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Selected Formula List



Price contingent orders:


Price that trigger a margin call for buying on margin:



Price that trigger a margin call for short-selling:



The value of an investment in a mutual fund after n years:
12 1
(1 )* *(1 ) *(1 )
n
n Front Portfolio Operating b Back
Value f I r f f f

= +
Return and variance for 2 risky assets portfolio:
2 2 2
( ) = ( )+ ( )
=( ) + ( ) + 2( )( )
P B B S S
P B B S S B B S S BS
E r w E r w E r
w w w w o o o o o

Composition of optimal risky portfolio formed by 2 risky assets:





Market risk premium:


Abnormal Performance Measures:









(1 IMR)*(1+InterestRate)
*initial.P
1 Maintenance Margin
p

<=

initial.P*(1 IMR)-d
1 Maintenance Margin
p
+
>=
+
2
2 2
[ ( ) - ] - [ ( ) - ]
=
[ ( ) - ] + [ ( ) - ] - [ ( ) - + ( ) - ]
=1 -
B f S S f B S BS
B
B f S S f B B f S f B S BS
S B
E r r E r r
w
E r r E r r E r r E r r
w w
o o o
o o o o
2
E( ) - = *
M f M
r r A o
' =( - )- *( - )= - * p m
p P f p m f p
Jensens r r r r R R o | |
-
=
p f
p
r r
Treynor Ratio
|
-
=
p f
p
r r
Sharpe Ratio
o

= =

p
ep
Abnormal Return
Information Ratio
Tracking Error
o
o
2

ROE:

'
Net Income
Shareholder s Equity

Dupont Equation:

= * * * *
'
= * * * *
Net Income Pretax Profit EBIT Sales Total Assets
ROE
Pretax Profit EBIT Sales Total Assets Shareholder s Equity
Tax Burden Interest Burden Operating Margin Total Asset Turnover Leverage
ROA:

EBIT
Total Assets


Relationship among ROA, ROE and Leverage:
=(1- )*[ +( - )* ]
Debt
ROE Tax Rate ROA ROA Interest Rate
Equity

Invoiced Bond Price:



Flat Bond Price:
Flat Price (Listed Price) = Invoiced Price Accrued Interest

Accrued Interest:

= *

Days Since Last Coupon Payment
Accrued Interest Coupon Payment
Days Separating Coupon Payments

Macaulays Duration:
=1
1
' = ( * * )
(1+ )
T
t
t
t
CF
MacaulaysDuration t
YTM Bond Price


Modified Duration:
1
= * '
1+
ModifiedDuration MacaulaysDuration
YTM

Convexity:
ModifiedDuration
Convexity
r
c
=
c


Price sensitivity of bond:
= - *
P
ModifiedDuration y
P
A
A
2
1
= - * + * *( )
2
P
ModifiedDuration y Convexity y
P
A
A A
1 1
1


(1 ) (1 )
T
t w T w
t
Coupon Par Value
Invoice Price
r r
+ +
=
= +
+ +

3

No-Growth DDM:


Constant-Growth DDM:
1
0
D
P
k g
=


Two-Stage DDM:
0 0
0
1
*(1 ) *(1 ) *(1 )
(1 ) (1 ) *( )
t n n
H H L
t n
t
L
D g D g g
P
k k k g
=
+ + +
= +
+ +


Dividend growth rate:
= * g ROE retention ratio
Present value of growth opportunities:
1
0
= +
E
P PVGO
r

FCFF:
FCFF = EBIT*(1-Tax Rate) + Depreciation Capital Expenditures Increase in
NWC

FCFE:
FCFE = FCFF Interest Expense *(1-Tax Rate) + Increases in net Debt

Constant-growth FCFF model:



Two-Stage FCFF model:



Constant-growth FCFE model:



Two-Stage FCFE Model:



Payoff to call option holder on expiration date:




0
D
P
k
=
1
0
FCFF
FirmValue
WACC g
=

0 0
0
1
*(1 ) *(1+g ) *(1 )
(1 ) (1 ) *( )
t n n
H H L
t n
t
L
FCFF g FCFF g
FirmValue
WACC WACC WACC g
=
+ +
= +
+ +

1
0

e
FCFE
Value of Equity
k g
=

0 0
0
1
*(1 ) *(1+g ) *(1 )

(1 ) (1 ) *( )
t n n
H H L
t n
t
e e e L
FCFE g FCFE g
Value of Equity
k k k g
=
+ +
= +
+ +

0 if S X
Payoff = V
if S > X
T
c
T T
S X
s
=

4

Payoff to put option holder on expiration date:



Profit to call option holder on expiration date:


Profit to put option holder on expiration date:


Profit of protective put:
Max (X-S
T
, 0) + S
T
S
0
P

Profit of covered call:
-Max (S
T
X,0) + S
T
S
0
+ C

Profit of long straddle:
Max(S
T
X,0) + Max(X S
T
,0) C P

Put-Call Parity:
C
0
P
0
= S
0
PV(X)

Call Option hedge ratio:
0 0
-C
=
-
u d
C
H
uS dS

Risk-neutral Probability:
(1 )
T
f
r d
p
u d
+
=



0 if S X
Payoff = V
if S < X
T
p
T T
X S
>
=

( ) ( , 0)
T
Profit Loss Max S X C =
( ) ( , 0)
T
Profit Loss Max X S P =