Formula list:

Portfolio optimization:
2 p = *'V *

1 min 'V + [ R p ' r ] + [1 ' e] 2

* = V 1 r + V 1e

=
*

e 'V 1e R p r 'V 1e r 'V 1 re 'V 1e r 'V 1e

V r+

' r V 1 r r 'V 1e R p r 'V 1 re 'V 1e r 'V 1e

V 1e

Same, with risk free object:

1 min 'V + R p [r f + ' (r rf e)] 2

}
V 1 (r rf e)

* =

R p rf r 'V r 2r 'V e(rf ) + e V e(rf )

' 1 1 1 2

= V =
2 p *' *

( R p rf ) 2 r V 1 r 2r V 1e(rf ) + e 'V 1e(rf ) 2 ' '

Security Market Line

E (ri ) = rf + ( E (rM ) rf ) i
SDF in a linear factor model:

1 = E (mt +1ri )
Skewness and Kurtosis:

m = a + b' f

E (mt +1ri ) = E (mt +1 ) E (ri ) + cov(mt +1 , ri )

( x x) skew = (1 / n)[ ( x x) ]
3

2 3/ 2

( x x) kurt = (1 / n)[ ( x x) ]
4

2 2

Arithmetic and Geometric means:

r arithmetic

1 t =T = rt T t =1

r geometric

t =T = (1 + rt ) t =1

1/ T

Relative and constant risk aversion

RRA =

xU ' ' ( x) U ' ( x)

1

ARA =

U ' ' ( x) U ' ( x)

Lower Partial Moments:

LPM n ,

1 t =T = (Min[( x ),0]) T t =1
coupont principal + t (1 + rt ) (1 + rT )T

Present value bond:

Pbond =
t =1

t =T

Duration:

CFt /(1 + y ) t D = t PBond t =1

t =T

(1 + y ) PBond = D PBond 1+ y
PBond 1 + y 1 2 = D + C [y ] ; PBond 1+ y 2

Convexity:

1 C= Pbond (1 + y ) 2

CFt (t 2 + t ) (1 + y )t t =1
t =T

Optimal investment, Grossman model:

Xi =

E [P ] + i2; P1 , yi ( yi E [P ]) rf P0 1 1 aiVar [P ] 1 i2; P1 , yi 1