Formula Sheet

FV n
C Ft
PV PV =
(1 r ) t t=1 ( 1+ r )t
Single cash flow: Present value of multiple cash flows:

1 R APR m
1r 1i 1 m 1
Fisher equation: = , Effective annual rate: EAR =
P
( 1+D 1P0 ) P1 + D1
= 1
Holding period return P0 P0 ;
HPR=

1 /T
Annualized HPR ( 1+ HPR ) 1 ; Annualized volatility Annual = Monthly 12

Expected return and return variance: E ( r )= p1 r 1+ p 2 r 2 + p3 r 3 ; p1 + p2 + p3=1

2 2 2
2 ( r )= p1 ( r 1E ( r ) ) + p 2 ( r 2 E ( r ) ) + p 3 ( r 3E ( r ) )

Covariance of returns:
Cov ( r A , r B )= p1 ( r A ,1E ( r A ) )( r B , 1E ( r B ) ) + p2 ( r A ,2E ( r A ) )( r B , 2E ( r B ) )

Cov rA ,rB E ( rp ) r f
Sharpe
Corr rA ,rB A, B A B P
Correlation of returns: = = Sharpe ratio:
1 /3
Geometric average of returns: r G =[ ( 1+r 1 ) ( 1+r 2 ) ( 1+r 3 ) ] 1

E ( r P )=w1 E ( r 1) + w2 E ( r 2 ) ; w1 + w2=1
Expected return for a portfolio P:

P2 2
w1 1
2 2
w2 2
2
2w1 w2 Cov r1 ,r2
Variance of two asset portfolio P: = + + ;
For a portfolio of risk-free and risky asset (A):

E P ( r ) (1 w A ) rrf w A E ( rA ), P ( r ) w A A ( r )
 E ( r p )r f
CAL: E ( r )=r f + ( r ) ; E(r ) as function of volatility ( r ) , P tangent
P

portfolio
U E P ( r ) 0.5 A P
2
A
Utility Function: , - risk-aversion

E (r ) r f
wrisky
A 2
Share of wealth invested in risky asset: