Chap.6 Chap.7 Chap.

8
Coupon payment:
CPN=(Coupon Rate*Face Value)/
Number of Coupon payment per year
YTM of n-year zero-coupon bond
1+YTMn=(face value/price)^1/n
YTM of coupon bond:
P=CPNx(1/y)(1-(1/(1+y)^n))+FV/(1+y)^n
Total return: rE=(Div1/P0)+(P1-P0/P0)
Stock price:
Constant Dividend growth:P0=Div1/(rE-g)
Dividend-Discount Model:
P0=(Div1/1+rE)+ (Div2/(1+rE)2)++
(Divn/(1+rn)n)+(Pn/(1+rE)n)
(Delete (Pn/(1+rE)n) if holding stock forever)
Divt=(Earningst/Share Outstandingt)(Dividend
payout ratet)
Earnings Growth Rate
=Change in Earnings/Earnings
=Retention Rate*Return on New investment
NPV decision rule: PV(benefit)-PV(cost)
IRR rule: Set NPV=0 and find the rate
Payback investment rule: Calculate the amount of
time it takes to pay back the initial investment(the
payback period).
If the payback period <prespecified length of time:
reject
Profitability Index
= Value Created/Resource Consumed
=NPV/Resource Consumed

Change in Earnings = New Investment * Return on

New Investment

New Investment = Earnings * Retention Rate

g=Retention rate*Return on new investment

P0=PV(Future Total Dividends and

Repurchases)/Shares Outstanding0
Chap.11 Chap.12
Realized Returns: Portfolio weight: A stocks beta () is the percentage change in its
Rt+1=(Divt+1+Pt+1-Pt)/Pt Wi= value of investment i/total value of portfolio return that we expect for each 1% change in the
markets return. Higher Beta=higher systematic risk
Average Annual Return: Portfolio return
Beta(): (SD(Ri)Corr(Ri,RMKt))/SD(RMkt)
Ravg=(1/t)(R1+R2++Rt) Rp=w1R1+w2R2++wnRn
=Covariance(Ri,RMkt)/Var(RMkt)

Variance of Returns: Portfolio expected retrun

Expected Return of i(aka Capital Asset Pricing Model)
Var(R)= E[Rp]= w1[R1]+w2[R2]++wn[Rn]
=Rf+i(E[RMkt]-Rf)
(1/t-1)((R1-Ravg)2+(R2- Ravg)2++(Rt- Ravg)2)
Portfolios Variance:
Volatility of Returns (aka SD)(measure total risk)
SD(R)= Var(R) Var(Rp)=(w1)2SD(R1)2+(w2)2SD(R2)2+
2w1w2Corr(R1R2)SD(R1)SD(R2)
95% Prediction Interval
Ravg +/- 2*SD(R) For three stocks:
Var(Rp)=
(w1)2SD(R1)2+(w2)2SD(R2)2+(w3)2SD(R3)2+
2w1w2Corr(R1R2)SD(R1)SD(R2)+
2w2w3Corr(R2R3)SD(R2)SD(R3)+
2w1w3Corr(R1R3)SD(R1)SD(R3)

Market Capitalization=(number of share

outstanding)*(price per share)