FinQuiz
Reading 7: The Behavioral Finance Perspective
1. Expected utility (U) = Σ (U values of
outcomes × Respective Prob)
2. Subjective expected U of an individual =Σ
[u (xi) × Prob (xi)]
3. Bayes’ formula = P (A|B) = [P (B|A) / P
(B)]× P (A)
4. Risk premium = Diff. b/w Certainty
Equivalent and Expected Value
5. Perceived value of each outcome =
= U = w (p1) v (x1) + w (p2) v (x2) + … +
w (pn) v (xn)
6. Abnormal return (R) = Actual R –
Expected R
Reading 8: The Behavioral Biases of
Individuals
--------------------------------------------
Reading 9: The Behavioral Finance Perspective
--------------------------------------------
Reading 10: Behavioral Finance and
Investment Processes
1. After-tax (AT)Real required return (RR) %
!"#$%&' ( *$+,#*$- $./$%-#&,*$( #% 0$1* %
= =
2$& 3%4$(&15"$ 6(($&(
7*89$:&$- %$$-( #% 0$1* %
2$& 3%4$(&15"$ 6(($&(
Formula Sheet
7*89$:&$- %$$-( #% 0$1* %
2. ATNominal RR % = 2$& 3%4$(&15"$ 6(($&(
+ Current Annual (Ann) Inflation (Inf) % =
AT real RR% + Current Ann Inf% Or
ATNominal RR% = (1 + AT Real RR%)
× (1 + Current Ann Inf %) – 1
3. Total Investable assets = Current Portfolio
-Current year cash outflows + Current year
cash inflows
4. Pre-tax income needed = AT income
needed / (1-tax rate)
5. Pre-tax Nominal RR = (Pre-tax income
needed / Total investable assets) + Inf%
If Portfolio returns are tax-deferred:
6. Pre-tax projected expenditure $ = AT
projected expenditure $ / (1 – tax rate)
7. Pre-tax real RR % = Pre-tax projected
expenditures $ / Total investable assets
8. Pre-tax nominal RR = (1 + Pre-tax real RR
%) × (1 + Inflation rate%) – 1
If Portfolio returns are NOT tax-deferred:
9. AT real RR% = AT projected expenditures
$ / Total Investable assets
10. AT nominal RR% = (1 + AT real RR%) ×
(1 + Inf%) – 1
CFA Level III 2019
11. Procedure of converting nominal, pre-tax
figures into real, after-tax return:
• Real AT R = [Expected total R –
(Expected total R of Tax-exempt Invst
× wt of Tax-exempt Invst)] × (1 – tax
rate) + (Expected total R of Tax-
exempt Invst × wt of Tax-exempt
Invst) – Inf rate
Or
• Real AT R =[(Taxable R of asset class
1 × wt of asset class 1) + (Taxable R
of asset class 2 × wt of asset class 2) +
…+ (Taxable return of asset class n ×
wt of asset class n)] × (1 – tax rate) +
(Expected total R of Tax-exempt Invst
× wt of Tax-exempt Invst) – Infrate
Reading 11: Taxes and Private Wealth
Management in a Global Context
1. Average tax rate = Total tax liability /
Total taxable income
2. AT Return = r × (1 – ti)
3. AT Future Accumulations after n years =
FVIFi= Initial Invst × [1 + r (1 – ti)]n
4. Tax drag ($) on capital accumulation =
Acc capital without tax – Acc capital with
tax
5. Tax drag (%) on capital accumulation =
(Acc capital without tax – Acccapital with
 FinQuiz
tax) / (Acc capital without tax – Initial
investment)
6. Returns-Based Taxes: Deferred Capital
Gains:
• AT Future Accumulations after n
years = FVIFcg= InitialInvst. × [(1 + r)
n
(1 – tcg) + tcg]
• Value of a capital gain tax deferral =
AT future accumulations in deferred
taxes – AT future accumulations in
accrued annually taxes
7. Cost Basis
• Capital gain/loss = Selling price –
Cost basis
• AT Future Accumulation = FVIFcgb=
Initial Invst × [(1 + r) n (1 – tcg) + tcg –
(1 – B) tcg] =Initial Invst × [(1 + r) n (1
– tcg) + (tcg × B)]
Where, B = Cost basis
tcg × B = Return of basis at the end of
the Invst.horizon.
When cost basis = initial InvstèB=1,
FVIFcg=Initial investment × [(1 + r) n
(1 – tcg) + tcg]
8. Wealth-Based Taxes
• AT Future Acc = FVIF w = Initial
Invst [(1 + r) (1 – tw)] n
Where, tw = Ann wealth tax rate
9. Blended Taxing Environments
Formula Sheet CFA Level III 2019
a) Proportion of total return from 15. Accrual Equivalent Tax Rates = r (1 – TAE)
GHI
Dividends (pd), taxed at a rate of td. = RAE = TAE = 1−
G
pd = Dividends ($) / Total dollar return
b) % of total return from Interest income
16. In Tax Deferred accounts (TDAs) Future
(pi), taxed at a rate of ti.
AT Acc = FVIF TDA = Initial Invst[(1 + r) n
pi = Interest ($) / Total dollar return
(1 – Tn)]
c) % of total return from Realized capital
17. In Tax-exempt accounts FVIF taxEx = Initial
gain (pcg), taxed at a rate of tcg.
Invst (1 + r) n
pcg = Realized Capital gain ($) / Total
• FVIF TDA = FVIF taxEx (1 – Tn)
dollar return
d) Unrealized capital gain return: Total
18. AT asset wt of an asset class (%) = AT
Dollar Return = Dividends + Interest
MV of asset class ($) / Total AT value of
income + Realized Capital gain +
Portfolio ($)
Unrealized capital gain
Total realized tax rate = [(pi× ti) + (pd×
19. AT Initial invst in tax-exempt accounts =
td)+ (pcg× tcg)]
(1 – T0)
10. Effective Ann AT R = r* = r (1 – piti – pdtd
20. FV of a pretax $ invested in a tax-exempt
– pcgtcg) = r (1 – total realized tax rate)
account = (1 – T0) (1 + r) n
Where, r = Pre-tax overall return on the
portfolio and r*= Effective ann AT R
21. FV of a pretax $ invested in a TDA = (1 +
r) n (1 – Tn)
11. Effective Capital Gains Tax = T* = tcg (1 –
pi – pd – pcg) / (1 – piti – pdtd – pcgtcg)
22. Investors AT risk = S.D of pre-tax R (1 –
Tax rate) = σ(1 – T)
12. Future AT acc. = FVIF Taxable = Initial Invst
[(1 + r*)n (1 – T*) + T* – (1 – B) tcg]
23. Tax alpha from tax-loss harvesting (or Tax
savings) =Capital gain tax with unrealized
13. Initial Invst (1 + Accrual Equivalent R)n =
losses – Capital gain tax with realized
Future AT Acc
losses Or
Tax alpha from tax-loss harvesting =
14. Accrual Equivalent R = (Future AT Acc /
Capital loss × Tax rate
Initial Invst) 1/n– 1
 FinQuiz
24. Pretax R taxed as a short-term gain needed
to generate the AT R equal to long-term
AT R = Long-term gain after-tax return /
(1 –short-term gains tax rate)
Reading 12: Estate Planning in a Global
Context
1. Estate =Financial assets + Tangible
personal assets + Immoveable property +
Intellectual property
2. Discretionary wealth or Excess capital =
Assets – Core capital
3. Core Capital (CC) Spending Needs =
N 3.
