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Many people like trading foreign currencies on the foreign exchange forex market because it requires the least amount of capital to start day trading. Forex trades 24 hours a day during the week and offers a lot of profit potential due to the leverage provided by forex brokers. Forex trading can be extremely volatile, and an inexperienced trader can lose substantial sums. The following scenario shows the potential, using a risk-controlled forex day trading strategy. Every successful forex day trader manages their risk; it is one of, if not the most, crucial elements of ongoing profitability.

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Value based management definition investopedia forex

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According to their functionalities, technical indicators can be grouped into three categories: lagging, leading, and volatility. Lagging indicators, also referred to as trend indicators, follow the past price action. Leading indicators, also known as momentum-based indicators, aim to predict future price trend directions and show rates of change in the price.

Volatility-based indicators measure volatility levels in the price. BB is the most widely used volatility-based indicator. Moving average MA is a trend-following or lagging indicator that smooths prices by averaging them in a specified period. In this way, MA can help filter out noise.

MA can not only identify the trend direction but also determine potential support and resistance levels TIO It is a trend-following indicator that uses the short and long term exponential moving averages of prices Appel MACD uses the short-term moving average to identify price changes quickly and the long-term moving average to emphasize trends Ozorhan et al.

Rate of change ROC is a momentum oscillator that defines the velocity of the price. This indicator measures the percentage of the direction by calculating the ratio between the current closing price and the closing price of the specified previous time Ozorhan et al. Momentum measures the amount of change in the price during a specified period Colby It is a leading indicator that either shows rises and falls in the price or remains stable when the current trend continues.

Momentum is calculated based on the differences in prices for a set time interval Murphy The relative strength index RSI is a momentum indicator developed by J. Welles Wilder in RSI is based on the ratio between the average gain and average loss, which is called the relative strength RS Ozorhan et al.

RSI is an oscillator, which means its values change between 0 and It determines overbought and oversold levels in the prices. Bollinger bands BB refers to a volatility-based indicator developed by John Bollinger in the s. It has three bands that provide relative definitions of high and low according to the base Bollinger While the middle band is the moving average in a specific period, the upper and lower bands are calculated by the standard deviations in the price, which are placed above and below the middle band.

The distance between the bands depends on the volatility of the price Bollinger ; Ozturk et al. CCI is based on the principle that current prices should be examined based on recent past prices, not those in the distant past, to avoid confusing present patterns Lambert This indicator can be used to highlight a new trend or warn against extreme conditions. Interest and inflation rates are two fundamental indicators of the strength of an economy.

In the case of low interest rates, individuals tend to buy investment tools that strengthen the economy. In the opposite case, the economy becomes fragile. If supply does not meet demand, inflation occurs, and interest rates also increase IRD In such economies, the stock markets have strong relationships with their currencies. The data set was created with values from the period January —January This 5-year period contains data points in which the markets were open.

Table 1 presents explanations for each field in the data set. Monthly inflation rates were collected from the websites of central banks, and they were repeated for all days of the corresponding month to fill the fields in our daily records. The main structure of the hybrid model, as shown in Fig. These technical indicators are listed below:. Our proposed model does not combine the features of the two baseline LSTMs into a single model. The training phase was carried out with different numbers of iterations 50, , and Our data points were labeled based on a histogram analysis and the entropy approach.

At the end of these operations, we divided the data points into three classes by using a threshold value:. Otherwise, we treated the next data point as unaltered. This new class enabled us to eliminate some data points for generating risky trade orders. This helped us improve our results compared to the binary classification results. In addition to the decrease and increase classes, we needed to determine the threshold we could use to generate a third class—namely, a no-action class—corresponding to insignificant changes in the data.

Algorithm 1 was used to determine the upper bound of this threshold value. The aim was to prevent exploring all of the possible difference values and narrow the search space. We determined the count of each bin and sorted them in descending order.

Then, the maximum difference value of the last bin added was used as the upper bound of the threshold value. As can be seen in Algorithm 1, it has two phases. In the first phase, which simply corresponds to line 2, the whole data set is processed linearly to determine the distributions of the differences, using a simple histogram construction function. The second phase is depicted in detail, corresponding to the rest of the algorithm.

The threshold value should be determined based on entropy. Entropy is related to the distribution of the data. To get balanced distribution, we calculated the entropy of class distribution in an iterative way for each threshold value up until the maximum difference value. However, we precalculated the threshold of the upper bound value and used it instead of the maximum difference value.

Algorithm 2 shows the details of our approach. In Algorithm 2, to find the best threshold, potential threshold values are attempted with increments of 0. Dropping the maximum threshold value is thus very important in order to reduce the search space. Then, the entropy value for this distribution is calculated. At the end of the while loop, the distribution that gives the best entropy is determined, and that distribution is used to determine the increase, decrease, and no-change classes.

In our experiments, we observed that in most cases, the threshold upper bound approach significantly reduced the search space i. For example, in one case, the maximum difference value was 0. In this case, the optimum threshold value was found to be 0. The purpose of this processing is to determine the final class decision. If the predictions of the two models are different, we choose for the final decision the one whose prediction has higher probability.

This is a type of conservative approach to trading; it reduces the number of trades and favors only high-accuracy predictions. Measuring the accuracy of the decisions made by these models also requires a new approach. If that is the case, then the prediction is correct, and we treat this test case as the correct classification.

We introduced a new performance metric to measure the success of our proposed method. We can interpret this metric such that it gives the ratio of the number of profitable transactions over the total number of transactions, defined using Table 2. In the below formula, the following values are used:.

After applying the labeling algorithm, we obtained a balanced distribution of the three classes over the data set. This algorithm calculates different threshold values for each period and forms different sets of class distributions. For predictions of different periods, the thresholds and corresponding number of data points explicitly via training and test sets in each class are calculated, as shown in Table 3.

This table shows that the class distributions of the training and test data have slightly different characteristics. While the class decrease has a higher ratio in the training set and a lower ratio in the test set, the class increase shows opposite behavior. This is because a split is made between the training and test sets without shuffling the data sets to preserve the order of the data points. We used the first days of this data to train our models and the last days to test them.

If one of these is predicted, a transaction is considered to be started on the test day ending on the day of the prediction 1, 3, or 5 days ahead. Otherwise, no transaction is started. A transaction is successful and the traders profit if the prediction of the direction is correct. For time-series data, LSTM is typically used to forecast the value for the next time point. It can also forecast the values for further time points by replacing the output value with not the next time point value but the value for the chosen number of data points ahead.

This way, during the test phase, the model predicts the value for that many time points ahead. However, as expected, the accuracy of the forecast usually diminishes as the distance becomes longer. They defined it as an n-step prediction as follows:. They performed experiments for 1, 3, and 5 days ahead. In their experiments, the accuracy of the prediction decreased as n became larger. We also present the number of total transactions made on test data for each experiment.

