Tools of Finance- HelpWithAssignment.com
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The presentation is about Finance and various concepts in Finance which influence the decision-making in a company are discussed.
![[object Object],[object Object],[object Object],0 In this Presentation, look for the answers to these questions](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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- 1. The Basic Tools of Finance 0 P R I N C I P L E S O F
- 34. 0 .550 1.272 12.5 10.3 S&P SmallCap 600 (index fund) Managed mid cap funds .535 1.458 10.9 8.1 S&P MidCap 400 (index fund) Managed mid cap funds .351 1.020 6.2% 5.9 S&P 500 (index fund) Managed large cap funds 2006 expense ratio 2001-2006 annualized return
- 41. CHAPTER 27 THE BASIC TOOLS OF FINANCE
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- The lot purchase would be for speculative purposes.
- Thus, a 2% increase in the rate of return leads to over $7000 of additional interest earned over the 30 years. Without compounding, a 2% rate-of-return difference over 30 years would lead to a 60% difference in FV. But because of the magic of compounding, the difference here is 74% ($17450 is 74% bigger than $10063).
- To help your students understand the concept of diminishing marginal utility, you might ask them: Would a poor person or a rich person be more excited about finding a $20 bill on the sidewalk? Students will answer the poor person. $20 means more to someone with little wealth than someone with lots of wealth. But this is exactly the type of reasoning behind the concept of diminishing marginal utility. And, as the next slide shows, it helps explain why people are risk averse.
- Example of adverse selection: People with chronic illnesses have more incentive to buy health insurance (provided it covers their treatment) than other people. Example of moral hazard: People with good fire insurance have less incentive to replace the batteries in their smoke detectors.
- Just a quick check to see if students understand the difference between moral hazard and adverse selection.
- If your students have had a statistics course, you can replace “not strongly related” with “not highly correlated.”
- Even a portfolio with 40 stocks still has risk, because you just can’t eliminate market risk through diversification.
- It’s easy to look up the price. But how does one determine the stock’s value?
- The objective of this exercise is to help students see for themselves that the value of a share of stock equals the present value of dividends received plus the present value of the final sale price. Some students may need a hint to get started.
- This brief exercise gets students thinking about whether it is possible to pick good stocks. They will feel more invested (no pun intended) in the material covered on the remaining slides of this chapter. Instructions: Read the question aloud. Ask students to raise their hands if they vote for choice “A.” Make a mental note of the approximate number of students who vote for “A.” Repeat for B, C, and D. After voting is complete, pick the choice that received the most votes. Ask students who voted for that choice to tell you why they picked it. Do the same for the second most popular choice. Common reasons students pick “A”: Merrill Lynch is reputable, they have a research department with highly paid analysts. Your broker has much more expertise than you, and spends a lot more time than you following the market. Therefore, he is more likely to find the good stocks than you. Common reasons students pick “B”: Brokers make a commission whenever you buy, even if the stock depreciates later.
- The figures for managed funds of a given class (large cap, medium cap, small cap) are asset-weighted averages of all managed funds in the class. The expense ratio of a fund includes all the expenses (fees) of owning the fund as a percentage of the fund’s value. The returns in the first column are net of expenses, so it is fair to compare them. In each asset class, the index fund beats the average of all managed funds in that class. Source: Standard and Poor’s Indices Versus Active Funds (SPIVA) Scorecard, Fourth Quarter 2006. http://www.standardandpoors.com http://www.spiva.standardandpoors.com This source has gobs of great information on this topic. Example: the % of actively managed funds that underperform the S&P 500 at different time horizons. Also, it reports various categories of funds, such as sector funds, international funds, and fixed income funds, and compares their performance at various time horizons to the corresponding index funds. Unfortunately, this project was discontinued, and the most recent SPIVA report available is for 2007:Q1. Hence, I will not be able to update the data on this slide. If you know where I can get more recent data of this type, please let me know! I would love to update the data on this slide on a regular basis. Contact me at: ron.cronovich@gmail.com