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Flashcard 1615952219404

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#cashflow-statement
Question
The [...] adjusts each item in the income statement to its cash equivalent.
Answer
The direct method

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Subject 2. Preparing the Cash Flow Statement
(e.g., cash received from customers, cash received from investment income) and operating cash outflows by use (e.g., cash paid to suppliers, cash paid for interest) in the operating activities section of the cash flow statement. <span>It adjusts each item in the income statement to its cash equivalent. It shows operating cash receipts and payments. More cash flow information can be obtained and it is more easily understood by the average reader. The indirect me







Flashcard 1647249853708

Question
Definition of Proportional

When two quantities always have the same size in relation to each other. In other words [...]
Answer
they have the same ratio

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Definition of Proportional When two quantities always have the same size in relation to each other. In other words they have the same ratio

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Definition of Proportional
Home Subjects ▼ Algebra Calculus Data Geometry Measure Money Numbers Physics More ▼ Activities Dictionary Games Puzzles Worksheets ☰ ABCDEFGHIJKLMNOPQRSTUVWXYZ Texto original Sugiere una traducción mejor <span>Definition of Proportional more ... When two quantities always have the same size in relation to each other. In other words they have the same ratio. Example: A rope's length and weight are in proportion. When 20m of rope weighs 1kg, then: • 40m of that rope weighs 2kg • 200m of that rope weighs 10kg etc. Another example: The len







Flashcard 1731533081868

Question
Deep Gaussian processes (DGPs) are [...] of Gaussian processes (GPs) and are formally equivalent to neural networks with multiple, infinitely wide hidden layers.
Answer
multi-layer hierarchical generalisations

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Deep Gaussian processes (DGPs) are multi-layer hierarchical generalisations of Gaussian pro- cesses (GPs) and are formally equivalent to neural networks with multiple, infinitely wide hidden layers.

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Flashcard 1735803669772

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#logic
Question
A History of Formal Logic (1961) is written by the distinguished [...]
Answer
J M Bocheński

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According to A History of Formal Logic (1961) by the distinguished J M Bocheński, the golden periods for logic were the ancient Greek period, the medieval scholastic period, and the mathematical period of the 19th and 20th centuries.

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The rise and fall and rise of logic | Aeon Essays
the hands of thinkers such as George Boole, Gottlob Frege, Bertrand Russell, Alfred Tarski and Kurt Gödel, it’s clear that Kant was dead wrong. But he was also wrong in thinking that there had been no progress since Aristotle up to his time. <span>According to A History of Formal Logic (1961) by the distinguished J M Bocheński, the golden periods for logic were the ancient Greek period, the medieval scholastic period, and the mathematical period of the 19th and 20th centuries. (Throughout this piece, the focus is on the logical traditions that emerged against the background of ancient Greek logic. So Indian and Chinese logic are not included, but medieval Ara







Flashcard 1735806291212

Question
Deep Gaussian processes are formally equivalent to neural networks with [...] .
Answer
multiple, infinitely wide hidden layers

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Deep Gaussian processes (DGPs) are multi-layer hierarchical generalisations of Gaussian pro- cesses (GPs) and are formally equivalent to neural networks with multiple, infinitely wide hidden layers.

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Flashcard 1735816514828

Tags
#logic
Question
The fall of [...] culture wasn’t the only cause for the demise of scholastic logic
Answer
disputational

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The fall of disputational culture wasn’t the only cause for the demise of scholastic logic, however. Scholastic logic was also viewed – rightly or wrongly – as being tied to broadly Aristotelian conceptions of language

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The rise and fall and rise of logic | Aeon Essays
s Diafoirus resorts to disputational vocabulary to make a point about love: Distinguo, Mademoiselle; in all that does not concern the possession of the loved one, concedo, I grant it; but in what does regard that possession, nego, I deny it. <span>The fall of disputational culture wasn’t the only cause for the demise of scholastic logic, however. Scholastic logic was also viewed – rightly or wrongly – as being tied to broadly Aristotelian conceptions of language and metaphysics, which themselves fell out of favour in the dawn of the modern era with the rise of a new scientific paradigm. Despite all this, disputations continued to be practised in certain university contexts for some time – indeed, they live on in the ceremonial character of PhD defences. The point, thou







Flashcard 1735818087692

Tags
#logic
Question
Scholastic logic was also viewed as being tied to Aristotelian conceptions of [...and...]
Answer
language and metaphysics

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The fall of disputational culture wasn’t the only cause for the demise of scholastic logic, however. Scholastic logic was also viewed – rightly or wrongly – as being tied to broadly Aristotelian conceptions of language and metaphysics, which themselves fell out of favour in the dawn of the modern era with the rise of a new scientific paradigm. <body><html>

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The rise and fall and rise of logic | Aeon Essays
s Diafoirus resorts to disputational vocabulary to make a point about love: Distinguo, Mademoiselle; in all that does not concern the possession of the loved one, concedo, I grant it; but in what does regard that possession, nego, I deny it. <span>The fall of disputational culture wasn’t the only cause for the demise of scholastic logic, however. Scholastic logic was also viewed – rightly or wrongly – as being tied to broadly Aristotelian conceptions of language and metaphysics, which themselves fell out of favour in the dawn of the modern era with the rise of a new scientific paradigm. Despite all this, disputations continued to be practised in certain university contexts for some time – indeed, they live on in the ceremonial character of PhD defences. The point, thou







Flashcard 1735819660556

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#logic
Question
the introduction of [...] in Europe accelerated the downfall of the disputational culture.
Answer
new printing techniques

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It is also not happenstance that the downfall of the disputational culture roughly coincided with the introduction of new printing techniques in Europe by Johannes Gutenberg, around 1440.

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The rise and fall and rise of logic | Aeon Essays
ich is thoroughly disputational, with Meditations on First Philosophy (1641) by Descartes, a book argued through long paragraphs driven by the first-person singular. The nature of intellectual enquiry shifted with the downfall of disputation. <span>It is also not happenstance that the downfall of the disputational culture roughly coincided with the introduction of new printing techniques in Europe by Johannes Gutenberg, around 1440. Before that, books were a rare commodity, and education was conducted almost exclusively by means of oral contact between masters and pupils in the form of expository lectures in which







Flashcard 1735821233420

Tags
#history #logic
Question
Johannes Gutenberg introduced new printing techniques in Europe around [...].
Answer
1440

You can't terrorise Aristotle!

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It is also not happenstance that the downfall of the disputational culture roughly coincided with the introduction of new printing techniques in Europe by Johannes Gutenberg, around 1440.

Original toplevel document

The rise and fall and rise of logic | Aeon Essays
ich is thoroughly disputational, with Meditations on First Philosophy (1641) by Descartes, a book argued through long paragraphs driven by the first-person singular. The nature of intellectual enquiry shifted with the downfall of disputation. <span>It is also not happenstance that the downfall of the disputational culture roughly coincided with the introduction of new printing techniques in Europe by Johannes Gutenberg, around 1440. Before that, books were a rare commodity, and education was conducted almost exclusively by means of oral contact between masters and pupils in the form of expository lectures in which







#logic
Instead, early modern authors emphasise the role of novelty and individual discovery
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The rise and fall and rise of logic | Aeon Essays
tually unthinkable before the wide availability of printed books) was well-established. Moreover, as indicated by the passage from Descartes above, the very term ‘logic’ came to be used for something other than what the scholastics had meant. <span>Instead, early modern authors emphasise the role of novelty and individual discovery, as exemplified by the influential textbook Port-Royal Logic (1662), essentially, the logical version of Cartesianism, based on Descartes’s conception of mental operations and the prima




Flashcard 1735825165580

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#logic
Question
Instead of justification of ideas, early modern authors emphasise the role of [...] and [...]
Answer
novelty and individual discovery

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Instead, early modern authors emphasise the role of novelty and individual discovery

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The rise and fall and rise of logic | Aeon Essays
tually unthinkable before the wide availability of printed books) was well-established. Moreover, as indicated by the passage from Descartes above, the very term ‘logic’ came to be used for something other than what the scholastics had meant. <span>Instead, early modern authors emphasise the role of novelty and individual discovery, as exemplified by the influential textbook Port-Royal Logic (1662), essentially, the logical version of Cartesianism, based on Descartes’s conception of mental operations and the prima







#logic
Descartes hits the nail on the head when he claims that the logic of the Schools (scholastic logic) is not really a logic of discovery. Its chief purpose is justification and exposition , which makes sense particularly against the background of dialectical practices, where interlocutors explain and debate what they themselves already know.
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The rise and fall and rise of logic | Aeon Essays
without judgment about things one does not know. Such logic corrupts good sense rather than increasing it. I mean instead the kind of logic which teaches us to direct our reason with a view to discovering the truths of which we are ignorant. <span>Descartes hits the nail on the head when he claims that the logic of the Schools (scholastic logic) is not really a logic of discovery. Its chief purpose is justification and exposition, which makes sense particularly against the background of dialectical practices, where interlocutors explain and debate what they themselves already know. Indeed, for much of the history of logic, both in ancient Greece and in the Latin medieval tradition, ‘dialectic’ and ‘logic’ were taken to be synonymous. Up to Descartes’s time, the ch




Flashcard 1735828311308

Tags
#logic
Question
Descartes claims the chief purpose of scholastic logic is [...]
Answer
justification and exposition

which makes sense particularly against the background of dialectical practices, where interlocutors explain and debate what they themselves already know.

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Descartes hits the nail on the head when he claims that the logic of the Schools (scholastic logic) is not really a logic of discovery. Its chief purpose is justification and exposition , which makes sense particularly against the background of dialectical practices, where interlocutors explain and debate what they themselves already know.

Original toplevel document

The rise and fall and rise of logic | Aeon Essays
without judgment about things one does not know. Such logic corrupts good sense rather than increasing it. I mean instead the kind of logic which teaches us to direct our reason with a view to discovering the truths of which we are ignorant. <span>Descartes hits the nail on the head when he claims that the logic of the Schools (scholastic logic) is not really a logic of discovery. Its chief purpose is justification and exposition, which makes sense particularly against the background of dialectical practices, where interlocutors explain and debate what they themselves already know. Indeed, for much of the history of logic, both in ancient Greece and in the Latin medieval tradition, ‘dialectic’ and ‘logic’ were taken to be synonymous. Up to Descartes’s time, the ch







#stochastics
The term random function is also used to refer to a stochastic or random process,[25][26] because a stochastic process can also be interpreted as a random element in a function space.
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Stochastic process - Wikipedia
are considered the most important and central in the theory of stochastic processes, [1] [4] [23] and were discovered repeatedly and independently, both before and after Bachelier and Erlang, in different settings and countries. [21] [24] <span>The term random function is also used to refer to a stochastic or random process, [25] [26] because a stochastic process can also be interpreted as a random element in a function space. [27] [28] The terms stochastic process and random process are used interchangeably, often with no specific mathematical space for the set that indexes the random variables. [27] [29]




#stochastics
If the random variables are indexed by the Cartesian plane or some higher-dimensional Euclidean space, then the collection of random variables is usually called a random field instead.
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Stochastic process - Wikipedia
hangeably, often with no specific mathematical space for the set that indexes the random variables. [27] [29] But often these two terms are used when the random variables are indexed by the integers or an interval of the real line. [5] [29] <span>If the random variables are indexed by the Cartesian plane or some higher-dimensional Euclidean space, then the collection of random variables is usually called a random field instead. [5] [30] The values of a stochastic process are not always numbers and can be vectors or other mathematical objects. [5] [28] Based on their properties, stochastic processes can be d




#stochastics
the Wiener process or Brownian motion process,[a] used by Louis Bachelier to study price changes on the Paris Bourse
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Stochastic process - Wikipedia
arkets have motivated the extensive use of stochastic processes in finance. [16] [17] [18] Applications and the study of phenomena have in turn inspired the proposal of new stochastic processes. Examples of such stochastic processes include <span>the Wiener process or Brownian motion process, [a] used by Louis Bachelier to study price changes on the Paris Bourse, [21] and the Poisson process, used by A. K. Erlang to study the number of phone calls occurring in a certain period of time. [22] These two stochastic processes are considered the mo




#stochastics
Each random variable in the collection takes values from the same mathematical space known as the state space.
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Stochastic process - Wikipedia
element in the set. [4] [5] The set used to index the random variables is called the index set. Historically, the index set was some subset of the real line, such as the natural numbers, giving the index set the interpretation of time. [1] <span>Each random variable in the collection takes values from the same mathematical space known as the state space. This state space can be, for example, the integers, the real line or n {\displaystyle n} -dimensional Euclidean space. [1] [5] An increment i




#stochastics
The set used to index the random variables is called the index set.
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Stochastic process - Wikipedia
stochastic or random process can be defined as a collection of random variables that is indexed by some mathematical set, meaning that each random variable of the stochastic process is uniquely associated with an element in the set. [4] [5] <span>The set used to index the random variables is called the index set. Historically, the index set was some subset of the real line, such as the natural numbers, giving the index set the interpretation of time. [1] Each random variable in the collection t




#stochastics
A stochastic process can have many outcomes, due to its randomness, and a single outcome of a stochastic process is called, among other names, a sample function or realization
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Stochastic process - Wikipedia
r n {\displaystyle n} -dimensional Euclidean space. [1] [5] An increment is the amount that a stochastic process changes between two index values, often interpreted as two points in time. [48] [49] <span>A stochastic process can have many outcomes, due to its randomness, and a single outcome of a stochastic process is called, among other names, a sample function or realization. [28] [50] [imagelink] A single computer-simulated sample function or realization, among other terms, of a three-dimensional Wiener or Brownian motion process for time 0 ≤ t ≤ 2.




#stochastics
A stochastic process can be classified in different ways, for example, by
  1. its state space,
  2. its index set, or
  3. the dependence among the random variables.
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Stochastic process - Wikipedia
f a three-dimensional Wiener or Brownian motion process for time 0 ≤ t ≤ 2. The index set of this stochastic process is the non-negative numbers, while its state space is three-dimensional Euclidean space. Classifications[edit source] <span>A stochastic process can be classified in different ways, for example, by its state space, its index set, or the dependence among the random variables. One common way of classification is by the cardinality of the index set and the state space. [51] [52] [53] When interpreted as time, if the index set of a stochastic process has a fi




#stochastics
One of the simplest stochastic processes is the Bernoulli process,[60] which is a sequence of independent and identically distributed (iid) Bernoulli variables.
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Stochastic process - Wikipedia
} -dimensional vector process or n {\displaystyle n} -vector process. [51] [52] Examples of stochastic processes[edit source] Bernoulli process[edit source] Main article: Bernoulli process <span>One of the simplest stochastic processes is the Bernoulli process, [60] which is a sequence of independent and identically distributed (iid) random variables, where each random variable takes either the value one or zero, say one with probability p {\displaystyle p} and zero with probability 1 − p {\displaystyle 1-p} . This process can be likened to somebody flipping a coin, where the probability of obtaining a head is p {\displaystyle p} and its value is on




#has-images
文献引文分析利器 HistCite 详细使用教程(精简易用免安装版本 HistCite Pro 首发页面) [imagelink]Tsing 2 年前
申明:本文是 HistCite Pro 唯一官方发布页面,从本文链接下载的软件绝无病毒!如果遇到杀毒软件的误报,请放心添加信任!请不要从其他下载站下载本程序!

