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Home > Asset Management Calculations

Asset Management Calculations


Calculations and Ratios presents the essential mathematical tools the finance professional needs for finding solutions to daily numerical problems. This section includes how to calculate return on investment, return on shareholders' equity, working capital productivity, EVA, risk-adjusted rate of return, CAPM, and many more.

  • Alpha and Beta Values of a Security
    A security’s performance, adjusted for risk, compared to overall market behavior.
  • Annual Percentage Rate
    The APR measures either the rate of interest that invested money earns in one year, or the cost of credit expressed as a yearly rate.
  • Basis Point Value
    The basis point value (BPV) expresses the change in value of an asset or financial instrument that results from a 0.01 percentage change in yield. BPV is commonly used to measure interest rate risk, and may be referred to as a delta or DV01.
  • Bond Yield
    The annual return on this certificate (the rate of interest) expressed as a percentage of the current market price of the bond.
  • Capital Asset Pricing Model
    The relationship between the risk and expected return of a security or stock portfolio.
  • Central Limit Theorem
    The central limit theorem (CLT) is a statistical theory which holds that, given a sufficiently large sample size from a sufficiently varied population, the mean of all results will be approximately equal to the mean of the population. In addition, samples will roughly follow a Normal distribution pattern (i.e., a bell-shaped curve), with variances reflecting the variance of the source population, divided by the sample size. As a rule of thumb, a...
  • Conversion Price
    The price per share at which the holder of convertible bonds, or debentures, or preferred stock, can convert them into shares of common stock.Depending on specific terms, the conversion price may be set when the convertible asset is issued.
  • Conversion Ratio
    The number of shares of common stock an investor will receive on converting a convertible security—a bond, debenture, or preferred stock.The conversion price may be set when the convertible security is issued, depending on its terms.
  • Convertible Preferred Stock
    Evaluating convertible preferred stock is principally an analysis of risk rather than of a company. Preferred stocks are listed as equity on a balance sheet, but they perform more like bonds than common stock since most of these issues pay a fixed dividend set at the time of issue. While holders of preferred stock are entitled to a fixed dividend, they do not usually have voting rights. Preferred stocks are usually repayable at par value, and...
  • Covariance
    Covariance measures the relationship between two random variables. For example, we might measure whether a sample population liked drinking wine, and whether they liked eating cheese. Covariance is a form of probability theory that allows us to measure the extent to which those two random variables change together. It’s important to remember this does not imply causality—simply because one variable increases along with another does not mean...
  • Current Price of a Bond
    The narrow range within which a given bond price falls, based on that bond’s current asking price and bid price.
  • Dividend Yield
    An investment’s dividend yield is a measure of the dividend paid on stock, expressed as a percentage over one year. This measure is frequently used in stock quotes and financial reports, and is based upon the company’s annual cash dividend per share and the current stock price.
  • Earnings at Risk
    Earnings at risk (EAR) measures the quantity by which net income might change in the event of an adverse change in interest rates. It is a risk measurement which is closely linked with value at risk (VAR) calculations. The difference is that while VAR looks at the change in the entire value over the forecast horizon, EAR looks at potential changes in cash flows or earnings.
  • Earnings per Share
    The portion of a company’s profit allocated to each outstanding share of a company’s common stock.
  • Expected Rate of Return
    The projected percentage return on an investment, based on the weighted probability of all possible rates of return.
  • Fixed-Deposit Compound Interest
    The compound interest paid on fixed deposits, which is usually paid more frequently (monthly or quarterly) than a traditional annual interest rate. As the frequency of compounding increases, so does the effective rate of interest.
  • Market/Book Ratio
    Market/book ratio, sometimes called price-to-book ratio, is a way of measuring the relative value of a company compared to its stock price or market value.
  • Nominal and Real Interest Rates
    When calculating interest rates, the nominal rate of interest refers to an interest rate calculated without any adjustment for inflation or for the full effect of compounding. The real interest rate includes compensation for value lost through inflation, whereas the nominal rate excludes this. Finally, the effective interest rate (sometimes known as the annual equivalent rate, or AER) is a rate that takes account of the impact of compounding.If...
  • Payout Ratio
    Dividend cover expresses the number of times a company’s dividends to common stockholders could be paid out of its net after-tax profits.Payout ratio expresses the total dividends paid to stockholders as a percentage of a company’s net profit in a given period of time.
  • Portfolio Analysis: Duration, Convexity, and Immunization
    Duration is a measure of how sensitive the price of bonds are to changes in interest rates (otherwise known as interest rate risk). For example, if interest rates rise 1%, a bond with a two-year duration will fall about 2% in value. Convexity is a measure of how prices rise when yields fall, and can also be used to measure interest rate risk.
  • Price/Earnings Ratio
    The price/earnings (P/E) ratio is simply the stock price divided by earnings per share (EPS). While EPS is an actual amount of money, usually expressed in cents per share, the P/E ratio has no units—it is just a number. Thus if a quoted company has a stock price of $100 and EPS of $12 for the last published year, then it has a historical P/E of 8.3. If analysts are forecasting for the next year an EPS of, say, $14 then the forecast P/E is 7.1.
  • Price/Sales Ratio
    The price/sales (P/S) ratio is another measure, like the price/earnings (P/E) ratio, of the relative value of a stock when compared with others.
  • Rate of Return
    The annual return on an investment, expressed as a percentage of the total amount invested. It also measures the yield of a fixed-income security.
  • Return on Stockholders’ Equity
    Profitability, specifically the percentage return that was delivered to a company’s owners.
  • Risk-Adjusted Rate of Return
    How much an investment returned in relation to the risk that was assumed to attain it.
  • Sharpe Ratio
    The Sharpe ratio, devised in 1966 by economist William F. Sharpe, measures the ratio of return from a portfolio to volatility. It is used to compare and select investment options, and identify which portfolio offers the most risk-efficient investment.
  • Term Structure of Interest Rates
    A mathematical description of the relationship between interest rates (or the cost of borrowing) and the time to maturity of a debt in a given currency, often used in relation to fixed securities. The resulting relationship is plotted on a graph that is known as a “yield curve.” This curve can then be analyzed to measure the expected yield of securities over time.
  • Total Return
    The total percentage change in the value of an investment over a specified time period, including capital gains, dividends, and the investment’s appreciation or depreciation.
  • Treynor Ratio
    The Treynor ratio, as devised by Jack Treynor, is a measurement of a portfolio’s return earned in excess of what would be earned on a risk-free investment. The higher the Treynor ratio, the better the performance of the portfolio or stock being analyzed.
  • Yield
    Stocks that pay dividends (note that not all do) will produce an annual cash return to the investor. Simply dividing this cash return by the current stock price and expressing that as a percentage is known as the “yield”—that is, the annual percentage income at the current price. As far as newspapers are concerned, the yield figure they publish is usually the historical one.Analysts will often provide forecasts for dividends in terms of earnings...

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