Section 1

CFA Level 1 - Cheatsheet

STUDY GUIDE

🎓 CFA Level 1 - Study Guide

📋 Course Structure


code
📚 CFA Level 1
├── 📖 Chapter 1: Exam 1 - Morning Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   └── 🔹 Economics (Questions 33-44)
├── 📖 Chapter 2: Exam 1 - Afternoon Session
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   └── 🔹 Portfolio Management (Questions 79-84)
├── 📖 Chapter 3: Exam 2 - Morning Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   └── 🔹 Economics (Questions 33-44)
├── 📖 Chapter 4: Exam 2 - Afternoon Session
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   └── 🔹 Portfolio Management (Questions 79-84)
├── 📖 Chapter 5: Exam 3 - Morning Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   └── 🔹 Economics (Questions 33-44)
└── 📖 Chapter 6: Exam 3 - Afternoon Session
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   └── 🔹 Portfolio Management (Questions 79-84)

Section 2

📖 Chapter 1: Exam 1 - Morning Session

What this chapter covers: This chapter encompasses the first part of the first practice exam, assessing knowledge in Ethical and Professional Standards, Quantitative Analysis, and Economics. It tests the application of ethical guidelines, statistical methods, and economic principles in investment scenarios. The goal is to evaluate a candidate's ability to make informed decisions based on these core areas. The questions require understanding and practical application of concepts.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Code of Ethics	Principles governing conduct	Ethical dilemmas	Consistency with CFA standards
Sharpe Ratio	$\frac{R_p - R_f}{\sigma_p}$	Portfolio performance	Higher ratio is better
Price Elasticity of Demand	$\frac{\% \Delta Q}{\% \Delta P}$	Demand sensitivity	Elasticity > 1 is elastic

🛠️ Problem Types

Type A: Ethical Violation Identification

Setup: "When you encounter scenarios involving potential breaches of the CFA Institute Code of Ethics and Standards of Professional Conduct, such as conflicts of interest or misuse of information."

Method: "Carefully analyze the facts, identify the relevant standards, and determine whether the actions violate those standards. Consider materiality and intent."

Example: "A portfolio manager trades ahead of client orders based on non-public information. This violates Standard III(B) - Fair Dealing and Standard II(A) - Material Nonpublic Information."

Type B: Quantitative Analysis Application

Setup: "If presented with investment data and asked to calculate statistical measures or test hypotheses."

Method: "Identify the appropriate statistical method, apply the relevant formulas, and interpret the results in the context of the investment problem."

Example: "Calculate the Sharpe ratio for a portfolio with a return of 12%, a risk-free rate of 3%, and a standard deviation of 15%. Sharpe Ratio = $\frac{0.12 - 0.03}{0.15} = 0.6$ "

🧮 Solved Example

Problem: Calculate the effective annual rate (EAR) for an investment with a stated annual rate of 8% compounded quarterly.

Given: Stated annual rate (r) = 8% = 0.08 Number of compounding periods per year (n) = 4

Steps:

Identify the formula for EAR: $EAR = (1 + \frac{r}{n})^n - 1$
Substitute the given values: $EAR = (1 + \frac{0.08}{4})^4 - 1$
Perform the calculation: $EAR = (1 + 0.02)^4 - 1 = (1.02)^4 - 1 = 1.0824 - 1$
Simplify and express as a percentage: $EAR = 0.0824 = 8.24\%$

"

✅
Answer: The effective annual rate is 8.24%.

⚠️ Common Mistakes

❌ Mistake 1: Confusing nominal and effective rates.

✅ How to avoid: Understand the difference and use the correct formula for EAR.

❌ Mistake 2: Misinterpreting p-values in hypothesis testing.

✅ How to avoid: Remember that a small p-value indicates strong evidence against the null hypothesis.

🦁 Erik's Tip

Memorize the key ethical standards and practice applying them to different scenarios. For quantitative analysis, focus on understanding the underlying concepts rather than just memorizing formulas.

📖 Chapter 2: Exam 1 - Afternoon Session

What this chapter covers: This chapter focuses on Financial Reporting and Analysis, Corporate Finance, and Portfolio Management. It assesses the ability to analyze financial statements, make capital budgeting decisions, and construct portfolios. The chapter requires applying financial concepts and techniques to real-world scenarios. Understanding financial ratios, cost of capital, and portfolio diversification is crucial.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Return on Equity (ROE)	$\frac{\text{Net Income}}{\text{Average Equity}}$	Company profitability	Higher ROE is better
Weighted Average Cost of Capital (WACC)	$\frac{E}{V}r_e + \frac{D}{V}r_d(1-T)$	Capital budgeting	Discount rate for NPV
Sharpe Ratio	$\frac{R_p - R_f}{\sigma_p}$	Portfolio performance	Risk-adjusted return

🛠️ Problem Types

Type A: Financial Statement Analysis

Setup: "When you are given financial statements and asked to evaluate a company's financial performance or position."

Method: "Calculate relevant financial ratios, compare them to industry benchmarks, and analyze trends over time."

Example: "Calculate the debt-to-equity ratio and interpret its implications for the company's financial risk."

Type B: Capital Budgeting Decision

Setup: "If presented with a capital budgeting project and asked to determine whether to accept or reject it."

