365 CFA Level 1 ®

Formula Sheet
Part I

www.365careers.com
Contents

Contents 2
Ethics 3
Quantitative Methods 5
Economics 13
Corporate Finance 18
Alternative Investments 23

2
Ethical and
Professional
Standards

01
3
 Ethical and Professional
Standards
I. Professionalism
I(A) Knowledge of the Law.
I(B) Independence and Objectivity.
I(C) Misrepresentation.
I(D) Misconduct.

II. Integrity of Capital Markets

II(A) Material Non-public Information.
II(B) Market Manipulation.

III. Duties to Clients

III(A) Loyalty, Prudence, and Care.
III(B) Fair Dealing.
III(C) Suitability.
III(D) Performance Presentation.
III(E) Preservation of Confidentiality.

IV. Duties to Employers

IV(A) Loyalty.
IV(B) Additional Compensation Arrangements.
IV(C) Responsibilities of Supervisors.

V. Investment Analysis, Recommendations, and Actions

V(A) Diligence and Reasonable Basis.
V(B) Communication with Clients and Prospective Clients.
V(C) Record Retention.

VI. Conflicts of Interest

VI(A) Disclosure of Conflicts.
VI(B) Priority of Transactions.
VI(C) Referral Fees.

VII. Responsibilities as a CFA Institute Member or CFA Candidate

VII(A) Conduct as Participants in CFA Institute Programs.
VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program.

4
Quantitative
Methods

02
5
 Quantitative Methods

TIME VALUE OF MONEY

( )
m
Stated annual rate
Effective Annual Rate (EAR) Effective annual rate = 1+ -1
m

FVN = PV x (1 + r)N
Single Cash Flow
(simplified formula) FVN
PV =
(1 + r)N

( ) rs mN
FVN = PV x 1 + m
rs = Stated annual interest rate
Investments paying interest m= Number of compounding
FVN periods per year
more than once a year PV =

( )
N= Number of years
rs mN
1+
m

Future Value (FV) of an

Investment with Continuous FVN = PVersN
Compounding

FVN = A x
[ (1 + r)N - 1
r ]
Ordinary Annuity

[ ]
1
1-
(1 + r)N
PV = A x r

FV ADue = FV AOrdinary x (1 + r) = A x
[(1 + r)N - 1
r ] x (1 + r)

[ ]
Annuity Due 1
1-
(1 + r)N
FV ADue = FV AOrdinary x (1 + r) = A x x (1 + r)
r

Present Value (PV) of a

PMT
Perpetuity PVPerpetuity =
r

6
 Quantitative Methods

TIME VALUE OF MONEY

Future value (FV) of a

FVN = Cash flow1(1 + r)1 + Cash flow2(1 + r)2 … Cash flowN(1 + r)N
series of cash flows

N
CFt
Net Present Value (NPV) NPV =
Σ
t=0
(1 + r)t

CF1 CF2 CFN

Internal Rate of Return (IRR) NPV = CF0 + + + ... + =0
(1 + IRR)1 (1 + IRR)2 (1 + IRR)N

Ending value - Beginning value

Holding Period Return (HPR) HPR =
No cash flows Beginning value

Ending Beginning Cash flows

Holding Period Return (HPR) value
- value + received P1 - P0 + D1
Cash flows occur at the end of the period HPR = =
Beginning value Beginning value

D = Dollar discount, which is equal to the

360 difference between the face value of
Yield on a Bank Discount D
Basis (BDY) rBD = F
X
t
the bill (F) and its purchase price (P0)
F = Face value of the T-bill
t = Actual number of days remaining to maturity

Effective annual yield 360

EAY = ( 1 + HPR) t -1
(EAY)

Money market yield

(CD equivalent yield)
Money market
yield
= HPR x
( )
360
t =
360 × rBankDiscount
360 - (t x rBankDiscount)