如果你选修过中国科学技术大学罗昭锋老师的《文献管理与信息分析》,那么你一定不会对HistCite 感到陌生,这是一款非常强大的引文分析工具,可以快速绘制出某个研究领域的发展脉络,快速锁定某个研究方向的重要文献和学术大牛,还可以找到某些具有开创性成果的无指定关键词的论文。

如果说一次引用表示给你的文章投一票,那么并不是所有票都有效,只有相同领域文章的引用才能真正体现你在这个领域中的实力。所以在 Web of Science (以下简称 WOS)上按照被引次数倒序排列,越靠前不一定就越重要。还有一种情况,你发明了某种材料,但是后来名字变了,之后的文章使用的关键词都是新名字,别人搜新名字的关键词是搜不到你的开创性文章的,但是很显然你的文章是非常重要的。通过 HistCite 可以直观的看出这个研究领域的论文全部引用了你的文章,可以体现你的文章的重要性。

好了,下面开始使用这个工具。首先要了解一点,HistCite 这款软件是 Thomson Reuters (汤森路透)公司开发的,和 WOS 是一家公司,所以 HistCite 只支持 WOS 数据库,对于 Scopus 等数据库则无能为力,不过 Github 上面有人写了一个可以将 Scopus 导入 Histcite 进行分析的脚本——Scopus2Histcite,有兴趣的同学可以去试试看。

2016年10月,汤森路透知识产权与科技业务被 Clarivate Analytics (科睿唯安)公司收购了,从此 WOS 也是归该公司所有,因此导出的数据纯文本也发生了些许变化,从而不能直接导入 HistCite 进行分析。不过别担心,HistCite Pro 完全兼容新的文件格式!

打开WOS,注意数据库要选择核心合集(Core Collection)!

<img src="https://pic2.zhimg.com/35b6a3eea278b8e0bcb0dc8ef2558865_b.jpg" data-caption="" data-size="normal" data-rawwidth="1302" data-rawheight="601" class="origin_image zh-lightbox-thumb" width="1302" data-original="https://pic2.zhimg.com/35b6a3eea278b8e0bcb0dc8ef2558865_r.jpg">

例如简单检索一下石墨烯在锂离子电池负极中的应用:

<img src="https://pic3.zhimg.com/1c0f54e6e334e3cbe48c393667b55503_b.jpg" data-caption="" data-size="normal" data-rawwidth="1346" data-rawheight="663" class="origin_image zh-lightbox-thumb" width="1346" data-original="https://pic3.zhimg.com/1c0f54e6e334e3cbe48c393667b55503_r.jpg">

检索结果不是太多,可以全部导出,如果文献太多的话,可以先按照被引频次降序排列,只导出前2000篇就差不多了。

<img src="https://pic3.zhimg.com/e56979a1d5c4432567b15c8851630847_b.jpg" data-caption="" data-size="normal" data-rawwidth="1351" data-rawheight="666" class="origin_image zh-lightbox-thumb" width="1351" data-original="https://pic3.zhimg.com/e56979a1d5c4432567b15c8851630847_r.jpg">

下面开始导出文献信息,点击页面上的【保存至 Endnote Online】按钮右边的下拉按钮,选择【保存为其他文件格式】。

<img src="https://pic3.zhimg.com/dc6e7ab49f30d58498a46f342e8ee718_b.jpg" data-caption="" data...
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#stochastics
Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time.
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Stochastic process - Wikipedia
one, while the value of a tail is zero. [61] In other words, a Bernoulli process is a sequence of iid Bernoulli random variables, [62] where each coin flip is a Bernoulli trial. [63] Random walk[edit source] Main article: Random walk <span>Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time. [64] [65] [66] [67] [68] But some also use the term to refer to processes that change in continuous time, [69] particularly the Wiener process used in finance, which has led to some c




#stochastics
A classic example of a random walk is known as the simple random walk, which is a stochastic process in discrete time with the integers as the state space, and is based on a Bernoulli process, where each iid Bernoulli variable takes either the value positive one or negative one.
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Stochastic process - Wikipedia
ere are other various types of random walks, defined so their state spaces can be other mathematical objects, such as lattices and groups, and in general they are highly studied and have many applications in different disciplines. [69] [71] <span>A classic example of a random walk is known as the simple random walk, which is a stochastic process in discrete time with the integers as the state space, and is based on a Bernoulli process, where each iid Bernoulli variable takes either the value positive one or negative one. In other words, the simple random walk takes place on the integers, and its value increases by one with probability, say, p {\displaystyle p}




#stochastics
Playing a central role in the theory of probability, the Wiener process is often considered the most important and studied stochastic process, with connections to other stochastic processes.[1][2][3][78][79][80][81] Its index set and state space are the non-negative numbers and real numbers, respectively, so it has both continuous index set and states space.
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Stochastic process - Wikipedia
wnian motion due to its historical connection as a model for Brownian movement in liquids. [75] [76] [76] [77] [imagelink] Realizations of Wiener processes (or Brownian motion processes) with drift (blue) and without drift (red). <span>Playing a central role in the theory of probability, the Wiener process is often considered the most important and studied stochastic process, with connections to other stochastic processes. [1] [2] [3] [78] [79] [80] [81] Its index set and state space are the non-negative numbers and real numbers, respectively, so it has both continuous index set and states space. [82] But the process can be defined more generally so its state space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83]




#stochastics
If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift.
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Stochastic process - Wikipedia
, so it has both continuous index set and states space. [82] But the process can be defined more generally so its state space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] <span>If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , w




#stochastics
Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk.
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Stochastic process - Wikipedia
stant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] <span>Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk. [49] [85] The process arises as the mathematical limit of other stochastic processes such as certain random walks rescaled, [87] [88] which is the subject of Donsker's theorem or inva




#stochastics
If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant , then the resulting stochastic process is said to have drift
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Stochastic process - Wikipedia
e space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. <span>If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple rando




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If a Poisson process is defined with a single positive constant, then the process is called a homogeneous Poisson process.
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arameter. This process has the natural numbers as its state space and the non-negative numbers as its index set. This process is also called the Poisson counting process, since it can be interpreted as an example of a counting process. [99] <span>If a Poisson process is defined with a single positive constant, then the process is called a homogeneous Poisson process. [99] [101] The homogeneous Poisson process (in continuous time) is a member of important classes of stochastic processes such as Markov processes and Lévy processes. [49] The homogen




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The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process.
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constant, then the process is called a homogeneous Poisson process. [99] [101] The homogeneous Poisson process (in continuous time) is a member of important classes of stochastic processes such as Markov processes and Lévy processes. [49] <span>The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} ,




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If the parameter constant of the Poisson process is replaced with some non-negative integrable function of , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant.
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sses. [49] The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] <span>If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant. [104] Serving as a fundamental process in queueing theory, the Poisson process is an important process for mathematical models, where it finds applications for models of events randoml




Flashcard 1735976160524

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Louis Bachelier used [...] to study price changes on the Paris Bourse
Answer

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the Wiener process or Brownian motion process, [a] used by Louis Bachelier to study price changes on the Paris Bourse

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arkets have motivated the extensive use of stochastic processes in finance. [16] [17] [18] Applications and the study of phenomena have in turn inspired the proposal of new stochastic processes. Examples of such stochastic processes include <span>the Wiener process or Brownian motion process, [a] used by Louis Bachelier to study price changes on the Paris Bourse, [21] and the Poisson process, used by A. K. Erlang to study the number of phone calls occurring in a certain period of time. [22] These two stochastic processes are considered the mo







Flashcard 1735977733388

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interpreted as a random element in a function space, a stochastic process can also be called a [...]
Answer
random function

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The term random function is also used to refer to a stochastic or random process, [25] [26] because a stochastic process can also be interpreted as a random element in a function space. <

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are considered the most important and central in the theory of stochastic processes, [1] [4] [23] and were discovered repeatedly and independently, both before and after Bachelier and Erlang, in different settings and countries. [21] [24] <span>The term random function is also used to refer to a stochastic or random process, [25] [26] because a stochastic process can also be interpreted as a random element in a function space. [27] [28] The terms stochastic process and random process are used interchangeably, often with no specific mathematical space for the set that indexes the random variables. [27] [29]







Flashcard 1735979306252

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a stochastic process can be called a random function because it can be interpreted as a [...]
Answer
random element in a function space.

random -- stochastic process
function -- function space

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The term random function is also used to refer to a stochastic or random process, [25] [26] because a stochastic process can also be interpreted as a random element in a function space.

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are considered the most important and central in the theory of stochastic processes, [1] [4] [23] and were discovered repeatedly and independently, both before and after Bachelier and Erlang, in different settings and countries. [21] [24] <span>The term random function is also used to refer to a stochastic or random process, [25] [26] because a stochastic process can also be interpreted as a random element in a function space. [27] [28] The terms stochastic process and random process are used interchangeably, often with no specific mathematical space for the set that indexes the random variables. [27] [29]







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In higher dimensions, stochastic process is usually called [...].
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If the random variables are indexed by the Cartesian plane or some higher-dimensional Euclidean space, then the collection of random variables is usually called a random field instead.

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hangeably, often with no specific mathematical space for the set that indexes the random variables. [27] [29] But often these two terms are used when the random variables are indexed by the integers or an interval of the real line. [5] [29] <span>If the random variables are indexed by the Cartesian plane or some higher-dimensional Euclidean space, then the collection of random variables is usually called a random field instead. [5] [30] The values of a stochastic process are not always numbers and can be vectors or other mathematical objects. [5] [28] Based on their properties, stochastic processes can be d







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The set used to index the random variables is called the [...].
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index set

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The set used to index the random variables is called the index set.

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stochastic or random process can be defined as a collection of random variables that is indexed by some mathematical set, meaning that each random variable of the stochastic process is uniquely associated with an element in the set. [4] [5] <span>The set used to index the random variables is called the index set. Historically, the index set was some subset of the real line, such as the natural numbers, giving the index set the interpretation of time. [1] Each random variable in the collection t







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Each random variable in the collection takes values from the same mathematical space known as the [...].
Answer
state space

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Each random variable in the collection takes values from the same mathematical space known as the state space.

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element in the set. [4] [5] The set used to index the random variables is called the index set. Historically, the index set was some subset of the real line, such as the natural numbers, giving the index set the interpretation of time. [1] <span>Each random variable in the collection takes values from the same mathematical space known as the state space. This state space can be, for example, the integers, the real line or n {\displaystyle n} -dimensional Euclidean space. [1] [5] An increment i







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Viewed from a function analysis perspective, a single outcome of a stochastic process can be called a [...]
Answer
sample function

Again, remember a function is just a vector with infinite length, and a topology for the notion of proximity and continuity.

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A stochastic process can have many outcomes, due to its randomness, and a single outcome of a stochastic process is called, among other names, a sample function or realization

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r n {\displaystyle n} -dimensional Euclidean space. [1] [5] An increment is the amount that a stochastic process changes between two index values, often interpreted as two points in time. [48] [49] <span>A stochastic process can have many outcomes, due to its randomness, and a single outcome of a stochastic process is called, among other names, a sample function or realization. [28] [50] [imagelink] A single computer-simulated sample function or realization, among other terms, of a three-dimensional Wiener or Brownian motion process for time 0 ≤ t ≤ 2.







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Question
A stochastic process can be classified in different ways, for example, by
  1. its state space,
  2. its index set, or
  3. the [...].
Answer
dependence among the random variables

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A stochastic process can be classified in different ways, for example, by its state space, its index set, or the dependence among the random variables.

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f a three-dimensional Wiener or Brownian motion process for time 0 ≤ t ≤ 2. The index set of this stochastic process is the non-negative numbers, while its state space is three-dimensional Euclidean space. Classifications[edit source] <span>A stochastic process can be classified in different ways, for example, by its state space, its index set, or the dependence among the random variables. One common way of classification is by the cardinality of the index set and the state space. [51] [52] [53] When interpreted as time, if the index set of a stochastic process has a fi







Flashcard 1735989792012

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Question
A stochastic process can be classified in different ways, for example, by
  1. its [...],
  2. its index set, or
  3. the dependence among the random variables.
Answer
state space

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A stochastic process can be classified in different ways, for example, by its state space, its index set, or the dependence among the random variables.

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f a three-dimensional Wiener or Brownian motion process for time 0 ≤ t ≤ 2. The index set of this stochastic process is the non-negative numbers, while its state space is three-dimensional Euclidean space. Classifications[edit source] <span>A stochastic process can be classified in different ways, for example, by its state space, its index set, or the dependence among the random variables. One common way of classification is by the cardinality of the index set and the state space. [51] [52] [53] When interpreted as time, if the index set of a stochastic process has a fi







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the Bernoulli process is just a sequence of [...]
Answer
iid Bernoulli variables.

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One of the simplest stochastic processes is the Bernoulli process, [60] which is a sequence of independent and identically distributed (iid) Bernoulli variables.

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} -dimensional vector process or n {\displaystyle n} -vector process. [51] [52] Examples of stochastic processes[edit source] Bernoulli process[edit source] Main article: Bernoulli process <span>One of the simplest stochastic processes is the Bernoulli process, [60] which is a sequence of independent and identically distributed (iid) random variables, where each random variable takes either the value one or zero, say one with probability p {\displaystyle p} and zero with probability 1 − p {\displaystyle 1-p} . This process can be likened to somebody flipping a coin, where the probability of obtaining a head is p {\displaystyle p} and its value is on







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Random walks are usually defined as [...] of iid random variables or random vectors in Euclidean space
Answer
sums

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Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time.

