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University of Richmond

Finance Faculty Publications

Articles 1 - 7 of 7

Full-Text Articles in Physical Sciences and Mathematics

Adding Depth To The Discussion Of Capital Budgeting Techniques, Tom Arnold, Terry D. Nixon Jul 2006

Adding Depth To The Discussion Of Capital Budgeting Techniques, Tom Arnold, Terry D. Nixon

Finance Faculty Publications

The subject of capital budgeting generally encompasses a significant percentage of any beginning finance course with net present value (NPV) often receiving the most attention. Even after this substantial time allotment, critical assumptions and comparisons of the different techniques (such as payback period, discounted payback period, NPV and IRR) are frequently glossed over due to time constraints. Consequently, the goal of this paper is to present these non-NPV techniques in a manner that allows the beginning finance student to expeditiously see the intuition, inherent assumptions, and any connection with the more popular NPV calculation. A small portion of this paper …

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Getting More Out Of Two Asset Portfolios, Tom Arnold, Terry D. Nixon Apr 2006

Getting More Out Of Two Asset Portfolios, Tom Arnold, Terry D. Nixon

Finance Faculty Publications

Two-asset portfolio mathematics is a fixture in many introductory finance and investment courses. However, the actual development of the efficient frontier and capital market line are generally left to a heuristic discussion with diagrams. In this article, the mathematics for calculating these attributes of two-asset portfolios are introduced in a framework intended for the undergraduate classroom.

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Improving Pro Forma Analysis Through Better Terminal Value Estimates, Tom Arnold, David S. North, Roy A. Wiggins Oct 2005

Improving Pro Forma Analysis Through Better Terminal Value Estimates, Tom Arnold, David S. North, Roy A. Wiggins

Finance Faculty Publications

Basic pro forma analysis often estimates the terminal value input using a simple growing perpetuity assumption. While this assumption is easy to implement, it potentially creates an upward bias in some inputs leading to lower firm or project value outputs. The purpose of this paper is to demonstrate a more accurate way to estimate the terminal value input. Further, by allowing for multiple sales growth rates and by not restricting other input variables to necessarily grow at these same rates, a more accurate, flexible, compact, and thorough analysis is possible.

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An Excel Application For Valuing European Options With Monte Carlo Analysis, Tom Arnold, Stephen C. Henry Apr 2005

An Excel Application For Valuing European Options With Monte Carlo Analysis, Tom Arnold, Stephen C. Henry

Finance Faculty Publications

By developing the basic intuition of how Monte Carlo simulation works within an Excel spreadsheet framework, this paper allows the undergraduate student to use Monte Carlo simulation techniques to price European style options without additional sophisticated software. Further, the skills and intuition developed provide the basis for much more complex simulation techniques.

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Intuitive Black-Scholes Option Pricing With A Simple Table, Tom Arnold, Terry D. Nixon, Richard L. Shockley Jr. Apr 2003

Intuitive Black-Scholes Option Pricing With A Simple Table, Tom Arnold, Terry D. Nixon, Richard L. Shockley Jr.

Finance Faculty Publications

The Black-Scholes option pricing model (1973) can be intimidating for the novice. By rearranging and combining some of the variables, one can reduce the number of parameters in the valuation problem from five to two: 1) the option's moneyness ratio and 2) its time-adjusted volatility. This allows the computationally complex Black-Scholes formula to be collapsed into an easy-to-use table similar to those in some popular textbooks. The tabular approach provides an excellent tool for building intuition about the comparative statics in the Black-Scholes equation. Further, the pricing table can be used to price options on dividend-paying stocks, commodities, foreign exchange …

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Visualizing The Stochastic Calculus Of Option Pricing With Excel And Vba, Tom Arnold, Stephen C. Henry Apr 2003

Visualizing The Stochastic Calculus Of Option Pricing With Excel And Vba, Tom Arnold, Stephen C. Henry

Finance Faculty Publications

Stochastic calculus, part calculus and part statistics, is an integral part of option pricing that can be intimidating. By developing the statistical nature of stochastic processes and introducing Monte Carlo simulation using Microsoft Excel, this paper develops a visualization of how stochastic processes are evaluated using Ito's lemma and integral calculus. Ultimately, the Black-Scholes (1973) option pricing equation is the natural result.

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Advanced Portfolio Theory: Why Understanding The Math Matters, Tom Arnold Oct 2002

Advanced Portfolio Theory: Why Understanding The Math Matters, Tom Arnold

Finance Faculty Publications

The goal of this paper is to motivate the use of efficient set mathematics for portfolio analysis [as seen in Roll, 1977] in the classroom. Many treatments stop at the two asset portfolio case (avoiding the use of matrix algebra) and an alarming number of treatments rely on illustration and templates to provide a heuristic sense of the material without really teaching how efficient portfolios are generated. This is problematic considering that the benefits of understanding efficient set mathematics go beyond portfolio analysis and into such topics as regression analysis (as demonstrated here).

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