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quantitative1

PopulationMean
U

SampleMean
wherethereareN membersinthepopulationandeach

SUM(X )
i

X =

1
n

SU M X

observationisX i=1,2,N .Sumofallthedeviationsiszero

i

WeightedMean
GeometricMean

X = SU M (w X )
i

G = (X

* X *.. . X )
2

(n)

MeanAbsoluteDeviation

M AD =

1
n

SU M

|X Weighted Mean|.Meanabsolutedeviationistheaverage

ofthedatasabsolutedeviationsfromthemean.
PopulationVariance
2

1
N

Covariance
2

SU M (X u)

PopulationVarianceistheaverageofthepopulations

Cov(X , Y ) = E [(X u

)(Y u )]
Y

Cov(X , Y ) = E (X Y ) u

squareddeviationsfromthemean.Thepopulationstandarddeviationis
simplythesquarerootofthepopulationvariance.

*u

Correlationcoefficient

PortfolioExpectedReturn
E (r ) = w r
p

+ (1 w )r
A

Cov(X , X )

(X , X ) =
1

Sharpemeasure
(r
SM =

r )
f

AdditionRule
Union of Events : P(A OR B) = P(A U B) = P(A) + P(B) P(A

NormalDistributionRandomVariable

B)

X ~N (

)Z =

Mutually Exclusive Events:P(A OR B) = P(A U B) = P(A) + P(B)

ConfidenceIntervals

SumRule&BayesTheorem
P(B) = P(A

B) + P(A

B) = P

(A)

X = u +/Zs

(A )

P(A) + P

TheFutureValueofaSingleCashFlow
FV

= PV (1 + r)

Purchases

ThePresentValueofaSingleCashFlow

Average trade payables

Number of days payables =

Number of days in period

FV

PV =

(1 + r)

Payables turnover
PV

PresentValueofaPerpetuity
PV (perpetuity) =

P(A )

PayablesActivity
Payables turnover =

FV

Annuity Due

Annuity Due

= PV

Ordinary Annuity

= FV

(1 + r)

Ordinary Annuity

(1 + r)

PM T
I/Y

ContinuousCompoundingandFutureValues
r N

FV

EffectiveAnnualRates
N

E AR = (1 + Periodic interest rate)

= PV e

NetPresentValue
N PV =

CF

t = 0

(1 + r)

t
t

whereCF =theexpectednetcashflowattimet
t

=theinvestment'sprojectedlife
r=thediscountrateorappropriatecostofcapital$
N

BankDiscountYield
r

BD

D
F

MoneyMarketYield

360
t

where:r =theannualizedyieldonabankdiscountbasis.
BD

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360 r
R

MM

MM

BD

360 (t r

BD

(360/ t )

= H PY

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=thedollardiscount(facevaluepurchaseprice)
=thefacevalueofthebill
t=numberofdaysremaininguntilmaturity$
D

BondEqualentYield

0.5

BEY = [(1 + EAY)

HoldingPeriodYield

PopulationMean

P P +D
1

H PY =

P +D

where:P =initialpriceoftheinvestment.
0

=pricereceivedfromtheinstrumentatmaturity/sale.

=interestordividendreceivedfromtheinvestment.$

i = 1

Where,x =istheithobservation.
i

SampleMean

EffectiveAnnualYield
365
t

E AY = (1 + H PY )

X =

where:H PY =holdingperiodyield
t=numbersofdaysremainingtillmaturity
H PY = (1 + E AY )

ORG = X

withX

withX

365

HarmonicMean
X

i = 1

GeometricMean
1 + R = (1 + R

1]

fori = 1, 2, ..., N .

X X

) (1 + R )... (1 + R )

3.

..X

fori = 1, 2, ..., n.

> 0

(1 + R )
t

t = 1

i = 1

Range
Range=MaximumvalueMinimumvalue

Percentiles
L

(n + 1)y
100

where:

=percentagepointatwhichwearedividingthedistribution
=location(L)ofthepercentile(P )inthedatasetsortedinascending

order
MeanAbsoluteDeviation

PopulationVariance

X X
i

i = 1

M AD =

(X
i

i = 1

where:X =observationi

Where:n=numberofitemsinthedataset
X
=thearithmeticmeanofthesample

=populationmean
N

=sizeofthepopulation

PopulationStandardDeviation

(X
i

i = 1

SampleVariance

Samplevariance=s

S =

(X X)
i

i = 1

n1

where:n=samplesize.

SampleStandardDeviation

Coefficientofvariation

(X X)
i

i = 1

CoefficientofVariation=

n1

where:s=samplestandarddeviation
X=thesamplemean

SharpeRatio
SharpeRatio=

Oddsforanevent
Wheretheoddsforaregivenas'atob',

then:P(E ) =

where:r =meanportfolioreturn

a
(a + b)

=riskfreereturn
=standarddeviationofportfolioreturns

ConditionalProbabilities
P(A | B) =

Sampleskewness
alsoknownassamplerelativeskewness,iscalculated

as:S

[ (n 1)(n 2) ]

P(AB)
P(B)

giventhatP(B)

MultiplicationRuleforProbabilities
P(AB) = P(A | B) P(B)

(X X)

i = 1

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AdditionRuleforProbabilities
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Asnbecomeslarge,theexpressionreducestothemeancubeddeviation.

