Equations Flashcards
Conversion Price formula
PAR/shares
Conversion Value formula
Convertible Shares * Price of stock
Coefficient of Variation (CV) formula
standard deviation/mean expected avg return
Coefficient of Variation (CV) description
- compares two assets with different average returns
- higher CV = riskier
- riskier = less likely investor will achieve average return
risk/return
Risk Adjusted Return description
- opposite of CV
return/risk
Covariance (COV) description
- measure 2 securities combined and their interactive risk
- measure of related risk
Correlation Coefficient (p) description
- ranges +1 to -1
- risk is reduced when correlation < 1
Covariance (COV) formula
(Correlation)(Std Dev1)(Std Dev2)
Correlation Coefficient (p) formula
Coefficient of Determination (R-Squared) description
- how much return is due to the market
Coefficient of Determination (R-Squared) formula
p^2
- squaring correlation coefficient (p)
Capital Market Line formula
Capital Asset Pricing Model (CAPM) description
- single factor model
- calculates relationship of risk and return of individual security using BETA
Capital Asset Pricing Model (CAPM) formula
Portfolio Risk description
- measured through determination of interactivity of the standard deviation and covariance of securities in portfolio
- utilizes weight of both securities, deviations, and correlation coefficient
Portfolio Risk formula
Information Ratio (IR) formula
Information Ratio (IR) description
- relative measure (compare to other IR)
- rank high to low
Treynor Index (Tp) formula
Treynor Index (Tp) description
- uses Beta as denominator
- relative measure (compare to other Treynor)
- measures reward achieved to level of systematic risk
- standardizes portfolio returns for volatility
Sharpe Index (Sp) formula
Sharpe Index (Sp) description
- 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
Investor seeking to invest in single fund should select fund with highest ___ ratio
Sharpe Ratio
Arbitrage Pricing Theory (APT) description
- 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
Arbitrage Pricing Theory (APT) formula
Holding Period Return (HPR) description
- not compounded rate of return
- no consideration for time an investment was held
- focused on margin returns or after tax rate of returns
Holding Period Return (HPR) formula for cash flows
made / paid
Holding Period Return (HPR) formula for rate of return
Effective Annual Rate (EAR) description
- calculates annual interest rate earned on investment when compounding occurs more than once a year
Effective Annual Rate (EAR) formula
Geometric Average description
- time weighted compounded rate of return
Geometric Average formula
Geometric Average calculator
Net Present Value (NPV) description
- 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
Net Present Value (NPV) formula
Internal Rate of Return (IRR) formula
- solve for IRR
Internal Rate of Return (IRR) description
- compounded rate of return
- used with uneven cash flows
- discount rate that sets NPV formula = 0
Price-Earnings Ratio (P/E) description
- 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
Price-Earnings Ratio (P/E) formula
Stock Price / EPS = P/E
Dividend Payout Ratio description
- 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
Dividend Payout Ratio formula
Return on Equity (ROE) description
- measures overall profitability of company
- direct relationship between ROE, earnings, and dividend growth
Return on Equity (ROE) formula
Net Income/Equity
Dividend Yield formula
Dividend Yield description
- annual dividend as percentage of stock price
Tax Equivalent Yield (TEY) formula
think PRE tax
After-Tax Yield formula
Unbiased Expectations Theory (UET) formula
Unbiased Expectations Theory (UET) description
- PV LT interest rates imbedded expectations about future ST interest rates
- LT rates are geometric avg of current & expected future ST interest rates
Duration description
- 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
(inverse/direct) relationship between coupon/YTM and duration
INverse relationship between coupon/YTM (INterest rates) and duration
Higher duration = (more/less) volatile bond price
more volatile
Longer maturity = (higher/lower) the duration
higher
Higher the coupon = (higher/shorter) the duration
shorter
Higher the YTM = (higher/shorter) the duration
shorter
Estimating Bond Price Change Formula
Convertible Bonds (CV) formula
Convertible Bonds (CV) description
- value of convertible bond
- terms of stock into which it can be converted
Property Valuation formula
Net Operating Income (NOI) formula
