By J. Estrada
Math and jargon make crucial monetary suggestions look intimidating, yet that's just because such a lot books would not have the aim of being obtainable to readers – this booklet does. In ten easy-to-read chapters, it explains all of the crucial monetary instruments and ideas, absolutely illustrated with real-world examples and Excel implementations.
Read or Download The Essential Financial Toolkit: Everything You Always Wanted to Know About Finance But Were Afraid to Ask PDF
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Additional resources for The Essential Financial Toolkit: Everything You Always Wanted to Know About Finance But Were Afraid to Ask
Sample text
20 The Essential Financial Toolkit IS: Why do we need another? WP: Simply because if you ask different questions you’re likely to get different answers! 3% is the right answer. 3% may be the right answer, depending on those statistical issues we’re waving our hands on. IS: So? WP: So that if you ask at what rate a capital invested in Sun stock evolved over the 1998–2007 period, then, as you realized yourself before, the arithmetic mean return is not going to give you the right answer. IS: OK, different question, different answer, I get that.
And how do we call this risk that can’t be diversified away? WP: It’s called systematic risk, or market risk, and it’s measured by a stock’s beta (β). Risk: Standard Deviation and Beta 43 IS: The famous beta! I’ve read and heard about it more than once, but I’m not quite clear about what it measures. WP: It can be interpreted at least in two ways, but first let me stress that beta is a relevant measure of an asset’s risk only when you hold the asset within a widely diversified portfolio. And, in that case, one way to think of an asset’s beta is as the contribution of the asset to the volatility of the whole portfolio.
WP: Formally speaking, the correlation coefficient can take any value between −1 and 1. In the first case, the two variables have a perfect negative relationship; in the second case, a perfect positive relationship. IS: I understand that by a positive relationship you mean that the variables tend to move in the same direction and by a negative relationship that they tend to move in opposite directions. But what do you mean by a perfect relationship? WP: I mean that in the extreme cases in which two variables have a correlation of −1 or 1, if I know the value of one variable, I can exactly determine the value of the other.