p(Survival j ) × Spending j
∑ (1+ r) j
j−1
4. Expected Real spending = Real annual
spending × Combined probability
5. CC needed to maintain given spending
pattern = Annual Spending needs /
Sustainable Spending rate
6. Tax-Free Gifts = 𝑅𝑉LMNOPQQRSTU =
WXYPZ [X\U]Z ^_
` (1+ rg )n + Toi [1+ re (1− tie )] (1− Te )
[XYPb (X\U]b)]` (X\Lb)
7. Relative value of the tax-free gift =
1 / (1 – Te)
Formula Sheet CFA Level III 2019
8. Taxable Gifts = 𝑅𝑉LMNMdeQRSTU = 15. Exemption method = TE = TS
`
WXYPZ [X\U]Z ^_ [X\LZ^
[XYPb (X\U]b )]` (X\Lb ) 16. Deduction method = TD = TR + TS– TRTS
9. Value of a taxable gift (if gift & asset Reading 13: Concentrated Single Asset
(bequeathed) have equal AT R ) = (1 – Tg) Positions
/ (1 – Te) --------------------------------------------
10. The relative after-tax value of the when the Reading 14: Risk Management for Individuals
donor pays gift tax and when the
recipient’s estate will not be taxable t
1. Human Capital 𝐻𝐶r = ∑v u
UwX (XYP) u
(assuming rg = re and tig = tie): x(yu ) tuz{ (XYlu )
extended model 𝐻𝐶r = ∑v
UwX (XYP| Y})u
𝐹𝑉RSTU 2. Income yield (payout) =
𝑅𝑉LMNMdeQRSTU =
𝐹𝑉gQhiQjU U~UMe ~nl~Snl MnniMe Sn•~€Q
n SnSUSMe xiP••MjQ xPS•Q
W1 + 𝑟l [1 − 𝑡Sl ^_ [1 − 𝑇l + 𝑇l 𝑇Q ^
=
[1 + 𝑟Q (1 − 𝑡SQ )]n (1 − 𝑇Q )
Mortality wghtd. NPV = mNPV0 = =
x(ju ) du
11. Size of the partial gift credit = Size of the ∑v
UwX (XYP)u
gift × TgTe
12. Relative value of generation skipping = 1 / Reading 15: Managing Institutional Investor
(1 – T1) Portfolio
13. Charitable Gratuitous Transfers = Defined-Benefit Plans:
1. Funded Status of Pension Plan (PP) = MV
FVCharitableGift
RVCharitableGift = of PP assets – PV of PP liabilities
FVBequest
n 2. Min RR for a fully-funded PP = Discount
rate used to calculate the PV of plan
= n
liabilities
[1+ re (1− tie )] (1− Te )
3. Desired R for a fully-funded PP =
14. Credit method = TC = Max [TR, TS] Discount rate used to calculate the PV of
plan liabilities + Excess Target return
 FinQuiz
4. Net cash outflow = Benefit payments –
Pension contributions
Foundations
5. Min R requirement (req) = Min Ann
spending rate + InvstMgmtExp+ Expected
Inf rate
Or
Min Rreq = [(1 + Min Ann spending rate)
× (1 + Invst Mgmt. Exp) × (1 + Expected
Inf rate)] -1
6. Foundation’s liquidity req = Anticipated
cash needs (captured in a foundation’s
distributions prescribed by minimum
spending rate*) + Unanticipated cash
needs (not captured in a foundation’s
distributions prescribed) – Contributions
made to the foundation.
* It includes Minimum annual spending
rate (including “overhead” expenses e.g.
salaries) + Investment management
expenses
Endowments
7. Ann Spending ($) = % of an endowment’s
current MV Or
AnnSpending ($) = % of an endowment’s
avg trailing MV
8. Simple spending rule = Spending t =
Spending rate × Endowment’s End MVt-1
Formula Sheet
9. Rolling 3-yr Avg spending rule =Spendingt
= Spending rate × Endowment’s Avg MV
of the last 3 fiscal yr-ends i.e.
è Spending t = Spending rate × (1/3)
[Endowment’s End MVt-1+ Endowment’s
End MVt-2 + Endowment’s End MVt-3]
10. Geometric smoothing rule = Spendingt =
WghtAvg of the prior yr’s spending
adjusted for Inf + Spending rate × Beg MV
of the prior fiscal yr i.e.
è Spending t = Smoothing rate ×
[Spendingt-1 × (1 + Inft-1)] + (1 –
Smoothing rate) × (Spending rate × Beg
MVt-1 of the endowment)
11. Min ReqRoR = Spending rate + Cost of
generating Invst R + Expected Infrate
Or
Min ReqRoR = [(1 + Spending rate) × (1 +
Cost of generating Invst R) × (1 +
Expected Inf rate)] -1
12. Liquidity needs = Ann spending needs +
Capital commitments + Portfolio
rebalancing expenses – Contributions by
donor
13. Neutrality Spending Rate = Real expected
R = Expected total R – Inf
Life Insurance Companies
14. Cash value = Initial premium paid + Any
accrued interest on that premium
CFA Level III 2019
15. Policy reserve = PV of future benefits - PV
of future net premiums
16. Surplus = Total assets of an insurance
company - Total liabilities of an insurance
company
Non-Life Insurance Companies
17. Combined Ratio = (Total amount of claims
paid out + Insurer's operating costs) /
Premium income
Banks
18. Net interest margin =
(‚nUQPQjU ‚n•~€Q\‚nUQPQjU ƒNxQnjQ)
„…l ƒMPnSnl „jjQUj
=
vQU ‚nUQPQjU ‚n•~€Q
„…l ƒMPnSnl „jjQUj
19. Interest spread = Avg yield on earning
assets – Average percent cost of interest-
bearing liabilities
20. Leverage-adjusted duration gap (LADG) =
DA – (k ×DL)
Where, k= MV of liabilities / MV of
assets = L/A
21. Change in MV of net worth of a bank
(resulting from interest rate shock) ≈
- LADG × Size of bank × Size of interest
rate shock
 FinQuiz Formula Sheet CFA Level III 2019

Reading 16: Capital Market Expectations 10. Nominal GDP = Real g rate in GDP + 20. Inf P = Yield of conventional Govt. bonds
Expected long-run Inf rate (at a given maturity) – Yield on Inf-
1. Precision of the estimate of the population indexed bonds of the same maturity
mean ≈ 1 / √no of obvs 11. Earnings g rate = Nominal GDP g rate +
Excess Corp g (for the index companies) 21. Default RP = Expected default loss in yield
2. Multiple-regression analysis: A = β0 + β1 B terms + P for the non-diversifiable risk of
Ž
+ β2 C + ε 12. Expected RoR on Equity ≈ - ∆S + i + g default
—
+ ∆PE
3. Time series analysis: A = β0 + β1 Lagged 22. Maturity P = Interest rate on longer-
-∆S = Positive repurchase yield
values of A + β2 Lagged values of B + β2 maturity, liquid Treasury debt - Interest
+∆S = Negative repurchase yield
Lagged values of C + ε rate on short-term Treasury debt
∆PE = Expected Repricing Return
23. Equity RP = Expected ROE (e.g. expected
13. Labor supply g = Pop g rate + Labor force
4. Shrinkage Estimator = (Wt of historical return on the S&P 500) – YTM on a long-
participation g rate
estimate × Historical parameter estimate) + term Govt. bond (e.g. 10-year U.S.
