CFA Revision

1. Tips and Tricks for entire CFA syllabus
6 days
Quants
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2. Tips and Tricks: Quants
 Time Value of Money
• Future value
– FV = PV*(1+1/Y)N
• Present value
• Annuities
– Ordinary annuity
– Annuity due
PV of Annuity Due = PV of Ordinary Annuity * (1 + r)
Perpetuities: annuities with an infinite life PVperpetuity = PMT / discount rate
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3. Tips and Tricks: Quants Contd …
 Holding Period Return
Total return:
Rt= [(Pt+Dt)/Pt‐1]‐1
Effective Annual Yield
EAY = (1+HPY)365/t ‐ 1
Bank Discount Yield
RBD = D/F * 360/t
Money Market Yield
rMM = 360 * RBD /(360 – t * RBD)
 Rates of Return on a Portfolio: Difference in:
• Time Weighted
• Money Weighted
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4.  Sharpe Ratio FORMULA
Descriptive Statistics
Measures excess return per unit of risk.
Sharpe ratio = rprf
 Expected Return / Std. Deviation
Expected Return:
E(X)=P(x1)x1+P(x2)x2+…….+P(xn)xn
Probabilistic variance:
σ2(x) =
= P(x1)[x1‐E(X)]2+P(x2)[x2‐E(X)]2+…….+
P(xn)[xn‐E(X)]2
Average of squared deviations from
mean. Population variance:
 X
N
 
2
i 1
i
X
2
N
Sample variance:



 Xi  X 

s 2  i 1 
n 1
N
2

p
r r
Roy's safety‐ First ratio:
p

t arget
p
Sharpe Ratio uses risk free rate,
Roys Ratio uses Min. hurdle rate
For both ratios, larger is better.
Standard deviation:
 or s  Variance
 ROY’s Safety‐first Ratio FORMULA
 Coefficient of Variation
Dispersion relative to mean of a
distribution; CV=σ/μ (σ is std dev.)
 Correlation & Covariance
Correlation = Corr(Ri, Rj) = Cov(Ri, Rj) / σ(Ri)*σ(Rj)
Expected return, Variance of 2‐stock portfolio:
E(Rp) = wAE(RA) + wBE(RB)
VaR(Rp) =wA2σ2(RA)+ wB2σ2(RB) +2wA wBσ(RA) σ(RB)ρ(RA,, RB)
 Measurement Scales
• Nominal Scale
• Interval Scale
• Ratio Scale
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5. Probability
 Empirical probability
 A Priori probability
 Subjective probability
 Bayes' Theorem: P(A|B) = P(B│A)*P(A) / [P(B│A)*P(A)+P(B│Ac)*P(Ac)]
 Binomial Distribution
nx
P(X x) Cx p (1p)
n
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x
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6. Skewness
Kurtosis
Negative‐Skewed
Median
Mode
Mean
Symmetric
Mean = Median = Mode
Positive‐Skewed
Mode
Median
Mean
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7. Hypothesis Testing
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8. Sampling Biases
 Data Mining
 Sample Selection
 Survivorship
 Look‐Ahead
 Time‐Period
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9. Technical Analysis Indicators
Sentiment Based Indicators
 Price Based Indicators
 Put/Call Ratio
 Moving Average Lines – mean of last n closing
prices
 Volatility Index
 Bollinger Bands – standard deviation of closing
prices over the last n days
 Oscillators
Based on market prices, scaled to oscillate around a
given value
 Margin Debt
 Short Interest Ratio
 Arms Index (TRIN)
 Mutual Fund Cash Position
 New Equity Issuance
 Rate of change oscillators
 Relative Strength Index
 Moving Average Convergence/Divergence
 Stochastic Oscillator
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10. Tips‐n‐Tricks
 One of the ways to quickly solve some questions on progressions is to remember the rule: AM >
GM > HM
 Don't forget that sample mean and population mean and sample standard deviation and
population standard deviation have different formulas (denominator: sample uses n‐1 vs. n of
population). In the exam if sample standard deviation is given, it can be used directly to
approximate the population standard deviation, there is no need to do extra calculations.
 Whenever risk or vola lity is men oned in a ques on to be 6% it stands for "standard devia on"
of the returns and not the Variance.
 Please do not make a mistake between Covariance and Correlation. Cov (A, B) should be replaced
with Corr (A,B)*σA*σB wherever required. Please note that the formula for standard deviation of
a portfolio is given below which has Covariance which can be later converted to Correlation:
2
2
w 2 A  (1 - w) 2  B  2w(1 - w) Cov(A, B)
 Whenever you get a problem on normal distribution, draw a rough sketch of it in your paper and
shade the relevant area. It will ensure that you will not get it wrong. Do not try to do mental
calculations for such problems.
 A trick to remember the formula for the Safety First Ratio. It is similar to Sharpe ratio, just that it
measures excess returns over a threshold return
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