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Unformatted text preview: FV = PV(1 + r )T
PV = FV/(1 + r )T
FV = future value
PV = present value
r = annual rate of return
T = number of years
m = number of times the interest is compounded per year
The future value (FV) of the investment m*T r FV = PV 1 +
÷
m Expected return of an event E(RA ) = N ∑p
i =1 i R Ai pi is the probability of event i happening.
RAi is the return of asset/project A if event i occur
E(RA) is the expected return of asset/project A
N = number of all possible events
Expected return = [ Probability of Event 1 * Return in Event 1]
+ [ Probability of Event 2 * Return in Event 2] + …for all possible events…
Variance return for an event VAR ( R A ) = N ∑p
i =1 Standard deviation of Return
SD( R A ) = VAR ( R A ) i ( R Ai −E ( R A )) 2 Expected Return of portfolio
= [ (wA) * (Expected ReturnA) ] + [ (wB) * (Expected ReturnB) ] +…for all assets/projects
 wA and wB …is the fraction of portfolio allocated to A, B etc. Covariance between the returns of two events
N Cov ( R A , R B ) = ∑ pi ( R Ai −E ( R A ))( R Bi − E ( RB ))
i =1 pi is the probability of event i happening.
RAi is the return of asset/project A if event i occur
RBi is the is the return of asset/project B if event i occur
E(RA) is the expected return of asset/project A
E(RB) is the expected return of asset/project B
N = number of all possible events
Value of a share today = PV of any dividends the stock will pay + PV of the price you
get when you resell the share ...
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 Fall '08
 EUDEY
 Macroeconomics, Standard Deviation, Variance, Probability theory, Rai

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