Financial Modeling Introduction Chapter 1
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Questions and Answers

What is the primary focus of Chapter 1 in the context of financial modeling?

  • Advanced programming techniques in Python
  • Market analysis using Excel and Python
  • Introduction to Excel functions and features (correct)
  • Fundamental theories of finance

Which aspect of spreadsheet quality is emphasized in this introduction?

  • Aesthetic appeal of the spreadsheet layout
  • User-friendly design for novice users
  • Compatibility with various software
  • Reliability and accuracy of spreadsheet calculations (correct)

In Excel, which method is most useful for ensuring correct formulas during development?

  • Test-driven development (correct)
  • Peer review of spreadsheets
  • Visual inspection of formula results
  • Using comments to explain formulas

Which topic does NOT fall under the Excel syntax section in Chapter 1?

<p>Manipulating large datasets (D)</p> Signup and view all the answers

Which method is likely included in the spreadsheet testing methods section?

<p>Comparison testing against historical data (C)</p> Signup and view all the answers

What kind of price data does the section 'Getting Price Data from Yahoo!' imply using?

<p>Real-time trading data (B)</p> Signup and view all the answers

Which functionality is least likely to be covered in the Other Functionality section of Excel?

<p>Manual data entry techniques (D)</p> Signup and view all the answers

Which feature is NOT recommended when enhancing the appearance of a spreadsheet?

<p>Applying cell-protection (C)</p> Signup and view all the answers

Which of the following best describes the first stage of the Test-Driven Development (TDD) cycle?

<p>Create test cases defining desired functionalities (B)</p> Signup and view all the answers

What is meant by the 'oracle problem' in spreadsheet testing?

<p>Establishing whether software output is correct (A)</p> Signup and view all the answers

Which feature is emphasized to prevent accidental overwriting of data in a deployed spreadsheet?

<p>Making the file read-only (B)</p> Signup and view all the answers

Which method is NOT listed as a way to solve the oracle problem?

<p>Applying comprehensive user feedback (B)</p> Signup and view all the answers

What is one of Tom Grossman's recommendations for protecting a deployed spreadsheet?

<p>Use passwords to restrict tampering (B)</p> Signup and view all the answers

Which guideline does NOT pertain to maintaining the integrity of spreadsheet formulas?

<p>Enhance the spreadsheet's visual appeal (B)</p> Signup and view all the answers

What is the primary purpose of standardizing data as described in the context?

<p>To express values as z-scores relative to the mean (B)</p> Signup and view all the answers

In spreadsheet testing, what do you need to determine if the results are correct?

<p>A valid oracle for output comparison (D)</p> Signup and view all the answers

In fitting ranked data to a normal distribution, how do points near P(a) compare to those near P(b)?

<p>They map further apart than those near P(b). (D)</p> Signup and view all the answers

Which of the following is an advantage of employing named cells and ranges in a spreadsheet?

<p>Facilitates easier troubleshooting of formulas (C)</p> Signup and view all the answers

What is the significance of the distributional method mentioned in the context?

<p>It determines the importance of gaps between neighboring observations. (C)</p> Signup and view all the answers

Which function is used to find the probabilities associated with standard deviations in the context discussed?

<p>NORMSDIST() (A)</p> Signup and view all the answers

What effect does standardizing the data by the formula $z_i = \frac{x_i - \mu}{\sigma}$ have on its variance?

<p>It rescales variance to 1. (A)</p> Signup and view all the answers

What is the purpose of the function 'pd.DataReader' in the provided example?

<p>To retrieve financial data from a specific data source (C)</p> Signup and view all the answers

What was the alternative method of installation used when 'conda install' failed?

<p>pip install (B)</p> Signup and view all the answers

Which type of data is characterized by the absence of price information for certain financial instruments?

<p>Valuation Data (A)</p> Signup and view all the answers

In the given code, which library is used to manipulate and analyze numerical data?

<p>numpy (A)</p> Signup and view all the answers

What command is specifically mentioned for checking the successful installation of the linearmodels package?

<p>import linearmodels (C)</p> Signup and view all the answers

Which statement accurately describes Price Data?

<p>It includes historical trade prices and quantities. (C)</p> Signup and view all the answers

What is the role of the 'plt.plot' function in the code sample?

<p>To visualize numerical data in a graph (D)</p> Signup and view all the answers

What information does Fundamental Data typically include?

<p>10-Q and 10-K report disclosures (D)</p> Signup and view all the answers

What is the appropriate start date for the data retrieval of 'IBM' in the code example?

<p>January 1, 2017 (D)</p> Signup and view all the answers

Which library is primarily responsible for obtaining data from the FRED database?

<p>pandas_datareader (A)</p> Signup and view all the answers

What does the dollar sign in cell reference $A$1 indicate in Excel?

<p>Both column A and row 1 are locked. (A)</p> Signup and view all the answers

Which formula implementation correctly computes the present value of a cash flow of $100 with a rate of 8% for a quarter of a year?

<p>= 100 / (1.08) ^ 0.25 (A)</p> Signup and view all the answers

What purpose does the F4 key serve when dealing with cell references in Excel?

<p>It locks the cell reference indicated by the cursor. (D)</p> Signup and view all the answers

What is the condition to decide if an investment should be taken based on Net Present Value (NPV)?

<p>NPV &gt; 0 indicates investment is worth taking. (B)</p> Signup and view all the answers

If a cash flow at time t is denoted as CFt, how is Net Present Value (NPV) calculated?

