CFA L1 |Mind Map

Quants

Interest Rates, Present Value, and Future Value

Time Value of Money in Finance

1. Nominal risk-free rate = Real risk-free rate + Expected inflation rate.

2. Additive Model: Nominal Rate = Inflation Premium + Real Rate
3. Multiplicative Model: (1 + Nominal Rate) = (1 + Inflation Rate) (1 + Real Rate)
4. Required interest rate = Nominal risk-free rate+ default risk premium + liquidity premium
+maturity risk premium.

5. Effective Annual Rate (EAR) = (1+ periodic rate)m -1

periodic rate = stated annual rate/m

m = no. of compounding periods per year

6. For continuous compounding, EAR = ert – 1

𝐹𝑉
7. Single Cash Flow: PV = (1+𝑟)𝑛
or FV = PV (1 + r)n

8. FV = PV (1 + Iൗy)N
PMT
9. PVperpetuity = I/y

Discounted Cash Flow Applications

1. NPV = PV(inflows) – PV(outflows)

Ending value−Beginning value P1 −P0 +D
2. Holding Period Return(HPR) = Beginning value
Or
P0

3. Money Weighted Rate of Return (MWROR) = IRR (depends on magnitude and timing)
4. Time Weighted Rate of Return (TWROR)
= ሾ(1 + r1 )(1 + r2 ) … . (1 + rn )ሿ1/n – 1

Where, (1 + r1 ) = HPR

5. Bank Discount Yield (BDY)=F−P

F
360
x n

6. Holding Period Yield (HPY) = F−P

P
P −P +D P +D
x 100 Or 1 P0 1 = 1P 1 - 1
0 0
365
7. Effective Annual Yield (EAY)= (1 + HPY) -1 n

8. (Annualized HPY & annual compounding)

∴ HPY = (𝐸AY + 1)n/365 - 1
360
9. Money Market Yield (MMY)= HPY X n
[Annual HPY in multiplicative fashion]

10. Bond Equivalent Yield (BEY) =2 x semiannual discount rate (per annum compounded semiannually) =
1
ቂ(1 + EAY)2 − 1ቃ x 2

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CFA L1 |Mind Map

Organizing, Visualizing, and Describing Data

Statistical Measures of Asset Returns

∑N
i=1 Xi
1. Population mean (μ) = ; where N is population size
N

∑N
i=1 Xi
Sample mean (X
̅) =
n
; when n is sample size

2. Sum of mean deviations = ∑N

i=1(xi − x)= 0

3. Geometric mean (GM) = n√(x1 ∗ x2 … . . xn )

Geometric mean return (R g ): 1 + R g = n√(1 + R1 ) (1 + R 2 ) … . (1 + R n )

AM ≥ GM [AM – GM increase as the dispersion of the observations increase.]

AM = GM [When all observations are equal]

N
4. Harmonic mean (HM) = 1 (average cost of shares purchase over time)
∑N
i=1 xi

AM > GM > HM (dollar cost averaging uses investing same amount every time period in a share;
average price will be lowest as HM is < AM or GM)
y
5. Ly = (n+1) 100[Quartiles, Deciles and Percentiles]

6. Range = Maximum Value – Minimum Value

∑N
i=1 | xi−x
̅| ∑ | x−x̅ |
7. Mean Absolute Deviation (MAD) = N
= N
2
∑𝑁
𝑖=1(x− µ)
8. Population variance, σ2 = N

2
∑𝑁
𝑖=1(x− μ)
9. Population Standard Deviation (σ) = √
N

σ > MAD
2
∑𝑁
𝑖=1(x−x
̅)
10. S 2 =
N−1

∑𝑁
𝑖=1 x− μ
11. K = σ

Standardizing a variable converts the mean into 0 and Standard Deviation into 1

12. Chebyshev’s inequality / Bienaymé Chebyshev’s Theorem

1
% of observations that lie within K standard deviation of mean is at least=1 − K2
1
i.e., min Probability that variable will lie betweenμ ± Kσ = 1 −
K2
(Applicable for all distribution) (K > 1)
σ Sx
13. Coefficient of variation (CV) = x 100 OR ( x 100)
μ x̅

̅ p − Rf
R
14. Sharpe ratio (Reward to variability ratio/SR) =
σp

15. Symmetrical: Mean = Median = Mode

Positive skewness: Mean > Median > Mode

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Negative skewness: Mean < Median < Mode

16. Skewness Extent to which a distribution is not symmetrical

(x−x̅)3 Third Moment
Coefficient of Skewness (Sk ) = n∗SD3
= SD3

<0 =0 o>

|Sk | > 0.5 (considered significant levels of Skewness)

17. Kurtosis: Degree to which a distribution is more / less peaked
∑( x−x̅ )4 Forth Moment
Coefficient of Kurtosis = =
n∗SD4 SD4

