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MBA FRM Formulas and Definitions

The document provides essential finance and risk management formulas and definitions across various topics, including portfolio management, risk metrics, capital market theories, time value of money, and performance metrics. It outlines key concepts such as risk, return, diversification, and various financial ratios, along with their corresponding mathematical formulas. Additionally, it covers advanced topics like derivatives and credit risk, offering a comprehensive overview for finance professionals.

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HamzaMehmoodBhatti
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43 views3 pages

MBA FRM Formulas and Definitions

The document provides essential finance and risk management formulas and definitions across various topics, including portfolio management, risk metrics, capital market theories, time value of money, and performance metrics. It outlines key concepts such as risk, return, diversification, and various financial ratios, along with their corresponding mathematical formulas. Additionally, it covers advanced topics like derivatives and credit risk, offering a comprehensive overview for finance professionals.

Uploaded by

HamzaMehmoodBhatti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Essential Finance & Risk Management Formulas and Definitions

1. Portfolio Management & Investments


**Definitions**

Risk: Possibility of loss or uncertainty in expected returns.

Return: Profit or loss derived from an investment.

Diversification: Strategy to reduce risk by holding different kinds of assets.

Efficient Frontier: Graph showing optimal portfolios offering the highest return for a given level
of risk.

**Formulas**

Expected Return of Portfolio (2 Assets): E(Rp) = w1*E(R1) + w2*E(R2)

Portfolio Variance (2 Assets): σ²p = w1²*σ1² + w2²*σ2² + 2*w1*w2*ρ12*σ1*σ2

2. Risk Metrics
**Definitions**

Systematic Risk: Market-wide risk, non-diversifiable.

Unsystematic Risk: Firm-specific risk, diversifiable.

Beta (β): Measure of stock’s volatility vs. market.

Value at Risk (VaR): Max loss over a period at a given confidence level.

Stress Testing: Testing portfolio performance under extreme conditions.

Expected Shortfall (CVaR): Expected loss given VaR has been exceeded.

**Formulas**

Beta: β = Cov(Ri, Rm) / Var(Rm)

VaR: VaR = Z * σ * √t * V

3. Capital Market Theories


**Definitions**

CAPM: Relates expected return to risk.

Security Market Line (SML): Graph of CAPM.


Arbitrage Pricing Theory (APT): Asset returns depend on multiple risk factors.

**Formulas**

CAPM: E(Ri) = Rf + βi*(E(Rm) - Rf)

Risk Premium: Risk Premium = E(Ri) - Rf

4. Time Value of Money


FV = PV × (1 + r)^n

PV = FV / (1 + r)^n

NPV = Σ(CFt / (1 + r)^t) - Initial Investment

IRR: Rate where NPV = 0

5. Correlation and Covariance


Cov(X, Y) = Σ[(Xi - X̄ )(Yi - Ȳ)] / (n - 1)

ρXY = Cov(X,Y) / (σX * σY)

6. Performance Metrics
Sharpe Ratio = (E(Rp) - Rf) / σp

Treynor Ratio = (E(Rp) - Rf) / βp

Jensen’s Alpha = Rp - [Rf + β(Rm - Rf)]

7. Bond Valuation
Bond Price: P = Σ(C / (1 + r)^t) + (F / (1 + r)^n)

8. Derivatives Basics
Put-Call Parity: C + PV(X) = P + S

9. Financial Ratios
Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Current Assets - Inventories) / Current Liabilities

ROA = Net Income / Total Assets

ROE = Net Income / Shareholders' Equity

Gross Profit Margin = Gross Profit / Sales × 100

Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity


Interest Coverage Ratio = EBIT / Interest Expense

10. Cost of Capital


WACC = (E/V * Re) + (D/V * Rd * (1 - T))

Cost of Equity (CAPM): Re = Rf + β(E(Rm) - Rf)

11. Credit Risk


Expected Loss = PD × LGD × EAD

12. Quantitative Methods


Variance: Var(X) = Σ(Xi - X̄ )² / (n - 1)

Standard Deviation: σ = √Variance

Exponential Smoothing: St = αYt + (1 - α)St-1

13. Corporate Finance


Dividend Discount Model (Gordon): P0 = D1 / (r - g)

14. Derivatives Advanced


Black-Scholes: C = S0*N(d1) - Xe^(-rt)*N(d2)

d1 = [ln(S0/X) + (r + σ²/2)t] / (σ√t), d2 = d1 - σ√t

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