CFA Level 1 - 101 Must Knows
, CFA Level 1 - 101 Must Knows
Addition Rule of Probability - Answer: ADDITION: P (A or B) = P(A) + P(B)
- P(AB)
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
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
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:
- A mean equal to the population mean
, CFA Level 1 - 101 Must Knows
- A variance equal to the population variance divided by sample size (σ²
/ n)
Standard Error of Sample Mean - Answer: σ / n^½
Binomial Probability - Answer: One of two possible outcomes (i.e.
success/failure)
Possible outcomes can be demonstrated in binomial tree
Use "nCr" on calculator to solve:
nCr = P(success)^x * P(failure)^(n-x)
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"
, CFA Level 1 - 101 Must Knows
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))
F(x) = probability of an outcome less than or equal to x
Standard normal table (z) shows cumulative probabilities
Effective Annual Yield - Answer: EAY = (1 + (i/n))^n - 1
Stated Rate = (EAY^(1/n) - 1) * n
Continuous Compounding - Answer: ln(EAY) = continuously
compounded stated rate
e^(continuously compounded stated rate) = EAY
Type I Error - Answer: Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
Type II Error - Answer: Failure to reject a false null hypothesis
, CFA Level 1 - 101 Must Knows
Addition Rule of Probability - Answer: ADDITION: P (A or B) = P(A) + P(B)
- P(AB)
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
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
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:
- A mean equal to the population mean
, CFA Level 1 - 101 Must Knows
- A variance equal to the population variance divided by sample size (σ²
/ n)
Standard Error of Sample Mean - Answer: σ / n^½
Binomial Probability - Answer: One of two possible outcomes (i.e.
success/failure)
Possible outcomes can be demonstrated in binomial tree
Use "nCr" on calculator to solve:
nCr = P(success)^x * P(failure)^(n-x)
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"
, CFA Level 1 - 101 Must Knows
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))
F(x) = probability of an outcome less than or equal to x
Standard normal table (z) shows cumulative probabilities
Effective Annual Yield - Answer: EAY = (1 + (i/n))^n - 1
Stated Rate = (EAY^(1/n) - 1) * n
Continuous Compounding - Answer: ln(EAY) = continuously
compounded stated rate
e^(continuously compounded stated rate) = EAY
Type I Error - Answer: Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
Type II Error - Answer: Failure to reject a false null hypothesis