>3 =3 <3
Leptokurtic Mesokurtic Platykurtic
(More peaked (Normal (Less
Distribution) peaked
Fat tails)
Thin Tails)

Excess Kurtosis = Normal distribution with Kurtosis of 3

Excess Kurtosis >1 [considered significant]

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CFA L1 |Mind Map

Probability Concepts
Probability Trees and Conditional Expectations
Portfolio Mathematics

no of favourable outcomes
1. Probability =
total possible outcomes

2. P(A)  Marginal / Unconditional Probability

P (A ∩ B)  Joint Probability A and B

P (A ∪ B)  Total Probability A or B

P (B | A)  Conditional Probability of B given that A has occurred

P(A ∩ B)
3. P (A | B) =
P (B)

Or P (A ∩ B) = P (A | B). P (B)

(Multiplication rule of probability)

4. P (A ∪ B) = P (A) + P (B) – P (A ∩ B)

(Addition rule)

5. For, mutually exclusive event, P (A ∩ B) = 0

For, independent event, P (A ∩ B) = P (A) P (B)

Also, P (A | B) = P (A) or P (B | A) = P (B)

6. P (R) = P (R | S1 ) x P (S1 ) + P(R | S2 ) x P (S2 ) + P(R | Sn) x P(Sn)

Where {S1 , S2 … . Sn } is mutually exclusive & exhaustive [total probability rule]

7. BAYES’ THEOREM – Posterior Probability

P (A∩X) P (A)∗P(X|A)
P (A |X) = P (A∩X )+P(B∩X) = P(A). P(X|A)+P(B).(X|B)

P(O|I) n! n!
OR P (I | O) = ∗ P(I)nPr = (n−r) !
= OrdernCr = (n−r)!
P(O) r!

↓ ↓
Order Choose

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Common Probability Distribution

Appendices
Simulation Methods

1. Expected value E(x) = Weighted average of all possible outcomes ∑PX

2. σ2 = ∑P. (X − ̅
X )2

3. Cov (R A , R B ) = ∑P(S) x ሾR A − E(RA )ሿሾRB − E (R B )ሿ

Cov (Ri ,Rj)
4. Correlation (R i , R j ) = σRi ∗ σR
j

MV of investment in Asseet
5. Weight (Wi ) =
MV of the portfolio

6. Expected value of portfolio composed of n asset : E(R P ) = W1 E (R1 ) + W2E(R 2 ) + …. + WnE(Rn )

7. Var (R p) for a two-asset portfolio = WA σ2RB + WB σ2RB + 2WA WB cov (R A RB )

Variance of n asset portfolio will have n(n-1)/2

Unique cov (R A , R B) as cov (R A , R B) = cov (R B , R A)

8. Var (R P ) for a 3 asset portfolio = WA2 σ2RA + WB2 σ2RB + WC2 σ2RC+ 2 ሾWA WB cov(RA R B ) + WA WC cov(RA R C ) +
WB WC cov(RB R C ) ሿ
Cov (R A R A) = Variance R A or σ2RA

9. Probability of function P(x) = P (X=x) (for discrete variables)

 0≤ p (x) ≤ 1

 ∑ P (x) = 1

10. Cumulative distribution function CDF F (x) = P (X ≤ x)

11. Bernoulli trials: P(x) = nCx px (1 − p)n−x

12. In Binominal Distribution,

Df, P <0.5 + ve Skewness

P = 0.5 Symmetrical

P >0.5 -ve Skewness

Expected value of a Binominal Random Variable  E(X) = np

Variance of a Binominal Random Variable  Variance of X = np(1-p)

Effective annual rate  eRcc

S
ln ( 1 ) = ln (1+HPR) = R cc (rate of continuous compounding)
S0

observation−population mean x
̅ −μ
13. Z = =
S.D. σ

90% confidence internal, x̅ – 1.65s to x̅ + 1.65s

95% confidence internal, x̅ – 1.96s to x̅ + 1.96s

99% confidence internal, x̅ – 2.58s to x̅ + 2.58s

E(RP)−Rmin
14. Roy’s Safety-First Ratio (SFR) = (higher the better)
σP

R min= threshold level

If threshold level = Risk free rate of return, i.e. R min = R f , SFR = Sharpe’s Ratio

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Sampling and Estimation

Estimation and Inference
1. Sample error of the mean = Sample mean – Population mean

= x̅ − 𝜇

2. Standard error of sample mean (σx̅ )

σ
= (If σ is known)
ξn

S
= (If σ is not known)
ξn

σ
3. Confidence Interval: x̅ ± Zαൗ2
ξn

α- Level of significance (for 3 distribution)

S
4. Confidence Interval: x̅ ± t αൗ2 [σ not known]
ξn

𝛼ൗ
t is calculated as df(n-1) → 2

Basics of Hypothesis Testing

Hypothesis Testing
Parametric and Non-Parametric Tests of Independence

1. Equality of mean (independent samples)

̅ 1−X
(X ̅2 )−(μ1 −μ2)
t statistic of x̅1 − x̅2 =
σX1 −X2

S S P2
Where, σx1−x2 = √ nP +
2

1 n2

(n1 −1)S21+(n2−1)S22
Sp22 = n1+n2 −2

2. Equality of mean: Dependent Samples

̅− μ
d
t=
Sd̅

Standard deviation of the differences

Where, d
̅ = Mean of differences between the samples; S ̅ =
d ξn

3. Testing of variance (Chi square statistic):

(n−1)S2
X 2 Statistic = σ2

Where, S 2 = Sample variance

σ2 = Hypothesized value for sample variance.

