といっても自分は難しいことは理解できていませんので、いちファンが書いた雰囲気記事と思っていただけると幸いです。内容についてはDYOR、NFAでお願いします。

説明するまでもないと思いますが、界隈で最大のレンディングプラットフォームです。ユーザーは貸し手としてクリプトを預け入れて金利を稼いだり、預け入れた資産に応じて資金を借りたりといったことができます。

DefillamaのTVLランキングでは3位につけています。

最近AAVEはAAVE V2からV3に移行しました。今後、異なるネットワーク上のAave V3市場間で資産をシームレスに流動させることができる「Portal」といういわゆるブリッジ機能のようなものが実装される予定のようです。

参考：

GHOとは？

GHOは、そんなAAVEが発行する新しいステーブルコインです。ちなみにAAVEという単語はフィンランド語でゴースト、幽霊という意味で、ステーブルコインのGHOも、Ghostから取っているようですね。

こちらにGHOの公式ドキュメントがあります。

参考：

GHOは、完全に裏付けされ、透明性が高く、Aaveプロトコルにネイティブな分散型マルチ担保型ステーブルコインである。 > GHO（「ゴー」と発音）は、分散型のマルチコラテラル・ステーブルコインで、当初はAaveプロトコルに供給された資産からのみミントされます。GHOの価値は、プログラム上、米ドルと一致しており、市場の効率性によって維持される予定です。 > イーサリアムメインネット上の分散型ステーブルコインであるGHOは、ユーザーによってミントされます。Aaveプロトコルにおけるすべての借入と同様に、GHOをミントするためには、ユーザーは担保を提供する必要があります（特定の担保比率で）。これに対応して、ユーザーが借入ポジションを返済する（または清算される）と、GHOはAaveプールに戻され、バーンされます。GHOの採掘者が支払う利息はすべて、Aave DAOのトレジャリーに直接支払われます。 > 真に分散化され、過剰担保を持ち、設定可能なステーブルコインに対する大きな需要が存在します。最近の出来事では、市場の変動が激しい時期に安定した価値を維持する手段として、分散型ステーブルコインのユースケースが実証されています。Aave Governanceが管理するステーブルコインであるGHOは、コミュニティのサポートにより、DeFiエコシステムの継続的な成長に不可欠な存在となる可能性を秘めています。

簡単にいうと、AAVEに預け入れた担保に対して、一定比率の分だけ借りられるステーブルコインっていう感じです（自分が触った感想です。間違ってたらすみません）。

とはいえ、昨今のステーブルコインはステーブルという名前にも関わらず不安定なことが多いですね。USDCショックもこないだありましたし、GHOと比較対象となっている、MakerDAOが発行しているステーブルコインであるDAIも、担保の大部分をUSDCが占めていることからデペグしたりしました。

AAVEもそれは重々承知しているようでして、3/18にはきちんとペグさせるためのパラメータに関するガバナンス提案を行なっています。

結論として、GHOは有力なステーブルコインになる可能性があり、Aaveのエコシステムにとって貴重な存在となることが期待されます。その成功を確実にするために、DAOは不確実性を考慮し、リスク軽減に注力し、成長への慎重なアプローチで仮定を検証する必要があります。GHOの安定性は非常に重要です。私たちは、安定性モジュールやミントレート調整など、ペグを強化するためのツールをいくつか確認しました。

まあそれでも、ちゃんとペグするのか？という不安はありますが、今後の動きに注目していきたいですね。

現在、GHOはテストネットでミントできます

現在、GHOはイーサリアムテストネットで公開されています。

担保となるトークンを預けることで、GHOをミント(借り入れ)することができます。Faucetが用意されているので、テストネットトークンは少量のガスがあれば使えます。

また、セーフティモジュールにAAVEをステーキングすることで、GHOを低金利で借り入れることも可能です。AAVEトークンホルダーは、AAVEをセーフティモジュールに流入させることでAaveの安全確保に貢献しながらインセンティブを得られるというもののようです。

ちなみに、テストネット期間中、以下のようなNFTをmintすることもできます。

うーん可愛い。

詳しくはこちら。

GHOの今後について

で、今後GHOはどのように活用されていくのか・・・についてですが、一応以下に文書があるものの、現状ではぼんやりしている印象を受けます。

Aaveプロトコルのエコシステム、将来の製品、展開との相乗効果により、GHOはAaveプロトコルの将来のロードマップに不可欠な存在となっています。

と書いてあるので、AaveとしてもGHOをしっかり育てていく気はあるようなのでどのよううな展開になっていくのか楽しみですね。

まだメインネットでローンチもされていないので、楽しみに待ちましょう。

GHOはLensで基軸通貨として使われる？

あと、面白そうな話として、GHOがAAVEが手掛けるソーシャルグラフプロトコルのLensの基軸通貨として使われるのでは？というのがあるそうです。もう半年くらい前の記事なので、今どういう状況なのかはわかりませんが。(尊敬するzakkさんに教えてもらった)

(Lensは厳密にはSocialFiといえないとは思うのですが、まあ)LensをSocialFiとしてカテゴライズするとして、SocialFiで稼いだトークンって必ず売られますよね。でもその必ず売られるトークンがステーブルコインだったら・・・コンテンツクリエイターにとって、エコシステムにとって、こんなに嬉しいことはないでしょう。

この辺の絡みについても今後追っておきたいところです。SocialFiの夜明けを見たい。

おわりに

AaveがGHOを発表したのは、2022年7月ですが、ちょうどUSTショックのすぐ後ですね。ステーブルやばくね？ってなった直後にステーブルをやるって発表したんだから、それはもう自信があったのでしょう。それからおそらくしっかり開発を進め、ようやくテストネットがローンチした2023年2月の直後にUSDCのペグが外れ、それによってDAIのペグも外れてしまいました。ロードマップに打撃を受けたりしてないかなとちょっと心配になります。

まあ、そういった苦境にある中、それでも成功するステーブルコインがあるなら見てみたい。Aaveがダメならどこがやってもダメだろ！くらいの大きなプロジェクトだと思ってるので、期待しています。

（ところで、やっぱりステーブルコイン事業って儲かるのかな）

A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities.

Because prices of securities rise and fall essentially continuously during trading, the term "bull market" is typically reserved for extended periods in which a large portion of security prices are rising. Bull markets tend to last for months or even years.Understanding Bull Markets

Bull markets are characterized by optimism, investor confidence, and expectations that strong results should continue for an extended period of time. It is difficult to predict consistently when the trends in the market might change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.There is no specific and universal metric used to identify a bull market. Nonetheless, perhaps the most common definition of a bull market is a situation in which stock prices rise by 20% or more from recent lows.

Since bull markets are difficult to predict, analysts can typically only recognize this phenomenon after it has happened. A notable bull market in recent history was the period between 2003 and 2007. During this time, the S&P 500 increased by a significant margin after a previous decline; as the 2008 financial crisis took effect, major declines occurred again after the bull market run.1

2

What Causes Bull Markets

Bull markets generally take place when the economy is strengthening or when it is already strong. They tend to happen in line with strong gross domestic product (GDP) and a drop in unemployment and will often coincide with a rise in corporate profits. Investor confidence will also tend to climb throughout a bull market period. The overall demand for stocks will be positive, along with the overall tone of the market. In addition, there will be a general increase in the amount of IPO activity during bull markets.

Notably, some of the factors above are more easily quantifiable than others. While corporate profits and unemployment are quantifiable, it can be more difficult to gauge the general tone of market commentary, for instance. Supply and demand for securities will seesaw: supply will be weak while demand will be strong. Investors will be eager to buy securities, while few will be willing to sell. In a bull market, investors are more willing to take part in the (stock) market in order to gain profits.

Characteristics of Bull Markets

During a bull market, there are several characteristics that can be observed. These include an increase in trading volume, as more investors are willing to buy and hold onto securities in the hopes of realizing capital gains. Securities in a bull market also tend to receive higher valuations, as investors are willing to pay more for them due to the perceived potential for price appreciation.

