Formulas / Maths

Question 1

How to calculate standard deviation

Answer 1

Return - Average ^2
Sum
Divide by N-1
Square Root

Question 2

How to calculate covariance?

Answer 2

ReturnX - AverageX
ReturnY - AverageY
Multiply the products together
Sum
Divide by N-1

Question 3

Calculate a stock’s beta

Given Covariance and SD

Answer 3

CovarianceSM / SDm^2

Covariance between share and market divided by variance (SD squared)

Question 4

How to annualise a figure

Returns over multiple years

Answer 4

((V1/V0)^1/n) -1

Question 5

How to annualise a figure

Compounds multiple times a year

Answer 5

((V1/V0)^n)-1

Question 6

How to calculate VaR?

Answer 6

Annualised Return - Confidence Interval * Standard Deviation

Question 7

How to calculate CVar?

Answer 7

Average of returns that exceed VaR

Question 8

How do you calculate downside deviation?

For the Sortino Ratio

Answer 8

1) Set a minimum absolute return (e.g. 1, 0 or the Risk free rate)
2) Subtract MAR from all negative returns
3) Square each return
4) Sum the returns
5) Divide returns by (n-1) (this is all counts, not just negative returns)
6) square root
7) Annualise if need be.