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CFA Level 1 - 101 Must Knows question with 100% correct answers 2023
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CFA Level 1 - 101 Must Knows question with 100% correct answers 2023Addition 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 ra...

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  • June 15, 2023
  • 62
  • 2022/2023
  • Exam (elaborations)
  • Questions & answers

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  • sharpe ratio
  • cfa level 1 101 must knows question with 100 co
  • addition rule of probability
  • roys safety first criterion

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CFA Level 1 - 101 Must Knows question
with 100% correct answers 2023

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



Binomial Probability - correct answer One of two possible outcomes (i.e. success/failure)



Possible outcomes can be demonstrated in binomial tree

,Use "nCr" on calculator to solve:



nCr = P(success)^x * P(failure)^(n-x)



P - Value - correct answer Based on a calculated test statistic, rather than a significance level (which is
chosen)



p-value = smallest significance level at which an analyst can reject the null hypothesis



one-tailed test - "less than or equal to"

two-tailed test - "equal to"



Cumulative Distribution Function - correct answer Gives the probability that a random variable will have
an outcome less than or equal to a specific value (represented by F(x))



F(x) = probability of an outcome less than or equal to x



Standard normal table (z) shows cumulative probabilities



Effective Annual Yield - correct answer EAY = (1 + (i/n))^n - 1

Stated Rate = (EAY^(1/n) - 1) * n



Continuous Compounding - correct answer ln(EAY) = continuously compounded stated rate



e^(continuously compounded stated rate) = EAY



Type I Error - correct answer Incorrectly rejecting a true null hypothesis

,(convicting an innocent person is Type I)



Type II Error - correct answer Failure to reject a false null hypothesis



(failure to convict a guilty person is Type II)



Significance Level / Power of a Test - correct answer Significance Level = Probability of Type I



Power of a Test = (1 - Probability of Type I)



Covariance (Probability Model) - correct answer Covariance of random variables A and B from probability
model



On the calculator:

1) Enter returns for set A and joint probabilities for AB; find mean A

2) Enter returns for set B and joint probabilities for AB; find mean B

3) Multiply each joint probability AB by each set's returns minus means

(ex: P(AB1)(A1 - Mean A)(B1 - Mean B) + P(AB2)(A2 - Mean A)(B2 - Mean B) + ... + P(ABn)(An - Mean A)
(Bn - Mean B))

4) The summed total is your covariance



Covariance (Sample) - correct answer Covariance of random variables A and B from sample with
historical data with n observations



Correlation Coefficient - correct answer COVab / σaσb



Bank Discount Yield (Discount basis) - correct answer (Discount / Face Value) * (360 / Days)



Money Market Yield - correct answer (HPY) * (360 / Days)

, Bond Equivalent Yield - correct answer (HPY) * (365 / Days)



Most appropriate for comparing yields!



Technical Analysis Indicators - correct answer Continuation:

TRIANGLE (or pennant) = Suggests a pause in the stock price movement that will be followed by a
continuation of the previous trend



Reversal:

HEAD AND SHOULDERS = Suggests a future decline in the stock price regardless of prior trend



DOUBLE BOTTOM = Increasing stock price in the future (reversal of a downtrend)



Trendlines:

SUPPORT / RESISTANCE = Range that stock price trades in based on supply/demand. Stock is "supported"
from going below a certain low price, and "resists" going above a certain high price



Price Elasticity - correct answer %ΔQuantity / %ΔPrice = (ΔQ / ΔP) * (P₀ / Q₀)



Demand is elastic if less than -1

Demand is inelastic if 0 to -1



Income Elasticity - correct answer %ΔQuantity / %ΔIncome



Positive for normal good

Negative for inferior good



Cross-Price Elasticity - correct answer %ΔQuantity / %ΔPriceʳᵉˡᵃᵗᵉᵈ ᵍᵒᵒᵈ

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