Summary List of Equations, 13th Edition

Investments: Analysis and Management

Chapter 2
Municipal bond yield
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 = (2-1)
1 − marginal tax rate

Chapter 5

Amount investor contributes

𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛 = (5-1)
Value of the transaction

Amount borrowed
𝑀𝑎𝑟𝑔𝑖𝑛 𝑐𝑎𝑙𝑙 𝑝𝑟𝑖𝑐𝑒 = (5-2)
Number of shares × (1 − maintenance margin percent)

Current value of securities − Amount borrowed

𝐴𝑐𝑡𝑢𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟𝑐𝑒𝑛𝑡 = (5-3)
Current value of securities

Chapter 6
𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝑌𝑖𝑒𝑙𝑑 + 𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 (6-1)

𝐶𝐹𝑡 + (𝑃𝐸 − 𝑃𝐵 ) 𝐶𝐹𝑡 + 𝑃𝐶

𝑇𝑅 = = (6-2)
𝑃𝐵 𝑃𝐵

𝐶𝑊𝐼𝑛 = 𝑊𝐼0 (1 + 𝑅1 )(1 + 𝑅2 ) ⋯ (1 + 𝑅𝑛 ) (6-3)

𝐸𝑛𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦

𝑅𝑒𝑡𝑢𝑟𝑛 𝑖𝑛 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑡𝑒𝑟𝑚𝑠 = [(1 + 𝑅𝐹𝐴 ) × ] − 1.0 (6-4)
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦

∑N
i=1 Xi
𝑋̅ = (6-5)
N

1
𝐺 = [(1 + 𝑅1 )(1 + 𝑅2 ). . . (1 + 𝑅𝑛 )]𝑛 − 1 (6-6)
Chapter 6 (continued)

𝑅 = [(1 + 𝑅𝑟 ) × (1 + 𝐼𝑟 )] − 1 (6-7)

2
∑𝑛𝑖=1(𝑋 − 𝑋̅ )2
𝜎 =
𝑛−1

(6-8)

(1 + 𝐺)2 ≈ (1 + 𝐴𝑀)2 − 𝜎 2 (6-9)

𝐶𝑊𝐼 = 𝐶𝐷𝑌 × 𝐶𝑃𝐶 (6-10)

𝐶𝑊𝐼
𝐶𝑃𝐶 = (6-11)
𝐶𝐷𝑌

𝐶𝑊𝐼
𝐶𝐷𝑌 = (6-12)
𝐶𝑃𝐶

Chapter 7

𝐸(𝑅) = ∑ 𝑅𝑖 𝑝𝑟𝑖
𝑖=1
(7-1)

𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 = 𝜎 = ∑[𝑅𝑖 − 𝐸(𝑅)]2 𝑝𝑟𝑖

2

𝑖=1
(7-2)
Chapter 7 (continued)

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 = 𝜎 = (𝜎 2 )1/2 (7-3)

𝑤1 + 𝑤2 + . . . + 𝑤𝑛 = ∑ 𝑤𝑖 = 1.0
𝑖=1
(7-4)

𝐸(𝑅𝑝 ) = ∑ 𝑤𝑖 𝐸(𝑅𝑖 )
𝑖=1
(7-5)

𝐸(𝑅𝑝 ) = ∑ 𝑤𝑖 𝐸(𝑅𝑖 )
𝑖=1
(7-6)

𝜎𝑝2 ≠ ∑ 𝑤𝑖 𝜎𝑖2
𝑖=1
(7-7)

𝜎𝑖
𝜎𝑝 = (7-8)
𝑛1/2

𝜎𝐴𝐵 = ∑[𝑅𝐴,𝑖 − 𝐸(𝑅𝐴 )][𝑅𝐵,𝑖 − 𝐸(𝑅𝐵 )]𝑝𝑟𝑖

𝑖=1
(7-9)

𝜎𝐴𝐵
𝜌𝐴𝐵 = (7-10)
𝜎𝐴 𝜎𝐵
Chapter 7 (continued)

𝜎𝐴𝐵 = 𝜌𝐴𝐵 𝜎𝐴 𝜎𝐵 (7-11)