In addition, a bull market is often characterized by greater liquidity in the market, as there is more demand for securities and fewer sellers, making it easier for investors to buy and sell quickly and at a reasonable price. Companies that are performing well in a bull market may also choose to reward their shareholders by increasing dividends, which can be attractive for income-focused investors. Finally, there may be an increase in the number of companies going public and raising capital through initial public offerings (IPOs) during a bull market, providing investors with the opportunity to participate in the growth of new, promising companies.

Bull vs. Bear Markets

The opposite of a bull market is a bear market, which is characterized by falling prices and typically shrouded in pessimism. The commonly held belief about the origin of these terms suggests that the use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.

Bull and bear markets often coincide with the economic cycle, which consists of four phases: expansion, peak, contraction, and trough. The onset of a bull market is often a leading indicator of economic expansion. Because public sentiment about future economic conditions drives stock prices, the market frequently rises even before broader economic measures, such as gross domestic product (GDP) growth, begin to tick up. Likewise, bear markets usually set in before economic contraction takes hold. A look back at a typical U.S. recession reveals a falling stock market several months ahead of GDP decline.

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Year-over-year (YOY)—sometimes referred to as year-on-year—is a frequently used financial comparison for looking at two or more measurable events on an annualized basis.12 Observing YOY performance allows for gauging if a company’s financial performance is improving, static, or worsening. For example, you may read in financial reports that a particular business reported its revenues increased for the third quarter, on a YOY basis, for the last three years.

KEY TAKEAWAYS

• Year-over-year (YOY) is a method of evaluating two or more measured events to compare the results at one period with those of a comparable period on an annualized basis.

• YOY comparisons are a popular and effective way to evaluate the financial performance of a company.

• Investors seeking to gauge a company’s financial performance use YOY reporting.

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1:12

Explaining Year Over Year (YOY)

Understanding YOY

YOY comparisons are a popular and effective way to evaluate the financial performance of a company and the performance of investments. Any measurable event that repeats annually can be compared on a YOY basis. Common YOY comparisons include annual, quarterly, and monthly performance.

Benefits of YOY

YOY measurements facilitate the cross comparison of sets of data. For a company’s first-quarter revenue using YOY data, a financial analyst or an investor can compare years of first-quarter revenue data and quickly ascertain whether a company’s revenue is increasing or decreasing.

For example, in the first quarter of 2021, the Coca-Cola corporation reported a 5% increase in net revenues over the first quarter of the previous year. By comparing the same months in different years, it is possible to draw accurate comparisons despite the seasonal nature of consumer behavior.3 This YOY comparison is also valuable for investment portfolios. Investors like to examine YOY performance to see how performance changes across time.

Reasoning Behind YOY

YOY comparisons are popular when analyzing a company’s performance because they help mitigate seasonality, a factor that can influence most businesses. Sales, profits, and other financial metrics change during different periods of the year because most lines of business have a peak season and a low demand season.

For example, retailers have a peak demand season during the holiday shopping season, which falls in the fourth quarter of the year. To properly quantify a company’s performance, it makes sense to compare revenue and profits YOY.

It’s important to compare the fourth-quarter performance in one year to the fourth-quarter performance in other years. If an investor looks at a retailer’s results in the fourth quarter versus the prior third quarter, it might appear that a company is undergoing unprecedented growth when it is seasonality that is influencing the difference in the results. Similarly, in a comparison of the fourth quarter with the following first quarter, there might appear a dramatic decline, when this could also be a result of seasonality.

YOY also differs from the term sequential, which measures one quarter or month to the previous one and allows investors to see linear growth. For instance, the number of cell phones a tech company sold in the fourth quarter compared with the third quarter or the number of seats an airline filled in January compared with December. 

Real-World Example

In a 2019 NASDAQ report, Kellogg Company released mixed results for the fourth quarter of 2018, revealing that its YOY earnings continued to decline, even when sales increased following corporate acquisitions. Kellogg predicted that adjusted earnings would drop by a further 5% to 7% in 2019 as it continued to invest in alternate channels and pack formats.4

The company also revealed plans to reorganize its North America and Asia-Pacific segments, removing several divisions from the former and reorganizing the latter into Kellogg Asia, Middle East, and Africa. Despite decreasing YOY earnings, the company’s solid presence and responsiveness to consumer consumption trends meant that Kellogg’s overall outlook remained favorable.4

What Is YOY Used For?

YOY is used to make comparisons between one time period and another that is one year earlier. This allows for an annualized comparison, say between third-quarter earnings this year vs. third-quarter earnings the year before. It is commonly used to compare a company’s growth in profits or revenue, and it can also be used to describe yearly changes in an economy’s money supply, gross domestic product (GDP), and other economic measurements.

How Is YOY Calculated?

YOY calculations are straightforward and usually expressed in percentage terms. This would involve taking the current year’s value and dividing it by the prior year’s value and subtracting one: (this year) ÷ (last year) - 1.

What’s the Difference Between YOY and YTD?

YOY looks at a 12-month change. Year to date (YTD) looks at a change relative to the beginning of the year (usually Jan. 1).

What If I Am Interested in Comparisons for Less Than a Year?

You can compute month-over-month or quarter-over-quarter (Q/Q) in much the same way as YOY. Indeed, you can choose any time frame you desire.

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Year to date (YTD) refers to the period of time beginning the first day of the current calendar year or fiscal year up to the current date. YTD information is useful for analyzing business trends over time or comparing performance data to competitors or peers in the same industry. The acronym often modifies concepts such as investment returns, earnings, and net pay.

KEY TAKEAWAYS

• YTD refers to a period of time beginning the first day of the current calendar year or fiscal year up to the current date.

• Some governmental agencies and organizations have fiscal years that begin on a date other than Jan. 1.

• YTD analysis is useful for managers to review interim financial statements in comparison to historical YTD financial statements.

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Year-to-Date

How Year to Date (YTD) Is Used

If someone uses YTD for a calendar year reference, they mean the period of time between Jan. 1 of the current year and the current date. If they use YTD for a fiscal year reference, they mean the period of time between the first day of the fiscal year in question and the current date.

A fiscal year is a period of time lasting one year but not necessarily beginning on Jan. 1. It is used by governments, corporations, and other organizations for accounting and external audit purposes.

For example, the federal government observes its fiscal year from Oct. 1 to Sept. 30,1 and Microsoft's fiscal year is from July 1 to June 30.2 It is common for nonprofit organizations to have a fiscal year of July 1 to June 30.

YTD financial information is useful for management, as it is a good way to check in on the financial health of a company on an interim basis rather than waiting until the end of the fiscal year.

YTD financial statements are routinely analyzed against historical YTD financial statements through the equivalent time period. For example, if a company's fiscal year begins on July 1, a three-month YTD financial statement would run through Sept. 30.

The September YTD financial statement for the current year may be compared to the September YTD financial statement from the prior year or years, to identify seasonal trends or abnormalities.

Types of Year to Date

Year to Date Returns

YTD return refers to the amount of profit made by an investment since the first day of the current year. Investors and analysts use YTD return information to assess the performance of investments and portfolios.

To calculate a YTD return on investment, subtract its value on the first day of the current year from its current value. Then, divide the difference by the value on the first day, and multiply the product by 100 to convert it to a percentage. For example, if a portfolio was worth $100,000 on Jan. 1, and it is worth $150,000 today, its YTD return is 50%.

Year to Date Earnings

YTD earnings refer to the amount of money an individual has earned from Jan. 1 to the current date. This amount typically appears on an employee's pay stub, along with information about Medicare and Social Security withholdings and income tax payments.

YTD earnings may also describe the amount of money an independent contractor or business has earned since the beginning of the year. This amount consists of revenue minus expenses. Small-business owners use YTD earnings to track financial goals and estimate quarterly tax payments.

Year to Date Net Pay

Net pay is the difference between employee earnings and the withholdings from those earnings. To calculate net pay, employees subtract the tax and other withholdings from their gross pay. YTD net pay appears on many paycheck stubs, and this figure includes all of the money earned since Jan. 1 of the current year minus all of the tax and other benefit amounts withheld.

Month to Date vs. Year to Date

Month to date (MTD) refers to the period of time between the 1st of the current month and the last finalized business day before the current date. Typically, MTD does not include the current date because business has not yet ended for that day.

