FACULTE DES HAUTES ETUDES COMMERCIALES DE L'UNIVERSITE DE LAUSANNE

Professor Subject Session

Amit Goyal Investments Winter 2018

FINAL EXAM WITH SOLUTIONS

• Closed-book, but non-programmable calculator is allowed
• Duration: 3 hours
• 11-page exam (on both sides) (included cover page and a formula sheet)
• Please give back the question sheet and the exam and write with a pen (pencil is not
allowed)

This exam contains 5 multiple choice problems and 5 problems. The total number of points is
100. Please answer the multiple choice problems in the question sheet itself – ambiguous
marking or choosing more than one option will get no credit. Points for problems are awarded
for correctness of the answer and the clarity of the reasoning as well as the steps leading to the
answer. Correct answers arrived at through false logic will not be awarded full points. If you
feel that you need to make additional assumptions, please do so and state your assumptions
clearly. The questions are in no particular order, so do not assume that the later questions are
more difficult than the earlier questions.

Student’s family name: _______________________________

Student’s first name: _______________________________

Date: _______________________________

Seat: _______________________________
Question 1 (25 points) [Fixed Income]

Suppose that prices of zero-coupon, default-free bonds with a face value of $100 are as follows:

Maturity 1 year 2 years 3 years 4 years

Price $98.75 $96.23 $93.96 $90.20

Suppose you buy a three-year, default-free bond that pays an annual coupon of 5% and has a
face value of $100.

1) If the expectations hypothesis holds, what is your rate of return from selling this coupon-
bond one year from now?

Short way!
Since the expectations hypothesis holds, all one-year rates are the same. This mean that the
one-year rate of return from buying and selling the bond is the same as the one-year spot rate
today. One-year spot rate is 100⁄98.75 − 1 = 1.27%. This means that the one-year rate of
return is 1.27%.

Long way: First, calculate the spot rates today:

100 100 1⁄2
𝑅𝑅1 = � � − 1 = 1.27%, 𝑅𝑅2 = � � − 1 = 1.94%,
98.75 96.23
100 1⁄3 100 1⁄4
𝑅𝑅3 = � � − 1 = 2.10%, 𝑅𝑅4 = � � − 1 = 2.61%
93.96 90.20

Now, calculate the price of the coupon-bond today:

5 5 105
𝑃𝑃0 = + + = 108.41
(1 + 1.27%) 1 (1 + 1.94%) 2 (1 + 2.10%)3

Next, calculate the forward rates:

98.75 2 98.75
𝐹𝐹(1, 2) = − 1 = 2.62%, 𝐹𝐹(1, 3) = � − 1 = 2.52%,
96.23 93.96
3 98.75
𝐹𝐹(1, 4) = � − 1 = 3.06%
90.20

Since the expectations hypothesis is true, the future spot rates are as follows:
𝑅𝑅�1 = 2.62%, 𝑅𝑅�2 = 2.52%, 𝑅𝑅�3 = 3.06%

The new price of the coupon-bond one year from now is:
5 105
𝑃𝑃�1 = + = 104.78
(1 + 2.62%)1 (1 + 2.52%)2

The desired rate of return is:

104.78 + 5
𝑅𝑅 = − 1 = 1.27%
108.41

2
2) Assume, instead, that, one year from now, the prices of zero-coupon, default-free bonds with
a face value of $100 are as follows:

Maturity 1 year 2 years 3 years 4 years

Price $97.49 $94.91 $91.17 $86.84

What is your rate of return from selling the coupon bond one year from now?

The new spot rates are:

100 100 1⁄2
𝑅𝑅�1 = � � − 1 = 2.57%, 𝑅𝑅�2 = � � − 1 = 2.65%,
97.49 94.91
100 1⁄3 100 1⁄4
�
𝑅𝑅3 = � � − 1 = 3.13%, �
𝑅𝑅4 = � � − 1 = 3.59%
91.17 86.84

The new price of the coupon-bond one year from now is:
5 105
𝑃𝑃�1 = + = 104.53
(1 + 2.57%)1 (1 + 2.65%)2

The desired rate of return is:

104.53 + 5
𝑅𝑅 = − 1 = 1.04%
108.41

3) If the price of the three-year coupon-bond today was $109.72, is there an arbitrage
opportunity? If yes, please show exactly how you would take advantage of this opportunity.

