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# Cfa l1 exam formula & concepts sheet 2013

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### Cfa l1 exam formula & concepts sheet 2013

1. 1. AnalystBuddy is an online CFA exam preparation provider, which will save you time and money. Access comprehensive StudyNotes, 1000’s of Practice Questions,Flash Cards, Mock Exams and more for just \$69 per exam. Or try it now free.... Visit www.AnalystBuddy.com©AnalystBuddy Pty LtdAll Rights Reserved.QUANTITATIVE METHODSTime Value of Money Basics• Future Value: FV = PV(1+I/Y)N• Present Value (PV): PV = FV/(1+I/Y)Ncurrent value of some future cash ﬂow• Annuities: series of equal cash ﬂows thatoccur at evenly spaced intervals over time.• Ordinary annuity: cash ﬂow at end of period.• Perpetuities: annuities with inﬁnite lives.PVperpetuity = PMT/(discount rate)Required Rate of Return Components1. Real risk-free rate (RFR).2. Expected inﬂation rate premium (IP).3. Risk premium.Approximation formula for nominal requiredrate:MeansArithmetic mean: sum of all observationvalues in sample/population, divided by # ofobservations.Geometric mean: used when calculatinginvestment returns over multiple periods or tomeasure compound growth rates.Geometric mean return:Variance and Standard DeviationVariance: average of squared deviations frommean.Standard Deviation: square root of variance.Holding Period Return (HPR)Coefﬁcient of VariationCoefﬁcient of variation (CV): expresses howmuch variation exists relative to mean of adistribution; allows for direct comparison ofdispersion across different data sets. CV iscalculated by dividing the SD of a distribution bythe mean (or expected value) of the distribution:Sharpe RatioSharpe ratio: measures excess return per unitof risk.For both ratios, large is better.Expected Return/Standard DeviationProbabilistic variance:Standard Deviation: take square root ofvariance.Correlation and CovarianceCorrelation: covariance divided by the productof the two standard deviations.Expected return, variance of 2-stock portfolio:Normal DistributionsNormal distribution is completely described byits mean and variance.68% of observations fall within90% fall within95% fall withinComputing Z-scoresZ-score:“standardizes”observationfromnormaldistribution; represents # of standard deviationsa given observation is from population mean.Binomial ModelsSampling DistributionCentral Limit TheoremStandard ErrorStandard error of the sample mean is thestandard deviation of the distribution of thesample means.Conﬁdence IntervalsConﬁdence interval: gives range of valuesthe mean value will be between, with a givenprobability (say 90% or 95%). With a knownvariance, formula for a conﬁdence interval is:(signiﬁcance level 10%, 5% in each tail)(signiﬁcance level 5%, 2.5% in each tail)Null Hypothesis (H0)(signiﬁcance level 1%,0.5% in each tail)Alternative Hypotheses: hypothesis theresearcher wants to reject; the Alternativehypothesis (Ha) is actually tested; the basis forthe selection of the tests statistics. Alternativehypothesis (Ha): concluded if there is sufﬁcientevidence to reject the null hypothesis.One-tailed test: tests whether value is greaterthan or less than a given number.Two-tailed test: tests whether value is equal toa given number.One-tailed test:Two-tailed test:ettp rrratiofirstsafetyRoyarg:0:0:0 aHversusH0:0:0  aHversusH