For example, if today's date is Aug. 21, 2021, MTD refers to the period of time from Aug. 1, 2021, to Aug. 20, 2021. This metric is used in similar ways as YTD metrics. Namely, business owners, investors, and individuals use MTD data to analyze their income, business earnings, and investment returns for the month so far.

How to Calculate Year to Date

Most YTD calculations can be determined through simple addition. For example, if a business wishes to calculate its YTD sales, it would simply add up the sales figures for every budget period since the beginning of the fiscal or calendar year. If you want to verify your YTD salary, you would simply add up the gross pay from every paycheck since the start of the year.

The math is more complicated for interest or yield figures, which are often represented in terms of annual percentage rates. This allows investors to compare returns over different time periods: If your portfolio is up 4% and it's now June, it may be hard to determine if your portfolio is on track to beat last year's 8% returns.

The first step to annualizing yields is to divide the present value by the initial value at the beginning of the year. This gives you a fraction representing YTD growth. Next, raise that fraction to the power of twelve divided by the number of months that have passed. Subtract 1 and multiply the result by 100 to get a percentage.3

For example, suppose your portfolio started the year at $1,000 and it currently has a value of $1,030 on September 30th. Divide $1,030 by $1,000 to get 1.03, and raise that to the power of 1.33 (12/9) to get 1.04. Thus, your portfolio is on track for an annualized 4% growth.

What Does Year to Date Mean on a Pay Stub?

Year to date (YTD) is a term that covers the period between the beginning of the year and the current (present) date. So, on a pay stub, your YTD figure shows the total of your wages or earnings from the start of the current calendar year until the most recent pay period. Most pay stubs will show a running total of YTD earnings that includes gross wages, net pay, or both. They may also provide a YTD tally of your FICA taxes, income taxes, and other deductions.

How Do You Calculate Year to Date Returns?

Consider an investor who bought shares in a company on January 1 at $200 per share. In March, they are worth $202. To calculate the year-to-date return on these shares, you would start by finding the percentage growth ($220- $200)/ $200 then multiply this by 100 to arrive at 1%. The next step is to annualize these returns. Since the shares grew 1% in the first quarter of the year, that works out to an annualized growth of 4%.

What Is the Difference Between Month to Date and Year to Date?

Month to date includes an important caveat when used in business. Here, month to date refers to the first of the month to the last business day before the given current date. For instance, if today were Aug. 21, the month-to-date would equal Aug. 1 to Aug. 20. This is because business has not been finalized for the current day. Month to date is used for similar metrics as the year to date, such as measuring earnings, return, and income. 

The Bottom Line

Year to date (YTD) represents one way to measure a company's financial progress. Rather than wait for end-of-year figures, the company can simply analyze performance trends over the course of the year. This represents a simple and straightforward way to assess progress over time.

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Whatever your learning style, understanding corporate finance and accounting is easy when you can choose from 183,000 online video courses. With Udemy, you’ll be able to learn accounting terminology and how to prepare financial statements and analyze business transactions. What’s more, each course has new additions published every month and comes with a 30-day money-back guarantee. Learn more about Udemy and sign up today.

A zero-coupon inflation swap (ZCIS) is a type of derivative in which a fixed-rate payment on a notional amount is exchanged for a payment at the rate of inflation. It is an exchange of cash flows that allows investors to either reduce or increase their exposure to the changes in the purchasing power of money.

A ZCIS is sometimes known as a breakeven inflation swap.

KEY TAKEAWAYS

• A zero-coupon inflation swap (ZCIS) is a type of inflation derivative, where an income stream that is tied to the rate of inflation is exchanged for an income stream with a fixed interest rate.

• With a ZCIS, both income streams are paid as a single lump sum when the swap reaches maturity and the inflation level is known, instead of exchanging periodic payments.

• As inflation rises, the inflation buyer receives more from the inflation seller than what they paid.

• Conversely, if inflation falls, the inflation buyer receives less from the inflation seller than what they paid.

Understanding a Zero-Coupon Inflation Swap (ZCIS)

An inflation swap is a contract used to transfer inflation risk from one party to another through an exchange of fixed cash flows. In a ZCIS, which is a basic type of inflation derivative, an income stream tied to the rate of inflation is exchanged for an income stream with a fixed interest rate. A zero-coupon security does not make periodic interest payments during the life of the investment. Instead, a lump sum is paid on the maturity date to the holder of the security.

Likewise, with a ZCIS, both income streams are paid as one lump-sum payment when the swap reaches maturity and the inflation level is known. The payoff at maturity depends on the inflation rate realized over a given period of time, as measured by an inflation index. In effect, the ZCIS is a bilateral contract used to provide a hedge against inflation.

While payment is typically exchanged at the end of the swap term, a buyer may choose to sell the swap on the over-the-counter (OTC) market prior to maturity.

Under a ZCIS, the inflation receiver, or buyer, pays a predetermined fixed rate and, in return, receives an inflation-linked payment from the inflation payer, or seller. The side of the contract that pays a fixed rate is referred to as the fixed leg, while the other end of the derivatives contract is the inflation leg. The fixed-rate is called the breakeven swap rate.

The payments from both legs capture the difference between expected and actual inflation. If actual inflation exceeds expected inflation, the resulting positive return to the buyer is considered a capital gain. As inflation rises, the buyer earns more; if inflation falls, the buyer earns less.

Computing the Price of a Zero-Coupon Inflation Swap (ZCIS)

The inflation buyer pays a fixed amount, known as the fixed leg. This is:

Fixed Leg = A * [(1 + r)t – 1]

The inflation seller pays an amount given by the change in the inflation index, known as the inflation leg. This is:

Inflation Leg = A * [(IE ÷ IS) – 1]

where**:**

• A = Reference notional of the swap

• r = The fixed rate

• t = The number of years

• IE = Inflation index at the end (maturity) date

• IS = Inflation index at the start date

Example of a Zero-Coupon Inflation Swap (ZCIS)

Assume that two parties enter into a five-year ZCIS with a notional amount of $100 million, a 2.4% fixed rate, and the agreed-upon inflation index, such as the Consumer Price Index (CPI), at 2.0% when the swap is agreed upon. At maturity, the inflation index is at 2.5%.

Fixed Leg = $100,000,000 * [(1.024)5 – 1)] = $100,000,000 * [1.1258999 – 1]

= $12,589,990.68

Inflation Leg = $100,000,000 * [(0.025 ÷ 0.020) – 1] = $100,000,000 * [1.25 – 1]

= $25,000,000.00

Since the compounded inflation rate rose above 2.4%, the inflation buyer profited; otherwise, the inflation seller would have profited.

Special Considerations

The currency of the swap determines the price index that is used to calculate the rate of inflation. For example, a swap denominated in U.S. dollars would be based on the CPI, a proxy for inflation that measures price changes in a basket of goods and services in the United States. A swap denominated in British pounds, meanwhile, would typically be based on Great Britain's Retail Price Index (RPI).

Like every debt contract, a ZCIS is subject to the risk of default from either party, either because of temporary liquidity problems or more significant structural issues, such as insolvency. To mitigate this risk, both parties may agree to put up collateral for the amount due.

Other financial instruments that can be used to hedge against inflation risk are real yield inflation swaps, price index inflation swaps, Treasury Inflation-Protected Securities (TIPS), municipal and corporate inflation-linked securities, inflation-linked certificates of deposit, and inflation-linked savings bonds.

Benefits of Inflation Swaps

The advantage of an inflation swap is that it provides an analyst with a fairly accurate estimation of what the market considers to be the 'break-even' inflation rate. Conceptually, it is very similar to the way that a market sets the price for any commodity, namely the agreement between a buyer and a seller (between demand and supply), to transact at a specified rate. In this case, the specified rate is the expected rate of inflation.

Simply put, the two parties to the swap come to an agreement based on their respective takes on what the inflation rate is likely to be for the period of time in question. As with interest rate swaps, the parties exchange cash flows based on a notional principal amount (this amount is not actually exchanged), but instead of hedging against or speculating on interest rate risk, their focus is solely on the inflation rate.

