Correlation is a familiar concept used to describe the strength of the relationship between variables. Serial correlation (also known as autocorrelation) is the term used to describe the relationship between observations on the same variable over independent periods of time. If the serial correlation of observations is zero, observations are said to be independent. However, […]

# PRM Exam I

## Minimum Variance Hedge Ratio

One problem with using futures contracts to hedge a portfolio of spot assets, is that a perfect futures contracts may not exist, that is, a perfect hedge cannot be achieved. For example, if an airline wishes to hedge its exposure to variation in jet fuel prices, it will find that there is no jet fuel […]

## Constructing an Efficient Frontier

The concept of Efficient Frontier was first introduced by Harry Markowitz in his paper on Portfolio Selection (1952 Journal of Finance). The portfolio theory considers a universe of risky investments and explores these possible investments in order to find the optimum portfolio. So, for a given amount of risk, MTP explains how select a portfolio […]

## Mean, Variance, Standard Deviation and Correlation

While making an investment decision, it is important to assess the risk/return profile of any investment. The relation between risk and return raises three basic questions: How do I estimate the percentage return that I will receive on an investment? How much risk does an asset add to a portfolio? What can I do to […]

## Nominal Interest Rate and Effective Yield

When you go to a bank enquiring about the deposit rates, the rates specified by the bank can be expressed in two ways: nominal interest rate, and the effective annual yield. The difference between the two is that the nominal rate does not take the compounding into consideration, while the effective annual yields take the […]

## Continuous and Discrete Compounding

When you invest a dollar today, you expect to receive more than a dollar after a period of time. The additional amount earned on your investment is the time value of money and is calculated based on the interest rate. There are primarily two ways of calculating interest: 1. Discrete (Includes simple and compound interest) […]

## Interest Rates and Time Value

This is the introduction section for PRM Exam I. It presents the fundamental concept that money has a time value that results from investment opportunities. It covers basic measures of interest rates, the value of time and compounding methods. These foundational concepts have relevance for the valuation of all financial assets. Learning Outcome Statements: Differentiate […]

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