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one, while the value of a tail is zero. [61] In other words, a Bernoulli process is a sequence of iid Bernoulli random variables, [62] where each coin flip is a Bernoulli trial. [63] Random walk[edit source] Main article: Random walk <span>Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time. [64] [65] [66] [67] [68] But some also use the term to refer to processes that change in continuous time, [69] particularly the Wiener process used in finance, which has led to some c







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Question
Random walks are usually defined as sums of [...] in Euclidean space
Answer
iid random variables or random vectors

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Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time.

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Stochastic process - Wikipedia
one, while the value of a tail is zero. [61] In other words, a Bernoulli process is a sequence of iid Bernoulli random variables, [62] where each coin flip is a Bernoulli trial. [63] Random walk[edit source] Main article: Random walk <span>Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time. [64] [65] [66] [67] [68] But some also use the term to refer to processes that change in continuous time, [69] particularly the Wiener process used in finance, which has led to some c







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the simple random walk has [...] as the state space
Answer
the integers

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A classic example of a random walk is known as the simple random walk, which is a stochastic process in discrete time with the integers as the state space, and is based on a Bernoulli process, where each iid Bernoulli variable takes either the value positive one or negative one.

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ere are other various types of random walks, defined so their state spaces can be other mathematical objects, such as lattices and groups, and in general they are highly studied and have many applications in different disciplines. [69] [71] <span>A classic example of a random walk is known as the simple random walk, which is a stochastic process in discrete time with the integers as the state space, and is based on a Bernoulli process, where each iid Bernoulli variable takes either the value positive one or negative one. In other words, the simple random walk takes place on the integers, and its value increases by one with probability, say, p {\displaystyle p}







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simple random walk is based on a [...process...]
Answer
Bernoulli process

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A classic example of a random walk is known as the simple random walk, which is a stochastic process in discrete time with the integers as the state space, and is based on a Bernoulli process, where each iid Bernoulli variable takes either the value positive one or negative one.

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Stochastic process - Wikipedia
ere are other various types of random walks, defined so their state spaces can be other mathematical objects, such as lattices and groups, and in general they are highly studied and have many applications in different disciplines. [69] [71] <span>A classic example of a random walk is known as the simple random walk, which is a stochastic process in discrete time with the integers as the state space, and is based on a Bernoulli process, where each iid Bernoulli variable takes either the value positive one or negative one. In other words, the simple random walk takes place on the integers, and its value increases by one with probability, say, p {\displaystyle p}







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Playing a central role in the theory of probability, [...] is often considered the most important and studied stochastic process,
Answer
the Wiener process

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Playing a central role in the theory of probability, the Wiener process is often considered the most important and studied stochastic process, with connections to other stochastic processes. [1] [2] [3] [78] [79] [80] [81] Its index set and state space are

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wnian motion due to its historical connection as a model for Brownian movement in liquids. [75] [76] [76] [77] [imagelink] Realizations of Wiener processes (or Brownian motion processes) with drift (blue) and without drift (red). <span>Playing a central role in the theory of probability, the Wiener process is often considered the most important and studied stochastic process, with connections to other stochastic processes. [1] [2] [3] [78] [79] [80] [81] Its index set and state space are the non-negative numbers and real numbers, respectively, so it has both continuous index set and states space. [82] But the process can be defined more generally so its state space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83]







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the index set and state space of Wiener process are [...] and [...], respectively
Answer
the non-negative numbers and real numbers

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Playing a central role in the theory of probability, the Wiener process is often considered the most important and studied stochastic process, with connections to other stochastic processes. [1] [2] [3] [78] [79] [80] [81] Its index set and state space are the non-negative numbers and real numbers, respectively, so it has both continuous index set and states space.

Original toplevel document

Stochastic process - Wikipedia
wnian motion due to its historical connection as a model for Brownian movement in liquids. [75] [76] [76] [77] [imagelink] Realizations of Wiener processes (or Brownian motion processes) with drift (blue) and without drift (red). <span>Playing a central role in the theory of probability, the Wiener process is often considered the most important and studied stochastic process, with connections to other stochastic processes. [1] [2] [3] [78] [79] [80] [81] Its index set and state space are the non-negative numbers and real numbers, respectively, so it has both continuous index set and states space. [82] But the process can be defined more generally so its state space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83]







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Question
If [...], then the resulting Wiener or Brownian motion process is said to have zero drift.
Answer
the mean of any increment is zero

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If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift.

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, so it has both continuous index set and states space. [82] But the process can be defined more generally so its state space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] <span>If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , w







Flashcard 1736006307084

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Question
If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have [...].
Answer
zero drift

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If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift.

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Stochastic process - Wikipedia
, so it has both continuous index set and states space. [82] But the process can be defined more generally so its state space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] <span>If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , w







Flashcard 1736008666380

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Question
If [...] is equal to the time difference multiplied by some constant , then the resulting stochastic process is said to have drift
Answer
the mean of the increment for any two points in time

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If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant , then the resulting stochastic process is said to have drift

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e space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. <span>If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple rando







Flashcard 1736010239244

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Question
If the mean of the increment for any two points in time is equal to [...] , then the resulting stochastic process is said to have drift
Answer
the time difference multiplied by some constant

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If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant , then the resulting stochastic process is said to have drift

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e space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. <span>If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple rando







Flashcard 1736012598540

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If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant , then the resulting stochastic process is said to have [...]
Answer
drift

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If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant , then the resulting stochastic process is said to have drift

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e space can be n {\displaystyle n} -dimensional Euclidean space. [71] [79] [83] If the mean of any increment is zero, then the resulting Wiener or Brownian motion process is said to have zero drift. <span>If the mean of the increment for any two points in time is equal to the time difference multiplied by some constant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple rando







Flashcard 1736014171404

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Question
Almost surely, a [...] of a Wiener process is continuous everywhere but nowhere differentiable.
Answer
sample path

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Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk.

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stant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] <span>Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk. [49] [85] The process arises as the mathematical limit of other stochastic processes such as certain random walks rescaled, [87] [88] which is the subject of Donsker's theorem or inva







Flashcard 1736015744268

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Almost surely, a sample path of a Wiener process is [...property...].
Answer
continuous everywhere but nowhere differentiable

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Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk.

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stant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] <span>Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk. [49] [85] The process arises as the mathematical limit of other stochastic processes such as certain random walks rescaled, [87] [88] which is the subject of Donsker's theorem or inva







Flashcard 1736017317132

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Question
Wiener process can be considered a continuous version of [...].
Answer
the simple random walk

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Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk.

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Stochastic process - Wikipedia
stant μ {\displaystyle \mu } , which is a real number, then the resulting stochastic process is said to have drift μ {\displaystyle \mu } . [84] [85] [86] <span>Almost surely, a sample path of a Wiener process is continuous everywhere but nowhere differentiable. It can be considered a continuous version of the simple random walk. [49] [85] The process arises as the mathematical limit of other stochastic processes such as certain random walks rescaled, [87] [88] which is the subject of Donsker's theorem or inva







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Question
a homogeneous Poisson process is defined with a [...]
Answer
single positive constant

The constant denotes a fixed area (or length) on the domain.

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If a Poisson process is defined with a single positive constant, then the process is called a homogeneous Poisson process.

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Stochastic process - Wikipedia
arameter. This process has the natural numbers as its state space and the non-negative numbers as its index set. This process is also called the Poisson counting process, since it can be interpreted as an example of a counting process. [99] <span>If a Poisson process is defined with a single positive constant, then the process is called a homogeneous Poisson process. [99] [101] The homogeneous Poisson process (in continuous time) is a member of important classes of stochastic processes such as Markov processes and Lévy processes. [49] The homogen







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Question
If a Poisson process is defined with a single positive constant, then the process is called a [...].
Answer
homogeneous Poisson process

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If a Poisson process is defined with a single positive constant, then the process is called a homogeneous Poisson process.

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Stochastic process - Wikipedia
arameter. This process has the natural numbers as its state space and the non-negative numbers as its index set. This process is also called the Poisson counting process, since it can be interpreted as an example of a counting process. [99] <span>If a Poisson process is defined with a single positive constant, then the process is called a homogeneous Poisson process. [99] [101] The homogeneous Poisson process (in continuous time) is a member of important classes of stochastic processes such as Markov processes and Lévy processes. [49] The homogen







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if [...], the homogeneous Poisson process is also called the stationary Poisson process.
Answer
its index set is the real line

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The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process.

Original toplevel document

Stochastic process - Wikipedia
constant, then the process is called a homogeneous Poisson process. [99] [101] The homogeneous Poisson process (in continuous time) is a member of important classes of stochastic processes such as Markov processes and Lévy processes. [49] <span>The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} ,







Flashcard 1736023608588

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Question
The homogeneous Poisson process defined on the real line is called [...].
Answer
the stationary Poisson process

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The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process.

Original toplevel document

Stochastic process - Wikipedia
constant, then the process is called a homogeneous Poisson process. [99] [101] The homogeneous Poisson process (in continuous time) is a member of important classes of stochastic processes such as Markov processes and Lévy processes. [49] <span>The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} ,







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Question
If the parameter constant of the Poisson process is replaced with [...] , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process
Answer
some non-negative integrable function of

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If the parameter constant of the Poisson process is replaced with some non-negative integrable function of , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant. <

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Stochastic process - Wikipedia
sses. [49] The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] <span>If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant. [104] Serving as a fundamental process in queueing theory, the Poisson process is an important process for mathematical models, where it finds applications for models of events randoml







Flashcard 1736029900044

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#stochastics
Question
If the constant parameter of the Poisson process is replaced with some non-negative integrable function of , the resulting process is called an [...],
Answer
inhomogeneous or nonhomogeneous Poisson process

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If the parameter constant of the Poisson process is replaced with some non-negative integrable function of , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant.

Original toplevel document

Stochastic process - Wikipedia
sses. [49] The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] <span>If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant. [104] Serving as a fundamental process in queueing theory, the Poisson process is an important process for mathematical models, where it finds applications for models of events randoml







Flashcard 1736031472908

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#stochastics
Question
With an nonhomogeneous Poisson process, the [...] of points of the process is no longer constant.
Answer
average density

The density is determined by the parameter, obviously.


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body> If the parameter constant of the Poisson process is replaced with some non-negative integrable function of , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant. <body><html>

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Stochastic process - Wikipedia
sses. [49] The homogeneous Poisson process can be defined and generalized in different ways. It can be defined such that its index set is the real line, and this stochastic process is also called the stationary Poisson process. [102] [103] <span>If the parameter constant of the Poisson process is replaced with some non-negative integrable function of t {\displaystyle t} , the resulting process is called an inhomogeneous or nonhomogeneous Poisson process, where the average density of points of the process is no longer constant. [104] Serving as a fundamental process in queueing theory, the Poisson process is an important process for mathematical models, where it finds applications for models of events randoml








Reading 14  Topics in Demand and Supply Analysis
#has-images #microscopio-session #reading-mano

In a general sense, economics is the study of production, distribution, and consumption and can be divided into two broad areas of study: macroeconomics and microeconomics. Macroeconomics deals with aggregate economic quantities, such as national output and national income, and is rooted in microeconomics, which deals with markets and decision making of individual economic units, including consumers and businesses. Microeconomics is a logical starting point for the study of economics.

Microeconomics classifies private economic units into two groups: consumers (or households) and firms. These two groups give rise, respectively, to the theory of the consumer and the theory of the firm as two branches of study. The theory of the consumer deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption). The theory of the firm deals with the supply of goods and services by profit-maximizing firms.

It is expected that candidates will be familiar with the basic concepts of demand and supply. This material is covered in detail in the recommended prerequisite readings. In this reading, we will explore how buyers and sellers interact to determine transaction prices and quantities. The reading is organized as follows: Section 2 discusses the consumer or demand side of the market model, and Section 3 discusses the supply side of the consumer goods market, paying particular attention to the firm’s costs. Section 4 provides a summary of key points in the reading.

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Reading 15  The Firm and Market Structures Introduction
#has-images #microscopio-session #reading-pluma-fuente

The purpose of this reading is to build an understanding of the importance of market structure. As different market structures result in different sets of choices facing a firm’s decision makers, an understanding of market structure is a powerful tool in analyzing issues such as a firm’s pricing of its products and, more broadly, its potential to increase profitability. In the long run, a firm’s profitability will be determined by the forces associated with the market structure within which it operates. In a highly competitive market, long-run profits will be driven down by the forces of competition. In less competitive markets, large profits are possible even in the long run; in the short run, any outcome is possible. Therefore, understanding the forces behind the market structure will aid the financial analyst in determining firms’ short- and long-term prospects.

Section 2 introduces the analysis of market structures. The section addresses questions such as: What determines the degree of competition associated with each market structure? Given the degree of competition associated with each market structure, what decisions are left to the management team developing corporate strategy? How does a chosen pricing and output strategy evolve into specific decisions that affect the profitability of the firm? The answers to these questions are related to the forces of the market structure within which the firm operates.

Sections 3, 4, 5, and 6 analyze demand, supply, optimal price and output, and factors affecting long-run equilibrium for perfect competition, monopolistic competition, oligopoly, and pure monopoly, respectively.

Section 7 reviews techniques for identifying the various forms of market structure. For example, there are accepted measures of market concentration that are used by regulators of financial institutions to judge whether or not a planned merger or acquisition will harm the competitive nature of regional banking markets. Financial analysts should be able to identify the type of market structure a firm is operating within. Each different structure implies a different long-run sustainability of profits. A summary and practice problems conclude the reading.

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Reading 16  Aggregate Output, Prices, and Economic Growth Introduction
#has-images #microscopio-session #reading-calculadora

In the field of economics, microeconomics is the study of the economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates.

Macroeconomic analysis examines a nation’s aggregate output and income, its competitive and comparative advantages, the productivity of its labor force, its price level and inflation rate, and the actions of its national government and central bank. The objective of macroeconomic analysis is to address such fundamental questions as:

  • What is an economy’s aggregate output, and how is aggregate income measured?

  • What factors determine the level of aggregate output/income for an economy?

  • What are the levels of aggregate demand and aggregate supply of goods and services within the country?

  • Is the level of output increasing or decreasing, and at what rate?

  • Is the general price level stable, rising, or falling?

  • Is unemployment rising or falling?

  • Are households spending or saving more?

  • Are workers able to produce more output for a given level of inputs?

  • Are businesses investing in and expanding their productive capacity?

  • Are exports (imports) rising or falling?

From an investment perspective, investors must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset classes and securities that will benefit from economic trends occurring within that country. Macroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those companies.

