CFA Level I cheat sheet

Code of Ethics has six components: act with integrity, competence, diligence and respect; place client interests above personal interests; use independent professional judgment; practice and encourage ethical behaviour; promote integrity of capital markets; maintain and improve professional competence.

Seven Standards: I Professionalism, II Integrity of Capital Markets, III Duties to Clients, IV Duties to Employers, V Investment Analysis/Recommendations/Actions, VI Conflicts of Interest, VII Responsibilities as a CFA Member or Candidate.

Mosaic theory (Standard II(A)): material nonpublic information may not be acted on, but a conclusion assembled from public information plus individually nonmaterial nonpublic pieces is permissible.

Standard III(B) Fair Dealing requires fair, not identical, treatment; dissemination procedures should give clients adequate advance notice before investment action is taken.

Standard VI(B) Priority of Transactions ranks client and employer transactions ahead of personal transactions; personal trading typically requires pre-clearance and blackout periods.

Referral fees (Standard VI(C)) must be disclosed to the employer and to clients, in writing, before or at the time of entering the arrangement.

Standard V(C) Record Retention: members must keep records supporting analyses and recommendations; CFA Institute recommends seven years absent a stricter local requirement.

GIPS require presentation of at least five years of compliant performance (or since inception), adding annual periods until ten years are shown, with composite definitions and benchmark disclosure.

FV = PV(1 + r)^N; PV = FV/(1 + r)^N; ordinary annuity PV = PMT[1 − (1 + r)^(−N)]/r.

EAR = (1 + periodic rate)^m − 1, where m is periods per year; with continuous compounding EAR = e^r − 1.

NPV discounts all cash flows at the required return; IRR sets NPV to zero and implicitly assumes reinvestment at the IRR, so NPV prevails when the two rankings conflict.

Time-weighted return strips out the effect of external cash flows; money-weighted return is the IRR of portfolio cash flows and is sensitive to their size and timing.

Coefficient of variation = standard deviation / expected return; a lower CV indicates less risk per unit of return.

Two-asset variance = w1²σ1² + w2²σ2² + 2w1w2σ1σ2ρ; when ρ = +1 there is no diversification benefit.

Type I error is rejecting a true null and has probability equal to the significance level α; lowering α raises the probability of a Type II error (failing to reject a false null).

Bayes' formula: P(A|B) = P(B|A)·P(A)/P(B); by the central limit theorem the sample mean approaches normality as n increases.

Regression inference: slope confidence interval = b1 ± t_c·s_b1; R² is the fraction of variation explained, and multicollinearity inflates slope standard errors.

Expenditure approach: GDP = C + I + G + (X − M); income approach: GDP = national income + capital consumption allowance + statistical discrepancy.

GDP deflator = nominal GDP / real GDP × 100; real GDP is valued at base-period prices.

Laspeyres index uses base-period quantities and tends to overstate inflation; Paasche uses current-period quantities and tends to understate it.

Price elasticity of demand = %Δ quantity / %Δ price; demand is elastic when |E| > 1, and a price cut raises total revenue only when demand is elastic.

Money multiplier = 1 / reserve requirement; central bank tools include open market operations, reserve requirements and the policy rate.

Fiscal multiplier = 1/(1 − MPC); crowding out occurs when government borrowing pushes interest rates up and displaces private investment.

Covered interest rate parity: forward/spot = (1 + r_price currency)/(1 + r_base currency); uncovered parity relates the expected spot change to the rate differential.

Relative purchasing power parity: expected % change in spot rate ≈ domestic inflation − foreign inflation.

Business cycle phases are expansion, peak, contraction and trough; leading indicators such as the yield spread, building permits and equity prices turn before the economy does.

Assets = Liabilities + Equity; the balance sheet is a point-in-time stock while the income statement and cash flow statement cover a period.

Revenue recognition five steps: identify the contract, identify performance obligations, determine the transaction price, allocate the price, recognise revenue as obligations are satisfied.

