# on 22-Jan-2018 (Mon)

#### Flashcard 1425700162828

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#cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #study-session-4
Question
[...] is the willingness of sellers to offer a given quantity of a good or service for a given price

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Supply is the willingness of sellers to offer a given quantity of a good or service for a given price

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3. BASIC PRINCIPLES AND CONCEPTS
#13; In this reading, we will explore a model of household behavior that yields the consumer demand curve. Demand , in economics, is the willingness and ability of consumers to purchase a given amount of a good or service at a given price. <span>Supply is the willingness of sellers to offer a given quantity of a good or service for a given price. Later, study on the theory of the firm will yield the supply curve. The demand and supply model is useful in explaining how price and quantity traded are determined and ho

#### Flashcard 1438270491916

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Question
[...] income calculations reflect non-cash items and ignore the time value of money.
Accounting

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d>Accounting profits only measure the return on the invested capital. Accounting income calculations reflect non-cash items and ignore the time value of money. They are important for some purposes, but for capital budgeting, cash flows are what are relevant. Economic income is an investment's after-tax cash flow plus the change in the market value. Financing costs are ignored in computing economic income. &

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Subject 2. Basic Principles of Capital Budgeting
Capital budgeting decisions are based on incremental after-tax cash flows discounted at the opportunity cost of capital. Assumptions of capital budgeting are: Capital budgeting decisions must be based on cash flows, not accounting income. Accounting profits only measure the return on the invested capital. Accounting income calculations reflect non-cash items and ignore the time value of money. They are important for some purposes, but for capital budgeting, cash flows are what are relevant. Economic income is an investment's after-tax cash flow plus the change in the market value. Financing costs are ignored in computing economic income. Cash flow timing is critical because money is worth more the sooner you get it. Also, firms must have adequate cash flow to meet maturing obligations. The opportunity cost should be charged against a project. Remember that just because something is on hand does not mean it's free. See below for the definition of opportunity cost. Expected future cash flows must be measured on an after-tax basis. The firm's wealth depends on its usable after-tax funds. Ignore how the project is financed. Interest payments should not be included in the estimated cash flows since the effects of debt financing are reflected in the cost of capital used to discount the cash flows. The existence of a project depends on business factors, not financing. Important capital budgeting concepts: A sunk cost is a cash outlay that has already been incurred and which

#### Flashcard 1438509829388

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-2-basic-principles-of-capital-budgeting
Question

The opportunity cost of capital for a risky project is the expected rate of return on a ______.

A. government security with the same maturity as the project.
B. well-diversified portfolio of common stocks.
C. portfolio of securities with similar risk to that of the project

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ties create costs for other parts of the firm. For example, if the bookstore is considering opening a branch two blocks away, some customers who buy books at the old store will switch to the new branch. The customers lost by the old store are <span>a negative externality. The primary type of negative externality is cannibalization, which occurs when the introduction of a new product causes sales of existing products to decline. &#13

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Subject 2. Basic Principles of Capital Budgeting

#### Flashcard 1645860228364

Question

According to Chebyshev’s inequality, for any distribution with finite variance, the proportion of the observations within k standard deviations of the arithmetic mean is at least [...] for all k > 1.

1 − 1/k2

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According to Chebyshev’s inequality, for any distribution with finite variance , the proportion of the observations within k standard deviations of the arithmetic mean is at least 1 − 1/k 2 for all k > 1.

#### Flashcard 1664685575436

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"given that" or "you are told that,"

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Look out for the words "given that" or "you are told that," which will help you know that the probability is conditional. In the absence of such information, the probability will be unconditional.

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Subject 2. Unconditional, Conditional, and Joint Probabilities
oil price, P(B), is 0.4. The probability of an increase in airfare given an increase in oil price, P(A|B), is 0.3. The joint probability of an increase in both oil price and airfare, P(AB), is 0.3 x 0.4 = 0.12. Hint: <span>Look out for the words "given that" or "you are told that," which will help you know that the probability is conditional. In the absence of such information, the probability will be unconditional. The letter after the | is the event that we know has definitely occurred, whereas the letter before the | is the event whose probability we are trying to calculate. <span>

#### Flashcard 1732440624396

Tags
#has-images #value-proposition-canvas

Question
Canvas

Design

Test

Evolve

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#### Flashcard 1736012598540

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#stochastics
Question
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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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

#### Annotation 1736148126988

 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.