4. Testing of equality of variance (F distribution)

S21
F statistic =
S22

5. Power of a Test = 1-P (Type II error)

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Economics

Topics in Demand and Supply Analysis

1. Own Price Elasticity = %Q

%P

2. Cross price Elasticity of Demand: % Q x

% Py

3. Income Elasticity of Demand: %QD Y: Income

%Y

4. Own Price Elasticity > 1: demand is elastic

5. Own Price Elasticity < 1: demand is inelastic

6. Cross price Elasticity < 0: related good is complement

7. Cross price Elasticity > 0: related good is a substitute

8. Income Elasticity < 0: good is an inferior good

9. Income Elasticity > 0: good is an normal good

10. Accounting Profit : TR – Accounting Cost

11. Economic Profit : TR – (AC + Implicit cost)

12. TCV = Wages x labour

TVC WxL W W
= = =
13. AVC = Q Q (Q/L) APL

14. AVC  1
APL

The Firm & Market Structures

1. Perfect Competition → Firm faces infinitely elastic demand

MR = AR = P = D

(Price is determined by the market supply and` demand.)

1
2. MR = P(1 − E )
p

3. HHI = ∑(market share)2

4. Nfirm = ∑ (market share)

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Aggregate Output, Price & Economic Growth

Nominal GDP
1. GDP Deflator = Real GDP
x 100
Real GDP
2. Per capita Real GDP = Population

3. GDP:

Under Expenditure Approach

C+I+G+(X-M)

Under Income Approach

NI + Dep (CCA) + Statistical Discrepancy or C+S+T

4. National Income

Compensation of Employees (Wages/COE) + Interest Income + Rent + Corporate & Govt.

Enterprise Profit before Taxes+ Unincorporated Business Net Income + Indirect Business

Taxes – Subsidies

5. Personal Income

National Income + Transfer payment to household

- Taxes (Indirect Business & Corporate)

- Undistributed corporate profits

6. Potential GDP = aggregate working hours x labor paid

Growth in potential GDP = growth in labor force + growth in labor productivity

I (G-T) (X-M)
S = +
+ (Fiscal (Trade
(Savings) (Investment)
balance) balance)

7. Personal Disposable Income = Personal Income – Personal Taxes.

8. Sustainability of Economic Growth:

Potential GDP = aggregate hours worked x labor productivity

Growth in Potential GDP = growth in labor force + growth in labor productivity.

9. Production Function:

Total Y = A x f (L, K)

10. Production per worker basis:

Y/L = A x f  k 
 
L

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CFA L1 |Mind Map

Introduction to Business Cycle

Understanding Business Cycle
1. Unemployed Rate = % of people in labor force who are unemployed

*people who are voluntarily unemployed, not include

2. Participation Ratio = % of working age population who are employed or actively seeking

employment.
cost of basket current prices
3. CPI (best indication) =
cost of basket at base prices

 p1q0
4. Consumers Price Index =  100
 PO q0
∑p q
5. Laspeyre’s Index = ∑p1q0
0 0

∑p1 p1
6. Paasche’s Index =
∑p0q1

∑p1q0 ∑p1 p1
7. Fishers Index = √ × × 100
∑p0q0 ∑p0 q1

8. Broad Money = Narrow Money + Liquid Assets

C+I
9. Money Multiplies = C+Y * When people hold some cash

Monetary & Fiscal Policy

Fiscal Policy
Monetary Policy

1. High powered money = Fed Currency + Reserve + Govt. money (coin)

2. M = money supply = mH

new deposit
3. Money created = reserve requirement

1
4. Money multiplier =reserve ratio = m

5. money supply(M) x velocity(V) = price(P) x real output(Y) [MV = PY]

6. The Fisher effect:

RNom = RReal + E[I]

For risky securities:

RNom = RReal + E[I] + RP

7. Nominal = real + inflation

(1+nominal) = (1+ real) (1+ inflation) + risk premium

8. Neutral int. rate = real tread rate of growth + infl. Target

9. Policy rate = neutral + ½ (actual target) growth + ½ (actual - target) inflation

1
10. Fiscal multiplier =
1−MPC(1−t)

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International Trade and Capital Flows

International Trade

price of exports
1. Terms of trade = price of imports

2. The relation between the trade deficit, saving and domestic investment:

X – M = private savings + government savings – investment.