𝜎𝑃 = [𝑤12 𝜎12 + 𝑤22 𝜎22 + 2(𝑤1 )(𝑤2 )(𝜌1,2 )𝜎1 𝜎2 ]1/2 (7-12)

𝑛 𝑛 𝑛

𝜎𝑝2 = ∑ 𝑤𝑖2 𝜎𝑖2 + ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖𝑗

𝑖=1 𝑖=1 𝑗=1
𝑖≠𝑗 (7-13)

Chapter 9

𝐸(𝑅𝑀 )−𝑅𝐹
𝐸(𝑅𝑝 ) = 𝑅𝐹 + 𝜎𝑝 (9-1)
𝜎𝑀

𝑅𝑖 = 𝑎𝑖 + 𝛽𝑖 𝑅𝑀 + 𝑒𝑖 (9-2)

𝐸(𝑅𝑖 ) = 𝑅𝑖𝑠𝑘 − 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒 + 𝑅𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

= 𝑅𝐹 + 𝛽𝑖 [𝐸(𝑅𝑀 ) − 𝑅𝐹] (9-3)

𝑅𝑖 = 𝑎1 + 𝑎2 𝛽𝑖 (9-4)

𝑅𝑖 = 𝐸(𝑅𝑖 ) + 𝛽𝑖1 𝑓1 + 𝛽𝑖2 𝑓2 + ⋯ + 𝛽𝑖𝑛 𝑓𝑛 + 𝑒𝑖 (9-5)

𝐸(𝑅𝑖 ) = 𝑎0 + 𝑏𝑖1 𝐹̅1 + 𝑏𝑖2 𝐹̅2 + ⋯ + 𝑏𝑖𝑛 𝐹̅𝑛 (9-6)

Chapter 10
𝑛
𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 𝑉0 = ∑
(1 + 𝑘)𝑡
𝑡=1
(10-1)

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑠𝑡𝑜𝑐𝑘 𝑡𝑜𝑑𝑎𝑦 = 𝑉0

𝐷1 𝐷2 𝐷3 𝐷∞
= + 2
+ 3
+ ⋯+
(1 + 𝑘) (1 + 𝑘) (1 + 𝑘) (1 + 𝑘)∞
∞
𝐷𝑡
= ∑
(1 + 𝑘)𝑡
𝑡=1

(10-2)

𝐷0
𝑉0 = = 𝑧𝑒𝑟𝑜-𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑚𝑜𝑑𝑒𝑙 (10-3)
𝑘

𝐷0 (1+𝑔) 𝐷0 (1+𝑔)2 𝐷0 (1+𝑔)3 𝐷0 (1+𝑔)∞

𝑉0 = + + + ⋯+ (10-4)
(1+𝑘) (1+𝑘)2 (1+𝑘)3 (1+𝑘)∞

𝐷1
𝑉0 = = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡-𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑚𝑜𝑑𝑒𝑙 (10-5)
𝑘−𝑔

𝑛
𝐷0 (1 + 𝑔𝑠 )𝑡 𝐷𝑛 (1 + 𝑔𝑐 ) 1
𝑉0 = ∑ 𝑡
+ ×
(1 + 𝑘) 𝑘 − 𝑔𝑐 (1 + 𝑘)𝑛
𝑡=1
(10-6)

𝐷1 𝐷2 𝐷3 𝑃3
𝑉0 = + + + (10-7)
(1+𝑘) (1+𝑘)2 (1+𝑘)3 (1+𝑘)3

𝐷4 𝐷5 𝐷∞
𝑃3 = + + ⋯+ (10-8)
(1+𝑘)1 (1+𝑘)2 (1+𝑘)∞
Chapter 10 (continued)

𝐷1
𝑘= +𝑔 (10-9)
𝑃0

𝑛𝑒𝑥𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 ′ 𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐹𝐶𝐹𝐸

𝑉0 = (10-10)
𝑘−𝑔

𝐹𝐶𝐹𝐹 = 𝐹𝐶𝐹𝐸 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 × (1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒) − 𝑛𝑒𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 (10-11)