When prices rise, FIFO reports higher ending inventory, lower cost of goods sold and higher gross profit than LIFO; LIFO reserve = FIFO inventory − LIFO inventory.

A LIFO liquidation occurs when sales exceed purchases, pushing old low-cost layers into cost of goods sold and temporarily inflating gross margin.

US GAAP: interest paid and interest received are operating, dividends paid are financing. IFRS permits interest paid and received in operating or investing, and dividends paid in operating or financing.

DuPont: ROE = net profit margin × total asset turnover × financial leverage; the five-step version further splits tax burden and interest burden.

A deferred tax liability arises when taxable income is below pretax accounting income, for example from accelerated tax depreciation, and is expected to reverse.

Cash conversion cycle = days of inventory on hand + days sales outstanding − days of payables; a shorter cycle frees working capital.

FCFF = NI + noncash charges + interest(1 − t) − fixed capital investment − working capital investment; FCFE = CFO − FCInv + net borrowing.

Capital budgeting: accept positive-NPV projects; when NPV and IRR rank mutually exclusive projects differently because of scale or timing, follow the higher NPV.

WACC = w_d·r_d(1 − t) + w_p·r_p + w_e·r_e; weights use market values and component costs are marginal and after tax.

Cost of equity can be estimated by CAPM (r_f + β × ERP), by the Gordon model (D1/P0 + g), or by bond yield plus a risk premium.

Degree of operating leverage = %ΔEBIT / %Δsales = Q(P − V)/[Q(P − V) − F]; degree of total leverage = DOL × DFL.

Modigliani-Miller dividend irrelevance holds in perfect markets; payout versus share repurchase differs in practice because of taxes, signalling and clientele effects.

Strong governance features include a majority-independent board, separation of chair and CEO, and independent audit and remuneration committees.

Primary sources of liquidity are cash, short-term credit lines and operating cash flow; secondary sources include asset sales, debt renegotiation and new equity.

Acquisition synergy = V(combined) − [V(acquirer) + V(target)]; a deal is accretive to EPS when the target's earnings yield exceeds the after-tax cost of the financing used.

Gordon growth: V0 = D0(1 + g)/(r − g); it requires constant growth with g < r and suits mature, dividend-paying companies.

H-model: V0 = [D0(1 + g_L) + D0·H·(g_S − g_L)]/(r − g_L), where H is half the length of the high-growth transition period.

Justified leading P/E = payout ratio/(r − g); justified trailing P/E = payout ratio(1 + g)/(r − g).

Justified P/B = (ROE − g)/(r − g); a higher ROE relative to the required return supports a higher justified multiple.

Residual income: RI = net income − (r × beginning book value); value = book value + present value of expected residual income.

Weak-form efficiency means technical analysis cannot earn abnormal returns; semi-strong means public information is already impounded; strong means even private information is reflected.

Porter's five forces: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, rivalry among existing competitors.

Cumulative voting allows minority shareholders to concentrate votes and elect directors; statutory voting gives one vote per share per board seat.

Price = Σ coupon/(1 + y)^t + principal/(1 + y)^N; price and yield are inversely related and the relationship is convex.

Yield to maturity assumes coupons are reinvested at the YTM and the bond is held to maturity; YTM equals the spot rate only when the curve is flat.

Spot rates discount single cash flows; the implied forward rate f(1,1) = (1 + s2)²/(1 + s1) − 1, and an upward-sloping spot curve implies forwards above spot rates.

Modified duration = Macaulay duration/(1 + y/m); %Δprice ≈ −D_mod × Δy, and the convexity adjustment adds +½ × convexity × (Δy)².

Effective duration is used for bonds with embedded options because their cash flows change when the benchmark yield curve shifts.

Callable bonds offer higher yields and exhibit negative convexity at low yields; putable bonds offer lower yields because the investor holds the option.