7
 Quantitative Methods

STATISTICAL CONCEPTS AND MARKET RETURNS

Largest number - Smallest number

Interval Width Interval Width =
Number of desired intervals

Relative Frequency Interval frequency

Relative frequency =
Formula Observations in data set

Σ
N

Population Mean xi
i = 1 ... n x1 + x2 + x3 + ... + xN
μ= =
N N

Σ
N

xi
Sample Mean x1 + x2 + x3 + ... + xn
=
i = 1 ... n
x=
n n

√ x x x ... x
n
Geometric Mean G= 1 2 3 n

n
xn = n
Harmonic Mean
Σ( )
i = 1 ... n
1
xi

Median Median =
{ }
(n + 1)
2

Weighted Mean xw =
Σ wixi
i = 1 ... n

Portfolio Rate of Return rp = wara + wbrb + wcrc + ... + wnrn

{ }
Position of the Observation y
Ly = (n + 1)
at a Given Percentile y 100

Range Range = Maximum value - Minimum value

8
 Quantitative Methods

STATISTICAL CONCEPTS AND MARKET RETURNS

n

Mean Absolute Deviation

MAD =
Σ
i = 1 ... n
|xi - x |

Population Variance
σ2 =
Σ
i = 1 ... n
(xi - μ)2

Σ
N

Population Standard Deviation

σ=√ n
i = 1 ... n
(xi - μ)2

Sample Variance
S2 =
Σ
i=1
(xi - x )2

n-1

Σ
Sample Standard Deviation
s=√ i=1
(xi - x )2

n-1
n

Semi-Variance
1
Semi-variance = n Σ
rt < Mean
(Mean - rt)2

Percentage of observations
Chebyshev Inequality 1
within k standard deviations of > 1 - 2
k
the arithmetic mean

S
Coefficient of Variation CV =
x

Rp - Rf
Sharpe Ratio Sharpe Ratio = σp

Skewness Sk = [ (n - 1)(n - 2)
n
] x
Σ
i = 1 ... n
(xi - x )3
S3

[ ]
n

n (n + 1) Σ (x - x )
i = 1 ... n
i
4
3 (n + 1)2
Kurtosis KE = (n - 1)(n - 2)(n - 3)
x
S3
x
(n - 2)(n - 3)

9
 Quantitative Methods

PROBABILITY CONCEPTS
P(E)
Odds FOR E Odds FOR E =
1 - P(E)

A and B are independent if

Conditional Probability P(A B)
U
P(A|B) = P(B)
P(A|B) = P(B) U
P(A B) = P(A) x P(B),
if A and B are independent

Additive Law
P(A U B) = P(A) + P(B) - P(A B)
U
(The Addition Rule)

The Multiplication Rule

P(A B) = P(A|B) x P(B)
U
(Joint Probability)

The Total Probability Rule P(A) = P(A|S1) x P(S1) + P(A|S2) x P(S2) + ... + P(A|Sn) x P(Sn)

Expected Value E(X) = P(A)XA + P(B)XB + ... + P(n)Xn

(x - x)(y - y)
σxy = n-1
Covariance
Cov(ri, rj) = E{[Ri - E(Ri)][Rj - E(Rj)]}

covxy
Correlation ρ = σxσy

Variance of a Random Variable σx = ∑(x - E(x))2 x P(x)

2
i = 1 ... n

Portfolio Expected Return E(RP) = E(w1r1 + w2r2 + w3r3 + … + wnrn)

Var(RP) = E[(Rp - E(Rp)2 ] = [w12 σ12 + w22σ22 + w32σ32 +

Portfolio Variance
2w1w2Cov(R1R2) + 2w2w3Cov(R2R3) + 2w1w3Cov(R1R3)]

P(B|A) x P(A)
Bayes’ Formula P(A|B) =
P(B)

() n n!
The Combination Formula nCr = =
c (n - r)! r!

n!
The Permutation Formula nPr =
(n - r)!

10
 Quantitative Methods

COMMON PROBABILITY DISTRIBUTIONS

The Binomial Probability P(x) =

n! px x (1 - p)n - x
Formula (n - x)! x!

Binomial Random E(X) = np

Variable Variance = np(1 - p)

90% confidence interval for X is x - 1.65s; x + 1.65s

For a Random Normal 95% confidence interval for X is x - 1.96s; x + 1.96s
Variable X
99% confidence interval for X is x - 2.58s; x + 2.58s

Safety-First Ratio SFRatio = [ E(Rp) - RL

σp ]
i = Interest rate
Continuously Compounded t = Time
FV = PV x ei x t
Rate of Return ln e = 1

SAMPLING AND ESTIMATION

Sampling Error of the Mean Sample Mean - Population Mean

σ
Standard Error of the Sample Mean SE =
(Known Population Variance) √n

s
Standard Error of the Sample Mean SE =
(Unknown Population Variance) √n
x-μ
Z-score Z=
σ

