Tag: decision making
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Budgeting basics
Budgeting is often seen as a chore—something tedious and restrictive. But in reality, a budget is one of the most powerful tools you can use to achieve financial freedom. It’s not about saying “no” to the things you enjoy; it’s about being intentional with your money so you can say “yes” to the things that…
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Financial Literacy: An introduction
In today’s fast-paced world, managing money effectively is more critical than ever. Yet, financial literacy remains a challenge for many. If you’ve ever felt overwhelmed by budgeting, saving, or investing, don’t worry—you’re not alone. The good news is that understanding financial literacy doesn’t require a finance degree. It’s a skill that anyone can learn, and…
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How to calculate NPV in Excel?
In this tutorial, we explain how to calculate the net present value (NPV) of an investment project using the NPV and XNPV functions in Excel. We’ll show how to compute the NPV without using these functions as well. If you prefer to go over this tutorial in a video format or if you’re visiting this…
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How to calculate payback period in Excel?
In this tutorial, we’ll teach you how to compute both the payback period and the discounted payback period in Excel. If you’ve arrived here from our Youtube channel, click on “Video tutorial and Excel template” section in the Contents box below to download the Excel template. If you’d like to learn more about the payback…
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Payback period
In this lesson, we’ll learn about the (discounted) payback period rule, which is a popular capital budgeting tool that helps corporate managers make investment decisions. We’ll discuss the pros and cons of this rule vis-à-vis the net present value (NPV) rule and will offer a (discounted) payback period calculator as well. What is the “payback…
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Mean-variance optimization
According to modern portfolio theory, investors are concerned about the “mean” and “variance” of asset returns, where the former captures the “centrality” and the latter the “spread” (or “riskiness”) of potential returns. As such, investors engage in mean-variance optimization. That is, they seek the portfolios that offer the best tradeoff between risk and return. In…
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Risk preferences: What’s the opposite of risk averse?
in investmentsAs humans, we have a natural tendency to avoid taking risks when we can, a notion that we refer to as risk aversion. Specifically, when faced with a choice between a safe payoff and a risky one, we’d opt for the latter only if it entails a sufficient risk premium, which is our reward for…
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Risk aversion coefficient – meaning and formula
When we discussed investors’ risk preferences, we distinguished between risk-averse, risk-neutral, and risk-seeking behavior. We also explained that risk-averse investors expect compensation for bearing risk, which is called a risk premium. But, how do measure a person’s level of risk aversion? The answer is the risk aversion coefficient. It quantifies the degree to which an…