P(AorB) = P(A) + P(B) P(AB)

(X X)

ForIndependantEvents
P(A | B) = P(A),orequivalently,

i = 1

P(B | A) = P(B)

where:
s=samplestandarddeviation

P(AorB) = P(A) + P(B) P(AB)

P(AandB) = P(A) P(B)

TheTotalProbabilityRule
c

TheTotalProbabilityRulefornPossibleScenarios
P(A) = P(A | S ) P(S ) + P(A | S ) P(S )+... +P(A | S ) P(S

P(A) = P(AS) + P(AS )

c

P(A) = P(A | S) P(S) + P(A | S ) P(S )

E (X ) = P(X )X
1

+ P(X )X
2

+ ..... . P(X )X
n

i = 1

= E {[X E (X )] }

P(X )[X E (X )]
i

i = 1

TheTotalProbabilityRuleforExpectedValue
1.E (X ) = E (X | S)P(S) + E (X | S )P(S )
2.E (X ) = E (X | S ) P(S ) + E (X | S ) P(S ) + ... + E (X
1

Where:X =oneofnpossibleoutcomes.

VarianceandStandardDeviation

P(X )X

ismutuallyexclusiveandexhaustive.

, S , ..., S

ExpectedValue

E (X ) =

wherethesetofeventsS

| S ) P(S )
n

Where:E (X )=theunconditionalexpectedvalueofX
E (X | S )=theexpectedvalueofX givenScenario1
1

=theprobabilityofScenario1occurring

P(S )
1

ThesetofeventsS

, S , ..., S

ismutuallyexclusiveandexhaustive.

Covariance

CorrelationCoefficient

Cov(X Y ) = E {[X E (X )][Y E (Y )]}

Cov(R , R ) = E {[R
A

E (R )][R
A

Corr(R , R ) =
A

E (R )]}

Var(R ) =
p

Cov(R , R )
A

)(

E (R ) =

w w Cov(R , R )
i

i = 1 j = 1

i = 1

w E (R ) = w E (R ) + w E (R ) + ... + w
i

Where:Weightofasseti=

Var(R ) = w
p

(R ) + w
A

(R ) + w
A

(R ) + 2w w

(R , R ) (R ) (R )
A

E (R

Varianceofa3AssetPortfolio
Var(R ) = w (R ) + w (R

(R ) + 2w w Cov(R , R )
B

Market value of portfolio

Market value of investment i

Varianceofa2AssetPortfolio
Var(R ) = w

ExpectedReturnonaPortfolio

(R , R ) =

PortfolioVariance
N

)+w

2
C

(R )
C

+2w w Cov(R , R ) + 2w w Cov(R , R )

+2w w Cov(R , R )
C

Bayes'Formula
P(Information | Event) P(Event)

P(Event | Information) =

P(Information)

CountingRules
Thenumberofdifferentwaysthatthek
taskscanbedoneequalsn n n n
1

Combinations
C

Permutations

n!

=( )=
r
(n r)!(r)!

P =

Remember:Thecombinationformulaisusedwhentheorderinwhichthe
itemsareassignedthelabelsisNOTimportant.

n!
(n r)!

Discreteuniformdistribution
F (x) = n p(x)forthenthobservation.

BinomialDistribution
P(X = x) =

nx

C (p) (1 p)
x

where:p=probabilityofsuccess
1 p=probabilityoffailure
C =numberofpossiblecombinationsofhavingxsuccessesinntrials.
n

Stateddifferently,itisthenumberofwaystochoosexfromnwhenthe
orderdoesnotmatter.

Varianceofabinomialrandomvariable

= n p (1 p)

TheContinuousUniformDistribution
P(X<a),P(X>b)=0
P(x

x x
x ) =
2

ba

ConfidenceIntervals
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ForarandomvariableXthatfollowsthenormaldistribution:
The90%confidenceintervalisx
1.65stox
+1.65s
The95%confidenceintervalisx
1.96stox
+1.96s
The99%confidenceintervalisx
2.58stox
+2.58s
Thefollowingprobabilitystatementscanbemadeaboutnormaldistributions
Approximately50%ofallobservationslieintheinterval(2/3)
Approximately68%ofallobservationslieintheinterval1
Approximately95%ofallobservationslieintheinterval2
Approximately99%ofallobservationslieintheinterval3>
zScore
z=(observedvaluepopulation
mean)/standarddeviation=(x)/

Roy'ssafetyfirstcriterion
MinimizeP(R < R )
P

where:R =portfolioreturn
P

ShortfallRatio
Shortfallratio(SFRatio)orzscrore=
E (R ) R
P

=targetreturn

ContinuouslyCompoundedReturns
r

EAR=e 1
r =continuouslycompoundedannualrate
cc

cc

SamplingError
Samplingerrorofthemean=Samplemean
Populationmean=x

HPR =e
t

cc

StandardErrorofSampleMeanwhenPopulationvarianceisKnown
= n
x

StandardErrorofSampleMeanwhen
PopulationvarianceisNotKnown
s

n
where:s =standarderrorofsamplemean
s

where:
=thestandarderrorofthesamplemean
x

=thepopulationstandarddeviation
=thesamplesize

=samplestandarddeviation.