(Wt of Target parameter estimate × Target Treasury bond R)
14. Expected income R = D/P - ∆S
parameter estimate)
24. Expected ROE using Bond-yield-plus-RP
15. Expected nominal earnings g R = i + g
5. Shrinkage estimator of Cov matrix = (Wt method = YTM on a LT Govt bond +
16. Expected Capital gains R = Expected
of historical Cov × Historical Cov) + (Wt Equity RP
nominal earnings grate + Expected
of Target Cov × Target Cov) 25. Expected ROA E (Ri) = Domestic Rf R +
repricing R
(βi) × [Expected R on the world market
6. Vol in Period t =σ2t = βσ2t-1 + (1 – β) ε2t portfolio – Domestic Rf rate of R]
17. Asset’s expected return E (Ri) = Rf +
(RP) 1 + (RP) 2 + …+ (RP) K
7. Multifactor Model: R on Asset i = Ri = ai + where, βi = The asset’s sensitivity to R on the
bi1F1 + bi2F2 + … + biK FK + εi world mktportf = Cov (Ri, RM) / Var (RM)
18. Expected bond R [E (Rb)] = Real Rf + Inf
premium + Default RP + Illiquidity P +
8. Value of asset at time t0 26. Asset class RPi= Sharpe ratio of the world
Maturity P+ Tax P
=∑•
•O MU US€Q U market portfolio × Asset’s own volatility
UwX (XYŽSj•~inU PMUQ)u
(σi) × Asset class’s correlation with the
19. Inf P = AvgInf rate expected over the
world mktportf (ρi,M)
9. Expected RoR on Equity = maturity of the debt + P (or discount) for
RPi = (RPM / σM) × σi × ρi,M
•#4 /$* (‘1*$ 1& &#’$ “ (XY”• – *1&$) the prob attached to higher Inf than
+ LT g rate
!,**$%& (‘1*$ /*#:$ expected (or greater disinflation)
= Div Yield + Capital Gains Yield where, Sharpe Ratio of the world market
portfolio = Expected excess R / S.D of the
 FinQuiz Formula Sheet CFA Level III 2019

world mkt portf. à represents systematic or 35. Neutral Level of Interest Rate = Target Inf Reading 17: Equity Market Valuation
non-diversifiable risk = RPM / σM Rate + Eco g
1. Cobb-Douglas Production Function Y =
27. RP for a completely segmented market 36. Taylor rule equation: Roptimal =Rneutral + [0.5 A× Kα× Lβ
(RPi) = Asset’s own volatility (σi) × Sharpe × (GDPgforecast – GDPgtrend)]
ratio of the world mktportf + [0.5 × (Iforecast – Itarget)] where, Y = Total real economic output
A = Total factor productivity (TFP)
28. RP of the asset class, assuming partial 37. Trend g in GDP = g from labor inputs + g K = capital stock
segmentation = (Degree of integration × from D in labor productivity α = Output elasticity of K
RP under perfectly integrated markets) + L = Labor input
({1 - Degree of integration} × RP under 38. g from labor inputs = g in potential labor β = Output elasticity of L
completely segmented markets) force size + g in actual labor force
participation 2. Cobb-Douglas Production Function Y
29. Illiquidity P = Required RoR on an illiquid (assuming constant R to Scale) = ln (Y) =
asset at which its Sharpe ratio = mkt’s 39. g from D in labor productivity = g from ln (A) + αln (K) + (1 – α) ln (L)
Sharpe ratio – ICAPM required RoR capital inputs + TFP g* Or
∆0 ∆6 ∆› ∆”
• TFP g = g associated with increased ≈ +α + (1 − α)
0 6 › ”
30. Cov b/w any two assets = Asset 1 beta × efficiency in using capital inputs.
Asset 2 beta × Var of the mkt
3. Solow Residual = %∆TFP = %∆Y – α
æ s ´ r (1, m) ö 40. GDP g = α + β1Consumer spending g + (%∆K) – (1 – α) %∆L
31. Beta of asset 1 = ç 1 ÷÷
ç sm
β2Investment g
è ø 4. H-Model: Value per share at time 0 =
41. Consumer spending g = α + β1Lagged •“
ל(1 +
æ s ´ r (2, m) ö consumer income g + β2Interest rate •#(:8,%& *1&$\”• (,(&1#%5"$ •#4 – *1&$
32. Beta of asset 2 = ç 2 ÷÷ LT sustainable Div g rate) +
ç s
è m ø 42. Investment g = α + β1Lagged GDP g+ ¤,/$* %8*’1" – /$*#8-
×
¥
β2Interest rate (ST higher Div g rate −
33. GDP (using expenditure approach) =
Consumption + Invst + D in Inventories + LT sustainable Div g rate)©
43. Consumer Income g = Consumer spending
Govt spending + (Expo- Impo) growth lagged one period
5. Gordon g Div discount model: Value per
(•ª )×(XY–)
34. Output Gap = Potential value of GDP – share at time 0 =
*\ –
Actual value of GDP
 FinQuiz Formula Sheet CFA Level III 2019

6. Forward justified P/E = 11. Discount/weighting factor (d) = Reading 20: Asset Allocation with Real-world
3%&*#%(#: 41",$
E1 Constraints
0* 1‘$1- $./$:&$- «1*%#%–( yB −
P0 1. After-tax Portfolio Return = rat = rpt(1-t)
d=
7. Fed Model: LTEG
¬-- r/$*1&#%– «1*%#%–( («X)
=Long-term US 2. Expected Equity Return (dividend income
3%-$. ”$4$" (7“)
12. 10-year Moving Average Price/Earnings [P + Price Appreciation) = rat = pd rpt (1-td) +
Treasury securities
/ 10-year MA (E)] = pa rpt (1-tcg) where, pd & pa are proportion
®$1" (8* 3%¯\1-9,(&$-∗)¤&— ²““ —PS•Q ‚n³QN
attributed to dividend income & price
E ´84#%– 64– 8¯ /*$:$-#%– X“ µ*( 8¯ ®$1" 8* 3%¯ 1-9 «1*%#%–(
appreciation respectively.