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The term Roth 401(k) refers to an employer-sponsored retirement savings account that is funded using after-tax dollars. This means that income tax is paid immediately on the earnings that the employee deducts from each paycheck and deposits into the account. Withdrawals from the account are tax-free upon retirement. This type of plan is different from a traditional 401(k) plan, which is funded with pretax money. In this case, payroll deductions come out of the employee's gross income and taxes are due only when the money is withdrawn from the account.1

KEY TAKEAWAYS

• A Roth 401(K) is a type of employer-sponsored retirement savings plan.

• Contributions made to Roth 401(k) are taxed but earnings and withdrawals made after retirement are tax-free.

• You must take at least the required minimum distributions after you turn 72.

• Contribution limits are adjusted annually for inflation and announced each year by the IRS.

• Penalties apply if you make withdrawals before you turn 59½ or if you had the account for less than five years.

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Introduction To The 401(K)

How Roth 401(k)s Work

Investors have many options when it comes to saving for retirement. One of the most common ways to put money aside is through employer-sponsored plans like the 401(k). Participation is voluntary and those who take part agree to automatic payroll deductions that are transferred into a special retirement account. Some employers even match employee contributions up to a certain amount.

There are several varieties of 401(k)s that exist. The Roth 401(k) option became available as of the beginning of 2006, while the traditional 401(k) has been around since 1978.23 Both were authorized by Congress as tax-advantaged retirement plans to encourage employees to save towards their retirement.4

Their tax advantages are different:

• A traditional 401(k) reduces the employee's gross income for the year, giving them an instant tax break in addition to a retirement savings vehicle. The employee will owe regular income tax on every withdrawal made during retirement.

• The Roth 401(k) requires that the income tax be paid immediately, so the employee's real net income is reduced by the amount earmarked for savings. But no further taxes will be owed on withdrawals of either the contributions or the profits earned over the years.

Roth 401(k)s is subject to contribution limits based on the individual's age. These limits are adjusted annually for inflation and released by the Internal Revenue Service (IRS). The contribution limit for individuals in 2021 is $19,500 per year and $20,500 in 2022. Individuals 50 and older can contribute an additional $6,500 as a catch-up contribution. Unlike other plans, there is no income limit to participate.1

Special Considerations

Withdrawals of any contributions and earnings are not taxed as long as the withdrawal is a qualified distribution, which means certain criteria must be met: 

• The Roth 401(k) account must have been held for at least five years.

• The withdrawal must have occurred because of a disability, on or after the death of an account owner, or when an account holder reaches at least age 59½.

Distributions are required for people who are at least 72 years old (70½ before Jan. 1, 2020) unless the individual is still employed at the company that holds the 401(k) and is not a 5% (or more) owner of the business sponsoring the plan.1 The first required minimum distribution (RMD) must be taken on April 1 after the account holder turns 72. Keep in mind that individuals can withdraw more than the RMD.5

Roth 401(k)s are not available in all company-sponsored retirement schemes. When they are, 43% of savers opt for the Roth over a traditional 401(k). Millennials are more likely to contribute to a Roth 401(k) than Gen Xers or baby boomers.6

Unlike a Roth 401(k), a Roth IRA is not subject to required minimum distributions.1

Advantages and Disadvantages of Roth 401(k)s

A Roth 401(k) may have the greatest benefit for employees currently in a low tax bracket who expect to move into a higher one after they retire. Contributions made to a Roth 401(k) are taxed at the lower tax rate. Distributions are tax-free in retirement, making it the greatest single advantage. No matter how much the account grows over the years, that money is still exempt from income taxes after the account holder retires.

The downside is a little more immediate financial pain. Because contributions to a traditional 401(k) are not taxed immediately (but effectively reduce the amount of your gross income), the impact on your take-home pay is reduced and your tax break for the year is maximized. But there's no such deal with a Roth 401(k). This means that you are out-of-pocket for (but still taxed on) the deposits you make to it in the year you make them.

Pros

• Helps people who believe they'll be in a higher tax bracket later in life

• Distributions are tax-free during retirement

• Earnings grow tax-free

Cons

• Contributions are made using after-tax dollars

• Contributions don't reduce your taxable income

Roth 401(k) vs. Other Retirement Accounts

As noted above, Roth 401(k) accounts are employer-sponsored plans that help people plan for retirement. But it's not the only option available to investors.

401(k) Plans

Like its Roth equivalent, the traditional 401(k) is an employer-sponsored plan. This means you can't set one up on your own. Money is taken out of your paycheck through automatic deductions and transferred into a special account. The money is then invested in a series of mutual funds that you choose.

The IRS sets limits on how much you contribute to the plan each year. This figure is adjusted annually for inflation:

• Employee contributions cannot exceed $19,500 per year in 2021 and $20,500 per year for 2022 for people under 50.

• Those 50 and over can make a catch-up contribution of $6,500 per year in 2021 and 2022.7

Employers can also contribute to their employees' plans. The combined limit for employer-employee contributions is capped at $58,000 or 100% of employee compensation. If the catch-up contribution is made, that limit increases to $64,500.8

This plan is a defined contribution plan, which means the contributions you make determine the account balance and how well your account performs. Contributions are made using pretax dollars, which reduces the amount of income tax you pay. Withdrawals made during retirement are subject to income tax.

Individual Retirement Accounts (IRAs)

If you don't have the option to invest in an employer-sponsored plan, you may want to consider an individual retirement account (IRA). This kind of account can be set up by anyone through a financial institution or investment firm, which means anyone who has earned income is entitled to one.

You can invest in a variety of investments under an IRA, including stocks, bonds, exchange-traded funds (ETFs), mutual funds, and real estate investment trusts (REITs). Just like the 401(k), there are several types of IRA options available:

• Traditional IRA: Contributions made to a traditional IRA are tax-deductible, thereby decreasing your taxable income. Withdrawals made during retirement are taxed at your normal income tax rate. For 2021 and 2022, you can only contribute $6,000 if you're under 50. You can make an additional $1,000 catch-up contribution per year if you are over 50.9

• Roth IRA: Contributions made to a Roth IRA are made using after-tax dollars. This means you can't use them to reduce your taxable income. The limits are the same as traditional IRAs. Any withdrawals you make during retirement are tax-free. Roth IRAs don't require you to take minimum distributions—or any at all. You can leave the money in your account if you choose to do so. You will be hit with a 10% early withdrawal penalty if you take money out before age 59½.

You can also choose a SEP IRA or a SIMPLE IRA if you're self-employed or work for a small business.

403(b) Plans

These plans are just like the 401(k) but are sponsored by employers for individuals who work in schools and other tax-exempt organizations. This includes teachers, professors, clergy people, doctors, nurses, government employees, and librarians.

Participants agree to regular payroll deductions. Individuals may also benefit from additional contributions by the employer if they provide 403(b)s. These plans have the same contribution limits as regular 401(k) plans, which means if you have one, you can contribute a maximum of $19,500 in 2021 and $20,500 in 2022 if you're under 50. People over 50 can make an additional contribution of $6,500 per year.7

How Do Roth 401(k) Plans Work?

Roth 401(k) plans are only available through an employer, which means you can't set one up on your own. Contributions are made using after-tax dollars through payroll deductions. The contributions grow tax-free in your account. Withdrawals are also tax-free as long as you've held the account for at least five years and you're at least 59½. The required minimum distribution must be taken for those who turn 72.

Is a Roth 401(k) Better Than a Traditional 401(k)?

Your personal circumstances can help answer that question. The Roth 401(k) is generally a better deal because you only pay income taxes on your contributions. This allows your earnings to grow tax-free and make withdrawals without paying income taxes. If you're cash-strapped now, this option will be a heavier hit to your current annual income.

Contributions to a traditional 401(k) are tax-free but you must pay taxes on your withdrawals. So if you expect to be in a lower tax bracket after retiring, the immediate tax break of a traditional 401(k) may be more useful.

What Are the Criteria for Roth 401(k) Withdrawals?

A withdrawal is only considered a qualified distribution as long as you've held the account for at least five years and you're 59½ unless you are disabled or the account holder dies.

You must make the required minimum distributions if you are at least 72 years old unless you still work for the company that holds the 401(k) and don't have at least a 5% ownership stake in the business that sponsors the plan.

Can You Lose Money in a Roth 401(k)?

