Formulas / Maths Flashcards
How to calculate standard deviation
Return - Average ^2
Sum
Divide by N-1
Square Root
How to calculate covariance?
ReturnX - AverageX
ReturnY - AverageY
Multiply the products together
Sum
Divide by N-1
Calculate a stock’s beta
Given Covariance and SD
CovarianceSM / SDm^2
Covariance between share and market divided by variance (SD squared)
How to annualise a figure
Returns over multiple years
((V1/V0)^1/n) -1
How to annualise a figure
Compounds multiple times a year
((V1/V0)^n)-1
How to calculate VaR?
Annualised Return - Confidence Interval * Standard Deviation
How to calculate CVar?
Average of returns that exceed VaR
How do you calculate downside deviation?
For the Sortino Ratio
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.
What is the formula to calculate equity beta?
Given unlevered Beta of 1 company & debt to equity of another
Beta(1+(1-Tax Rate)(Debt/Equity)
What is the money weighted rate of return
Also known as the IRR
Measures the total return from start to finish taking into account cash flows
What is the time weighted rate of return
Ignores cashflows / timing of cashflows
Measures returns in sub-periods which end with a cash flow
What is time weighted rate of return useful for?
Comparing manager skill
What is money weighted rate of return useful for?
Understanding the actual investment reurn received.
What does Negative Skewness show?
Negative skewness shows that a distributions tail is stretched left. Implies a greater occurance of losses.
“left tail is longer”
Measures the “assymetry” of a distribution e.g. how lopsided it is.
What does a Kurtosis of >0 Show?
Leptokurtic Distribution
