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CFA Level 1 - 101
Must Knows
Comprehensive
Questions (Frequently
Tested) with Verified
Answers Graded A+
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1. Addition Rule of Probability Answer: ADDITION Answer: P(A or B) = P(A) + P(B) -
P(AB)
2. Roy's Safety First Criterion Answer: Safety First
Ratio = (E(R) - Rₜ) / σ Larger ratio is better
If (Rₜ) is risk free rate, then it becomes Sharpe Ratio
3. Sharpe Ratio Answer: Sharpe Ratio =
(E(R) - RFR) / σ Larger ratio is better
If (Rt) is higher than RFR, then it becomes Safety First Ratio
4. Central Limit Theorem Answer: If we take samples of a population, with a large
enough sample size, the distribution of all sample means is normal with Answer:
-A mean equal to the population mean
-A variance equal to the population variance divided by sample size (σ² / n)
5. Standard Error of Sample Mean Answer: σ / n^½
6. Binomial Probability Answer: One of two possible outcomes
(i.e. success/failure) Possible outcomes can be demonstrated in
binomial tree
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Use "nCr" on calculator to solve Answer:
nCr = P(success)^x * P(failure)^(n-x)
7. P - Value Answer: Based on a calculated test statistic, rather than a significance
level (which is chosen) p-value = smallest significance level at which an analyst can
reject the null hypothesis
one-tailed test - "less than or
equal to" two-tailed test - "equal
to"
8. Cumulative Distribution Function Answer: Gives the probability that a random variable
will have an outcome less than or equal to a specific value (represented by F(x))
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F(x) = probability of an outcome less than or equal to x
Standard normal table (z) shows cumulative probabilities
9. Effective Annual Yield Answer: EAY =
(1 + (i/n))^n - 1 Stated Rate = (EAY^(1/n) - 1) *
n
10. Continuous Compounding Answer: ln(EAY) = continuously compounded stated
rate
e^(continuously compounded stated rate) = EAY
11. Type I Error Answer: Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
12. Type II Error Answer: Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
13. Significance Level / Power of a Test Answer: Significance Level = Probability
3/
102
CFA Level 1 - 101
Must Knows
Comprehensive
Questions (Frequently
Tested) with Verified
Answers Graded A+
1/
102
, Contact for further consultation
1. Addition Rule of Probability Answer: ADDITION Answer: P(A or B) = P(A) + P(B) -
P(AB)
2. Roy's Safety First Criterion Answer: Safety First
Ratio = (E(R) - Rₜ) / σ Larger ratio is better
If (Rₜ) is risk free rate, then it becomes Sharpe Ratio
3. Sharpe Ratio Answer: Sharpe Ratio =
(E(R) - RFR) / σ Larger ratio is better
If (Rt) is higher than RFR, then it becomes Safety First Ratio
4. Central Limit Theorem Answer: If we take samples of a population, with a large
enough sample size, the distribution of all sample means is normal with Answer:
-A mean equal to the population mean
-A variance equal to the population variance divided by sample size (σ² / n)
5. Standard Error of Sample Mean Answer: σ / n^½
6. Binomial Probability Answer: One of two possible outcomes
(i.e. success/failure) Possible outcomes can be demonstrated in
binomial tree
1/
102
, Contact for further consultation
Use "nCr" on calculator to solve Answer:
nCr = P(success)^x * P(failure)^(n-x)
7. P - Value Answer: Based on a calculated test statistic, rather than a significance
level (which is chosen) p-value = smallest significance level at which an analyst can
reject the null hypothesis
one-tailed test - "less than or
equal to" two-tailed test - "equal
to"
8. Cumulative Distribution Function Answer: Gives the probability that a random variable
will have an outcome less than or equal to a specific value (represented by F(x))
2/
102
, Contact for further consultation
F(x) = probability of an outcome less than or equal to x
Standard normal table (z) shows cumulative probabilities
9. Effective Annual Yield Answer: EAY =
(1 + (i/n))^n - 1 Stated Rate = (EAY^(1/n) - 1) *
n
10. Continuous Compounding Answer: ln(EAY) = continuously compounded stated
rate
e^(continuously compounded stated rate) = EAY
11. Type I Error Answer: Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
12. Type II Error Answer: Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
13. Significance Level / Power of a Test Answer: Significance Level = Probability
3/
102
