1

QUANTITATIVE CONCEPTS
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LEARNING OUTCOME
▪ Define the concept of interest;
▪ Compare simple and compound interest;
▪ Define present value, future value, and discount rate;
▪ Describe how time and discount rate affect present and future
values;
▪ Explain the relevance of net present value in valuing financial
investments;
▪ Describe applications of time value of money;
▪ Explain uses of mean, median, and mode, which are measures of
frequency or central tendency;
▪ Explain uses of range, percentile, standard deviation, and variance,
which are measures of dispersion;
▪ Describe and interpret the characteristics of a normal distribution;
▪ Describe and interpret correlation.
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I. The time value of money

1. Interest

Interest

• Is the cost of borrowing money

• Is the amount of money lenders receives for lending out money
and borrowers have to pay more for borrowing

The cost to the borrower or the rate of

return to the lender, per period, on the
Simple original principal.
interest
Two Simple interest = Simple interest rate ×
main Principal × Number of periods
types
of Is often referred to as “interest on
interest interest”.
Compound
interest
Future value = Original principal x
1 + simple interest rate no. of period
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I. The time value of money

1. Interest

Interest

Example: You invest $100 (the

principal) at a 5% annual rate for one
year. Compute the simple interest
Simple
interest
Answer:
Two $100×5%×1=$5
main
types
of Example: If an amount of $5,000 is
interest deposited into a savings account at an
annual interest rate of 5%,
compounded monthly, what is the
Compound value of the investment after 10 years?
interest
An swer:
0.05 (12×10)
5000× 1+ =8235.05
12
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I. The time value of money

1. Interest

Annual Percentage Rate and Effective Annual Rate

Annual percentage rate (APR) Effective Annual Rate (EAR)

A simple interest rate that does The annual rate of interest that
not involve compounding investors actually realize as a
result of compounding

APR
EAR = [(1+ number of periods ) numberof period per years ]−1
per year

Example: Compute EAR if the stated annual rate is 12%, compounded

quarterly (3 months).
Answer:
APR = 12%; number of period = 4
APR 12
Periodic rate is: = = 3%.
number of periods per year 4

Thus, EAR = (1 + 0.03)4 – 1 = 1.1255 – 1 = 0.1255 = 12.55%.

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I. The time value of money

2. Present Value and Future Value

Example: Simple and compound interest rates

A credit card charges interest at an APR of 15.24%, compounded daily.

A bank pays 0.2% monthly on the average amount on deposit over the
month. A loan is made with a 6.0% annual rate, compounded quarterly.
The following table shows what the expected annual rate is for each of
these situations. The rate is higher than the APR because of
compounding

Answer:

APR EAR

Credit
15.24% 0.1524 365
card 16.46% = 1+ −1
365
Bank 2.4% (= 0.2% 0.024 12
deposit x 12) 2.43% = 1+ −1
12

Loan 6.0% 0.06 4

6.14% = 1+ −1
4
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I. The time value of money

2. Present Value and Future Value

The investor can distinguish

between the worth of
People would rather have
investment that offers
money today than in the future.
different returns at a different
time
Present value (PV)
• The current value of a future sum of
money or stream of cash flows given a
• The value of a current asset at
specified rate of return.
a future date based on an
• Determining the appropriate
assumed rate of growth.
discount rate is the key to properly
• Estimate how much an
valuing future cash flows
FV investment made today will be
PV= worth in the future.
1+r n
FV = PV× 1+r n
Future value (FV)
Present value Interest rate (r %) Future value

Present time Future time

Discount rate (r %)
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I. The time value of money

2. Present Value and Future Value

Example: Comparing investment

You are choosing between two investments of equal risk, given by

discount rate to use is 12% and outflow for each is £500

Project A is expected to pay Project B is expected to pay

out £1,000 three years from out £1,200 five years from
now now

Present value of £1,000 in Present value of £1,200 in

three years discounted at 12% five years discounted at 12%
£ 1,000 £ 1,200
= = £ 711.78 = = £ 680.91
1.12 3 1.12 5

Project A is worth more in present value terms, so it is the better

investment.
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I. The time value of money

2. Present Value and Future Value
Net present value

Definition Formula

Cash flow
= − initial investment
Is the present value of future (1+i)t
cash flows minus the value of the where:
cost of the initial investment i: required return (discount rate)
t: number of time periods

Example:

Imagine a project that costs $1,000 and will provide three cash flows of
$500, $300, and $800 over the next three years. Assume there is no
salvage value at the end of the project and the required rate of return is
8%. Calculate the NPV of the project.

