WEEK 1 - Risk and Return

Question 1

What are Financial Assets?

Answer 1

Claims to wealth generated by real assets (Right to future cash flows)

Question 2

How do you calculate FV?

Answer 2

FV = C x (1+R)n

Where C = Cash Flow

Question 3

How do you calculate the PV of Future Cash Flow?

Answer 3

PV = C/ (1+R)n

Question 4

How do you calculate the stream of Cash Flow?

Answer 4

PV = Sum of C x n/(1+R)n

Question 5

What is/ How do you calculate the Perpuity?

Answer 5

Equal cash payouts that last forever

C/R

Question 6

What is/ How do you calculate the Annuity?

Answer 6

A stream of N equal cash flows paid at regular intervals

C X 1/R { 1 - 1/(1+R)n}

Question 7

How do you generally calculate Interest rates?

Answer 7

r = EAR (Effective Annual Rate)

Where EAR = (1+R)N - 1

Question 8

What is APR?

Answer 8

Amount of simple interest in one year without compounding

Question 9

How do you turn APR into EAR?

Answer 9

1 + EAR = (1+APR/K) to the power of K

Question 10

How do you calculate EAR if K is large/continuous?

Answer 10

1 + EAR = e to the power of APR

Question 11

How do you calculate FV and PV with APR if N is continuous?

Answer 11

FV = PV x e to the power of APR x T
PV = FV x e to the power of -APR x T

Question 12

How do you calculate real interest?

Answer 12

Nominal Return - Inflation

Question 13

How do you calculate Nominal Interest?

Answer 13

r = π* + RR

APPROX USING FISHER EQUATION

Where
π* = Inflation

Question 14

How do you calculate expected return/avg return

Answer 14

Sum of Probability x Return

SEE IN NOTES

Question 15

How do you calculate St Dev and VAR?

Answer 15

VAR = Sum of Pr x (R - E(R)) to the power of 2

SD = Square Root VAR

Question 16

What does VAR and St Dev display

Answer 16

VAR = How spread out distribution on return is

SD = Risk -> Volatility

Question 17

What are realised historical returns useful in estimating?

Answer 17

The distribution of expected future returns

Question 18

How do you calculate Realised Return (Rt+1)

Answer 18

Rt+1 = DIV t+1 + Pt+1 / Pt

Where:
DIV t+1 = Dividend
P t+1 = Capital Gain Rate/ Future Price

Question 19

How do you calculate Sample Avg?

Answer 19

R bar = 1/T x Sum of Rt

Question 20

How do you calculate Sample VAR?

Answer 20

VAR (R) = 1/T-1 x Sum of (Rt - R bar) to the power of 2

Question 21

How do you calculate Covariance and Correlation Co-efficient?

Answer 21

Ri and Rj are Securities i and j

μ = Expected Return

COV (Ri,Rj) = σij
σij = E { (ri - μi) x (rj - μj)}

Correlation Coefficient:
Pij = σij / σi σj