Investments Formulas

Question 1

Sharpe Ratio

Answer 1

Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation.

Question 2

BETA

Answer 2

Risk as a measure of volatility relative to that of the market.

• Standard Deviation
• Diversified
• Systematic Risk

Question 3

Covariance

Answer 3

Measures how one security behaves as a direct result of another.

Question 4

Correlation

Answer 4

A measure of the relationship between two variables

Question 5

Intrinsic value formula

Answer 5

Question 6

Change in Bond Price

Answer 6

Question 7

Information Ratio

Answer 7

Portfolio returns above the returns of a benchmark to the volatility of those returns. Managers ability to generate excess returns to a benchmark.

High Ratio means a manager can achieve higher returns more efficiently.

Question 8

expected return on a portfolio

Answer 8

Question 9

Capital Asset Pricing Model (CAPM)

Answer 9

Used to determine a theoretically appropriate required rate of return of an asset

Question 10

Jenson’s alpha

Answer 10

Measures the performances of a portfolio manager to the market

Question 11

Treynor Ratio

Answer 11

A measure of risk-adjusted performance that relates a portfolio’s excess returns to the portfolio’s beta.

Question 12

Taxable Equivalent Yield (TEY)

Answer 12

Tax-Exempt Yield / (1 - Marginal Tax Rate)

Question 13

Dividend payout ratio

Answer 13

Dividends per share / Earnings per share

Question 14

Stock Yield

Answer 14

Dividend per share / Stock price per share

Question 15

Margin Call Formula Shortcut

Answer 15

2/3 x Purchase price

Then look for next highest number.

Question 16

Price Earnings Ratio

Answer 16

current market price / earnings per share

or

Earnings per share x P/E = Valuation

Question 17

Return on Equity (ROE)

Answer 17

EPS / Common Equity

Book Value / Shares outstanding = Common Equity

Question 18

Current Yield

Answer 18

Annual Coupon / Bond Price

Question 19

Property Intrinsic Value

Answer 19

Net Operating Income (NOI) / Cap Rate

Question 20

Intrinsic Value of a Call

Answer 20

Market Price - Exercise Price

Question 21

Intrinsic Value of a Put

Answer 21

Exercise Price - Market Price

Question 22

Coefficient of Variation

Answer 22

standard deviation/mean

Question 23

Weighted Portfolio Standard Deviation

Answer 23

(Weighting x Return) + (Weighting x Return)

Question 24

Average Cost Per Share Basis

Question 26

Correlation

Answer 26

A measure of the relationship between two variables

Question 27

Monetrary Policy

Answer 27

FED

1. Reserve requirement
2. Discount Rate
3. Open market operations
4. Repo or reverse repo
5. Margin

Question 29

Sam buys 100 shares of stock at $50/share. The stock has been paying a $0.25 quarterly dividend. The company earnings increase by 10%, and the company declares that the dividend will increase by 5% for the year. Sam sells the stock at $53. What is the total return if he holds the stock one year?

Answer 29

HPR = ($53 + $1.05 - $50) / $50 = 8.1%

The $0.25 dividend increases by 5% to $0.2625. The yearly dividend is $0.2625 x 4 = $1.05. You can calculate per share.

Question 30

A client uses a 5-year time horizon to buy stocks that are volatile. He has a 12% required rate of return. If the stock is first up 10% (1st year), up 30% (2nd year), no change (3rd year), down 15% (4th year), up 20% (5th year), did he make his required rate of return over the 5 years?

Answer 30

1.10 x 1.30 x 1 x 0.85 x 1.20 = 1.4586

Calculator Keystrokes: 1.4586 FV, 1 ± PV, 5N

Solve for I: 7.84%

Question 31

ROE

Answer 31

EPS / Book Value Per Share