$500 $300 $800

NPV = + + − $1000
(1+0.08)1 (1+0.08)2 (1+0.08)3

= $355.23
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I. The time value of money

2. Present Value and Future Value

Application of the time value of money

The current value (price) of a financial product should

equal the present value of its expected future cash
flows (PV).

Valuation of Investors can assess the price of a financial instrument

Financial and evaluate its price.
Instruments
Price < PV Price = PV Prive > PV

Underpriced Priced fairly Overpriced

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I. The time value of money

2. Present Value and Future Value
Application of the time value of money

Evaluation of Annuity
Involves the initial payment of an amount, in exchange for a fixed number
of future payments of a certain amount

Cash flows (A) occur at the beginning of each period

Annuity Due
(1 + i)n −1 1 1
FV = A x x (1 + i) PV = A x [ − ]x (1+i)
i i i 1+i n

Cash flows (A) occur at the end of each period.

Ordinary
Annuity (1 + i)n −1 1 1
FV = A x PV = A x [ − ]
i i i 1+i n

Annuities with infinite lives

Perpetuities
Perpetuities has no FV A
PV =
i
A: Cash flow each period
i: rate per perod
n: number of period
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I. The time value of money

2. Present Value and Future Value
Application of the time value of money

Example: Let's assume that you invest $1,000 at the beginning of the
year for the next five years, at 5% interest. How much would you
have at the end of the five-year period?

This is an Annuity Due.

The total amount you get after 5 years is:
(1 + i)n −1 (1 + 5%)5 −1
FV = A x x (1 + i) = 1,000 x x (1 + 5%) = 5,801.9
i 5%
It can also be explained in this way
0 1 2 3 4 5
FV = PV x (1 + r)n

$1,000 FV5 = 1,000× 1.05 1 = $1,050.0

$1,000 FV = 1,000× 1.05 2= $1,102.5
4

$1,000 FV3 = 1,000× 1.05 3= $1,157.6

$1,000 FV = 1,000× 1.05 4= $1,215.5
2

$1,000 FV1 = 1,000× 1.05 5= $1,276.2

FV of an annuity due: $5,801.9
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I. The time value of money

Vocabulary

Vocabulary Meaning

Interest Lãi vay

Principle Gốc

Lender Người cho vay

Borrower Người đi vay

Simple/ compound interest Lãi đơn/ kép

Effective annual rate Lãi suất thực hưởng

Saving Tiết kiệm

Deposit Tiền gửi

Quarterly Hàng quý

Net present value Giá trị hiện tại thuần

Ordinary Annuity Dòng tiền đều cuối kì

Annuity due Dòng tiền đều đầu kì

Perpetuities Dòng tiền đều vô hạn

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II. DESCRIPTIVE STATISTICS

1. Basic knowledge of statistics and probability
Probability

Definition
Describe how likely an event could occur.
The probability of an event is a number between 0 and 1 (0% - 100%)
Ex: When flipping a coin, 2 events may occur: getting head side or
getting number side. The probability of getting head side is: 1 : 2 = ½ =
50%

Rules

Addition rules Multiplication rules

Event A and B Event A and B Event A and B Event A and B

are mutually are non- are are
exclusive mutually independent dependent
exclusive
If event A A & B still can The outcome The outcome
occurs, then occur at the of event A of event A
event B same time does not affects the
cannot occur affect the outcome of B
outcome of B
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II. DESCRIPTIVE STATISTICS

1. Basic knowledge of statistics and probability

Probability Rules

Addition rules

Mutually exclusive events

Ex: flipping a coin, get head side or number side
A B
The probability that at least A or B occur: P(A or
B) = P(A) + P(B)
P (both A and B) = 0
Non-mutually exclusive events

Ex: Choose 2 cards from 3 cards J, Q, K. Calculate

the probability that at least 1 J or 1 Q is chosen.
These are non-mutually exclusive events because A B
there is a chance that both J and Q are chosen

The probability that A or B will occur: P(A or B) =

P(A) + P(B) – P(A and B) Probability that bọth
in which A: 1J is chosen A & B happen
B: 1Q is chosen
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II. DESCRIPTIVE STATISTICS

1. Basic knowledge of statistics and probability
Probability Rules

Multiplication rules
Dependent events
Ex: Event A: Number of people who smoke increases
Event B: Number of people who have lung cancer increases