ConfidenceIntervals
Pointestimate(reliabilityfactorstandarderror)
where:Pointestimate=valueofthesamplestatisticthatisusedtoestimatethepopulationparameter
Reliabilityfactor=anumberbasedontheassumeddistributionofthepointestimateandthelevelofconfidencefortheinterval
(1).
Standarderror=thestandarderrorofthesamplestatistic(pointestimate)

n
where:x=Thesamplemean(pointestimateofpopulationmean)
z
=Thestandardnormalrandomvariableforwhichtheprobabilityofan
x z

observationlyingineithertailis/2(reliabilityfactor).

=Thestandarderrorofthesamplemean.

TestStatistic
Teststatistic=
Sample statistic Hypothesized value
Standard error of sample statistic

DecisionRulesforHypothesisTests
Decision
DonotrejectH

RejectH

isTrue

Correctdecision

isFalse

Incorrectdecision
TypeIIerror

Incorrectdecision
Correctdecision
TypeIerror
Powerofthetest=1P(TypeIIerror)
Significancelevel=P(TypeIerror)

ConfidenceInterval
sample

[( statistic ) (

critical
value

) (

standard
error

population

sample

)] ( parameter ) [( statistic ) + (

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standard
error

) (

critical
value

)]

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(z

(s

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n)

(z

(s

n)

HypothesisTests
Typeoftest Nullhypothesis Alternatehypothesis Rejectnullif
Onetailed
(uppertail)
test

Onetailed
(lowertail)
test
tStatistic
x

tstat=

>

<

Failtoreject
Pvaluerepresents
nullif

Teststatistic> Teststatistic Probabilitythatlies

criticalvalue
criticalvalue
abovethecomputed
teststatistic.
Teststatistic< Teststatistic Probabilitythatlies
criticalvalue
criticalvalue
belowthecomputed
teststatistic.

Where:
x=samplemean
=hypothesizedpopulationmean
0

=standarddeviationofthesample
n=samplesize
s

zStatistic
x

zstat=

n
Where:x=samplemean
=hypothesizedpopulationmean

=standarddeviationofthesample
=samplesize

zstat=

n
Where:x=samplemean
=hypothesizedpopulationmean
0

=standarddeviationofthesample
n=samplesize
s

PairedComparisonsTest

d
t =

dz

Where:
d =samplemeandifference
s

=standarderrorofthemeandifference=

=samplestandarddeviation

=thenumberofpairedobservations

HypothesisTestsConcerningtheMeanofTwoPopulationsAppropriateTests
Relationship Assumption
Population
between
regarding
Typeoftest
distribution
samples
variance
Normal

Independent

Dependent

ttestpooled
variance

Normal

Independent

Unequal

ttestwith
variancenot
pooled
ttestwith

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Normal

Dependent

N/A

paired
comparisons

ChiSquaredTestStatistic

SettingPriceTargetswithHeadand
ShouldersPatterns
Pricetarget=Neckline(HeadNeckline)

(n 1)s

2
0

Where:n=samplesize
s =samplevariance
=hypothesizedvalueforpopulationvariance
2

TestStatisticfortheFTest

ShortInterestratio
ShortInterestratio=

F =

Where:s =VarianceofsampledrawnfromPopulation1
2

SettingPriceTargetsforInverseHeadand
ShouldersPatterns
Pricetarget=Neckline+(NecklineHead)

Short interest
Average daily trading volume

=VarianceofsampledrawnfromPopulation2

Hypothesistestsconcerningvariance
HypothesisTestConcerning

Appropriateteststatistic

Varianceofasingle,normallydistributed Chisquarestat
population
Equalityofvarianceoftwoindependent,
normallydistributedpopulations

Fstat

MomentumorRateofChangeOscillator
M=(VVx)100
where:M=momentumoscillatorvalue
V=lastclosingprice
Vx=closingpricexdaysago,typically10days
RelativeStrengthIndex
RSI=100
whereRS=

100

1 + RS
(Up changes for the period under consideration)

(|Down changes for the period under consideration|)

StochasticOscillator
C L14

( H 14 L14 )

%K = 100

where:
C=lastclosingprice
L14=lowestpriceinlast14days
H 14=highestpriceinlast14days
%D(signalline)=Averageofthelastthree%K valuescalculateddaily.
ArmsIndex
ArmsIndex=

Number of advancing issues / Number of declining issues

Volume of advancing issues / Volume of declining issues

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