CFP Investment Planning Formulas

For doing certification, you will need to do lot of calculations. I found having all formulas in one place very useful for revising before exam. In this post, I will keep updating formulas that will help you for Investment Planning module.

Please use this page as last minute revision and unless you have context of CFP Investment Planning module, some of the things may not directly make sense to you.

This page is best seen on wider screen like Laptop. Post is still work in progress……Visit in couple of days to see entire list.

Holding Period Return or HPR formula

$$ HPR = {{ Value \ at \ End \ – \ Value \ at \ start } \over {Value \ at \ Start}} $$

Compound Annual Growth Return or CAGR formula

$$ CAGR = ( { {Value \ at \ End} \over {Value \ at \ Start} } ) ^ { 1 \over {years \ – 1} }-1 $$

Arithmetic Mean formula

$$ Arithmetic Mean = {\sum_ \ HPR \over Number \ of \ Years} \ OR \ { Sum \ of \ yearly \ returns \over Number \ of \ Years} $$

Geometric Mean formula

$$ Geometric \ Mean \ = ( (1 +R_1 ) * (1 +R_2 ) *…(1 +R_n ) ) ^ { 1 \over n }-1 $$

where R are returns over years and n is number of years

Real Rate of return formula

$$ Real \ rate \ of \ return \ = \ {{1 \ + \ Nominal \ Return } \over{1 \ + \ Inflation}} – 1 $$

Return Adjusted for Taxation Formula

$$ Return \ Adjusted \ for \ Taxation \ = \ {{ \ Realized \ Return } \over{1 \ – \ Tax \ bracket}} $$

Post Tax and Inflation Return Formula

$$Return \ Adjusted \ for \ Inflation \ and \ Tax \ = \ {Inflation \over {1 \ – \ Tax \ Bracket }}$$

Tax free to Taxable Return Formula

$$ Taxable \ Return \ = \ {Tax \ Free \ Return \over {1 \ – \ Tax \ Bracket }} $$

Standard Deviation Formula

$$ \sigma \ = \ \sqrt{variance}$$

Risk Adjusted Return – Sharpe Ratio Formula

$$ Sharpe \ Ratio \ = \ {{ R_p \ – R_f} \over \sigma_p}$$

\(R_p \) is Return of Portfolio or Asset

\(R_f \) is Risk free Returns

\(\sigma_p \) is Standard Deviation Portfolio or of Asset

Risk Adjusted Return – Treynor ratio Formula

$$ Treynor \ Ratio \ = \ {{ R_p \ – R_f} \over \beta_p}$$

\(R_p \) is Return of Portfolio or Asset

\(R_f \) is Risk free Returns

\(\beta_p \) is Beta of Portfolio or Asset

Formula for Total Risk of Portfolio

$$ \sigma_p \ = \ \sqrt{ w_1^2\sigma_1^2 \ + \ w_2^2\sigma_2^2 \ + \ w_3^2\sigma_3^2 \ + \ 2w_1w_2r_{12}\sigma_1\sigma_2 \ + \ 2w_1w_3r_{13}\sigma_1\sigma_3 \ + \ 2w_2w_3r_{23}\sigma_2\sigma_3 }$$

\(w\) = weight of asset in portfolio

\(\sigma \) is Standard Deviation of asset

\(r\) = correlation between two securities

Formula for Return on Asset

$$ ROA \ = \ { Net \ Income \over Assets} $$

Formula for Share using Dividend Discount Model (Constant Growth)

$$ P_0 \ = \ {D_1 \over r \ – \ g} \ = {D_0 ( \ 1 \ + \ g \ ) \over r \ – \ g}$$

\( P_0\) is current price of share as per this formula

\( D_1\) is expected dividend next year

\( r \) is expected return or yield from this investment

\( g \) is expected growth in dividend

\( D_0\) is dividend this year

Formula for Dividend Yield

$$ Dividend \ Yield \ = \ { Dividend \ Per \ Share \over Market \ Price \ of \ Share } \ X \ 100$$

Formula for Earning per share (EPS)

$$ EPS \ = { {Profit \ After \ Tax \ – \ Preference \ Dividend}\over Number \ of \ Equity \ Shares } $$

Formula for P/E ratio

$$ P/E \ = { Market \ Price \ of \ Share \over EPS } $$

Formula for PEG

$$ PEG \ = { P/E \over Projected \ Growth \ in \ earnings } $$

Intrinsic Value of option

$$ Intrinsic \ Value \ of \ Call \ option \ = max(\ 0 \ , \ S \ – \ X) $$

$$ Intrinsic \ Value \ of \ Put \ option \ = max(\ 0 \ , \ X \ – \ S) $$

\( S \) is Spot price

\( X \) is Strike price

Time Value of option or Profit for Option holder

$$ Time \ Value \ of \ option \ = diff(\ Premium \ , \ Intrinsic \ Value \ of \ option) $$

$$ Profit \ for \ of \ Option \ Holder \ = Intrinsic \ value \ – \ Premium$$

Please comment if any formula is incorrect and I will update same. Also suggest if any formula you used which is not in the list so we can add and help readers.

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