Accuracy results are obtained for transactions that are made. For each experiment, we performed 50, , , and iterations in the training phases to properly compare different models. The execution times of the experiments were almost linear with the number of iterations. For our data set, using a typical high-end laptop MacBook Pro, 2. As seen in Table 4 , this model shows huge variance in the number of transactions.

Additionally, the average predicted transaction number is For this LSTM model, the average predicted transaction number is The results for this model are shown in Table 6. The average predicted transaction number is One major difference of this model is that it is for iterations. For this test case, the accuracy significantly increased, but the number of transactions dropped even more significantly.

In some experiments, the number of transactions is quite low. Basically, the total number of decrease and increase predictions are in the range of [8, ], with an overall average of When we analyze the results for one-day-ahead predictions, we observe that although the baseline models made more transactions Table 8 presents the results of these experiments.

One significant observation concerns the huge drop in the number of transactions for iterations without any increase in accuracy. Furthermore, the variance in the number of transactions is also smaller; the average predicted transaction number is There is a drop in the number of transactions for iterations but not as much as with the macroeconomic LSTM. The results for this model are presented in Table However, the case with iterations is quite different from the others, with only 10 transactions out of a possible generating a very high profit accuracy.

On average, this value is However, all of these cases produced a very small number of transactions. When we compare the results, similar to the one-day-ahead cases, we observe that the baseline models produced more transactions more than The results of these experiments are shown in Table Table 13 shows the results of these experiments.

Again, the case of iterations shows huge differences from the other cases, generating less than half the number of the lowest number of transactions generated by the others. Table 14 shows the results of these experiments. Meanwhile, the average predicted transaction number is However, the case of iterations is not an exception, and there is huge variance among the cases.

From the five-days-ahead prediction experiments, we observe that, similar to the one-day- and three-days-ahead experiments, the baseline models produced more transactions more than This extended data set has data points, which contain increases and decreases overall. Applying our labeling algorithm, we formed a data set with a balanced distribution of three classes. Table 16 presents the statistics of the extended data set.

Below, we report one-day-, three-days-, and five-days-ahead prediction results for our hybrid model based on the extended data. The average the number of predictions is The total number of generated transactions is in the range of [2, 83]. Some cases with iterations produced a very small number of transactions.

The average number of transactions is Table 19 shows the results for the five-days-ahead prediction experiments. Interestingly, the total numbers predictions are much closer to each other in all of the cases compared to the one-day- and three-days-ahead predictions.

These numbers are in the range of [59, 84]. On average, the number of transactions is Table 20 summarizes the overall results of the experiments. However, they produced 3. In these experiments, there were huge differences in terms of the number of transactions generated by the two different LSTMs. As in the above case, this higher accuracy was obtained by reducing the number of transactions to Moreover, the hybrid model showed an exceptional accuracy performance of Also, both were higher than the five-days-ahead predictions, by 5.

The number of transactions became higher with further forecasting, for It is difficult to form a simple interpretation of these results, but, in general, we can say that with macroeconomic indicators, more transactions are generated. The number of transactions was less in the five-days-ahead predictions than in the one-day and three-day predictions. The transaction number ratio over the test data varied and was around These results also show that a simple combination of two sets of indicators did not produce better results than those obtained individually from the two sets.

Hybrid model : Our proposed model, as expected, generated much higher accuracy results than the other three models. Moreover, in all cases, it generated the smallest number of transactions compared to the other models The main motivation for our hybrid model solution was to avoid the drawbacks of the two different LSTMs i.

Some of these transactions were generated with not very good signals and thus had lower accuracy results. Although the two individual baseline LSTMs used completely different data sets, their results seemed to be very similar. Even though LSTMs are, in general, quite successful in time-series predictions, even for applications such as stock price prediction, when it comes to predicting price direction, they fail if used directly.

Moreover, combining two data sets into one seemed to improve accuracy only slightly. For that reason, we developed a hybrid model that takes the results of two individual LSTMs separately and merges them using smart decision logic. That is why incorrect directional predictions made by LSTMs correspond to a very small amount of errors. This causes LSTMs to produce models making many such predictions with incorrect directions.

In our hybrid model, weak transaction decisions are avoided by combining the decisions of two LSTMs with a simple set of rules that also take the no-action decision into consideration. This extension significantly reduced the number of transactions, by mostly preventing risky ones.

As can be seen in Table 20 , which summarizes all of the results, the new approach predicted fewer transactions than the other models. Moreover, the accuracy of the proposed transactions of the hybrid approach is much higher than that of the other models. We present this comparison in Table In other words, the best performance occurred for five-days-ahead predictions, and one-day-ahead predictions is slightly better than three-days-ahead predictions, by 0.

Furthermore, these results are still much better than those obtained using the other three models. We can also conclude that as the number of transactions increased, it reduced the accuracy of the model. This was an expected result, and it was observed in all of the experiments. Depending on the data set, the number of transactions generated by our model could vary.

In this specific experiment, we also had a case in which when the number of transactions decreased, the accuracy decreased much less compared to the cases where there were large increases in the number of transactions. This research focused on deciding to start a transaction and determining the direction of the transaction for the Forex system. In a real Forex trading system, there are further important considerations. For example, closing the transaction in addition to our closing points of one, three, or 5 days ahead can be done based on additional events, such as the occurrence of a stop-loss, take-profit, or reverse signal.

Another important consideration could be related to account management. The amount of the account to be invested at each transaction could vary. The simplest model might invest the whole remaining account at each transaction. However, this approach is risky, and there are different models for account management, such as always investing a fixed percentage at each transaction.

Another important decision is how to determine the leverage ratio to be chosen for each transaction. Simple models use fixed ratios for all transactions. Our predictions included periods of one day, three days, and 5 days ahead. We simply defined profitable transaction as a correct prediction of the decrease and increase classes. Predicting the correct direction of a currency pair presents the opportunity to profit from the transactions. This was the main objective of our study. We used a balanced data set with almost the same number of increases and decreases.

Thus, our results were not biased. Two baseline models were implemented, using only macroeconomic or technical indicator data. However, the difference was very small and insignificant. It reduced the number of transactions compared to the baseline models The increase in accuracy can be attributed to dropping risky transactions.

The proposed hybrid model was also tested using a recent data set. Macroeconomic and technical indicators can both be used to train LSTMs, separately or together, to predict the directional movement of currency pairs in Forex. We showed that rather than combining these parameters into a single LSTM, processing them separately with different LSTMs and combining their results using smart decision logic improved prediction accuracy significantly.

Rather than trying to determine whether the currency pair rate will increase or decrease, a third class was introduced—a no-change class—corresponding to small changes between the prices of two consecutive days. This, too, improved the accuracy of direction prediction. We described a novel way to determine the most appropriate threshold value for defining the no-change class.

We used this feature to predict three days and 5 days ahead, with some decreases in accuracy values. Typically, the accuracy of LSTMs can be improved by increasing the number of iterations during training. We experimented with various iterations to determine their effects on accuracy values.

