CFA Level 1 - 101 Must Knows

Addition Rule of Probability CORRECT ANSWER ADDITION: P(A or B) = P(A) + P(B) - P(AB) Roy's Safety First Criterion CORRECT 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 CORRECT 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 CORRECT 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 - A variance equal to the population variance divided by sample size (σ² / n) Standard Error of Sample Mean CORRECT ANSWER σ / n^½