Quantitative Methods

Cheat Sheets
 Quantitative Methods
TIME VALUE OF MONEY

( )
m
Effective Annual Rate Stated annual rate
Effective annual rate = 1 + -1
(EAR) m

FVN = PV x (1 + r)N r = Interest rate per period

Single Cash Flow PV = Present value of the investment
FVN FVN = Future value of the investment
(Simplified formula) PV = (1 + r)N
N periods from today

mN

Investments paying interest

( )rs
FVN = PV x 1 + m
rs = Stated annual interest rate
m = Number of compounding
FVN periods per year
more than once a year PV =

( )
mN N = Number of years
rs
1+
m

Future Value (FV) of an

Investment with Continuous FVN = PVersN
Compounding

Ordinary Annuity
FVN = A x
[(1 + r)N - 1
r ] N = Number of time periods
A = Annuity amount

[ ]
1- 1 r = Interest rate per period
(1 + r)N
PV = A x r

FV ADue = FV AOrdinary x (1 + r) = A x
[
(1 + r)N - 1
r ]
x (1 + r)

[ ]
1- 1
Annuity Due
(1 + r)N
PV ADue = FV AOrdinary x (1 + r) = A x x (1 + r)
r

A = Annuity amount
r = The interest rate per period
corresponding to the frequency
of annuity paments (for example,
annual, quarterly, or monthly)
N = Number of annuity payments
 Quantitative Methods
TIME VALUE OF MONEY

Present Value (PV) of A

PVPerpetuity = A = Annuity amount
a Perpetuity r

Future value (FV) of a series FVN = Cash flow1(1 + r)1 + Cash flow2(1 + r)2 … Cash flowN(1 + r)N
of unequal cash flows

N CFt = Expected net cash flow at time t

Σ CFt N = Investment’s projected life

Net Present Value (NPV) NPV =
(1 + r)t r = Discount rate or opportunity
t=0 cost of capital

CF1 CF2 CFN

Internal Rate of Return NPV = CF0 + + (1 + IRR)2 + ... + (1 + IRR)N = 0
(IRR) (1 + IRR) 1

Holding Period Return (HPR) Ending value - Beginning value

No cash flows HPR =
Beginning value

Holding Period Return Ending Beginning Cash flow

(HPR) value - value + received P1 - P0 + D1
HPR = =
Cash flows occur at the end of Beginning value Beginning value
the period
P1 = Ending Value
P0 = Beginning Value
D = Cash flow/dividend received
rBD = Annualized yield on a bank
discount basis
D = Dollar discount, which is equal to the
Yield on a Bank Discount D 360 difference between the face value of
Basis (BDY) rBD = X the bill (F) and its purchase price (P0)
F t
F = Face value of the T-bill
t = Actual number of days remaining
to maturity

360 t = Time until maturity

Effective annual yield (EAY) EAY = (1 + HPR) t -1 HPR = Holding Period Return

Money market yield

(CD equivalent yield)
Money market yield = HPR x
( )360
t
=
360 × rBankDiscount
360 - (t x rBankDiscount)
 Quantitative Methods
STATISTICAL CONCEPTS AND MARKET RETURNS

Range = Largest observation number

Range
Interval Width Interval Width = - Smallest Observation or number
k k = Number of desired intervals

Relative Frequency Interval frequency

Relative frequency =
Formula Observations in data set

Σ
N
N = Number of observations in the
xi
Population Mean entire population
i = 1 ... n
x1 + x2 + x3 + ... + xN Xi = the ith observation
μ= =
N N

Sample Mean
x=
Σ
i = 1 ... n
xi

=
x1 + x2 + x3 + ... + xn
n n

n
Geometric Mean G= √ x1x x 2 3 ... xn n = Number of observations

n
xn =

Σ( )
n
Harmonic Mean 1
xi
i = 1 ... n

Median for odd

numbers Median =
{ }
(n + 1)
2

Median of even
Median =
{ }
(n + 2)
2
numbers
n
Median = 2
 Quantitative Methods
STATISTICAL CONCEPTS AND MARKET RETURNS