Currency Exchange Rates

Capital Flows and the FX Market
Exchange Rate Calculations

CPIforeign
1. Real exchange rate (d/f) = nominal exchange rate x ቂ ቃ
CPI𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐

2. R P/B = SP/B (PB /PA)

1+Inf A
3. New Exchange Rate = old exchange rate ( )
1+Inf B

MXN MXN USD

4. Cross Rate = = ×
AUD USD AUD

 1 + iA 
T

5. Interest Rate Parity (IRP) = SA/B x  

 1 + iB 
6. Marshall - Lerner condition:

WX𝜀X + WM ( 𝜀M -1) > 0

7. The Absorption Approach:

BT (Balance of Trade) = Y (Income) –E (Expense)

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FRA

Introduction to Financial Statement Analysis

1. Balance Sheet – Financial position – at a point in time

Assets = liabilities + owners’ equity.

Income Statement
Analyzing Income Statements

1. Revenues – Expenses = Net Income

2. Net Income = Revenues - Ordinary Expenses + Other Income – Other Expenses + Gains – Losses

Total Expected Profit

3. Profit = Cash receive during period x
Sales

4. Straight line Depreciation:

Cost−residual value
Useful Life

5. Double Declining Depreciation:

2
(Cost – accumulated Depreciation)[* salvage value not to be considered here]
Useful life

EAFESH
6. Basic EPS =
wtd. Average of no.of shares

ሾ𝑃𝐴𝑇−𝑝𝑟𝑒𝑓.𝑑𝑖𝑣ሿ+𝑐𝑜𝑛𝑣𝑒𝑖𝑡𝑏𝑙𝑒 𝑝𝑟𝑒𝑓𝑒𝑣𝑒𝑑 𝑑𝑖𝑣+𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑖𝑛(1−𝑡)

7. Diluted EPS = 𝑊𝑡𝑑.𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 + 𝑠ℎ𝑎𝑟𝑒𝑠 𝑓𝑟𝑜𝑚 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒 𝑑𝑒𝑏𝑡
+ 𝑆ℎ𝑎𝑟𝑒𝑠 𝑓𝑟𝑜𝑚 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠 𝑓𝑟𝑜𝑚 𝑜𝑓 𝑜𝑝𝑡𝑖𝑜𝑛𝑠 | 𝑤𝑎𝑖𝑟𝑎𝑛𝑡𝑠

8. Comprehensive Income = Net Income (PAT) + Other Comprehensive Income [OCI]

GP
9. Gross profit margin =
Revence/sales

NP
10. Net profit margin = sales

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CFA L1 |Mind Map

Balance Sheets
Analyzing Balance Sheets

1. Balance Sheet – Financial position – at a point in time

Assets = liabilities + owners’ equity.

Liquidity:
Current Assets
1. Current Ratio =
Current Liabilities
CA−Inventing
2. Quick Ratio =
Current Liabilities
cash+marketable securities
3. Cash Ratio =
Current Liabilities

Solvency:
Total Debt
4. Debt-to-Equity = Total shareholders′ equity
total debt
5. Debt-to-Capital =
total debt+total equity+preference
total Debt
6. Debt-to-Assets =
Total Assets
average Assets
7. Financial leverage = = A/E
Average Equity

Cash Flow Statements

Analyzing Statements of Cash Flows I
Analyzing Statements of Cash Flows II

1. FCFF = NI + Interest [1-tax] + Depreciation – Working Capital Investment - FC Investment

2. FCFE = CFO – FC Inv + Net Borrowing

Performance Ratio:
CFO
1. Cash flow to Revenue = net revenue
CFO
Cash return on Asset = average total assets
CFO
2. Cash return on Equity = average total equity
CFO
3. Cash to Income =
operating income

CFO−preferred div.
4. Cash flow per share = wtd average of common share

Coverage Ratio:
CFO
1. Debt coverage = total debt
CFO+int paid+taxes paid
2. Interest coverage =
int paid

CFO
3. Reinvestment Ratio = cash paid for long−term assets
CFO
4. Debt payment ratio = cash long term debt repay
CFO
5. Dividend payment = dividends paid
CFO
6. Investing & Financing =
Cash outflows from CFI+CFF

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Financial Analysis Techniques

Income statement accounts
1. Vertical common-size income statement ratios =
Sales
Balance sheet accounts
2. Vertical common-size balance-sheet ratios = Total assets

Activity:
Annual sales/Credit sales
3. Receivable turnover = Average receivables

365
4. Days of sales outstanding = Receivables Turnover
COGS
5. Inventory Turnover = average inventory
365
6. Days =
inventory turnover

purchases
7. Payables turnover = average payables
365
8. Days =
payables turnover

Revenue
9. Total Asset Turnover = average total assets
Revenue
10. Fixed Asset Turnover =
average net fixed assets
Revenue
11. Working Capital Turnover = average working capital

Profitability:
Net income
12. Net profit margin =
revenue/sales

Net Income = Earnings after takes but before div.