Since the theoretical correct price is $108.41 and the actual market price is higher at $109.72,
there is an arbitrage. We should sell the coupon-bond and buy the corresponding zero-coupon
bonds. The exact strategy is:
• Buy 0.05 of 1-year zero-coupon bond
• Buy 0.05 of 2-year zero-coupon bond
• Buy 1.05 of 3-year zero-coupon bond
• Sell 3-year coupon-bond
This will net you 109.72 − 108.41 = 1.31 of immediate riskless profit.

4) Show how you would synthetically construct a two-year forward loan that starts at 𝑡𝑡 = 2.

The loan can be constructed by going long the two-year zero-coupon bond and at the same time
shorting four-year zero-coupon bond. In order to ensure that there is no money exchanged
today, we need to short 96.23⁄90.20 − 1 = 1.0669 of the four-year bond for each two-year
bond that we buy. The implied forward rate is √1.0669 − 1 = 3.29%.

3
Question 2 (20 points) [Portfolios]

The market consists of only two risky assets, A and B, and a risk-free security. The expected
returns and volatilities of return on the two risky assets are 𝜇𝜇𝐴𝐴 = 5%, 𝜇𝜇𝐵𝐵 = 10%, 𝜎𝜎𝐴𝐴 =
10%, 𝜎𝜎𝐵𝐵 = 20%. The correlation between the return on the two risky assets is 0.5. The risk-
1
free rate is 3%. All investors have mean-variance utility functions, 𝑈𝑈 = 𝜇𝜇 − 2 𝛾𝛾𝜎𝜎 2 .

An investor X in this economy is holding the following portfolio:

𝑤𝑤𝑅𝑅𝑅𝑅 = 33.33%, 𝑤𝑤𝐴𝐴 = 11.11%, 𝑤𝑤𝐵𝐵 = 55.56%

1) Find the optimal portfolio composition for an investor Y with risk-aversion coefficient 𝛾𝛾 =
2?

The tangency portfolio is given by:

11.11
𝑤𝑤𝐴𝐴 = = 16.66%, 𝑤𝑤𝐵𝐵 = 1 − 16.66% = 83.34%
11.11 + 55.56

The expected return and variance of the tangency portfolio are:

𝜇𝜇 𝑇𝑇 = 16.67% ∙ 5% + 83.34% ∙ 10% = 9.17%

𝜎𝜎𝑇𝑇2 = 16.67% ∙ 10%2 + 83.34%2 ∙ 20%2 + 2 ∙ 16.67% ∙ 83.34% ∙ 10% ∙ 20% ∙ 0.5
2

= 0.0308

The optimal allocation to the tangency portfolio is given by:

𝜇𝜇 𝑇𝑇 − 𝑅𝑅𝑓𝑓
𝑤𝑤 ∗ =
𝛾𝛾𝜎𝜎𝑇𝑇2
This means that the optimal allocation to the tangency portfolio for investor Y is
9.17% − 3%
= 100%
2 × 0.0308
Her portfolio is thus:
𝑤𝑤𝑅𝑅𝑅𝑅 = 0%, 𝑤𝑤𝐴𝐴 = 16.66%, 𝑤𝑤𝐵𝐵 = 83.34%

2) Does CAPM exist in this world? If yes, calculate the alpha and beta of securities A and B.

The tangency portfolio is the same as the market portfolio.