Confidence Interval for Population x - Zα x

σ
; x + Zα x
σ
Mean with z 2
√n 2
√n

Confidence Interval for Population S S

x - tα x ; x + tα x
Mean with t 2
√n 2
√n

11
 Quantitative Methods

SAMPLING AND ESTIMATION

known population, standard deviation σ,

Z no matter the sample size
unknown population, standard deviation s,
z or t-statistic? t
and sample size below 30
unknown population, standard deviation s,
Z
and sample size above 30

HYPOTHESIS TESTING

X-μ X-μ
Test Statistics: Population Mean zα = σ ; tn-1, α = s
√n √n
(x1 - x2) - (μ1 - μ2)
t-statistic =
Test Statistics: Difference in Means - ( sp2 sp2 12
+
n1 n2 )
Sample Variances Assumed Equal
(independent samples) (n1 - 1)s12 + (n2 - 1)s22
sp 2
=
n1 + n2 - 2

(x1 - x2) - (μ1 - μ2)

t-statistic =
( s12 s22 12
+
n1 n2 )
Test Statistics: Difference in Means -
( )
2
Sample Variances Assumed Unequal s12 s22
+
(independent samples) n1 n2
degrees of freedom =
( ) ( )
2 2
s12 s22
n1 n2
+
n1 n2

Test Statistics: Difference in Means - n

Paired Comparisons Test

(dependent samples)
t=
d - μdz
Sd
, where d =
1
n Σ di
i = 1 ... n

degrees of freedom: n - 1
Test Statistics: Variance 2 (n - 1)s2
X n-1 = s2 : sample variance
Chi-square Test σ02
σ02 : hypothesized variance

Test Statistics: Variance degrees of freedom:

s12 , where s12 > s22 n1 - 1 and n2 - 1
F-Test F=
s22
s12 : larger sample variance
s22 : smaller sample variance

12
Economics

03
13
 Economics

TOPICS IN DEMAND AND SUPPLY ANALYSIS

0 > e > -1 -> inelastic demand
-1 > e > -∞ -> elastic demand
%∆ Quantity demanded (Qx)
Price Elasticity = e = -1 -> unit elastic demand
%∆ Price (Px) e=0 -> perfectly inelastic demand
e = -∞ -> perfectly elastic demand

%∆ Quantity demanded (Qx) e>0 -> normal goods

Income Elasticity = %∆ Income (Ix) e<0 -> inferior goods

Cross-price %∆ Quantity demanded (Qx) e>0 -> the related product is a substitute
Elasticity = e<0 -> the related product is a complement
%∆ Price of a related good (Py)

THE FIRM AND MARKET STRUCTURES

For all market structures, Max Profit -> when MC = MR Market structures:
Perfect Competition
Monopolistic Competition
Breakeven points AR = ATC (perfect competition) Oligopoly
TR = TC (imperfect competition) Monopoly

Short-run shutdown points AR < AVC (perfect competition)

TR < TVC (imperfect competition)

AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH

Total GDP = final value of goods and services produced (market value)
+ government services (at cost)
+ rental value of owner-occupied housing (an estimate)
+ transfer payments (pensions, etc)
+ by-products
+ grey economy

Nominal GDP
GDP Deflator = Real GDP
x 100

Nominal GDPt = Pt x Qt

Real GDPt = Pbase-year x Qt

14
 Economics

AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH

Real GDP = Consumption spending (C) + Investment (I) +
Expenditure Approach + Government spending (G) + Net exports (X-M)

Real GDP = National income + Capital consumption allowance +

+ Statistical discrepancy
Real GDP = Consumption spending (C) + Savings (S) + Taxes (T)
Income Approach Savings (S) = Investments (I) + Fiscal Balance (G-T) + Trade Balance (X-M)

S – I = Fiscal Balance (G-T) + Trade Balance (X-M)

National Income = employees’ compensation

+ corporate and government profits before taxes
+ interest income
+ unincorporated business net income (business owners’ incomes)
+ rent
+ indirect business taxes
− subsidies

Personal Income = national income

+ transfer payments (social insurance, unemployment or disability payments)
− indirect business taxes
− corporate income taxes
− undistributed corporate profits