The results showed that more iterations increased accuracy while decreasing the number of transactions i. Additionally, a trading simulator could be developed to further validate the model. Such a simulator could be useful for observing the real-time behavior of our model. However, for such a simulator to be meaningful, several issues related to real trading e.

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Qiu M, Song Y Predicting the direction of stock market index movement using an optimized artificial neural network model. Financ Innov Shen F, Zhao X, Kou G Three-stage reject inference learning framework for credit scoring using unsupervised transfer learning and three-way decision theory. Decis Support Syst J Oper Res Soc — Int Rev Financ Anal Capital budgeting refers to a process that involves a business to determine whether the projects, like investing in a long-term venture or building a new plant, are worth following.

Generally, capital employed is presented as deducting the current liabilities from the current assets. It can be defined as equity plus loans which are subject to interest. To define it properly, capital employed can be expressed as the total amount of capital that has been utilized for acquisition of profits. It also refers to the value of all assets fixed as well as working capital employed in a business.

A capital output ratio which is abbreviated as COR is related to be availability of natural resources in a country. It is used to measure the capital ratio that would be used for the production of some output over a certain period of time. The capital output ratio tends to increase if the capital available in a country is cheaper than the other inputs. The rate at which a company utilizes its cash supply over a specific period of time is known as the cash burn rate.

From its name, it is clear that it is used to measure the speed at which cash ends or is burnt in consumption. It is specially used in such situations where the cash flow of the business activities is negative rather than positive. It is meant for such businesses that have been started newly and because of this they have not managed to make much of the sales that could cover up the expenses.

The coefficient of variation CV refers to a statistical measure of the distribution of data points in a data series around the mean. It represents the ratio of the standard deviation to the mean. The coefficient of variation is a helpful statistic in comparing the degree of variation from one data series to the other, although the means are considerably different from each other.

The compound annual growth rate CAGR of a company refers to the growth rate of an investment, year after year, for a particular time period. Compound interest is the form of simple interest where interest is added to the principle.

When this happens, the interest that is added to the principle also earns interest. This method of addition of interest to the principle is known as compounding. Contribution Margin CM is the difference between sales revenue and variable costs.

It is the measure of the profit margin that focuses on the proportion of sales revenue which is left after the deduction of variable costs associated with the product. Cost of debt generally refers to the effective paid by a company on its debts.

The cost of debt can be calculated in either before or after tax returns. However, the interest expense being deductible, the after tax cost is considered very often. Moreover, the cost of debt is one part of capital structure of the company and also includes the cost of equity.

Country risk is a collection of risks that are associated with investing in a foreign country instead of investing in the domestic market. The risks included are exchange rate risk, economic risk, political risk, and sovereign risk or transfer risk and by which there is a risk of capital being frozen for Government action.

Each country has different type of country risk, some having higher risks would not encourage any type of foreign investments. Credit risk arises every time a borrower is looking ahead to use future cash flows through the payment of a current obligation. The investors are rewarded for presuming credit risk through the way of interest payments from the issuer or borrower of a debt contract. A credit score refers to a statistically derived numeric expression which implicates the creditworthiness of a person.

Currency risk refers to a risk form arising from the changes price of one currency as compared to another currency. Whenever companies or investors possess assets or business operations across national boundaries, they experience currency risk if their positions are not prevaricated. Currency risk is also referred as exchange rate risk.

Putting it simple, currency risk can be defined as the possibility that currency depreciation will show negative effect on the value of assets, investments, and their related interest and dividend payment streams, specifically those securities denominated in foreign currency.

Data analysis techniques for fraud detection refer to the techniques that make use of statistical techniques and artificial intelligence to detect fraud in any company. Fraud is defined as an intentional act of an individual or more persons to deny another person or organization of something that is of value for their own gain.

Every year, the number of fraud cases is increasing and the reason for this may be attributed to technological development. An annuity is essentially a finance related contract, which permits the person who is buying it to pay on a lump-sum basis or make payments in series, in return for acquiring disbursements at regular intervals in future. Deferred Payment Annuity is a type of an annuity in which the payments that are received start somewhere in the future instead of starting at the time it is initiated.

This ratio helps in ascertaining the best possible financial and operational leverage that is to be used in any firm or business. The degree of financial leverage DFL is the leverage ratio that sums up the effect of an amount of financial leverage on the earning per share of a company.

The degree of financial leverage or DFL makes use of fixed cost to provide finance to the firm and also includes the expenses before interest and taxes. Operating Leverage takes into account the proportion of fixed costs to variable costs in the operations of a business. If the degree of operating leverage is high, it means that the earnings before interest and taxes would be unpredictable for the company, even if all the other factors remain the same.

In finance, the discount rate has different meanings, some important ones mentioned below The discounted cash flow is a quantification method used to evaluate the attractiveness of an investment opportunity. The Discounted Cash Flow analysis involves the use of future free cash flow protrusions and discounts them so as to reach the present value, which is then used to calculate the potential for investment.

The underlying idea is that if the value obtained from the dividend discount model is greater than the value at which shares are being already traded, the stock is considered to be undervalued. Putting it simple, the discounted dividend model is one of the methods of evaluating a company based on the theory that a stock holds the value equal to the discounted sum of all the prospective dividend payments. Diversification strategies are made use of to expand the operations of the firm by adding different strategies to a business.

The main aim of diversification in a company is to allow the company to establish itself apart from its current operations. There are two types of diversification strategies. Concentric diversification is when a new venture is strategically related to the existing lines of business, and Conglomerate diversification is when there is nothing common between old and new business strategies, that is both the businesses are not related in anyway.

As the name suggests, Economic order quantity EOQ model is the method that provides the company with an order quantity. This order quantity figure is where the record holding costs and ordering costs are minimized. By using this model, the companies can minimize the costs associated with the ordering and inventory holding.

In , Ford W. Harris developed this formula whereas R. Wilson is given credit for the application and in-depth analysis on this model. Generally speaking, economic risk can be described as the likelihood that an investment will be affected by macroeconomic conditions such as government regulation, exchange rates, or political stability, most commonly one in a foreign country. In other words, while financing a project, the risk that the output of the project will not produce adequate revenues for covering operating costs and repaying the debt obligations.

Elasticity of demand refers to the degree of responsiveness to change in the demand of a product or services and its price. Explicit cost is defined as the direct payment which is supposed to be made to others during the due course of running business. This includes the wages, rents or materials which are due in the contract. Factor analysis is to reduce a set of variables to a set of new variables.

It can be done through many methods and the variables are reduced to a set of lesser variables. In other words the process of making a reduced set of new and useful variables from a set of many variables is factor analysis. Comprehensive financial analysis reports accentuate the strengths and weaknesses of a company.

Financial modeling refers to the process through which a company builds up a financial representation of some, or even all aspects of the company or the given security. The financial model is generally featured by performing calculations, and making recommendations on the basis of that information.

Financial planning can be delineated as long-term profit planning intended at generating higher return on assets, growth in market share, and at solving foreseeable problems. Putting it simple, it is the process of estimating the amount of required capital and determining its competition.