First, calculate covariance of A and B with the market:

𝜎𝜎𝐴𝐴𝐴𝐴 = 𝑤𝑤𝐴𝐴 𝜎𝜎𝐴𝐴2 + 𝑤𝑤𝐵𝐵 𝜎𝜎𝐴𝐴𝐴𝐴 = 16.66% ∙ 10%2 + 83.34% ∙ 10% ∙ 20% ∙ 0.5 = 0.0100
𝜎𝜎𝐵𝐵𝐵𝐵 = 𝑤𝑤𝐴𝐴 𝜎𝜎𝐴𝐴𝐴𝐴 + 𝑤𝑤𝐵𝐵 𝜎𝜎𝐵𝐵2 = 16.66% ∙ 10% ∙ 20% ∙ 0.5 + 83.34% ∙ 20%2 = 0.0350

The betas are given by:

𝜎𝜎𝐴𝐴𝐴𝐴 0.0100 𝜎𝜎𝐵𝐵𝐵𝐵 0.0350
𝛽𝛽𝐴𝐴 = 2 = = 0.325, 𝛽𝛽𝐵𝐵 = 2 = 0.0308 = 1.136
𝜎𝜎𝑀𝑀 0.0308 𝜎𝜎𝑀𝑀

The alphas are given by

𝛼𝛼𝐴𝐴 = 𝜇𝜇𝐴𝐴 − �𝑅𝑅𝑓𝑓 + 𝛽𝛽𝐴𝐴 �𝜇𝜇𝑀𝑀 − 𝑅𝑅𝑓𝑓 �� = 0%
𝛼𝛼𝐵𝐵 = 𝜇𝜇𝐵𝐵 − �𝑅𝑅𝑓𝑓 + 𝛽𝛽𝐵𝐵 �𝜇𝜇𝑀𝑀 − 𝑅𝑅𝑓𝑓 �� = 0%

4
Question 3 (15 points) [CAPM/APT]

Assume that security returns are generated by the single-index model

𝑅𝑅𝑖𝑖𝑖𝑖 − 𝑅𝑅𝑓𝑓𝑓𝑓 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑖𝑖 �𝑅𝑅𝑚𝑚𝑚𝑚 − 𝑅𝑅𝑓𝑓𝑓𝑓 � + 𝑒𝑒𝑖𝑖𝑖𝑖
The risk-free rate is 2%. Suppose that there are securities A, B, and C characterized by the
following data:

Security 𝛽𝛽𝑖𝑖 𝑅𝑅�𝑖𝑖 𝜎𝜎𝑒𝑒𝑖𝑖

A 0.8 10% 25%
B 1.0 12% 10%
C 1.2 14% 20%

1) If 𝜎𝜎𝑀𝑀 = 20%, calculate the volatility of returns of securities A, B, and C.

𝜎𝜎𝐴𝐴2 = 𝛽𝛽𝐴𝐴2 𝜎𝜎𝑀𝑀

2
+ 𝜎𝜎𝑒𝑒2𝐴𝐴 = 0.82 ∙ 20%2 + 25%2 = 0.0881, 𝜎𝜎𝐴𝐴 = 29.7%
𝜎𝜎𝐵𝐵2 = 𝛽𝛽𝐵𝐵2 𝜎𝜎𝑀𝑀
2
+ 𝜎𝜎𝑒𝑒2𝐵𝐵 = 1.02 ∙ 20%2 + 10%2 = 0.0500, 𝜎𝜎𝐵𝐵 = 22.4%
𝜎𝜎𝐶𝐶2 = 𝛽𝛽𝐶𝐶2 𝜎𝜎𝑀𝑀
2
+ 𝜎𝜎𝑒𝑒2𝐶𝐶 = 1.22 ∙ 20%2 + 20%2 = 0.0976, 𝜎𝜎𝐶𝐶 = 31.2%

2) Does CAPM hold in this world?

The ratio of risk premium to beta is the same for all securities: (10−2)/0.8 = (12−2)/1 =
(14−2)/1.2 = 10%. Thus, all securities lie on the SML. Thus, CAPM holds in this world.

3) Do the securities lie on CML?

Since the securities have diversifiable risk, they do not lie on CML.

