CFP - Investment 2

expected return

CAPM = rf+(mr-rf)b

correlation coefficient

-1 to 1+
1+ = perfect correlation
0 = no correlation
-1 = perfect negative correlation

security market line

above - undervalued
lower - overvalued

margin call

purchase price x (1-initial margin/1-maint. Margin)

strong form

all information

semi strong form

all public information is reflected in current prices. insider information will help

weak form

only past information is reflected in current prices. fundamental and insider information can help

standard deviation

1. 68 - 34
2. 95 - 13.5
3. 99 - 2

in the money

out of the money

intrinsic value

stock price - current price

Beta Formula

captures systematic risk

Covariance Formula

Pij x Oi x Oj
Pij = Correlation Coefficient
Oi = std dev investment 1
Oj = std dev investment 2

Required rate of return formula

(D1 / P) + G
D1 = dividend payment
P = market price
G = Dividend Growth Rate

Dividend Growth Model

answer = intrinsic value
compare answer to current market price

V = D1 / (r-g)
D1 = Dividend payment
r = required rate
g = Dividend Growth Rate

Sharpe Ratio

S = Rp-Rf / Op
Rp = portfolio return
Rf = Risk Free
Op = Std dev

Treynor Ratio

compare performance to market

Current Yield Formula

Annual Interest / Current Market Price

Yield to Call Formula

2x /2

FV = 1

yield to maturity formula

2x /2

FV = 1

Holding period return

(end value - beg value +/- cash flow) / beg investment

Security Market Line

shows a security's EXPECTED return as a function of its systematic risk. defined by CAPM

Expected Return

(%1 x %2) + (%1 x %2)
%1 = probability %
%2 = return %

long hedge

transaction where the asset is not currently held but futures are purchased to lock in current prices.

short hedge

transaction involving the sale of futures while holding the asset

Capital asset Pricing Model

rf + (rm-rf)b
rf = risk free
rm = market return
b = beta

duration

this is complicated you wont know it

capitalization approach

earnings / cap rate