A financial ratio can be well defined as a comparative magnitude of two selected statistical values taken from the financial statements of a business enterprise. Financial responsibility refers to the process of managing money and other similar assets in a way that is considered productive and is also in the best interest of the individual, or the family, or the business company.

Being adept at financial tasks and money management involves cultivation of a mindset which makes it possible to look beyond the needs of the present so as to provide for the needs of future. Besides, it is essentially important to understand the various basic principles so as to achieve a high level of financial responsibility.

Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial info, especially annual and quarterly reports. Putting another way, financial statement analysis is a study about accounting ratios among various items included in the balance sheet.

These ratios include asset utilization ratios, profitability ratios, leverage ratios, liquidity ratios, and valuation ratios. Moreover, financial statement analysis is a quantifying method for determining the past, current, and prospective performance of a company. Fixed costs , in economics, are explained as business expenses which do not depend on the level of goods and services proffered by a business.

Fundamental analysis can be explained as a method of estimating a security which involves attempting to evaluate its basic value by assessing allied financial, economic, and other quantitative and qualitative factors. Fundamental analysis aims at studying everything which affects the value of the security, including macro-economic factors such as the overall economy and industry conditions and company-specific factors including financial condition and management.

The future value FV refers to the value of an asset or cash at a particular date in the future which is equivalent to the value of a specified sum at present. The future value can also be explained as the amount of money which will be reached by a present investment as a result of its growth in the future.

Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark, or a line item over a number of accounting periods. This method of analysis is also known as trend analysis. Horizontal analysis allows the assessment of relative changes in different items over time. The idiosyncratic risk can be defined as the risk which affects a very diminutive number of assets, and can be almost eradicated through diversification. It is quite similar to unsystematic risk.

Implicit cos t in economics, means the opportunity cost that is equal to what that has to be given up by a firm for using factors that it neither hires nor purchases. Implicit cost is actually the cost that is the consequence of using the assets, instead of lending, selling or renting them. It also means the income that is forgone from making a choice of not to work. Implicit cost is also known as implied cost, notional cost or imputed cost.

Industry analysis can be delineated as a market assessment tool which is designed to provide a business with ideas of complexity in a specific industry. Putting it simple, the industry analysis is a report that guides companies on their business strategy. A benchmark , basically, refers to a standard used to measure the performance of a mutual fund, security, or investment manager. Generally speaking, broad market and market-segment stock and bond indexes are used for this objective.

As explained by Investopedia, while evaluating the performance of any investment, it is essential to compare it with an apt benchmark. In the financial field, there are numerous indexes used by analysts to determine the performance of a particular investment. The internal rate of return IRR is defined as the return rate that makes the present value of cash flows in addition to the final market value of any investment thus bringing it to the level of current market price of the same.

Used frequently in determining the worth of an investment, the internal rate of return is an important calculation. The study to analyze the performance of a particular investment for a given investor is known as investment analysis. It is also known as the study of the past decisions made for a particular investment made. Investment banking can be explained as a form of banking which provides funds to meet the capital requirements of companies.

Moreover, investment banking supports as it carries out IPOs, bond offerings, and private placement in addition to acting as a broker and helping out in accomplishment of mergers and possessions. Putting it other way, investment banking is a field of banking that helps businesses in acquiring funds. Also, besides acquiring fresh working capital, investment banking also proffers advice for wide ranging transactions a business might engage in.

Investors may include private investors as well as institutions. Investment management is, moreover, a huge and essential global industry in its own right accountable for caretaking of trillions of dollars, yuans, pounds, euro, and yen. Jarrow Turnbull Model is the first models for pricing credit risk. It was developed by two people, Robert Jarrow and Stuart Turnbull. This model makes use of multiple factor and complete analysis of interest rates to calculate the probability of default.

It is one of the best reduced-forms of model that helps in ascertaining credit risk. The other type of model to ascertain credit risk is structural model. The KPI can be expressed as a set of irrefutable measures used by an industry or a company to estimate or determine performance in terms of congregating their strategic as well as operational goals.

The KPIs differ between companies and industries, depending upon the performance criteria or the priorities. In order to understand the labor efficiency variance properly, you will have to understand the concept and workings of standard costing first. Variance is simply a method that is used in the bigger picture of the standard costing. There are many ratios to calculate leverage but the important factors include debt, interest expenses, equity and assets. A leveraged buyout LBO refers to the possession of a company which is funded mostly with debt obligations.

Industries and companies of all sizes have been aimed by leveraged buyout transactions. Generally, leveraged buyout involves the use of a combination of different debt instruments from banks and debt capital markets. Liquid assets can be referred as an asset that can be converted into cash quickly and with minimal impact to the price received.

Generally, liquid assets are considered similar to cash for their prices being relatively stable on being sold in the open market. As per Investopedia, to be a liquid asset, it is essential for the asset to have an established market with sufficient participants to absorb the selling without significantly i8nfluencing the price of the asset. Marginal analysis refers to an evaluation of the additional benefits of an activity contrasted to the additional costs of that activity.

Marginal analysis is used by companies as a decision making tool to provide help in increasing the profits. Moreover, marginal analysis is used instinctively to make a host of everyday decisions. Also, marginal analysis is generally used in microeconomics while analyzing the complexity of a system being affected by marginal manipulation of its comprising variables. Marginal revenue refers to the increase in revenue resulting from the sale of one extra unit of output.

Many of the competitive firms continue to produce output until marginal revenue equals marginal cost. However, although marginal revenue can remain constant over a particular level of output quantity, it follows the law of diminishing returns and eventually slows down, with an increase in the output level. Market capitalization can be delineated as the total dollar market value of all the outstanding shares of a company.

This figure is used by the investment community to determine the size of a company as contrasted to sales or total assets figures. Market risk also known by some as systematic risk is when there is potential for an investor to lose the value of its factors or experience a decline in them due to the volatility of the market that is for example by the structural changes that occur in the market or the economy as whole.

Market risk premium is the variance between the predictable return on a market portfolio and the risk-free rate. Market Risk Premium is equivalent to the incline of the security market line SML , a capital asset pricing model.

The Microeconomic Pricing Model is essentially a model wherein prices for a concerned good or service are determined within a given market. As per this model, the prices are determined based on the balance of demand and supply in a market.

Overheads that are fixed in the total volume of activity but variable when calculated as per unit are called fixed overheads. Monte Carlo Simulation implies a problem solving technique which is used to estimate the possibility of certain outcomes by running several trial runs, known as simulations, through the use of random variables.

Moving Average is often utilized for measuring momentum and also for defining areas of resistance and support. Negative equity is basically the name of a phenomenon. This is found to be observed the values of an asset change during different situations. For example, at the time of securing a loan, this value is less while the outstanding balance in the amount of loan is higher than its value. Net debt can be expressed as a metric that indicates the overall debt situation of a company by netting the value of the liabilities and debts of a company along with its cash and other similar liquid assets.