#### Annotation 1736153107724

 Reading 41  Portfolio Risk and Return: Part I (Intro) #has-images #portfolio-session #reading-rocky-balboa 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.

#### Annotation 1736159923468

 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.

#### Annotation 1736166477068

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

...

#### Annotation 1736168312076

 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.

#### Annotation 1736170147084

 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.

#### Annotation 1736172506380

 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.

#### Flashcard 1736175914252

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#matrix
Question
a square matrix A is called diagonalizable if there exists an invertible matrix P such that [...] is a diagonal matrix.
P−1AP

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In linear algebra, a square matrix A is called diagonalizable if it is similar to a diagonal matrix, i.e., if there exists an invertible matrix P such that P −1 AP is a diagonal matrix.

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Diagonalizable matrix - Wikipedia

#### Annotation 1736184565004

 In mathematics, an operation is a calculation from zero or more input values (called operands) to an output value.

Operation (mathematics) - Wikipedia
d and removed. (January 2016) (Learn how and when to remove this template message) [imagelink] Elementary arithmetic operations: +, plus (addition) −, minus (subtraction) ÷, obelus (division) ×, times (multiplication) <span>In mathematics, an operation is a calculation from zero or more input values (called operands) to an output value. The number of operands is the arity of the operation. The most commonly studied operations are binary operations of arity 2, such as addition and multiplication, and unary operations of

#### Flashcard 1736186662156

Question
In mathematics, an [...] is a calculation from zero or more input values (called operands) to an output value.
operation

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In mathematics, an operation is a calculation from zero or more input values (called operands) to an output value.

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Operation (mathematics) - Wikipedia
d and removed. (January 2016) (Learn how and when to remove this template message) [imagelink] Elementary arithmetic operations: +, plus (addition) −, minus (subtraction) ÷, obelus (division) ×, times (multiplication) <span>In mathematics, an operation is a calculation from zero or more input values (called operands) to an output value. The number of operands is the arity of the operation. The most commonly studied operations are binary operations of arity 2, such as addition and multiplication, and unary operations of

#### Annotation 1736189545740

 #abstract-algebra In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms.

Algebraic structure - Wikipedia
Module-like[show] Module Group with operators Vector space Linear algebra Algebra-like[show] Algebra Associative Non-associative Composition algebra Lie algebra Graded Bialgebra v t e <span>In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. [1] Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets,

#### Flashcard 1736192953612

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#abstract-algebra
Question
an [...] is a set with one or more operations defined on it that satisfies a list of axioms.
algebraic structure

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In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms.

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Algebraic structure - Wikipedia
Module-like[show] Module Group with operators Vector space Linear algebra Algebra-like[show] Algebra Associative Non-associative Composition algebra Lie algebra Graded Bialgebra v t e <span>In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. [1] Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets,

#### Annotation 1736194526476

 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.

#### Flashcard 1736195050764

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#abstract-algebra
Question
The underlying set for an algebraic structure is called a [...]
carrier set

Think sigma-algebra and measurable space

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In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms.

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Algebraic structure - Wikipedia
Module-like[show] Module Group with operators Vector space Linear algebra Algebra-like[show] Algebra Associative Non-associative Composition algebra Lie algebra Graded Bialgebra v t e <span>In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. [1] Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets,

#### Flashcard 1736196885772

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#abstract-algebra
Question
an algebraic structure is a set with one or more [...] defined on it that satisfies a list of axioms.

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In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms.

#### Original toplevel document

Algebraic structure - Wikipedia
Module-like[show] Module Group with operators Vector space Linear algebra Algebra-like[show] Algebra Associative Non-associative Composition algebra Lie algebra Graded Bialgebra v t e <span>In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. [1] Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets,

#### Flashcard 1736198458636

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#abstract-algebra
Question
an algebraic structure is a set with one or more operations defined on it that satisfies [...].
a list of axioms

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tml> In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. <html>

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Algebraic structure - Wikipedia
Module-like[show] Module Group with operators Vector space Linear algebra Algebra-like[show] Algebra Associative Non-associative Composition algebra Lie algebra Graded Bialgebra v t e <span>In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. [1] Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets,

#### Annotation 1736202128652

 #abstract-algebra Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets, or by altering the defining axioms. Examples of more complex algebraic structures include vector spaces, modules, and algebras.

