final review Flashcards
total dollar return formula
total dollar return = (end price - beg price) + total dividends in the period
percent return formula, capital gain formula, dividend yield formula
percent return = [(end price - beg price)/beg price] + (dividends/beg price) OR capital % + dividend %
capital return % = (end price - beg price) / beg price
dividend yield = dividends / beg price
steps when finding CAGR
step 1) find the % return (monthly)
step 2) do compounded return by 1+return (monthly)
step 3) use product function -1 for comp. return
step 4) convert into annual frequency (ex. months -> year)
step 5) use product function return and new year figure to find cagr –> (1+comp. return)^(1/year)-1
how do you find the annual dividend yield
(1+Dividend Yield)^(1/years)-1
For each stock how do you calculate the expected return, level of risk, and the annualized Sharpe ratio
Step 1] monthly mean return: average monthly return
Step 2] Std dev monthly = STDEV.S function
Step 3] monthly sharpe = mean - risk free rate / std. dev
Step 4] annualized sharpe = monthly share * sqrt(12)
Step 5] z,score = x - mean / std dev
Step 6] P(-0.05) = NORMDIST function
If you are given probabilities and weights - how do you calculate the expected return and standard deviation for the investment
step 1] turn return and probability into decimals
step 2] to find expected return do sumproduct function on the decimal forms of both variables
step 3] compute (x-mean)^2
step 4] compute dec.prob x (x-mean)^2
step 5] use sum function on probx(x-mean)2 to find the variance
step 6] to find standard deviation do variance^0.5
step 6] sharpe ratio = expected - risk free rate / std dev
what does a negative sharpe ratio mean?
a negative sharpe ratio indicates that the investment is below the risk free rate and therefore no investor would do that because they have no return
what do we use to measure risk
standard deviation
what impacts asset returns
1) new information
2 ) liquidity
standard deviation quantifies how often and how much investors recieve unexpected information
when do we use p(x) and 1-p(x) for probability returns
p(x) = return less or equal to
1-p(x) = return greater than
sharpe ratio
sharpe ratio = (expected - risk free)/std dev
Comparing the riskiness of different stocks: “what do we look at”
which security demonstrated greatest risk – largest standard deviation
which stock produced the best risk adjusted return – highest sharpe ratio
which stock has the greatest probability of a substantial negative monthly retirn - highest prob from x< -5%
which stock has the greatest porbability of a substantial positive monthly return – highest prob from x> 5%
which security demonstrated greatest risk – largest standard deviation
which stock produced the best risk adjusted return – highest sharpe ratio
which stock has the greatest probability of a substantial negative monthly retirn - highest prob from x< -5%
which stock has the greatest porbability of a substantial positive monthly return – highest prob from x> 5%
systematic risk vs idiosyncratic risk
systematic = market wide
idiosyncratic = firm specific and is diversifiable
how does adding unrelated assets to your portfolio decrease idiosyncratic risk
Allows us to control volatility as when there is fluctuations in the portfolio it is not majorly impacted as then some assets go down, some will go up essentially offsetting the volatility
what risk are investors rewarded for
investors are only rewarded for systematic risk that they bear since idiosyncratic risk is diversifiable
how do you know if a portfolio is underperforming or overperforming
step 1) find the beta of the portfolio: (correlation * portfolio B std deviation) / market port std dev
2) find the fair value and outperforming return
fair value = beta * (market portfolio return - asset c return) + asset c return
Outperform = portfolio B expected return - fair return
how do you find the beta of a portfolio
average all the individual asset betas
How is relatedness measured
Relatedness is measured using correlation, we use a correlation matrix to determine stock relatedness
how do you calculate the standard deviation of a portfolio
standard deviation = weight on market portfolio x standard deviation of market portfolio
what is a derivative
a derivative is a contract between two or more parties whose value is based on an agreed upon underlying financial asset
whats the difference between being in a long and short position
long = agreed buy in the future
short = agreed to sell in the future
what is the strike price
strike price is the price at which the contract both parties have agreed to transact
strike price = market price -> no value to either party
strike price < market price –> value for long (buyer) party
strike price > market price –> value for short (seller) party
what are some advantages of derivative contracts
1) enable hedging which stabilizes cash flows
2) allow investors to more easily realize short positions
3) Mitigate recall risk
4) Lower transaction costs compared to short sale contracts
5) highly leveraged
6) less visible - attractive if want to hide trades
what are futures/forwards
binding contract (obligation) to buy/sell an asset in the future at a price set today – settled monetarily not physically
calculation = strike price x (1+r)^time
r = opportunity cost
