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ADMS 3531 Personal Investment Management

Midterm Exam Formula Sheet

Chapters 1 and 2: Risk Return and Diversification

 

=

+1

 

   = (+1 −  )   = (+1 + +1 − )   (as a decimal; multiply by 100 to express as a percent) 

 ℎ    = 1 ×

=1 

    = ⌊(1 + 1) × (1 + 2) × … ( 1 + )⌋1 − 1 

    = ( 1 + ℎ  ) − 1  = 

=1 

  =   −      = 2 = 1 − 1 × ( − )�   2

=1  (from N historical returns) 

= 2 =  ( − (())2

=1   (for future returns)   = √  (,) = (, − ())(, − ())

=1 

() = ()  

(

) =

 ∑   (

=1

)

2 = 22 + 22 + 2() Approximate probabilities for normal distribution:

68% within 1 standard deviation of the mean

95% within 2 standard deviations of the mean

99% within 3 standard deviations of the mean

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Chapter 3 and 4: The Investment Process and Security Types

=      

∗ =  /  ℎ1 −    (margin call, long position)

∗∗ =     +  (  + 1)   ×   ℎ   (margin call, short position)

Chapter 6: The Stock Market

  =       (for a price − weighted index) 

Chapter 7: Valuation

(0) = (1)(1 + ) +

(2)(1 + )2 + ⋯+

()(1 + )   (when dividends end at year T)

(0) = (0)(1 +

)

−   1 − 1 +

1 +

  ≠   (when dividends end at year T, constant growth)(0) =   × (0)  =   (when dividends end at year T, constant growth, special case)

(0) = (0)(1 + )( − )  

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  =   + (   ×    )   ℎ () = ℎℎ ℎ  

 

 

ℎ (

) =

 ℎ 

 

ℎ   ℎ () =  ℎ ℎ   

    ( ⁄ ) =        ( ⁄ ) =    

 

 

ℎ 

  

 (

⁄) =

 

 

0 = 0 + 0(1 + ) − 0 × −   (residual income model)

0 = 1 − 0 × −   (another way to write the residual income model)1 − 1 = 1 − 0  (clean surplus relationship)  = 

  ×  

=    ×   × ( 1 +   ℎ )  =     ×  

=     ×   × ( 1 +   ℎ )  =    ×  

= 

  ×   × ( 1 +   ℎ )

Chapter 14: Options

Put − call parity (zero− dividend stock ): − =  − /(1 + ) Put − call parity with dividends: − =  − −  /(1 + )