WEEK 1 - Risk and Return Flashcards
What are Financial Assets?
Claims to wealth generated by real assets (Right to future cash flows)
How do you calculate FV?
FV = C x (1+R)n
Where C = Cash Flow
How do you calculate the PV of Future Cash Flow?
PV = C/ (1+R)n
How do you calculate the stream of Cash Flow?
PV = Sum of C x n/(1+R)n
What is/ How do you calculate the Perpuity?
Equal cash payouts that last forever
C/R
What is/ How do you calculate the Annuity?
A stream of N equal cash flows paid at regular intervals
C X 1/R { 1 - 1/(1+R)n}
How do you generally calculate Interest rates?
r = EAR (Effective Annual Rate)
Where EAR = (1+R)N - 1
What is APR?
Amount of simple interest in one year without compounding
How do you turn APR into EAR?
1 + EAR = (1+APR/K) to the power of K
How do you calculate EAR if K is large/continuous?
1 + EAR = e to the power of APR
How do you calculate FV and PV with APR if N is continuous?
FV = PV x e to the power of APR x T PV = FV x e to the power of -APR x T
How do you calculate real interest?
Nominal Return - Inflation
How do you calculate Nominal Interest?
r = π* + RR
APPROX USING FISHER EQUATION
Where
π* = Inflation
How do you calculate expected return/avg return
Sum of Probability x Return
SEE IN NOTES
How do you calculate St Dev and VAR?
VAR = Sum of Pr x (R - E(R)) to the power of 2
SD = Square Root VAR
What does VAR and St Dev display
VAR = How spread out distribution on return is
SD = Risk -> Volatility
What are realised historical returns useful in estimating?
The distribution of expected future returns
How do you calculate Realised Return (Rt+1)
Rt+1 = DIV t+1 + Pt+1 / Pt
Where:
DIV t+1 = Dividend
P t+1 = Capital Gain Rate/ Future Price
How do you calculate Sample Avg?
R bar = 1/T x Sum of Rt
How do you calculate Sample VAR?
VAR (R) = 1/T-1 x Sum of (Rt - R bar) to the power of 2
How do you calculate Covariance and Correlation Co-efficient?
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
