Formulas Wednesday, October27, 2021 6:41PM (chapter 10 1. Expected Return Expected (Mean) Return Expected Return = ELR]= Dy 7p R ‘Variance and Standard Deviation of the Return Distribution 2 Var(R) = EU R— ELRY?=D Pp X (R~ ELR))? SD(R)= | VartR Diggs + Py 4 Annual Reaised repsYa 4. Annual Realized returns ‘Average Annual Return of a Security a ‘ R FIR +R RIED R i Variance Estimate Using Realized Returns Ly Pt VarR)= YR, = AR), raid’ RY Standard Error of the Estimate of the Expected Return - 7 SDilndividual Risk) ‘SD (Average of Independent, Menta Risks) = Ce hs = TNamber of Obseratons 8. Betac Change return in stacks portoio/Change of return in market portato 3. Market Risk Premium = £ [Ry] ~ r; E [R] = Risk-Free Interest Rate + Risk Premium * 1) + BE [Ral ~1) Chapter 12 1. Pontoio Weights Value of investment i ~Toral value of portfolio 2. Expected cetum of prtlio Ream Rte totek, => 58 3. covariance Covariance between Returns R,and R; Cov( Ry, R) = BUR, E1R)VR, E1R,D) ‘When estimating the covariance from historical data, we use the formula’ Estimate of the Covariance from Historical Data oikR,R,) SD(R)SD(R,) R) 4 Correlation Cort RR Historical Average Return + (2 x Standard Error)5. Two secures porto: Var(R,) = VartR,) + 8VartR,) + 2%.%,ConRR) p= Vwi ge tm Gy +2 We OLA.s 6. Voltiity of age portfolio Var(By) = Cov(Ry sky) = Con(S,3Rkp) = E,xCOnR Ry) ~ which reduces to THCOMR.R,) = Ti xConRx,R,) LT v4 ConRn,) VariR, Variance of an Equally Weighted Portfolio of n Stocks 7. arth) = “ = + BM (ETR l= 1) ik prem for seer 2. ote DAR) x Corr(R Ry) _ Con Ry) SDE) VartBou) 4, Betaofa portfolio br = ~Tartfig) Var(Rje) COVR Rye.) DG) = Ysa chapter 12 1. Market vale of firm's outstanding shares MY, = (Number of Shares of Outstanding) « (Pie of per Shars) = N, x B 2. Weighted portfolio MaiketWalve of My, ~ Total Market Vale of All Secures 5D, MV, 3. Market ik premium = Div z ividend Vield + Expected Dividend Growth Rate 4. Estimation of bes fit of bets Linear regression FIR) = 15 + ACER] ~ 1) + a + a represents 2 risk-adjusted performance measure for the historical returns. 5. When abond defaults, new rte: ta= (1 - p)y + ply -L) = y- pl Yield to Maturity - Prob(default) X Expected Loss Rate Raving AAA _AA coc _ coe. Detlev ‘cigs «1% 02% 05% 22% 53% 122% 141 Tn Recesions 00% LOW 30% 3.0% 80% 160% 480% 79.0% Sue: "Carree Dei aR Rat 1920-201." Mah il Cr Py. bry 2012 DEBT BETAS by Asndaine 888 BB 6 ce. vg Bea <005 010 Ol7 «G26 ~~ By Maccy (BBB and shone) 1-5 ear 5-10 Yar 10-15 Yor _> 15 Year ‘vg. Do 006 «MA 6. Uniavered cost of capital Ee nh, - nt qr, “ E+D* E+D° 7. Uniavered Beta By ® Vet Debt = Debt - Excess Cash and short-term investments 1. Effective after-tax interest rate = r(1 - rc) + Weighted Average Cost of Capital (WACC) a) DB’ ED tof lte) 2 * Given a target leverage ratio, hati Byte chapter 16 - MM Proposition I states that E+D=U=A, * the total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered. D Re = Ry + FRu — Ro) 2 Remun Risk without fraton Se "adage ak ‘ducto leverage 3. Cost of capital of levered equity D ut Ew - »)E D ee re » Toe U" EE D+W E+DtW E+D+W” Chapter 23 a, = BIR] ~ 7, EIR] = 1, = BY x (ElRy] - 17) 3. Mukifactor mode! + BEER] — 17) + BER ea] 1) + + BER] = 7) = + YAM Ela) ~ 7) EIR] = ry + BUEDR | + BOER) +o + BEYER] y m+ re (ElRey)) - Fama-French-Carhart (FFC) Factor Specifications EIR] = 17 + BU (EDR yw] ~ 1) + BER v6] + BER aa) + Be ELRowe]