CFA Level 1 - 101 Must Knows question and answers 2023 verified to pass
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CFA Level 1
CFA Level 1 - 101 Must Knows question and answers 2023 verified to pass
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 fr...
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) - 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) * (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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