The reason I am making a school blog entry doesn’t make much
sense in my own mind, so whoever reads this…don’t think I am too strange. I
need repetition to sink principles into my medulla oblongata (see I already
have forgotten from anatomy class about where the brain stores learning). If you happen to have trudged upon this post understand its purpose
is to help an A-minus student stay afloat in the competitive college world becuase he doesn't have a great memory. And
spoiler alert: it could be/is boring. I will cover some random principles I
learned in my classes and hopefully you find something interesting. This is not
a comprehensive list of what I learned but a little insight into BYU and the
Marriott School.
Investments
We studied
the efficient frontier which is a
plot of expected returns versus standard deviations for a portfolio of
assets. Because there are varying levels of correlation
between assets actual returns, diversification
and optimization can be achieved by reaching different weights in those assets.
The efficient frontier graph is a line which represents the highest portfolio
returns possible at each unit of standard deviation or risk. With a given risk
free rate (which are represented by US Treasury Bills) one can create a capital allocation line from the
risk-free’s return to the tangency of optimal portfolio on the efficient
frontier. Investors would then choose according to their risk preferences on
where they want to allocate their resources between the portfolio and risk free
notes.
The sharpe ratio is a useful tool in valuing
an asset. For comparable assets you can use this ratio which is derived from
the assets return in excess of the risk free, divided by the realized standard
deviation of those returns. The sharpe ratio is essentially the slope of your
historical returns and risk. The higher the sharpe ratio the higher return you
can expect for one unit of risk.
Stock
indices are weighted in different ways. The S&P 500 is a value weighted index which means the
size and influence of the individual companies within it is weighted into the
change of index level. The more market cap a company has, the more its portion
is felt in the index. The Dow Jones is a
price weighted index so this means
the size of firms doesn’t affect the index as much as the price of a share
does.
You can
find the beta of a security by
regressing the returns of the security against the returns of the market in the
same time period. Betas over one indicate that a security will fluctuate
cyclically with the market. When the market is good then the security with high
beta will have great returns, if the market dives then the security will have
compoundingly worse returns. Low beta securities tend to be the “needs” type
products which will are stable but not going to boost in times of prosperity.
Efficient market theory has several
components but essentially revolves around the debate of whether the price of
securities reflects all information. Weak
form theory suggests that a securities price includes only information
known to the public. Strong form
believes that both insider information and public information is already built
into the price of a stock. Strong form essentially asserts that there is a
random walk of prices according to new information and that if two economists
were walking down the street and one spotted a $20 bill on the ground, the
other would tell him not to waste his time picking it up because if it was
actually worth something (like an undervalued stock), then somebody else would
have already picked it up.
We discussed
real and nominal interest rates. Real
rates include the effects of inflation and are a reflection of what your true
purchasing power is. Nominal for example could be a promised raise in your
salary which doesn’t include rising inflation.
Several
factors can go into mutual fund
returns. Different mutual funds have different ways of charging the investors.
The varying loads include front and back end fees, 12-b 1 fees (marketing and selling fees), and annual expenses. Each
of these fee types has its pros and cons. An investor should be sure to discuss
with his fund manager what type of fee schedule his asset will have.
Corporate Finance
Net present value illustrates the worth of a project or investment.
Time value of money theory concludes that a dollar today is worth more than a
dollar tomorrow. NPV is a function which can be performed either on a financial
calculator or via Excel (the god of
computer programs). To get the present value of a number you will need a time
horizon, interest rate, and either payments of a future value. This function is
useful if you have an obligation to make in the future and want to know how
much you need to devote today and what type of interest rate you should work
with.
A discounted cash flow analysis is
performed by taking data off of the income statement and balance sheet and
figuring the annual cash flow of a project. Then using an appropriate hurdle rate a finance manager will
discount those returns back to the present. If the NPV is positive, or the internal rate of return (IRR) is over
the required rate of return, then the project should be pursued. A DCF
typically includes information about the initial costs or outlay of a project
and the subsequent expected cash flows.
