CFA Level 1 - 101 Must Knows With Complete
Solutions Latest Update
Addition Rule of Probability - correct answers ADDITION: P(A or B) = P(A) + P(B) -
P(AB)
Roy's Safety First Criterion - correct answers 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 answers 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 answers 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 answers σ / n^½
Binomial Probability - correct answers 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 answers 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 answers 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
Type I Error - correct answers Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
Type II Error - correct answers Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
Significance Level / Power of a Test - correct answers Significance Level =
Probability of Type I
Power of a Test = (1 - Probability of Type I)
Covariance (Probability Model) - correct answers 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 answers Covariance of random variables A and B
from sample with historical data with n observations
Technical Analysis Indicators - correct answers Continuation:
TRIANGLE (or pennant) = Suggests a pause in the stock price movement that will
be followed by a continuation of the previous trend
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