This reading is organized as follows: Section 2 describes gross domestic product and related measures of domestic output and income. Section 3 discusses short-run and long-run aggregate demand and supply curves, the causes of shifts and movements along those curves, and factors that affect equilibrium levels of output, prices, and interest rates. Section 4 discusses sources, sustainability, and measures of economic growth. A summary and practice problems complete the reading.

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Reading 17  Understanding Business Cycles Introduction
#microscopio-session #reading-wheat

Agricultural societies experience good harvest times and bad ones. Weather is a main factor that influences crop production, but other factors, such as plant and animal diseases, also influence the harvest. Modern diversified economies are less influenced by weather and diseases but, as with crops, there are fluctuations in economic output, with good times and bad times.

This reading addresses changes in economic activity and factors that affect it. Some of the factors that influence short-term economic movements—such as changes in population, technology, and capital—are the same as those that affect long-term sustainable economic growth. Other factors, such as money supply and inflation, are more specific to short-term economic fluctuations.

This reading is organized as follows. Section 2 describes the business cycle and its phases. The typical behaviors of businesses and households in different phases and transitions between phases are described. Section 3 provides an introduction to business cycle theory, in particular how different economic schools of thought interpret the business cycle and their recommendations with respect to it. Section 4 introduces basic concepts concerning unemployment and inflation, two measures of short-term economic activity that are important to economic policymakers. Section 5 discusses variables that demonstrate predictable relationships with the economy, focusing on variables whose movements have value in predicting the future course of the economy. A summary and practice problems conclude the reading.

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Reading 18  Monetary and Fiscal Policy Introduction
#globo-terraqueo-session #has-images #reading-agustin-carsten

The economic decisions of households can have a significant impact on an economy. For example, a decision on the part of households to consume more and to save less can lead to an increase in employment, investment, and ultimately profits. Equally, the investment decisions made by corporations can have an important impact on the real economy and on corporate profits. But individual corporations can rarely affect large economies on their own; the decisions of a single household concerning consumption will have a negligible impact on the wider economy.

By contrast, the decisions made by governments can have an enormous impact on even the largest and most developed of economies for two main reasons. First, the public sectors of most developed economies normally employ a significant proportion of the population, and they are usually responsible for a significant proportion of spending in an economy. Second, governments are also the largest borrowers in world debt markets. Exhibit 1 gives some idea of the scale of government borrowing and spending.

Exhibit 1

Panel A. Central Government Debt to GDP, 2009

Panel B. Public Sector Spending to GDP, 2009

Note: All data are for 2009.

Source: Thomson Financial.

Government policy is ultimately expressed through its borrowing and spending activities. In this reading, we identify and discuss two types of government policy that can affect the macroeconomy and financial markets: monetary policy and fiscal policy.

Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy.1 By contrast, fiscal policy refers to the government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time. They can be used to accelerate growth when an economy starts to slow or to moderate growth and activity when an economy starts to overheat. In addition, fiscal policy can be used to redistribute income and wealth.

The overarching goal of both monetary and fiscal policy is normally the creation of an economic environment where growth is stable and positive and inflation is stable and low. Crucially, the aim is therefore to steer the underlying economy so that it does not experience economic booms that may be followed by extended periods of low or negative growth and high levels of unemployment. In such a stable economic environment, householders can feel secure in their consumption and saving decisions, while corporations can concentrate on their investment decisions, on making their regular coupon payments to their bond holders and on making profits for their shareholders.

The challenges to achieving this overarching goal are many. Not only are economies frequently buffeted by shocks (such as oil price jumps), but some economists believe that natural cycles in the economy also exist. Moreover, there are plenty of examples from history where government policies—either monetary, fiscal, or both—have exacerbated an economic expansion that eventually led to damaging cons

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Reading 19  International Trade and Capital Flows Introduction
#globo-terraqueo-session #has-images #reading-globo-terraqueo

Global investors must address two fundamentally interrelated questions: where to invest and in what asset classes? Some countries may be attractive from an equity perspective because of their strong economic growth and the profitability of particular domestic sectors or industries. Other countries may be attractive from a fixed income perspective because of their interest rate environment and price stability. To identify markets that are expected to provide attractive investment opportunities, investors must analyze cross-country differences in such factors as expected GDP growth rates, monetary and fiscal policies, trade policies, and competitiveness. From a longer term perspective investors also need to consider such factors as a country’s stage of economic and financial market development, demographics, quality and quantity of physical and human capital (accumulated education and training of workers), and its area(s) of comparative advantage.1

This reading provides a framework for analyzing a country’s trade and capital flows and their economic implications. International trade can facilitate economic growth by increasing the efficiency of resource allocation, providing access to larger capital and product markets, and facilitating specialization based on comparative advantage. The flow of financial capital (funds available for investment) between countries with excess savings and those where financial capital is scarce can increase liquidity, raise output, and lower the cost of capital. From an investment perspective, it is important to understand the complex and dynamic nature of international trade and capital flows because investment opportunities are increasingly exposed to the forces of global competition for markets, capital, and ideas.

This reading is organized as follows. Section 2 defines basic terminology used in the reading and describes patterns and trends in international trade and capital flows. It also discusses the benefits of international trade, distinguishes between absolute and comparative advantage, and explains two traditional models of comparative advantage. Section 3 describes trade restrictions and their implications and discusses the motivation for, and advantages of, trade agreements. Section 4 describes the balance of payments and Section 5 discusses the function and objectives of international organizations that facilitate trade. A summary of key points and practice problems conclude the reading.

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Reading 20  Currency Exchange Rates Introduction
#globo-terraqueo-session #has-images #reading-fajo-de-pounds

Measured by daily turnover, the foreign exchange (FX) market—the market in which currencies are traded against each other—is by far the world’s largest market. Current estimates put daily turnover at approximately USD4 trillion for 2010. This is about 10 to 15 times larger than daily turnover in global fixed-income markets and about 50 times larger than global turnover in equities. Moreover, volumes in FX turnover continue to grow: Some predict that daily FX turnover will reach USD10 trillion by 2020 as market participation spreads and deepens.

The FX market is also a truly global market that operates 24 hours a day, each business day. It involves market participants from every time zone connected through electronic communications networks that link players as large as multibillion-dollar investment funds and as small as individuals trading for their own account—all brought together in real time. International trade would be impossible without the trade in currencies that facilitates it, and so too would cross-border capital flows that connect all financial markets globally through the FX market.

These factors make foreign exchange a key market for investors and market participants to understand. The world economy is increasingly transnational in nature, with both production processes and trade flows often determined more by global factors than by domestic considerations. Likewise, investment portfolio performance increasingly reflects global determinants because pricing in financial markets responds to the array of investment opportunities available worldwide, not just locally. All of these factors funnel through, and are reflected in, the foreign exchange market. As investors shed their “home bias” and invest in foreign markets, the exchange rate—the price at which foreign-currency-denominated investments are valued in terms of the domestic currency—becomes an increasingly important determinant of portfolio performance.

Even investors adhering to a purely “domestic” portfolio mandate are increasingly affected by what happens in the foreign exchange market. Given the globalization of the world economy, most large companies depend heavily on their foreign operations (for example, by some estimates about 40 percent of S&P 500 Index earnings are from outside the United States). Almost all companies are exposed to some degree of foreign competition, and the pricing for domestic assets—equities, bonds, real estate, and others—will also depend on demand from foreign investors. All of these various influences on investment performance reflect developments in the foreign exchange market.

This reading introduces the foreign exchange market, providing the basic concepts and terminology necessary to understand exchange rates as well as some of the basics of exchange rate economics.

The reading is divided up as follows. Section 2 describes the organization of the foreign exchange market and discusses the major players—who they are, how they conduct their business, and how they respond to exchange rate changes. Section 3 takes up the mechanics of exchange rates: definitions, quotes, and calculations. This section shows that the reader has to pay close attention to conventions used in various foreign exchange markets around the world because they can vary widely. Sometimes exchange rates are quoted in the number of domestic currency units per unit of foreign currency, and sometimes they are quoted in the opposite way. The exact notation used to represent exchange rates can vary widely as well, and occasionally the same exchange rate notation will be used by different sources to mean completely different things. The notation used here may not be the same as that encountered elsewhere. Therefore, the focus should be on understanding the underlying concepts rather than relying on rote memorization of formulas. We also show how to calculate cross-exchange rates and how to compute the forward exchange rate given either the forward points or the percentage forward p

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Reading 21  Financial Statement Analysis: An Introduction Intro
#has-images #megafono-session #reading-megafono

Financial analysis is the process of examining a company’s performance in the context of its industry and economic environment in order to arrive at a decision or recommendation. Often, the decisions and recommendations addressed by financial analysts pertain to providing capital to companies—specifically, whether to invest in the company’s debt or equity securities and at what price. An investor in debt securities is concerned about the company’s ability to pay interest and to repay the principal lent. An investor in equity securities is an owner with a residual interest in the company and is concerned about the company’s ability to pay dividends and the likelihood that its share price will increase. Overall, a central focus of financial analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities. Fundamental financial analysis starts with the information found in a company’s financial reports. These financial reports include audited financial statements, additional disclosures required by regulatory authorities, and any accompanying (unaudited) commentary by management. Basic financial statement analysis—as presented in this reading—provides a foundation that enables the analyst to better understand information gathered from research beyond the financial reports.

This reading is organized as follows: Section 2 discusses the scope of financial statement analysis. Section 3 describes the sources of information used in financial statement analysis, including the primary financial statements (statement of financial position or balance sheet, statement of comprehensive income, statement of changes in equity, and cash flow statement). Section 4 provides a framework for guiding the financial statement analysis process. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 22  Financial Reporting Mechanics Introduction
#has-images #megafono-session #reading-agustin-rios

The financial statements of a company are end-products of a process for recording transactions of the company related to operations, financing, and investment. The structures of financial statements themselves reflect the system of recording and organizing transactions. To be an informed user of financial statements, the analyst must be knowledgeable about the principles of this system. This reading will supply that essential knowledge, taking the perspective of the user rather than the preparer. Learning the process from this perspective will enable an analyst to grasp the critical concepts without being overwhelmed by the detailed technical skills required by the accountants who prepare financial statements that are a major component of financial reports.

This reading is organized as follows: Section 2 describes the three groups into which business activities are classified for financial reporting purposes. Any transaction affects one or more of these groups. Section 3 describes how the elements of financial statements relate to accounts, the basic content unit of classifying transactions. The section is also an introduction to the linkages among the financial statements. Section 4 provides a step-by-step illustration of the accounting process. Section 5 explains the consequences of timing differences between the elements of a transaction. Section 6 provides an overview of how information flows through a business’s accounting system. Section 7 introduces the use of financial reporting in security analysis. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 23  Financial Reporting Standards Introduction
#has-images #megafono-session #reading-estandarte

Financial reporting standards provide principles for preparing financial reports and determine the types and amounts of information that must be provided to users of financial statements, including investors and creditors, so that they may make informed decisions. This reading focuses on the framework within which these standards are created. An understanding of the underlying framework of financial reporting standards, which is broader than knowledge of specific accounting rules, will allow an analyst to assess the valuation implications of financial statement elements and transactions—including transactions, such as those that represent new developments, which are not specifically addressed by the standards.

Section 2 of this reading discusses the objective of financial statements and the importance of financial reporting standards in security analysis and valuation. Section 3 describes the roles of financial reporting standard-setting bodies and regulatory authorities and several of the financial reporting standard-setting bodies and regulatory authorities. Section 4 describes the trend toward and barriers to convergence of global financial reporting standards. Section 5 describes the International Financial Reporting Standards (IFRS) framework1 and general requirements for financial statements. Section 6 discusses the characteristics of an effective financial reporting framework along with some of the barriers to a single coherent framework. Section 7 illustrates some of the specific differences between IFRS and US generally accepted accounting practices (US GAAP), and Section 8 discusses the importance of monitoring developments in financial reporting standards. A summary of the key points and practice problems in the CFA Institute multiple choice format conclude the reading.

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Reading 24  Understanding Income Statements Intro
#bascula-session #reading-embudo

The income statement presents information on the financial results of a company’s business activities over a period of time. The income statement communicates how much revenue the company generated during a period and what costs it incurred in connection with generating that revenue. The basic equation underlying the income statement, ignoring gains and losses, is Revenue minus Expenses equals Net income. The income statement is also sometimes referred to as the “statement of operations,” “statement of earnings,” or “profit and loss (P&L) statement.” Under International Financial Reporting Standards (IFRS), the income statement may be presented as a separate statement followed by a statement of comprehensive income that begins with the profit or loss from the income statement or as a section of a single statement of comprehensive income.1 US generally accepted accounting principles (US GAAP) permit the same alternative presentation formats.2 This reading focuses on the income statement, but also discusses comprehensive income (profit or loss from the income statement plus other comprehensive income).

Investment analysts intensely scrutinize companies’ income statements.3 Equity analysts are interested in them because equity markets often reward relatively high- or low-earnings growth companies with above-average or below-average valuations, respectively, and because inputs into valuation models often include estimates of earnings. Fixed-income analysts examine the components of income statements, past and projected, for information on companies’ abilities to make promised payments on their debt over the course of the business cycle. Corporate financial announcements frequently emphasize information reported in income statements, particularly earnings, more than information reported in the other financial statements.

This reading is organized as follows: Section 2 describes the components of the income statement and its format. Section 3 describes basic principles and selected applications related to the recognition of revenue, and Section 4 describes basic principles and selected applications related to the recognition of expenses. Section 5 covers non-recurring items and non-operating items. Section 6 explains the calculation of earnings per share. Section 7 introduces income statement analysis, and Section 8 explains comprehensive income and its reporting. A summary of the key points and practice problems in the CFA Institute multiple choice format complete the reading.

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Reading 25  Understanding Balance Sheets Introduction
#bascula-session #has-images #reading-camara-fotografica

The balance sheet provides information on a company’s resources (assets) and its sources of capital (equity and liabilities/debt). This information helps an analyst assess a company’s ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners. The basic equation underlying the balance sheet is Assets = Liabilities + Equity.

Analysts should be aware that different items of assets and liabilities may be measured differently. For example, some items are measured at historical cost or a variation thereof and others at fair value.1 An understanding of the measurement issues will facilitate analysis. The balance sheet measurement issues are, of course, closely linked to the revenue and expense recognition issues affecting the income statement. Throughout this reading, we describe and illustrate some of the linkages between the measurement issues affecting the balance sheet and the revenue and expense recognition issues affecting the income statement.

