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SAPM Formulas

The document provides formulas and definitions for key concepts in finance and portfolio management including: 1) Formulas for calculating continuous return, variance, risk, expected return, systematic risk or beta, correlation, and models like the Capital Asset Pricing Model and Arbitrage Pricing Theory. 2) Formulas for calculating portfolio variance, expected return, risk using a two security portfolio theory. 3) Definitions of portfolio performance measures like the Sharpe Index, Treynor's Index, Jensen's Expected Return. 4) The formula for calculating Macaulay Duration for bonds.

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Ganesh Edala
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© Attribution Non-Commercial (BY-NC)
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Download as PDF, TXT or read online on Scribd
313 views

SAPM Formulas

The document provides formulas and definitions for key concepts in finance and portfolio management including: 1) Formulas for calculating continuous return, variance, risk, expected return, systematic risk or beta, correlation, and models like the Capital Asset Pricing Model and Arbitrage Pricing Theory. 2) Formulas for calculating portfolio variance, expected return, risk using a two security portfolio theory. 3) Definitions of portfolio performance measures like the Sharpe Index, Treynor's Index, Jensen's Expected Return. 4) The formula for calculating Macaulay Duration for bonds.

Uploaded by

Ganesh Edala
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
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Dr.

Y Rama Krishna, PhD


[email protected]

SAPM Formulas Continuous Return = ln(Current Price Realized Return or Return = (Current Price Previous Price) Previous Price) Previous Price ln = Natural Logarithm (Single period return, this equation should be (this formula should be used when we have used when data is short term) large data set or long term data) 2 Variance (2) = (Return Average Return) Risk ( ) = Square Root of Variance (2) n-1 E (R) = Probability * Realized Return Probability Variance (2) (variance when (E (R) = Expected return. E(R) is calculated probability values are given) = Probability * when we have data on probability of returns (Realized Return Expected Return)2 Systematic Risk or Beta () = Covxy Variancex Risk ( ) (when probability values are given) = Note: While calculating Beta, proxy for the Square Root of Probability Variance market or Market Index ex: Nifty, SENSEX, etc., should be treated as X, and Stock as Y. Covxy = (X-x) * (Y - y) N-1 x = Average or Mean of X, y = Average or Correlationxy = Covxy x * y Mean of Y APT = Rf + 1 (R1 - Rf ) + 2 (R2 - Rf ) + 2 (R2 - Rf ) + 3 (R3 - Rf ) + 4 (R4 - Rf ) + 5 (R5 - Rf ) + .. CAPM - E(R) = Rf + (Rm - Rf ) CAPM = Capital Asset Pricing Model APT = Arbitrage Price Theory Rf = Risk Free Rate (typically return on Govt. Rf = Risk Free Rate, 1 = Beta of Factor 1 Treasury Bills is considered as Risk Free Rate) APT considers many numbers of Macro and = Beta, Rm = Return on Market Micro economic factors that influence the stock price. Return and Beta for each factor need to be calculated. Two Security Portfolio Theory Portfolio Variance ( 2p )= W2x* 2x+ W2y* Portfolio E(R)= Wx*rx + Wy*ry 2y+2*wx*wy* * *Correlxy Portfolio Risk ( p )= Square Root of Portfolio Variance( 2p ) Portfolio Performance Measures Sharpe Index = Rp Rf p Treynors Index = = Rp Rf Jensens Expected Return = Rf + (Rm - Rf ) Bond Duration Macaulay Duration = t* PVCF Current Value CF = Cash Flows, i=interest rate, t=time
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