8. Yardeni Model: = 1 = yB − d × LTEG
P0
*The stock index and reported earnings are
where, 3. 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
adjusted for Inflation using the CPI
E1/P0 = Justified (forward) earnings yield on 𝜎„L = 𝜎—L (1-t)
equities 13. Real Stock Price Index t = (Nominal SPIt ×
yB = Moody’s A-rated corporate bond yield CPI base yr) / CPI t Reading 21: Currency Management: An
LTEG = Consensus 5-yr earnings g forecast for Introduction
the S&P 500 14. Real Earnings t = (Nominal Earnings t ×
d = Discount or Weighting factor that CPI base year) / CPI t+1 1. Bid Fwd rate = Bid Spot exchange (X) rate
Ö#- ¬-- /8#%&(
represents the weight assigned by the market to +
X“,“““
the earnings projections ´¶8¯ -$5&Y´¶ 8¯ $+,#&µ
15. Tobin’s q = ®$/"1:$’$%& :8(& 8¯ 1(($&(
«+,#&µ ´›& !1/ 2. Offer Fwd rate = Offer Spot X rate +
9. Yardeni estimated fair value of P/E ratio = Equity q = = r¯¯$* ¬--- /8#%&(
2$& ·8*&‘
P0 1 7*#:$ /$* (‘1*$ × 28 8¯ ¤‘1*$( r/¤ X“,“““
= ®$/"1:’$%& :8(& 8¯ 1(($&(\´¶ 8¯ "#15#"#&#$(
E1 yB − d × LTEG (/8& × *1&$\(
ØÙÚ ÛÜÝÞ
)
{ª,ªªª
Reading 18: Introduction to Asset Allocation 3. FwdPrem/Disc % = (/8& × *1&$
–1
10. Fair value of equity mkt under Yardeni X ¾\P|
E1 1. Risky Asset Allocation = 𝑤 ∗ = ½ œ © 4. To convert spot rate into a forward quote
¿À
Model (P0) = P0 = when points are represented as %,
yB − d × LTEG
Reading 19: Principles of Asset Allocation Spot X rate × (1 + % prem)
Spot X rate × (1 - % disct)
¥
1. 𝑈€ = 𝐸(𝑅€ ) − 0.005𝜆𝜎€

X
2. 𝑤S × 𝐶𝑜𝑣 (𝑟S , 𝑟— ) = n 𝜎—¥
 FinQuiz Formula Sheet CFA Level III 2019

5. Mark-to-MV on dealer’s position = 14. Size of Delta hedge (that would set net 22. Hedge ratio =
¤$&&"$’$%& -1µ !¬ delta of the overall position to 0) = 7*#%:#/1" ¯1:$ 41",$ 8¯ &‘$ -$*#41&#4$(
Ý :8%&*1:& ,($- 1( 1 ‘$-–$
XY•#(:& *1&$∗ ß á
à Option’s delta × Nominal size of the 7*#%:#/1" ¯1:$ 8¯ &‘$ ‘$-–$- 1(($&
contract
6. CF at settlement = Original contract size × 15. Long Straddle = Long atm put opt (with 23. Min or Optimal hedge ratio = r (RDC; RFX)
(All-in-fwd rate for new, offsetting fwd delta of -0.5) + Long atm call opt (with ! S.D (RDC ) $
position – Original fwd rate) delta of +0.5) ×# &
" S.D (RFX ) %
7. Hedge Ratio = 16. Short Straddle = Short ATM put opt (with
28’#%1" ¶1",$ 8¯ -$*#41&#4$( :8%&*1:&
delta of -0.5) + Short ATM call opt (with Reading 22: Introduction to Fixed-Income