This reading is organized as follows: In Section 2, we describe and give examples of the elements and formats of balance sheets. Section 3 discusses current assets and current liabilities. Section 4 focuses on assets, and Section 5 focuses on liabilities. Section 6 describes the components of equity and illustrates the statement of changes in shareholders’ equity. Section 7 introduces balance sheet analysis. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 26  Understanding Cash Flow Statements Introduction
#bascula-session #has-images #reading-grifo

The cash flow statement provides information about a company’s cash receipts and cash payments during an accounting period. The cash-based information provided by the cash flow statement contrasts with the accrual-based information from the income statement. For example, the income statement reflects revenues when earned rather than when cash is collected; in contrast, the cash flow statement reflects cash receipts when collected as opposed to when the revenue was earned. A reconciliation between reported income and cash flows from operating activities provides useful information about when, whether, and how a company is able to generate cash from its operating activities. Although income is an important measure of the results of a company’s activities, cash flow is also essential. As an extreme illustration, a hypothetical company that makes all sales on account, without regard to whether it will ever collect its accounts receivable, would report healthy sales on its income statement and might well report significant income; however, with zero cash inflow, the company would not survive. The cash flow statement also provides a reconciliation of the beginning and ending cash on the balance sheet.

In addition to information about cash generated (or, alternatively, cash used) in operating activities, the cash flow statement provides information about cash provided (or used) in a company’s investing and financing activities. This information allows the analyst to answer such questions as:

  • Does the company generate enough cash from its operations to pay for its new investments, or is the company relying on new debt issuance to finance them?

  • Does the company pay its dividends to common stockholders using cash generated from operations, from selling assets, or from issuing debt?

Answers to these questions are important because, in theory, generating cash from operations can continue indefinitely, but generating cash from selling assets, for example, is possible only as long as there are assets to sell. Similarly, generating cash from debt financing is possible only as long as lenders are willing to lend, and the lending decision depends on expectations that the company will ultimately have adequate cash to repay its obligations. In summary, information about the sources and uses of cash helps creditors, investors, and other statement users evaluate the company’s liquidity, solvency, and financial flexibility.

This reading explains how cash flow activities are reflected in a company’s cash flow statement. The reading is organized as follows. Section 2 describes the components and format of the cash flow statement, including the classification of cash flows under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP) and the direct and indirect formats for presenting the cash flow statement. Section 3 discusses the linkages of the cash flow statement with the income statement and balance sheet and the steps in the preparation of the cash flow statement. Section 4 demonstrates the analysis of cash flow statements, including the conversion of an indirect cash flow statement to the direct method and how to use common-size cash flow analysis, free cash flow measures, and cash flow ratios used in security analysis. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 27  Financial Analysis Techniques Introduction
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Financial analysis tools can be useful in assessing a company’s performance and trends in that performance. In essence, an analyst converts data into financial metrics that assist in decision making. Analysts seek to answer such questions as: How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of this company or the securities it issues?

A primary source of data is a company’s annual report, including the financial statements and notes, and management commentary (operating and financial review or management’s discussion and analysis). This reading focuses on data presented in financial reports prepared under International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (US GAAP). However, financial reports do not contain all the information needed to perform effective financial analysis. Although financial statements do contain data about the past performance of a company (its income and cash flows) as well as its current financial condition (assets, liabilities, and owners’ equity), such statements do not necessarily provide all the information useful for analysis nor do they forecast future results. The financial analyst must be capable of using financial statements in conjunction with other information to make projections and reach valid conclusions. Accordingly, an analyst typically needs to supplement the information found in a company’s financial reports with other information, including information on the economy, industry, comparable companies, and the company itself.

This reading describes various techniques used to analyze a company’s financial statements. Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, conducting due diligence related to an acquisition, or assessing a subsidiary’s performance. This reading will describe techniques common to any financial analysis and then discuss more specific aspects for the two most common categories: equity analysis and credit analysis.

Equity analysis incorporates an owner’s perspective, either for valuation or performance evaluation. Credit analysis incorporates a creditor’s (such as a banker or bondholder) perspective. In either case, there is a need to gather and analyze information to make a decision (ownership or credit); the focus of analysis varies because of the differing interest of owners and creditors. Both equity and credit analyses assess the entity’s ability to generate and grow earnings, and cash flow, as well as any associated risks. Equity analysis usually places a greater emphasis on growth, whereas credit analysis usually places a greater emphasis on risks. The difference in emphasis reflects the different fundamentals of these types of investments: The value of a company’s equity generally increases as the company’s earnings and cash flow increase, whereas the value of a company’s debt has an upper limit.1

The balance of this reading is organized as follows: Section 2 recaps the framework for financial statements and the place of financial analysis techniques within the framework. Section 3 provides a description of analytical tools and techniques. Section 4 explains how to compute, analyze, and interpret common financial ratios. Sections 5 through 8 explain the use of ratios and other analytical data in equity analysis, credit analysis, segment analysis, and forecasting, respectively. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 28  Inventories Introduction
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Merchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent a significant asset on these companies’ balance sheets. Merchandisers (wholesalers and retailers) purchase inventory, ready for sale, from manufacturers and thus account for only one type of inventory—finished goods inventory. Manufacturers, however, purchase raw materials from suppliers and then add value by transforming the raw materials into finished goods. They typically classify inventory into three different categories: raw materials, work in progress, and finished goods. Work-in-progress inventories have started the conversion process from raw materials but are not yet finished goods ready for sale. Manufacturers may report either the separate carrying amounts of their raw materials, work-in-progress, and finished goods inventories on the balance sheet or simply the total inventory amount. If the latter approach is used, the company must then disclose the carrying amounts of its raw materials, work-in-progress, and finished goods inventories in a footnote to the financial statements.

Inventories and cost of sales (cost of goods sold)3 are significant items in the financial statements of many companies. Comparing the performance of these companies is challenging because of the allowable choices for valuing inventories: Differences in the choice of inventory valuation method can result in significantly different amounts being assigned to inventory and cost of sales. Financial statement analysis would be much easier if all companies used the same inventory valuation method or if inventory price levels remained constant over time. If there was no inflation or deflation with respect to inventory costs and thus unit costs were unchanged, the choice of inventory valuation method would be irrelevant. However, inventory price levels typically do change over time.

International Financial Reporting Standards (IFRS) permit the assignment of inventory costs (costs of goods available for sale) to inventories and cost of sales by three cost formulas: specific identification, first-in, first-out (FIFO), and weighted average cost.4 US generally accepted accounting principles (US GAAP) allow the same three inventory valuation methods, referred to as cost flow assumptions in US GAAP, but also include a fourth method called last-in, first-out (LIFO).5 The choice of inventory valuation method affects the allocation of the cost of goods available for sale to ending inventory and cost of sales. Analysts must understand the various inventory valuation methods and the related impact on financial statements and financial ratios in order to evaluate a company’s performance over time and relative to industry peers. The company’s financial statements and related notes provide important information that the analyst can use in assessing the impact of the choice of inventory valuation method on financial statements and financial ratios.

This reading is organized as follows: Section 2 discusses the costs that are included in inventory and the costs that are recognised as expenses in the period in which they are incurred. Section 3 describes inventory valuation methods and compares the measurement of ending inventory, cost of sales and gross profit under each method, and when using periodic versus perpetual inventory systems. Section 4 describes the LIFO method, LIFO reserve, and effects of LIFO liquidations, and demonstrates the adjustments required to compare a com

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Reading 29  Long-Lived Assets Introduction
#essay-tubes-session #has-images #reading-max

Long-lived assets, also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.1 Long-lived assets may be tangible, intangible, or financial assets. Examples of long-lived tangible assets, typically referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles; examples of long-lived intangible assets (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets include investments in equity or debt securities issued by other companies. The scope of this reading is limited to long-lived tangible and intangible assets (hereafter, referred to for simplicity as long-lived assets).

The first issue in accounting for a long-lived asset is determining its cost at acquisition. The second issue is how to allocate the cost to expense over time. The costs of most long-lived assets are capitalised and then allocated as expenses in the profit or loss (income) statement over the period of time during which they are expected to provide economic benefits. The two main types of long-lived assets with costs that are typically not allocated over time are land, which is not depreciated, and those intangible assets with indefinite useful lives. Additional issues that arise are the treatment of subsequent costs incurred related to the asset, the use of the cost model versus the revaluation model, unexpected declines in the value of the asset, classification of the asset with respect to intent (for example, held for use or held for sale), and the derecognition of the asset.

This reading is organised as follows. Section 2 describes and illustrates accounting for the acquisition of long-lived assets, with particular attention to the impact of capitalizing versus expensing expenditures. Section 3 describes the allocation of the costs of long-lived assets over their useful lives. Section 4 discusses the revaluation model that is based on changes in the fair value of an asset. Section 5 covers the concepts of impairment (unexpected decline in the value of an asset). Section 6 describes accounting for the derecognition of long-lived assets. Section 7 describes financial statement presentation, disclosures, and analysis of long-lived assets. Section 8 discusses differences in financial reporting of investment property compared with property, plant, and equipment. Section 9 describes accounting for leases. A summary is followed by practice problems.

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Reading 30  Income Taxes Introduction
#essay-tubes-session #has-images #reading-rey-arturo-corona

For those companies reporting under International Financial Reporting Standards (IFRS), IAS 12 [Income Taxes] covers accounting for a company's income taxes and the reporting of deferred taxes. For those companies reporting under United States generally accepted accounting principles (US GAAP), FASB ASC Topic 740 [Income Taxes] is the primary source for information on accounting for income taxes. Although IFRS and US GAAP follow similar conventions on many income tax issues, there are some key differences that will be discussed in the reading.

Differences between how and when transactions are recognized for financial reporting purposes relative to tax reporting can give rise to differences in tax expense and related tax assets and liabilities. To reconcile these differences, companies that report under either IFRS or US GAAP create a provision on the balance sheet called deferred tax assets or deferred tax liabilities, depending on the nature of the situation.

Deferred tax assets or liabilities usually arise when accounting standards and tax authorities recognize the timing of revenues and expenses at different times. Because timing differences such as these will eventually reverse over time, they are called “temporary differences.” Deferred tax assets represent taxes that have been recognized for tax reporting purposes (or often the carrying forward of losses from previous periods) but have not yet been recognized on the income statement prepared for financial reporting purposes. Deferred tax liabilities represent tax expense that has appeared on the income statement for financial reporting purposes, but has not yet become payable under tax regulations.

This reading provides a primer on the basics of income tax accounting and reporting. The reading is organized as follows. Section 2 describes the differences between taxable income and accounting profit. Section 3 explains the determination of tax base, which relates to the valuation of assets and liabilities for tax purposes. Section 4 discusses several types of timing differences between the recognition of taxable and accounting profit. Section 5 examines unused tax losses and tax credits. Section 6 describes the recognition and measurement of current and deferred tax. Section 7 discusses the disclosure and presentation of income tax information on companies' financial statements and illustrates its practical implications for financial analysis. Section 8 provides an overview of the similarities and differences for income-tax reporting between IFRS and US GAAP. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 31  Non-Current (Long-Term) Liabilities Introduction
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A non-current liability (long-term liability) broadly represents a probable sacrifice of economic benefits in periods generally greater than one year in the future. Common types of non-current liabilities reported in a company’s financial statements include long-term debt (e.g., bonds payable, long-term notes payable), finance leases, pension liabilities, and deferred tax liabilities. This reading focuses on bonds payable and leases. Pension liabilities are also introduced.

This reading is organised as follows. Section 2 describes and illustrates the accounting for long-term bonds, including the issuance of bonds, the recording of interest expense and interest payments, the amortisation of any discount or premium, the derecognition of debt, and the disclosure of information about debt financings. In discussing the financial statement effects and analyses of these issues, we focus on solvency and coverage ratios. Section 3 discusses leases, including benefits of leasing and accounting for leases by both lessees and lessors. Section 4 provides an introduction to pension accounting and the resulting non-current liabilities. Section 5 discusses the use of leverage and coverage ratios in evaluating solvency. Section 6 concludes and summarises the reading. Practice problems in the CFA Institute format are included after the reading.

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Reading 32  Financial Reporting Quality Introduction
#bisturi-session #has-images #reading-machaca-de-sonora

Ideally, analysts would always have access to financial reports that are based on sound financial reporting standards, such as those from the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), and are free from manipulation. But, in practice, the quality of financial reports can vary greatly. High-quality financial reporting provides information that is useful to analysts in assessing a company’s performance and prospects. Low-quality financial reporting contains inaccurate, misleading, or incomplete information.

Extreme lapses in financial reporting quality have given rise to high-profile scandals that resulted not only in investor losses but also in reduced confidence in the financial system. Financial statement users who were able to accurately assess financial reporting quality were better positioned to avoid losses. These lapses illustrate the challenges analysts face as well as the potential costs of failing to recognize practices that result in misleading or inaccurate financial reports.1Examples of misreporting can provide an analyst with insight into various signals that may indicate poor-quality financial reports.

It is important to be aware, however, that high-profile financial scandals reflect only those instances of misreporting that were identified. Although no one can know the extent of undetected misreporting, some research suggests that it is relatively widespread. An Ernst & Young 2013 survey of more than 3,000 board members, executives, managers, and other employees in 36 countries across Europe, the Middle East, India, and Africa indicates that 20% of the respondents had seen manipulation (such as overstated sales and understated costs) occurring in their own companies, and 42% of board directors and senior managers were aware of some type of irregular financial reporting in their own companies (Ernst & Young, 2013). Another survey of 169 chief financial officers of public US companies found that they believed, on average, that “in any given period, about 20% of companies manage earnings to misrepresent economic performance, and for such companies 10% of EPS [earnings per share] is typically managed” (Dichev, Graham, Harvey, and Rajgopal, 2013).

This reading addresses financial reporting quality, which pertains to the quality of information in financial reports, including disclosures in notes. High-quality reporting provides decision-useful information, which is relevant and faithfully represents the economic reality of the company’s activities during the reporting period as well as the company’s financial condition at the end of the period. A separate but interrelated attribute of quality is quality of reported results or earnings quality, which pertains to the earnings and cash generated by the company’s actual economic activities and the resulting financial condition. The term “earnings quality” is commonly used in practice and will be used broadly to encompass the quality of earnings, cash flow, and/or balance sheet items. High-quality earnings result from activities that a company will likely be able to sustain in the future and provide a sufficient return on the company’s investment. The concepts of earnings quality and financial reporting quality are interrelated because a correct assessment of earnings quality is possible only when there is some basic level of financial reporting quality. Beyond this basic level, as the quality of reporting increases, the ability of financial statement users to correctly assess earnings quality and to develop expectations for future performance arguably also increases.

