FINANCIAL MARKETS
COMPILATION OF FORMULA
HISTORICAL RATES OF RETURN
Holding Period Return (HPR)= Ending value of investment / Beginning value of investment
Note:
The HPR value will always be zero or greater - that is, it can never be a negative value.
If HPR > 1.0, then there is an increase in wealth; a positive rate of return during the
period.
If HPR < 1.0, then there is a decline in wealth; a negative return during the period.
If HPR = 0, then it indicates that you lost all your money.
1
Annual Holding Period Return (Annual HPR) = ���� ; where n = years
Holding Period Yield (HPY) = HPR - 1
Annual Holding Period Yield (Annual HPY) = Annual HPR - 1
Compounded = [πHPR]�
Arithmetic Mean (AM) = HPY / n ; where HPY = the sum of annual holding period yields
1
Geometric Mean (GM) = [πHPR]� - 1
Supporting table:
Year Beginning Ending HPR HPY
value value (Ending value / Beginning value) (HPR - 1)
1 xxx xxx xxx xxx
2 xxx xxx xxx xxx
Portfolio of investments
Supporting table:
Investment # of Beg. Beg. MV Ending Ending MV HPR HPY Market Weighted
shares price (# of shares price (# of shares (Ending (HPR - 1) weight HPY
x Beg. Price) x Ending MV / Beg. (Ending MV of (HPY x
price) MV) investment / Market
Ending Weight)
MV)
A xxx xxx xxx xxx xxx xxx xxx xxx xxx
B xxx xxx xxx xxx xxx xxx xxx xxx xxx
C xxx xxx xxx xxx xxx xxx xxx xxx xxx
Total xxx xxx xxx
Supporting computation:
HPR = Ending market value / Beginning Market Value
HPY = HPR - 1 = Weighted HPY
EXPECTED RATES OF RETURN
�
Expected return / E(�� ) = �=1
(����������� �� ������) � (�������� ������)
Variance (�� ) = ��=1 (�����������) � (�������� ������ − �������� ������)2
Note:
The larger the variance for an expected rate of return, the greater the dispersion of
expected returns and the greater the uncertainty, or risk, of the investment.
If variance is equal to zero, then there is no variance of return because there is no
deviation from expectations and, therefore, no risk or uncertainty.
FINANCIAL MARKETS
COMPILATION OF FORMULA
Standard Deviation (SD) (�) = �
�=1
(�����������) � (�������� ������ − �������� ������)2
or Variance
Coefficient of Variation (CV) = Standard deviation of returns / Expected rate of return
Alternative computation using table:
Probability Possible Expected Possible Return - (�������� ������ Probability
Return Return �������� ������ − �������� ������)2 x
(Probability x (�������� ������ −
Possible �������� ������)�
Return)
Jan. xxx xxx xxx xxx xxx xxx
Feb. xxx xxx xxx xxx xxx xxx
March xxx xxx xxx xxx xxx xxx
xxx xxx
Above = Standard deviation + Expected return = xxx
Below = Standard deviation - Expected return = xxx
Return can be observed between xxx and xxx
Alternative computation using table:
Month ABC Market ������������ ��������������� Product (������������ )� (��������������� )�
(ABCR - Average (Market- Average Deviation
of ABCR) of Market (������������ x
��������������� )
1 xxx xxx xxx xxx xxx xxx xxx
2 xxx xxx xxx xxx xxx xxx xxx
3 xxx xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
(Average) (Average)
1
Covariance (COV) = Product Deviation x ; where n = the number of months/years
�−1
(������������)2
Variance (�� ) =
�−1
(��������������� )2
= �−1
(������������)2
Standard Deviation (SD) (�) = �−1
(��������������� )2
= �−1
���������� (���)
Correlation (Corr) =
����� � ��������
����������� (����) � �����
Beta (�� ) =
��������
FINANCIAL MARKETS
COMPILATION OF FORMULA
Supporting table:
Economic Situation
Good Bad
ABC Company (Business) % %
Market Portfolio % %
������� − ������
Beta (�� ) =
���������� − ���������
Beta Portfolio of Investments
Supporting table:
Investment Beta XYZ Corp. Proportions Total
(Investment / Total x Beta)
A xxx xxx xxx xxx
B xxx xxx xxx xxx
xxx Beta of the portfolio = xxx
Note:
The higher the beta, the more responsive it is to changes in market returns and are
therefore more risky.
