Copyright 2018 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise,
except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without
either the prior written permission of the Publisher, or authorization through payment of the
appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers,
MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests
to the Publisher for permission should be addressed to the Permissions Department, John Wiley &
Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online
at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
efforts in preparing this book, they make no representations or warranties with respect to the
accuracy or completeness of the contents of this book and specifically disclaim any implied
warranties of merchantability or fitness for a particular purpose. No warranty may be created or
extended by sales representatives or written sales materials. The advice and strategies contained
herein may not be suitable for your situation. You should consult with a professional where
appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other
commercial damages, including but not limited to special, incidental, consequential, or other
damages.

For general information on our other products and services or for technical support, please contact
our Customer Care Department within the United States at (800) 762-2974, outside the United
States at (317) 572-3993 or fax (317) 572-4002.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some
material included with standard print versions of this book may not be included in e-books or in
print-on-demand. If this book refers to media such as a CD or DVD that is not included in the
version you purchased, you may download this material at http://booksupport.wiley.com. For
more information about Wiley products, visit www.wiley.com.
Quantitative Methods
The Time Value of Money

The Time Value of Money

Effective Annual Rates

EAR = (1 + Periodic interest rate) N 1

The Future Value of a Single Cash Flow

FVN = PV (1 + r) N

The Present Value of a Single Cash Flow

FV
PV =
(1 + r) N

The Present and Future Value of an Ordinary Annuity

PVAnnuity: # periods N; % interest per period I/Y; amount FV or amount PMT PV

FVAnnuity: # periods N; % interest per period I/Y; amount FV or amount PMT FV

The Present and Future Value of an Annuity Due

PVAnnuity Due = PVOrdinary Annuity (1 + r)

FVAnnuity Due = FVOrdinary Annuity (1 + r)

Present Value of a Perpetuity

PMT
PVPerpetuity =
I/Y
Continuous Compounding and Future Values

FVN = PVe r N s

2 Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright.
 Discounted Cash Flow Applications

Discounted Cash Flow Applications

Net Present Value

N
CFt
NPV =
t=0 (1 + r )
t

where:
CFt = the expected net cash flow at time t
N = the investments projected life
r = the discount rate or appropriate cost of capital

Internal Rate of Return

n
CFt
NPV= 0 =
t=0 (1 + IRR )
t

Solved as an iterative process using calculator TVM functions.

Bank Discount Yield

D 360
rBD =
F t

where:
rBD = the annualized yield on a bank discount basis
D = the dollar discount (face value purchase price)
F = the face value of the bill
t = number of days remaining until maturity

Holding Period Yield

P1 P0 + D1 P1 + D1
HPY = = 1
P0 P0

where:
P0 = initial price of the investment.
P1 = price received from the instrument at maturity/sale.
D1 = interest or dividend received from the investment.

Money-weighted rate of return

rmw = IRRCF

Time-weighted rate of return

1
rtw = [ (1 + HPY1 )(1 + HPY2 )...(1 + HPYn ) ] n 1
1
n n
= (1 + HPYt ) 1
t =1

Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright. 3
Discounted Cash Flow Applications

Effective Annual Yield

EAY = (1 + HPY)365/ t 1

where:
HPY = holding period yield
t = numbers of days remaining till maturity

HPY = (1 + EAY) t /365 1

Money Market Yield

360 rBD
R MM =
360 (t rBD )

R MM = HPY (360/t)

Bond Equivalent Yield

BEY = [(1 + EAY)0.5 1] 2

4 Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright.
 Statistical Concepts

Statistical Concepts
Population Mean

N
xi
i =1
=
N

where:
xi = is the ith observation.

Sample Mean

n
xi
i =1
X=
n

Geometric Mean

1 + R G = T (1 + R1 ) (1 + R 2 ) (1 + R T ) OR G = n X1X 2 X 3 X n
with X i > 0 for i = 1, 2,, n.
1
T T
R G = (1 + R t ) 1
t =1

Harmonic Mean

N
Harmonic mean: X H = N with X i > 0 for i = 1,2,,N.
1
x
i =1 i

Percentiles

( n + 1) y
Ly =
100

where:
y = percentage point at which we are dividing the distribution
Ly = location (L) of the percentile (Py) in the data set sorted in ascending order

Range

Range = Maximum value Minimum value

Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright. 5
Statistical Concepts

Mean Absolute Deviation

n
Xi X
i =1
MAD =
n

where:
n = number of items in the data set
X = the arithmetic mean of the sample

Population Variance

N
(X i )2
i =1
2 =
N

where:
Xi = observation i
= population mean
N = size of the population

Population Standard Deviation

N
(X i )2
i =1
=
N

Sample Variance

n
(X i X)2
i =1
Sample variance = s2 =
n 1

where:
n = sample size.

Sample Standard Deviation

n
(X i X)2
i =1
s=
n 1

6 Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright.
 Statistical Concepts

Coefficient of Variation

s
Coefficient of variation =
X

where:
s = sample standard deviation
X = the sample mean.

Sharpe Ratio

rp rf
Sharpe ratio =
sp

where:
rp = mean portfolio return
rf = riskfree return
sp = standard deviation of portfolio returns

Sample skewness, also known as sample relative skewness, is calculated as:

n
(X i X)3
i =1
SK =
( n 1)( n 2 ) s3

As n becomes large, the expression reduces to the mean cubed deviation.

1
(X i X)3
i =1
SK
n s3

where:
s = sample standard deviation

Sample Kurtosis uses standard deviations to the fourth power. Sample excess kurtosis is
calculated as:

n

n(n + 1)
(X i X)4
3(n 1)2
KE = i =1
4

(n 1)(n 2)(n 3) s (n 2)(n 3)

Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright. 7
Statistical Concepts

As n becomes large the equation simplifies to:

1
(X i X)4
i=1
KE 3
n s4

where:
s = sample standard deviation

For a sample size greater than 100, a sample excess kurtosis of greater than 1.0 would be
considered unusually high. Most equity return series have been found to be leptokurtic.

8 Wiley 2018 All Rights Reserved. Any unauthorized copying or distribution will constitute an infringement of copyright.