If event A happens, the probability of event B increases

Probability that number of people who smoke and number of people
who have lung cancer increase : P(A&B)= P(A) x P(A|B)
Independent events
Ex: There are 2 bags, each bag has 5 red balls and 5 blue balls. Take 1
ball in each bag.
Event A: Take the red ball in the first bag
Event B: Take the red ball in the second bag

The probability of these two events does not affect each other.
Probability that the red balls are taken in both first and second bag:
P(A & B) = P(A) x P(B)
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II. DESCRIPTIVE STATISTICS

1. Basic knowledge of statistics and probability

Permutation Arrangement Combination

Pn=n! n! n!
Formula Akn= Cnk=
=n x (n-1) x … x1 n−k ! n−k !k!

How many From the given There is a group

ways to digits: 2, 3, 5, of 3 students, 2
arrange 3 how many students have to
Example students into numbers have sweep the floor.
3 chairs? 2 different How many ways
digits that can to choose those
be created? 2 students?

P4 =3! 3! 3!
A23 = 3−2 ! C2
3=
Solution = 3 x 2 x1 3−2 !2!
= 6 ways = 6 numbers = 3 ways
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II. DESCRIPTIVE STATISTICS

2. Measures of Frequency and Average

Arithmetic mean

Definition

The arithmetic mean is the sum of the observation values

divided by the number of observations

Example
Let's say that a stock's returns over the last five years are 20%, 6%,
-10%, -1%, and 6%. Calculate the arithmetic mean.
Answer:
20 + 6 − 10 − 1 + 6
The arithmetic mean = = 4.2
5
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II. DESCRIPTIVE STATISTICS

2. Measures of Frequency and Average
Geometric mean

Definition

Geometric mean return is the average return assuming that

returns are compounding.

Formula

Geometric mean = 1+ r1 ×… 1+rt 1/t−1

Where:
• rt:the return in period i expressed using decimals
• t : the number of periods

Example
Let's say that a stock's returns over the last five years are 20%, 6%,
-10%, -1%, and 6%. Calculate the arithmetic mean.
Answer:
5 (1+20%)×(1+6%)×(1−10%)×(1−1%)×(1+6%) − 1 = 3.74%
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II. DESCRIPTIVE STATISTICS

2. Measures of Frequency and Average

is the midpoint of a data set when the data is arranged

in ascending or descending order. Half the
observations lie above the median and half are below
Median
Example: The median of 4, 1 and 7 is 4 because when
the numbers are put in order (1,4,7) the number 4 is in
the middle.

The value that occurs most frequently in a data set

▪ Unimodal: When a distribution has one value that
appears most frequently
▪ Bimodal or trimodal: When a set of data has two
or three values that occur most frequently Mode
Example: The mode of (4, 4, 2, 3, 2, 2) is 2 because it
occurs three times, which is more than any other
number.
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II. DESCRIPTIVE STATISTICS

3. Measures of Dispersion

The distance between the largest and the

smallest value in the date set range

Range

Range = maximum value – minimum value

Example: What is the range for the 5-year annualized total returns
for five investment managers if the managers’ individual returns
were 30%, 12%, 25%, 20%, and 23%?

Answer:
Range = 30% − 12% = 18%
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II. DESCRIPTIVE STATISTICS

3. Measures of Dispersion

Standard deviation (σ)

It measures the variability or volatility of a data set around the arithmetic

mean of that data set

• Population SD: Where:

Xi = Observation i (one of n
2 2 2 possible outcomes)
X1 − E X + X2 − E X + … + Xi − E X
σ=
N E(X) = Arithmetic mean or
expected value of X
• Sample SD:
N = Number of observations in
2 2 2 a population
X1 − E X + X2 − E X + … + Xi − E X
s= n = Number of observations in
n − 1
a sample
Example: What is th e standard deviat ion for th e 5-y ear annualized tot al
returns for 5 inv estment managers if the individual returns were 30%, 12%,
25%, 20%, 23%?
Answer:
തX = (30 + 12 + 25 + 20 + 23) / 5 = 22

(30−22)2 + (12−22) 2 + (25−22)2 + (20−22) 2 + (23−22) 2

σ= = 6.67%
5 −1
6.67% is considered as small standard deviation, means that the values in the
data set are close to the mean ( തX) of the data set.
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II. DESCRIPTIVE STATISTICS

3. Measures of Dispersion

Definition
A probability distribution that is symmetric about
the mean, showing that data near the mean occurs
more frequently than data far from the mean.
Normal
Characteristics
distribution
Being represented in a graph by a bell curve
Having special importance in statistics because
many probability distributions have the similar
shape to this

