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Lesson 11 Formulas

The document outlines key financial formulas for calculating expected returns, variance, and standard deviation of stocks and portfolios. It explains how to compute the expected return for a stock based on different economic states and how to calculate portfolio returns and beta coefficients. Additionally, it notes the assumption of equal probability when using historical data for calculations.

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fany15barrientos
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Download as XLSX, PDF, TXT or read online on Scribd
2 views

Lesson 11 Formulas

The document outlines key financial formulas for calculating expected returns, variance, and standard deviation of stocks and portfolios. It explains how to compute the expected return for a stock based on different economic states and how to calculate portfolio returns and beta coefficients. Additionally, it notes the assumption of equal probability when using historical data for calculations.

Uploaded by

fany15barrientos
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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If you want to use formulas, listed below are some formulas comm

1) Suppose a Stock "A" has returns given by Ri for a state of economy Pi (assuming that there a
(Pi represents the different possible states of the economy. For example, P1 could be a belo
Then, the expected return for Stock A is calculated as:

2) The variance of the stocks return is calculated as the sum of the squares of difference betwee
Therefore, the variance is calculated as:

3) The standard deviation is simply the square root of the variance.

4) Note: If we use historical data for our calculations, we are simply assuming that each data point had an

5) Suppose a portfolio consists of Stocks A, B, and C, with weights wA, wB, and wC and returns R A, RB, a

6) Suppose a portfolio consists of Stocks A, B, and C, with beta-coefficients bA, bB, and bC and returns R
If we divide one equation by the other, we will get

We can use this to solve for the growth rate and then use the growth rate if the problem calls for it or to
some formulas commonly used in statistical Calculations:

my Pi (assuming that there are n possible states of the economy)


example, P1 could be a below average economy and P2 could be an above average economy etc).

squares of difference between the actual returns and the expected return, weighted by the appropriate probability.

ming that each data point had an equal probability and hence we essentially are ignoring the probability weighting.

B, and wC and returns R A, RB, and RC respectively. Then the return of the portfolio is given by:

nts bA, bB, and bC and returns RA, RB, and RC respectively. Then the beta of the portfolio is given by:
ate if the problem calls for it or to solve for the Expected rate of Return if the problem calls for it.
conomy etc).

he appropriate probability.

bability weighting.

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