Stockholm Business School

Formula sheet
Finance I

Caroline Strugala Johan Cassel Ian Khrashchevskyi Anders Bckstrm

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Present Value calculation

Discount factor Present value of single cash flow

1
= PV =
(1 + ) (1 + )

Present value of an annuity

1 1
PV() = [1 ]
(1 + )

Present value of a growing annuity with growth rate g

1 1+
PV = [1 ( ) ]
1+

Present value of a growing perpetuity with growth rate g

1
PV =

Constant dividend growth model

1
PV (share)0 =

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Future Value calculations

Future value Future value of Annuity

1
FV = (1 + ) FV () = [(1 + ) 1]

Conversion of interest rates

Nominal and real rates Nominal rate after taxes

( )
=
+

Effective annual rate to effective period rate Effective annual rate to annual percentage rate

+ = ( + ) + = ( + )

Bonds

Coupon bonds Zero-coupon bond

1 1
P = [1 ] + P=
(1 + ) (1 + ) (1 + )

Options payoff

Buy call option Write call option

max( ; 0) max( ; 0)

Buy sell option Write sell option

max( ; 0) max( ; 0)
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Expected return and variance

Expected return Variance

[] = = = [] = = ( []) =

= 1 1 + 2 2 + = 1 (1 [])2 + 2 (2 [])2 + + ( [])2

Variance estimation

1 1
() = 2 = ( )2 = [(1 )2 + (2 )2 + + ( )2 ]
1 1
=1

Average return Standard deviation

1 1 + 2 + +
= = = 2

=1

Covariance and correlation

Covariance

, = ( , ) = (, )(, )

= 1 (,1 ) (,1 ) + 2 (,2 ) (,2 ) + + (, ) (, )

Covariance estimation
1
, = ( , ) = ( )(, )
1 ,
1
= [(,1 )(,1 ) + (2 )(2 ) + + ( )( )]
1

Correlation

( , )
, =

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Portfolio theory

Variance of a portfolio with two assets

2 = 12 12 + 22 22 + 21 1,2 2

2 = 12 12 + 22 22 + 21 1 1,2 2 2

Return of a portfolio Minimum variance portfolio

22 1,2 22 1 1,2 2
= 1 1 + 2 2 + + 1 = 2 =
1 21,2 + 22 12 21 1,2 2 + 22

CAPM (Capital Asset Pricing Model)

Security Market Line Beta

,
[ ] = + ([ ] ) = 2