CFA Level 1 - 101 Must Knows 368 Questions with Verified Answers,100% CORRECT
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CFA Level 1
CFA Level 1 - 101 Must Knows 368 Questions with Verified Answers
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 ra...
CFA Level 1 - 101 Must Knows 368 Questions with Verified Answers
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) - R ₜ) / 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) * (P ₀ / 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
Positive for substitutes
Negative for complements
Sources of Economic Growth - CORRECT ANSWER Increases in:
- Labor
- Physical Capital
- Technology
- Natural Resources
- Human Capital
(LPT:HN)
"Life Pro Tip: No Hangovers"
Production Function Approach (GDP) - CORRECT ANSWER Potential GDP = A * f(L,K)
L = Labor
K = Capital
A = "total factor productivity" aka increased growth not explained by growth of labor and capital
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