1.
Q: YIELD (TREASURY BILLS)
Y = Selling Price – Purchase Price
x 365/n
Purchase Price
2. Q: YIELD DISCOUNT
Yd = Par – Purchase Price
x 360/n
Par
3. Q: YIELD (COMMERCIAL PAPER)
Y = Face Value – Purchase Price
x 360/n
Purchase Price
4. Q: REPO
Repo Principal = Securities Market Value x (1-Haircut)
*For haircut, convert the basis point given into decimal places. Example, 25 basis
points is equals to 0.0025. How? 25 = 0.25% = 0.0025.
Securities Market Value = PAR x (1-discount rate x n/360)
Repurchase Price = Repo Principal x (1 + (yield x time/360)
5. Q: Required Rate of Return
rt = Ct + Pt + Pt-1
Pt-1
(Use this formula pag rate hinahanap. Pag value yung hinahanap, tanggalin na yung pt-1 sa baba. Wag idivide.)
6. Q: STANDARD DEVIATION (SINGLE ASSET) – Table Form, the easiest approach
Asset A Return Weighted Average Difference Squared Probability (d)(e)
a b (a-b) (c^2) e g
c d
1 13% 15% -2% 0.04% 0.25 0.01%
2 15% 15% 0% 0.00% 0.50 0.00%
3 17% 15% 2% 0.04% 0.25 0.01%
Total: 0.02%
Square Root
(0.02%) = 1.41%
Asset B Return Weighted Average Difference Squared Probability (d)(e)
a b (a-b) (c^2) e g
c d
1 7% 15% -8% 0.64% 0.25 0.16%
2 15% 15% 0% 0.00% 0.50 0.00%
3 23% 15% 8% 0.64% 0.25 0.16%
Total: 0.32%
Square Root
(0.32%) = 5.66%
REMEMBER: The higher the standard deviation, the greater the risk.
Probability and Weighted Average (b and e on table):
Asset A
Possible Outcomes Probability Return Weighted Value
a b (a)(b)
Pessimistic 0.25 13% 3%
Most Likely 0.50 15% 8%
Optimistic 0.25 17% 4%
Total: 1.00 15%
Asset B
Possible Outcomes Probability Return Weighted Value
a b (a)(b)
Pessimistic 0.25 7% 2%
Most Likely 0.50 15% 8%
Optimistic 0.25 23% 6%
Total: 1.00 15%
7. Q: WHICH INVESTMENT IS BETTER? (CV)
CV = Standard Deviation
Weighted Value (rate)
Asset A = 0.09
Asset B = 0.38
Asset B investment is better.
8. Q: STANDARD DEVIATION USING HISTORICAL DATA – Table Form
Year Return Weighted Average Difference Squared
a b (a-b) (c^2)
c d
2010 14.29% 10.48% 3.81% 0.14%
2011 4.11% 10.48% -6.37% 0.41%
2012 13.04% 10.48% 2.56% 0.07%
Total: 0.62%
Square Root: 5.55%
Weighted Average:
[(14.29+4.11+13.04)/3] = 10.48%
9. STANDARD DEVIATION (PORTFOLIO)
10. CORRELATION
(for 9 & 10, refer sa uploaded materials ni ma’am entitled “correlation” and “portfolio”.
11. CAPM & SML
Step 1: Solve the Market Risk Premium.
Ex: 10% (Market return rate) - 5% (Risk-free rate) = 5%
Step 2: Find the Asset Risk Premium.
Ex: 5% (Risk-free rate) x 1.25 (beta) = 0.0625
Step 3: Compute the Required Return on Asset.
Ex: 0.0625 (ARP) x 100 (to make it a percent) = 6.25%
6.25% + 5% (Risk-free rate) = 11.25%
With Inflation: ex: 5%
(If Required Return on Asset lang hinahanap, just add the RRA computed + inflation rate. If hindi lang RRA
hinahanap, use the new given below and solve step by step.)
Effect of inflation; same example to the previous problem
Risk-free rate = 5% + 5% = 10%
Market Return rate = 10% + 5% = 15%
Beta = 1.25
With risk aversion: ex: 2%
(Market Return Rate lang naaapektuhan)
Effect of risk aversion; same example to the previous problem
Risk-free rate = 5%
Market Return rate = 10% + 2% = 12%
Beta = 1.25
Computation:
Step 1: 12% - 5% = 7%
Step 2: 7% x 1.25 = 0.0875
Step 3: 0.0875 x 100 = 8.75% + 5% = 13.75%