To put it simple, net debt refers to the total debt of a company minus cash on hand. As expressed by Investopedia, one of the most important factors that require consideration while investing in a company is the amount of debt carried by the company. As explained by financial authors, the Net Present Value or Net Present Worth is defined as the present values of the individual cash flows, both incoming and outgoing, of a business entity.

In order for a company to calculate what the new addition or expansion project will add to the worth of the existing firm, it needs to calculate the present value of growth opportunities. Furthermore, an appropriate purchase price can be calculated by utilizing the present value model. The net present value of growth opportunities can be determined by deducting purchase price from the present value of growth opportunities.

Non-diversifiable risk can be referred to a risk which is common to a whole class of assets or liabilities. The investment value might decline over a specific period of time only due to economic changes or other events which affect large sections of the market.

However, diversification and asset allocation can provide protection against non-diversifiable risk as different sections of the market have a tendency to underperform at different times. Non-diversifiable risk can also be referred as market risk or systematic risk. Putting it simple, unlike systematic risk affecting the entire market, it applies only to certain investments. Moreover, it is the element of price risk which can be eliminated largely through adequate diversification within a specific asset class.

It is, therefore, the individual business risk related to underlying stock, if the company goes bankrupt, it can be stated as a non-systematic risk event and usually has little to do with the general recede and flow of the entire market. The division of distance of one data point from its mean to the standard deviation of the distribution is known as normal deviate or the standardized value. A unit deviation with zero mean is standard normal deviation and it shows the variation from the average mean or the expected value.

Opportunity cost can be defined as the cost of an alternative which must be abstained from so as to pursue a specific action. In other words, opportunity cost refers to the benefits that could have been received through an alternative action. The optimal capital structure indicates the best debt-to-equity ratio for a firm that maximizes its value. Theoretically, debt financing usually proffers the lowest cost of capital because of its tax deductibility.

Pareto principle which is also known as the 80 to 20 rule was created by Vilfredo Pareto who was an Italian economist in the year This formula was created to explain the unequal distribution of wealth assuming that 20 percent of the people of the country hold 80 percent of the total wealth. At the end of the year , DR. Joseph M. Juran attributed this rule to Pareto calling it the Pareto Principle. In simple terms, payback period can be defined as a tool of capital budgeting which calculates the length of time required to recover the original invested amount.

This period is usually expressed in years and can be calculated using simple dividing total investment on a project and annual cash inflow. A performance indicator refers to an industry jargon term for a type of performance measure. The performance indicators are, generally, used by an organization for evaluating its achievements or the achievements of a specific activity it is engaged in. Many a times, success is defined in terms of progressing towards strategic goals, but very often, success is simply referred as the repeated achievement of some level of operational goals.

Perpetuity can be well defined as an annuity without any end, or it can be said that perpetuity features a stream of cash payments continuing forever. To describe in detail, perpetuity is an annuity wherein the periodic payments commence on a specific date and continue to an indefinite time. The Present Value of an entity can be defined as the present worth of a prospective amount of money or a stream of cash flows with a specified return rate.

The Present Value is conversely related to the discount rate. Price sensitivity is also known as price elasticity of demand and this means the extent to which sale of a particular product or service is affected. It basically helps the manufacturers study the consumer behavior and assists them in making good decisions about the products. In economics, the term production possibility frontier refers to a graph that is used for comparing the rates of production of two commodities that make use of the same fixed total of factors of production.

Production possibility frontier is also known as production possibility curve, production transformation curve and production possibility boundary. A qualitative analysis is a technique which uses complex mathematical and statistical modeling, measurement and research to evaluate things. There could be a number of reasons behind conducting this analysis and may include: measurement of progress; performance evaluation; prediction of related global events and valuation of financial instrument.

For a business individual or company it is very important to keep a check on all these factors in order to smoothen progress his business. Quantitative analysis is a business or financial analysis technique that aims at understanding behavior through the use of complex mathematical and statistical modeling, measurement, and research. R-squared is a statistical measure that provides with data in percentage of a fund from the standard index or by definition the value of fraction of variance.

The value of R-squared can vary from 0 to If the R-squared of a security is , it denotes that all the movements of security are completely ascertained by the standard movement of market index. Ratio can be defined as one value divided by another. Ratio analysis is a tool brought into play by individuals to carry out an evaluative analysis of information in the financial statements of a company. These ratios are calculated from current year figures and then compared to past years, other companies, the industry, and also the company to assess the performance of the company.

Besides, ratio analysis is used predominantly by proponents of financial analysis. Regression analysis is the process of determining how the value of a dependent variable changes when any one of independent variable changes. The values of other independent variables do not change in this process.

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Fbidx bogleheads investing Trading in the United States accounted for Currency carry trade refers to the act of borrowing one currency that has a low interest rate in order to purchase another with a higher interest rate. There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. Selwyn M. One thing investors can do is choose the stocks of companies that sell high-demand products and services.
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The KPI can be expressed as a set of irrefutable measures used by an industry or a company to estimate or determine performance in terms of congregating their strategic as well as operational goals. The KPIs differ between companies and industries, depending upon the performance criteria or the priorities.

In order to understand the labor efficiency variance properly, you will have to understand the concept and workings of standard costing first. Variance is simply a method that is used in the bigger picture of the standard costing. There are many ratios to calculate leverage but the important factors include debt, interest expenses, equity and assets. A leveraged buyout LBO refers to the possession of a company which is funded mostly with debt obligations.

Industries and companies of all sizes have been aimed by leveraged buyout transactions. Generally, leveraged buyout involves the use of a combination of different debt instruments from banks and debt capital markets. Liquid assets can be referred as an asset that can be converted into cash quickly and with minimal impact to the price received.

Generally, liquid assets are considered similar to cash for their prices being relatively stable on being sold in the open market. As per Investopedia, to be a liquid asset, it is essential for the asset to have an established market with sufficient participants to absorb the selling without significantly i8nfluencing the price of the asset. Marginal analysis refers to an evaluation of the additional benefits of an activity contrasted to the additional costs of that activity.

Marginal analysis is used by companies as a decision making tool to provide help in increasing the profits. Moreover, marginal analysis is used instinctively to make a host of everyday decisions. Also, marginal analysis is generally used in microeconomics while analyzing the complexity of a system being affected by marginal manipulation of its comprising variables.

Marginal revenue refers to the increase in revenue resulting from the sale of one extra unit of output. Many of the competitive firms continue to produce output until marginal revenue equals marginal cost. However, although marginal revenue can remain constant over a particular level of output quantity, it follows the law of diminishing returns and eventually slows down, with an increase in the output level.

Market capitalization can be delineated as the total dollar market value of all the outstanding shares of a company. This figure is used by the investment community to determine the size of a company as contrasted to sales or total assets figures. Market risk also known by some as systematic risk is when there is potential for an investor to lose the value of its factors or experience a decline in them due to the volatility of the market that is for example by the structural changes that occur in the market or the economy as whole.

