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    Formulas: FV PV × (1 + R)

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    pram006
    This document contains formulas for calculating present and future values of cash flows, yields, risk measures like variance and standard deviation, covariance and correlation, portfolio theory including the capital asset pricing model (CAPM) and portfolio betas. Key concepts covered include calculating present and future values of single and multiple cash flows, yields on perpetuities and annuities, variance and standard deviation of returns, covariance and correlation between securities, the security market line in CAPM, and construction of efficient portfolios.

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    Formulas: FV PV × (1 + R)

    Uploaded by

    pram006
    14 views3 pages
    This document contains formulas for calculating present and future values of cash flows, yields, risk measures like variance and standard deviation, covariance and correlation, portfolio theory including the capital asset pricing model (CAPM) and portfolio betas. Key concepts covered include calculating present and future values of single and multiple cash flows, yields on perpetuities and annuities, variance and standard deviation of returns, covariance and correlation between securities, the security market line in CAPM, and construction of efficient portfolios.

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    Formulas 1

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    This document contains formulas for calculating present and future values of cash flows, yields, risk measures like variance and standard deviation, covariance and correlation, portfolio theory including the capital asset pricing model (CAPM) and portfolio betas. Key concepts covered include calculating present and future values of single and multiple cash flows, yields on perpetuities and annuities, variance and standard deviation of returns, covariance and correlation between securities, the security market line in CAPM, and construction of efficient portfolios.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views3 pages

    Formulas: FV PV × (1 + R)

    Uploaded by

    pram006
    This document contains formulas for calculating present and future values of cash flows, yields, risk measures like variance and standard deviation, covariance and correlation, portfolio theory including the capital asset pricing model (CAPM) and portfolio betas. Key concepts covered include calculating present and future values of single and multiple cash flows, yields on perpetuities and annuities, variance and standard deviation of returns, covariance and correlation between securities, the security market line in CAPM, and construction of efficient portfolios.

    Copyright:

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    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Formulas

    Present Value and Future Value of a Single Cash Flow FVt = PV0 (1 + r)t
    PV0 = FVt (1 + r )t

    Where: PV = present value FV = future value Present Value of Perpetuities

    Perpetuity : PV0 =

    CF1 r

    Growing Perpetuity : PV0 =

    CF1 rg

    Present Value and Future Value of Ordinary Annuities

    PV0 =

    CF1 1 1 t r (1 + r )

    FVt =

    CF t (1 + r ) 1 r

    Effective Annual Yield (or Effective Annual Interest Rate)

    APR EAY = 1 + 1 m
    Where: m = number of compounding periods per year. APR = Annual Percentage Rate (or Stated Annual Interest Rate). Risk and Return

    Percentage return =

    Cash flow over the period + Change in market value Beginning market value

    Sample variance (for historical returns):

    2 = (R1 R ) + (R2 R ) + ... + (RT R ) T 1


    1
    2 2

    2 =
    Where:

    1 T Rt R T 1 t =1

    T = total number of observations. Ri = return in period i. R-bar = average return over entire sample. 1

    Variance of expected returns:

    2 = P1 (R1 R ) + P2 (R2 R ) + ... + PT (RT R )


    2 2

    ][
    2

    2 = Pt (Rt R )
    T t =1

    Where:

    Pi = probability of being in state i. Ri = return in period i. R-bar = expected return.

    Covariance and correlation:

    Cov ( X , Y ) = P 1 X 1 X Y1 Y + P 2 X 2 X Y2 Y + ...
    Cov ( X , Y ) = Pt X t X Yt Y
    t =1 T

    [(

    )(

    )] [(
    )

    )(

    )]

    )(

    Where: Pi = probability of being in state i. Xi and Yi = return on security X and Y, respectively, in period i. X-bar and Y-bar = expected return on security X and Y, respectively.
    Corr ( X , Y ) = X ,Y = COV ( X , Y ) X Y

    Cov ( X , Y ) = X ,Y X Y
    Portfolio Theory

    E Rp =

    [ ] w E[R ]
    n i =1 i i

    For two securities:


    2 2 2 2 2 p = w1 1 + w2 2 + 2 w1w2 COV ( R1 , R2 )

    2 2 2 2 2 p = w1 1 + w2 2 + 2 w1w2 12 1 2

    Where: wi is the weight of security i in the portfolio.

    Asset Pricing Theory Security Market Line (the CAPM):


    E R = R + ER R i f m f

    [ ]

    [ ]

    Where:

    E[Rm] is the expected return of the market portfolio. Rf is the risk-free rate of return.
    2 m

    i =

    COV ( Ri , Rm )

    Where: m2 is the variance of the market portfolio.


    Portfolio Betas:

    p = wi i
    i =1

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