Category: investments

Total return formula and calculator
In the second lesson of our investments course, we’ll be learning about a stock’s total return and its two components: capital gains and dividend yield. Total return formula Imagine that you bought a stock a few months ago for $10 per share and the current share price is $12. Based on what we learned in…

Gross return vs net return
We start our investments course by teaching you basic return calculations. One of the first things you need to understand is the distinction between gross returns and net returns. So, we begin with defining these two fundamental concepts below. You might find the video tutorial at the end useful as well. Gross return Let’s suppose…

Portfolio risk calculator and formula
We often say that risk and return are two sides of the same coin. So, when assessing the performance of a portfolio, we need to consider its risk as well as its return. In the previous lesson, we focused on portfolio return. Now, we turn our attention to portfolio risk. Portfolio risk calculator You can…

How to calculate Jensen’s alpha in Excel
The purpose of this tutorial is to teach you to calculate Jensen’s alpha in Excel. We’ll estimate the Jensen’s alpha on Amazon (AMZN) shares using the S&P500 as the market benchmark and the 13week Tbill as the proxy of riskfree asset. Our analysis will be based on five years of monthly data (i.e., 60 observations…

How to calculate portfolio risk and return in Excel
In this tutorial, we’ll teach you how to calculate portfolio risk and return in Excel. We’ll focus on an example where we construct a portfolio of the following three stocks: Tesla (TSLA), Amazon (AMZN), and Netflix (NFLX). If you’re unfamiliar with the formulas for portfolio return and portfolio risk, we’d recommend you check the following…

Capital allocation line
When a riskfree asset exists in an economy, investors can add that asset to their portfolios if they wish so. In the riskreturn space, the combination of the riskfree asset and any risky asset is a straight line. This line is called the capital allocation line as it shows how an investor’s capital is allocated…

Security market line
The security market line (SML) depicts the linear relationship between expected return and systematic risk, which is measured by beta, according to the capital asset pricing model (CAPM). Specifically, the equation of the security market line is nothing but the CAPM formula: where E[Ri] is the expected return on asset i, E[Rm] is the expected…

Market portfolio
We have so far learned how to calculate the risk and return of portfolios and how to trace an efficient frontier through meanvariance optimization. It is now time to introduce a special portfolio that will play a significant role when we discuss the CAPM: The market portfolio. What is the market portfolio? The market portfolio is the…

Capital asset pricing model (CAPM)
The capital asset pricing model (or CAPM) is among the most widelyused asset pricing models by stock analysts and portfolio managers. Its popularity arises from its simplicity and elegance. Analysts and investors can use it to forecast returns or to estimate the cost of equity. In this lesson, we explain this model and its assumptions.…

Minimum variance portfolio
In a market with multiple risky assets, the minimum variance portfolio is a particular combination of those assets that yields the minimum volatility. To be more specific, consider the market depicted in Figure 1. Here, the blue curve represents the efficient frontier. That is, all portfolios that lie on it are efficient portfolios (e.g., D…