Formulas 2

Question 1

Portfolio expected return formula?

Answer 1

𝐸(𝑅𝑝) = ∑(𝑤𝑖𝑅𝑖)

Question 2

Portfolio variance (2 assets)?

Answer 2

𝜎𝑝² = 𝑤𝐴²𝜎𝐴² + 𝑤𝐵²𝜎𝐵² + 2𝑤𝐴𝑤𝐵𝜎𝐴𝜎𝐵𝜌𝐴𝐵

Question 3

Sharpe Ratio formula, risk used, what it measures?

Answer 3

(𝑅𝑝 − 𝑅𝑓) / 𝜎𝑝. Total risk (σ). Excess return per unit total volatility.

Question 4

Treynor Ratio formula, risk used, what it measures?

Answer 4

(𝑅𝑝 − 𝑅𝑓) / β𝑝. Systematic risk (β). Excess return per unit market risk.

Question 5

Jensen’s Alpha formula, what it measures?

Answer 5

𝛼 = 𝑅𝑝 − [𝑅𝑓 + β𝑝(𝑅𝑚 − 𝑅𝑓)]. Measures manager skill vs CAPM.

Question 6

Coefficient of Variation formula, what it measures?

Answer 6

𝐶𝑉 = σ / 𝐸(𝑅). Risk per unit of expected return. Lower = better.

Question 7

Geometric mean return formula?

Answer 7

(∏(1 + 𝑅𝑡))¹/n − 1

Question 8

Holding Period Return formula?

Answer 8

𝐻𝑃𝑅 = (𝑃₁ − 𝑃₀) + 𝐷 / 𝑃₀

Question 9

CAPM formula, what it measures?

Answer 9

𝐸(𝑅) = 𝑅𝑓 + β (𝑅𝑚 − 𝑅𝑓). Required return for systematic risk.

Question 10

Beta formula, what it measures?

Answer 10

β = Cov(𝑅𝑖, 𝑅𝑚) / σ𝑚². Sensitivity to market risk.

Question 11

DDM (Gordon Growth) formula?

Answer 11

𝑃₀ = 𝐷₁ / (𝑟 − 𝑔)

Question 12

If given D₀, how do you find D₁?

Answer 12

𝐷₁ = 𝐷₀(1 + 𝑔)

Question 13

Rearranged DDM to solve for r?

Answer 13

𝑟 = (𝐷₁ / 𝑃₀) + 𝑔

Question 14

Rearranged DDM to solve for g?

Answer 14

𝑔 = 𝑟 − (𝐷₁ / 𝑃₀)

Question 15

P/E ratio formula?

Answer 15

P/E = Market price per share/earnings per share (EPS)

Question 16

Duration measures what?

Answer 16

Sensitivity of bond price to interest rates.

Question 17

After-tax return formula?

Answer 17

Step 1
ATRR= R × (1 - MTR)

Question 18

Real return formula?

Answer 18

RR = (1 + nom) / (1 + inf)

Question 19

Real after-tax return formula?

Answer 19

STEP 2 = (ATR/1+ inf) -1

Question 20

Capital gains reserve formula?

Answer 20

Max reserve = Proceeds − (Proceeds / 5) − ACB − Selling costs

Question 21

Current ratio?

Answer 21

Current assets ÷ Current liabilities.

Question 22

Liquidity ratio?

Answer 22

Cash & equivalents ÷ Monthly expenses.

Question 23

Debt-to-Asset ratio?

Answer 23

Total liabilities ÷ Total assets.

Question 24

Future Value formula?

Answer 24

FV=PV(1+r)^n

Question 25

Present Value formula?

Answer 25

PV=FV/(1+r)^n

Question 26

PV of an annuity?

Answer 26

PV=PMT×(1−(1+r)^−n)/r

Question 27

FV of an annuity?

Answer 27

FV=PMT×((1+r)^n−1)/r

Question 28

PV of a perpetuity?

Answer 28

PV=PMT/r

Question 29

PV of a growing perpetuity?

Answer 29

PV=PMT/(r−g)