4) Assume that there are an infinite number of assets with return characteristics identical to
those of A, B, and C, respectively. If one forms a well-diversified portfolio of type A securities,
what will be the mean and standard deviation of the portfolio’s excess returns?

If there are an infinite number of assets with identical characteristics, then a well-diversified
portfolio of each type will have only systematic risk since the non-systematic risk will approach
zero with large N. Hence, the standard deviation will be equal to 𝛽𝛽𝐴𝐴 𝜎𝜎𝑀𝑀 = 16%. The expected
return will be equal to 10% (the excess return is 8%).

5
Question 4 (15 points) [Commodities]

It is January 2018 now. A company anticipates that it will purchase 100 pounds of copper each
in June 2018, November 2018, April 2019, and September 2019. The company has decided to
use the futures contracts traded in the COMEX division of the CME Group to hedge its risk.
One contract is for the delivery of 100 pounds of copper. The company considers only contracts
with maturities up to 13 months into the future to have sufficient liquidity to meet its needs.
Assume that the market prices (in cents per pound) today and at future dates are as in the
following table (of course, prices at future dates will become known at the corresponding future
dates only).

Prices Prices on Prices on Prices on Prices on

today Jun 2018 Nov 2018 Apr 2019 Sep 2019
Spot price 372.00 369.00 365.00 377.00 388.00
Jul 2018 future 372.30 369.10
Dec 2018 future 372.80 370.20 364.80
May 2019 future 370.70 364.30 376.70
Oct 2019 future 364.20 376.50 388.20

1) Devise a hedging strategy for the firm.

To hedge the oil purchase the company should take a long position in futures.
• To hedge the Jun 2018 purchase, the company should take a long position in Jul 2018
future.
• To hedge the Nov 2018 purchase, the company should take a long position in Dec 2018
future.
• To hedge the Apr 2019 purchase, the company could take a long position in Jul 2018
contracts and roll them into May 2019 contracts in Nov 2018. (Alternatively, the company
could hedge the Apr 2019 purchase by taking a long position in Dec 2018 contracts and
rolling them into May 2019 contracts.)
• To hedge the Sep 2019 purchase, the company could take a long position in Dec 2018
contracts and roll them into Oct 2019 contracts in Nov 2018.

Thus the strategy is summarized as follows:

To do To do on To do on To do on To do on
today Jun 2018 Nov 2018 Apr 2019 Sep 2019
Spot price — Buy spot Buy spot Buy spot Buy spot
Jul 2018 future Buy two Close two
Dec 2018 future Buy two — Close two
May 2019 future Buy one — Close one
Oct 2019 future Buy one — Close one

6
2) Find the prices that the company pays for copper at various dates using the hedging strategy
that you devised.

Today On On On On
Jun 2018 Nov 2018 Apr 2019 Sep 2019
Spot price −369.00 −365.00 −377.00 −388.00
Jul 2018 future — 2×
(369.10−372.30)
Dec 2018 future — 2×
(364.80−372.80)
May 2019 future — 1×
(376.70−370.70)
Oct 2019 future — 1×
(388.20−364.20)
Net −375.40 −381.00 −371.00 −364.00

Thus, the total price paid is $1491.4 cents per pound compared to $1499.0 cents per pound
without hedging (using just the spot prices).

7
Question 5 (10 points) [Trading]

Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give
your broker $15,000 to establish your margin account.

1) If you earn no interest on the funds in your margin account, what will be your rate of return
after 1 year if Intel is selling at: (i) $44; (ii) $40; (iii) $36? Assume that Intel pays no dividends.

The gain or loss on the short position is: (−500×∆P)

Invested funds = $15,000
Therefore: rate of return = (−500×∆P)/15,000
The rate of return in each of the three scenarios is:
(i) rate of return = (−500×$4)/$15,000 = −0.1333 = −13.33%
(ii) rate of return = (−500×$0)/$15,000 = 0%
(iii) rate of return = [−500×(−$4)]/$15,000 = +0.1333 = +13.33%

2) If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin
call?

