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)
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   ├── 🔹 Portfolio Management (Questions 79-84)
│   ├── 🔹 Equity Investments (Questions 85-96)
│   ├── 🔹 Fixed Income (Questions 97-110)
│   ├── 🔹 Derivatives (Questions 111-116)
│   └── 🔹 Alternative Investments (Questions 117-120)
├── 📖 Chapter 2: Exam 1 - Afternoon Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   ├── 🔹 Economics (Questions 33-44)
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   ├── 🔹 Portfolio Management (Questions 79-84)
│   ├── 🔹 Equity Investments (Questions 85-96)
│   ├── 🔹 Fixed Income (Questions 97-110)
│   ├── 🔹 Derivatives (Questions 111-116)
│   └── 🔹 Alternative Investments (Questions 117-120)
├── 📖 Chapter 3: Exam 2 - Morning Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   ├── 🔹 Economics (Questions 33-44)
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   ├── 🔹 Portfolio Management (Questions 79-84)
│   ├── 🔹 Equity Investments (Questions 85-96)
│   ├── 🔹 Fixed Income (Questions 97-110)
│   ├── 🔹 Derivatives (Questions 111-116)
│   └── 🔹 Alternative Investments (Questions 117-120)
├── 📖 Chapter 4: Exam 2 - Afternoon Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   ├── 🔹 Economics (Questions 33-44)
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   ├── 🔹 Portfolio Management (Questions 79-84)
│   ├── 🔹 Equity Investments (Questions 85-96)
│   ├── 🔹 Fixed Income (Questions 97-110)
│   ├── 🔹 Derivatives (Questions 111-116)
│   └── 🔹 Alternative Investments (Questions 117-120)
├── 📖 Chapter 5: Exam 3 - Morning Session
│   ├── 🔹 Ethical and Professional Standards (Questions 1-18)
│   ├── 🔹 Quantitative Analysis (Questions 19-32)
│   ├── 🔹 Economics (Questions 33-44)
│   ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
│   ├── 🔹 Corporate Finance (Questions 69-78)
│   ├── 🔹 Portfolio Management (Questions 79-84)
│   ├── 🔹 Equity Investments (Questions 85-96)
│   ├── 🔹 Fixed Income (Questions 97-110)
│   ├── 🔹 Derivatives (Questions 111-116)
│   └── 🔹 Alternative Investments (Questions 117-120)
└── 📖 Chapter 6: Exam 3 - Afternoon Session
    ├── 🔹 Ethical and Professional Standards (Questions 1-18)
    ├── 🔹 Quantitative Analysis (Questions 19-32)
    ├── 🔹 Economics (Questions 33-44)
    ├── 🔹 Financial Reporting and Analysis (Questions 45-68)
    ├── 🔹 Corporate Finance (Questions 69-78)
    ├── 🔹 Portfolio Management (Questions 79-84)
    ├── 🔹 Equity Investments (Questions 85-96)
    ├── 🔹 Fixed Income (Questions 97-110)
    ├── 🔹 Derivatives (Questions 111-116)
    └── 🔹 Alternative Investments (Questions 117-120)

Section 2

📖 Chapter 1: Exam 1 - Morning Session

What this chapter covers: This chapter contains the first 120 questions of the first practice exam. It covers ethical and professional standards, quantitative methods, economics, financial reporting and analysis, corporate finance, portfolio management, equity investments, fixed income, derivatives, and alternative investments. The questions are designed to mirror the topic weighting of the actual CFA Level 1 exam.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
GIPS Compliance	Voluntary standards for investment performance reporting.	Presenting investment performance to clients.	Ensure all requirements of GIPS are met and documented.
Time Value of Money	$FV = PV(1+r)^n$	Calculating future or present values of investments.	Check that the interest rate and number of periods are consistent.
NPV	$\sum_{t=0}^{N} \frac{CF_t}{(1+r)^t}$	Evaluating capital budgeting projects.	Ensure the discount rate reflects the project's risk.

🛠️ Problem Types

Type A: Ethical Violation Identification

Setup: "When presented with a scenario involving a CFA charterholder or candidate potentially violating the Code of Ethics and Standards of Professional Conduct."

Method: "Carefully analyze the scenario, identifying potential conflicts of interest, breaches of confidentiality, or failures to act with integrity, competence, diligence, respect, and ethical manner. Refer to the specific standards to determine if a violation occurred."

Example: "An analyst uses material nonpublic information to make investment recommendations. This violates Standard II(A): Material Nonpublic Information."

Type B: Statistical Hypothesis Testing

Setup: "If given a hypothesis about a population parameter and sample data."

Method: "Formulate the null and alternative hypotheses, calculate the test statistic (e.g., t-statistic, z-statistic), determine the p-value, and compare it to the significance level ( $\alpha$ ). Reject the null hypothesis if p-value < $\alpha$ ."

Example: "Testing if the mean return of a portfolio is significantly different from zero using a t-test."

🧮 Solved Example

Problem: A company is considering a project with an initial investment of $1,000,000 and expected cash flows of$ 300,000 per year for 5 years. The company's cost of capital is 10%. Calculate the NPV.

Given: Initial Investment = $1,000,000 Annual Cash Flow =$ 300,000 Project Life = 5 years Cost of Capital = 10%

Steps:

Calculate the present value of each cash flow: $PV = \frac{CF}{(1+r)^t}$
Sum the present values of all cash flows.
Subtract the initial investment from the sum of the present values.
$NPV = \sum_{t=1}^{5} \frac{300,000}{(1+0.10)^t} - 1,000,000$

"

✅
Answer: NPV = $137,234.40

⚠️ Common Mistakes

❌ Mistake 1: Incorrectly applying GIPS standards due to misunderstanding specific requirements.

