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

The Financial Times Guide to Understanding Finance presents the analytical tools used to evaluate investments, construct portfolios, value securities, and assess corporate financial decisions. This second edition organises its coverage into four parts: risk and return, valuation, other important topics, and statistical background.

Javier Estrada combines intuitive explanations with formulas, numerical examples, and Excel implementation guidance. Short, focused chapters connect the reasoning behind each technique with its practical application, covering subjects such as diversification, the cost of capital, discounted cash flow valuation, and portfolio optimization.

The book also examines the assumptions and limitations that influence financial analysis. Discussions of downside risk, reverse valuation, conflicting NPV and IRR decisions, and non-normal return distributions help readers assess when a calculation provides useful insight and when its interpretation requires greater care.

Designed as both a learning companion and a reference, the book serves investors, students, and professionals developing practical finance skills. Its examples and spreadsheet instructions reflect the 2011 edition, including guidance based on Excel 2007.

✅ What You’ll Learn

• Calculate investment returns and distinguish arithmetic from geometric mean returns.
• Measure total, systematic, and downside risk when evaluating investments.
• Apply diversification principles and construct portfolios under return and risk constraints.
• Estimate required returns using CAPM and understand the three-factor model.
• Compare investment performance using risk-adjusted return measures.
• Value equities using dividend discount, other discounted cash flow, reverse valuation, and relative valuation approaches.
• Analyse bond prices, yields, default risk, duration, and convexity.
• Evaluate investment projects through NPV, IRR, and real options.
• Explain the financial applications of options, futures, forwards, and currencies.
• Use summary statistics, probability distributions, and regression analysis to interpret financial data.

💡 Key Benefits

• Connects investment analysis and corporate finance within one organised reference.
• Makes financial calculations easier to follow through worked examples.
• Supports practical implementation with Excel guidance throughout relevant chapters.
• Strengthens judgment about model assumptions and valuation inputs.
• Provides focused chapters suited to both sequential study and targeted review.

👤 Who This Book Is For

• Beginner to intermediate investors developing skills in valuation, portfolio construction, and performance assessment.
• Finance and business students seeking practical explanations alongside formal coursework.
• Analysts and finance professionals reviewing investment models and financial decision tools.
• Managers and executives evaluating projects, financing costs, and corporate value creation.

📚 Table of 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