EQUATION SHEET

Bank Discount Rate(DR), Bond Equivalent Yield, and Price

Par −Price 360 Par−Pr ice 365 365 DR

DR= × Yield= × =
Par n Pr ice n 360−n( DR)
DR×n
Price=Par 1− ( 360 )
Margin Trading
# of Price per Amount
Actual =Investor's equity =
( shares ) ×(
share ) −(
borrowed )
margin Market value of margined stock
( #shares
of
)×( Price
share
per
)
M arg in call Amount borrowed
=
price ( # of shares )×( 1−Ma int enance margin )
Short Selling
Actual Amount deposited
=
margin Cash from short sale

Call price on Amount deposited + Cash from short sale

=
a short position ( # of shares ) ×( 1+ Maintenance margin )
Mutual Funds
Market value of the fund - Fund's liabilities
NAV=
Outstanding shares
Ending NAV - Beginning NAV + Income distribution + Cap gains distribution
Re turn=
Beginning NAV

Offer price = NAV/(1-load)

Breakeven (%) = (Load$/NAV)

Interest Rates
Real rate 1+R Nominal
=r= −1 =R=(1+r )(1+i)−1
of return 1+i rate of return

R = Risk-free rate + Premium for risk

= [r + E(i)] + RP

NB: i is inflation
 Historic Returns

Holding period return [rf(T)] for zero-coupon bonds

r (T )=100
f
P(T )
−1

Effective Annual Rate (EAR)

1/T
EAR=[1+r f (T )] −1

Annual Percentage Rate (APR)

APR = [n*rf(T)], where n = 1/T

EAR and APR

(1 + EAR) = [1 + (APR/n)]n

(1 + EAR) = exp(rcc) = ercc

ln(1 + EAR) = rcc where rcc is the APR when rates are continuously compounded

Arithmetic average return (expected return)

n n
1
E( r )=∑ p s r s = ∑ r s
s=1 n s=1
Variance
2
1
σ 2= ∑
n
r
n−1 s=1 ( s
− E (r ) )
Terminal value

TV =(1+r 1 )(1+r 2 )(1+r 3 )(1+r 4 ). ..(1+r n )

Geometric return
1/n
g=TV −1= (1+r )(1+r )(1+r )(1+r ).. .(1+r ) 1/n−1
( )
1 2 3 4 n

excess return
Sharpe ratio=
std dev ( excessreturn)

Utility Function
1
U=E ( r )− 2
Aσ 2
Return and Risk Premiums
Holding period = Ending value - Beginning value + Income = P1−P 0 + D1
return Beginning value P0

n
E(r )=Pr 1 r 1 + Pr 2 r 2 +⋯+ Pr n r n =∑ Pr s r s
s=1
n
σ =Pr 1 [r 1 −E(r )] +Pr2 [r 2−E (r )] +⋯+Pr n [ r n −E(r )] = ∑ Pr s [r s−E (r )]2
2 2 2 2

s=1
2
σ =√ σ
n
Cov(r A , r B )=σ AB =∑ Pr i [ r Ai −E(r A )][ r Bi −E( r B )]
i=1
σ
ρ AB = AB
σAσB

Portfolio Risk and Return

N
E( r P )=w1 r 1 + w2 r 2 +⋯+w N r N =∑ wi r i
i=1
σ P=Pr P 1 [ r P 1 −E(r P )] +Pr P 2 [r P 2 −E(r P )]2 +⋯+Pr PN [r PN −E(r P )]2
2 2

N
¿ Pr Pi [r Pi −E(r P )]2
∑ (direct method )
i=1
n n n n
¿ ∑ ∑ wi w j [Cov(r i ,r j )]=∑ ∑ wi w j σ ij ( indirect method)
i=1 j=1 i=1 j=1

Variance of a two-asset portfolio:

σ 2P =w 2A σ 2A + w2B σ 2B + 2 w A w B σ AB

Variance of a three-asset portfolio:

2 2 2 2 2 2 2
σ P =w A σ A + wB σ B + wC σ C +2 w A w B σ AB + 2 w A wC σ AC + 2 wB w C σ BC

Weights for minimum variance for a two-asset portfolio

σ 2B −σ AB σ 2B −( ρ AB σ A σ B )
w A= 2 2
= 2 2
σ A + σ B −2σ AB σ A + σ B −2( ρ AB σ A σ B ) wB = 1.0 - wA

Index/Factor Models

Single index model:

Ri = i + iRm +i R = excess return

Multifactor model:
Ri = i + 1ƒ1 + 2 ƒ 2n ƒ n + i ƒ may include the market factor

Variance of stock returns

 σ 2i =β 2i σ 2M +σ 2 (e i )

R-squared (R2) of a regression of stock i’s returns on the market’s returns

β 2i σ 2M β 2i σ 2M
R2i = 2 2 R 2
i = 2 2
β i σ M +σ 2 ( e i ) or σ 2i (and R =ρ )

