The Financial Times Guide to Understanding Finance: A No-Nonsense Companion to Financial Tools and Techniques

Whether you are an executive or a student, beginner or expert, this book is designed to explain and illustrate the working essentials of finance with clarity and speed. The Financial Times Guide to Understanding Finance deliberately combines essential theory with real-world application, using short, focused chapters to help you find what you need and implement right away.

Author’s Note:

The book is divided into four parts. The first, entitled ‘Risk and return,’ covers a wide range of issues that deal with different definitions of returns, different ways of assessing risk, different ways to put risk and return together, and the optimization of portfolios. The second part, entitled ‘Valuation,’ focuses on stocks and bonds. It covers different models of stock valuation, including several versions of the DCF model, reverse valuation, and relative valuation. It also covers issues related to fixed-income securities, including pricing, sources of risk, duration, and convexity.

The third part, entitled ‘Other important topics,’ puts together several issues that no book of finance essentials could ignore. These include project evaluation through NPV, IRR, and real options, as well as derivatives such as options, futures, and forwards. Finally, the fourth part, entitled ‘Statistical background,’ contains a refresher of essential statistical topics for practitioners, including summary statistics, the calculation of probabilities with the normal and lognormal distributions, and regression analysis. The discussion includes the implementation of all these concepts and tools in Excel.

I wrote the book thinking of professionals who needed to jump in for a specific issue. As a result, I wrote the chapters as independent of each other as possible. This means that this is not a book that you need to start reading at Chapter 1 and finish at Chapter 30. Some readers will not need to read the statistical background and others will find it essential reading. Some readers will be interested in stocks and others in bonds. Others may want to focus on issues related to investing or corporate finance.

Every chapter concludes with an Excel section and a Challenge section. The Excel sections aim to show how to implement in Excel the concepts and tools discussed in the chapter. These sections range from discussing some elementary functions, such as logs and exponentials, to more complex implementations, such as multiple regression analysis and portfolio optimization programs. If you’re not fully familiar with Excel, I think you will find these sections essential. And if you are familiar with Excel, these sections will probably take you a few steps further.

The Challenge sections aim to test the essential concepts and tools discussed in each chapter. The problems are few, short, and go straight to the key points. Most of them are based on data from well-known companies so that you can not only test what you’ve learned but also learn a bit about the companies too. Some people may find these sections useful and others will probably ignore them. It’s your choice.

Finally, if you want to reproduce precisely all the calculations discussed in the book, it is important that you use the data in the accompanying Excel file (see www.pearsoned.co.uk/estrada). I have performed all calculations in Excel, which ‘remembers’ many more decimals than would be wise to report in a book. That’s why you may find ‘rounding errors,’ particularly in calculations based on previous calculations. Similarly, if you go over the problems in the Challenge sections, you may want to use the data in the accompanying Excel file rather than that provided in the tables and exhibits.

Take a good look at the index and a quick look at the rest of the book. I trust you will find the scope comprehensive, the chapters short, the style engaging, the approach practical, and the discussions easy to follow. You will also find loads of information on many companies that are household names, which are used throughout to keep your feet firmly on the ground.

Contents:

• Returns I: Basic concepts
• Returns II: Mean returns
• Risk I: Total risk
• Risk and return I: Portfolios
• Risk II: Diversification
• Risk III: Systematic risk
• Risk and return II: CAPM and the cost of capital
• Risk and return III: The three-factor model
• Risk IV: Downside risk
• Risk and return IV: Risk-adjusted returns
• Risk and return V: Portfolio optimization
• Risk and return VI: The long term
• Stocks I: The dividend discount model
• Stocks II: The WACC model
• Stocks III: Other DCF models
• Stocks IV: Reverse valuation
• Stocks V: Relative valuation
• Bonds I: Prices and yields
• Bonds II: Default risk and market risk
• Bonds III: Duration and convexity
• NPV and IRR
• Real options
• Corporate value creation
• Options
• Futures and forwards
• Currencies
• Stats I: Summary statistics
• Stats II: Normality
• Stats III: Non-normality
• Stats IV: Regression analysis

The Financial Times Guide to Understanding Finance: A No-Nonsense Companion to Financial Tools and Techniques By Javier Estrada pdf