than today

• Time value of money

• “Riskiness” of cash flows

• Refer to 1-2.1 and 1-2.2

Different Return Measures

LO#2

Recall

Return

Arithmetic Average

Geometric Average

Excess Returns

Notes

• Change in price plus cash payout received normalized by beginning price

• Refer to 1.2.3

• useful for forecasting the next period return based on past experience

• unbiased estimate of future returns of the same horizon given past experience (assuming same return generating process going forward)

• Refer to 1.2.4

• equivalent per-period return

• useful for buy-and-hold investors

• Refer to 1.2.5

• geometric < arithmetic average (more volatility = higher difference)

• in excess of the risk-free rate

<aside> 📌 SUMMARY: arithmetic average > geometric average

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Firm Characteristics Relevant for Investments