Total assets in the margin account equal:

$20,000 (from the sale of the stock) + $15,000 (the initial margin) = $35,000
Liabilities are 500P. You will receive a margin call when:
$35,000 − 500𝑃𝑃
= 0.25
500𝑃𝑃
when P = $56 or higher.

3) Redo parts (1) and (2), but now assume that Intel also has paid a year-end dividend of $1
per share. The prices in part (1) should be interpreted as ex-dividend, that is, prices after the
dividend is paid.

With a $1 dividend, the short position must now pay on the borrowed shares: ($1/share×500
shares) = $500. Rate of return is now:
[(–500×∆P) − 500]/15,000
(i) rate of return = [(−500×$4) − $500]/$15,000 = −0.1667 = −16.67%
(ii) rate of return = [(−500×$0) − $500]/$15,000 = −0.0333 = −3.33%
(iii) rate of return = [(−500)×(−$4) − $500]/$15,000 = +0.1000 = +10.00%

Total assets are $35,000, and liabilities are (500P + 500). A margin call will be issued when:
$35,000 − 500𝑃𝑃 − 500
= 0.25
500𝑃𝑃
when P = $55.20 or higher.

8
Multiple-choice problems (3 points each)

MCQ1: Which of the following would be a viable way to earn abnormally high trading profits
if the markets are semi-strong form efficient?

a) Passive portfolio management

b) Buy shares in companies with low P/E ratios
c) Buy shares in companies with recent above-average price changes
d) Buy shares in companies with recent below-average price changes
e) Buy shares in companies in which you have advance knowledge of an improvement in the
management team

(e) If the markets are semi-strong form efficient, then no strategy based on publicly available
information will yield abnormal returns. The only way to earn an alpha is through non-public
private information.

MCQ2: Consider an investment opportunity set formed with two securities that are perfectly
negatively correlated, A and B. A has an expected rate of return of 13% and a standard
deviation of 19%. B has an expected rate of return of 10% and a standard deviation of 16%.
The global-minimum variance portfolio has:

a) Expected return of 9.5% and a standard deviation of 12.9%

b) Risk-free return of 11.4%
c) Expected return of 10.9% and a standard deviation of 17.4%
d) Expected return of 9.9% and a standard deviation of 11.4%

(b) If two securities were perfectly negatively correlated, the standard deviation of the global
minimum variance portfolio is equal to zero.

MCQ3: An analyst estimates the index model for a stock using regression analysis involving
raw returns. The estimated intercept in the regression equation is 6% and the beta is 0.5. The
risk-free rate of return is 6%. The alpha of the stock is

a) 0%
b) 3%
c) 6%
d) 9%

(b) The regression is 𝑅𝑅𝑖𝑖𝑖𝑖 = 𝑎𝑎𝑖𝑖 + 𝛽𝛽𝑖𝑖 𝑅𝑅𝑚𝑚𝑚𝑚 + 𝑒𝑒𝑖𝑖𝑖𝑖 . A regression with excess returns would have
been 𝑅𝑅𝑖𝑖𝑖𝑖 − 𝑅𝑅𝑓𝑓𝑓𝑓 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑖𝑖 �𝑅𝑅𝑚𝑚𝑚𝑚 − 𝑅𝑅𝑓𝑓𝑓𝑓 � + 𝑒𝑒𝑖𝑖𝑖𝑖 or 𝑅𝑅𝑖𝑖𝑖𝑖 = �𝛼𝛼𝑖𝑖 + 𝑅𝑅𝑓𝑓𝑓𝑓 − 𝛽𝛽𝑖𝑖 𝑅𝑅𝑓𝑓𝑓𝑓 � + 𝛽𝛽𝑖𝑖 𝑅𝑅𝑚𝑚𝑚𝑚 + 𝑒𝑒𝑖𝑖𝑖𝑖 .
Comparing we find that 𝑎𝑎𝑖𝑖 = �𝛼𝛼𝑖𝑖 + 𝑅𝑅�𝑓𝑓 − 𝛽𝛽𝑖𝑖 𝑅𝑅�𝑓𝑓 � or 𝛼𝛼𝑖𝑖 = 𝑎𝑎𝑖𝑖 − 𝑅𝑅�𝑓𝑓 + 𝛽𝛽𝑖𝑖 𝑅𝑅�𝑓𝑓 = 𝑎𝑎𝑖𝑖 + (𝛽𝛽𝑖𝑖 − 1)𝑅𝑅�𝑓𝑓 .
Plugging in the numbers we find that the alpha is 6%+(0.5−1)×6%=3%