Section 2 provides a conceptual over

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Reading 33  Financial Statement Analysis: Applications Intro
#bisturi-session #has-images #reading-llave-de-tuercas

This reading presents several important applications of financial statement analysis. Among the issues we will address are the following:

  • What are the key questions to address in evaluating a company’s past financial performance?

  • How can an analyst approach forecasting a company’s future net income and cash flow?

  • How can financial statement analysis be used to evaluate the credit quality of a potential fixed-income investment?

  • How can financial statement analysis be used to screen for potential equity investments?

  • How can differences in accounting methods affect financial ratio comparisons between companies, and what are some adjustments analysts make to reported financials to facilitate comparability among companies.

The reading “Financial Statement Analysis: An Introduction” described a framework for conducting financial statement analysis. Consistent with that framework, prior to undertaking any analysis, an analyst should explore the purpose and context of the analysis. The purpose and context guide further decisions about the approach, the tools, the data sources, and the format in which to report results of the analysis, and also suggest which aspects of the analysis are most important. Having identified the purpose and context, the analyst should then be able to formulate the key questions that the analysis must address. The questions will suggest the data the analyst needs to collect to objectively address the questions. The analyst then processes and analyzes the data to answer these questions. Conclusions and decisions based on the analysis are communicated in a format appropriate to the context, and follow-up is undertaken as required. Although this reading will not formally present applications as a series of steps, the process just described is generally applicable.

Section 2 of this reading describes the use of financial statement analysis to evaluate a company’s past financial performance, and Section 3 describes basic approaches to projecting a company’s future financial performance. Section 4 presents the use of financial statement analysis in assessing the credit quality of a potential debt investment. Section 5 concludes the survey of applications by describing the use of financial statement analysis in screening for potential equity investments. Analysts often encounter situations in which they must make adjustments to a company’s reported financial results to increase their accuracy or comparability with the financials of other companies. Section 6 illustrates several common types of analyst adjustments. Section 7 presents a summary, and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 34  Corporate Governance and ESG: An Introduction
#has-images #puerquito-session #reading-puerquito-verde

Weak corporate governance is a common thread found in many company failures. A lack of proper oversight by the board of directors, inadequate protection for minority shareholders, and incentives at companies that promote excessive risk taking are just a few of the examples that can be problematic for a company. Poor corporate governance practices resulted in several high-profile accounting scandals and corporate bankruptcies over the past several decades and have been cited as significantly contributing to the 2008–2009 global financial crisis.

In response to these company failures, regulations have been introduced to promote stronger governance practices and protect financial markets and investors. Academics, policy makers, and other groups have published numerous works discussing the benefits of good corporate governance and identifying core corporate governance principles believed to be essential to ensuring sound capital markets and the stability of the financial system.

The investment community has also demonstrated a greater appreciation for the importance of good corporate governance. The assessment of a company’s corporate governance system, including consideration of conflicts of interest and transparency of operations, has increasingly become an essential factor in the investment decision-making process. Additionally, investors have become more attentive to environment and social issues related to a company’s operations. Collectively, these areas often are referred to as environmental, social, and governance (ESG).

Section 2 of this reading provides an overview of corporate governance, including its underlying principles and theories. Section 3 discusses the various stakeholders of a company and conflicts of interest that exist among stakeholder groups. Section 4 describes stakeholder management, reflecting how companies manage their relationships with stakeholders. Section 5 focuses on the role of the board of directors and its committees as overseers of the company. Section 6 explores certain key factors that affect corporate governance. Section 7 highlights the risks and benefits that underlie a corporate governance structure. Section 8 provides an overview of corporate governance issues relevant for investment professionals. Finally, Section 9 discusses the growing effect of environmental and social considerations in the investment process.

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Reading 35  Capital Budgeting Introduction
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Capital budgeting is the process that companies use for decision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons.

  • First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations.

  • Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding.

  • Third, the valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management. Many of the methods used by security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting.

  • Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus.

This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeting in Section 3, in Section 4 we discuss the criteria by which a decision to invest in a project may be made.

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Reading 36  Cost of Capital Introduction
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A company grows by making investments that are expected to increase revenues and profits. The company acquires the capital or funds necessary to make such investments by borrowing or using funds from owners. By applying this capital to investments with long-term benefits, the company is producing value today. But, how much value? The answer depends not only on the investments’ expected future cash flows but also on the cost of the funds. Borrowing is not costless. Neither is using owners’ funds.

The cost of this capital is an important ingredient in both investment decision making by the company’s management and the valuation of the company by investors. If a company invests in projects that produce a return in excess of the cost of capital, the company has created value; in contrast, if the company invests in projects whose returns are less than the cost of capital, the company has actually destroyed value. Therefore, the estimation of the cost of capital is a central issue in corporate financial management. For the analyst seeking to evaluate a company’s investment program and its competitive position, an accurate estimate of a company’s cost of capital is important as well.

Cost of capital estimation is a challenging task. As we have already implied, the cost of capital is not observable but, rather, must be estimated. Arriving at a cost of capital estimate requires a host of assumptions and estimates. Another challenge is that the cost of capital that is appropriately applied to a specific investment depends on the characteristics of that investment: The riskier the investment’s cash flows, the greater its cost of capital. In reality, a company must estimate project-specific costs of capital. What is often done, however, is to estimate the cost of capital for the company as a whole and then adjust this overall corporate cost of capital upward or downward to reflect the risk of the contemplated project relative to the company’s average project.

This reading is organized as follows: In the next section, we introduce the cost of capital and its basic computation. Section 3 presents a selection of methods for estimating the costs of the various sources of capital. Section 4 discusses issues an analyst faces in using the cost of capital. A summary concludes the reading.

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Reading 37  Measures of Leverage Intro
#has-images #pie-de-cabra-session #reading-pie-de-cabra

This reading presents elementary topics in leverage. Leverage is the use of fixed costs in a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.

Analysts refer to the use of fixed costs as leverage because fixed costs act as a fulcrum for the company’s earnings. Leverage can magnify earnings both up and down. The profits of highly leveraged companies might soar with small upturns in revenue. But the reverse is also true: Small downturns in revenue may lead to losses.

Analysts need to understand a company’s use of leverage for three main reasons. First, the degree of leverage is an important component in assessing a company’s risk and return characteristics. Second, analysts may be able to discern information about a company’s business and future prospects from management’s decisions about the use of operating and financial leverage. Knowing how to interpret these signals also helps the analyst evaluate the quality of management’s decisions. Third, the valuation of a company requires forecasting future cash flows and assessing the risk associated with those cash flows. Understanding a company’s use of leverage should help in forecasting cash flows and in selecting an appropriate discount rate for finding their present value.

The reading is organized as follows: Section 2 introduces leverage and defines important terms. Section 3 illustrates and discusses measures of operating leverage and financial leverage, which combine to define a measure of total leverage that gauges the sensitivity of net income to a given percent change in units sold. This section also covers breakeven points in using leverage and corporate reorganization (a possible consequence of using leverage inappropriately). A summary and practice problems conclude this reading.

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Reading 39  Portfolio Management: An Overview Intro
#has-images #portfolio-session #reading-portafolios
In this reading we explain why the portfolio approach is important to all types of investors in achieving their financial goals. We compare the financial needs of different types of individual and institutional investors. After we outline the steps in the portfolio management process, we compare and contrast the types of investment management products that are available to investors and how they apply to the portfolio approach.

One of the biggest challenges faced by individuals and institutions is to decide how to invest for future needs. For individuals, the goal might be to fund retirement needs. For such institutions as insurance companies, the goal is to fund future liabilities in the form of insurance claims, whereas endowments seek to provide income to meet the ongoing needs of such institutions as universities. Regardless of the ultimate goal, all face the same set of challenges that extend beyond just the choice of what asset classes to invest in. They ultimately center on formulating basic principles that determine how to think about investing. One important question is: Should we invest in individual securities, evaluating each in isolation, or should we take a portfolio approach? By “portfolio approach,” we mean evaluating individual securities in relation to their contribution to the investment characteristics of the whole portfolio. In the following section, we illustrate a number of reasons why a diversified portfolio perspective is important.
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Reading 40  Risk Management: An Introduction Intro
#has-images #portfolio-session #reading-tiburon

Risk—and risk management—is an inescapable part of economic activity. People generally manage their affairs in order to be as happy and secure as their environment and resources will allow. But regardless of how carefully these affairs are managed, there is risk because the outcome, whether good or bad, is seldom predictable with complete certainty. There is risk inherent in nearly everything we do, but this reading will focus on economic and financial risk, particularly as it relates to investment management.

All businesses and investors manage risk, whether consciously or not, in the choices they make. At its core, business and investing are about allocating resources and capital to chosen risks. In their decision process, within an environment of uncertainty, these entities may take steps to avoid some risks, pursue the risks that provide the highest rewards, and measure and mitigate their exposure to these risks as necessary. Risk management processes and tools make difficult business and financial problems easier to address in an uncertain world. Risk is not just a matter of fate; it is something that organizations can actively control with their decisions, within a risk management framework. Risk is an integral part of the business or investment process. Even in the earliest models of modern portfolio theory, such as mean–variance portfolio optimization and the capital asset pricing model, investment return is linked directly to risk but requires that risk be managed optimally. Proper identification and measurement of risk, and keeping risks aligned with the goals of the enterprise, are key factors in managing businesses and investments. Good risk management results in a higher chance of a preferred outcome—more value for the company or portfolio or more utility for the individual.

Portfolio managers need to be familiar with risk management not only to improve the portfolio’s risk–return outcome, but also because of two other ways in which they use risk management at an enterprise level. First, they help to manage their own companies that have their own enterprise risk issues. Second, many portfolio assets are claims on companies that have risks. Portfolio managers need to evaluate the companies’ risks and how those companies are addressing them.

This reading takes a broad approach that addresses both the risk management of enterprises in general and portfolio risk management. The principles underlying portfolio risk management are generally applicable to the risk management of financial and non-financial institutions as well.

The concept of risk management is also relevant to individuals. Although many large entities formally practice risk management, most individuals practice it more informally and some practice it haphazardly, oftentimes responding to risk events after they occur. Although many individuals do take reasonable precautions against unwanted risks, these precautions are often against obvious risks, such as sticking a wet hand into an electrical socket or swallowing poison. The more subtle risks are often ignored. Many individuals simply do not view risk management as a formal, systematic process that would help them achieve not only their financial goals but also the ultimate end result of happiness, or maximum utility as economists like to call it, but they should.

Although the primary focus of this reading is on institutions, we will also cover risk management as it applies to individuals. We will show that many common themes underlie risk management—themes that are applicable to both organizations and individuals.

Although often viewed as defensive, risk management is a valuable offensive weapon in the manager’s arsenal. In the quest for preferred outcomes, such as higher profit, returns, or share price, management does not usually get to choose the outcomes but does choose the risks it takes in pursuit of those outcomes. The choice of which risks to undertake through the allocation of its scarce resources is the key

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Reading 41  Portfolio Risk and Return: Part I (Intro)
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Construction of an optimal portfolio is an important objective for an investor. In this reading, we will explore the process of examining the risk and return characteristics of individual assets, creating all possible portfolios, selecting the most efficient portfolios, and ultimately choosing the optimal portfolio tailored to the individual in question.

During the process of constructing the optimal portfolio, several factors and investment characteristics are considered. The most important of those factors are risk and return of the individual assets under consideration. Correlations among individual assets along with risk and return are important determinants of portfolio risk. Creating a portfolio for an investor requires an understanding of the risk profile of the investor. Although we will not discuss the process of determining risk aversion for individuals or institutional investors, it is necessary to obtain such information for making an informed decision. In this reading, we will explain the broad types of investors and how their risk–return preferences can be formalized to select the optimal portfolio from among the infinite portfolios contained in the investment opportunity set.

The reading is organized as follows: Section 2 discusses the investment characteristics of assets. In particular, we show the various types of returns and risks, their computation and their applicability to the selection of appropriate assets for inclusion in a portfolio. Section 3 discusses risk aversion and how indifference curves, which incorporate individual preferences, can be constructed. The indifference curves are then applied to the selection of an optimal portfolio using two risky assets. Section 4 provides an understanding and computation of portfolio risk. The role of correlation and diversification of portfolio risk are examined in detail. Section 5 begins with the risky assets available to investors and constructs a large number of risky portfolios. It illustrates the process of narrowing the choices to an efficient set of risky portfolios before identifying the optimal risky portfolio. The risky portfolio is combined with investor risk preferences to generate the optimal risky portfolio. A summary concludes this reading.

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Reading 42  Portfolio Risk and Return: Part II (Intro)
#has-images #portfolio-session #reading-apollo-creed

Our objective in this reading is to identify the optimal risky portfolio for all investors by using the capital asset pricing model (CAPM). The foundation of this reading is the computation of risk and return of a portfolio and the role that correlation plays in diversifying portfolio risk and arriving at the efficient frontier. The efficient frontier and the capital allocation line consist of portfolios that are generally acceptable to all investors. By combining an investor’s individual indifference curves with the market-determined capital allocation line, we are able to illustrate that the only optimal risky portfolio for an investor is the portfolio of all risky assets (i.e., the market).

Additionally, we discuss the capital market line, a special case of the capital allocation line that is used for passive investor portfolios. We also differentiate between systematic and nonsystematic risk, and explain why investors are compensated for bearing systematic risk but receive no compensation for bearing nonsystematic risk. We discuss in detail the CAPM, which is a simple model for estimating asset returns based only on the asset’s systematic risk. Finally, we illustrate how the CAPM allows security selection to build an optimal portfolio for an investor by changing the asset mix beyond a passive market portfolio.

The reading is organized as follows. In Section 2, we discuss the consequences of combining a risk-free asset with the market portfolio and provide an interpretation of the capital market line. Section 3 decomposes total risk into systematic and nonsystematic risk and discusses the characteristics of and differences between the two kinds of risk. We also introduce return-generating models, including the single-index model, and illustrate the calculation of beta by using formulas and graphically by using the security characteristic line. In Section 4, we introduce the capital asset pricing model and the security market line. We discuss many applications of the CAPM and the SML throughout the reading, including the use of expected return in making capital budgeting decisions, the evaluation of portfolios using the CAPM’s risk-adjusted return as the benchmark, security selection, and determining whether adding a new security to the current portfolio is appropriate. Our focus on the CAPM does not suggest that the CAPM is the only viable asset pricing model. Although the CAPM is an excellent starting point, more advanced readings expand on these discussions and extend the analysis to other models that account for multiple explanatory factors. A preview of a number of these models is given in Section 5, and a summary and practice problems conclude the reading.