• Mean = Median = Mode

• Symmetry about the center
• 50% of values less than the
mean and 50% greater than
Mean
the mean
Mode
Symmetry
Median
50% 50%
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II. DESCRIPTIVE STATISTICS

3. Measures of Dispersion

Normal distribution example

Female shoe sales, by size

20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41

• Mean = Median = Mode = 38

• Most of women have the shoe size around 38.
• A very small number of women wears either extremely small
or extremely big shoes
→ It follows normal distribution
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II. DESCRIPTIVE STATISTICS

4. Covariance

Definition

measures the directional relationship between the returns on two

variances

Positive covarriance Negative Covariance

The 2 variables move in the The 2 variables move inversely

same direction e.i. if X increases, then Y
e.i. if X increases, Y increases decreases, vice versa

Formula

SUM [(xi − xm) ∗ (yi − ym)]

𝑪𝒐𝒗 𝑹𝒊,𝑹 𝒋 =
(n − 1)
Where:
Xm: the mean of x
Ym: the mean of y
n: number of data set
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II. DESCRIPTIVE STATISTICS

4. Covariance

Formula

SUM [(xi − xm) ∗ (yi − ym)]

𝑪𝒐𝒗 𝑹𝒊,𝑹𝒋 =
(n − 1)

Example
Assume an analyst in a company has a 3-quarter data set that
shows quarterly GDP growth(x) and a company's product growth
(y). The data set may look like:
Q1: x = 2%, y = 10%
Q2: x = 4%, y = 14%
Q3: x = 3%, y = 12%
xm = (2 + 4 + 3)/3 = 3; ym = (10 + 14 + 12)/3 = 12
Cov X,Y
(2 − 3) x (10 −12) + (4 − 3) x (14 − 12) + (3−3) x (12 −12)
= = 2 >0
(3− 1)
→ The GDP growth rate and product growth rate have positive
covariance
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II. DESCRIPTIVE STATISTICS

5. Correlation

Measures the strength of the relationship between

two variables

Correlation A scale form of covariance

Range: from -1 to +1

Cov Ri,Rj
Cor Ri,Rj = ρi,j =
σ Ri σ Rj
If 𝜌𝑖,𝑗 = 1.0, the random variables have perfect
positive correlation.
Equation
If 𝜌𝑖,𝑗 = −1.0, the random variables have perfect
negative correlation.

If 𝜌𝑖,𝑗 = 0, there is no linear relationship between

variables.
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II. DESCRIPTIVE STATISTICS

5. Correlation

Example
Assume an analyst in a company has a 3-quarter data set that
shows quarterly GDP growth (x) and a company's product growth
(y). The data set may look like:
Q1: x = 2%, y = 10%
Q2: x = 4%, y = 14%
Q3: x = 3%, y = 12%
Calculate the correlation between the GDP growth rate and product
growth rate ?

Xm = 3%, ym = 12%; Cov X,Y = 2

(2−3) 2 +(4−3)2 +(3−3) 2

σ(x) = 3−1
= 1%

(10−12)2 +(14−12) 2 +(12−12)2

σ(y) = 3−1
= 2%
Cov x,y 2
Corr x,y = = =1
σ x σ y 1x2
→ The GDP growth rate and product growth rate have positive
covariance and strong relation ship
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II. DESCRIPTIVE STATISTICS

Vocabulary

Vocabulary Meaning

Statistics Thống kê

Probability Xác suất

Addition rule Quy tắc cộng

Mutually exclusive events Biến cố xung khắc

Multiplication rule Quy tắc nhân

Independent events Biến cố độc lập

Dependent events Biến cố phụ thuộc

Permutation Hoán vị

Arrangement Chỉnh hợp

Combination Tổ hợp

Arithmetic mean Trung bình cộng giản đơn

Geometric mean Trung bình nhân

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II. DESCRIPTIVE STATISTICS

Vocabulary

Vocabulary Meaning

Median Trung vị

ascending or descending order Thứ tự tăng hoặc giảm dần

Mode Số yếu vị

Most frequently Thường xuyên nhất

Normal distribution Phân phối chuẩn

Range Khoảng biến thiên

Standard deviation Độ lệch chuẩn

Variability Biến thiên

Normal distribution Phân phối chuẩn

Covariance Hiệp phương sai

Variable Biến

Correlation Hệ số tương quan