CAPITAL ASSET PRICING MODEL
Portfolio Required Rate of Return (RRR / ��� ) = r + � (��� - r)
where:
r = risk free rate
� = Beta
��� = Market’s required rate of return / Market risk premium
OPERATING LEVERAGE
Supporting table:
Case 1 Case 2
Change in sales Base % increase/decrease % increase/decrease
Sales (in units) xxx xxx (Base - (+) Base x %) xxx (Base - (+) Base x %)
Sales revenue (Sales in units x SP per unit) xxx xxx xxx
Less: Variable costs (Sales in units x VC per unit) xxx xxx xxx
Contribution Margin xxx xxx xxx
Less: Fixed cost xxx xxx xxx
Earnings before interest and tax (EBIT) xxx xxx xxx
% △ �� ����
Degree of Operating Leverage (DOL) =
% △ �� �����
����1 − ���� ����2 − ����
% △ �� ���� =
����
x 100 , ����
x 100
� � (� − ��)
������ �� ��������� ���������� ���� ����� ����� ����� =
� � (� − ��) − ��
Where: Q = units
P = price per unit
VC = variable cost per unit
FC = fixed costs
FINANCIAL MARKETS
COMPILATION OF FORMULA
% △ in Profit = % △ in Sales x Degree of Operating Leverage (DOL)
FINANCIAL LEVERAGE
Supporting table:
Case 1 Case 2
Change in EBIT Base % increase/decrease % increase/decrease
EBIT xxx xxx (Base - (+) Base x %) xxx (Base - (+) Base x %)
Less: Interest (Amount x NI%) xxx xxx xxx
Net profit before taxes xxx xxx xxx
Less: Tax xxx xxx xxx
Net profit after taxes xxx xxx xxx
Less: Preferred dividend (# of preferred shares x
annual dividend per share) xxx xxx xxx
Earnings available for common xxx xxx xxx
Divided by: # of common stock outstanding xxx xxx xxx
Earnings per share (EPS) xxx xxx xxx
% △ �� ���
Degree of Financial Leverage (DFL) =
% △ �� ����
����1 − ���� ����2 − ����
% △ �� EPS = x 100 , x 100
���� ����
����
������ �� ��������� ���������� ���� ����� ���� = 1
���� − � − (�� � )
1−�
Where: I = interest
PD = preferred stock dividend
T = tax rate
TOTAL LEVERAGE
Supporting table:
Case 1 Case 2
Change in sales Base % increase/decrease % increase/decrease
Sales (in units) xxx xxx (Base - (+) Base x %) xxx (Base - (+) Base x %)
Sales revenue (Sales in units x SP per unit) xxx xxx xxx
Less: Variable costs (Sales in units x VC per unit) xxx xxx xxx
Contribution Margin xxx xxx xxx
Less: Fixed cost xxx xxx xxx
Earnings before interest and tax (EBIT) xxx xxx xxx
Less: Interest (Amount x NI%) xxx xxx xxx
Net profit before taxes xxx xxx xxx
Less: Tax xxx xxx xxx
Net profit after taxes xxx xxx xxx
Less: Preferred dividend (# of preferred shares x
annual dividend per share) xxx xxx xxx
Earnings available for common xxx xxx xxx
Divided by: # of common stock outstanding xxx xxx xxx
Earnings per share (EPS) xxx xxx xxx
% △ �� ���
Degree of Total Leverage (DTL) =
% △ �� �����
FINANCIAL MARKETS
COMPILATION OF FORMULA
� � (� − ��)
������ �� ����� ���������� ���� ����� ����� ����� = 1
� � (� − ��) − �� − � − (�� � )
1−�
Where: Q = units
P = price per unit
VC = variable cost per unit
FC = fixed costs
I = interest
PD = preferred stock dividend
T = tax rate
��� = Degree of Operating Leverage (DOL) x Degree of Financial Leverage (DFL)
FINANCIAL LEVERAGE AND BETA
������� ����
Unlevered Beta (������ ) = ����
[ 1 + (1 − ��� ����) � ( )]
������
������
������ = (������� )
���� + ������
����
Levered Beta (������� ) = Unlevered Beta x [ 1 + (1 − ��� ����) � ( ������ ) ]
Debt = Current term debt + Non current term debt
����
������� = ������ (1 + )
������
Note: As long as it stayed in the same industry, its asset beta would remain the same. The effect of
leverage then, is to increase the equity beta.
DERIVATIVES (OPTION)
Payoff = Spot Price - Strike Price
Net Profit (Call Option) = Spot Price - Strike Price - Option Premium
Net Profit (Put Option) = Strike Price - Spot Price - Option Premium
Call Option Put Option
Spot price > Strike Price ITM OTM
Spot price < Strike Price OTM ITM
Spot price = Strike price ATM ATM
Note: ITM (In the money) = Exercise
OTM (Out the money) = Do not exercise
ATM (At the money) = Neither profit not loss
FINANCIAL MARKETS
COMPILATION OF FORMULA
INVESTMENT MODELS
Black-Scholes Option Pricing Model
� �2
�� ( � ) + [��� + 2 ]�
�� =
� �
�� = �2 − � �
C = SN(�1 ) − ��−���� �(�2 )
Current strike price = Strike Price(K) + C
Put Option = C - S + K�−����