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1. Individual Securities

Expected return: The return that an individual expects a stock to earn over the next period. Only and expectation. An individual's expectation may simply be the average return per period a security has earned in the past.


Variance and standard deviation: The volatility of a security's return.


Covariance and correlation: Returns on individual securities are relate to one another. The relationship between two securities. 


*Note!!! Correlation is a translated version of covariance. The two parameters always have the same sign (positive, negative, or 0) 



2. Expected Return, Variance, and Covariance and Correlation

 

Stock Fund 

Bond Fund 

Scenario 

Rate of Return 

Squared Deviation 

Rate of Return 

Squared Deviation 

 Recession

 -7%

0.0324

 17%

0.0100 

Normal 

12% 

0.0001 

7% 

0.0000 

Boom 

28% 

0.0289 

-3% 

0.0100 

Expected return 

11.00% 

 

7.00% 

 

Variance 

0.0205 

 

0.0067 

 

Standard Deviation 

14.3% 

 

 

 







Scenario 

Stock Deviation 

Bond Deviation 

Product of Deviation 

 

 

 

 

 Recession

-.18 

.10

-.0180 

Normal 

0.1

0

.0000 

Boom 

.17

-.10

-.0170 

Sum 

 

 

 -.035

Covariance 

 

 

 -.0117


Correlation


     =>  Strong negative

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Cost Classifications for Preparing External Financial Statements

1. Manufacturing Costs

A. Direct materials; raw material inputs

B. Direct labor; “touch labor”, workers who “touch” the product as it is being made

C. Manufacturing overhead (indirect materials + indirect labor costs); all manufacturing costs other than A+B. Not easy to trace. Ex) misc supplies such as rivets in a Boeing 777, supervisors, doorkeeper, factory facility charges, etc.

D. Prime vs. Conversion costs

- Prime cost = direct materials + direct labor

- Conversion cost = direct labor + manufacturing overhead

2. Non-manufacturing costs

A. Marketing or selling costs

B. Administrative costs


3. Period vs. Product costs

A. Period costs (all marketing + selling costs + admin costs)

; are expensed in the time period in which they are incurred. All  selling and administrative costs. Ex) administrative salary costs are “incurred” when they are earned and not necessarily when they are paid to employees.

B. Product costs (inventorial costs, direct materials + direct labor + manuf. overhead)

; are added to units of product as they are incurred and not treated as expenses until the units are sold. 


Cost Classifications for Decision-Making

1. Differential Costs

2. Opportunity Costs

3. Sunk Costs



Cost Classifications for Predicting Cost Behavior


1. Variable Cost; texting bill, cost per text = 5 cents



    2. Fixed Costs; monthly fee for a cell phone, avg. fixed cost per phone call made decreases as more calls are made.



      3. Mixed Costs: Variable + Fixed costs




      4. Relavant Range



      Analysis of Mixed Costs

      1. The Scattergraph Method

      2. The High-Low Method

      3. Least-Squares Regression Method




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      Comparison of Financial and Managerial Accounting


      - Financial Accounting:

        • Is concerned with reports made to those outside the organization.
        • Summarizes the financial consequences of past activities.
        • Emphasizes precision and verifiability.
        • Summarizes data for the entire organization.
        • Must follow GAAP since the reports are made to outsiders and are audited.
        • Is required for publicly-held companies and by lenders. 

      - Managerial Accounting:

        • Is concerned with information for the internal use of management.
        • Emphasizes the future.
        • Emphasizes relevance and flexibility of data.
        • Places more emphasis on non-monetary data and timeliness and less emphasis on precision.
        • Emphasizes the segments of an organization rather than the organization as a whole.
        • Is not governed by GAAP.
        • Is not required by external regulatory bodies or by lenders. 

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      • Converger likes certainty, excels at finding the one right answer, like GMAT or IQ test. Loves planning. Learns by rules. 
      • Accomodator wants immediate action, adjust plans to fit reality. Learns by doing 
      • Assimilator looks for a better strategy, different perspective, prefers complex understanding to integrate conflicting issues and goals 
      • Diverger high in Social Intelligence prefers to take care of human and concrete issues. 





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      • Present Value: If the payments are in the future, they are discounted to reflect the time value of money.

      • Future Value: The value of an asset at a specific date.


      • The One-Period Case

      If you were to invest $10,000 at 5 percent interest for one year, your investment would grow to $10,500.

       => interest = $500 ($10,000 * .05), principal = $10,000, total due = $10,500

       => FV(Future Value) = $10,500 = $10,000 * 1.05

       

       

      If you were to be promised $10,000 due in one year when interest rates are 5-percent, your investment
      would be worth $9,523.81 in today’s dollars.




      • Multiperiod Case (Compounding)
      Suppose a stock currently pays a dividend of $1.0, which is expected to grow at 14% per year for the next five years. What will the dividend be in five years?

      Note, $5.92 > $1.10 + 5 X ($1.10 * 0.40) = $3.30  This is due to compounding.


      • Present Value and Discounting
      How much would an investor have to set aside today in order to have $20,000 five years from now if current rate is 15%?

             


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