βi2 σ 2M
σ 2i = 2
 Ri

Covariance of returns of stocks A and B

Cov(r A , r B )=β A β B σ 2M

Information risk of stock i

IR=α i /σ i

Sharpe ratio of optimized risky portfolio

2 2 2 2 2
S P =S M + IR =S M +(α p / σ P )

Capital Asset Pricing Model

E( r i )=r f + RPi
¿ r f + β i×RP M
¿ r f + β i×[ E ( r M )−r f ]
Cov ( r i ,r M )
¿ rf +
{
σ 2M }
×[ E ( r M )−r f ]

Characteristic line: Ri,t = i + iRM,t + i,t Ri,t and RM,t = excess return

Portfolio beta: P = w11 + w22 + … + wNN

Arbitrage Pricing Theory

ri = E(ri) + 1F1 + 2F2nFn + i F is the unanticipated component of the factor

E(r i )=r f + β1 i×[ E (r 1 )−r f ]+β 2i ×[ E(r 2 )-r f ]+β 3i ×[ E(r 3 )-r f ]+.. .. One factor may be the market

Technical Analysis

volume .. declining /# declining

T rin=
volume .. advancing /# advancing

General Asset Valuation

n

Asset = C F1 + C F2 + … + C F n = C
^ ^ ^ ^ Ft
value (1 + k )1
(1 + k)2
( 1 + k )n ∑
t=1
¿
( 1 + k )t
¿
Bond Valuation
n

Bond = P = $ Coupon + .. . + $ Coupon + Par

value 0
( 1 + y )1 (1 + y )n ( 1 + y )n
=
∑ t=1
¿
C
(1 + y )t
+
Par
( 1 + y )n
¿

Bond Yield/Return
Coupon = $ Coupon = C ¿ Current =
$ Coupon C
= ¿
yield Face Par yield Price P0
n

P0 =
∑ t=1
¿
C
(1 + y )t
+
Par
( 1 + y )n
solving for y gives the YTM ¿

Par - P 0

y = YTM ≈
C+ ( n )
(2 x P0 ) + Par
[ 3 ]
Realized Compound Yield (RCY)
TFCF=(Investment )(1+RCY )n TFCF is total future cash flows; n is number of investment periods

General Stock Value ∞

d1 d2 d∞ dt
Stock =
value (1 + k )1
+
(1 + k )2
+…+
(1 + k )∞
= ∑ t=1
¿
(1 + k )t
¿

Constant Growth Model

d ( 1 + g) d1 E 1 (1−b) d
P0 = 0 = ¿ In general, Pt = t+1 ¿
k-g k - g k - ( b×ROE ) k- g

Present Value of Growth Opportunity

E1
P0 = + PVGO
k

Stock Return/Growth

d1
k= + g = ¿ Dividend + ¿ Capital g ≈ ROE x (Retention ratio )¿
P0 yield appreciation

Forward Rates

(1 + y n )n =(1 + y n−1 )n−1 (1 + f n ) where, y n is the YTM for an n -year zero−coupon bond
f n is the forward rate from t=n-1 to t=n
Bond Duration
CF2 CF n

DUR periods = DURn =

(1) x
[
CF 1

(1 + y)
1
] + (2) x
[ (1 + y )
2
] + .. . + (n ) x
[ n
(1 + y ) ] = ¿¿
CF1 CF2 CFn
[ (1 + y )
1 +
(1 + y )
2 + .. . +
(1 + y )
n
]
T
t
Dur periods=∑ t׿ w t ¿ w t =[ CF ¿ ¿ /(1+ y ) ] / Pr ice
t=1

NB: CFn = is the cash flow equivalent to the final coupon plus the par value of the bond.

Bond Price Elasticity

y1 - y0
%( ΔP / P)≈(-DUR )
Δy
[ ]
1+ y
=(-DUR )
1 + y0 [ ]
Δy
$( ΔP)≈(-DUR) [ ]
1+ y
×P

DUR portfolio =
∑ i=1
¿ W i x DUR i ¿

Correction for Convexity

Δy 1
%( ΔP/ P)≈(-DUR ) [ ] 1+ y
+ 2 (convexity )( Δy)2

Option valuation
At Expiration: Call Option CX = SX - X if SX > X; 0 otherwise
Put Option PX = X - SX if X > SX; 0 otherwise

Call price
X
C0 = S 0 N (d 1 ) -
[ ]
e
rF T
N(d 2 )

Put Price
X
P0 =
[ ]e
rF T
(1−N (d 2 ))−S 0 [1−N (d 1 )]

2
σS
(X) ( )
S0
ln + rF +
2
d1 = d 2 = d 1 - σ S √T
σS √ T
Put-Call Parity
X X
C0 + )T = S0 +P0 ≈C0 + r T ¿
(1 + r F ¿ eF

Futures Price
F0 = S 0 (1+r F )−D=S 0 (1+r F−d )