Market risk premium is the variance between the predictable return on a market portfolio and the risk-free rate. Market Risk Premium is equivalent to the incline of the security market line SML , a capital asset pricing model.

The Microeconomic Pricing Model is essentially a model wherein prices for a concerned good or service are determined within a given market. As per this model, the prices are determined based on the balance of demand and supply in a market. Overheads that are fixed in the total volume of activity but variable when calculated as per unit are called fixed overheads. Monte Carlo Simulation implies a problem solving technique which is used to estimate the possibility of certain outcomes by running several trial runs, known as simulations, through the use of random variables.

Moving Average is often utilized for measuring momentum and also for defining areas of resistance and support. Negative equity is basically the name of a phenomenon. This is found to be observed the values of an asset change during different situations. For example, at the time of securing a loan, this value is less while the outstanding balance in the amount of loan is higher than its value.

Net debt can be expressed as a metric that indicates the overall debt situation of a company by netting the value of the liabilities and debts of a company along with its cash and other similar liquid assets. To put it simple, net debt refers to the total debt of a company minus cash on hand. As expressed by Investopedia, one of the most important factors that require consideration while investing in a company is the amount of debt carried by the company.

As explained by financial authors, the Net Present Value or Net Present Worth is defined as the present values of the individual cash flows, both incoming and outgoing, of a business entity. In order for a company to calculate what the new addition or expansion project will add to the worth of the existing firm, it needs to calculate the present value of growth opportunities. Furthermore, an appropriate purchase price can be calculated by utilizing the present value model.

The net present value of growth opportunities can be determined by deducting purchase price from the present value of growth opportunities. Non-diversifiable risk can be referred to a risk which is common to a whole class of assets or liabilities. The investment value might decline over a specific period of time only due to economic changes or other events which affect large sections of the market. However, diversification and asset allocation can provide protection against non-diversifiable risk as different sections of the market have a tendency to underperform at different times.

Non-diversifiable risk can also be referred as market risk or systematic risk. Putting it simple, unlike systematic risk affecting the entire market, it applies only to certain investments. Moreover, it is the element of price risk which can be eliminated largely through adequate diversification within a specific asset class. It is, therefore, the individual business risk related to underlying stock, if the company goes bankrupt, it can be stated as a non-systematic risk event and usually has little to do with the general recede and flow of the entire market.

The division of distance of one data point from its mean to the standard deviation of the distribution is known as normal deviate or the standardized value. A unit deviation with zero mean is standard normal deviation and it shows the variation from the average mean or the expected value. Opportunity cost can be defined as the cost of an alternative which must be abstained from so as to pursue a specific action.

In other words, opportunity cost refers to the benefits that could have been received through an alternative action. The optimal capital structure indicates the best debt-to-equity ratio for a firm that maximizes its value. Theoretically, debt financing usually proffers the lowest cost of capital because of its tax deductibility.

Pareto principle which is also known as the 80 to 20 rule was created by Vilfredo Pareto who was an Italian economist in the year This formula was created to explain the unequal distribution of wealth assuming that 20 percent of the people of the country hold 80 percent of the total wealth.

At the end of the year , DR. Joseph M. Juran attributed this rule to Pareto calling it the Pareto Principle. In simple terms, payback period can be defined as a tool of capital budgeting which calculates the length of time required to recover the original invested amount. This period is usually expressed in years and can be calculated using simple dividing total investment on a project and annual cash inflow.

A performance indicator refers to an industry jargon term for a type of performance measure. The performance indicators are, generally, used by an organization for evaluating its achievements or the achievements of a specific activity it is engaged in. Many a times, success is defined in terms of progressing towards strategic goals, but very often, success is simply referred as the repeated achievement of some level of operational goals.

Perpetuity can be well defined as an annuity without any end, or it can be said that perpetuity features a stream of cash payments continuing forever. To describe in detail, perpetuity is an annuity wherein the periodic payments commence on a specific date and continue to an indefinite time. The Present Value of an entity can be defined as the present worth of a prospective amount of money or a stream of cash flows with a specified return rate.

The Present Value is conversely related to the discount rate. Price sensitivity is also known as price elasticity of demand and this means the extent to which sale of a particular product or service is affected. It basically helps the manufacturers study the consumer behavior and assists them in making good decisions about the products. In economics, the term production possibility frontier refers to a graph that is used for comparing the rates of production of two commodities that make use of the same fixed total of factors of production.

Production possibility frontier is also known as production possibility curve, production transformation curve and production possibility boundary. A qualitative analysis is a technique which uses complex mathematical and statistical modeling, measurement and research to evaluate things. There could be a number of reasons behind conducting this analysis and may include: measurement of progress; performance evaluation; prediction of related global events and valuation of financial instrument.

For a business individual or company it is very important to keep a check on all these factors in order to smoothen progress his business. Quantitative analysis is a business or financial analysis technique that aims at understanding behavior through the use of complex mathematical and statistical modeling, measurement, and research. R-squared is a statistical measure that provides with data in percentage of a fund from the standard index or by definition the value of fraction of variance.

The value of R-squared can vary from 0 to If the R-squared of a security is , it denotes that all the movements of security are completely ascertained by the standard movement of market index. Ratio can be defined as one value divided by another. Ratio analysis is a tool brought into play by individuals to carry out an evaluative analysis of information in the financial statements of a company. These ratios are calculated from current year figures and then compared to past years, other companies, the industry, and also the company to assess the performance of the company.

Besides, ratio analysis is used predominantly by proponents of financial analysis. Regression analysis is the process of determining how the value of a dependent variable changes when any one of independent variable changes. The values of other independent variables do not change in this process. Residual income is the net operating income that is earned by the investment center. This income is the earning that is above the minimum target return.

This means that a residual income is the excess income earned on the return on investment. An estimation of the present value of cash for high risk investments is known as risk-adjusted discount rate. A very common example of risky investment is the real estate. Risk adjusted discount rate is representing required periodical returns by investors for pulling funds to the specific property.

It is generally calculated as a sum of risk free rate and risk premium. Risk free rate of return refers to the theoretical rate of return of an investment involving zero risk. The riskless rate represents the interest expected by an investor from a completely riskless investment over a certain time period.

By keeping track of the changes in the external factors, necessary actions can be taken to prevent the losses. In order to keep track of the external changes, the entity needs to implement a method that will help it determine the sensitivity of its sales, costs and changes in its income patterns. This method is known as sensitivity analysis. The sensitivity analysis determines the changes in the quantifiable variables of the project to determine it viability. Nobel Laureate William F.

Sharpe has derived a formula that helps to measure the risk adjusted performance. As per definition, Sharpe Ratio helps in arriving at an answer which helps us analyse the risk that can be, and allowing you to make decisions on investments and also helps analyse the performance of a group.

In finance, solvency refers to the extent to which the current assets of a business entity exceed its current liabilities. Solvency can also be defined as the ability of a business to congregate its long term fixed expenses in addition to accomplishment of long term growth and expansion. Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. Also, it provides an assessment of the likelihood of a company to continue congregating its debt obligations.