Total Cap = long -term + short term debt + common & preferred equity = Total Assets E+L = A
GP
13. Gross profit Margin = Revenue
Operating income
14. Operating profit Margin =
Revenue
EBT
15. Pretax Margin = sales
Net income Net income+intex (1−t)
16. ROA = or
average total asets average total assets
EBIT
17. Operating return on total assets =
average total assets

EBIT
18. ROTC = (E+D+P)
Average total capital

Net Income
19. ROE = Average total equity
net income−preferred div. EAFESH
20. Return on common Equity = =
average common Equity Equity

Liquidity:
Current Assets
21. Current Ratio =
Current Liabilities
CA+marketable securities+receivables
22. Quick Ratio = Current Liabilities
cash+marketable securities
23. Cash Ratio =
Current Liabilities
cash+marketable securites+receivables
24. Defensive Interval =
average daily expenditures

25. Cash conversion cycle = Days sales outstanding + Days of inventory on hand – Days of payable

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Solvency:
Total Debt
26. Debt-to-Equity =
Total shareholders equity

total debt
27. Debt-to-Capital =
total debt+total equity

total Debt
28. Debt-to-Assets =
Total Assets
Average Assets
29. Financial leverage = = A/E
Average Equity

Earning Before Interest & Taxes

30. Interest coverage = interest payments

EBIT+lease payments
31. Fixed charge coverage = interest+lease payments

DuPont System of Analysis:

Net Income Sales Assets

1. ROE = x x
Sales Asset Equity

PAT PBT EBIT SALES A

2. ROE = X X X X
PBT EBIT SALES ASSETS E

Dividends:

3. G = RR ×ROE

4. Retention Rate = 1 - Dividend Payout Ratio

Dividends
5. Dividend Payout Ratio =
Net income available to common shareholder

Inventories
Analysis of Inventories

1. Cost of Goods Sold (COGS) = Beginning inventory + purchases – ending inventory

2. FIFO COGS = LIFO COGS – (ending LIFO reserve – beginning LIFO reserve)

3. Weighted Average Cost –

Cost per unit is calculated using this formula =

Total Cost of Goods Available for sale (Opening Inventory + Purchases)

Total Quality Available for sale

4. Ending Inventory = Beginning Inventory + Purchases – COGS

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Long Lived Assets

Analysis of Long-Term Assets

Original Cost−Salvage value

1. SL Depreciation expense =
Depreciable life

2
2. DDB depreciation in year = ( ) (Cost – Accumulated Depreciation)
useful life

3. Unit – of – production depreciation =

Original Cost−Salvage value

Life in output units
× output units in the period

Accumulated Depreciation
4. Average Age = Annual Depreciation Expense

Historical Cost
5. Total Useful Life =
Annual Depreciation Expense

Ending Net PP&E

6. Remaining Useful Life =
Annual Depreciation Expense

Income Taxes
Analysis of Income Taxes

1. Income tax Expense = taxes payable + DTL - DTA

2. DTA = Tax expense < Tax payable

3. DTL = Tax expense < Tax payable

4. Interest Expense = (the market rate at issue) x (the balance sheet value of the liability at the

beginning of the period)

Income Tax Expense

5. Effective Tax Rate = Pretax Income

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Non-Current Liabilities (Long Term)

Topics in Long-Term Liabilities and Equity
1. CR = MR (At par)

CR > MR (Premium)

CR < MR (Discount)

2. Ending Book value = Beginning book value + Interest expense – coupon

3. Interest expense = BV of bond at inception (issuance) x market rate at the time of issuance

4. Balance Sheet Liability:

BV Ending = BV Beginning + (Interest Expense – Coupon)

5. Interest Expense = Market Rate at Issue × Balance Sheet Value at Liability at beginning of the period.

6. Leverage Ratios:
Total Debt
• Debt/ Asset Ratio =
Total Assets

Total Debt
• Debt/ Capital Ratio = (Total Debt+Total Equity)

Total Debt
• Debt to Equity Ratio = Total Equity

Average Total Assets

• Financial Leverage Ratio = Average Total Equity

7. Coverage Ratios:
EBIT
• Interest Coverage = Interest Payments

EBIT+Lease payments
• Fixed Charge Coverage =
Interest payments+lease payments

CFO
• Debt Coverage = Total Debt

CFO
• Reinvestment = Cash paid for long−term assets

CFO
• Debt Payment = Cash long−term debt repayment

CFO
• Dividend Payment = Dividend Paid

CFO
• Investing and Financing =
Cash outflows from Investing and Financing activities

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CFA L1 |Mind Map

Corporate Finance

Working Capital Management

Current Asset
1. Current Ratio =
Current Liabilities
Cash + Short Term marketable Securities+receivables
2. Quick Ratio OR Acid Test Ratio= Current Liabilities
Credit Sales
3. Receivable Turnover =
Avarage Receivables

