Formula Revision Flashcards
What does Interest Yield indicate in bond investments?
Can be misleading as bonds may produce a capital gain or loss if held until redemption.
What does Redemption Yield take into account?
Both the income payments from a bond and the capital gain or loss from holding the bond until maturity.
When will there be a capital loss in relation to Redemption Yield and Interest Yield?
When redemption yield is less than the interest yield.
What does EPS stand for?
Earnings Per Share.
What does Dividend Yield measure?
The dividend as a percentage return on the current share price.
What does Dividend Cover indicate?
How many times the dividend could be paid out of the available current earnings.
What does a high P/E Ratio suggest?
Shares are in high demand.
What does P/B Ratio compare?
Share price to the net asset value (NAV).
What is the NAV in the context of a company?
The value of the tangible assets that are attributable to the ordinary shareholders.
What are some limitations of investment ratios?
- Different accounting policies can be used to calculate profits and value assets
- Management may change accounting policy of a company
- Ratios calculate historical data
- Periods with high inflation may be misleading.
What does Jensen’s Alpha represent?
The difference between the expected return of a security given its beta and the return it has actually produced.
What is Compound Interest?
Interest calculated on the initial principal and also on the accumulated interest of previous periods.
How is the annual payment of interest related to capital payment?
It can be used to work out how much needs to be invested now to provide an annual payment.
What is the formula for Time Weighted Return (TWR)?
TWR = Increase or decrease in the value of money invested on the first day that stays invested for the entire period.
What does the Sharpe Ratio measure?
The risk-adjusted return of an investment.
What does the Information Ratio assess?
The risk-adjusted performance of active portfolio managers.
What does ROCE stand for?
Return on Capital Employed.
What is a healthy Current Ratio?
Should be between 1.5 and 2.
What does the Liquidity Ratio measure?
Only assets that can be quickly turned into cash.
What does Debtor Turnover estimate?
The number of times a business collects its average accounts receivable balance during a period.
What is the focus of VCT investments?
Smaller unlisted UK companies and companies listed on AIM.
What is the maximum annual investment for EIS?
£1m or £2m for knowledge-intensive companies.
What does MPT stand for?
Modern Portfolio Theory.
What is a key assumption of the Capital Asset Pricing Model (CAPM)?
Investors are rational and risk-averse.
What does APT stand for?
Arbitrage Pricing Theory.
What does EMH indicate?
There are no undervalued or overvalued securities, making it impossible to outperform the market.
What are the three forms of EMH?
- Weak-form efficiency
- Semi-strong efficiency
- Strong-form efficiency.
How do you calculate the yield on a share?
Dividend / share price x 100
How do you calculate dividend cover?
EPS/dividend
How do you calculate PE ratio?
Share price / EPS
How do you calculate the Information Ratio?
Fund return - benchmark return / tracking error
How do you calculate EPS?
Profits / shares in issue
EPs measures profit available to ordinary shareholders and is one of the most important factors affecting share prices
What is the formula for compound interest of a capital sum
FV = PV (1+r)n
r is rate of interest
n is time period