´¶ 8¯ &‘$ ‘$-–$- 1(($&
delta of +0.5) Portfolio Management
8. RDC =(1 + RFC)(1 + RFX)–1
ATM = at the money
opt = option 1. E(R)≈Yield income + Rolldown Return +
9. RDC (for multiple foreign assets) =
n
𝐸𝑥𝑝. ∆𝑃 − 𝐸𝑥𝑝. 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑜𝑠𝑠𝑒𝑠 +
lMSnj
17. Long Strangle: Long OTM put option + 𝐸𝑥𝑝. 𝐶𝑢𝑟𝑟𝑒𝑛𝑐𝑦 e~jjQj
∑ω (1+ R ) (1+ R ) −1
i FC,i FX,i
Long OTM call opt
i=1
OTM = out of the money 2. Roll Down return =
10. Total risk of DC returns = [g~n³ —PS•QI`î. \g~n³ —PS•QïbZ. ^
18. Long Risk reversal = Long Call opt + g~n³ —PS•QïbZ.
𝜎 ¥ (𝑅O• ) + 𝜎 ¥ (𝑅Oã ) + Short Put opt
= 𝜎 ¥ (𝑅Ž• ) ≈â
[2𝜎(𝑅O• )𝜎(𝑅Oã )𝜌(𝑅O• , 𝑅Oã )] —~PUT~eS~ GQUiPn
3. rp = —~PUT~eS~ QhiSU} =
19. Short Risk reversal = Long Put opt + Short
[P‚ ×(ðI Yðï )\(ðï ×Pg)] ð
11. % D in spot X rate (%∆SH/L) = Interest rate Call opt ðI
= 𝑟‚ + ðï (𝑟‚ − 𝑟g )
I
on high-yield currency (iH) – Interest rate
on low-yield currency (iL) 20. Short seagull position = Long protective v~US~nMe ðMeiQ\ñMPlSn
4. LeverageFuture =
(ATM) put + Short deep OTM Call opt + ñMPlSn

12. Forward Rate Bias =

¬æ/ç \¤æ/ç
= Short deep OTM Put opt
¤æ/ç 5. Dollar Interset = Principal × Repo Rate ×
Ý
(#æ \#ç )ß
èéª
á 21. Long seagull position = Short ATM call + (Days/360)
Ý
XY#ç ß á Long deep-OTM Call opt + Long deep-
èéª
OTM Put opt
13. Net delta of the combined position =
Option delta + Delta hedge
 FinQuiz Formula Sheet CFA Level III 2019

Reading 23: Liability-driven and Index-based 2. Total return ≈ −1 × 2. Ex post active return =
Strategies 𝑒𝑛𝑑. 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 × 𝑅„ = - ß𝛽x/ − 𝛽d/ × 𝐹/ + (𝛼 + 𝜀)á
(𝑒𝑛𝑑. 𝑌𝑇𝑀 − 𝑏𝑒𝑔. 𝑌𝑇𝑀) + 𝑏𝑒𝑔. 𝑌𝑇𝑀
1. Convexity = where,
ñM•.ŽiPMUS~n À YñM•.ŽiPMUS~nYŽSjxQPjS~n Reading 25: Fixed Income Active βpk = sensitivity of the portfolio (p) to each
(XY•Mj• Te~õ }SQe³) À
Management: Credit Strategies rewarded factor (k)
βbk = sensitivity of the benchmark to each
2. Future Contracts=Nf = rewarded factor
öSMdSeSU} —~PUT~eS~ g—ð\„jjQU x~PUT~eS~ g—ð
1. Excess Return = XR = (𝑠 × 𝑡)−(∆𝑠 ×
𝑆𝐷) Fk = the return of each rewarded factor
OiUiPQj g—ð
g—ð÷øù
3. Future BPV ≈ •O÷øù À
2. Expected XR = EXR = (𝑠 × 𝑡)−(∆𝑠 × ∑ø
u&{(GHø )
3. Active Risk (𝜎𝑅„ ) = )
€×R×õª X X 𝑆𝐷) − (𝑡 × 𝑝 × 𝐿) where 𝑝 × 𝐿 = L\X
4. ABO = (XYP)ø
× œP − P×(XYP)ú © 𝑒𝑥𝑝. 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑙𝑜𝑠𝑠 × 𝑒𝑥𝑝. 𝑙𝑜𝑠𝑠 where,
𝑅„L = active return at time t
€×R×õª ×(XYõ)ø X Reading 26: Introduction to Equity Portfolio
5. PBO = × œP −
(XYP)ø
Management 4. E (𝑅„ ) = IC2𝐵𝑅¿GH 𝑇𝐶
X
© -------------------------------------------- where,
P×(XYP) ú
Reading 27: Passive Equity Investing IC = expected information coefficient
6. 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 1. HHI = ∑nSwX 𝑤S ¥ BR = Breadth
(—ð\)\(—ðY) 2. Effective # of shares = ∑`
X X
= ''‚ TC = Transfer coefficient
À
¥×∆•iP…Q×(—ðª ) ]&{ õ] 𝜎𝑅„ = Manager’s active risk
3. 𝑇𝑟𝑎𝑐𝑘𝑖𝑛𝑔 𝑒𝑟𝑟𝑜𝑟— = )𝑉𝑎𝑟(G* \G+ )
yõMx g—ð X
7. Asset BPV + œ𝑁𝑃 × X““
©=
4. Excess return p = Rp – Rb 5. Active Share = ¥ ∑nSwX3𝑤x,S − 𝑤d,S 3
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐵𝑃𝑉 where,
Reading 28: Active Equity Investing: Strategies w = weight, p= portfolio, b = benchmark
8. Asset BPV × ∆𝐴𝑠𝑠𝑒𝑡 𝑦𝑖𝑒𝑙𝑑𝑠 + --------------------------------------------
𝐻𝑒𝑑𝑔𝑒 𝐵𝑃𝑉 × ∆𝐻𝑒𝑑𝑔𝑒 𝑦𝑖𝑒𝑙𝑑𝑠 ≈ Reading 29: Active Equity Investing: Portfolio 6. Active Risk of Portfolio 𝜎GH =
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐵𝑃𝑉 × ∆𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑦𝑖𝑒𝑙𝑑𝑠 Construction
)𝜎 ¥ [∑[𝛽x/ − 𝛽d/ ^ × 𝐹/ ^ + 𝜎Q¥
1. 𝑅„ = ∑nSwX ∆𝑊S 𝑅S
Reading 24: Yield Curve Strategies where, where,
𝑅S = return on society i 𝜎Q¥ = idiosyncratic risk
1. Effective Portfolio Duration ≈ ∆𝑊S = active weight = diff. b/w portfolio
v~US~nMe x~PUT~eS~ …MeiQ weight and benchmark weight.
× 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛
—~PUT~eS~ QhiSU}
 FinQuiz Formula Sheet CFA Level III 2019

X X interest(%) discount = (investor’s interest ending NAV and HWM NAV) × incentive
7. Max ß∑v
SwX 4 𝑆𝑖𝑧𝑒S + 4 𝑉𝑎𝑙𝑢𝑒S +
X
in equity × total equity value) × minority fee %.
𝑀𝑜𝑚𝑒𝑛𝑡𝑢𝑚S á interest discount(%)
4
11. Hedge Fund R = [(End value) – (Beg
8. Total Portfolio Variance = 2. Marketable minority interest ($) = value)] / (Beg value)
𝑉— = ∑nSwX ∑n6wX 𝑥S 𝑥6 𝐶S6 Marketable controlling interest value ($) –
minority interest discount ($) 12. Rolling R = RR n,t = (Rt + Rt-1 + Rt-2 + … +
9. Contribution of each asset to portfolio R t –(n-1) / n
variance = 𝐶𝑉S = ∑n6wX 𝑥S 𝑥6 𝐶S6 = 𝑥S 𝐶Sx 3. Marketability discount ($) = Marketable
minority interest ($) × marketability 13. Downside Deviation = =
10. 𝑉x = 𝑉𝑎𝑟[∑7SwX[𝛽Sx × 𝐹S ^^ + 𝑉𝑎𝑟[𝜀x ^ discount (%) ∑` ∗
]&{[€Sn(Pu \P ,“)]
À
)
n\X
4. Non-Marketable minority interest ($) = where, r* = threshold
11. Variance of the portfolio’s active return =
Marketable minority interest ($) -
𝐴𝑉— = ∑nSwX ∑n6wX (𝑥S − 𝑏S )(𝑥6 − 𝑏6 )𝑅𝐶S6
marketability discount ($) 14. Semi-deviation =
where,
5. Total R on Commodity Index = Collateral ∑`
]&{[€Sn(Pu \M…l. €~nU•e} PQUiPn,“)]
À
𝑥S = asset’s weight, )
R + Roll R + Spot R n\X
𝑏S = benchmark weight
𝑅𝐶S6 = covariance of relative return b/w 6. Monthly Roll R = ∆ in futures contract 15. Sharpe ratio = (Annualized RoR –
asset i and j. price over the month - ∆ in spot price over Annualized Rf rate) / Annualized S.D.