Method: "Calculate the project's NPV, IRR, and payback period, and compare them to the company's hurdle rate."

Example: "Calculate the NPV of a project with an initial investment of $1,000,000 and expected cash flows of $300,000 per year for 5 years, using a discount rate of 10%."

🧮 Solved Example

Problem: Calculate the WACC for a company with 40% equity, 60% debt, a cost of equity of 12%, a cost of debt of 6%, and a tax rate of 30%.

Given: Equity (E) = 40% = 0.4 Debt (D) = 60% = 0.6 Cost of equity ( $r_e$ ) = 12% = 0.12 Cost of debt ( $r_d$ ) = 6% = 0.06 Tax rate (T) = 30% = 0.3

Steps:

Identify the formula for WACC: $WACC = \frac{E}{V}r_e + \frac{D}{V}r_d(1-T)$
Substitute the given values: $WACC = (0.4)(0.12) + (0.6)(0.06)(1-0.3)$
Perform the calculation: $WACC = 0.048 + (0.036)(0.7) = 0.048 + 0.0252$
Simplify and express as a percentage: $WACC = 0.0732 = 7.32\%$

"

✅
Answer: The weighted average cost of capital is 7.32%.

⚠️ Common Mistakes

❌ Mistake 1: Using book values instead of market values for WACC calculation.

✅ How to avoid: Use market values to reflect the current cost of capital.

❌ Mistake 2: Incorrectly interpreting financial ratios.

✅ How to avoid: Understand the underlying drivers of each ratio and compare them to industry benchmarks.

🦁 Erik's Tip

Practice analyzing financial statements and calculating key ratios. Focus on understanding the relationship between different financial metrics and their implications for investment decisions.

📖 Chapter 3: Exam 2 - Morning Session

What this chapter covers: This chapter mirrors the structure of Chapter 1, focusing on Ethical and Professional Standards, Quantitative Analysis, and Economics. It reinforces the application of ethical guidelines, statistical methods, and economic principles in investment contexts. The emphasis is on solidifying understanding and improving problem-solving speed.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
GIPS Compliance	Standards for performance reporting	Presenting investment results	Verification by independent firm
Geometric Mean	$\sqrt[n]{(1+r_1)(1+r_2)...(1+r_n)} - 1$	Average investment return	Accounts for compounding
Natural Rate of Unemployment	Frictional + Structural unemployment	Macroeconomic analysis	Full employment level

🛠️ Problem Types

Type A: Ethical Scenario Analysis

Setup: "When presented with a scenario involving potential ethical dilemmas, such as conflicts of interest or misrepresentation of performance."

Method: "Identify the relevant CFA Institute Standards of Professional Conduct and determine whether the actions violate those standards."

Example: "A research analyst publishes a biased report to benefit a friend's company. This violates Standard I(B) - Independence and Objectivity."

Type B: Statistical Calculation

Setup: "If given investment data and asked to calculate statistical measures, such as mean, standard deviation, or correlation."

Method: "Apply the appropriate statistical formulas and interpret the results in the context of the investment problem."

Example: "Calculate the standard deviation of a portfolio with the following returns: 10%, 15%, and 5%."

🧮 Solved Example

Problem: Calculate the geometric mean return for an investment with returns of 10%, -5%, and 8% over three years.

Given: $r_1 = 10\% = 0.10$ $r_2 = -5\% = -0.05$ $r_3 = 8\% = 0.08$

Steps:

Identify the formula for geometric mean: $\sqrt[n]{(1+r_1)(1+r_2)...(1+r_n)} - 1$
Substitute the given values: $\sqrt[3]{(1+0.10)(1-0.05)(1+0.08)} - 1$
Perform the calculation: $\sqrt[3]{(1.10)(0.95)(1.08)} - 1 = \sqrt[3]{1.13076} - 1 \approx 1.041 - 1$
Simplify and express as a percentage: $0.041 = 4.1\%$

"

✅
Answer: The geometric mean return is approximately 4.1%.

⚠️ Common Mistakes

❌ Mistake 1: Confusing arithmetic and geometric means.

✅ How to avoid: Use the geometric mean for calculating average investment returns over multiple periods.

❌ Mistake 2: Misinterpreting economic indicators.

✅ How to avoid: Understand the meaning and limitations of key economic indicators, such as GDP and inflation.

🦁 Erik's Tip

Focus on understanding the underlying principles of ethical standards and quantitative methods. Practice applying these concepts to different scenarios to improve your problem-solving skills.

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CFA Level 1 - Cheatsheet

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CFA Level 1 - Cheatsheet

🎓 CFA Level 1 - Study Guide

📋 Course Structure

📖 Chapter 1: Exam 1 - Morning Session

🔑 Essential Concepts & Formulas

🛠️ Problem Types

🧮 Solved Example

⚠️ Common Mistakes

🦁 Erik's Tip

📖 Chapter 2: Exam 1 - Afternoon Session

🔑 Essential Concepts & Formulas

🛠️ Problem Types

🧮 Solved Example

⚠️ Common Mistakes

🦁 Erik's Tip

📖 Chapter 3: Exam 2 - Morning Session

🔑 Essential Concepts & Formulas

🛠️ Problem Types

🧮 Solved Example

⚠️ Common Mistakes

🦁 Erik's Tip

5 more sections