Personal Disposable Income = Personal income - personal taxes

Potential GDP = Aggregate hours worked x Labor productivity

Aggregate hours worked = Labor force x Average hours worked per week

Growth in Potential GDP = Growth in labor force + Growth in labor productivity

Y = Aggregate output
A = Total Factor Productivity (TFP)
The Production Function Y = A x f (K, L) K = Capital
L = Labor

Growth in Potential GDP = Growth in technology + WL x (growth in labor) + WC x (growth in capital)

WL = Labor’s percentage share of national income

WC = Capital’s percentage share of national income

15
 Economics

UNDERSTANDING BUSINESS CYCLES

Number of unemployed people

Unemployment Rate =
Total labor force

Total labor force

Participation Rate (Activity Ratio) = Total working-age population

Labor Force = Unemployed people + Employed people

Cost of basket at current-year prices

Consumer Price Index = Cost of basket at base-year prices
x 100

∑ (Current-year price x Base-year quantity)

Laspeyres’ Index =
∑ (Base-year price x Base-year quantity)

Fisher’s Index = √(Laspeyres’ Index) x (Paashe’s Index)

MONETARY AND FISCAL POLICY

1
Money Multiplier = Reserve requirement

1 MPC = Marginal propensity to consume

Fiscal Multiplier = 1- MPC X (1- t) t = Tax rate

Equation of Exchange MV = PY (Money supply x Velocity = Price x Real output)

Fisher Effect Nominal Interest Rate = Real interest rate + Expected inflation rate

Neutral interest rate = Real trend rate of economic growth +

Neutral Interest Rate
+ inflation target

16
 Economics

INTERNATIONAL TRADE AND CAPITAL FLOWS

C = Consumption
I = Investments
GDP GDP = C + I + G + X - M G = Government Spending
X = Export
M = Import

Balance of Payments Current Account + Capital Account + Financial Account = 0

X - M = Private Savings +
Trade Balance + Government Savings -
- Investments in domestic capital

CURRENCY EXCHANGE RATES

Real Exchange Rate = Nominal exchange rate x CPI base currency

CPI price currency

17
Corporate
Finance

04
18
 Corporate Finance

CAPITAL BUDGETING

N
CFt
Net present value (NPV) NPV =
Σ
t=0
(1 + r)t

N
CFt
Σ
Internal Rate of Return
=0
(IRR) (1 + IRR) t
t=0

Average Accounting Rate Average net income

of Return (AAR) AAR =
Average book value

PV of future cash flows NPV

Profitability Index (PI) PI = =1+
Initial Investment Initial Investment

COST OF CAPITAL

Weighted Average Cost of

WACC = wdrd (1- t) + wprp + were
Capital (WACC)

Tax shield Tax shield = Deduction × Tax rate

Dp
Cost of Preferred Stock rp = Pp

Cost of Equity D1
(Dividend discount model approach)
re = P0
+g

Growth Rate g= 1- D
( EPS ) x ROE

Cost of Equity Risk premium = the additional

(Bond yield plus risk premium) re = rd + Risk Premium yield on a company’s stock relative
to its bonds

19
 Corporate Finance

COST OF CAPITAL

Capital Asset Pricing

E (Ri) = RF + βi [E (RM) - RF]
Model (CAPM)

Cov (Ri, RM)

Beta of a Stock βi = Var (RM)

βLevered, Comparable
Pure-play Method Project βUnlevered(Comparable) =
Beta (De-lever)
[ (1 + (1 - tComparable) DComparable
EComparable )]
Pure-play Method for
Subject Firm (Re-lever) [ (
βLevered, Project = βLevered, Comparable 1 + (1 - tProject)
DProject
EProject )]
Adjusted CAPM
E(Ri) = RF + βi [E (RM) - RF + Country risk premium]
(for country risk premium)

( )
σ of equity
Country Risk index of the developing country
Premium CRP = Sovereign yield spread x
σ of sovereign bond market in terms
of the developed market currency

Amount of capital at which

the source’ s cost of capital changes
Break Point Break point =
Proportion of new capital
raised from the source

MEASURES OF LEVERAGE

Degree of Operating Degree of Operating Percentage change in operating income

=
Leverage Leverage Percentage change in units sold

Degree of Financial Degree of Financial Percentage change in Net Income

Leverage Leverage
= Percentage change in EBIT

20
 Corporate Finance

MEASURES OF LEVERAGE

Degree of Percentage change in Net Income

Degree of Total =
Total Leverage Percentage change in number of Units Sold
Leverage