Algebraic structure - Wikipedia
algebra v t e In mathematics, and more specifically in abstract algebra, an algebraic structure is a set (called carrier set or underlying set) with one or more operations defined on it that satisfies a list of axioms. [1] <span>Examples of algebraic structures include groups, rings, fields, and lattices. More complex structures can be defined by introducing multiple operations, different underlying sets, or by altering the defining axioms. Examples of more complex algebraic structures include vector spaces, modules, and algebras. The properties of specific algebraic structures are studied in abstract algebra. The general theory of algebraic structures has been formalized in universal algebra. The language of c

#### Annotation 1736205012236

 Reading 56  Derivative Markets and Instruments (Intro) #has-images #reading-volante #volante-session 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.

#### Annotation 1736207371532

 Reading 57  Basics of Derivative Pricing and Valuation (Intro) #has-images #reading-ferrari #volante-session 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.

#### Annotation 1736209730828

 Reading 58  Introduction to Alternative Investments (Intro) #casita-session #has-images #reading-casita 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.

#### Annotation 1736239353100

 #poisson-process #stochastics Its name (Poisson Process) derives from the fact that if a collection of random points in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution.

Poisson point process - Wikipedia
oint processes, some of which are constructed with the Poisson point process, that seek to capture such interaction. [22] The process is named after French mathematician Siméon Denis Poisson despite Poisson never having studied the process. <span>Its name derives from the fact that if a collection of random points in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution. The process was discovered independently and repeatedly in several settings, including experiments on radioactive decay, telephone call arrivals and insurance mathematics. [23] [24] T

#### Annotation 1736242236684

 #poisson-process #stochastics The Poisson point process is often defined on the real line, where it can be considered as a stochastic process.

Poisson point process - Wikipedia
and used as a mathematical model for seemingly random processes in numerous disciplines such as astronomy, [3] biology, [4] ecology, [5] geology, [6] physics, [7] economics, [8] image processing, [9] and telecommunications. [10] [11] <span>The Poisson point process is often defined on the real line, where it can be considered as a stochastic process. In this setting, it is used, for example, in queueing theory [12] to model random events, such as the arrival of customers at a store or phone calls at an exchange, distributed in tim

#### Annotation 1736243809548

 #poisson-process #stochastics In the plane, the point process, also known as a spatial Poisson process,[13] can represent the locations of scattered objects such as transmitters in a wireless network,[10][14][15][16] particles colliding into a detector, or trees in a forest.

Poisson point process - Wikipedia
e, where it can be considered as a stochastic process. In this setting, it is used, for example, in queueing theory [12] to model random events, such as the arrival of customers at a store or phone calls at an exchange, distributed in time. <span>In the plane, the point process, also known as a spatial Poisson process, [13] can represent the locations of scattered objects such as transmitters in a wireless network, [10] [14] [15] [16] particles colliding into a detector, or trees in a forest. [17] In this setting, the process is often used in mathematical models and in the related fields of spatial point processes, [18] stochastic geometry, [1] spatial statistics [18] [1

#### Flashcard 1736250101004

Tags
#poisson-process #stochastics
Question
if [...] in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution.
a collection of random points

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Its name (Poisson Process) derives from the fact that if a collection of random points in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution.

#### Original toplevel document

Poisson point process - Wikipedia
oint processes, some of which are constructed with the Poisson point process, that seek to capture such interaction. [22] The process is named after French mathematician Siméon Denis Poisson despite Poisson never having studied the process. <span>Its name derives from the fact that if a collection of random points in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution. The process was discovered independently and repeatedly in several settings, including experiments on radioactive decay, telephone call arrivals and insurance mathematics. [23] [24] T

#### Flashcard 1736251673868

Tags
#poisson-process #stochastics
Question
In a Poisson process, [...] is a random variable with a Poisson distribution.
the number of points in a region of finite size

status measured difficulty not learned 37% [default] 0

#### Parent (intermediate) annotation

Open it
Its name (Poisson Process) derives from the fact that if a collection of random points in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution.

#### Original toplevel document

Poisson point process - Wikipedia
oint processes, some of which are constructed with the Poisson point process, that seek to capture such interaction. [22] The process is named after French mathematician Siméon Denis Poisson despite Poisson never having studied the process. <span>Its name derives from the fact that if a collection of random points in some space forms a Poisson process, then the number of points in a region of finite size is a random variable with a Poisson distribution. The process was discovered independently and repeatedly in several settings, including experiments on radioactive decay, telephone call arrivals and insurance mathematics. [23] [24] T

#### Flashcard 1736253246732

Tags
#poisson-process #stochastics
Question
The Poisson point process is often defined on [...], where it can be considered as a stochastic process.
the real line

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#### Parent (intermediate) annotation

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The Poisson point process is often defined on the real line, where it can be considered as a stochastic process.