You can lose money in any investment if the market tanks. That said, most employers offer a choice of funds, including very low-risk options like government bond funds. You can mix and match choices to reach the level of risk you are comfortable taking.

You can also lose money in a Roth 401(k) if you break the rules and take early distributions. If you're considering taking some money out early, check with the fund administrator to find out whether you might owe a tax penalty.

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The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while also factoring in the company's expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio.

KEY TAKEAWAYS

• The PEG ratio enhances the P/E ratio by adding in expected earnings growth into the calculation.

• The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.

• The PEG for a given company may differ significantly from one reported source to another, depending on which growth estimate is used in the calculation, such as one-year or three-year projected growth.

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PEG Ratio

How to Calculate the PEG Ratio

\begin{aligned} &\text{PEG Ratio}=\frac{\text{Price/EPS}}{\text{EPS Growth}}\\ &\textbf{where:}\\ &\text{EPS = The earnings per share}\\ \end{aligned}​PEG Ratio=EPS GrowthPrice/EPS​where:EPS = The earnings per share​

To calculate the PEG ratio, an investor or analyst needs to either look up or calculate the P/E ratio of the company in question. The P/E ratio is calculated as the price per share of the company divided by the earnings per share (EPS), or price per share / EPS.

Once the P/E is calculated, find the expected growth rate for the stock in question, using analyst estimates available on financial websites that follow the stock. Plug the figures into the equation, and solve for the PEG ratio number.

Accuracy

As with any ratio, the accuracy of the PEG ratio depends on the inputs used. When considering a company's PEG ratio from a published source, it's important to find out which growth rate was used in the calculation. In an article from Morgan Stanley Wealth Management, for example, the PEG ratio is calculated using a P/E ratio based on current-year data and a five-year expected growth rate.1

Using historical growth rates, for example, may provide an inaccurate PEG ratio if future growth rates are expected to deviate from a company's historical growth. The ratio can be calculated using one-year, three-year, or five-year expected growth rates, for example.

To distinguish between calculation methods using future growth and historical growth, the terms "forward PEG" and "trailing PEG" are sometimes used.

What Does the Price/Earnings-to-Growth Ratio Tell You?

While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio may tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its future earnings expectations. Adding a company's expected growth into the ratio helps to adjust the result for companies that may have a high growth rate and a high P/E ratio.

The degree to which a PEG ratio result indicates an over or underpriced stock varies by industry and by company type. As a broad rule of thumb, some investors feel that a PEG ratio below one is desirable.

According to well-known investor Peter Lynch, a company's P/E and expected growth should be equal, which denotes a fairly valued company and supports a PEG ratio of 1.0. When a company's PEG exceeds 1.0, it's considered overvalued while a stock with a PEG of less than 1.0 is considered undervalued.2

Example of How to Use the PEG Ratio

The PEG ratio provides useful information to compare companies and see which stock might be the better choice for an investor's needs, as follows.

Assume the following data for two hypothetical companies, Company A and Company B:

Company A:

• Price per share = $46

• EPS this year = $2.09

• EPS last year = $1.74

Company B

• Price per share = $80

• EPS this year = $2.67

• EPS last year = $1.78

Given this information, the following data can be calculated for each company.

Company A

• P/E ratio = $46 / $2.09 = 22

• Earnings growth rate = ($2.09 / $1.74) - 1 = 20%

• PEG ratio = 22 / 20 = 1.1

Company B

• P/E ratio = $80 / $2.67 = 30

• Earnings growth rate = ($2.67 / $1.78) - 1 = 50%

• PEG ratio = 30 / 50 = 0.6

Many investors may look at Company A and find it more attractive since it has a lower P/E ratio between the two companies. But compared to Company B, it doesn't have a high enough growth rate to justify its P/E. Company B is trading at a discount to its growth rate and investors purchasing it are paying less per unit of earnings growth.

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Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models.

A Monte Carlo simulation can be used to tackle a range of problems in virtually every field such as finance, engineering, supply chain, and science. It is also referred to as a multiple probability simulation.

KEY TAKEAWAYS

• A Monte Carlo simulation is a model used to predict the probability of different outcomes when the intervention of random variables is present.

• Monte Carlo simulations help to explain the impact of risk and uncertainty in prediction and forecasting models.

• A variety of fields utilize Monte Carlo simulations, including finance, engineering, supply chain, and science.

• The basis of a Monte Carlo simulation involves assigning multiple values to an uncertain variable to achieve multiple results and then averaging the results to obtain an estimate.

• Monte Carlo simulations assume perfectly efficient markets.

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Monte Carlo Simulation

Understanding Monte Carlo Simulations

When faced with significant uncertainty in the process of making a forecast or estimation, rather than just replacing the uncertain variable with a single average number, the Monte Carlo Simulation might prove to be a better solution by using multiple values.

Since business and finance are plagued by random variables, Monte Carlo simulations have a vast array of potential applications in these fields. They are used to estimate the probability of cost overruns in large projects and the likelihood that an asset price will move in a certain way.

Telecoms use them to assess network performance in different scenarios, helping them to optimize the network. Analysts use them to assess the risk that an entity will default, and to analyze derivatives such as options.

Insurers and oil well drillers also use them. Monte Carlo simulations have countless applications outside of business and finance, such as in meteorology, astronomy, and particle physics.

Monte Carlo Simulation History

Monte Carlo simulations are named after the popular gambling destination in Monaco, since chance and random outcomes are central to the modeling technique, much as they are to games like roulette, dice, and slot machines.

The technique was first developed by Stanislaw Ulam, a mathematician who worked on the Manhattan Project. After the war, while recovering from brain surgery, Ulam entertained himself by playing countless games of solitaire. He became interested in plotting the outcome of each of these games in order to observe their distribution and determine the probability of winning. After he shared his idea with John Von Neumann, the two collaborated to develop the Monte Carlo simulation.

Monte Carlo Simulation Method

The basis of a Monte Carlo simulation is that the probability of varying outcomes cannot be determined because of random variable interference. Therefore, a Monte Carlo simulation focuses on constantly repeating random samples to achieve certain results.

A Monte Carlo simulation takes the variable that has uncertainty and assigns it a random value. The model is then run and a result is provided. This process is repeated again and again while assigning the variable in question with many different values. Once the simulation is complete, the results are averaged together to provide an estimate.

Calculating a Monte Carlo Simulation in Excel

One way to employ a Monte Carlo simulation is to model possible movements of asset prices using Excel or a similar program. There are two components to an asset's price movement: drift, which is a constant directional movement, and a random input, which represents market volatility.

By analyzing historical price data, you can determine the drift, standard deviation, variance, and average price movement of a security. These are the building blocks of a Monte Carlo simulation.

To project one possible price trajectory, use the historical price data of the asset to generate a series of periodic daily returns using the natural logarithm (note that this equation differs from the usual percentage change formula):

\begin{aligned} &\text{Periodic Daily Return} = ln \left ( \frac{ \text{Day's Price} }{ \text{Previous Day's Price} } \right ) \\ \end{aligned}​Periodic Daily Return=ln(Previous Day’s PriceDay’s Price​)​

Next use the AVERAGE, STDEV.P, and VAR.P functions on the entire resulting series to obtain the average daily return, standard deviation, and variance inputs, respectively. The drift is equal to:

\begin{aligned} &\text{Drift} = \text{Average Daily Return} - \frac{ \text{Variance} }{ 2 } \\ &\textbf{where:} \\ &\text{Average Daily Return} = \text{Produced from Excel's} \\ &\text{AVERAGE function from periodic daily returns series} \\ &\text{Variance} = \text{Produced from Excel's} \\ &\text{VAR.P function from periodic daily returns series} \\ \end{aligned}​Drift=Average Daily Return−2Variance​where:Average Daily Return=Produced from Excel’sAVERAGE function from periodic daily returns seriesVariance=Produced from Excel’sVAR.P function from periodic daily returns series​

Alternatively, drift can be set to 0; this choice reflects a certain theoretical orientation, but the difference will not be huge, at least for shorter time frames.