The general definition of standard deviation can be given as a measure of the dispersion of a set data from its mean. The deviation from the actual mean of a population is known as the standard error. In statistics the standard deviation of the sampling distribution is known as the standard error. Generally, SWOT is a basic, simple model that evaluates the capabilities of an organization as well as its potential opportunities and threats. The method of SWOT analysis is to obtain info from an environmental analysis and separate it into internal and external issues.

Once this is accomplished, SWOT analysis determines what may help the firm in accomplishment of its aims and objectives, and also in overcoming or mitigating the obstacles to achieve desired results. Systematic risk refers to the risk intrinsic to the complete market or the complete market segment.

Terminal value is the worth of your investment after a certain period of time. It is calculated by keeping factors like the current worth of asset, the rate of interests etc. In consideration yet assuming a stable rate of growth. Terminal value is sometimes also known as horizon value or continuing value. It is also used with the discounted cash flow which calculates the firms worth for up to 3 to 5 years to calculate the current worth of the firm or business.

The terminal value of assets or of a company can be calculated beyond the time period of the discounted cash flow projection. The time value of money refers to the value of money existing in a given amount of interest which is earned during a specific time period. The time value of money can be explained as the central concept in finance theory.

Moreover, the concept of time value of money also helps in evaluating a likely stream of income in the future in a manner that the annual incomes are discounted and added thereafter, thereby providing a lump-sum present value of the complete income stream. Investors use this analysis tool a lot in order to determine the financial position of the business. In a trend analysis, the financial statements of the company are compared with each other for the several years after converting them in the percentage.

In the trend analysis, the sales of each year from the to will be converted into percentage form in order to compare them with each other. Jack Treynor found the formula for the Treynor Ratio. It is the ratio that measures returns earned in surplus of which could have been earned on a risk free speculation per each unit of market risk.

Variable costs can be defined as expenses which keep changing in proportion to the activities of a business. Variable costs can be calculated as the sum of marginal costs over all units produced. Vertical analysis of financial statements is a technique in which the relationship between items in the same financial statement is identified by expressing all amounts as a percentage a total amount.

This method compares different items to a single item in the same accounting period. The Weighted Average Cost of Capital WACC can be explained as the rate expected to be provided by a company on average to all the security holders for financing its assets. In this method of weighted average cost flow assumptions, the periodic inventory method is used, which is employed to compute the value of the inventory in addition to the costs of the goods sold.

This cost that is the average of the total cost is based on the costs of goods available for sale in the inventory for the entire year. This average cost is then applied to the units that have been sold and the units that are still in the inventory. No registration required! But if you signed up extra ReadyRatios features will be available. Have you forgotten your password? ReadyRatios - financial reporting and statements analysis on-line IFRS financial reporting and analysis software.

FAQ Manuals Contacts. Sign up or. Goals and Objectives The main objectives of financial analysis include: Solvency One of the most important goals of financial analysis is to assess the ability of a business to pay back its debts Short term and Long term to its creditors. Profitability Another goal of financial analysis aims at assessing the profitability of a firm. Stability Stability implies the ability of a business firm to maintain its existence in the long run. Altman Z-Score The Altman Z-Score is an analytical representation created by Edward Altman in the s which involves a combination of five distinctive financial ratios used for determining the odds of bankruptcy amongst companies.

Annualized Rate Annualized rate is a rate of return for a given period that is less than 1 year, but it is computed as if the rate were for a full year. Annuity In finance theory, the term annuity is used to refer to a terminating stream of fixed payments over a particular time period.

Average Annual Return The average annual return is defined as a percentage figure which is used while reporting the previous returns, like 3-, 5-, and year average returns of a mutual fund. Bad Debt A bad debt can be defined and explained as an amount which has been written off by the business as a loss and categorized as an expense for the debt owed to the business cannot be collected and all efforts made for the same have failed to collect the owed amount.

Balance Sheet Analysis Balance sheet analysis can be defined as an analysis of the assets, liabilities, and equity of a company. Bankruptcy Bankruptcy can be explained as a legal proceeding which involves a business or individual being unable to repay his outstanding debts.

Break-even Point The break-even point is a point where total costs expenses and total sales revenue are equal. Capital Budgeting Capital budgeting refers to a process that involves a business to determine whether the projects, like investing in a long-term venture or building a new plant, are worth following. Capital Employed Generally, capital employed is presented as deducting the current liabilities from the current assets.

Capital Output Ratio A capital output ratio which is abbreviated as COR is related to be availability of natural resources in a country. Cash Burn Rate The rate at which a company utilizes its cash supply over a specific period of time is known as the cash burn rate. Coefficient of Variation The coefficient of variation CV refers to a statistical measure of the distribution of data points in a data series around the mean.

Compound Annual Growth Rate The compound annual growth rate CAGR of a company refers to the growth rate of an investment, year after year, for a particular time period. Compound Interest Compound interest is the form of simple interest where interest is added to the principle.

Contribution Margin Contribution Margin CM is the difference between sales revenue and variable costs. Cost of Debt Cost of debt generally refers to the effective paid by a company on its debts. Country Risk Country risk is a collection of risks that are associated with investing in a foreign country instead of investing in the domestic market. Credit Score A credit score refers to a statistically derived numeric expression which implicates the creditworthiness of a person.

Currency Risk Currency risk refers to a risk form arising from the changes price of one currency as compared to another currency. Data Analysis Techniques for Fraud Detection Data analysis techniques for fraud detection refer to the techniques that make use of statistical techniques and artificial intelligence to detect fraud in any company.

Deferred Payment Annuity An annuity is essentially a finance related contract, which permits the person who is buying it to pay on a lump-sum basis or make payments in series, in return for acquiring disbursements at regular intervals in future. Degree of Financial Leverage DFL The degree of financial leverage DFL is the leverage ratio that sums up the effect of an amount of financial leverage on the earning per share of a company.

Discount Rate In finance, the discount rate has different meanings, some important ones mentioned below Discounted Cash Flow The discounted cash flow is a quantification method used to evaluate the attractiveness of an investment opportunity. Diversification Diversification strategies are made use of to expand the operations of the firm by adding different strategies to a business.

Economic Risk Generally speaking, economic risk can be described as the likelihood that an investment will be affected by macroeconomic conditions such as government regulation, exchange rates, or political stability, most commonly one in a foreign country. Elasticity of Demand Elasticity of demand refers to the degree of responsiveness to change in the demand of a product or services and its price. Explicit Cost Explicit cost is defined as the direct payment which is supposed to be made to others during the due course of running business.

Factor Analysis Factor analysis is to reduce a set of variables to a set of new variables. Financial Analysis Report Comprehensive financial analysis reports accentuate the strengths and weaknesses of a company. Financial Modeling Financial modeling refers to the process through which a company builds up a financial representation of some, or even all aspects of the company or the given security. Financial Planning Financial planning can be delineated as long-term profit planning intended at generating higher return on assets, growth in market share, and at solving foreseeable problems.