Return on Equity Net Income

Return on Equity =
(ROE) Shareholders’ Equity

P = the price per unit

The Breakeven F+C V = the variable cost per unit
Quantity of Sales QBreakeven = P-V F = the fixed operating costs
C = the fixed financial cost

P = the price per unit

Operating Breakeven F
QOperating Breakeven = V = the variable cost per unit
Quantity of Sales P-V F = the fixed operating costs

WORKING CAPITAL MANAGEMENT

Current assets
Current Ratio Current Ratio =
Current liabilities

Cash + Receivables +
Quick Ratio + Short-term marketable investments
Quick Ratio =
Current liabilities

Accounts Receivable Accounts Receivable Credit sales

Turnover Turnover =
Average receivables

Number of Days of Number of days of 365

=
Receivables receivables Accounts receivable turnover

Cost of goods sold

Inventory Turnover Inventory Turnover = Average Inventory

Number of Days of Number of Days of 365

=
Inventory Inventory Inventory turnover

21
 Corporate Finance

WORKING CAPITAL MANAGEMENT

Purchases
Payables Turnover Payables Turnover Ratio =
Average accounts payables

Number of Days of 365

Number of Days of Payables =
Payables Payables turnover ratio

Net operating cycle = Number of days of inventory +

Net Operating Cycle + Number of days of receivables -
- Number of days of payables

D = Dollar discount, which is equal to the

Yield on a Bank Discount
Basis (BDY)
difference between the face value of
D 360
rBD = x the bill (F) and its purchase price (P0)
F t F = Face value of the T-bill
t = Actual number of days remaining to maturity

360
Effective Annual Yield (EAY) EAY = ( 1 + HPR) t -1

%Discount
Holding Period Return HPR =
1 - %Discount

( )
360
Cost of trade %Discount
Cost of Trade Credit
Number of days past discount
= 1+ -1
credit 1 - %Discount

Cost of Interest + Dealer’ s commission + Other costs

Cost of Borrowing =
borrowing Loan amount - Interest

22
Alternative
Investments

05
23
 Alternative Investments

Total Debt * This is one of several definitions and formulas

Leverage Ratio* Leverage = for leverage, also known as Debt-to-Equity ratio
Total Equity

√
n
Volatility Σ (R - R i avg)
2 Ri = Individual returns data points
Ravg = Average of all return data points in the set
(standard deviation of
σ=
i=1
returns) - population n n = Number of data points

√
n
Ri = Individual returns data points
Volatility
(standard deviation of
Σ (Ri - Ravg)2
Ravg = Average of all return data points in the set
σ=
i=1
returns) - sample n-1 n = Number of data points

Rp = Portfolio return
Sharpe Ratio Rp - Rf Rf = Risk-free rate of return
Sharpe Ratio =
σp σp = Standard deviation (volatility) of portfolio
return

Rp = Portfolio return
Sortino Ratio Rp - Rf Rf = Risk-free rate of return
Sortino Ratio =
σd σd = Standard deviation (volatility) of the
downside (“downside risk”)

Ri = Individual returns data points

√
n
Downside Risk Σ (Ri - Rtreshold)2 Rtreshold = Return threshold (determined by the
(semi-deviation) - population user, for example the risk-free rate, hard target return or
σd =
i=1
n 0% can be used)
n = Number of data points

Ri = Individual returns data points

√
n
Downside Risk
(semi-deviation) - sample
Σ (Ri - Rtreshold)2 Rtreshold = Return threshold (determined by the user,
for example the risk-free rate, hard target return or 0%
σd =
i=1
n-1 can be used)
n = Number of data points

N
Discounted Cash Flow
Σ
CFt CFt = Cash flow in time t
(DCF) = Net Present Value DCF = NPV =
(1 + r)t r = Discount rate
(NPV) of an investment t=0

Capitalization Rate Net Operating Income (NOI)

(Cap Rate) Cap rate =
Market Value (or purchase price of property)

24
 Alternative Investments

FFO = Net Income +

Funds From + Depreciation (and other non-cash items)
Operations (FFO) - Gains/Losses from property sales
(and other non-recurring items)

Adjusted Funds From AFFO = FFO – Recurring Capital Expenditures (CAPEX)

Operations (AFFO)

Net Asset Value per NAV

NAV per share =
share (NAV per share) Total number of shares outstanding

25