Fall Semester 2012 School Stuff

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.