365 Average Recoverables

4. No of days of receivable = =
Receivables turnover Average Day′ s credit sales
COGS
5. Inventory turnover =
Average Inventory

365 Average Inventory

6. No of days of inventory = −
inventory turnover Average day′ s of COGS

Purchases
7. Payables turnover ratio =
Average trade payables

365 Average payables

8. No of days of payable = payable turnover ratio =
Average Day′ s of purchases

9. Operating cycle = days of inventory + days of receivables

10. Cash conversion cycle = (Average days of receivables) + (Average days of inventory) –
(Average days of payables)
Face Value−Price 360
11. Discount basis yield (Bank Disc yield) = ( ) x days
Face Value

Face Value−Price 360 360

12. Money Market Yield = ( )x = HPY x days
Face Value days

Face Value−Price 365 365

13. Bond Equivalent Yield = ( Face Value
) x days = HPY x days
365
% discount days past discount
14. Cost of trade credit = (1 + ) −1
1−% discount
365ൗ
𝑃 𝑛
Or, (𝑃1 ) −1
0

(Day past discount = no of days after the end of discount period)

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CFA L1 |Mind Map

Equity Investments

Equity Valuation: Concepts and Basic Tools

1. Dividend discount model:

∞
𝐷𝑡
V0 = ∑
(1 + 𝑘𝑒 )𝑡
𝑡=1

D D DP DP
2. Preferred stock value = (1+KP 1 + (1+KP 2 + ⋯...+ (1+Kp )α
=
P) P) KP

3. FCFE = Net Income + Depreciation – Increase in working Capital - Fixed Capital Investment –

debt principal repayments + new debt issues

D1 + P1
4. P0 =
1+ Ke
D1 Do (1+g)
5. P0 = = ሾK e > gሿ
Ke −g Ke −g

g = constant growth rate

D1
Also, Ke = +g
P0

Ke = investor required rate

6. Gordon growth model:

D0 (1+𝑔𝑐) D0 (1+𝑔𝑐)2 D0 (1+𝑔𝑐 )3 D0 (1+𝑔𝑐 )∞
V0 = + + + ⋯+
1+Ke (1+Ke) 2
(1+Ke) 3 (1+Ke)∞
D4
D1 D2 D3 D4
7.
Ke −g
P0 = + 2+ 3 + ; = P4
1+Ke (1+Ke) (1+Ke) (1+Ke )3 Ke −g

when the growth rate of dividend is constant:

D0 (1+𝑔𝑐) D1
V0 = =K
Ke−𝑔𝑐 e −𝑔𝑐

8. Multistage dividend discount model:

D D2 Dn P
Value = 1+K1 + (1+Ke ) 2
+⋯+ (1+Ke )n
+ (1+Kn )n
e e
Dn+1
Where , Pn = Ke −g

P0
9. = leading /expected PE Ratio
E1
D1/E1
Ke −g
[Dividend Payout Ratio =D1 /E1]

P
ቂ 0ൗE − lagging / historical PE ratioቃ
0

10. Sustainable growth = ROE x (1 – dividend payout ratio)

market value of equity market price per share
11. P/BV ratio (Price / book Value Ratio) = =
book value of equity book value per share

Book value of equity = (total assets – total liabilities) - preferred stock

Market Value of Equity
12. P/S Ratio (Price to Sale Ratio) =
Total Sales

13. Enterprise Value = Market value of stocks + Market value of debt – Cash and short term investments.

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CFA L1 |Mind Map

Market Organization and Structure

1−Initial margin
1. Margin call price = P0 ( ) P0 = Initial purchase price
1−maintenance margin

Security Market Index

1. Return index: RP = ሾ(1 + R S1 ) (1 + R S2 )(1 + R S3 ) … . . (1 + 𝑅𝑆𝐾 )ሿ − 1
∑P1
2. Price weighted Index = ቂ ቃ
n
P1
∑( −1)
3. Equal weighted Index = [
P0
]
n

∑P Q
4. Market Capital weighted Index = ቂ∑P1 Q1 − 1ቃ
0 0

current total market value of index stocks

5. Current index value = base year total market value of index stocks × base year index value

∑P Q ff
6. Free float Adjusted Market Capital wtd Index = ቂ∑P1 Q1ff − 1ቃ
0 0

Overview of Equity Securities

NIt
1. ROE =
(BV1 +BVt−1)/2
NIt
ROE =
BVt−1/2
D1
2. DDM: R e = +g
Po

3. CAPM: RF + (Rm-RF) β

C1 C2
4. Market Price + (1+r)2
+ …….
(1+r)

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CFA L1 |Mind Map

Fixed Income

Fixed-Income Instrument Features

Fixed-Income Cash Flows and Types
Par Value of the Bond
1. Conversion Ratio = Conversion Price