Next, obtain a random input:

\begin{aligned} &\text{Random Value} = \sigma \times \text{NORMSINV(RAND())} \\ &\textbf{where:} \\ &\sigma = \text{Standard deviation, produced from Excel's} \\ &\text{STDEV.P function from periodic daily returns series} \\ &\text{NORMSINV and RAND} = \text{Excel functions} \\ \end{aligned}​Random Value=σ×NORMSINV(RAND())where:σ=Standard deviation, produced from Excel’sSTDEV.P function from periodic daily returns seriesNORMSINV and RAND=Excel functions​

The equation for the following day's price is:

\begin{aligned} &\text{Next Day's Price} = \text{Today's Price} \times e^{ ( \text{Drift} + \text{Random Value} ) }\\ \end{aligned}​Next Day’s Price=Today’s Price×e(Drift+Random Value)​

To take e to a given power x in Excel, use the EXP function: EXP(x). Repeat this calculation the desired number of times (each repetition represents one day) to obtain a simulation of future price movement. By generating an arbitrary number of simulations, you can assess the probability that a security's price will follow a given trajectory.

Special Considerations

The frequencies of different outcomes generated by this simulation will form a normal distribution, that is, a bell curve. The most likely return is in the middle of the curve, meaning there is an equal chance that the actual return will be higher or lower than that value.

The probability that the actual return will be within one standard deviation of the most probable ("expected") rate is 68%, while the probability that it will be within two standard deviations is 95%, and that it will be within three standard deviations 99.7%. Still, there is no guarantee that the most expected outcome will occur, or that actual movements will not exceed the wildest projections.

Crucially, Monte Carlo simulations ignore everything that is not built into the price movement (macro trends, company leadership, hype, cyclical factors); in other words, they assume perfectly efficient markets.

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The kiddie tax is a special tax law created in 1986 to address investment and unearned income tax for individuals 18 years of age or under—or dependent full-time students under age 24.

KEY TAKEAWAYS

• The kiddie tax prevents parents from avoiding taxes by transferring large gifts of stock.

• All unearned income over the threshold is taxed at the parent’s marginal income tax rate rather than the lower child’s tax rate.

• It applies to all children who are 18 years of age or under—or dependent full-time students between the ages of 19 and 24.

• The kiddie tax applies to most unearned income that a child receives and does not apply to any salary or wages.

• In 2022, unearned income under $1,150 qualifies for the standard deduction under kiddie tax law.12

How the Kiddie Tax Works

The kiddie tax is imposed on individuals under a certain age (18 years old or under and full-time students age 19-24 years old), whose investment and unearned income is higher than an annually determined threshold.1

This rule is designed to prevent parents from exploiting a tax loophole where their children are given large gifts of stock. In this case, the child would then realize any gains from the investments and would be taxed at a far lower rate compared to the rate the guardians face for their realized stock gains.

Under the kiddie tax law, all unearned income over the threshold is taxed at the parent's marginal income tax rate rather than the child's tax rate. In 2021, unearned income under $1,100 qualifies for the standard deduction. The next $1,100 is taxed at the child's tax rate, which is very low—sometimes 0%—and then anything over $2,200 is taxed at the guardian's tax rate, which could be as high as 37%.13

In 2022, unearned income under $1,150 qualifies for the standard deduction, and the next $1,150 is taxed at the child's tax rate.2

Who and What the Kiddie Tax Applies to

As of 2021, the kiddie tax applies to all children aged 18 and under at the end of the tax year and children who are dependent full-time students between the ages of 19 and 24. However, it does not apply to children under these ages who are married and file joint tax returns.1

The kiddie tax includes unearned income a child receives: interest, dividends, capital gains, rent, and royalties. Any salary or wages the child earns is not subject to the kiddie tax.1

Adult children who turn 19—or 25 in the case of dependent full-time students—by the end of the tax year are not subject to the kiddie tax.1 

History of the Kiddie Tax

The tax law originally only covered children under 14 years of age. Children under the age of 14 cannot legally work, which means that any income they received usually came from dividends or interest from bonds. However, the tax authorities realized that some guardians would take advantage of the situation and then give stock gifts to their older, 16-to-18-year-old children.4

The kiddie tax is imposed on individuals 18 years old or under whose investment and unearned income is higher than an annually determined threshold. The IRS taxes any income exceeding the predetermined threshold at the parent's tax rate. The Tax Cuts and Jobs Act of 2017 temporarily changed the kiddie tax to use the tax rates that apply to estates and trusts rather than the tax rate of the child's parents.5

However, the Further Consolidated Appropriations Act 2020 retroactively changed it back to the parent's tax rate. For 2018 and 2019 returns, taxpayers could use either the estate tax rates or the parent's take rate for calculating the kiddie tax. For 2020 and beyond, the parent's tax rate applies.61

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Negative correlation is a relationship between two variables in which one variable increases as the other decreases, and vice versa.

In statistics, a perfect negative correlation is represented by the value -1.0, while a 0 indicates no correlation, and +1.0 indicates a perfect positive correlation. A perfect negative correlation means the relationship that exists between two variables is exactly opposite all of the time.

KEY TAKEAWAYS

• Negative or inverse correlation describes when two variables tend to move in opposite size and direction from one another, such that when one increases the other variable decreases, and vice-versa.

• Negative correlation is put to use when constructing diversified portfolios, so that investors can benefit from price increases in certain assets when others fall.

• Correlation between two variables can vary widely over time. Stocks and bonds generally have a negative correlation, but in the 10 years to 2018, their measured correlation has ranged from -0.8 to +0.2.

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Correlation

Understanding Negative Correlation

Negative correlation or inverse correlation indicates that two individual variables have a statistical relationship such that their prices generally move in opposite directions from one another. If, for instance, variables X and Y have a negative correlation (or are negatively correlated), as X increases in value, Y will decrease; similarly, if X decreases in value, Y will increase.

The degree to which one variable moves in relation to the other is measured by the correlation coefficient, which quantifies the strength of the correlation between two variables. For example, if variables X and Y have a correlation coefficient of -0.1, they have a weak negative correlation, but if they have a correlation coefficient of -0.9, they would be regarded as having a strong negative correlation.

The higher the negative correlation between two variables, the closer the correlation coefficient will be to the value -1. By the same token, two variables with a perfect positive correlation would have a correlation coefficient of +1, while a correlation coefficient of zero implies that the two variables are uncorrelated and move independently of each other.

The correlation coefficient, usually denoted by "r" or "R", can be determined by regression analysis. The square of the correlation coefficient (generally denoted by "R2", or R-squared) represents the degree or extent to which the variance of one variable is related to the variance of the second variable, and is typically expressed in percentage terms.

For example, if a portfolio and its benchmark have a correlation of 0.9, the R-squared value would be 0.81. The interpretation of this figure is that 81% of the variation in the portfolio (the dependent variable in this case) is related to—or can be explained by—the variation of the benchmark (the independent variable).

The degree of correlation between two variables is not static, but can swing over a wide range—or from positive to negative, and vice versa—over time.

Graphs showing positive, negative, and no correlation. Illustration by Hugo Lin. © 2018 ThoughtCo.

The Importance of Negative Correlation

The concept of negative correlation is a key one in portfolio construction. Negative correlation between sectors or geographies enables the creation of diversified portfolios that can better withstand market volatility and smooth out portfolio returns over the long term.

The building of large and complex portfolios where the correlations are carefully balanced to provide more predictable volatility is generally referred to as the discipline of strategic asset allocation.

Consider the long-term negative correlation between stocks and bonds. Stocks generally outperform bonds during periods of strong economic performance, but as the economy slows down and the central bank reduces interest rates to stimulate the economy, bonds may outperform stocks.

As an example, assume you have a $100,000 balanced portfolio that is invested 60% in stocks and 40% in bonds. In a year of strong economic performance, the stock component of your portfolio might generate a return of 12%, while the bond component may return -2% because interest rates are on a rising trend. Thus, the overall return on your portfolio would be 6.4% ((12% x 0.6) + (-2% x 0.4).

The following year, as the economy slows markedly and interest rates are lowered, your stock portfolio might generate -5% while your bond portfolio may return 8%, giving you an overall portfolio return of 0.2%.

What if, instead of a balanced portfolio, your portfolio was 100% equities? Using the same return assumptions, your all-equity portfolio would have a return of 12% in the first year and -5% in the second year, which are more volatile than the balanced portfolio's returns of 6.4% and 0.2%.