12. 𝐶𝐴𝑉S = (𝑥S − 𝑏S )𝑅𝐶Sx the month
where, 𝑅𝐶S6 = covariance of relative 7. Compensation structure of Hedge Funds 16. Sortino Ratio = (Annualized RoR –
return b/w asset i and the portfolio. (comprises of ) Management fee (or AUM Annualized Rf*) / Downside Deviation
fee) + Incentive fee
13. Expected compounded geometric return = 17. Gain-to-loss Ratio =
¿À 8. Management fee= % of NAV (net asset 28 8¯ ’8%&‘( -#&‘Y4$ ®
𝑅l = 𝑅M − ß28 8¯ ’8%&‘( -#&‘\4$ ® á ×
¥
value generally ranges from 1-2%)
where, 𝑅M = arithmetic return and 𝜎 = 64– ,/ ’8%&‘ ®
ß64– -8-% ’8%&‘ ®á
expected volatility.
9. Incentive fee = % of profits (specified by
the investment terms) 18. Calmar ratio = Compound Annualized
Reading 30: Alternative Investments Portfolio
ROR / ABS* (Maximum Drawdown)
Management
10. Incentive fee (when High Water mark
Provision) = (positive difference between
1. Minority interest discount ($) = marketable
controlling interest value ($) × minority
 FinQuiz Formula Sheet CFA Level III 2019

19. Sterling ratio= Compound Annualized yx~U GMUQù/< •$(#*$- Ö$&1 !‘1%–$
7. Fwd contract value”8%–w ; u − Nf = ¬,&,*$( Ö$&1
×
ROR / ABS* (XYGO<)ø=u>? u]@b 78*&¯8"#8 ¶1",$
(Average Drawdown - 10%) Oõ³ GMUQ ¬,&,*$( :8%&*1:& 7*#:$
u A × 𝑁𝑃
where, *ABS = Absolute Value (XYGOù )ø=u>? u]@b *Actual futures price = Quoted futures
price × Multiplier
´$1% /8*&¯ ®\®¯
Reading 31: Risk Management 8. Sharpe Ratio = ¤.• 8¯ /8*&¯ ® \ÖG ¤
5. Reducing β to zero: N¯ = ß ÖØ
á ß ¯ á and βT
1. Delta Normal Method: VAR = E(R) – z- ´$1% /8*&¯ ®\´#% 1::$/&15"$ ®
9. Sortino Ratio = =0
value (S.D) •8-%(#-$ -$4#1&#8%
6. Effective β = Combined position R in % /
• Daily E(R) = Annual E(R) / 250 10. Risk Adjusted R on Capital =
«./$:&$- ® 8% 1% #%4(& Market R in %
• Daily S.D = Annual S.D. / √250
:1/#&1" 1& *#(B ’$1(,*$
• Monthly E(R) = Annual E(R) / 12 7. Synthetic Cash: Long Stock + Short
• Monthly S.D = Annual S.D. / √12 11. R over Max Drawdown = Futures = Long risk-free bond
• Daily E(R) = Monthly E(R) / 22 «./$:&$- 64$*1–$ ® 8% 1% #%4(& #% 1 –#4$% µ*
’1. -*1--8-%
• Daily S.D = Monthly S.D. / √22 8. Synthetic Stock: Long Stock = Long Rf
• Annual VAR = Daily VAR×√250 bond + Long Futures
Reading 32: Risk Management Applications of
Forward and Futures Strategies
2. Diversification effect = Sum of individual 9. Creating a Synthetic Index Fund:
VARs – Total VAR • No of futures contract = Nf* =
1. β = CovSI / σ2I
{V ×(1 + r) T}/ (q×f)
• CovSI= covariance b/w stock portf&
3. Incremental VAR=Portf’s VAR inclu a where,
index
specified asset – Portf’s VAR exclu that Nf* = No of futures contracts
• σ2I= var of index.
asset. q = multiplier
V = Portfolio value
2. $β of stock portf = β of stock portf × MV
4. Tail Value at Risk (TVAR) or Conditional • Amount needed to invest in bonds = V* =
of stock portf = βs S
Tail Expectation = VAR + expected loss in (Nf*× q× f) / (1 + r)T
excess of VAR • Equity purchased = (Nf* ×q) / (1 + δ) T
3. Future $ β = βf × f
where, βf = Futures contract beta
5. Value Long = Spot t – [Forward / (1 + r) n] where, δ = dividend yield
4. Target level of beta exposure: βT S = βs S + • Pay-off of Nf* futures contracts = Nf*× q
6. Swap ValueLong = PV inflows – PV outflows Nfβf f ×(ST –f)
B• − B¤ S
N¯ = D FD F where, ST = Index value at time T
B¯ F
 FinQuiz
Reading 33: Risk Management Applications of
Options Strategies
1. Covered Call = Long stock position +
Short call position
a) Value at expiration = VT = ST –
max (0, ST – X)
b) Profit = VT – S0 + c0
c) Maximum Profit = X – S0 + c0
d) Max loss (when ST = 0) = S0 – c0
e) Breakeven =ST* = S0 – c0
2. Protective Put = Long stock position +
Long Put position
a) Value at expiration: VT = ST +
max (0, X - ST)
b) Profit = VT – S0 - p0
c) Maximum Profit = ∞
d) Maximum Loss = S0 + p0 – X
e) Breakeven =ST* = S0 + p0
3. Bull Call Spread = Long Call (lower
exercise price) + Short Call (higher
exercise price)
a) Initial value = V0 = c1 – c2
b) Value at expiration: VT = value of
long call – Value of short call =
max (0, ST – X1) - max (0, ST – X2)
c) Profit = VT – c1 + c2
d) Maximum Profit = X2 – X1 – c1 +
c2
e) Maximum Loss = c1 – c2
f) Breakeven =ST* = X1 + c1 – c2
Formula Sheet
4. Bull Put spread = Long Put (lower XP) +
Short Put (higher XP). Identical to the sale
of Bear Put Spread
XP = exercise price
5. Bear Put Spread = Long Put (higher XP) +
Short Put (lower XP)
a) Initial value = V0 = p2 – p1
b) Value at expiration: VT = value of
long put – value of short put = max (0,
X2 - ST) - max (0, X1 - ST)
c) Profit = VT – p2 + p1
d) Max Profit = X2 – X1 – p2 + p1
e) MaxLoss = p2 – p1
f) Breakeven =ST* = X2 – p2 + p1
6. Bear Call Spread = Short Call (lower XP)
+ Long Call (higher XP). Identical to the
sale of Bull Call Spread.
7. Long Butterfly Spread (Using Call) = Long
Butterfly Spread = Long Bull call spread +
Short Bull call spread (or Long Bear call
spread)
Long Butterfly Spread = (Buy the call with
XP of X1 and sell the call with XP of X2) +
(Buy the call with XP of X3 and sell the
call with XP of X2).
where, X1< X2 < X3 and Cost of X1 (c1) >
Cost of X2 (c2) > Cost of X3 (c3)
CFA Level III 2019
a) Value at expiration: VT = max (0, ST –
X1) – 2 max (0, ST – X2) + max (0, ST
– X3)
b) Profit = VT – c1 + 2c2 - c3
c) Max Profit = X2 – X1 – c1 + 2c2 – c3
d) Maximum Loss = c1 – 2c2 + c3
e) Two breakeven points
i. Breakeven =ST* = X1 + net
premium = X1 + c1 – 2c2 + c3
ii. Breakeven = ST* = 2X2 – X1 –
Net premium = 2X2 – X1 – (c1 –
2c2 + c3 ) = 2X2 – X1 – c1 + 2c2 - c3
8. Short Butterfly Spread (Using Call) =
Selling calls with XP of X1 and X3 and
buying two calls with XP of X2.
