Formula

HPR =
Annualized HPR =

HPR=Ending Value of Investment (including

{[(Income + (Ending value of investment] /
t= time

HPY=HPR-1
HPY(Total) =HPY(Price Increase)+HPY (Div)

Arithmatic mean
Not accurate if the amount invested in differ
Geo mean = {Return1 * return2* return3}power to 1/n
n= no.of returns
Coefficient of variation = std deviation/mean
Real rate of return with inflation
Standard Deviation

1+n=(1+r)/(1+i)-1

Sigma[X-E(X)]^2*Pi
E(x)=Return*Probablity
Pi=Probability
X=Return
Standard Deviation used to measure relative risk
When both have same expected
Coefficient of Variation used to measure relative variability

nvestment (including cash flows)/Beginning value of investment)

alue of investment] / Initial Value+ 1} 1

ount invested in different years are different

have same expected rate of return

Estimation of Yield to Maturity

Settlement date
Maturity date
Coupon rate
Price
Redemption
Frequency

Date of purchase

Market-vaule-weighted inde
100
2 SEMI ANNUAL

Current yeild (Present return) Coupon rate/Price (Asked)

After tax return=HPY(1-tax)
EPS=P/(P/E)

Price-weighted Index
To find divisor of the stocks
In case of a stock split

Equally-weighted index
Call option
Put option

rice-weighted Index
o find divisor of the stocks
n case of a stock split

Average price of the stocks (t1)/Average price of the stocks (t2)-1

Market-vaule-weighted index

Sum product of stocks( Price*o/s shares)(t1)/Sum product of stocks( Price*o/s sh

qually-weighted index

all option

(Sum of the stock's price/sum of the stock's price)/n (no of stocks)

[price of stock a (t1)/price of stock a (t2)+price of stock b (t1)/price of stock b (t2

cks (t2)-1
of stocks)

ct of stocks( Price*o/s shares) (t2)-1

b (t1)/price of stock b (t2)]/n (no.of stocks)-1

Margin
Total price of the stock (Value)-Amount borrowed
% Margin Total price of the stock (Value)/Margin
% Margin Equity in account (the amount you pay)/Value of stock

NAV
Price-costs+dividends/Price
Turnover raShares changed *price/total no of shares*Price
If the funds sell for (x)
They say NAV

U = E(r) 0.5A^2
e(r )
A
U
sigma

expected rate of return

risk aversion
Utility level( risk free rate rf)
Std dev

A must be less than ans for the risky portfolio to be preferred to bills.
tbill
rindex

Rf
rm

ERP
y*e(r )+(1-y)*rf
Expected return of the portfolio
Y=portfolio

E(rC) = rf + y [E(rP) rf] = 8 + y (18 8)

E(rc)
rf
y
E (rp)
1-y

Clients expected rate of return

t-bill rate
proportion to invest in risky portfolio
expected rate of return of portfolio
proportion to invest in non-risky portfolio
Calculate the reward to risk ratio
E-SD/rf
E(rp)-SD(sd*y)/RF

E(rP ) r f
A

2
P

0.18 0.08
0.10

0.3644
2
0.2744
3.5 0.28

Sharpe ratio
E(RP)-sd (rp)/rf
CML

Capital Market line

E ( rP ) rf

E ( rM ) rf

P 0.05 0.35 0.10 0.085 8.5%

Cov ( rS , rB ) S B

2
The weight of minimum-variance portfolio is computed as follows: B Cov( rS ,rB )
S2 B2 2Cov( rS ,rB )

The minimum variance portfolio mean and standard deviation are:

2 =2
2
2
1/ 2
Min
[w
S S w B B 2 wS w B Cov ( rS , rB )]

Covariance matrix

Bonds
Stocks

Bonds
225
45

Stocks
45
900

45 =

Cov ( rS , r
225
900

 Cov( rS ,rB )
225 45

0.1739
2
900 225 ( 2 45)
B 2Cov( rS ,rB )

2
B

Cov ( rS , rB ) S B
square of standard deviation of bond
square of standard deviation of stock

stock
bond

1-stock

Ri2

i2 2M

i2

n2

Variance

2
n 2 3n
2

Estimates of Covariance

Total estimates

rA rf = + (rM rf)

SCL

2
A

wA A + wB B + wf
P =
Beta of Portfolio
Risk-free Rate SD
Risk-free Rate

2A 2M
0.7 2 20 2

980
0.20
R A2

Standard deviation of each stock

Standard deviation (Firm specific)
Standard deviation of market

The expected rate of return on a portfolio

expected re

A2 M2 0.702 202 196

2
B

1.2 2 20 2

4,800
0.12
R2

Cov(rA, rM ) A M 0.201/ 2 31.30 20 280

Cov(rB , rM ) B M 0.121/ 2 69.28 20 480

2 (e P ) 2P 2P 2M 1282.08 (0.90 2 400) 958.08

cov(a,b)=betaA*betaB*sigmaM^2
i = ri [rf + i (rM rf )]

B2 M2 1.202 202 576

The beta of a portfolio is simi

wA A + wB B + wf f
0

2
2 (ei )]1 / 2
viation of each stock i [ i2 M
viation (Firm specific)

viation of market

Market index SD

rate of return on a portfolio is the weighted average of the

expected returns of the individual securities:
E(rP ) = wA E(rA ) + wB E(rB ) + wf rf
Stock a
Stock B
T-bill (rf)

weight
Weight
weight

Expected return
Expected return
risk free rate

he beta of a portfolio is similarly a weighted average of the betas of the

individual securities:
P = wA A + wB B + wf f

The standard deviation of each stock can be derived from the following

Ri2

i2 2M

i2

2
A

2A 2M
0.7 2 20 2

980
0.20
R A2

The firm-specific risk of A (the residual variance) is the difference between

As total risk and its systematic risk:

A2 M2 0.702 202 196

(Total risk)

Firm specific risk

total risk - systamatic risk

CovariancBetween stocks

Cov (rA ,rB ) A B 2M 0.70 1.20 400 336

Correlation CoefficiBetween stocks

AB

Cov( rA , rB )
336

0.155
A B
31.30 69.28

CovariancBetween market and stock

R2

Cov ( rA, rM ) A M 0.201

Cov ( rB , rM ) B M 0.121
Firm specific variance

2 (e P ) 2P 2P 2M 1282.08 (0.90 2 400) 958.08

CovariancBetween market and portfolio

Cov(rP,rM ) = Cov(0.6rA + 0.4rB, rM ) = 0.6 Cov(rA, rM ) + 0.4 Cov(rB,rM )

 B + wf f

1.20 400 336

.28

0.155

r ) A M 0.201/ 2 31.30 20 280

A, M

r ) B M 0.121/ 2 69.28 20 480

B, M

90 2 400) 958.08

(rA, rM ) + 0.4 Cov(rB,rM )

E ( rP ) r f [ ( P ) E rM
] rf
.18 .06

[.14

.06]

.12
1.5

.08