Key Formulas

Present value of a cash flow stream

-
𝐶'
𝑃𝑉# = %
(1 + 𝑟 )'
'./

Future value of a cash flow P0 at date t

𝐹𝑉 = 𝑃𝑉# × (1 + 𝑟)'

Present value of a perpetuity starting in date 1

𝐶/
𝑃𝑉# =
𝑟
Present value of an annuity starting in date 1

𝐶/ 1
𝑃𝑉# = × 21 − 4
𝑟 (1 + 𝑟 )-

Present value of a constantly growing perpetuity starting in date 1

𝐶/
𝑃𝑉# =
𝑟−𝑔

Present value of a growing annuity starting in date 1

𝐶/ 1+𝑔 -
𝑃𝑉# = × 61 − 7 8 9
𝑟−𝑔 1+𝑟

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Measures of risk for individual assets

Variance:
C

𝑉𝑎𝑟 (𝑅< ) = 𝜎<? = 𝐸 (𝑅< − 𝑅A)? = % 𝑝< × (𝑅< − 𝑅A )?

<./

Standard deviation (volatility):

𝑆𝐷 (𝑅< ) = 𝜎< = F𝜎<?

Covariance:

𝐶𝑜𝑣I𝑅< , 𝑅K L = 𝜎<K = 𝐸[(𝑅< − 𝑅A< ) × I𝑅K − 𝑅AK L]

Correlation:
𝜎<K
𝐶𝑜𝑟𝑟I𝑅< , 𝑅K L = 𝜌<K =
𝜎< × 𝜎K

Portfolio analysis

Expected return of a portfolio p consisting of N assets where wi is the weight of i-th

asset in the portfolio:
C

𝐸I𝑅P L = % 𝑤< × 𝐸(𝑅< )

<./

Variance of the portfolio p:

C C C C

𝜎P? = % % 𝑤< 𝑤K 𝜎<K = % 𝑤<? 𝜎<? + % 𝑤< 𝑤K 𝜎<K

<./ K./ <./ <./
K./
<RK

𝐶𝑜𝑣(𝑅< , 𝑅T )
𝛽< =
𝑉𝑎𝑟(𝑅T )

Capital Asset Pricing Model

𝐸 (𝑅< ) = 𝑟U + 𝛽< × (𝐸 (𝑅T ) − 𝑟U )

Weighted average cost of capital

𝐸 𝐷
𝑅VWXX = × 𝑅Y + × 𝑅Z × (1 − 𝑇X )
𝐸+𝐷 𝐸+𝐷

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