• Max Profit = c1 + c3 – 2c2
9. Long Butterfly Spread (Using Puts) = (Buy
put with XP of X3 and sell put with XP of
X2) + (Buy the put with XP of X1 and sell
the put with XP of X2)
where,X1< X2 < X3 and Cost of X1 (p1) <
Cost of X2 (p2) <Cost of X3 (p3)
10. Short Butterfly Spread (Using Puts) =
Short butterfly spread = Selling puts with
XPs of X1 and X3 and buying two puts
with XP of X2.
• Max Profit = p3 + p1 – 2p2
11. For zero-cost collar
a) Initial value of position = V0 = S0
 FinQuiz
b) Value at expiration: VT = ST + max (0,
X1 - ST) – max (0, ST – X2)
c) Profit = VT – V0 = VT –S0
d) Max Profit = X2 – S0
e) Max Loss = S0 – X1
f) Breakeven =ST* = S0
12. Straddle = Buying a put and a call with
same strike price on the same underlying
with the same expiration; both options are
at-the-money.
a) Value at expiration: VT = max (0, ST -
X) + max (0, X– ST)
b) Profit = VT –p0 - c0
c) Max Profit = ∞
d) Max Loss = p0 + c0
e) Breakeven = ST* = X ± (p0 + c0)
13. Short Straddle: Selling a put and a call
with same strike price on the same
underlying with the same expiration; both
options are at-the-money.
• Adding call option to a straddle
“Strap”.
• Adding put option to a straddle
“Strip”.
14. Long Strangle = buying the put and call on
the same underlying with the same
expiration but with different exercise
prices.
Formula Sheet
15. Short Strangle = selling the put and call on
the same underlying with the same
expiration but with different exercise
prices.
16. Box-spread = Bull spread + Bear spread
17. Long Box-spread= (buy call with XPof X1
and sell call with XP of X2) + (buy put
with XP of X2 and sell put with XP of X1).
a) Initial value of the box spread =
Net premium = c1 – c2 + p2 – p1.
b) Value at expiration: VT = X2 –X1
c) Profit = X2 –X1 - (c1 – c2 + p2 –
p1)
d) Max Profit = same as profit
e) Max Loss = no loss is possible
given fair option prices
f) Breakeven =ST* = no break-even;
the transaction always earns Rf
rate, given fair option prices.
18. Pay-off of an interest rate Call Option=
(NP) × max (0, Underlying rate at
expiration – X-rate) ×
•1µ( #% ,%-$*"µ#%– *1&$
ß á
4H“
19. Pay-off of an interest rate Put Option=
(NP) × max (0, X-rate - Underlying rate at
•1µ( #% ,%-$*"µ#%– *1&$ price
expiration) × ß 4H“
á d.) To delta hedge: Desired Quantity of option
CFA Level III 2019
20. Loan Interest payment = NP × (LIBOR on
previous reset date + Spread) ×
•1µ( #% ($&&"$’$%& /$*#8-
ß á
4H“
21. Cap Pay-Off = NP × (0, LIBOR on
previous reset date – X rate) ×
•1µ( #% ($&&"$’$%& /$*#8-
ß á
4H“
22. Floorlet Pay-Off = NP × (0, X rate -
LIBOR on previous reset date) ×
•1µ( #% ($&&"$’$%& /$*#8-
ß á
4H“
23. Effective Interest = Interest received on the
loan + Floorlet pay-off
!‘1%–$ #% r/&#8% 7*#:$ ∆!
24. Delta = !‘1%–$ #% I%-$*"µ#%– 7*#:$= ∆¤
25. Size of the Long position = Nc / Ns = - 1 /
(∆C / ∆S) = -1 / Delta
where, Nc = No of call options
Ns = No of stocks
26. Hedging using non-identical option:
a) One option has a delta of ∆1.
b) Other option has a delta of ∆2.
c) Value of the position = V = N1 c1 + N2c2
where, N =option quantity & c =option
•$"&1 8¯ 8/&#8% ¥
1 relative to option 2 =
•$"&1 8¯ 8/&#8% X
 FinQuiz
N1 / N2 = - ∆c2 / ∆c1
!‘1%–$ #% -$"&1 1.
27. Gamma = !‘1%–$ #% ,%-$*"µ#%– /*#:$
28. Gamma hedge = Position in underlying +
Positions in two options
!‘1%–$ #% r/&#8% /*#:$ 3.