<p>NPV = ∑ CFt / (1 + r)^t (B)</p> Signup and view all the answers

How can named ranges complicate Excel use according to the content?

<p>They can lead to confusion by obscuring actual cell references. (D)</p> Signup and view all the answers

What effect does a higher discount rate have on the present value of future cash flows?

<p>It decreases the present value of cash flows. (B)</p> Signup and view all the answers

What is the correct sequence of actions to copy a formula in Excel to adjacent cells?

<p>Left-click and drag the square in the lower right-hand corner. (D)</p> Signup and view all the answers

When implementing the formula for net present value, what must always be included?

<p>The cost of asset acquisition. (C)</p> Signup and view all the answers

What is a potential misunderstanding when using Excel for calculations?

<p>Assuming Excel always displays exact values. (A)</p> Signup and view all the answers

Flashcards

Spreadsheet Quality

Ensuring spreadsheets are accurate and reliable using various testing methods.

Spreadsheet Testing

Methods for validating spreadsheet accuracy, often using test-driven development.

Test-driven Development

A software development method where tests are written before the code.

Excel Syntax

The rules for writing commands and formulas in Excel spreadsheet software.

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Working with Cells

Referring to and manipulating specific cells in an Excel spreadsheet.

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Working with Data

Using Excel to manage and analyze different types of information.

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Yahoo! Finance Data

Obtaining financial data from the Yahoo! Finance website.

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Spreadsheet Testing Methods

In spreadsheet testing, you try various input values to see if the spreadsheet produces correct results.

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Oracle Problem in Spreadsheet Testing

The challenge of determining if a spreadsheet produces the right output during testing.

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Spreadsheet Protection

Techniques to prevent accidental or intentional modifications of spreadsheet formulas and data.

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Spreadsheet Formula Management

Best practices for creating simple, well-organized spreadsheets; using named cells/ranges, entering input only once, using absolute references, protecting cell formulas and the spreadsheet itself.

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Test-Driven Development (TDD)

Software development method focusing on creating tests before the actual code ensuring each step of the code is as intended.

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TDD Cycle

A three-stage process done repeatedly; 1. Define test cases; 2. Write code to pass the tests; 3.Refactor if needed.

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Test Cases

Sets of input data used to validate software or spreadsheet functions.

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Protecting Spreadsheet Formulas

Preventing accidental modification of spreadsheet formulas by users.

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Spreadsheet Read-only

Making a spreadsheet file uneditable by others to prevent accidental overwriting.

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Uniform Distribution

A distribution where all values have an equal chance of occurring, resulting in a flat line when graphed.

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Standardization (z-score)

Transforming data by subtracting the mean and dividing by the standard deviation. This converts values to their number of standard deviations away from the mean.

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Normal Distribution

A symmetrical, bell-shaped distribution where most values cluster around the mean.

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Slope of F(x) - Normal Distribution

The steepness of the curve at specific points in a normal distribution. This influences how changes in data affect the ranks.

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Distribution Fitting

Adjusting data ranks to a specific distribution (like normal) by assigning weights to differences in ranks. This accounts for outliers and determines their importance.

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Financial Data Types

There are various types of financial data used in finance. These include Price Data (bid/ask, trade prices), Valuation Data (theoretical prices for non-traded instruments), and Fundamental Data (information from financial reports).

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Price Data

Price data consists of bid and ask prices and quantities, as well as trade prices and quantities for securities and derivatives.

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Valuation Data

Valuation data is used for instruments like bonds, swaps, and derivatives that don't have readily available market prices. It represents a theoretical price that is not necessarily a firm bid or offer.

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Fundamental Data

This data is gathered from corporate reports like 10-Q and 10-K and includes information on financials, sales, and other key aspects of a company's operations.

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Installing a New Package

The process of adding new functionality to your programming environment, often using tools like conda install or pip install.

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conda install

A command used to install new software packages within the Anaconda environment.

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pip install

A command used to install new software packages within a Python environment.

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Checking Package Installation

Verify if the newly installed package can be imported and used in your programming environment.

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Linear Models

A category of statistical models that describe the relationship between a dependent variable and one or more independent variables.

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linearmodels Package

A Python package designed for estimating and analyzing econometric linear models including panel data models.

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What are relative cell references?

Cell references that adjust when copied to other cells. For example, A1 will become A2 when copied down one row, and B1 will become C1 when copied right one column.

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What are absolute cell references?

Cell references that stay fixed even when copied to other cells. They use dollar signs ($) to lock the row and/or column. For example, $A$1 will always refer to cell A1, no matter where the formula is copied.

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What is a named range?

Assigning a meaningful name to a group of cells, allowing you to use that name instead of cell references in formulas.

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What is the present value (PV)?

The current value of a future cash flow, discounted back to today's value using a discount rate.

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What is the discount rate?

A rate that reflects the time value of money and the risk associated with future cash flows. It's used to calculate the present value.

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What is the net present value (NPV)?

The present value of all future cash flows minus the initial investment cost.

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Why is the NPV decision rule important?

The decision rule states that an investment is worthwhile only if the NPV is greater than zero.

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How is NPV calculated?

NPV adds the present values of all future cash flows, including the initial investment as a negative cash flow at time zero.

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What are some reasons NOT to blindly trust Excel?

Never assume Excel is automatically correct. Always test carefully and double check formulas, especially when using built-in functions.

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What are the four possible combinations of cell references?

There are four options for cell references in formulas: A1 (no lock), $A1 (column locked), A$1 (row locked), and $A$1 (both row and column locked).

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