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Formula Sheet - Study Version. - Portfolio Management PDF

This formula sheet provides formulas for topics related to finance and investments including: 1) Calculating total return, arithmetic mean, geometric mean, and variance of returns. 2) Calculating expected return on individual securities and portfolios, variance, covariance, and correlation. 3) The capital market line equation and formulas for beta of a portfolio and individual securities. 4) Performance evaluation metrics like the Sharpe ratio, Treynor ratio, Jensen's alpha, and M2 measure.

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Anhthu Dang
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241 views

Formula Sheet - Study Version. - Portfolio Management PDF

This formula sheet provides formulas for topics related to finance and investments including: 1) Calculating total return, arithmetic mean, geometric mean, and variance of returns. 2) Calculating expected return on individual securities and portfolios, variance, covariance, and correlation. 3) The capital market line equation and formulas for beta of a portfolio and individual securities. 4) Performance evaluation metrics like the Sharpe ratio, Treynor ratio, Jensen's alpha, and M2 measure.

Uploaded by

Anhthu Dang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FIN3IPM Formula Sheet (Study Version)

(This formula sheet will not be provided with the mid-semester test or exam.)

Topic 1

CFt + ( PE − PB )
Total return TR =
PB
n

R t
Arithmetic mean RA = t =1

n
1/ n
P 
Geometric mean RG =  n  −1
 P0 

Fisher equation 1 + R = (1 + Rr )  (1 + Ir )

( X )
n 2
i −X
Variance of returns (ex-post) σ2 = i =1
n −1

Standard deviation σ = σ2

Topic 2
m
Expected return on a security E ( R ) =  Ri Pri
i =1

m
σ 2 =  Ri − E ( R )  Pri
2
Variance of returns (ex-ante)
i =1

E ( Rp ) =  w i E ( Ri )
n
Expected return on a portfolio
i =1

m
Covariance (ex-ante) σ AB =  RA,i − E ( RA ) RB,i − E ( RB ) Pri
i =1

σ AB
Correlation ρAB = σ AB = ρABσ AσB
σ Aσ B
n n n
Variance of an n-security portfolio σ p 2 =  w i 2σ i 2 +  w i w j σ ij
i =1 i =1 i =1

Variance of a 2-security portfolio σ p 2 = w12σ12 + w 22σ 22 + 2w1w 2 ρ12σ1σ 2

σ p 2 = w12σ12 + w 22σ 22 + w 3 2σ 3 2
Variance of a 3-security portfolio
+ 2w1σ1ρ12σ1σ 2 + 2w1σ 3 ρ13σ1σ 3 + 2w 2σ 3 ρ23σ 2σ 3
Topic 4

E ( RM ) − RF
CML Equation E ( Rp ) = RF + σp
σM
n
Beta of a portfolio βp =  w i βi
i =1

COVi ,M
Beta βi =
σ M2

Market model Ri = αi + βi RM + ei

CAPM E ( Ri ) = RF + βi E ( RM ) − RF 

Fama-French 3-factor model E ( Ri ) = RF + β1i E ( RM ) − RF  + β2i SMB + β3 i HML

Carhart 4-factor model E ( Ri ) = RF + β1i E ( RM ) − RF  + β2i SMB + β3 i HML + β4 iUMD

Topic 7
n PV (CFt )
Macaulay duration D= t
t =1 price

D
Modified duration D* =
1 + ytm

ΔP
Change in bond price  −D *  Δr
P
Topic 8

Rp − RF
Sharpe ratio SR =
σp

Rp − RF
Treynor ratio TR =
βp

Jensen’s alpha α = Rp − RF + βp ( RM − RF ) 

M2 M 2 = RF + σ M / σ p  ( Rp − RF )

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