Equation 7-1.

Expected Value, or Mean (), of a Probability

Distribution:

Equation 7-2. The Standard Deviation:

= (VP)

Where:

= the expected value, or mean

Where:

= the sum of

V = the possible value for some variable

P = the probability of the value V occurring
Equation 7-3. Coefficient of Variation of a Probability
Distribution:

CV =

P ( V )

= the standard deviation

= the sum of

= the expected value

V = the possible value for some variable

P = the probability of the value V occurring
Equation 7-4. Expected Rate of Return (ROR) of a 2 Asset
Portfolio:

Standard Deviation
Mean

E ( R p ) =( w aE ( R a ) ) + ( wbE ( Rb ) )

Where:

E ( Rp)

= expected ROR of the portfolio

wa, wb

= weight of each Asset (A&B) in the

portfolio

E ( Ra ) , E ( Rb )
Equation 7-5. Standard Deviation of a 2 Asset portfolio:

(A&B)
Equation 7-6. The Capital Asset Pricing Model (CAPM):

p = w2a 2a + w2b 2b +2 w a wb r a , b a b
Where:

= standard deviation of the returns of the

portfolio

k p =k rf + ( k mk rf )
kp

Where:

= the required rate of return

appropriate for the investment

wa, wb

= weight of each Asset (A&B) in the

a , b

= standard deviation of returns of each

portfolio

Asset (A&B)

ra , b

= expected ROR of each Asset

km

= the required rate of return on the overall

= the investment projects Beta

Equation 8-2a. Present Value of a Single Amount

Algebraic Method:

FV =PV( 1+k )n
FV = Future Value, the ending amount
PV = Present Value, the starting amount or
original principal
k = Rate of interest per period (expressed as a
decimal)
n = Number of time periods

= the risk-free rate of return

market

= correlation coefficient of the returns of

Asset A&B.
Equation 8-1a. Future Value of a Single Amount
Algebraic Method:

k rf

PV =

FV 1
n
(1+k )

Where:

Where:

PV = Present Value, the starting amount

FV = Future Value, the ending amount
k = Discount rate of interest per period (expressed
as decimal)
n = Number of time periods

Equation 8-3a. Future Value of an Annuity Algebraic

Method:

FVA=PMT

(1+ k) 1
k

FVA = Future Value of an Annuity

PMT = Amount of each annuity payment
k = Interest rate per time period (expressed as
decimal)
n = Number of annuity payments

Equation 8-4a. Present Value of an Annuity Algebraic

Method:

PVA=PMT

1
(1+k )n
k

Where:

Equation 8-5. Present Value of a Perpetuity Algebraic

Method:

1
k

()

PVP=PMT

Where: PVP = Present Value of a Perpetuity

PMT = Amount of each payment
k = Discount rate (expressed as decimal)
Equation 8-7. Future Value with Continuous
Compounding:

FV =PV e (kn)
Where: FV = Future Value
PV = Present Value
e = Natural antilog of 1
n = Number of years
k = Stated annual interest rate (expressed as
decimal)

Where: PVA = Present Value of an Annuity

PMT = Amount of each annuity payment
k = Discount rate per period (expressed as
decimal)
n = Number of annuity payments
Equation 8-6. Rate of Return Algebraic Method:

FV
PV

1
n

( ) 1

k=

Where: k = Rate of Return (expressed as decimal)

FV = Future Value
PV = Present Value
n = Number of compounding periods