Financial Ratio A financial ratio can be well defined as a comparative magnitude of two selected statistical values taken from the financial statements of a business enterprise. Financial Responsibility Financial responsibility refers to the process of managing money and other similar assets in a way that is considered productive and is also in the best interest of the individual, or the family, or the business company.

Financial Statement Analysis Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial info, especially annual and quarterly reports. Fixed Costs Fixed costs , in economics, are explained as business expenses which do not depend on the level of goods and services proffered by a business.

Fundamental Analysis Fundamental analysis can be explained as a method of estimating a security which involves attempting to evaluate its basic value by assessing allied financial, economic, and other quantitative and qualitative factors. Future Value The future value FV refers to the value of an asset or cash at a particular date in the future which is equivalent to the value of a specified sum at present. Horizontal Analysis of Financial Statements Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark, or a line item over a number of accounting periods.

Idiosyncratic Risk The idiosyncratic risk can be defined as the risk which affects a very diminutive number of assets, and can be almost eradicated through diversification. Implicit Costs Implicit cos t in economics, means the opportunity cost that is equal to what that has to be given up by a firm for using factors that it neither hires nor purchases. Industry Analysis Industry analysis can be delineated as a market assessment tool which is designed to provide a business with ideas of complexity in a specific industry.

Industry Benchmark A benchmark , basically, refers to a standard used to measure the performance of a mutual fund, security, or investment manager. Internal Rate of Return IRR The internal rate of return IRR is defined as the return rate that makes the present value of cash flows in addition to the final market value of any investment thus bringing it to the level of current market price of the same. Investment Analysis The study to analyze the performance of a particular investment for a given investor is known as investment analysis.

Investment Banking Investment banking can be explained as a form of banking which provides funds to meet the capital requirements of companies. Key Performance Indicators KPI The KPI can be expressed as a set of irrefutable measures used by an industry or a company to estimate or determine performance in terms of congregating their strategic as well as operational goals.

Labor Efficiency Variance In order to understand the labor efficiency variance properly, you will have to understand the concept and workings of standard costing first. Leveraged Buyout A leveraged buyout LBO refers to the possession of a company which is funded mostly with debt obligations. Liquid Asset Liquid assets can be referred as an asset that can be converted into cash quickly and with minimal impact to the price received. Marginal Analysis Marginal analysis refers to an evaluation of the additional benefits of an activity contrasted to the additional costs of that activity.

Marginal Revenue Marginal revenue refers to the increase in revenue resulting from the sale of one extra unit of output. Market Capitalization Market capitalization can be delineated as the total dollar market value of all the outstanding shares of a company.

Market Risk Market risk also known by some as systematic risk is when there is potential for an investor to lose the value of its factors or experience a decline in them due to the volatility of the market that is for example by the structural changes that occur in the market or the economy as whole.

Market Risk Premium Market risk premium is the variance between the predictable return on a market portfolio and the risk-free rate. Microeconomic Pricing Model The Microeconomic Pricing Model is essentially a model wherein prices for a concerned good or service are determined within a given market. Mixed Expenses Semi-variable Expenses Overheads that are fixed in the total volume of activity but variable when calculated as per unit are called fixed overheads.

Omega Co has numerous divisions, including Alpha and Beta, which are treated by management as autonomous investment centres. She accepts the project. Division Beta is the leader in its fastest-growing market. She has the opportunity to invest in a new project. Hence, she rejects this investment. Both managers made decisions based on accounting profit measures rather than value-based measures. If a manager uses ROCE to make decisions, they are ignoring cash flows, the impact of tax, and the effect their actions have on the value of the company.

How could we know if the two divisions are growing or eroding shareholder wealth? Is there a better way? This system of value drivers cascades throughout all levels of the company, linking to objectives for managers and staff. VBM is a hierarchical system that connects all levels of a company to shareholder value, not just a framework for board-level evaluation. Under an effective VBM system, individual employee objectives should be connected with the high-level company objective of increasing shareholder value.

This is the core idea behind VBM. It is important to emphasise that this system of value drivers is matched to the specific activities that management can control at each level of the company. For example, employee satisfaction and employee training are value drivers that have a direct impact on customer satisfaction. Customer satisfaction, in turn, directly impacts customer retention.

Improved customer retention will then combined with revenue per customer positively affect revenue, which will directly impact operating profit. These value drivers move up from operational to strategic level and cover financial and non-financial areas of operation. Step 1: Strategy development At the corporate level, a strategy is developed with the high-level objective of maximising shareholder value.

This strategy can span operations, financial management, and buying and selling of business units. Value drivers are then created for business units and all levels of the company. Similar value drivers would be defined for all business units and at all organisation levels.

Step 2: performance targets are created After value drivers are defined, they should be translated into specific targets. Note that VBM promotes linking short term targets to long-term ones, and all the targets should be connected to say the EVA metric at the top of the organisational pyramid. For example, the business unit manager might be responsible for reducing personnel costs, and a customer service team leader might be responsible for maintaining six minutes per call.

Specific operational plans are then defined that will help employees take actions that will help them achieve their individual targets. Step 4: Performance measurement As with all modern performance management systems, VBM promotes the creation of key performance indicators for all members of staff, and a shift will be required from financial metrics to the inclusion of management-driven, non-financial metrics yes, this idea overlaps with the Balanced Scorecard.

Depending on the value driver being measured, the metric may be non-financial in nature for example, customer satisfaction level , and focused on the long-term, rather than short-term for example, customer lifetime value. Successful VBM implementation will require linking management remuneration to key value drivers and objectives, ideas covered by the Building Block Model.

Spreadsheet modelling Spreadsheet modelling is a critical tool for the management accountant in VBM as there will be many forecast variables involved in calculating EVA or other value-based metrics , such as growth in revenue, forecast capital expenditure and depreciation, corporate tax rate, interest rate on issued debt, etc. With a spreadsheet it will be possible to conduct scenario analysis and see how different economic assumptions impact different value drivers, and in turn, impact the value of the company.

Also, a spreadsheet will help the management accountant combine performance metrics from many business units and management processes into a unified financial model and this can drive a dashboard to monitor performance. For example, a dashboard could be designed to present operational-level metrics such as receivables and payables timing, percentage of billable hours to total hours, or percentage of capacity utilised.

Managers at different levels of the company can use this information for improved decision making and performance management. Now that you understand the concepts of VBM, you need to be able to apply these ideas to your upcoming APM exam, and this topic often causes trouble for APM candidates. Next, many candidates talked about VBM in general terms without showing an understanding of it in the context of the scenario. Without doing this, you will certainly not gain passing marks.

To generate ideas that are linked to the particular company given, you can ask yourself these questions:. Here are some ideas you could develop of course, related to the scenario :. This article has examined the topic of VBM and its links with other syllabus areas. With a practical approach that answers the question asked, further question practice, and an answer this is linked to the scenario, you should be able to successfully tackle any VBM requirement on your upcoming exam.