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Reading 43  Basics of Portfolio Planning and Construction Intro
#has-images #portfolio-session #reading-bob-el-constructor

To build a suitable portfolio for a client, investment advisers should first seek to understand the client’s investment goals, resources, circumstances, and constraints. Investors can be categorized into broad groups based on shared characteristics with respect to these factors (e.g., various types of individual investors and institutional investors). Even investors within a given type, however, will invariably have a number of distinctive requirements. In this reading, we consider in detail the planning for investment success based on an individualized understanding of the client.

This reading is organized as follows: Section 2 discusses the investment policy statement, a written document that captures the client’s investment objectives and the constraints. Section 3 discusses the portfolio construction process, including the first step of specifying a strategic asset allocation for the client. A summary and practice problems conclude the reading.

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Reading 44  Market Organization and Structure (Intro)
#has-images #manzana-session #reading-arbol-de-manzanas

Financial analysts gather and process information to make investment decisions, including those related to buying and selling assets. Generally, the decisions involve trading securities, currencies, contracts, commodities, and real assets such as real estate. Consider several examples:

  • Fixed income analysts evaluate issuer credit-worthiness and macroeconomic prospects to determine which bonds and notes to buy or sell to preserve capital while obtaining a fair rate of return.

  • Stock analysts study corporate values to determine which stocks to buy or sell to maximize the value of their stock portfolios.

  • Corporate treasurers analyze exchange rates, interest rates, and credit conditions to determine which currencies to trade and which notes to buy or sell to have funds available in a needed currency.

  • Risk managers work for producers or users of commodities to calculate how many commodity futures contracts to buy or sell to manage inventory risks.

Financial analysts must understand the characteristics of the markets in which their decisions will be executed. This reading, by examining those markets from the analyst’s perspective, provides that understanding.

This reading is organized as follows. Section 2 examines the functions of the financial system. Section 3 introduces assets that investors, information-motivated traders, and risk managers use to advance their financial objectives and presents ways practitioners classify these assets into markets. These assets include such financial instruments as securities, currencies, and some contracts; certain commodities; and real assets. Financial analysts must know the distinctive characteristics of these trading assets.

Section 4 is an overview of financial intermediaries (entities that facilitate the functioning of the financial system). Section 5 discusses the positions that can be obtained while trading assets. You will learn about the benefits and risks of long and short positions, how these positions can be financed, and how the financing affects their risks. Section 6 discusses how market participants order trades and how markets process those orders. These processes must be understood to achieve trading objectives while controlling transaction costs.

Section 7 focuses on describing primary markets. Section 8 describes the structures of secondary markets in securities. Sections 9 and 10 close the reading with discussions of the characteristics of a well-functioning financial system and of how regulation helps make financial markets function better. A summary reviews the reading’s major ideas and points, and practice problems conclude.

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Reading 45  Security Market Indexes (Intro)
#has-images #manzana-session #reading-dedo-indice

Investors gather and analyze vast amounts of information about security markets on a continual basis. Because this work can be both time consuming and data intensive, investors often use a single measure that consolidates this information and reflects the performance of an entire security market.

Security market indexes were first introduced as a simple measure to reflect the performance of the US stock market. Since then, security market indexes have evolved into important multi-purpose tools that help investors track the performance of various security markets, estimate risk, and evaluate the performance of investment managers. They also form the basis for new investment products.

 

in·dex, noun (pl. in·dex·es or in·di·ces) Latin indic-, index, from indicare to indicate: an indicator, sign, or measure of something.

ORIGIN OF MARKET INDEXES

Investors had access to regularly published data on individual security prices in London as early as 1698, but nearly 200 years passed before they had access to a simple indicator to reflect security market information.1 To give readers a sense of how the US stock market in general performed on a given day, publishers Charles H. Dow and Edward D. Jones introduced the Dow Jones Average, the world’s first security market index, in 1884.2 The index, which appeared in The Customers’ Afternoon Letter, consisted of the stocks of nine railroads and two industrial companies. It eventually became the Dow Jones Transportation Average.3Convinced that industrial companies, rather than railroads, would be “the great speculative market” of the future, Dow and Jones introduced a second index in May 1896—the Dow Jones Industrial Average (DJIA). It had an initial value of 40.94 and consisted of 12 stocks from major US industries.4,5 Today, investors can choose from among thousands of indexes to measure and monitor different security markets and asset classes.

This reading is organized as follows. Section 2 defines a security market index and explains how to calculate the price return and total return of an index for a single period and over multiple periods. Section 3 describes how indexes are constructed and managed. Section 4 discusses the use of market indexes. Sections 5, 6, and 7 discuss various types of indexes, and the final section summarizes the reading. Practice problems follow the conclusions and summary.

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Reading 46  Market Efficiency (Intro)
#has-images #manzana-session #reading-pure-de-manzana

Market efficiency concerns the extent to which market prices incorporate available information. If market prices do not fully incorporate information, then opportunities may exist to make a profit from the gathering and processing of information. The subject of market efficiency is, therefore, of great interest to investment managers, as illustrated in Example 1.

EXAMPLE 1

Market Efficiency and Active Manager Selection

The chief investment officer (CIO) of a major university endowment fund has listed eight steps in the active manager selection process that can be applied both to traditional investments (e.g., common equity and fixed-income securities) and to alternative investments (e.g., private equity, hedge funds, and real assets). The first step specified is the evaluation of market opportunity:

What is the opportunity and why is it there? To answer this question we start by studying capital markets and the types of managers operating within those markets. We identify market inefficiencies and try to understand their causes, such as regulatory structures or behavioral biases. We can rule out many broad groups of managers and strategies by simply determining that the degree of market inefficiency necessary to support a strategy is implausible. Importantly, we consider the past history of active returns meaningless unless we understand why markets will allow those active returns to continue into the future.1

The CIO’s description underscores the importance of not assuming that past active returns that might be found in a historical dataset will repeat themselves in the future. Active returns refer to returns earned by strategies that do not assume that all information is fully reflected in market prices.

Governments and market regulators also care about the extent to which market prices incorporate information. Efficient markets imply informative prices—prices that accurately reflect available information about fundamental values. In market-based economies, market prices help determine which companies (and which projects) obtain capital. If these prices do not efficiently incorporate information about a company’s prospects, then it is possible that funds will be misdirected. By contrast, prices that are informative help direct scarce resources and funds available for investment to their highest-valued uses.2 Informative prices thus promote economic growth. The efficiency of a country’s capital markets (in which businesses raise financing) is an important characteristic of a well-functioning financial system.

The remainder of this reading is organized as follows. Section 2 provides specifics on how the efficiency of an asset market is described and discusses the factors affecting (i.e., contributing to and impeding) market efficiency. Section 3 presents an influential three-way classification of the efficiency of security markets and discusses its implications for fundamental analysis, technical analysis, and portfolio management. Section 4 presents several market anomalies (apparent market inefficiencies that have received enough attention to be individually identified and named) and describes how these anomalies relate to investment strategies. Section 5 introduces behavioral finance and how that field of study relates to market efficiency. A summ

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Reading 47  Overview of Equity Securities (Intro)
#has-images #lingote-de-oro-session #reading-ana-de-la-garza

Equity securities represent ownership claims on a company’s net assets. As an asset class, equity plays a fundamental role in investment analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios.

The study of equity securities is important for many reasons. First, the decision on how much of a client’s portfolio to allocate to equities affects the risk and return characteristics of the entire portfolio. Second, different types of equity securities have different ownership claims on a company’s net assets, which affect their risk and return characteristics in different ways. Finally, variations in the features of equity securities are reflected in their market prices, so it is important to understand the valuation implications of these features.

This reading provides an overview of equity securities and their different features and establishes the background required to analyze and value equity securities in a global context. It addresses the following questions:

  • What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s operations?

  • What are convertible preference shares, and why are they often used to raise equity for unseasoned or highly risky companies?

  • What are private equity securities, and how do they differ from public equity securities?

  • What are depository receipts and their various types, and what is the rationale for investing in them?

  • What are the risk factors involved in investing in equity securities?

  • How do equity securities create company value?

  • What is the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return?

The remainder of this reading is organized as follows. Section 2 provides an overview of global equity markets and their historical performance. Section 3 examines the different types and characteristics of equity securities, and Section 4 outlines the differences between public and private equity securities. Section 5 provides an overview of the various types of equity securities listed and traded in global markets. Section 6 discusses the risk and return characteristics of equity securities. Section 7 examines the role of equity securities in creating company value and the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return. The final section summarizes the reading.

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Reading 48  Introduction to Industry and Company Analysis (Intro)
#has-images #lingote-de-oro-session #reading-chimenea-industrial

Industry analysis is the analysis of a specific branch of manufacturing, service, or trade. Understanding the industry in which a company operates provides an essential framework for the analysis of the individual company—that is, company analysis. Equity analysis and credit analysis are often conducted by analysts who concentrate on one or several industries, which results in synergies and efficiencies in gathering and interpreting information.

Among the questions we address in this reading are the following:

  • What are the similarities and differences among industry classification systems?

  • How does an analyst go about choosing a peer group of companies?

  • What are the key factors to consider when analyzing an industry?

  • What advantages are enjoyed by companies in strategically well-positioned industries?

After discussing the uses of industry analysis in the next section, Sections 3 and 4 discuss, respectively, approaches to identifying similar companies and industry classification systems. Section 5 covers the description and analysis of industries. Also, Section 5, which includes an introduction to competitive analysis, provides a background to Section 6, which introduces company analysis. The reading ends with a summary, and practice problems follow the text.

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Reading 49  Equity Valuation: Concepts and Basic Tools (Intro)
#has-images #lingote-de-oro-session #reading-jens

Analysts gather and process information to make investment decisions, including buy and sell recommendations. What information is gathered and how it is processed depend on the analyst and the purpose of the analysis. Technical analysis uses such information as stock price and trading volume as the basis for investment decisions. Fundamental analysis uses information about the economy, industry, and company as the basis for investment decisions. Examples of fundamentals are unemployment rates, gross domestic product (GDP) growth, industry growth, and quality of and growth in company earnings. Whereas technical analysts use information to predict price movements and base investment decisions on the direction of predicted change in prices, fundamental analysts use information to estimate the value of a security and to compare the estimated value to the market price and then base investment decisions on that comparison.

This reading introduces equity valuation models used to estimate the intrinsic value(synonym: fundamental value) of a security; intrinsic value is based on an analysis of investment fundamentals and characteristics. The fundamentals to be considered depend on the analyst’s approach to valuation. In a top-down approach, an analyst examines the economic environment, identifies sectors that are expected to prosper in that environment, and analyzes securities of companies from previously identified attractive sectors. In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine valuation. Whatever the approach, an analyst who estimates the intrinsic value of an equity security is implicitly questioning the accuracy of the market price as an estimate of value. Valuation is particularly important in active equity portfolio management, which aims to improve on the return–risk trade-off of a portfolio’s benchmark by identifying mispriced securities.

This reading is organized as follows. Section 2 discusses the implications of differences between estimated value and market price. Section 3 introduces three major categories of valuation model. Section 4 presents an overview of present value models with a focus on the dividend discount model. Section 5 describes and examines the use of multiples in valuation. Section 6 explains asset-based valuation and demonstrates how these models can be used to estimate value. Section 7 states conclusions and summarizes the reading.

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Reading 50  Fixed-Income Securities: Defining Elements (Intro)
#estatua-session #has-images #reading-david-de-miguel-angel

Judged by total market value, fixed-income securities constitute the most prevalent means of raising capital globally. A fixed-income security is an instrument that allows governments, companies, and other types of issuers to borrow money from investors. Any borrowing of money is debt. The promised payments on fixed-income securities are, in general, contractual (legal) obligations of the issuer to the investor. For companies, fixed-income securities contrast to common shares in not having ownership rights. Payment of interest and repayment of principal (amount borrowed) are a prior claim on the company’s earnings and assets compared with the claim of common shareholders. Thus, a company’s fixed-income securities have, in theory, lower risk than that company’s common shares.

In portfolio management, fixed-income securities fulfill several important roles. They are a prime means by which investors—individual and institutional—can prepare to fund, with some degree of safety, known future obligations such as tuition payments or pension obligations. The correlations of fixed-income securities with common shares vary, but adding fixed-income securities to portfolios including common shares is usually an effective way of obtaining diversification benefits.

Among the questions this reading addresses are the following:

  • What set of features define a fixed-income security, and how do these features determine the scheduled cash flows?

  • What are the legal, regulatory, and tax considerations associated with a fixed-income security, and why are these considerations important for investors?

  • What are the common structures regarding the payment of interest and repayment of principal?

  • What types of provisions may affect the disposal or redemption of fixed-income securities?

Embarking on the study of fixed-income securities, please note that the terms “fixed-income securities,” “debt securities,” and “bonds” are often used interchangeably by experts and non-experts alike. We will also follow this convention, and where any nuance of meaning is intended, it will be made clear.1

The remainder of this reading is organized as follows. Section 2 describes, in broad terms, what an investor needs to know when investing in fixed-income securities. Section 3 covers both the nature of the contract between the issuer and the bondholders as well as the legal, regulatory, and tax framework within which this contract exists. Section 4 presents the principal and interest payment structures that characterize fixed-income securities. Section 5 discusses the contingency provisions that affect the timing and/or nature of a bond’s cash flows. The final section provides a conclusion and summary of the reading.

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Reading 51  Fixed-Income Markets: Issuance, Trading, and Funding (Intro)
#estatua-session #has-images #reading-barro-en-la-madre-que-da-vueltas

Global fixed-income markets represent the largest subset of financial markets in terms of number of issuances and market capitalization. These markets bring borrowers and lenders together to allocate capital globally to its most efficient uses. Fixed-income markets include not only publicly traded securities, such as commercial paper, notes, and bonds, but also non-publicly traded loans. At the end of 2010, the total amount of debt and equity outstanding was about $212 trillion globally.1 The global fixed-income market represented approximately 75% of this total; simply put, global debt markets are three times larger than global equity markets.

Understanding how fixed-income markets are structured and how they operate is important for debt issuers and investors. Debt issuers have financing needs that must be met. For example, a government may need to finance an infrastructure project, a new hospital, or a new school. A company may require funds to expand its business. Financial institutions also have funding needs, and they are among the largest issuers of fixed-income securities. Fixed income is an important asset class for both individual and institutional investors. Thus, investors need to understand the characteristics of fixed-income securities including how these securities are issued and traded.

