FORMULA SHEET

Probability and Statistics

Expected Returns:

E (r ) r

Sample Covariance:

pr

Cov ( X , Y )

i i

all _ i

E (r ) r

Covariance & Correlation:

1
ri
n i

1
rX E (rX )rY E rY
n
Cov ( X , Y ) prX E ( rX )rY E rY
Cov ( X , Y )

Variance:

Var 2

p r r
2

XY

all _ i

2 pi ri r 2
1
ri r 2

n i

1
2
ri r 2

n i

XY

E ( rP ) w X E ( rX ) wY E ( rY )

Cov ( X , Y )

For a two-asset portfolio:

P2 w X2 X2 wY2 Y2 2 w X wY X Y XY

Sample Variance:

s2

1
rX E (rX )rY E rY
n 1

n 1
1
2
ri r 2
ri r

n 1 n i
n 1 i

r 2

n
2
2
i
s
r

n 1 n

Annuity Calculations

Replicating Portfolio

1
1
1 i n

PVIFA
i

C S B

C Cd

e h u
S
(
u

d
)
0

uC dC u
B PV d

ud

1 i 1
FVIFA

Binomial Method Options Pricing

Perpetuity Calculations

PV ( perpetuity )

1
i

CAPM

E (ri ) r f i E rM r f

Cov ( ri , rM )

M2

S(1 r u) C u
1 r

u e r h

d e r h

Put-Call Parity

Black Scholes Formula

C P S 0 PV ( div ) PV ( X )

C 0 S 0 e T N (d1 ) Xe rT N (d 2 )

F0 S 0 1 r f D

1
S

ln 0 r 2 T
2

X
d1
T

Interest Rate Parity

d 2 d1 T

Spot-Futures Parity

1 rdom
F0 E 0
1 r
for