CFA LEVEL 1 - 101 MUST KNOWS / STUDY GUIDE
EXAM NEWEST ACTUAL QUESTIONS AND ANSWERS
(A+ GUIDE SOLUTION)
Terms in this set (368)
Addition Rule of ADDITION: P(A or B) = P(A) + P(B) - P(AB)
Probability
Roy's Safety First Criterion Safety First Ratio = (E(R) - Rₜ) / σ
Larger ratio is better
If (Rₜ) is risk free rate, then it becomes Sharpe Ratio
Sharpe Ratio 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 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
- A variance equal to the population variance dividedby sample
size (σ² / n)
Standard Error of Sample σ / n^½
Mean
,Binomial Probability 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 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"
Cumulative Distribution Gives the probability that a random variable will have an
Function 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 EAY = (1 + (i/n))^n - 1
Stated Rate = (EAY^(1/n) - 1) * n
Continuous Compounding ln(EAY) = continuously compounded stated rate
e^(continuously compounded stated rate) = EAY
Incorrectly rejecting a true null hypothesis
Type I Error
(convicting an innocent person is Type I)
,Type II Error Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
Significance Level / Power of Significance Level = Probability of Type I
a Test
Power of a Test = (1 - Probability of Type I)
Covariance (Probability Covariance of random variables
Model) A and B from probability model
On the calculator:
1) Enter returns for set A andjoint
probabilities for AB; find
mean A
2) Enter returns for set B andjoint
probabilities for AB; find
mean B
3) Multiply each joint probabilityAB
by each set's returns minus means
(ex: P(AB1)(A1 - Mean A)(B1 -
Mean B) + P(AB2)(A2 - Mean A)
(B2 - Mean B) + ... + P(ABn)(An -
Mean A)(Bn - Mean B)) 4) The
summed total is your
covariance
Covariance of random variables A and B
from sample with historical data with n
Covariance (Sample) observations
Correlation Coefficient COVab / σaσb
Bank Discount Yield (Discount / Face Value) * (360 / Days)
(Discount basis)
Money Market Yield (HPY) * (360 / Days)
, Bond Equivalent Yield (HPY) * (365 / Days)
Most appropriate for comparing yields!
Technical Analysis Continuation:
Indicators TRIANGLE (or pennant) = Suggests a pause in the stock price
movement that will be followed by a continuation of the
previous trend
Reversal:
HEAD AND SHOULDERS = Suggests a future decline in the
stock price regardless of prior trend
DOUBLE BOTTOM = Increasing stock price in the future
(reversal of a downtrend)
Trendlines:
SUPPORT / RESISTANCE = Range that stock price trades in
based on supply/demand. Stock is "supported" from going
below a certain low price, and "resists" going above a
certain high price
Price Elasticity %ΔQuantity / %ΔPrice = (ΔQ / ΔP) * (P₀ / Q₀)
Demand is elastic if less than -1
Demand is inelastic if 0 to -1
Income Elasticity %ΔQuantity / %ΔIncome
Positive for normal good
Negative for inferior good
%ΔQuantity / %ΔPriceʳᵉˡᵃᵗᵉᵈ ᵍᵒᵒᵈ
Cross-Price Elasticity
Positive for substitutes
Negative for complements
EXAM NEWEST ACTUAL QUESTIONS AND ANSWERS
(A+ GUIDE SOLUTION)
Terms in this set (368)
Addition Rule of ADDITION: P(A or B) = P(A) + P(B) - P(AB)
Probability
Roy's Safety First Criterion Safety First Ratio = (E(R) - Rₜ) / σ
Larger ratio is better
If (Rₜ) is risk free rate, then it becomes Sharpe Ratio
Sharpe Ratio 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 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
- A variance equal to the population variance dividedby sample
size (σ² / n)
Standard Error of Sample σ / n^½
Mean
,Binomial Probability 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 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"
Cumulative Distribution Gives the probability that a random variable will have an
Function 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 EAY = (1 + (i/n))^n - 1
Stated Rate = (EAY^(1/n) - 1) * n
Continuous Compounding ln(EAY) = continuously compounded stated rate
e^(continuously compounded stated rate) = EAY
Incorrectly rejecting a true null hypothesis
Type I Error
(convicting an innocent person is Type I)
,Type II Error Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
Significance Level / Power of Significance Level = Probability of Type I
a Test
Power of a Test = (1 - Probability of Type I)
Covariance (Probability Covariance of random variables
Model) A and B from probability model
On the calculator:
1) Enter returns for set A andjoint
probabilities for AB; find
mean A
2) Enter returns for set B andjoint
probabilities for AB; find
mean B
3) Multiply each joint probabilityAB
by each set's returns minus means
(ex: P(AB1)(A1 - Mean A)(B1 -
Mean B) + P(AB2)(A2 - Mean A)
(B2 - Mean B) + ... + P(ABn)(An -
Mean A)(Bn - Mean B)) 4) The
summed total is your
covariance
Covariance of random variables A and B
from sample with historical data with n
Covariance (Sample) observations
Correlation Coefficient COVab / σaσb
Bank Discount Yield (Discount / Face Value) * (360 / Days)
(Discount basis)
Money Market Yield (HPY) * (360 / Days)
, Bond Equivalent Yield (HPY) * (365 / Days)
Most appropriate for comparing yields!
Technical Analysis Continuation:
Indicators TRIANGLE (or pennant) = Suggests a pause in the stock price
movement that will be followed by a continuation of the
previous trend
Reversal:
HEAD AND SHOULDERS = Suggests a future decline in the
stock price regardless of prior trend
DOUBLE BOTTOM = Increasing stock price in the future
(reversal of a downtrend)
Trendlines:
SUPPORT / RESISTANCE = Range that stock price trades in
based on supply/demand. Stock is "supported" from going
below a certain low price, and "resists" going above a
certain high price
Price Elasticity %ΔQuantity / %ΔPrice = (ΔQ / ΔP) * (P₀ / Q₀)
Demand is elastic if less than -1
Demand is inelastic if 0 to -1
Income Elasticity %ΔQuantity / %ΔIncome
Positive for normal good
Negative for inferior good
%ΔQuantity / %ΔPriceʳᵉˡᵃᵗᵉᵈ ᵍᵒᵒᵈ
Cross-Price Elasticity
Positive for substitutes
Negative for complements
