Formula Sheet Flashcards
What does the covariance formula determine?
How two investments move in relation to each other
Pos = moves in the same direction
Neg = moves in opposite direction
What does Beta measure?
Volatility in relation to the market
Beta of 1 equals the same volitilty as the market. Less than 1 means less volitile and more than 1 means more volitile
What does [greek] P mean?
Correlation coefficient
For standard deviation of a sample, what calculator keystrokes do you use?
Return [E+]
Return [E+]…
[SFT][x,y] =avg return
[SFT][Sx,Sy] = Std Dev
In CAPM, what part of the formula is represented by the market risk premium?
(Rm - Rf)
What does the CAPM formula calulate?
The expected performance of a given security
What does Alpha measure?
The performance of a portfolio manager relative to the market
How do you interpret Alpha?
If positive, the PM performed better than expected. Negative, worse than expected. Even, as expected.
What does the Treynor formula measure?
How do you interpret its data?
The risk-adjusted performance of a portfolio manager
Use when R2 is greater than .7. Otherwise, use Sharpe.
To be useful, the Treynor ratio is used on more than one investment to compare risk-adjusted returns. Pick the higher number.
What do you measure with information ratio?
How do you interpret results?
It is the return compared to the benchmark
Use on more than one investment portfolio. Highest number wins
What does the Sharpe ratio measure?
The risk-adjusted performance of a portfolio in terms of standard deviation.
Use when R2 is less than .7. Otherwise, use Treynor