Term structure theories: pure expectations, liquidity preference (term premium rising with maturity), segmented markets and preferred habitat.

Full (dirty) price = clean (flat) price + accrued interest, where accrued interest is based on days elapsed since the last coupon date.

Credit spreads compensate for default and liquidity risk; senior secured debt ranks above subordinated debt and recovery rates drive expected loss.

Long forward payoff at maturity = S_T − F0; a futures position is marked to market daily through variation margin, which mitigates counterparty risk.

Long call payoff = max(0, S_T − X); long put payoff = max(0, X − S_T); option premium = intrinsic value + time value.

Put-call parity for European options on a non-dividend stock: c + PV(X) = p + S0; rearranged, it creates synthetic stock, call or put positions.

Binomial pricing values the option as the present value of the risk-neutral expected payoff, with risk-neutral probability p = (1 + r − d)/(u − d).

Black-Scholes assumes lognormal asset prices, constant volatility and risk-free rate, no dividends, European exercise and no transaction costs.

Delta = change in option price per unit change in the underlying (calls 0 to 1, puts −1 to 0); gamma measures the change in delta, vega the sensitivity to volatility.

An interest rate swap can be valued as a series of forwards or as the difference between a fixed-rate and a floating-rate bond; its value is zero at inception.

Cost of carry: forward price = spot compounded at the risk-free rate plus storage costs minus convenience yield and income over the contract life.

Forwards are customised and carry counterparty risk; futures are standardised, cleared and margined, and their prices converge to spot at expiry.

Hedge fund fees commonly combine a 1–2% management fee with a 20% incentive fee, subject to a hurdle rate and a high-water mark.

Hedge fund strategy groups are equity hedge (long/short), event-driven, relative value and macro; liquidity terms include lockups, notice periods and gates.

Private equity stages include venture capital, growth equity, buyouts, mezzanine and distressed; the J-curve shows negative early returns as fees precede exits.

Real estate: capitalisation rate = net operating income / property value; direct ownership is illiquid while REITs provide liquidity and must distribute most taxable income.

Commodity futures returns decompose into spot return, roll return and collateral yield; contango produces negative roll return while backwardation produces positive roll return.

Infrastructure assets typically have long-lived, regulated or contracted cash flows, high leverage and lower correlation with public equities.

Alternative valuations rely on appraisal or models, producing stale and smoothed reported returns that understate volatility and correlation with public markets.

Due diligence covers investment process, risk management, back-office operations, fund terms and service providers; operational failure is a leading cause of hedge fund closures.

Portfolio expected return = Σ w_i·E(R_i); variance = ΣΣ w_i·w_j·σ_i·σ_j·ρ_ij; diversification eliminates unsystematic risk but not systematic risk.

The efficient frontier gives the maximum expected return for each risk level; adding the risk-free asset creates the capital allocation line and a tangency portfolio.

The CML plots expected return against total risk for efficient portfolios; the SML plots expected return against beta for all assets, as specified by the CAPM.

CAPM: E(R_i) = r_f + β_i[E(R_m) − r_f]; an asset plotting above the SML offers more return than required and is undervalued.

Sharpe = (R_p − r_f)/σ_p; Treynor = (R_p − r_f)/β_p; Jensen's alpha = R_p − [r_f + β_p(R_m − r_f)]; information ratio = (R_p − R_b)/tracking error.

IPS components are risk and return objectives plus constraints: liquidity, time horizon, tax, legal/regulatory and unique circumstances.

Utility = E(R) − ½Aσ²; a higher risk-aversion coefficient A implies steeper indifference curves and a larger weight in the risk-free asset.

Rebalancing may be calendar-based or threshold-based; tactical asset allocation deliberately deviates from strategic weights to exploit short-term views.

Behavioural biases split into cognitive (conservatism, confirmation, representativeness, anchoring) and emotional (loss aversion, overconfidence, regret aversion, self-control).