Finance Cheat Sheet: Key Terms, Formulas & Examples
1. Holding Period Return (HPR)
Formula: HPR = (Ending Price - Starting Price + Dividend) / Starting Price
Example: Buy at 100, sell at 120, dividend 5 HPR = 25%
2. Effective Annual Rate (EAR)
Formula: EAR = (1 + r/n)^n - 1
Example: 12% annual rate compounded quarterly EAR = 12.55%
3. APR vs EAR
APR = Periodic Rate n
EAR includes compounding; APR does not.
4. Continuous Compounding
Formula: EAR = e^r - 1
Example: r = 8% EAR 8.33%
5. Fisher Equation (Nominal Rate)
Formula: Nominal = Real + Inflation
Example: Real = 3%, Inflation = 5% Nominal = 8%
6. Expected Return (E[R])
Formula: E(R) = p_i R_i
Example: 50% chance of 10%, 50% of 20% E(R) = 15%
7. Variance & Std Deviation
Variance = p(R - E(R))
Std Dev = Variance
Example: Two outcomes (10%, 20%) Std Dev = 5%
8. Risk Premium
Formula: E(R) - R_f
Example: E(R) = 12%, R_f = 6% Premium = 6%
9. Sharpe Ratio
Formula: (E(R) - R_f) / Std Dev
Example: E(R)=12%, R_f=6%, =10% Sharpe = 0.6
10. Arithmetic vs Geometric Mean
Arithmetic = (r1 + r2 + ... + rn) / n
Geometric = [(1 + r1)...(1 + rn)]^(1/n) - 1
Use geometric for compounding.
11. Portfolio Expected Return
Formula: E(R_P) = w1R1 + w2R2 + ...
Example: 40% in 10%, 60% in 20% Return = 16%
12. Portfolio Risk (2 Assets)
Formula: _P = (w11 + w22 + 2w1w212)
Use to measure total portfolio volatility.
13. Covariance & Correlation
Cov(Ri, Rj) = p (Ri - ERi)(Rj - ERj)
= Cov(Ri, Rj) / (i j)
14. CAPM
Formula: E(Ri) = Rf + i (Rm - Rf)
Example: Rf = 5%, = 1.2, Rm = 12% E(R) = 13.4%
15. Jensens Alpha
Formula: = Ri - [Rf + (Rm - Rf)]
Use: Measures excess performance above CAPM.
16. Treynor Ratio
Formula: (E(R) - Rf) /
Use: Return per unit of market risk.
17. Information Ratio
Formula: (Rp - Rb) / Tracking Error
Use: Manager skill over benchmark.
18. Single Index Model
Ri = i + i Rm + ei
Breaks return into market and firm-specific parts.
19. APT (Arbitrage Pricing Theory)
Ri = b1I1 + b2I2 + ... + bkIk + ei
Uses multiple macroeconomic factors.
