Study Session #2
Learning Outcome Statements
(Last revised 12/14/04)

DOWNLOAD

1. A. “The Time Value of Money”
a) explain an interest rate as the sum of a real risk-free rate and premiums that compensate investors
for distinct types of risk;
b) calculate the future value (FV) and present value (PV) of a single sum of money;
c) distinguish between the stated annual interest rate and the effective annual rate;
d) calculate the effective annual rate, given the stated annual interest rate and the frequency of
compounding;
e) solve time value of money problems when compounding periods are other than annual;
f) calculate the FV and PV of an ordinary annuity and an annuity due;
g) calculate the PV of a perpetuity;
h) calculate an unknown variable, given the other relevant variables, in time value of money
problems;
i) calculate the FV and PV of a series of uneven cash flows;
j) draw a time line, specify a time index, and solve problems involving the time value of money as
applied, for example, to mortgages and savings for college tuition or retirement;
k) explain the cash flow additivity principle in time value of money applications.
B. “Discounted Cash Flow Applications”
a) calculate and interpret the net present value (NPV) and the internal rate of return (IRR) of an
investment;
b) contrast the NPV rule to the IRR rule;
c) discuss problems associated with the IRR method;
d) distinguish between money-weighted and time-weighted rates of return;
e) calculate the money-weighted and time-weighted rates of return of a portfolio;
f) calculate the bank discount yield, holding period yield, effective annual yield, and money market
yield for a U.S. Treasury bill;
g) convert among holding period yields, money market yields, and effective annual yields;
h) calculate the bond equivalent yield.
C. “Statistical Concepts and Market Returns”
a) differentiate between descriptive statistics and inferential statistics;
b) differentiate between a population and a sample;
c) explain the concepts of a parameter and a sample statistic;
d) differentiate among the types of measurement scales;
e) define and interpret a frequency distribution;
f) calculate and interpret a holding period return (total return);
g) calculate relative frequencies and cumulative relative frequencies, given a frequency distribution;
h) describe the properties of data presented as a histogram or a frequency polygon;
i) calculate and interpret measures of central tendency, including the population mean, sample mean,
arithmetic mean, median, mode, weighted mean, geometric mean, and harmonic mean;
j) describe and interpret quartiles, quintiles, deciles, and percentiles;
k) calculate and interpret 1) a weighted average or mean (including a portfolio return viewed as a
weighted mean), 2) a range and mean absolute deviation, and 3) the variance and standard deviation
of a sample and of a population;
l) contrast variance to semivariance and target semivariance;
m) calculate the proportion of observations falling within a specified number of standard deviations
of the mean, using Chebyshev’s inequality;
n) calculate and interpret the coefficient of variation;

o) calculate and interpret the Sharpe ratio;
p) describe the relative locations of the mean, median, and mode for a nonsymmetrical distribution;
q) define and interpret skew, and explain the meaning of a positively or negatively skewed return
distribution;
r) define and interpret kurtosis, and explain excess kurtosis;
s) describe and interpret measures of sample skew and kurtosis.
D. “Probability Concepts”
a) define a random variable, an outcome, an event, mutually exclusive events, and exhaustive events;
b) explain the two defining properties of probability;
c) distinguish among empirical, subjective, and a priori probabilities;
d) describe the investment consequences of probabilities that are mutually inconsistent;
e) distinguish between unconditional and conditional probabilities;
f) calculate, using the multiplication rule, the joint probability of two events;
g) calculate, using the addition rule, the probability that at least one of two events will occur;
h) distinguish between dependent and independent events;
i) calculate a joint probability of any number of independent events;
j) calculate, using the total probability rule, an unconditional probability;
k) calculate and interpret expected value, variance, and standard deviation;
l) explain the use of conditional expectation in investment applications;
m) calculate an expected value using the total probability rule for expected value;
n) calculate and interpret covariance and correlation;
o) explain the relations among covariance, standard deviation, and correlation;
p) calculate the expected return, variance of return, and standard deviation of return on a portfolio;
q) calculate covariance given a joint probability function;
r) calculate an updated probability, using Bayes’ formula;
s) calculate the number of ways a specified number of tasks can be performed using the
multiplication rule of counting;
t) solve counting problems using the factorial, combination, and permutation notations;
u) distinguish among problems for which different counting methods are appropriate;
v) calculate the number of ways to choose r objects from a total of n objects, when the order in
which the r objects is listed does or does not matter.

DOWNLOAD