9
MCQ4: Alphabet is expected to have before-tax cash flow from operations of $500,000 in the
coming year. The firm’s corporate tax rate is 30%. It is expected that $200,000 of operating
cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After
the coming year, cash flows are expected to grow at 6% per year. The company has no net
working capital. The appropriate market capitalization rate for unleveraged cash flow is 15%
per year. The firm has no outstanding debt. The total value of the equity of Alphabet should be

a) $1 million
b) $2 million
c) $3 million
d) $4 million

(b)
Before-tax cash from operation = $500,000
− Depreciation = $100,000
= Taxable Income = $400,000
− Taxes @30% = $120,000
= After-tax unleveraged Income = $280,000
After-tax unleveraged Income + Deprec = $380,000
− New investment = $200,000
= Free cash flow = $180,000

The value of the company is 180,000/(15%−6%) = $2 million

MCQ5: To take advantage of the low-beta anomaly, an investor would

I. Invest in a market-neutral factor that buys high-beta securities and short-sells low-beta
securities.
II. Believe that the slope of the security market line is too steep relative to the CAPM.
III. Take a short position in high-beta stocks and a long position in low-beta stocks.
IV. Believe that high-beta stocks deliver lower risk-adjusted returns than low-beta stocks.

a) I and IV
b) III and IV
c) II and IV
d) I and III

(b) Only III and IV are correct. I is incorrect because the investor should short high-beta
securities and buy low-beta securities. II is incorrect because the slop of the SLM is too flat
relative to CAPM.

10
Formula sheet

• Growing perpetuity: 𝑃𝑃𝑃𝑃 = 𝐶𝐶 ⁄(𝑅𝑅 − 𝐺𝐺)

• Growing annuity: 𝑃𝑃𝑃𝑃 = 𝐶𝐶 ⁄(𝑅𝑅 − 𝐺𝐺) × [1 − (1 + 𝐺𝐺)𝑇𝑇 ⁄(1 + 𝑅𝑅)𝑇𝑇 ]

• Bond Price = ∑𝑇𝑇𝑡𝑡=1 𝐶𝐶 ⁄(1 + 𝑅𝑅𝑡𝑡 )𝑡𝑡 + 𝐹𝐹 ⁄(1 + 𝑅𝑅𝑇𝑇 )𝑇𝑇

𝑁𝑁 𝑁𝑁
• Forward rate 𝐹𝐹𝑇𝑇→𝑇𝑇+𝑁𝑁 = �(1 + 𝑅𝑅𝑇𝑇+𝑁𝑁 )𝑇𝑇+𝑁𝑁 ⁄(1 + 𝑅𝑅𝑇𝑇 )𝑇𝑇 − 1 = �𝐵𝐵𝑇𝑇 ⁄𝐵𝐵𝑇𝑇+𝑁𝑁 − 1

• Duration = 1⁄𝑃𝑃 × ∑𝑇𝑇𝑡𝑡=1 𝑡𝑡 × 𝐶𝐶𝐹𝐹𝑡𝑡 ⁄𝑌𝑌 𝑡𝑡

• Convexity = 1⁄[𝑃𝑃 × 𝑌𝑌 2 ] × ∑𝑇𝑇𝑡𝑡=1(𝑡𝑡 2 + 𝑡𝑡) × 𝐶𝐶𝐹𝐹𝑡𝑡 ⁄𝑌𝑌 𝑡𝑡

• % change in price = Δ𝑃𝑃⁄𝑃𝑃 ≈ −Modified Duration × Δ𝑦𝑦 + 0.5 × Convexity × Δ𝑦𝑦 2