𝑃
𝑉0 = 𝐸1 × [𝐸0 ] (10-12)
1 𝐴

Chapter 13
𝑃
𝑃0 = [𝐸0 ] × 𝐸1 (13-1)
1 𝐴

Chapter 15

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑠𝑎𝑙𝑒𝑠

𝑅𝑂𝐴 = ×
𝑠𝑎𝑙𝑒𝑠 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑅𝑂𝐴 = 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 × 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 (15-1)

𝑅𝑂𝐸 = 𝑅𝑂𝐴 × 𝑒𝑞𝑢𝑖𝑡𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 (15-2)

𝐸𝑃𝑆 = 𝑅𝑂𝐸 × 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (15-3)

𝑔 = 𝑏 × 𝑅𝑂𝐸 = (1 − 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜) × 𝑅𝑂𝐸 (15-4)

𝑃 𝐷1 /𝐸1
= (15-5)
𝐸 𝑘−𝑔
Chapter 15 (continued)

𝑃 𝑅𝑂𝐸−𝑔
= (15-6)
𝐵 𝑘−𝑔

𝑃 [(𝐸0 /𝑆0 ) × (𝐷0 /𝐸0 ) × (1 + 𝑔)]

=
𝑆 𝑘−𝑔
(15-7)

(𝑃/𝐸 )
𝑃𝐸𝐺 𝑟𝑎𝑡𝑖𝑜 =
𝑔
(15-8)

Chapter 16

𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑜𝑙𝑑 𝑠ℎ𝑜𝑟𝑡

𝑆ℎ𝑜𝑟𝑡-𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑣𝑜𝑙𝑢𝑚𝑒 (16-1)

Chapter 17

1 + 𝑅𝐹 = (1 + 𝑟𝑟) × (1 + 𝑒𝑖)
𝑅𝐹 = (1 + 𝑟𝑟) × (1 + 𝑒𝑖) − 1 (17-1)

𝑅 = 𝑅𝐹 + 𝑟𝑝 (17-2)

(1 + 𝑡 𝑅3 ) = [(1 + 𝑡 𝑅1 )(1 + 1/3

𝑡+1 𝑟1 )(1 + 𝑡+2 𝑟1 )] (17-3)
Chapter 17 (continued)
𝑛
𝑐𝑡 𝐹𝑉
𝑃= ∑ 𝑡
+
(1 + 𝑦𝑡𝑚) (1 + 𝑦𝑡𝑚)𝑛
𝑡=1
(17-4)

𝑦𝑡𝑚 = [𝐹𝑉/𝑃]1/𝑛 − 1 (17-5)

𝑓𝑐
𝑐𝑡 𝐶𝑃
𝑃= ∑ 𝑡
+
(1 + 𝑦𝑐) (1 + 𝑦𝑐) 𝑓𝑐
𝑡=1
(17-6)

𝑡𝑜𝑡𝑎𝑙 𝑑𝑜𝑙𝑙𝑎𝑟 𝑟𝑒𝑡𝑢𝑟𝑛 1/𝑛

𝑅𝐶𝑌 = [ ] − 1.0
𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑

(17-7)

𝑛
𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠
𝑉𝑎𝑙𝑢𝑒0 = ∑
(1 + 𝑟)𝑡
𝑡=1
(17-8)

𝑛
𝑐𝑡 𝐹𝑉
𝑃= ∑ 𝑡
+
(1 + 𝑟) (1 + 𝑟)𝑛
𝑡=1
(17-9)

𝑛
𝑐𝑡 𝐹𝑉
𝑃= ∑ +
(1 + 𝑦𝑡𝑚)𝑡 (1 + 𝑦𝑡𝑚)𝑛
𝑡=1
(17-10)
Chapter 18

𝑛
𝑃𝑉(𝐶𝐹𝑡 )
𝑀𝑎𝑐𝑎𝑢𝑙𝑎𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝐷 = ∑ ×𝑡
𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒
𝑡=1
(18-1)

𝐷
𝑀𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝐷∗ = (18-2)
(1+𝑦𝑡𝑚)