Σ
n
w = Weights
Weighted Mean xw = wixi X = Observations
i = 1 ... n
Sum of all weights = 1

w = Weights
Portfolio Rate of Return rp = wara + wbrb + wcrc + ... + wnrn
r = Returns

y = The percentage point at which we

{ }
Position of the Observation are dividing the distribution
y
Ly = (n + 1) 100 Ly = The location (L) of the percentile
at a Given Percentile y
(Py) in the array sorted in
ascending order

Range Range = Maximum value - Minimum value

Σ
n
X = The sample mean
Mean Absolute Deviation |xi - x |
n = Number of observations in
MAD =
i = 1 ... n
the sample
n

Population Variance
σ2 =
Σ
i = 1 ... n
(xi - μ)2 μ = Population mean
N = Size of the population
N

√ Σ
N
Population Standard (xi - μ)2 μ = Population mean
Deviation N = Size of the population
σ= i = 1 ... n
N

Σ
n
X = Sample mean
Sample Variance (xi - x )2
n = Number of observations in
i=1
s2 = the sample
n-1
 Quantitative Methods
STATISTICAL CONCEPTS AND MARKET RETURNS

Σ
n
Sample Standard X = Sample mean
(xi - x )2 n = Number of observations in
Deviation i=1 the sample
s= n-1

Σ
n
n = Total number of observations
1 (Mean - rt)2
Semi-Variance Semi-variance = n below the mean
rt = Observed value
rt < Mean

Percentage of observations 1
Chebyshev Inequality k = Number of standard
within k standard deviations > 1 - 2
k deviations from the mean
of the arithmetic mean

s s = Sample standard deviation

Coefficient of Variation CV =
x x = Sample mean

Rp = Mean return to the portfolio

Rp - Rf RF = Mean return to a risk-free asset
Sharpe Ratio Sharpe Ratio =
σp σp = Standard deviation of return
on the portfolio

Σ (xi - x )3 n = Number of observations in

Skewness
sk =
[ n
(n - 1)(n - 2) ] x
i = 1 ... n

s3
the sample
s = Sample standard deviation

[ Σ(x - x )
]
4
i
Kurtosis n (n + 1) 3 (n - 1)2
KE = x i = 1 ... n
-
(n - 1)(n - 2)(n - 3) S4 (n - 2)(n - 3)

n = Sample size
s = Sample standard deviation
 Quantitative Methods
PROBABILITY CONCEPTS
P(E) E = Odds for event
Odds FOR E Odds FOR E = P(E) = Probability of event
1 - P(E)

P(A B)
U
Conditional Probability P(A|B) = where P(B) ≠ 0
P(B)

Additive Law P(A U B) = P(A) + P(B) - P(A

U
B)
(The Addition Rule)

The Multiplication Rule P(A

U
B) = P(A|B) x P(B)
(Joint Probability)

P(A) = P(A|S1) x P(S1) + P(A|S2) x S1, S2, …, Sn are mutually exclusive

The Total Probability Rule x P(S2) + ... + P(A|Sn) x P(Sn) and exhaustive scenarios or events

P(n) = Probability of an variable

Expected Value E(X) = P(A)XA + P(B)XB + ... + P(n)Xn Xn = Value of the variable
x = Value of x
(x - x)(y - y) X = Mean of x values
Covariance COVxy = y = Value of y
n-1
y = Means of y
n = Total number of values
covxy σx = Standard Deviation of x
Correlation ρ= σσ σy = Standard Deviation of y
x y COVxy = Covariance of x and y
n
Variance of a Random
Variable σ2X = ∑(x - E(x))
i = 1 ... n
2
x P(x)
The sum is taken over all values of
x for which p(x) > 0

w = Constant
Portfolio Expected Return E(RP) = E(w1r1 + w2r2 + w3r3 + … + wnrn) r = Random variable

Var(RP) = E[(Rp - E(Rp)2 ] = [w12 σ12 + w22σ22 +

Portfolio Variance + w32σ32 + 2w1w2Cov(R1R2) + Rp = Return on Portfolio
+ 2w2w3Cov(R2R3) + 2w1w3Cov(R1R3)]

