FUNDAMENTALS OF FINANCE CHEAT SHEET
FUNDAMENTALS OF FINANCE CHEAT SHEET Section D Annuity – a constant stream of equal cash flows which occurs for a fixed period. Perpetuity – a constant stream of equal cash flows which continues forever. Australian Treasury Bonds ALWAYS make semi-annual coupon payments. Incremental Cash Flows Table
Realised Return =
𝐷𝑖𝑣+(𝑃1−𝑃𝑜) 𝑃𝑜
Dividend Yield =
𝐷𝑖𝑣 𝑃𝑜
Capital Gain Yield =
𝑃1−𝑃𝑜 𝑃𝑜
Capital Market Line (CML) – The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. Security Market Line (SML) – The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. If price is: On the SML = correctly priced Above the SML = underpriced Below the SML = overpriced Both the CML and the SML are graphs which show the relationship between risk and return for assets and portfolios. Risk is shown on the horizontal axis and expected return is shown on the vertical axis. The risk-free asset plots on the vertical axis and the market portfolio plots on the line. Differences are: The CML defines risk as total risk, represented by sigma or standard deviation. It shows the relationship between expected return and total risk.
Realised Return =
𝐷𝑖𝑣+(𝑃1−𝑃𝑜) 𝑃𝑜
Dividend Yield =
𝐷𝑖𝑣 𝑃𝑜
Capital Gain Yield =
𝑃1−𝑃𝑜 𝑃𝑜
Capital Market Line (CML) – The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. Security Market Line (SML) – The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. If price is: On the SML = correctly priced Above the SML = underpriced Below the SML = overpriced Both the CML and the SML are graphs which show the relationship between risk and return for assets and portfolios. Risk is shown on the horizontal axis and expected return is shown on the vertical axis. The risk-free asset plots on the vertical axis and the market portfolio plots on the line. Differences are: The CML defines risk as total risk, represented by sigma or standard deviation. It shows the relationship between expected return and total risk.
