CFA Level 1 Exam Study Tips

Introduction

• Importance of preparing for the CFA Level 1 exam
• Previous videos covered study tips and motivation
• Focus on formulas and tricks for memorization

Overview of Formulas

• Visual aid included for reference
• Not covering every formula; focus on key ones
• Follow normal order of the exam as per CFA curriculum

Key Formulas and Memorization Tricks

Probability Formulas

• Multiplication Rule of Probability:

  • Formula: P(A) * P(B)
  • Trick: Keep the order the same with a line in the middle.

• Base Formula:

  • Formula: P(B|A) = (P(A)*P(B))/P(A)
  • Trick: Note the order is flipped compared to multiplication rule.

• Addition Rule:

  • Formula: P(A or B) = P(A) + P(B) - P(A and B)
  • Trick: Visualize two overlapping circles.

Portfolio Variance Formula

• Portfolio Variance:
  • Formula: Var(P) = w_A^2 * Var(A) + w_B^2 * Var(B) + 2 * w_A * w_B * Cov(A, B)
  • Memorization: Multiply weights and variances.

Confidence Intervals

• Normal Distributions: Recall common Z-scores: 1.65, 1.96, 2.58

Correlation and Covariance

• Correlation:
  • Formula: Corr(A, B) = Cov(A, B) / (σ_A * σ_B)
  • Key: Remember the denominator has standard deviations, not squared.

Economics Formulas

• Fiscal Balance: S - I (Savings - Investment)
  • Memorization: Use the acronym "Got Six Mates" for negatives.
• Quantity Theory of Money: MV = PY

Financial Ratios

• Current Ratio: Current Assets / Current Liabilities
• Quick Ratio: (Current Assets - Inventories) / Current Liabilities
• Cash Ratio: Cash / Current Liabilities

Earnings Per Share (EPS)

• Basic EPS: Net Income / Shares Outstanding
• Diluted EPS: Adding back all convertible securities.

Cash Conversion Cycle

• Formula: Days Sales Outstanding + Days Inventory Outstanding - Days Payable Outstanding

Return on Equity (ROE) Analysis

• Three-Step ROE: Net Income / Equity
• Five-Step ROE: Involves more intermediary steps but leads back to Net Income / Equity.

Bond and Duration Formulas

• Duration: Measure of interest rate sensitivity
• Duration Gap: Important for assessing interest rate risk.

Derivatives Formulas

• Forward Pricing: Cost + Benefit
  • Remember the sign difference in no-arbitrage forward price.

Portfolio Management Formulas

• Important ratios include Sharpe Ratio, Jensen's Alpha, and M squared.
  • Sharpe Ratio: (Return - Risk-free rate) / Standard Deviation

Conclusion

• Importance of memorizing and practicing formulas
• Suggest to practice writing down formulas and applying them in exercises
• Encouragement to leave feedback for future content
• Wishing best of luck to students preparing for the CFA exam.