CFA Level 1: Quant Study Guide with Complete and Verified Solutions

CFA Level 1: Quant Study Guide with Complete and Verified Solutions nominal risk free rate equals... - Answer️️ -real risk free rate + expected inflation required interest rate on a security - Answer️️ -nominal risk free rate + default risk premium + liquidity premium + maturity risk premium EAR or APY - Answer️️ -(1+periodic rate)^m - 1 always higher than annual percentage rates (not compounded) ordinary annuity - Answer️️ -cash flows that occur at the end of each compounding period annuity due - Answer️️ -payments or receipts occur at the beginning of each period PV of Perpetuity - Answer️️ -Payment/interest rate Effect of increase in the frequency of compounding rates - Answer️️ -increases FV, decreases PV amortization schedule - Answer️️ -interest component = interest rate * beginning balance principal component = payment - interest component ending balance = period's beginning balance (last period's ending balance) - principal component holding period return - Answer️️ -(ending value-beginning value) / beginning value OR ©SOPHIABENNETT EXAM SOLUTIONS_2024/2025 Tuesday, September 3, 2024 10:30 AM Page | 2 (Ending value / beginning value) - 1 time-weighted rate of return - Answer️️ -The compound rate of growth of one unit of currency invested in a portfolio during a stated measurement period; a measure of investment performance that is not sensitive to the timing and amount of withdrawals or additions to the portfolio. Also a geometric mean return money weighted return - Answer️️ -IRR based on cash inflows and outflows Bank discount yield - Answer️️ -RBD = D/F * 360/t Where: D = dollar discount from face value, F = face value, T = days until maturity, 360 = days in a year US T-Bills are quoted on a bank discount basis holding period yield - Answer️️ -Holding Period Return = (ending value/beginning value) - 1 EAY^t/365 - 1 total return an investor earns between the purchase date and the sale or maturity date effective annual yield - Answer️️ -EAY = (1 + HPY)^365/t - 1 where t is days to maturity. Remember that EAY bank discount yield, for three reasons: (a) yield is based on purchase price, not face value, (b) it is annualized with compound interest (interest on interest), not simple interest, and (c) it is based on a 365-day year rather than 360 days. Be prepared to compare these two measures of yield and use these three reasons to explain why EAY is preferable. money market yield (Rmm) - Answer️️ -= HPR * (360/days until maturity) ©SOPHIABENNETT EXAM SOLUTIONS_2024/2025 Tuesday, September 3, 2024 10:30 AM Page | 3 bond equivalent yield - Answer️️ -= Semiannual Yield * 2 semiannual yield needs to be compounded Descriptive statistics - Answer️️ -used to summarize the important characteristics of large data sets Inferential statistics - Answer️️ -a sample, pertain to the procedures used to make forecasts, estimates or judgement about a large set of data nominal scale / categorical - Answer️️ -level of measurement with least information, observations are classified or counted with no particular order ordinal scale - Answer️️ -level of measurement, categorized with respect to specified characteristic interval scale - Answer️️ -provides relative ranking like ordinal scale plus assurance that the difference between the scale values are equal e.g. temperature however measurement of 0 does not necessarily indicate the total absence of what we are measuring - e.g. 30 c is not three times as hot as 10 c ratio scale - Answer️️ -ratio scales provide ranking and equal difference between scale values and a true zero point as the origin e.g. measurement of money difference between parameter and sample statistic - Answer️️ -parameter is used for population sample statistic is used for sample ©SOPHIABENNETT EXAM SOLUTIONS_2024/2025 Tuesday, September 3, 2024 10:30 AM Page | 4 modal interval - Answer️️ -For any frequency distribution, the interval with the greatest frequency relative frequency - Answer️️ -dividing the absolute frequency of reach return by the total number of observations mode - Answer️️ -the value that occurs most frequently in a data set unimodal: one value that happens most frequent bimodal, trimodal: two or three values happen the most frequent geometric mean - Answer️️ -Compounded annual rate of return for an investment, harmonic mean geometric mean arithmetic mean