Among the questions this reading addresses are the following:

  • What are the key bond market sectors?

  • How are bonds sold in primary markets and traded in secondary markets?

  • What types of bonds are issued by governments, government-related entities, financial companies, and non-financial companies?

  • What additional sources of funds are available to banks?

The remainder of this reading is organized as follows. Section 2 presents an overview of global fixed-income markets and how these markets are classified, including some descriptive statistics on the size of the different bond market sectors. Section 2 also identifies the major issuers of and investors in fixed-income securities and presents fixed-income indexes. Section 3 discusses how fixed-income securities are issued in primary markets, and how these securities are then traded in secondary markets. Sections 4 to 7 examine different bond market sectors. Section 8 discusses additional short-term funding alternatives available to banks, including repurchase agreements. Section 9 concludes and summarizes the reading.

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Reading 52  Introduction to Fixed-Income Valuation (Intro)
#estatua-session #has-images #reading-buda-de-oro

Globally, the fixed-income market is a key source of financing for businesses and governments. In fact, the total market value outstanding of corporate and government bonds is significantly larger than that of equity securities. Similarly, the fixed-income market, which is also called the debt market or bond market, represents a significant investing opportunity for institutions as well as individuals. Pension funds, mutual funds, insurance companies, and sovereign wealth funds, among others, are major fixed-income investors. Retirees who desire a relatively stable income stream often hold fixed-income securities. Clearly, understanding how to value fixed-income securities is important to investors, issuers, and financial analysts. This reading focuses on the valuation of traditional (option-free) fixed-rate bonds, although other debt securities, such as floating-rate notes and money market instruments, are also covered.

Section 2 describes and illustrates basic bond valuation, which includes pricing a bond using a market discount rate for each of the future cash flows and pricing a bond using a series of spot rates. Valuation using spot rates allows for each future cash flow to be discounted at a rate associated with its timing. This valuation methodology for future cash flows has applications well beyond the fixed-income market. Relationships among a bond’s price, coupon rate, maturity, and market discount rate (yield-to-maturity) are also described and illustrated.

Section 3 describes how bond prices and yields are quoted and calculated in practice. When bonds are actively traded, investors can observe the price and calculate various yield measures. However, these yield measures differ by the type of bond. In practice, different measures are used for fixed-rate bonds, floating-rate notes, and money market instruments. When a bond is not actively traded, matrix pricing is often used to estimate the value based on comparable securities.

Section 4 addresses the maturity or term structure of interest rates. This discussion involves an analysis of yield curves, which illustrates the relationship between yields-to-maturity and times-to-maturity on bonds with otherwise similar characteristics. Various types of yield curves are described.

Section 5 focuses on yield spreads over benchmark interest rates. When investors want relatively higher yields, they have to be prepared to bear more risk. Yield spreads are measures of how much additional yield over the benchmark security (usually a government bond) investors expect for bearing additional risk. A summary of key points and practice problems conclude the reading.

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Reading 53  Introduction to Asset-Backed Securities (Intro)
#estatua-session #has-images #reading-guitarra-electrica

Previous readings examined risk characteristics of various fixed-income instruments and the relationships among maturity, coupon, and interest rate changes. This reading introduces an additional level of complexity—that of fixed-income instruments created through a process known as securitization. This process involves transferring ownership of assets from the original owners into a special legal entity. The special legal entity then issues securities backed by these assets, and the assets’ cash flows are used to pay interest and repay the principal owed to the holders of the securities. These securities are referred to generically as asset-backed securities (ABS); the pool of securitized assets from which the ABS’s cash flows are generated is called the collateral. Assets that are used to create ABS are called securitized assets. These assets are typically loans and receivables and include, among others, residential mortgage loans (mortgages), commercial mortgages, automobile (auto) loans, student loans, bank loans, accounts receivables, and credit card receivables. Advances and innovations in securitization have led to securities backed, or collateralized, by all kinds of income-yielding assets, including airport landing slots and toll roads.

This reading discusses the benefits of securitization, describes securitization, and explains the investment characteristics of different types of ABS. The terminology regarding ABS varies by jurisdiction. Mortgage-backed securities (MBS) are ABS backed by a pool of mortgages, and a distinction is sometimes made between MBS and ABS backed by non-mortgage assets. This distinction is common in the United States, for example, where typically the term “mortgage-backed securities” refers to securities backed by high-quality real estate mortgages and the term “asset-backed securities” refers to securities backed by other types of assets. Because the US ABS market is the largest in the world, much of the discussion and many examples in this reading refer to the United States. Note, however, that many non-US investors hold US ABS, including MBS, in their portfolios.

To underline the importance of securitization from a macroeconomic perspective, Section 2 discusses of the benefits of securitization for economies and financial markets. In Section 3, the reading describes securitization and identifies the parties involved in the process and their roles. Section 3 also discusses typical structures of securitizations, including credit tranching and time tranching. Sections 4–6 discuss securities backed by mortgages for real estate property. Many types of residential mortgage designs around the world are described in Section 4. Sections 5 and 6 focus on residential MBS and commercial MBS, respectively. Section 7 discusses ABS based on two types of non-mortgage loans that are typically securitized throughout the world: auto loans and credit card receivables. Collateralized debt obligations are covered in Section 8. Section 9 concludes the reading with a summary.

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Reading 54  Understanding Fixed‑Income Risk and Return (Intro)
#has-images #paracaidas-session #reading-la-ñora

It is important for analysts to have a well-developed understanding of the risk and return characteristics of fixed-income investments. Beyond the vast worldwide market for publicly and privately issued fixed-rate bonds, many financial assets and liabilities with known future cash flows may be evaluated using the same principles. The starting point for this analysis is the yield-to-maturity, or internal rate of return on future cash flows, which was introduced in the fixed-income valuation reading. The return on a fixed-rate bond is affected by many factors, the most important of which is the receipt of the interest and principal payments in the full amount and on the scheduled dates. Assuming no default, the return is also affected by changes in interest rates that affect coupon reinvestment and the price of the bond if it is sold before it matures. Measures of the price change can be derived from the mathematical relationship used to calculate the price of the bond. The first of these measures (duration) estimates the change in the price for a given change in interest rates. The second measure (convexity) improves on the duration estimate by taking into account the fact that the relationship between price and yield-to-maturity of a fixed-rate bond is not linear.

Section 2 uses numerical examples to demonstrate the sources of return on an investment in a fixed-rate bond, which includes the receipt and reinvestment of coupon interest payments and the redemption of principal if the bond is held to maturity. The other source of return is capital gains (and losses) on the sale of the bond prior to maturity. Section 2 also shows that fixed-income investors holding the same bond can have different exposures to interest rate risk if their investment horizons differ. Discussion of credit risk, although critical to investors, is postponed to Section 5 so that attention can be focused on interest rate risk.

Section 3 provides a thorough review of bond duration and convexity, and shows how the statistics are calculated and used as measures of interest rate risk. Although procedures and formulas exist to calculate duration and convexity, these statistics can be approximated using basic bond-pricing techniques and a financial calculator. Commonly used versions of the statistics are covered, including Macaulay, modified, effective, and key rate durations. The distinction is made between risk measures that are based on changes in the bond’s yield-to-maturity (i.e., yield duration and convexity) and on benchmark yield curve changes (i.e., curve duration and convexity).

Section 4 returns to the issue of the investment horizon. When an investor has a short-term horizon, duration (and convexity) are used to estimate the change in the bond price. In this case, yield volatility matters. In particular, bonds with varying times-to-maturity have different degrees of yield volatility. When an investor has a long-term horizon, the interaction between coupon reinvestment risk and market price risk matters. The relationship among interest rate risk, bond duration, and the investment horizon is explored.

Section 5 discusses how the tools of duration and convexity can be extended to credit and liquidity risks and highlights how these different factors can affect a bond’s return and risk.

A summary of key points and practice problems in the CFA Institute multiple-choice format conclude the reading.

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Reading 55  Fundamentals of Credit Analysis (Intro)
#has-images #paracaidas-session #reading-chris-schoening

With bonds outstanding worth many trillions of US dollars, the debt markets play a critical role in the global economy. Companies and governments raise capital in the debt market to fund current operations; buy equipment; build factories, roads, bridges, airports, and hospitals; acquire assets, and so on. By channeling savings into productive investments, the debt markets facilitate economic growth. Credit analysis has a crucial function in the debt capital markets—efficiently allocating capital by properly assessing credit risk, pricing it accordingly, and repricing it as risks change. How do fixed-income investors determine the riskiness of that debt, and how do they decide what they need to earn as compensation for that risk?

This reading covers basic principles of credit analysis, which may be broadly defined as the process by which credit risk is evaluated. Readers will be introduced to the definition of credit risk, the interpretation of credit ratings, the four Cs of traditional credit analysis, and key financial measures and ratios used in credit analysis. The reading explains, among other things, how to compare bond issuer creditworthiness within a given industry as well as across industries and how credit risk is priced in the bond market.

The reading focuses primarily on analysis of corporate debt; however, credit analysis of sovereign and non-sovereign, particularly municipal, government bonds will also be addressed. Structured finance, a segment of the debt markets that includes securities backed by pools of assets, such as residential and commercial mortgages as well as other consumer loans, will not be covered here.

The key components of credit risk—default probability and loss severity—are introduced in the next section along with such credit-related risks as spread risk, credit migration risk, and liquidity risk. Section 3 discusses the relationship between credit risk and the capital structure of the firm. Credit ratings and the role of credit rating agencies are addressed in Section 4. Section 5 focuses on the process of analyzing the credit risk of corporations, whereas Section 6 examines the impact of credit spreads on risk and return. Special considerations applicable to the analysis of (i) high-yield (low-quality) corporate bonds and (ii) government bonds are presented in Section 7. Section 8 gives a brief summary, and a set of review questions concludes the reading.

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Reading 56  Derivative Markets and Instruments (Intro)
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Equity, fixed-income, currency, and commodity markets are facilities for trading the basic assets of an economy. Equity and fixed-income securities are claims on the assets of a company. Currencies are the monetary units issued by a government or central bank. Commodities are natural resources, such as oil or gold. These underlying assets are said to trade in cash markets or spot markets and their prices are sometimes referred to as cash prices or spot prices, though we usually just refer to them as stock prices, bond prices, exchange rates, and commodity prices. These markets exist around the world and receive much attention in the financial and mainstream media. Hence, they are relatively familiar not only to financial experts but also to the general population.

Somewhat less familiar are the markets for derivatives, which are financial instruments that derive their values from the performance of these basic assets. This reading is an overview of derivatives. Subsequent readings will explore many aspects of derivatives and their uses in depth. Among the questions that this first reading will address are the following:

  • What are the defining characteristics of derivatives?

  • What purposes do derivatives serve for financial market participants?

  • What is the distinction between a forward commitment and a contingent claim?

  • What are forward and futures contracts? In what ways are they alike and in what ways are they different?

  • What are swaps?

  • What are call and put options and how do they differ from forwards, futures, and swaps?

  • What are credit derivatives and what are the various types of credit derivatives?

  • What are the benefits of derivatives?

  • What are some criticisms of derivatives and to what extent are they well founded?

  • What is arbitrage and what role does it play in a well-functioning financial market?

This reading is organized as follows. Section 2 explores the definition and uses of derivatives and establishes some basic terminology. Section 3 describes derivatives markets. Section 4 categorizes and explains types of derivatives. Sections 5 and 6 discuss the benefits and criticisms of derivatives, respectively. Section 7 introduces the basic principles of derivative pricing and the concept of arbitrage. Section 8 provides a summary.

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Reading 57  Basics of Derivative Pricing and Valuation (Intro)
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It is important to understand how prices of derivatives are determined. Whether one is on the buy side or the sell side, a solid understanding of pricing financial products is critical to effective investment decision making. After all, one can hardly determine what to offer or bid for a financial product, or any product for that matter, if one has no idea how its characteristics combine to create value.

Understanding the pricing of financial assets is important. Discounted cash flow methods and models, such as the capital asset pricing model and its variations, are useful for determining the prices of financial assets. The unique characteristics of derivatives, however, pose some complexities not associated with assets, such as equities and fixed-income instruments. Somewhat surprisingly, however, derivatives also have some simplifying characteristics. For example, as we will see in this reading, in well-functioning derivatives markets the need to determine risk premiums is obviated by the ability to construct a risk-free hedge. Correspondingly, the need to determine an investor’s risk aversion is irrelevant for derivative pricing, although it is certainly relevant for pricing the underlying.

The purpose of this reading is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered:

  • How does the pricing of the underlying asset affect the pricing of derivatives?

  • How are derivatives priced using the principle of arbitrage?

  • How are the prices and values of forward contracts determined?

  • How are futures contracts priced differently from forward contracts?

  • How are the prices and values of swaps determined?

  • How are the prices and values of European options determined?

  • How does American option pricing differ from European option pricing?

This reading is organized as follows. Section 2 explores two related topics, the pricing of the underlying assets on which derivatives are created and the principle of arbitrage. Section 3 describes the pricing and valuation of forwards, futures, and swaps. Section 4 introduces the pricing and valuation of options. Section 5 provides a summary.

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Reading 58  Introduction to Alternative Investments (Intro)
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Assets under management in vehicles classified as alternative investments have grown rapidly since the mid-1990s. This growth has largely occurred because of interest in these investments by institutions, such as endowment and pension funds, as well as high-net-worth individuals seeking diversification and return opportunities. Alternative investments are perceived to behave differently from traditional investments. Investors may seek either absolute return or relative return.

Some investors hope alternative investments will provide positive returns throughout the economic cycle; this goal is an absolute return objective. Alternative investments are not free of risk, however, and their returns may be negative and/or correlated with other investments, including traditional investments, especially in periods of financial crisis. Some investors in alternative investments have a relative return objective. A relative return objective, which is often the objective of portfolios of traditional investment, seeks to achieve a return relative to an equity or fixed-income benchmark.

This reading is organized as follows. Section 2 describes alternative investments’ basic characteristics and categories; general strategies of alternative investment portfolio managers; the role of alternative investments in a diversified portfolio; and investment structures used to provide access to alternative investments. Sections 3 through 7 describe features of hedge funds, private equity, real estate, commodities, and infrastructure, respectively, along with issues in calculating returns to and valuation of each.1 Section 8 briefly describes other alternative investments. Section 9 provides an overview of risk management, including due diligence, of alternative investments. A summary and practice problems conclude the reading.

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