The following formula sheet will be provided during the Investment exams (both regular and resit).

Disclaimer: we have included a number of key formulas which you may be required to use during the
exams, but:
• We have not “labeled” the formulas, so you still need to find out which formula to use.
• The list is not exhaustive. For example, we have not included formulas for the t-statistic, the
present value of a security (stock or bond), 2nd stage Fama-MacBeth regression, the
decomposition of realized returns into its various components, the decomposition of long-term
bond yields according to the expectations and liquidity preference hypotheses, etc. These and
other formulas are so straightforward / common that we expect you to know them.
• We have tried to use notation in the formulas that is consistent with either the BKM textbook
and/or the lecture and workshop slides, but we do not guarantee 100% notational consistency.
We expect you to be flexible enough to be able to understand and use the appropriate formulas
nonetheless.
• In case you see any issues with the formula sheet (such as mistakes), please post a message on
the general discussion board on Canvas. Thank you!

𝑒𝑞𝑢𝑖𝑡𝑦
𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑀𝑉 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛
1
𝑈 = 𝐸[𝑅] − 𝐴𝜎 2
2
𝑆

𝐸[𝑅] = ∑ 𝜋 𝑠 𝑅 𝑠
𝑠=1

𝜎[𝑅] = √∑ 𝜋 𝑠 (𝑅 𝑠 − 𝐸[𝑅])2
𝑠=1

𝐶𝑜𝑣𝑖𝑗 = 𝜎𝑖𝑗 = ∑ 𝜋 𝑠 [(𝑅𝑖𝑡𝑠 − 𝐸[𝑅𝑖𝑡 ])(𝑅𝑗𝑡

𝑠
− 𝐸[𝑅𝑗𝑡 ])]
𝑠=1
𝑛

𝐸(𝑟𝑝 ) = ∑ 𝑤𝑖 𝐸(𝑟𝑖 )
𝑖=1

𝑛 𝑛

𝜎𝑝 = √∑ ∑ 𝑤𝑗 𝑤𝑖 𝜎𝑖𝑗
𝑗=1 𝑖=1

[𝐸(𝑅1 ) − 𝑟𝑓 ]
𝑤1∗ =
𝐴𝜎12
 𝐸(𝑅1 ) − 𝐸(𝑅2 ) + 𝐴{𝜎22 − 𝜎12 }
𝑤1∗ =
𝐴{𝜎12 + 𝜎22 − 2𝜎12 }
(𝐸(𝑅1 ) − 𝑟𝑓 )𝜎22 – (𝐸(𝑅2 ) − 𝑟𝑓 )𝜎12
𝑤1∗ =
(𝐸(𝑅1 ) − 𝑟𝑓 )𝜎22 + (𝐸(𝑅2 ) − 𝑟𝑓 ) 𝜎12 – {𝐸(𝑅1 ) − 𝑟𝑓 + 𝐸(𝑅2 ) − 𝑟𝑓 }𝜎12

𝐸(𝑟𝑃 ) − 𝑟𝑓
𝜎𝑝

𝑟𝑖𝑡 − 𝑟𝑓 = 𝛼𝑖 + 𝛽𝑖 (𝑟𝑀𝑡 − 𝑟𝑓 ) + ϵit

𝐶𝑜𝑣(𝑟𝑖 , 𝑟𝑀 )
𝛽𝑖 = 2
𝜎𝑀

𝜎𝑖2 = 𝛽𝑖2 𝜎𝑚
2
+ 𝜎𝜖2

𝐸(𝑟𝑖 ) − 𝑟𝑓 = βi [E(rM ) − 𝑟𝑓 ]

𝐸[𝑟𝑀 ] − 𝑟𝑓 = 𝐴̄𝜎𝑀
2

𝐸(𝑟𝑖 ) − 𝑟𝑓 = 𝛼𝑖 + ∑ 𝛽𝑖𝑘 𝑅𝑃𝑘

𝑘=1

𝑃𝑖,𝑡+1 = 𝜇 + 𝑃𝑖,𝑡 + 𝜀𝑖,𝑡+1

1 1
[1 − ]
𝑟 (1 + 𝑟)𝑇

𝑇 𝐶𝐹𝑡
(1 + 𝑦)𝑡
𝐷 = ∑𝑡 ∗
𝑃𝑟𝑖𝑐𝑒
𝑡=1

𝐶 𝐹
∑𝑇𝑡=1 [(𝑡 2 + 𝑡) • ] + [(𝑇 2 + 𝑇) • ]
(1 + 𝑦)𝑡 (1 + 𝑦)𝑇
𝐶=
𝐵(1 + 𝑦)2
𝐷
Δ𝑃 = − Δ𝑦 = −𝐷∗ Δ𝑦
1+𝑦
𝐷 1
Δ𝑃 = − Δ𝑦 + 𝐶(Δ𝑦)2
1+𝑦 2