ADMS 3531, Personal Investment Management

Midterm Exam Formula Sheet

Chapters 1 and 2: Risk, Return and Diversification

+1

(+1 )
=

(+1 + +1 )
=
(as a decimal; multiply by 100 to express as a percent)

1
=

=1

= (1 + 1 ) (1 + 2 ) (1 + ) 1
= (1 + ) 1

=
=1

1
2
= =
( )
1
2

=1

= 2 = ( (())2
=1

(from N historical returns)

(for future returns)

( , ) = (, ( ))(, ( ))

( ) =

=1

( )

( ) =
=1 ( )

2 = 2 2 + 2 2 + 2 ( )

Approximate probabilities for normal distribution:

68% within 1 standard deviation of the mean
95% within 2 standard deviations of the mean
99% within 3 standard deviations of the mean

Chapter 3 and 4: The Investment Process and Security Types

=
=

/
1

(margin call, long position)

+
( + 1)

Chapter 6: The Stock Market

=

(for a price weighted index)

Chapter 7: Valuation
(0) =

(1)
(2)
()
+
+

+
(1 + ) (1 + )2
(1 + )

(0)(1 + )
1 +
(0) =
1


1 +

(0) = (0)
(0) =

(0)(1 + )
( )

<

(margin call, short position)

(when dividends end at year T)

(when dividends end at year T, constant growth)

(when dividends end at year T, constant growth, special case)

(constant perpetual growth)

() =
(0) =

(0)(1 + 1 )
1 + 1
1 + 1 (0)(1 + 2)
1
+

1
1 +
1 +
2

(0) = (0) +

(0)(1 + 2 )
2

1 = 2 <

2 <

(two stage model)

(two stage model, special case)

 = + ( )
() =

() =

( ) =

() =

( ) =

( ) =
0 = 0 +
0 =

0 (1 + ) 0

1 0

1 1 = 1 0

(residual income model)

(another way to write the residual income model)

(clean surplus relationship)

= (1 + )

=
(1 + )

= (1 + )

Chapter 14: Options

Put call parity (zero dividend stock): = /(1 + )

Put call parity with dividends: = /(1 + )