Adjusted present value is a useful tool
when including the value of tax shields
into your discounted cash flow. A tax shield is created when managers use debt
financing. Because interest payments are tax deductible it is a useful way to
increase cash flow assuming financial distress is not high. Depreciation also
contributes to the tax shield because it is deductible as well.
Investment
risk is divided into two major compartments: firm specific and market risk. Firm specific or idiosyncratic risk
is assumed to be diversified away when creating portfolios and doing models but
it relates to specific problems which a firm might incur like losing a manager
or having a fire in a warehouse. Reward is given for market risk. Market risk
affects an entire asset class. Examples would be war or high inflation. Even
market risk in theory can be diversified away if you take globalization into
account.
Effective capital structure is what finance
managers work for. The balance between utilizing debt, equity, or some kind of
hybrid instrument is the challenge. Trade-off
theory illustrates firm characteristics which show how a company should be
financed: high tangible assets means high debt levels, highly skilled labor
calls for lower debt levels, in some industries customers or suppliers care
about a company’s debt level, etc..
One of the
most crucial financial principles is that of the weighted average cost of capital. The WACC is used to value
projects because it is a representation of the average hurdle rate which
investors and creditors require. The cost of equity is higher than the cost of
debt and doesn’t have tax benefits. The cost of debt is lower and more
available but obviously doesn’t give investors a great return. A company gets a
weighted average of its financial backing and this constitutes the WACC.
Business
Communication
I didn’t
get the best grade in this class, possibly evidenced by how hard it has been to
read this article. I certainly have lost some of the flare I used to have in
writing and I am not writing the best CLOUD
paragraphs (coherence, length, organization, unity, development).
We tailored
our resumes and I learned to have a base resume which you alter each time you
apply to a different job. Cover letters are also a great way to show interest
in a company and get them prepped to seeing you as a good fit for them. We
practiced interviews and came up with PAR stories (Problem, Action, Result)
which could be quickly recited with interview questions. Doing mock interviews
is very useful in preparing yourself for the real questions and introspection
(?).
I have
improved my powerpoint proficiency. Until this semester I had honestly done
less than five powerpoints and I was a pretty straight bullet point and times
roman guy. Now I am pretty confident I can create engaging powerpoint presentations.
Animations are simple to work with and there are great templates to choose from
that will give that extra touch to your oration.
Information Systems
I am
computer illiterate compared to my generation, but this semester I programmed
my own website using HTML. We learned
the basic tags and rules of programming and created a very simple website which
had a photo, links to other pages and websites, and different text and background
styles using cascading style sheets.
Excel is
the bomb dot com if you didn’t know. New and built upon functions included solver, goal seek, pivot tables, and VLookUp. These functions have a lot to
do with optimization. You can use different variables and create useful
presentable information.
I was
introduced to database with Microsoft
Access. With access you can search through large amounts of data and create
useful reports. There are basic rules to understand about narrowing criteria
and getting accurate outputs.
Visual Basic Application is the root of
excel functions. You can program a macro
so that with the click of one button you run a series of functions and get a
coherent output. VBA will come in handy someday when you are working with large
amounts of repetitive data and need to perform calculations within that data.
Islam
My most enjoyable class was Islam
and the Gospel. I won’t go into great depth here but I do consider myself in
the top 75% of non-Muslims knowledge about Islam. We learned in-depth about the
five pillars of Islam: confession of
faith, prayer, fasting, charity, and pilgrimage. Being Muslim is pretty simple
and if one believes in Allah as the only God and Muhammad as his prophet, well
then you’re doing good.
Muhammad
is a great character to study. His similarities to Joseph Smith are more than
can be overlooked. He was a great man and powerful leader. He received things
from heaven which if people would follow them it would be good for the whole
world.
We contrasted the differences
between Islam and Islamism. Islamism is
the politicization of Islam. It relates to the political ideology that Sharia
Law should be practiced and generally has an anti-western theme. Extreme Islamism
is giving Islam a bad reputation in the modern world.
The entry ends because I grow weary
of this recounting. Sorry this is long and I kinda hope nobody made it this
far. But if you did read and want to discuss any of these principles further
then please let me know. Ask me about VBA at a dinner party or something and we
can see if more can be learned…which it can because like I said I am an A-minus
student.