P(B|A) x P(A)
Bayes’ Formula P(A|B) =
P(B)

The Combination Formula nCr = () n n!

c = (n - r)! r!
n = Total objects
r = Selected objects

n!
The Permutation Formula nPr =
(n - r)!
 Quantitative Methods
COMMON PROBABILITY DISTRIBUTIONS
n = Number of trials
The Binomial Probability n! x = Up moves
P(x) = px x (1 - p)n - x px = Probability of up moves
Formula (n - x)! x! (1 - p)n - x = Probability of
down moves
Binomial Random E(X) = np n = Number of trials
Variable Variance = np(1 - p) p = Probability

90% confidence interval for X is x - 1.65s; x + 1.65s s = Standard error

For a Random Normal
95% confidence interval for X is x - 1.96s; x + 1.96s 1.65 = Reliability factor
Variable X x = Point estimate
99% confidence interval for X is x - 2.58s; x + 2.58s
RP = Portfolio Return
Safety-First Ratio SFRatio =
[E(Rp) - RL
σp ] RL = Threshold level
σp = Standard Deviation
i = Interest rate
Continuously Compounded t = Time
Rate of Return FV = PV x e ixt
ln e = 1
e = Тhe exponential function,
equal to 2.71828

SAMPLING AND ESTIMATION

Sampling Error of the
Sample Mean - Population Mean
Mean
Standard Error of the σ n = Number of samples
Sample Mean SE =
(Known Population Variance)
√n σ = Standard deviation

Standard Error of the S s = Standard deviation in

Sample Mean SE = unknown population’s
(Unknown Population Variance) √n sample
x = Observed value
x-μ
Z-score Z= σ = Standard deviation
σ μ = Population mean
Zα/2 = Reliability factor
Confidence Interval for σ σ x = Mean of sample
x - Zα x ; x + Zα x σ = Standard deviation
Population Mean with z 2 √n 2 √n n = Number of trials/size of
the sample
Confidence Interval for s s tα/2 = Reliability factor
x - tα x ; x + tα x n = Size of the sample
Population Mean with t 2 √n 2 √n s = Standard deviation
Z known population, standard deviation σ, no matter the sample size
z or t-statistic? t unknown population, standard deviation s, and sample size below 30
Z unknown population, standard deviation s, and sample size above 30
 Quantitative Methods
HYPOTHESIS TESTING
tn - 1= t-statistic with n − 1 degrees of
freedom (n is the sample size)
Test Statistics: X-μ X-μ
x = Sample mean
Population Mean
zα = σ ; tn-1, α = s μ = Hypothesized value of the
√n √n population mean
s = Sample standard deviation

(x1 - x2) - (μ1 - μ2)

t-statistic =
sp2 sp2 12
Test Statistics: Difference in
Means - Sample Variances ( n1 + n2 ) Number of degrees of freedom =
= n1 + n2 − 2
Assumed Equal
(Independent samples) (n1 - 1)s12 + (n2 - 1)s22
sp2 =
n1 + n2 - 2

(x1 - x2) - (μ1 - μ2)

t-statistic =
s12 s22 12
Test Statistics: Difference in
Means - Sample Variances
( n1 + n2 ) S = Standard deviation of
respective sample
Assumed Unequal n = Total number of observations
( )
2
s12 s2
(Independent samples) + n2 in the respective population
degrees of n1 2
=
freedom s12
( ) +( )
2 s22 2
n1 n2
n1 n2

Test Statistics: Difference in degrees of freedom = n - 1

Σ
n
Means - Paired Comparisons d - μd0 1 di n = Number of paired observations
t= , where d = n d = Sample mean difference
Test Sd i = 1 ... n
(Dependent samples) Sd = Standard error of d

degrees of freedom = n - 1
Test Statistics: Variance (n - 1)s2
X
2
= s2 = Sample variance
Chi-square Test n-1
σ0 2
σ02 = Hypothesized variance

Test Statistics: Variance s12 degrees of freedom = n1 - 1 and n2 - 1

F= , where s12 > s22 s12 = Larger sample variance
F-Test s22
s22 = Smaller sample variance