#### Original toplevel document

Poisson point process - Wikipedia
and used as a mathematical model for seemingly random processes in numerous disciplines such as astronomy, [3] biology, [4] ecology, [5] geology, [6] physics, [7] economics, [8] image processing, [9] and telecommunications. [10] [11] <span>The Poisson point process is often defined on the real line, where it can be considered as a stochastic process. In this setting, it is used, for example, in queueing theory [12] to model random events, such as the arrival of customers at a store or phone calls at an exchange, distributed in tim

#### Flashcard 1736254819596

Tags
#poisson-process #stochastics
Question
In the plane, the point process, also known as a spatial Poisson process,[13] can represent [...] such as transmitters in a wireless network,[10][14][15][16] particles colliding into a detector, or trees in a forest.
the locations of scattered objects

status measured difficulty not learned 37% [default] 0

#### Parent (intermediate) annotation

Open it
In the plane, the point process, also known as a spatial Poisson process, [13] can represent the locations of scattered objects such as transmitters in a wireless network, [10] [14] [15] [16] particles colliding into a detector, or trees in a forest.

#### Original toplevel document

Poisson point process - Wikipedia
e, where it can be considered as a stochastic process. In this setting, it is used, for example, in queueing theory [12] to model random events, such as the arrival of customers at a store or phone calls at an exchange, distributed in time. <span>In the plane, the point process, also known as a spatial Poisson process, [13] can represent the locations of scattered objects such as transmitters in a wireless network, [10] [14] [15] [16] particles colliding into a detector, or trees in a forest. [17] In this setting, the process is often used in mathematical models and in the related fields of spatial point processes, [18] stochastic geometry, [1] spatial statistics [18] [1

#### Annotation 1736270023948

 #cabra-session #has-images #reading-sus-straffon The GIPS standards are a practitioner-driven set of ethical principles that establish a standardized, industry-wide approach for investment firms to follow in calculating and presenting their historical investment results to prospective clients. The GIPS standards ensure fair representation and full disclosure of investment performance. In other words, the GIPS standards lead investment management firms to avoid misrepresentations of performance and to communicate all relevant information that prospective clients should know in order to evaluate past results.

Reading 4  Introduction to the Global Investment Performance Standards (GIPS®)
l investment management firms was problematic. For example, a pension fund seeking to hire an investment management firm might receive proposals from several firms, all using different methodologies for calculating their results. <span>The GIPS standards are a practitioner-driven set of ethical principles that establish a standardized, industry-wide approach for investment firms to follow in calculating and presenting their historical investment results to prospective clients. The GIPS standards ensure fair representation and full disclosure of investment performance. In other words, the GIPS standards lead investment management firms to avoid misrepresentations of performance and to communicate all relevant information that prospective clients should know in order to evaluate past results. <span><body><html>

#### Annotation 1736271596812

 #cabra-session #has-images #reading-sus-straffon Misleading practices in the portfolio management indutry included: Representative Accounts : Selecting a top-performing portfolio to represent the firm’s overall investment results for a specific mandate. Survivorship Bias : Presenting an “average” performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm. Varying Time Periods : Presenting performance for a selected time period during which the mandate produced excellent returns or out-performed its benchmark—making comparison with other firms’ results difficult or impossible.

Reading 4  Introduction to the Global Investment Performance Standards (GIPS®)
nvestment performance data. Several performance measurement practices hindered the comparability of performance returns from one firm to another, while others called into question the accuracy and credibility of performance reporting overall. <span>Misleading practices included: Representative Accounts: Selecting a top-performing portfolio to represent the firm’s overall investment results for a specific mandate. Survivorship Bias: Presenting an “average” performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm. Varying Time Periods: Presenting performance for a selected time period during which the mandate produced excellent returns or out-performed its benchmark—making comparison with other firms’ results difficult or impossible. Making a valid comparison of investment performance among even the most ethical investment management firms was problematic. For example, a pension fund seeking to