• Portfolio mean = 𝑤𝑤1 𝜇𝜇1 + 𝑤𝑤2 𝜇𝜇2

• Portfolio variance = 𝑤𝑤12 𝜎𝜎12 + 𝑤𝑤22 𝜎𝜎22 + 2𝑤𝑤1 𝑤𝑤2 𝜎𝜎12

• Optimal allocation: 𝑤𝑤𝑃𝑃 = �𝜇𝜇 − 𝑅𝑅𝑓𝑓 �⁄[𝛾𝛾𝜎𝜎 2 ] for utility 𝑈𝑈 = 𝜇𝜇 − 0.5𝛾𝛾𝜎𝜎 2

𝑚𝑚𝑚𝑚𝑚𝑚
• Minimum variance portfolio: 𝑤𝑤1 = (𝜎𝜎22 − 𝜎𝜎12 )⁄(𝜎𝜎12 + 𝜎𝜎22 − 2𝜎𝜎12 )

• Tangency portfolio: 𝑤𝑤1𝑇𝑇 = (𝜇𝜇1𝑒𝑒 𝜎𝜎22 − 𝜇𝜇2𝑒𝑒 𝜎𝜎12 )⁄[𝜇𝜇1𝑒𝑒 𝜎𝜎22 + 𝜇𝜇2𝑒𝑒 𝜎𝜎12 − (𝜇𝜇1𝑒𝑒 + 𝜇𝜇2𝑒𝑒 )𝜎𝜎12 ]

• CAPM: 𝐸𝐸(𝑅𝑅𝑖𝑖 ) = 𝑅𝑅𝑓𝑓 + 𝛽𝛽𝑖𝑖 × �𝐸𝐸(𝑅𝑅𝑀𝑀 ) − 𝑅𝑅𝑓𝑓 �

• APT: 𝐸𝐸�𝑅𝑅𝑖𝑖 − 𝑅𝑅𝑓𝑓 � = 𝛽𝛽𝑖𝑖1 𝜆𝜆1 + 𝛽𝛽𝑖𝑖2 𝜆𝜆2 + ⋯ + 𝛽𝛽𝑖𝑖𝑖𝑖 𝜆𝜆𝐾𝐾

• Risk decomposition: 𝑅𝑅𝑖𝑖𝑖𝑖 − 𝑅𝑅𝑓𝑓𝑓𝑓 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑖𝑖 𝐹𝐹𝑡𝑡 + 𝑒𝑒𝑖𝑖𝑖𝑖 ⟺ 𝜎𝜎𝑖𝑖2 = 𝛽𝛽𝑖𝑖2 𝜎𝜎𝐹𝐹2 + 𝜎𝜎𝑒𝑒𝑒𝑒
2

• Sharpe ratio = �𝜇𝜇 − 𝑅𝑅𝑓𝑓 �⁄𝜎𝜎

• Jensen′ s alpha = 𝑅𝑅� − �𝑅𝑅�𝑓𝑓 + 𝛽𝛽�𝑅𝑅�𝑀𝑀 − 𝑅𝑅�𝑓𝑓 ��

𝐷𝐷 𝐸𝐸
• WACC = 𝐷𝐷+𝐸𝐸 × 𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 × (1 − 𝜏𝜏) + 𝐷𝐷+𝐸𝐸 × 𝑅𝑅𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒

• Hedge ratio ℎ∗ = cov(Δ𝑃𝑃, Δ𝐹𝐹)⁄var(Δ𝐹𝐹)

• Futures price 𝐹𝐹0,𝑇𝑇 = 𝑃𝑃0 (1 + 𝑅𝑅)𝑇𝑇 − 𝐷𝐷 + 𝑆𝑆 − 𝐶𝐶 = 𝑃𝑃0 + Carry cost − Convenience yield

11