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CFA Level 1 - Quantitative Methods, Exams of Accounting

Illinois College (IC)Accounting

CFA Level 1 - Quantitative Methods

Typology: Exams

2021/2022

Available from 11/06/2022

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CFA Level 1 - Quantitative Methods
Default Risk - Risk that a borrower will not make promised payments
Liquidity Risk - Risk of recieving less than fair value for an investment if it must be sold for cash quickly
Required Interest Rate on A Security - = Nominal Interest Rate
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Risk Premium
Real Risk Free Rate / Nominal Risk Free Rate - - Single period interest rate for a completely risk-free
security with no inflation added
- Nominal = Real Risk Free Rate + Expected Inflation Rate
Required Rate of Return - Required Rate of Return for an investor to willingly invest
Discount Rate - Used interchangeably with interest rates, especially in use of discounting cash flows
Opportunity Cost - The gain that is missed by not investing in a particular investment
Effective Annual Rate - The actualy rate of interst that is actually being earned after compounding more
than annually
Continuous Compounding - 1. Multiply rate by time
2. Multiple answer by e (Second LN)
3. Multiply by PV
Present Value of Perpetuity - Financial instrument that pays a fixed amount of money at set intervals
over an infinite period of time
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CFA Level 1 - Quantitative Methods

Default Risk - Risk that a borrower will not make promised payments Liquidity Risk - Risk of recieving less than fair value for an investment if it must be sold for cash quickly Required Interest Rate on A Security - = Nominal Interest Rate

  • Default Risk Premium
  • Liquidity Premium
  • Maturity Risk Premium Real Risk Free Rate / Nominal Risk Free Rate - - Single period interest rate for a completely risk-free security with no inflation added
  • Nominal = Real Risk Free Rate + Expected Inflation Rate Required Rate of Return - Required Rate of Return for an investor to willingly invest Discount Rate - Used interchangeably with interest rates, especially in use of discounting cash flows Opportunity Cost - The gain that is missed by not investing in a particular investment Effective Annual Rate - The actualy rate of interst that is actually being earned after compounding more than annually Continuous Compounding - 1. Multiply rate by time
  1. Multiple answer by e (Second LN)
  2. Multiply by PV Present Value of Perpetuity - Financial instrument that pays a fixed amount of money at set intervals over an infinite period of time

Present Value of a Projected Perpetuity - 1. Calculate PV of Perpetuity

  1. Find present value of (N -1) PV of Uneven Cash Flows - 1. Clear Memory
  2. Enter 0 in CF
  3. Enter Cash Flows in Sequence
  4. NPV = Discount Rate
  5. ComputeT NPV FV of Uneven Cash Flows - 1. Calculate the FV of each individual Cash Flow 2: Then add the results together Calculating the Growth Rate - Or use TMV calculator
  6. N = Periods, PV = PV, PMT = 0, FV = FV
  7. Compute I/Y Annual Payments (Amortization) - 1. N = Years, I/Y = Interest, PV = Loan Amount, FV = 0
  8. Compute Payments Calculate Amortization Schedule - 1. Calculate Loan Payment
  9. Calculate Interest Component (Beginning balance x I/Y)
  10. Calculate Principal component (Payment - Interest Component) 4.The following beginning balance is the first period balance - principal component only. (Interest goes to bank) Cash Flow Additivity Principle - Present value of any stream of cash flow equals the sum of the present values of the cash flows. Ex: Cash flows of $100 for 4 Years & a $300 payment that occurs in year 3. Calculate the PV of both and add them together.

(Required rate also called hurdle rate) IRR vs. NPV (Mutually Exclusive) - Always accept the project with the greatest NPV when the IRR and NPV rules are conflicting. Holding Period Return - Money-Weighted Return - Takes into account all time and cash inflows/outflows Calculate Using IRR Calculation:

  1. Set CF0 - Initial Cash Outlay
  2. CF1.......CFn (adding dividends into each period)
  3. Compute IRR Time-Weighted Return - Measures compound growth. Is not affected by cash inflows/outflows To Calculate:
  4. Figure each seperate periods individual holding period return
  5. Use formula to calculate Yield Conversion - Statistics (Defined) - Statistics - Refering to Data and methods that we use to analze data. Descriptive Statistics - The study of how data can be summarized effictively to describe important aspects of large data sets. Inference Statistics - Involves making forcasts, estimates, or judgements about a larger group from a smaller group actually observed.

Measurement Scales - Nominal Scale - Contains the least information. Counted with no particular order. Ex: Municipal Bond Fund 1, Corporate Bond Fund 1, etc Ordinal Scale - Observation is assigned to one of several categories, then ordered with respect to a characteristic. Ex: Assigning 1 to first 100, 2 to second 100, etc Interval Scale - Provide relative ranking and differences between scale values are equal, but 0 doesn;t required absence. Ex: Temperature Ratio Scales - Ranking and qual differences between scale values. Also have true 0. Ex: Money. Population and Samples - Population - All members of a specfic group Parameter - Descriptive measure of the population Sample - A subset of the population Samples statistic - A quantity computer from or used to describe a sample Frequency Distribution - Tabular display of data summarizing statistical data by assigning it to an interval. Relative Frequency - Percentage of frequencies within each interval Absolute Frequency - Actual number of frequencies within each interval Cumulative Relative/Absolute Frequencies - Cumulative sum of frequncies Histogram - Graphical representation of an absolute frequency

  1. Use only observations equal or below the mean
  2. Use variance formula to calculate
  3. If Semivariance is less than SD, then the SD overstates risk.
  4. Square Root for Deviation Target Semivariance/Target Standard Deviation - 1. Identify Target
  5. Use numbers below target
  6. Use Variance Formula, but use total number of observations for N (instead of just the numbers used in formula)
  7. Square Root for Deviation Chebyshev's Inequality (2) - The following relationships hold for any distribution Coefficient of Variation/Relative Dispersion - Relative Dispersion - the amount of variability in a distribution relative to a reference point or benchmark CV - Common measurement for relative dispersion Sharpe Ratio - - Higher the number, the better
  • The extra reward that you recieve for the added risk is called the "Mean excess return" Skewness (Effects on Mean, Median, Mode) -