Equities and bonds generally have a negative correlation, but in the 10 years to 2018, their correlation has ranged from approximately -0.8 to +0.2, according to BlackRock.

Examples of Negative Correlation

Examples of negative correlation are common in the investment world. A well-known example is the negative correlation between crude oil prices and airline stock prices. Jet fuel, which is derived from crude oil, is a large cost input for airlines and has a significant impact on their profitability and earnings.

If the price of crude oil spikes up, it could have a negative impact on airlines' earnings and hence on the price of their stocks. But if the price of crude oil trends lower, this should boost airline profits and therefore their stock prices.

Here's how the existence of this phenomenon can help in the construction of a diversified portfolio. As the energy sector has a substantial weight in most equity indices, many investors have significant exposure to crude oil prices, which are typically quite volatile. As the energy sector, for obvious reasons, has a positive correlation with crude oil prices, investing part of one's portfolio in airline stocks would provide a hedge against a decline in oil prices.

Special Considerations

It should be noted that this investment thesis may not work all of the time, as the typical negative correlation between oil prices and airline stocks might occasionally turn positive. For example, during an economic boom, oil prices and airline stocks may both rise; conversely, during a recession, oil prices and airline stocks could slide in tandem.

When negative correlation between two variables breaks down, it can play havoc with investment portfolios. For example, US equity markets experienced their worst performance in a decade in the fourth quarter of 2018, partly fueled by concerns that the Federal Reserve (Fed) would continue to raise interest rates.

Fears of rising rates also took their toll on bonds, leading their normally negative correlation with stocks to fall to the weakest levels in decades. At such times, investors often discover to their chagrin that there is no place to hide.

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The free market is an economic system based on supply and demand with little or no government control. It is a summary description of all voluntary exchanges that take place in a given economic environment. Free markets are characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions. Based on its political and legal rules, a country's free market economy may range between very large or entirely illegal.

KEY TAKEAWAYS

• A free market is one where voluntary exchange and the laws of supply and demand provide the sole basis for the economic system, without government intervention.

• A key feature of free markets is the absence of coerced (forced) transactions or conditions on transactions.

• While no pure free market economies actually exist, and all markets are in some ways constrained, economists who measure the degree of freedom in markets have found a generally positive relationship between free markets and measures of economic well being.

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What are Free Market Economies?

Understanding Free Market

The term “free market” is sometimes used as a synonym for laissez-faire capitalism. When most people discuss the “free market,” they mean an economy with unobstructed competition and only private transactions between buyers and sellers. However, a more inclusive definition should include any voluntary economic activity so long as it is not controlled by coercive central authorities.

Using this description, laissez-faire capitalism and voluntary socialism are each examples of a free market, even though the latter includes common ownership of the means of production. The critical feature is the absence of coercive impositions or restrictions regarding economic activity.1 Coercion may only take place in a free market by prior mutual agreement in a voluntary contract, such as contractual remedies enforced by tort law.

The Free Market's Connection With Capitalism and Individual Liberty

No modern country operates with completely uninhibited free markets. That said, the most free markets tend to coincide with countries that value private property, capitalism, and individual rights. This makes sense since political systems that shy away from regulations or subsidies for individual behavior necessarily interfere less with voluntary economic transactions. Additionally, free markets are more likely to grow and thrive in a system where property rights are well protected and capitalists have an incentive to pursue profits.

Free Markets and Financial Markets

In free markets, a financial market can develop to facilitate financing needs for those who cannot or do not want to self-finance. For example, some individuals or businesses specialize in acquiring savings by consistently not consuming all of their present wealth. Others specialize in deploying savings in pursuit of entrepreneurial activity, such as starting or expanding a business. These actors can benefit from trading financial securities such as stocks and bonds.

For example, savers can purchase bonds and trade their present savings to entrepreneurs for the promise of future savings plus remuneration, or interest. With stocks, savings are traded for an ownership claim on future earnings. There are no modern examples of purely free financial markets.

Common Constraints on the Free Market

All constraints on the free market use implicit or explicit threats of force. Common examples include: prohibition of specific exchanges, taxation, regulations, mandates on specific terms within an exchange, licensing requirements, fixed exchange rates, competition from publicly provided services, price controls, and quotas on production, purchases of goods, or employee hiring practices. Common justifications for politically imposed constraints on free markets include consumer safety, fairness between various advantaged or disadvantaged groups in society, and the provision of public goods. Whatever the outward justification, business firms and other interest groups within society often lobby to shape these constraints in their own favor in a phenomenon known as rent-seeking. When free market behavior is regulated, the scope of the free market is curtailed but usually not eliminated entirely, and voluntary exchanges may still take place within the framework of government regulations.

Some exchanges may also take place in violation of government rules and regulations on illegal markets which may be in some ways considered an underground version of the free market. However, market exchange is still heavily constrained because, on an illegal market, competition often takes the form of violent conflict between rival groups of producers or consumers as opposed to free market competition or rent-seeking competition via the political system. As a result, in an illegal market, competitive advantage tends to flow to those who have a relative advantage at violence, so monopolistic or oligopolistic behavior is likely and barriers to entry are high as weaker players are driven out of the market.

Measuring Economic Freedom

In order to study the effects of free markets on the economy, economists have devised several well known indexes of economic freedom. These include the Index of Economic Freedom published by the Heritage Foundation and the Economic Freedom of the World and Economic Freedom of North America indexes published by the Fraser Institute, which measure. These indexes include items such as the security of property rights, the burden of regulation, and openness of financial markets, among many other items. Empirical analysis comparing these indexes to various measures of economic growth, development, and standards of living shows overwhelming evidence of a relationship between free markets and material well being across countries. 

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Delivered Duty Unpaid (DDU) is an old international trade term indicating that the seller is responsible for the safe delivery of goods to a named destination, paying all transportation expenses, and assuming all risks during transport.

Once the goods arrive at the agreed-upon location, the buyer becomes responsible for paying import duties, as well as further transport costs. However, Delivered Duty Paid (DDP) indicates that the seller must cover duties, import clearance, and any taxes.

KEY TAKEAWAYS

• Delivered Duty Unpaid (DDU) is an international trade term meaning the seller is responsible for ensuring goods arrive safely to a destination; the buyer is responsible for import duties.

• By contrast, Delivered Duty Paid (DDP) indicates that the seller must cover duties, import clearance, and any taxes.

• DDU is still commonly used in transportation contracts, even though the International Chamber of Commerce has officially replaced it with the term Delivered-at-Place (DAP).

• The primary benefit of delivered duty unpaid (DDU) shipping is that it gives the buyer more control over the shipping procedures.

• From the seller's perspective, DDU shipping provides the ability to take more of a "hands-off" approach when it comes to the destination country's shipping rules.

• The biggest problem for buyers in DDU shipping is the possibility of surprise duties and/or tax charges when their shipment finally arrives.

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Delivery Duty Unpaid (DDU)

Understanding Delivered Duty Unpaid (DDU)

The International Chamber of Commerce (ICC) is an organization that was originally formed after World War I with the goal of fostering prosperity in Europe by setting standards for international trade. It was this group that, in 1936, published a set of standardized terms for different types of shipping agreements, known as Incoterms.1

Incoterms are contract specifications outlining who bears the costs and risks of international transactions; they are subject to change at the discretion of the ICC. Because of the legal and logistical intricacies of international shipping, the ICC seeks to simplify matters for businesses by standardizing its terms.

Notably, 2020 Incoterms revision is available for purchase direct from the site.

Delivered Duty Unpaid (DDU) was actually not included in the most recent (2010) edition of the International Chamber of Commerce's Incoterms; the current official term that best describes the function of DDU is Delivered-at-Place (DAP).2

However, DDU is still commonly used in international trade parlance. On paper, the term is followed by the location of delivery (e.g., "DDU: Port of Los Angeles"). 

DPU Shipping

Delivered at Place Unloaded (DPU) is the third term used to differentiate between shipping methods. Under DPU, the seller is also responsible for unloading the goods at the place of destination.