✅ How to avoid: Thoroughly review and understand each GIPS provision and its application.

❌ Mistake 2: Using an incorrect discount rate when calculating NPV.

✅ How to avoid: Ensure the discount rate accurately reflects the project's risk and opportunity cost.

🦁 Erik's Tip

When dealing with ethical questions, always consider the spirit of the Code and Standards, not just the letter.

📖 Chapter 2: Exam 1 - Afternoon Session

What this chapter covers: This chapter presents the second 120 questions of the first practice exam. It covers the same topics as the morning session, providing a comprehensive assessment of the candidate's knowledge.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Standard Deviation	$\sqrt{\frac{\sum_{i=1}^{N}(x_i - \mu)^2}{N}}$	Measuring the dispersion of a dataset.	Ensure you are using the correct formula for population or sample.
CAPM	$E(R_i) = R_f + \beta_i(E(R_m) - R_f)$	Calculating the expected return of an asset.	Verify that beta is appropriate for the asset.
Dividend Discount Model	$P_0 = \sum_{t=1}^{\infty} \frac{D_t}{(1+r)^t}$	Valuing a stock based on its future dividends.	Ensure the growth rate is less than the discount rate.

🛠️ Problem Types

Type A: Portfolio Construction

Setup: "When given risk and return characteristics of different assets and an investor's risk preferences."

Method: "Apply Markowitz portfolio theory to construct an efficient portfolio that maximizes return for a given level of risk, or minimizes risk for a given level of return. Consider the correlation between assets."

Example: "Constructing a portfolio with a target return of 10% using stocks and bonds, considering their expected returns, standard deviations, and correlation."

Type B: Bond Valuation

Setup: "If presented with a bond's coupon rate, maturity date, and yield to maturity."

Method: "Calculate the present value of the bond's future cash flows (coupon payments and face value) using the yield to maturity as the discount rate."

Example: "Valuing a 5-year bond with a 6% coupon rate and a yield to maturity of 7%."

🧮 Solved Example

Problem: Calculate the expected return of a stock with a beta of 1.2, given a risk-free rate of 3% and an expected market return of 10%.

Given: Beta = 1.2 Risk-Free Rate = 3% Expected Market Return = 10%

Steps:

Apply the CAPM formula: $E(R_i) = R_f + \beta_i(E(R_m) - R_f)$
Substitute the given values: $E(R_i) = 0.03 + 1.2(0.10 - 0.03)$
Calculate the expected return.

"

✅
Answer: Expected Return = 11.4%

⚠️ Common Mistakes

❌ Mistake 1: Forgetting to annualize returns or standard deviations.

✅ How to avoid: Always check the time period of the data and adjust accordingly.

❌ Mistake 2: Misinterpreting the results of a hypothesis test.

✅ How to avoid: Clearly define the null and alternative hypotheses and understand the meaning of the p-value.

🦁 Erik's Tip

Pay close attention to units when performing calculations. Mismatched units are a common source of errors.

📖 Chapter 3: Exam 2 - Morning Session

What this chapter covers: This chapter presents the first 120 questions of the second practice exam, covering all topics in the CFA Level 1 curriculum.

🔑 Essential Concepts & Formulas

Concept/Formula	Definition/Equation	When to Use	Quick Check
Covariance	$Cov(X,Y) = E[(X - E[X])(Y - E[Y])]$	Measuring the degree to which two variables move together.	Ensure you are using the correct formula for population or sample.
WACC	$WACC = w_d r_d (1-t) + w_e r_e$	Calculating a company's cost of capital.	Verify that the weights are based on market values.
Price-Earnings Ratio	$P/E = \frac{Price \ per \ Share}{Earnings \ per \ Share}$	Valuing a stock relative to its earnings.	Compare to industry averages and historical values.

🛠️ Problem Types

Type A: Ethical Dilemma involving Conflicts of Interest

Setup: "When an analyst's personal interests conflict with their duty to clients."

Method: "Prioritize client interests, disclose the conflict, and obtain consent if necessary. Consider recusation."

Example: "An analyst owns shares in a company they are recommending to clients."

Type B: Capital Budgeting Decision

Setup: "When evaluating multiple investment projects with different cash flows."

Method: "Calculate NPV, IRR, and payback period. Choose projects with positive NPV and IRR greater than the cost of capital."

Example: "Comparing two projects with different initial investments and cash flow patterns."

🧮 Solved Example

Problem: A company has a debt-to-equity ratio of 0.5. The cost of debt is 6%, the cost of equity is 12%, and the tax rate is 30%. Calculate the WACC.

Given: Debt-to-Equity Ratio = 0.5 Cost of Debt = 6% Cost of Equity = 12% Tax Rate = 30%

Steps:

Calculate the weights of debt and equity: $w_d = \frac{D}{D+E}$ , $w_e = \frac{E}{D+E}$
Substitute the given values: $w_d = \frac{0.5}{1+0.5} = 0.333$ , $w_e = \frac{1}{1+0.5} = 0.667$
Apply the WACC formula: $WACC = w_d r_d (1-t) + w_e r_e$
Substitute the given values: $WACC = 0.333(0.06)(1-0.30) + 0.667(0.12)$

"

✅
Answer: WACC = 9.0%

⚠️ Common Mistakes

❌ Mistake 1: Using book values instead of market values when calculating WACC.

✅ How to avoid: Always use market values for weights in the WACC formula.

❌ Mistake 2: Failing to consider all relevant cash flows in a capital budgeting analysis.

✅ How to avoid: Carefully identify all incremental cash flows associated with the project.

🦁 Erik's Tip

When calculating WACC, remember that the cost of debt is tax-deductible, so adjust accordingly.

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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