FORMULAS Flashcards
(12 cards)
What is Compounding?
What is the formula for Compounding?
Earning interest on interest
What is Present Value?
What’s another name for Present Value?
What is the PV formula?
The amount of money that needs to be invested today to achieve a desired amount by a designated future date.
Discounting
How do you calculate Total Return?
Original Investment
What is Standard Deviation?
How does it differ from Beta?
What do Higher or Lower Standard Deviations mean regarding a financial analysis?
The volatility of an expected return to its actual return.
Beta measures volatility as compared to a benchmark (i.e. S&P 500 Index) whereas Standard Deviation measures volatility of an investment to its own past performance.
The higher a Standard Deviation, the LESS reliable the analysis. The lower the Standard Deviation, the MORE reliable the analysis.
What is Expected Return?
How do you calculate it?
An investment’s projected return based on different scenarios (i.e. Bull, Bear, or Neutral Market).
By multiplying the asset’s projected return by its likelihood of occurrence and then adding all resulting weighted values. For example:
Bull 15% X 40% = 6%
Bear -10% X 30% = -3%
Neutral 7% X 30% = 2.1%
—————————————————————
Overall Total Expected Return = 5.1%
What is Overall Return on a diversified portfolio?
How can you calculate it?
It is the return of different asset classes weighted per their percentage makeup of the whole portfolio.
By multiplying each asset’s percentage makeup of the total portfolio by its return. Then adding all resulting weighted values. For example:
Equities 30% of Portfolio X 10% Return = .03
Bonds 40% of Portfolio X 25% Return = .1
—————————————————————
Overall Total Expected Return = .13 = 13%
What is the Sharpe Ratio?
How is it calculated?
What is Risk Adjusted Return?
What does a high Sharpe Ratio mean?
It compares the return on an investment to the risk taken.
Standard Deviation
The Portfolio Return - Risk Free Return
- again, the Risk Free Return is that of the 3-mont T-Bill
The better the portfolio was managed or the Safer the investment was.
What is the Rule of 72?
How is it calculated?
Used to tell how long an investor needs to double their money at a particular rate of return.
72 / Rate of Return = Years to Double
*72 / Years to Double = Rate of Return
How do you calculate Payments in Perpetuity?
What if the desired payment is multiple times a year (i.e. monthly or quarterly)?
Lump Sum = Periodic Pmt / Return %
Then divide the Return % by that frequency per year. For example, if quarterly is desired, then divide the Rate % by 4. PLEASE NOTE, the Periodic Payment must be in that denomination. So if $30,000 per year is desired, but in quarterly payments, then divide $30,000 by 4 also.
What is Current Yield on a bond?
What is its formula?
Means to calculate the return if a bond is purchased at current market price.
CY = Annual Interest / Current Mkt $
How can you calculate the needed stock price to achieve a client’s requested return based on annual payouts?
Price = Annual Payout / Required Return
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How do you calculate Expected Return?
Expected Return =
Risk Free Return +
[Beta X (Mkt Return - Risk Free Return)]
