AF4 Calculations Flashcards
(34 cards)
Standard Deviation - Calculation?
What does it tell you?
Return - mean (of returns)
= Result squared
Mean of result squared
Find the square root
Standard deviation helps determine market volatility or the spread of asset prices from their average price. When prices move wildly, standard deviation is high, meaning an investment will be risky. Low standard deviation means prices are calm, so investments come with low risk.
CAPM Calculation?
What does it tell you?
= Rf + B (Rm - Rf)
Describes the relationship between systematic risk and the expected return for assets.
Rests on two assumptions: (1) securities markets are efficient (that is, relevant information about the companies is quickly and universally distributed and absorbed); (2) these markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction from returns on their investments.
Holding Period Return Calculation?
What does it tell you?
D + V1 - V0
/
V0
Total return earned on an investment during the time that it has been held.
MWR Calculation?
What does it tell you?
D + V1 - V0 +/- C
/
V0 +/- C * n/12
Calculates the performance of an investment that accounts for the size and timing of deposits or withdrawals
TWR Calculation?
What does it tell you?
1+R = (1+R)(1+R2) = R is holding period return -
D + V1 - V0
/
V0
The TWR is a measure of the compound rate of growth in a portfolio. The TWRR measure is often used to compare the returns of investment managers because it eliminates the distorting effects on growth rates created by inflows and outflows of money.
Interest Yield Calculation?
What does it tell you?
Coupon
/
Clean price
The annual return that an investor receives from the bond investment
(GRY) Redemption Yield Calculation?
What does it tell you?
Interest Yield +/- gain or loss / yrs to maturity
/
Clean Price
- 100
The yield is the annual income and anticipated capital gain (or loss) from holding a bond until maturity. The yield represents the expected annual returns.
If less than Interest Yield then there will be a capital loss, and vice versa.
Sharpe Ratio Calculation?
What does it tell you?
Rp - Rf
/
Standard Deviation
The Sharpe ratio adjusts a portfolio’s past performance—or expected future performance—for the excess risk that was taken by the investor.
Assumes that returns are normally distributed.
Can be manipulated by portfolio managers seeking to boost their apparent risk-adjusted returns. This can be done by lengthening the measurement interval.
Alpha Calculation?
What does it tell you?
Rp - CAPM
Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations.
Tells investors whether an asset has consistently performed better or worse than its beta predicts.
Information Ratio Calculation?
What does it tell you?
Rp - Rb
/
Tracking Error
A measurement of portfolio returns beyond the returns of a benchmark, compared to the volatility of those returns.
Attempts to identify the consistency of the performance.
A low tracking error means the portfolio is beating the index consistently over time. A high tracking error means that the portfolio returns are more volatile over time and not as consistent in exceeding the benchmark.
EPS Calculation?
What does it tell you?
Net income
/
Shares in issue
How much money a company makes for each share of its stock.
P/E Calculation?
What does it tell you?
Price per share
/
EPS
The price-to-earnings (P/E) ratio relates a company’s share price to its earnings per share.
A high P/E ratio could mean that a company’s stock is overvalued, or else that investors are expecting high growth rates in the future.
Dividend Yield Calculation?
What does it tell you?
Dividend
/
Share Price
* 100
The percentage of a company’s share price that it pays out in dividends each year.
Dividend Cover Calculation?
What does it tell you?
EPS
/
DPS
Measures the number of times that a company can pay dividends to its shareholders.
P/B Calculation?
What does it tell you?
Share Price
/
NAV
Measures the market’s valuation of a company relative to its book value.
NAV Calculation?
What does it tell you?
Assets - Liabilities
/
Shares in issues
Net worth of a company per share
Behavioural Finance
What does it tell you?
Emotional & Psychological factors which affect investment decisions.
Loss aversion - People do not behave rationally; they are more distressed about a prospective loss than being happy about gains.
Regret - Less willing to sell investments at a loss.
Overconfidence - Tendency to overestimate own skills, more optimistic in rising markets, pessimistic in falling markets.
EMH
What does it tell you?
A hypothesis that states that share prices reflect all information and consistent alpha generation is impossible. It should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments.
Weak form - This type of EMH claims that all past prices of a stock are reflected in today’s stock price. Therefore, technical analysis cannot be used to predict and beat the market
Semi-Strong - This form of EMH implies all public (but not non-public) information is calculated into a stock’s current share price. Neither fundamental nor technical analysis can be used to achieve superior gains.
Strong form - All information in a market, whether public or private, is accounted for in a stock’s price.
MPT
What does it tell you?
A diversified portfolio of un correlated assets.
Investors are risk adverse and seek a maximum return for a given risk.
Efficient Frontier - plots the risk/reward of various portfolios and shows the expected return for a given risk.
Uses Standard Deviation and the correlation to optimise the portfolio.
A rational investor will only hold a portfolio on the efficient frontier.
Systematic risk cannot be removed, non systematic risk can be diversified out.
Sensitivity is then measured by Beta.
CAPM
Limitations:
Assumes SD is the correct measure of risk.
Uses historical data which may not be stable.
No charges or tax included.
Assumes portfolios are index funds/ETFs.
Doesn’t take C4L into account - Only looks at risk.
R.E.I.T
What does it tell you?
A company that owns, operates, or finances income-producing properties.
REITs generate a steady income stream for investors but offer little in the way of capital appreciation.
UK Listed REITs are CLOSED ENDED publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments).
REITs invest in most real estate property types, including apartment buildings, cell towers, data centres, hotels, medical facilities, offices, retail centres, and warehouses.
Derive at least 75% of profits and assets relate to rental income.
Borrowing of 125%
Pay a minimum of 90% of profits in 1 year.
PIDs are paid after deducting withholding tax at 20%. A basic rate taxpayer should have no further tax to pay. Higher rate taxpayers (40%) and additional rate taxpayers (45%) will have an additional tax liability of 20% and 25%. Nil rate taxpayers can reclaim the tax back.
M0 & M4
What does it tell you?
M0 Narrow Money: M0: Notes and coin in circulation plus banks’ reserve balance with Bank of England.
M4 Broad money: is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is a broader definition because it includes bank accounts and not just notes and coins in circulation
Capital vs Current account
What does it tell you?
Capital Account: Part of the balance of payments which records all movement of money in and out of the country for investment.
Current account: Consists of transactions in goods (oil, raw materials) and services (tourism, financial), import and export. A deficit means that more goods and services have been imported.
Sequencing Risk
What does it tell you?
Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return.
Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.
A diversified portfolio can protect your savings against sequence risk.
Reduce income/stop it, change frequency, invest in more stable income producing assets.
ESG
What does it tell you?
Negative screening: aiming to avoid investing in the ‘bad stuff’.
Positive screening: is a process that identifies companies that are actively making contributions to social or environmental change
ESG: focuses on companies that demonstrate great behaviours in terms of their environmental impact, their social responsibility and the quality of their internal governance practices.
(SRI): aims to generate positive social outcomes through investment. SRI is a blend of Ethical and ESG investing.
Impact Investing: focusses on the outcome (or impact) of an organisation’s work on the planet and its people.
Sustainable Investing: is a broad approach to ethical investing that encompasses an element of all of the above forms of ethical investing, including negative screening, positive screening, and a focus on the output and impact of companies’ operations on the environment.
