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    FM Formula Sheet 02

    Uploaded by

    Aninda Dutta
    Total return from equity investments equals dividends plus capital gains or losses. Dividend yield and capital gains yield are calculated based on purchase price and dividends/selling price. The expected return on a portfolio is the weighted average of the expected returns of individual assets. The Capital Asset Pricing Model relates expected security return to market risk premium and security's beta. Beta measures the volatility of a security compared to the market. The Sharpe Ratio measures risk-adjusted return. Alpha is the difference between actual and expected returns based on the CAPM.

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    FM Formula Sheet 02

    Uploaded by

    Aninda Dutta
    9 views2 pages
    Total return from equity investments equals dividends plus capital gains or losses. Dividend yield and capital gains yield are calculated based on purchase price and dividends/selling price. The expected return on a portfolio is the weighted average of the expected returns of individual assets. The Capital Asset Pricing Model relates expected security return to market risk premium and security's beta. Beta measures the volatility of a security compared to the market. The Sharpe Ratio measures risk-adjusted return. Alpha is the difference between actual and expected returns based on the CAPM.

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    Total return from equity investments equals dividends plus capital gains or losses. Dividend yield and capital gains yield are calculated based on purchase price and dividends/selling price. The expected return on a portfolio is the weighted average of the expected returns of individual assets. The Capital Asset Pricing Model relates expected security return to market risk premium and security's beta. Beta measures the volatility of a security compared to the market. The Sharpe Ratio measures risk-adjusted return. Alpha is the difference between actual and expected returns based on the CAPM.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    9 views2 pages

    FM Formula Sheet 02

    Uploaded by

    Aninda Dutta
    Total return from equity investments equals dividends plus capital gains or losses. Dividend yield and capital gains yield are calculated based on purchase price and dividends/selling price. The expected return on a portfolio is the weighted average of the expected returns of individual assets. The Capital Asset Pricing Model relates expected security return to market risk premium and security's beta. Beta measures the volatility of a security compared to the market. The Sharpe Ratio measures risk-adjusted return. Alpha is the difference between actual and expected returns based on the CAPM.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    • Total return from equity investment = Dividend income + Capital gain (or loss)

    • Dividend yield = D(t+1) / Pt

    where Pt is the buying price of equity shares at time t and D(t+1) is the amount of dividend to be
    received in the next year

     Capital gains yield= [P(t+1) – Pt] / Pt


     Total Yield = [Dividend + (Selling Price – Buying Price)] / Buying Price
     Expected return on a portfolio= E (Rp) = 1 * E (R1) + 2 * E (R2) + …+ n * E (Rn)

    where E (Rp) is the expected return from the portfolio of assets and E (Ri) represents the expected
    return from the ith asset and i is the weight of the ith asset in the portfolio

     CAPM Model: E(Rs) = Rf + s [E(Rm ) – Rf]


    Where,
    E(Rs) = Expected rate of return of the security
    E(Rm) = Expected rate of return of the market
    Rf = Risk free rate of return
    s = Beta coefficient of the security
    (E(Rm) – Rf) is the Equity Market Risk Premium

     s = (s,m)* s / m
    s = standard deviation of return of the security
    m = standard derivation of return of the market
    (s,m) = coefficient of correlation between
    returns of the security and the market

     Portfolio beta= p = ∑ i* i over all securities


     Sharpe Ratio:
    R P - Rf
    Sharpe ratio=
    σ
    where,
    R P = Average return of the portfolio
    Rf = Risk-free rate
    σ = Standard deviation of returns
     Alpha of a security over a period= Actual return – CAPM-based return
    2
     σ TR =σ 2SR +σ 2USR+ 2∗ρ∗σ SR∗σ USR
    Where TR= Total Risk
    SR= Systematic Risk
    USR= Unsystematic Risk

     Ke = [Do*(1+g) /Po] + g
    Po = Current value of the equity share
    Do = Dividend per share paid at time 0
    g= Constant rate of growth of dividends
    Ke= Cost of the retained earnings
     Kat= (1-t) * Kbt

    where Kat is the post-tax cost, Kbt is the pre-tax cost and t is the rate of corporate income tax

     WACC = We * Ke + Wp * Kp + Wd * Kd * (1-t)
    where,
    We = Proportion of equity in the total capital
    Wp = Proportion of preference shares in the total capital
    Wd = Proportion of debt in the total capital
    Ke = Cost of retained earnings / external equity
    Kp = Cost of preference capital
    Kd = Pre-tax cost of debt
    t = corporate tax rate
    and We + Wp + Wd = 1.0

     Percent Spread (PS)= (Ask price – Bid price )/Ask price*100


     Forward Premium or Discount= (Forward rate – Spot rate )/ Spot rate*(360/Forward
    contract days)*100
    t
    et ( 1+ i h )
    =
    e0 ( 1+i f )t

    Where et= future spot rate
    e0= spot rate
    ih= home inflation
    if= foreign inflation
    t= the time period

     Real Exchange Rates:


    (1  i f ) t
    et'  et
    (1  ih ) t

     Interest Rate Parity:

    F

     1 rh 
    S  1 r  f

    Where F is the forward rate and S is the spot rate

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