#### Annotation 1736274218252

 Reading 6  The Time Value of Money Introduction #concerta-session #has-images #reading-mayweather As individuals, we often face decisions that involve saving money for a future use, or borrowing money for current consumption. We then need to determine the amount we need to invest, if we are saving, or the cost of borrowing, if we are shopping for a loan. As investment analysts, much of our work also involves evaluating transactions with present and future cash flows. When we place a value on any security, for example, we are attempting to determine the worth of a stream of future cash flows. To carry out all the above tasks accurately, we must understand the mathematics of time value of money problems. Money has time value in that individuals value a given amount of money more highly the earlier it is received. Therefore, a smaller amount of money now may be equivalent in value to a larger amount received at a future date. The time value of money as a topic in investment mathematics deals with equivalence relationships between cash flows with different dates. Mastery of time value of money concepts and techniques is essential for investment analysts.

Reading 6  The Time Value of Money Introduction
As individuals, we often face decisions that involve saving money for a future use, or borrowing money for current consumption. We then need to determine the amount we need to invest, if we are saving, or the cost of borrowing, if we are shopping for a loan. As investment analysts, much of our work also involves evaluating transactions with present and future cash flows. When we place a value on any security, for example, we are attempting to determine the worth of a stream of future cash flows. To carry out all the above tasks accurately, we must understand the mathematics of time value of money problems. Money has time value in that individuals value a given amount of money more highly the earlier it is received. Therefore, a smaller amount of money now may be equivalent in value to a larger amount received at a future date. The time value of money as a topic in investment mathematics deals with equivalence relationships between cash flows with different dates. Mastery of time value of money concepts and techniques is essential for investment analysts. The reading1 is organized as follows: Section 2 introduces some terminology used throughout the reading and supplies some economic intuition for the variables we will discu

#### Annotation 1736276577548

 Reading 6  The Time Value of Money (Layout) #concerta-session #has-images #reading-mayweather The reading is organized as follows: Section 2 introduces some terminology used throughout the reading and supplies some economic intuition for the variables we will discuss. Section 3 tackles the problem of determining the worth at a future point in time of an amount invested today. Section 4 addresses the future worth of a series of cash flows. These two sections provide the tools for calculating the equivalent value at a future date of a single cash flow or series of cash flows. Sections 5 and 6 discuss the equivalent value today of a single future cash flow and a series of future cash flows, respectively. In Section 7, we explore how to determine other quantities of interest in time value of money problems.

Reading 6  The Time Value of Money Introduction
time value of money as a topic in investment mathematics deals with equivalence relationships between cash flows with different dates. Mastery of time value of money concepts and techniques is essential for investment analysts. <span>The reading1 is organized as follows: Section 2 introduces some terminology used throughout the reading and supplies some economic intuition for the variables we will discuss. Section 3 tackles the problem of determining the worth at a future point in time of an amount invested today. Section 4 addresses the future worth of a series of cash flows. These two sections provide the tools for calculating the equivalent value at a future date of a single cash flow or series of cash flows. Sections 5 and 6 discuss the equivalent value today of a single future cash flow and a series of future cash flows, respectively. In Section 7, we explore how to determine other quantities of interest in time value of money problems. <span><body><html>

#### Annotation 1736279461132

 The HMM is based on a discrete state vari- able and on the probabilistic assertions that the state transitions are Markovian and that the observations are conditionally inde- pendent given the state.

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#### Annotation 1736281033996

 These models distinguish between the discrete component of the state, which is referred to as a “mode,” and the continuous component of the state, which cap- tures the continuous dynamics associated with each mode.

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#### Annotation 1736527187212

 In particular, the discrete component of the state in the Markov switching process has no topological structure (beyond the trivial discrete topology). Thus it is not easy to compare state spaces of differ- ent cardinality and it is not pos- sible to use the state space to encode a notion of similarity between modes. More broadly, many problems involve a collec- tion of state-space models (either HMMs or Markov switching processes), and within the classical framework there is no natural way to talk about overlap between models.

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#### Annotation 1736737950988

 Combinatorial sto- chastic processes have been studied for several decades in probability theory (see, e.g., [9]), and they have begun to play a role in statistics as well, most notably in the area of Bayesian nonparametric statistics where they yield Bayesian approaches to clustering and survival analysis (see, e.g., [10])

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#### Annotation 1736891567372

 Reading 15  The Firm and Market Structures (Intro) #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.

Reading 15  The Firm and Market Structures Introduction
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 struc

#### Annotation 1736936656140

 Reading 15  The Firm and Market Structures (Layout) #has-images #microscopio-session #reading-pluma-fuente 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.