Investment analysis exam 2 cheat sheet - HPR=Div yield Capital gain yield Arithmetic average ignores compounding best forecast performance for next year

# Investment analysis exam 2 cheat sheet - HPR=Div yield...

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HPR=Div yield + Capital gain yield; Arithmetic averageignores compounding, best forecast performance for next year; Dollar-weighted returninclude timing of purchases and redemptions, is internal rate of return (IRR) ->in calculator, IRR(CF0,{CF1,CF2,CF3…}); Geometric average returnmeasures the actual average historical performance of the investments, published data on past returns earned by mutual funds; Complete portfoliorefers to the investment in risk-free asset and the risky portfolio combined; APR = (per period rate) * (pd per year) = ln(1+EAR); EAR = (1+rate per period)^n - 1 = [1+(APR/n)]^n – 1 = e^(APR); Continuously compound rate (rcc) = ln(1+EAR); Risk premium: difference between the expected HPR on the index fund and risk-free rate; one method of forecasting the risk premiumis to use the average historical excess returns for the asset under consideration. Excess return: rate of return in excess of the T-bill rate; Sharpe (reward-to-volatility) ratio(S): the slope of capital allocation line, ratio of portfolio risk prem to s.d. S=(E(r)-rf)/sigma(s.d), higher sharpe ratio, better reward per unit of volatility;Expected return(E(r)) = summation of P(r)r(s), mean of the distribution of HPR or mean return; Variance Var(r) = Squared s.d = summation P(s)[r(s) – E(r)]^2; Standard deviation: SD(r) = sqroot(Var(r)); Value at risk(VaR) = E(r) + (-1.64485)sigma; Risk aversion (A) = [E(r) – rf]/squared sigma, most studies indicate that investors’ risk aversion is in the range of 1.5-4; During 1926-2010 period: the geometric mean return on small-firm stocks was 11.08%, on treasury bonds was 5.12%, the sharpe ratio was greatest for large US stocks, Long-term US treasury bonds provided the lowest real return; During 1985-2010 period, the sharpe ratio was lowest for long-term US treasury bonds; Historical return have generally been higher for stocks of small firms as for stocks of large firms; small firms are riskier than large firms; Squaring the deviations from the mean result in Preventing the sum of the deviations from always equaling zero and Exaggerating the effects of large positive and negative deviations; Real interest rate (r) Nominal interest rate (R) Inflation rate (i): 1+r=(1+R)/(1+i), so r=(R-i)/(1+i); Complete portfolio (C): the entire portfolio including risky and risk-free assets; Risky asset portfolio (P), proportion of investment budget on risky asset (y), proportion of investment budget on risk-free asset (1-y): E(rC)-rf=y[E(rP)-rf]; sigmaC = y(sigmaP). Capital Market Line(CML)
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