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Summary CFA LEVEL 1 - QUANTITATIVE METHODS
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  • Course
  • CFA LEVEL 1
  • Institution
  • CFA Institute
  • Book
  • CFA Program Curriculum 2018 Level I

I create this summary of knowledge related to CFA level 1 for my 2017 December exam. I got into the top 10% with this. Hope this can help you. (This does not guarantee for your pass, which requires dedication, hardwork and consistency. In case having trouble with any part, please refer to CFA note...

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  • No
  • Quantitative methods
  • October 26, 2018
  • April 16, 2019
  • 13
  • 2017/2018
  • Summary

Subjects

  • cfa
  • level 1
  • quantitatives
  • investment
  • fund

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  • CFA LEVEL 1
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Concepts Description
Time Value of Money
Nominal risk‐free rate / Nominal risk‐free rate = Real risk‐free rate + expected inflation rate
Real risk‐free rate

Required interest rate on a Required interest rate on a securities = Nominal risk‐free rate
security + default risk premium
+ liquidity premium
+ maturity risk premium

Effective annual rate (EAR) 1 1

In which :



FV / PV formula 1 ⁄


1 ⁄
1 ⁄

PV of a perpetuity
⁄




Concepts Description
Discounted Cash Flow Applications
NPV decision rule ‐ (+) NPV → ↑ shareholder wealth → Accept
‐ (‐) NPV → ↓ shareholder wealth → Reject
‐ 2 mutually exclusive projects → Accept project with higher (+) NPV

IRR decision rule ‐ IRR > Firm's required rate of return → Accept
‐ IRR < Firm's required rate of return → Reject

Problems with NPV and IRR Mutually exclusive projects → might have conflict result between NPV and IRR, due to :
‐ Different size of initial costs
‐ Different timing of CF

Holding period return (HPR) Holding period return : % change in investment value over the holding period
(or Holding period yield ‐ HPY)
1


Money‐weighted return / Money weighted return : IRR on a portfolio, taking into account all cash inflows and outflows
Time‐weighted rate of return Time‐weighted rate of return : compound growth
1 1 1 ⋯ 1


Bank discount yield (BDY) Bank discount yield : express the dollar discount from the face (par) value as a fraction of the face value
360


In which :




BDY is not representative of the return earned by an investor, due to :
‐ BDY annualises using simple interest → ignore effects of compound interest
‐ Based on bond's Face value instead of purchase price
‐ BDY annualises on a 360‐day year

Effective annual yield (EAY) Effective annual yield (EAY) : annualised value, based on a 365‐day year, that accounts for compound interest rate
1 / 1


Money market yield (or CD Money market yield (or CD equivalent yield) : annualised holding period yield, assuming a 360‐day year
equivalent yield)
360⁄

360
360

Bond equivalent yield Bond equivalent yield : 2 × semiannual discount rate (because the coupon interest is paid in 2 semiannual payments)

2 1 1

2 1 . 1



Concepts Description

, Statistical Concept and Market Returns
Statistic / Statistic : refer to data and methods used to analyse data
Descriptive statistic / Descriptive statistics : summarise the important characteristics of large data sets
Inferential statistic / Inferential statistics : used to make foreasts, estimates, or judgements about a large data seton the basis of statistical characteristics of a smaller sample set
Population / Population : set of all possible members of a stated group
Sample Sample : subset of the population

Types of measurement scales 4 major categories of measurement scales :
1. Nominal scale ‐ data is put into categories that have no particular order
2. Ordinal scale ‐ data is put into categories that could be ordered based on several characteristic
3. Interval scale ‐ Differences in data values are meaningful, but ratios are not meaningful
4. Ratio scale ‐ Ratios are meaningful ; zero represents the complete absence of the characteristic being measured

Parameter / Parameter : any measurable characteristic of a population
Sample statistic / Sample statistic : characteristic of a sample
Frequency distribution / Frequency distribution : summary of statistical data, by assigning sample data into specific intervals (groups). Procedures to construct a frequency distribution :
Relative frequency / ‐ Step 1 : Define the intervals ‐ Too few intervals → data might be too broadly summarised ; Too many intervals → data might not be summarised enough
Cummulative frequency ‐ Step 2 : Tally (assign) the observations
‐ Step 3 : Count the observations
Relative frequency = Absolute frequency ÷ Total number of observations
Cumulative frequency for an interval = sum of all absolute / relative frequencies for all values ≤ that interval's max value

Histogram / Histogram : bar chart of data that has been grouped into a frequency distribution
Frequency polygon




Frequency polygon :
‐ Horizontal axis : midpoint of each interval
‐ Vertical axis : absolute frequency
‐ Each point is connected with a straight line




Measurement of central tendency Measurement of central tendency : to identify the center, or average, of a data set → used to represent the typical, or expected, value in the data set
: Population mean / Sample mean Arimethic mean : sum of all observation value divided by the number of observations
/ arimethic mean / weighted Population mean : mean of all observed values in the population
mean / geometric mean / ∑
harmonic mean / median / mode
Sample mean : mean of all sample values
∑

Weighted mean :


⋯
Geometrical mean :

⁄
⋯ ⋯
Harmonic mean : used to find the average purchasing price


1
∑
In which :

Median : midpoint of a data set when the data is arranged from smallest to largest
Mode : Value that occurs ost frequently in a data set
‐ Unimodal : 1 value that occurs most frequently
‐ Bimodal : 2 values that occur most frequently
‐ Trimodal : 3 values that occur most frequently

Quartiles / Quartiles ‐ distribution is divided into quarters
Quintiles / Quintiles ‐ distribution is divided into fifth
Deciles / Deciles ‐ distribution is divided into tenth
Percentiles Percentiles ‐ distribution is divided into hundredth (percents)

Formula for the position of the observation at given percentiles

1
100

In which :



Dispersion Dispersion : variability around the central tendency

Range Range : relative simple measure of variability
Range = Maximum value ‐ Minimum value

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