Responsibilities Under Delivered Duty Unpaid (DDU)

According to DDU arrangements, the seller secures licenses and takes care of other formalities involved in exporting a good; it is also responsible for all licenses and costs incurred in transit countries, as well as for providing an invoice at its own cost.

The seller assumes all risk until the goods are delivered to the specified location, but it has no obligation to obtain insurance on the goods. 

The buyer is responsible for obtaining all necessary licenses for importing the goods and paying all relevant taxes, duties, and inspection costs. All risks involved in this process are borne by the buyer. Once the goods are placed at the disposal of the buyer, all further transportation costs and risks fall on the buyer.

Seller Obligations vs. Seller Obligations Under DDUSeller ObligationsBuyer ObligationsDelivers the goods, as well as the documentation that proves the buyer can take legal possession of them.Pays for the delivered goods.Responsible for all documentation required to export the goods.Responsible for all documentation required for import clearance once the shipment has arrived.Once the goods are delivered to the destination country, all risk is transferred to the buyer.Once the goods are delivered alongside the ship, the buyer is responsible for any loss or damage from that point on.Seller pays for the delivery, loading, labor, and transportation costs up to the destination country.Buyer pays for the import duties and taxes, customs charges, unloading costs, and delivery costs to their own warehouses.

Delivered Duty Unpaid (DDU) vs. Delivered Duty Paid (DDP)

In the world of shipping, delivered duty unpaid (DDU) simply means that it's the customer's responsibility to pay for any of the destination country's customs charges, duties, or taxes. These must all be paid in order for customs to release the shipment after it arrives.

On the other hand, delivered duty paid (DDP) means it's the shipper's responsibility to pay any of the customs charges, duties, and/or taxes required to send the product to the destination country.

Advantages and Disadvantages of Delivered Duty Unpaid (DDU)

The primary benefit of delivered duty unpaid (DDU) shipping is that it gives the buyer more control over the shipping procedures. For global buyers looking to keep a consistent flow of inventory, having a higher degree of control over the process can be paramount.

For instance, controlling costs and tracking shipments are typically easier to do under DDU shipping than in DDP shipping. Buyers are naturally more knowledgeable of their own country's shipping customs.

From the seller's perspective, DDU shipping provides the ability to take more of a "hands-off" approach when it comes to the destination country's shipping rules. The seller is simply responsible for getting the cargo to its destination, where the buyer can handle all of the legal complications.

Of course, there are also disadvantages to DDU shipping. The biggest problem for buyers is the possibility of surprise duties or tax charges when their shipment finally arrives. Obviously, that's a big negative for buyers. But it's not ideal for shippers, either, because disgruntled customers may refuse to pay for their parcel to be delivered.

DDU Shipping FAQs

Is DDU Shipping or DDP Shipping Better?

As we've discussed, there are pros and cons to each method of shipping. So it ultimately boils down to what the buyer or receiver wants out of their shipping experience.

If the receiver prioritizes control of the shipping process and doesn't mind the legal complications or surprise charges that come with more control, DDU is a good option. But if a buyer wants a streamlined process without the possibility of any surprise charges, DDP is probably the way to go.

Who Is Responsible for DDU Shipments?

Under DDU shipping rules, the seller is fully responsible for the delivery of the goods to the destination country. The seller assumes all risks involved up to unloading.

The buyer bears the risk and cost of the unloading.

Is DAP the Same as DDU?

Delivery-at-place (DAP) was introduced in 2010 to basically replace the term delivery duty unpaid (DDU), so they're essentially the same.

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The average true range (ATR) is a technical analysis indicator, introduced by market technician J. Welles Wilder Jr. in his book New Concepts in Technical Trading Systems, that measures market volatility by decomposing the entire range of an asset price for that period.1

The true range indicator is taken as the greatest of the following: current high less the current low; the absolute value of the current high less the previous close; and the absolute value of the current low less the previous close. The ATR is then a moving average, generally using 14 days, of the true ranges.

KEY TAKEAWAYS

• The average true range (ATR) is a market volatility indicator used in technical analysis.

• It is typically derived from the 14-day simple moving average of a series of true range indicators.

• The ATR was originally developed for use in commodities markets but has since been applied to all types of securities.

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Calculating Volatility with Average True Range

The Average True Range (ATR) Formula

The first step in calculating ATR is to find a series of true range values for a security. The price range of an asset for a given trading day is simply its high minus its low. Meanwhile, the true range is more encompassing and is defined as:

\begin{aligned} &TR = \text{Max}[(H\ -\ L), \text{Abs}(H\ -\ C_P),\text{Abs}(L\ -\ C_P)]\\ &ATR=\bigg(\frac1n\bigg)\sum\limits^{(n)}_{(i=1)}TR_i\\ &\textbf{where:}\\ &TR_i=\text{A particular true range}\\ &n=\text{The time period employed} \end{aligned}​TR=Max[(H − L),Abs(H − CP​),Abs(L − CP​)]ATR=(n1​)(i=1)∑(n)​TRi​where:TRi​=A particular true rangen=The time period employed​

How to Calculate the Average True Range (ATR)

Traders can use shorter periods than 14 days to generate more trading signals, while longer periods have a higher probability to generate fewer trading signals.

For example, assume a short-term trader only wishes to analyze the volatility of a stock over a period of five trading days. Therefore, the trader could calculate the five-day ATR. Assuming the historical price data is arranged in reverse chronological order, the trader finds the maximum of the absolute value of the current high minus the current low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close. These calculations of the true range are done for the five most recent trading days and are then averaged to calculate the first value of the five-day ATR.

Image by Sabrina Jiang © Investopedia 2020

What Does the Average True Range (ATR) Tell You?

Wilder originally developed the ATR for commodities, although the indicator can also be used for stocks and indices.1 Simply put, a stock experiencing a high level of volatility has a higher ATR, and a low volatility stock has a lower ATR.

The ATR may be used by market technicians to enter and exit trades, and is a useful tool to add to a trading system. It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations. The indicator does not indicate the price direction; rather it is used primarily to measure volatility caused by gaps and limit up or down moves. The ATR is fairly simple to calculate and only needs historical price data.

The ATR is commonly used as an exit method that can be applied no matter how the entry decision is made. One popular technique is known as the "chandelier exit" and was developed by Chuck LeBeau. The chandelier exit places a trailing stop under the highest high the stock reached since you entered the trade. The distance between the highest high and the stop level is defined as some multiple times the ATR. 2 For example, we can subtract three times the value of the ATR from the highest high since we entered the trade.

Image by Sabrina Jiang © Investopedia 2020

The ATR can also give a trader an indication of what size trade to put on in derivatives markets. It is possible to use the ATR approach to position sizing that accounts for an individual trader's own willingness to accept risk as well as the volatility of the underlying market.

Example of How to Use the Average True Range (ATR)

As a hypothetical example, assume the first value of the five-day ATR is calculated at 1.41 and the sixth day has a true range of 1.09. The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one, and then adding the true range for the current period to the product.

Next, divide the sum by the selected timeframe. For example, the second value of the ATR is estimated to be 1.35, or (1.41 * (5 - 1) + (1.09)) / 5. The formula could then be repeated over the entire time period.

While the ATR doesn't tell us in which direction the breakout will occur, it can be added to the closing price, and the trader can buy whenever the next day's price trades above that value. This idea is shown below. Trading signals occur relatively infrequently, but usually spot significant breakout points. The logic behind these signals is that whenever a price closes more than an ATR above the most recent close a change in volatility has occurred. Taking a long position is betting that the stock will follow through in the upward direction.

Image by Sabrina Jiang © Investopedia 2020 

Limitations of the Average True Range (ATR)

There are two main limitations to using the ATR indicator. The first is that ATR is a subjective measure, meaning that it is open to interpretation. There is no single ATR value that will tell you with any certainty that a trend is about to reverse or not. Instead, ATR readings should always be compared against earlier readings to get a feel of a trend's strength or weakness.

Second, ATR only measures volatility and not the direction of an asset's price. This can sometimes result in mixed signals, particularly when markets are experiencing pivots or when trends are at turning points. For instance, a sudden increase in the ATR following a large move counter to the prevailing trend may lead some traders to think the ATR is confirming the old trend; however, this may not actually be the case.

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