Math Of Finance

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NOTES FOR WEEK 1 – JUNE 02, 2007

OVERVIEW OF FINANCE

Finance – is an inter-temporal choice between spending today and spending tomorrow.

Investing – is a productive activity

Productive activity can be classified as:

Directly – putting up your own a business.

Indirectly – if there is an intermediary assigned to take care of your investments such as banks, investment bankers, etc.

Saver

Productive activity

Financial instrument

Claim on cash flows of a productive activity that is being funded

Needs computation to value the instrument

Types of Financial Instruments:

Equity

Secured Debt

Converting Debt

Unsecured Debt

Convertible Preferred

Preferred

Common

Tree Model of Finance

– consider the value of the asset

– expected return/yield of the asset

Cow Model of Finance

– Produce same result regardless of scenarios, also known as cash cow model.

Principle of Finance

Price and Rate of Return (R) – manifestation of the value of the asset.

Price is inversely related to Return

If the Price is low the rate of Return will be very high

Risk – possibility to lose value because of market movement

The higher the risk, the higher the return that should be asked for

Portfolio Theory – some risks cancel each other out when assets are put together.

NUMBERS

Real numbers

– everything on the number line

Rational numbers – numbers that can be expressed in decimal, which are terminating or repeating.

integers – positive integers, zero, negative integers

non-integers

Irrational numbers- expressed as non-repeating decimals

e.g.

=SQRT(2)

=P1()

=EXP(1)

– measures the number of radiuses or radii around the circle.

Complex numbers

E.g.:

= i

i = “imaginary numbers”

= = = 2i

Absolute Value

– distance of a number from 0

– without equality will just mean an expression.

To illustrate:

E.g:

If then =

(ii.)

If , then

=1

Intervals on the red line:

– open interval

< <
Read as: Sets of all x, such that x is greater than 2 or less than 3
(ii.)
- closed interval
Read as: Sets of all x, such that x

# Essay About Positive Integers And Portfolio Theory

Essay, Pages 1 (341 words)

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