2. Conversion Value = Conversion Ratio × Current Market Price of a Common Share

Fixed-Income Bond Valuation: Prices and Yields

Yield and Yield Spread Measures for Fixed-Rate Bonds
Yield and Yield Spread Measures for Floating-Rate Instruments
The Term Structure of Interest Rates: Spot, Par, and Forward
1. Full price = flat price + accrued interest Curves

2. Cash price = quoted price + accrued interest

3. Dirty price = clean price + accrued interest

4. G-spread = YTMBond – YTMTreasury

5. Option value = Z-spread – OAS

6. An annual-coupon bond with N years maturity:

Coupon Coupon (Coupon +principal)

Price = 1+YTM + (1+YTM)2 … … … …
(1+YTM)N

7. A semiannual-coupon bond with N years maturity:

𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 (𝐶𝑜𝑢𝑝𝑜𝑛 +principal)

Price = 𝑌𝑇𝑀 + 𝑌𝑇𝑀 2 ………… 𝑌𝑇𝑀 𝑁×2
1+ (1+ ) (1+ )
2 2 2

𝐶𝐹 𝐶𝐹 (CF +principal)
8. No arbitrage price =1+𝑆1 + (1+𝑆2 ) … … … …
1 2 (1+Sn)n

discount/premium
coupon ±
9. Simple Yield = n Does not matter quarterly
Bond price
or semi-annually
anual coupon payment
10. Current Yield =
Bond price

11. Option Value = Zspread – OAS (Option Adjusted Spread)

Fixed-Income Securitization
Asset-Backed Security (ABS) Instrument and Market Features
Mortgage-Backed Security (MBS) Instrument and Market Features
NOI
1. Debt-to-service = debt service ; where debt service = principal + interest
current mortgage amount
2. Loan-to-value =
current appraised value

3. Annualized Conditional prepayment rate (CPR) = 1 – (1-SMM)12

4. Single month mortality (SMM) = 1 – (1-CPR) 1/12

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CFA L1 |Mind Map

Interest Rate Risk and Return

Yield-Based Bond Duration Measures and Properties
Yield-Based Bond Convexity and Portfolio Properties
Curve-Based and Empirical Fixed-Income Risk Measures

∑WX
1. Macaulay’s Duration = wtd. Average of time, where W= PV of CF =
∑w
macaulay′ s duration
Modified Duration = Compounding frequency
1+ytm/m

2. Modification Duration  E.D. [only for option free bonds]

P2 −P1
3. Effective Duration (E.D.) = ; Y= change in YTM
2∆Y P0

P2 +P1−2Po
4. Effective Convexity (E.C.) = Po (∆Y)2

1
5. Convexity adjustment = x EC x (Y)2
2

6. Money duration = annual modification duration x full price of bond position

7. Portfolio duration = ∑widi ; Wi= market value rates

1
8. Change in full bond price = (-E.D. x Y) + x Ec x (Y)2
2

9. Duration gap = Macaulay’s duration – investment horizon

P2 −P1
10. Price Value of a Basis Point (PVBP) =
2

Credit Risk
Credit Analysis for Government Issuers
Credit Analysis for Corporate Issuers

1. Expected loss = exposure × prob of default (default risk) x loss severity (1-RR)

2. Credit risk = default risk + loss severity (1-RR)

3. Yield Spread = YTMCredit risky bond − YTMrisk free bond Or,

Yield spread = liquidity premium + credit spread (will widen) affected by 2 factors:

• credit wordiness (credit migration / downgrade risk)

• Market liquidity risk.

4. Enterprise Value = Equity + Debt – Cash and Marketable Securities

5. Leverage Ratios:

• Debt/Capital

• Debt/EBITDA

• FFO/Debt

• FCF after dividends/Debt

6. Coverage Ratios:

• EBITDA/ Interest Expense

• EBIT/Interest Expense

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CFA L1 |Mind Map

Derivatives
Derivative Instruments and Derivative Markets
Features

1. Risk free Asset = Risky Asset + Derivatives

Forward = Spot + Storage + Int – Benefit

→ Spot (1 + Rf)t FV (storage - benefit)

→{s+ PV (storage - benefit)} (1+Rf)

2. IM = μ + 3σ

Vswap = VFloating rate bond – VFixed rate bond

Forward Commitment and Contingent Claim Features and Instruments

1. Forward Price = Spot + Interest Cost + Storage Cost -Benefits.

= Spot(1 + R F )T + FV(Storage − Benefit)

2. The forward price of an asset to be delivered at time T is:

F0 (T) = S0 (1 + Rf)T
3. The value of a forward contract is zero at initiation:
Vt (T) = St – F0(T) / (1+Rf) T-t
n
(market rate−contracted rate)x NPx n
4. Payoff to FRA = n
12
* if no. of days
1+(market rate x ) 360
12

