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CFP > Equations > Flashcards

Equations Flashcards

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CFP® flashcards
1
Q

Conversion Price formula

A

PAR/shares

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2
Q

Conversion Value formula

A

Convertible Shares * Price of stock

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3
Q

Coefficient of Variation (CV) formula

A

standard deviation/mean expected avg return

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4
Q

Coefficient of Variation (CV) description

A
  • compares two assets with different average returns
  • higher CV = riskier
  • riskier = less likely investor will achieve average return

risk/return

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5
Q

Risk Adjusted Return description

A
  • opposite of CV

return/risk

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6
Q

Covariance (COV) description

A
  • measure 2 securities combined and their interactive risk
  • measure of related risk
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7
Q

Correlation Coefficient (p) description

A
  • ranges +1 to -1
  • risk is reduced when correlation < 1
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8
Q

Covariance (COV) formula

A

(Correlation)(Std Dev1)(Std Dev2)

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9
Q

Correlation Coefficient (p) formula

A
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10
Q

Coefficient of Determination (R-Squared) description

A
  • how much return is due to the market
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11
Q

Coefficient of Determination (R-Squared) formula

A

p^2

  • squaring correlation coefficient (p)
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12
Q

Capital Market Line formula

A
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13
Q

Capital Asset Pricing Model (CAPM) description

A
  • single factor model
  • calculates relationship of risk and return of individual security using BETA
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14
Q

Capital Asset Pricing Model (CAPM) formula

A
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15
Q

Portfolio Risk description

A
  • measured through determination of interactivity of the standard deviation and covariance of securities in portfolio
  • utilizes weight of both securities, deviations, and correlation coefficient
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16
Q

Portfolio Risk formula

A
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17
Q

Information Ratio (IR) formula

A
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18
Q

Information Ratio (IR) description

A
  • relative measure (compare to other IR)
  • rank high to low
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19
Q

Treynor Index (Tp) formula

A
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20
Q

Treynor Index (Tp) description

A
  • uses Beta as denominator
  • relative measure (compare to other Treynor)
  • measures reward achieved to level of systematic risk
  • standardizes portfolio returns for volatility
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21
Q

Sharpe Index (Sp) formula

A
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22
Q

Sharpe Index (Sp) description

A
  • if no r^2, always use Sharpe
  • uses standard deviation as denominator
  • relative measure (compare to other Sharpe)
  • measures risk premiums of portfolio relative to total amount of risk in portfolio
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23
Q

Investor seeking to invest in single fund should select fund with highest ___ ratio

A

Sharpe Ratio

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24
Q

Arbitrage Pricing Theory (APT) description

A
  • multifactor model
  • attempts to take advantage of pricing imbalances
  • inputs include factor like inflation, then specifics including expected returns and sensitivity to the factors
  • standard deviation and beta are NOT inputs
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25
Q

Arbitrage Pricing Theory (APT) formula

A
26
Q

Holding Period Return (HPR) description

A
  • not compounded rate of return
  • no consideration for time an investment was held
  • focused on margin returns or after tax rate of returns
27
Q

Holding Period Return (HPR) formula for cash flows

A

made / paid

28
Q

Holding Period Return (HPR) formula for rate of return

A
29
Q

Effective Annual Rate (EAR) description

A
  • calculates annual interest rate earned on investment when compounding occurs more than once a year
30
Q

Effective Annual Rate (EAR) formula

A
31
Q

Geometric Average description

A
  • time weighted compounded rate of return
32
Q

Geometric Average formula

A
33
Q

Geometric Average calculator

A
34
Q

Net Present Value (NPV) description

A
  • present value of cash flows minus initial cost
  • evaluate capital expenses that will result in differing cash flows over useful life/investment period
  • positive = make investment
35
Q

Net Present Value (NPV) formula

A
36
Q

Internal Rate of Return (IRR) formula

A
  • solve for IRR
37
Q

Internal Rate of Return (IRR) description

A
  • compounded rate of return
  • used with uneven cash flows
  • discount rate that sets NPV formula = 0
38
Q

Price-Earnings Ratio (P/E) description

A
  • number of dollars investor will pay for each dollar of company earnings
  • measure of relationship between stock price and earnings
  • stock price as multiple of company earnings
  • use when firm DOES NOT pay dividends
39
Q

Price-Earnings Ratio (P/E) formula

A

Stock Price / EPS = P/E

40
Q

Dividend Payout Ratio description

A
  • relationship between amount of earnings paid to shareholders in form of a dividend, relative to EPS
  • higher ratio = more mature company
  • high ratio may also indicate possibility of dividend being reduced
41
Q

Dividend Payout Ratio formula

A
42
Q

Return on Equity (ROE) description

A
  • measures overall profitability of company
  • direct relationship between ROE, earnings, and dividend growth
43
Q

Return on Equity (ROE) formula

A

Net Income/Equity

44
Q

Dividend Yield formula

A
45
Q

Dividend Yield description

A
  • annual dividend as percentage of stock price
46
Q

Tax Equivalent Yield (TEY) formula

A

think PRE tax

47
Q

After-Tax Yield formula

A
48
Q

Unbiased Expectations Theory (UET) formula

A
49
Q

Unbiased Expectations Theory (UET) description

A
  • PV LT interest rates imbedded expectations about future ST interest rates
  • LT rates are geometric avg of current & expected future ST interest rates
50
Q

Duration description

A
  • bond’s price sensitivity to changes in interest rates
  • higher duration = more price sensitive
  • moment in time investor is immunized from interest rate risk & reinvestment rate risk
  • weighted avg time until investor receives all coupon payments & principal
51
Q

(inverse/direct) relationship between coupon/YTM and duration

A

INverse relationship between coupon/YTM (INterest rates) and duration

52
Q

Higher duration = (more/less) volatile bond price

A

more volatile

53
Q

Longer maturity = (higher/lower) the duration

A

higher

54
Q

Higher the coupon = (higher/shorter) the duration

A

shorter

55
Q

Higher the YTM = (higher/shorter) the duration

A

shorter

56
Q

Estimating Bond Price Change Formula

A
57
Q

Convertible Bonds (CV) formula

A
58
Q

Convertible Bonds (CV) description

A
  • value of convertible bond
  • terms of stock into which it can be converted
59
Q

Property Valuation formula

A
60
Q

Net Operating Income (NOI) formula

A

CFP (9 decks)

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