Formula sheet

Portfolio risk and return

E (r ) = ∑ p( s)r ( s)
s

σ C = yσ P
E ( rP ) − rf
SP =
σP
=s2 ∑ p(s)[r (s) − E (r )]
s
2

Cov(rX , rY )= ∑ Pr(s)[r (s) − E (r )][r (s) − E (r )]

s
X X Y Y

Cov(rX , rY )
r (X, Y) =
σ XσY
Cov(ri, rM )
β = i
σ M2
) − rf β i[ E (rM ) − rf ]
E (ri=
rf + β [ E ( rM ) − rf ]
k=
E (rc ) = yE (rp ) + (1 − y )rf = rf + y[ E (rp ) − rf ]
E ( rp ) − rf
y* =
Aσ P2

U E (r ) − 0.5 Aσ 2
=

=
E (rP ) wXE (rX ) + wYE (rY )
σ P2 = wX2 σ X2 + wY2σ Y2 + 2w w Cov(r , r )
X Y X Y

Cov(rX , rY ) = r XYσ X σ Y

[ E (rX ) − rf ]σ Y2 − [ E (rY ) − rf ]Cov(rX , rY )

wX =
[ E (rX ) − rf ]σ Y2 + [ E (rY ) − rf ]σ X2 − [ E (rX ) − rf + E (rY ) − rf ]Cov(rX , rY )

σ Y2 − Cov(r , r )
wMin ( X ) =
X Y

σ X2 + σ Y2 − 2Cov(r , r ) X Y
 Stock and bond valuation
D1 D2 DH + PH
V=0 + + ... +
1 + k (1 + k ) 2
(1 + k ) H
D1
P0 =
k−g
D1 P1 − P 0 D1
E (r ) = Dividend yield + Capital gains yield =+ =+ g
P0 P0 P0
E1
P=0 + PVGO
k
=g ROE × b
T
Coupon Par value
=V0 ∑ (1 + r )
t =1
t
+
(1 + r )T
T
=
D ∑t × w
t =1
t

CFt /(1 + y )t
wt =
Bond price
D
D* =
1+ y
DP
= − D * Dy
P
T
1 CFt
=Convexity
P × (1 + y ) 2
∑ [ (1 + y)
t =1
t
(t 2 + t )]

DP 1
= − D * ×Dy + × Convexity × (Dy ) 2
P 2
DP / P
Effective duration = −
Dr
Asset duration= w × duration1 + (1 − w) × duration 2
1+ y
Durationperpetuity =
y
1+ y T
Duration= annuity −
y (1 + y )T − 1
1 + y (1 + y ) + T (c − y )
Durationcoupon=
bond −
y c[(1 + y )T − 1] + y
1+ y 1
Durationcoupon =
bond at par [1 − ]
y (1 + y )T
 The index model
σ i2 βi2σ M2 + σ (2ei )
=

Cov(ri, rj ) = β i β jσ M2
1 2
σ (2e ) = σ (e)
P
n

Options
P = C − S 0 + PV ( X ) + PV ( Dividends )
CU − CD
H=
uS 0 − dS 0
(1 + r ) − d
pupward ( risk neutral ) =
u−d
=C 0 S 0 N (d 1) − Xe − rT N (d 2)
ln( S 0 / X ) + (r + s 2 / 2)T
d1 =
s T
d=2 d 1 − s T

Term structure, futures and forwards

(1 + yn ) n
(1 + rn ) =
(1 + yn − 1) n −1
(1 + yn ) n
1 + fn =
(1 + yn − 1) n −1
F 0= S 0(1 + rf ) − D= S 0(1 + rf − d )
T 2) F (T 1)(1 + rf − d )(T 2 −T 1)
F (=

Performance measures and performance contribution

E ( rP ) − rf
Sharpe ' s measure =
s P

E ( rP ) − rf
Treynor ' s measure =
β P

a
Information ratio =
P

s (e ) P

Jensen ' s measure = a = E (r ) − [r + β [ E (r ) − r )

P P f P M f

n n n
rP=
− rB ∑ w r − ∑ w=
=i 1 =i 1 =i 1
r ∑ (w r
Pi Pi Bi Bi Pi Pi − wBirBi )
Discount factors and annuity tables
Cumulative normal distribution