5. U = up factor
1
D=
U

(1+Rf)T −D
Probability risk neutral = u =
U−D

D = 1- U

Call option value = (u x C1+ ) + (D x C1− )

call option value
 Today value = (co) = (1+Rf)

6. Option premium = intrinsic value + time value

X
7. Put call parity = Co + (1+RF)T = Po + So
X F
8. Put call forward parity = Co + = Po +
(1+RF)T (1+RF)T

F−X
→ Co − Po = (1+RF)T

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CFA L1 |Mind Map

Introduction to Alternative Investments

1. Future Price = Spot Price x (1+risk free rate) +Storage Costs - convenience yield

Cost of carry Net cost of carry

2. Contango = Cost of Carry > Benefit

Backwardation = Cost of Carry < Benefit

RP −RMAR Mean acceptable return

3. Sortino Ratio =
ξMSD
Mean square deviation

4. Value of Real Estate

Income Based Approach:

Net Operating Income (NOI)
a) Cap Rate = R e − g → estimated growth rate
Cap Rate

5. Value of REIT – Income Based

Net Income

+Depreciation

-Gains from sold property

+Sales from property sold

Funds from operations (FFO)

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CFA L1 |Mind Map

Portfolio
Portfolio management: An Overview

Risk of equally weighted portfolio of ′n′ securities

1. Diversification Ratio =
Risk of single security at random from ′n′ securities

Portfolio Risk and Return: Part I

end of period value
1. Holding period return = −1
beginning of period value

(R1+R2+R3+⋯+Rn)
2. Arithmetic mean return =
n

3. Geometric mean return = √(1 + R1 ) × (1 + R 2 ) × (1 + R 3 ) … × (1 + R n ) − 1

𝑛

∑(𝑥−𝑥̅ )2
4. Population variance: 𝜎 2 =
𝑛
∑(𝑥−𝑥̅ )2
5. Sample variance: 𝜎 2 = 𝑛−1

6. Cov = ∑(X − 𝐸𝑥 ) (Y − 𝐸𝑦 ) x P

7. 𝑅𝑝 = ∑ 𝑊𝑖 𝑅𝑖 and 𝐸𝑅𝑝 = ∑ 𝑊𝑖 𝐸𝑅𝑖

̅ 1) (Rt,2−R
∑(Rt,1 −R ̅ 2) ̅ )(y−y
∑(x−x ̅)
8. Cov1,2 = =
n−1 n−1
Cov(x,y)
9. 𝜌𝑥,𝑦 =
σx σy

10. σP = √σ2P = √∑ w 2 σ2 ∑ wi wj Covi,j

σP = √w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 r1,2

σP = √w12 σ12 + w22 σ22 + 2w1 w2 Cov1,2

σP = √w12 σ12 + w22 σ22 + w32 σ23 + 2w1 w2 Cov1,2 + 2w2 w3 Cov2,3 + 2w1 w3 Cov1,3

11. P/L from securities - Commission and other Brokerage Expenses

Gross Return - Management and Administration Fees

Net Return

12. After tax return = Pre-tax return (1-t)

gain
on Total Investment
13. Leveraged Return = Investor
loss
′ s Cash Investment

14. Investor’s Utility Function:

1
U= E(R) - 𝐴 𝜎2
2

Risk (-ve)
Utility Return Risk
(+ve) Aversion
(-ve)

(-ve) 0 (+ve)

Risk Seeking Risk Neutral Risk Averse

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CFA L1 |Mind Map

Portfolio Risk and Return: Part II

1. E(R P ) = (1 − wm )R f + wm R m

= R f + wm (Rm − R f )

σP = √(1 − wm )2 σR2f + wm
2 2
σm + 2(1 − wm )σRf σRmrRf , R m

For R f , σ = 0 and Cov = 0

2 2
∴ σP = √wm σm = σm wm
σp
∴ wm =
σm

2. Capital market line:

Rm −Rf
E(RP ) = R f + σP ቂ σm
ቃ
E(Rm )−Rf
3. E (Ri ) = R f + σ2m
x Covi,m
Covi,m
Or E (R i ) = R f + ሾE(Rm ) − R t ሿ
σ2m

Covi,m σi
4. β= = r
σ2m σm

5. Market Model:
R i = αi + βi Rm + εi
6. Total risk = systematic risk + unsystematic risk

7. Single factor model:

E (Ri ) − R f = 𝛽𝑖 × ሾ𝐸(R m ) − R f ሿ
σB
8. Risk free portfolio: WA =
σA +σB

9. Security Market Line:

Covi,mkt
Re = Rf + (Rm − R f )
σ2mkt
σ
10. M - Squared = (R p − R f ) σm − (R m − R f )
p

Rp − R f
11. Sharpe Ratio = σp

Rp−Rf
12. Treynor measure = β𝑃

13. Jensen’s Alpha = R p − CAPM

25 | P a g e Aswini Bajaj