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 ≈ −𝐷∗ × 𝑦𝑖𝑒𝑙𝑑 𝑐ℎ𝑎𝑛𝑔𝑒 (18-3)

∆𝑃
Or ≈ −𝐷∗ × ∆𝑟 (18-4)
𝑃

Chapter 19

𝐼𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑐𝑎𝑙𝑙 = 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 (𝑆 − 𝐸), 0 (19-1)

𝐼𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑝𝑢𝑡 = 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 (𝐸 − 𝑆), 0 (19-2)

𝑇𝑖𝑚𝑒 𝑣𝑎𝑙𝑢𝑒 = 𝑜𝑝𝑡𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒 − 𝑖𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑣𝑎𝑙𝑢𝑒 (19-3)

𝑃𝑟𝑒𝑚𝑖𝑢𝑚 𝑜𝑟 𝑜𝑝𝑡𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒 = 𝑖𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑣𝑎𝑙𝑢𝑒 + 𝑡𝑖𝑚𝑒 𝑣𝑎𝑙𝑢𝑒 (19-4)

𝐸
𝐶 = 𝑆[𝑁(𝑑1 )] − [𝑁(𝑑2 )] (19-5)
𝑒 𝑟𝑡
Chapter 19 (continued)

𝐼𝑛(𝑆/𝐸) + (𝑟 + 0.5𝜎 2 )𝑡
𝑑1 = 1
(𝜎[(𝑡)2 ])
(19-6)

1
𝑑2 = 𝑑1 − (𝜎 [(𝑡)2 ]) (19-7)

𝑃 = 𝐶 − 𝑆 + 𝐸/(𝑒 𝑛 ) (19-8)

Chapter 20
Return on investment on a futures contract =
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡(𝑠)−𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠(𝑠)
(20-1)
𝑀𝑎𝑟𝑔𝑖𝑛 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 𝑚𝑎𝑑𝑒 𝑏𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟

Chapter 22

𝑉𝐸 − 𝑉𝐵
𝑅𝑃 = (22-1)
𝑉𝐵

̅̅̅̅
𝑆ℎ𝑎𝑟𝑝𝑒 𝑟𝑎𝑡𝑖𝑜 = [𝑅 ̅̅̅̅
𝑝 − 𝑅𝐹 ]/𝜎𝑝 (22-2)

= 𝑒𝑥𝑐𝑒𝑠𝑠 𝑟𝑒𝑡𝑢𝑟𝑛/𝑟𝑖𝑠𝑘

̅̅̅̅𝑝 − ̅̅̅̅
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 = [𝑅 𝑅𝐹 ]/𝛽𝑝 (22-3)

𝐸(𝑅𝑝 ) = 𝑅𝐹 + 𝛽𝑝 [𝐸(𝑅𝑀 ) − 𝑅𝐹] (22-4)

𝑅𝑝𝑡 = 𝑅𝐹𝑡 + 𝐵𝑝 [𝑅𝑀𝑡 − 𝑅𝐹𝑡 ] + 𝐸𝑝𝑡 (22-5)

Chapter 22 (continued)

𝑅𝑝𝑡 − 𝑅𝐹𝑡 = 𝛽𝑝 [𝑅𝑀𝑡 − 𝑅𝐹𝑡 ] + 𝐸𝑝𝑡 (22-6)

𝑅𝑝𝑡 − 𝑅𝐹𝑡 = 𝑎𝑝 + 𝛽𝑝 [𝑅𝑀𝑡 − 𝑅𝐹𝑡 ] + 𝐸𝑝𝑡 (22-7)

𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 = 𝑅𝐴 /𝜎(𝑅𝑝 − 𝑅𝑏 ) (22-8)

= mean active return/standard deviation of active return

= alpha/tracking risk

𝑀2 = 𝑅𝐹 + 𝜎𝑀 /𝜎𝑝 × (𝑅𝑝 − 𝑅𝐹) (22-9)

𝑆𝑅𝑝 = (𝑅𝑝 − 𝑅𝑀𝐴 )/𝐷𝐷𝑝 (22-10)