Analytical Methods: Rapid Fire
Chapters in this video
- 0:00 NPV versus IRR: dollar amount vs percentage
- 1:57 Two test-day traps: NPV above zero and reinvestment assumption
- 3:24 Standard deviation (total risk) vs beta (systematic risk)
- 4:10 Jensen's Alpha: proving active manager skill
- 5:04 Sharpe ratio divides by standard deviation, never beta
- 5:55 Diversification magic number: 30 or more securities
- 6:09 Current ratio vs quick ratio: the inventory exclusion
- 6:49 Price-to-book for asset-heavy industries and the preferred-stock trap
- 7:46 Trailing P/E vs forward P/E and what high or low implies
- 8:02 Rapid-fire exam recap
What this video covers
- Why NPV is a dollar amount and IRR is a percentage, and which one wins when they conflict on mutually exclusive projects
- How standard deviation measures total risk while beta measures systematic risk only, and what the 1.0 benchmark means
- How to calculate Jensen's Alpha to judge active manager skill, and why the Sharpe ratio divides by standard deviation, never beta
- Why roughly 30 securities diversifies away most unsystematic risk, and why systematic market risk always remains
- When to use the current ratio versus the quick ratio (acid test), and why inventory exclusion makes the quick ratio more conservative
- How to calculate price-to-book (P/B) for capital-intensive industries, including the critical step of subtracting preferred stock from net assets
- When trailing P/E and forward P/E apply, and what each implies about growth expectations or possible overvaluation
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