29. Vega = !‘1%–$ #% ¶8"1&#"#&µ 8¯ &‘$ ,%-$*"µ#%–
Reading 34: Risk Management Applications of
Swap Strategies
1. NP of a swap (to manage D of portf.) =
´•ÝLMNOÝ \´•ç
NP = V7 D F profit or loss + Delay costs + Missed trade
´•ÞÙLÛ
2. Inverse Floater Coupon rate = b – LIBOR
3. When LIBOR > b, inverse floater issuer
should buy an interest rate cap with the
following features:
• exercise rate of b
• NP = NP of inverse floater
• Each caplet expires on the interest
rate reset date of the swap/loan
• Whenever Libor > b, Caplet pay-
off = (L – b) × NP
4. Synthetic Dual-currency Bond = Ordinary
bond issued in one currency Currency
swap (with no principal payments)
Formula Sheet
Reading 35: Execution of Portfolio Decisions
Bid-ask Spread = Ask price – Bid price
2. Inside/Mkt bid-ask spread = Inside/Mkt
Ask Price – Inside/Mkt Bid Price
´B& Ö#- 7*#:$Y´B& 6(B 7*#:$
Mid-Quote = ¥ 12. Missed Trade Opp Cost =
4. Effective Spread = 2 × (Actual Execution
Price – MidQuote)
5. Avg Effective Spread (ES) =
«¤ 8¯ 8*-$* XY «¤ 8¯ 8*-$* ¥ Y⋯Y «¤ 8¯ 8*-$* %
%
6. Share Volume Wgtd (VW) ES = [(V of
shares traded for order 1 × ES of order 1) +
(V of shares traded for order 2 × ES of
order 2) +⋯+ (V of shares traded for order
n × ES of order n)/n
7. VW Avg price = Avg P (security traded
during the day)
Where, weight is the fraction of the day’s
volume associated with the trade
8. Mkt-adj Implementation Shortfall (IS) = I
cost – Predicted R estimated using Mkt
model
9. Trade Size relative to Available Liquidity
r*-$* (#Q$
= 64– -1#"µ 48",’$
CFA Level III 2019
10. Realized profit/loss = Execution price –
Relevant decision price
28 8¯ (‘1*$( 1:&,1""µ &*1-$-
11. Delay costs = •8&1" 28 8¯ (‘1*$( #% 1% 8*-$* ×
6:&,1" &*1-#%– /*#:$ 8% •1µ & \ !7 8% -1µ &\X
Ö$%:‘’1*B (:"8(#%–)/*#:$ 8% -1µ &ª
where CP = closing price
28 8¯ (‘1*$( %8& &*1-$-
•8&1" %8 8¯ (‘1*$( #% 1% 8*-$*
×
!1%:$""1&#8% /*#:$ –r*#–#%1" Ö /*#:$
r*#–#%1" Ö /*#:$
where B = benchmark
13. IC = Commissions & Fees as % + Realized
opp costs
14. Estimated Implicit Costs for “Buy” =
Trade Size × (Trade Price – B Price)
15. Estimated Implicit Costs for “Sale” =
Trade Size × (B Price - Trade Price)
Reading 36: Evaluating Portfolio Performance
1. Account’s rate of return during evaluation
period ‘t’
• when there are no external cash flows =
´¶ ($%- 8¯ /$*#8-)\´¶ (5$– 8¯ /$*#8-)
´¶ (5$– 8¯ /$*#8-
• when a contribution received (start of the
period) =
´¶ ($%- 8¯ /$*#8-)\(´¶ (5$– 8¯ /$*#8-)Y:8%&*#5,&#8% )
´¶ (5$– 8¯ /$*#8-)Y !8%&*#5,&#8%
 FinQuiz
• when a withdrawal is made (start of the
period) =
´¶ ($%- 8¯ /$*#8-)\(´¶ (5$– 8¯ /$*#8-)\:8%&*#5,&#8% )
´¶ (5$– 8¯ /$*#8-)\ !8%&*#5,&#8%
• when a contribution is received at the
end of the evaluation period =
(´¶ ($%- 8¯ /$*#8-) \ :8%&*#5,&#8% )\´¶ (5$– 8¯ /$*#8-)
´¶ (5$– 8¯ /$*#8-)
• when a withdrawal is made at the end of
the evaluation period =
(´¶ ($%- 8¯ /$*#8-)Y :8%&*#5,&#8% )\´¶ (5$– 8¯ /$*#8-)
´¶ (5$– 8¯ /$*#8-)
2. TWR (when no external CFs) =
´B& 41",$ 1& $%- 8¯ /$*#8-\´B& 41",$ 1& 5$–#%%#%– 8¯ /$*#8-
´B& 41",$ 1& 5$–#%%#%– 8¯ /$*#8-
3. TWR (entire evaluation period) = (1 + rt,1)
× (1 + rt,2) × …× (1 + rt,n) – 1
4. MWR = MV1= MV0(1+R)m+CF1(1+R)m-
L(1)
+…+CFn(1+R)m–L(n)
where,
m = No of time units in evaluation period
L(i) = No of time units by which the ith CF
is separated from beg of evaluation period
5. Compound g rate or geometric mean R =
(1 + rt,1) × (1 + rt,2) × …× (1+ rt,n) 1/n - 1
n = No of yrs in measurement period
6. Style = Manager’s B portf - Mrkt index
7. Active Mgmt = Manager’s portf – B
Formula Sheet
8. Portf R = MrkeIndex + Style + Active
Mgmt
9. Periodic R on an a/c (factor-based model)
= αp + (b1 × F1) + (b2 × F2) + …+ (bk × Fk)
+ εp
10. Benchmark coverage =
´¶ 8¯ ($:,*#&#$( &‘1& 1*$ /*$($%& #% 58&‘ Ö & x~PUT
•8&1" ´¶ 8¯ /8*&¯
11. Active position = Wght of a security in an
account - Wght of the same security in B
12. Value-added R on a long-short portf =
Portf R – B
13. RoR for a long-short portf =
7/” *$(,"&#%– ¯*8’ ‘$-–$ ¯,%- (&*1&$–µ
6’8,%& 8¯ 1(($&( 1& *#(B
= invstmnt strategy = Wghtd* Avg of
7/” *$(,"&#%– ¯*8’ ‘$-–$ ¯,%- (&*1&$–µ
14. 65(8",&$ 41",$ 8¯ 1"" ( "8%– /8(#&#8%( Y (‘8*& /8(#&#8%()
15. Fundamental rule of Active Mgmt: Impact
= (active) wght × R
16. D in value of fund = Total amount of net
contributions
17. Ending value of a fund under the Net
Contributions investment strategy =
Beginning value + Net contributions
18. D in Fund’s value = End value of a fund
under the Rf asset Invst strategy –
CFA Level III 2019
Begvalue (i.e. ending value of the fund
under the Net Contributions investment
strategy)
19. R-metric perspective: Incremental R
contribution of the Asset Category
investment strategy = ∑6#wX WS × (R •S −
RT )
20. Value-metric perspective: Incremental
contribution of the Asset Category
investment strategy = Sum [(Each asset
category’s policy proportion of the Fund’s
beg value and all net external cash inflows)
× (Asset category’s B RoR - Rf rate)]
21. Aggregate manager B R under B level
IndMngr’s B R
22. Return-metric perspective: Incremental
return contribution of the B strategy =
∑6#wX ∑´
9wX WS × WS6 × [𝑟gS6 – r•S ^
23. Value-metric perspective: Incremental
contribution of the B strategy = Sum [each
manager’s policy proportion of the total
fund’s beg value and net external cash
inflows × (manager’s B R – R of
manager’s asset category)]
24. Misfit R or Style bias = R generated by the
aggregate of the managers’ B - R
 FinQuiz Formula Sheet CFA Level III 2019

GH \P̅|
generated by the aggregate of the asset 33. Within sector Selection = ∑¤9wX 𝑊g6 [𝑟—6 − 43. M2 = 𝑟̅T + œ © 𝜎Yñ
¿
XH
category B 𝑟g6 ^
GTH \GTï
25. Return to the Investment managers level = 44. Information ratio = 𝐼𝑅„ =
34. Allocation/selection Interaction = ¿
XHzï
Sum (active managers’ returns – their
∑nS\X[W—6 − Wg6 ^ × (r—S − rg6 )
benchmark returns)

35. Interest rate Mgmt contribution = Agg

26. Return-metric perspective: Contribution of
the Investment Managers strategy = r‚ñ =
∑6#wX× ∑´9wX WS × W#9 × [r„S6 − rgS6 ^
27. Allocation Effects incremental
contribution = Fund’s ending value - Value
calculated at the Investment Managers
level
28. Value-added/active return = Portf R – B R
29. Security-by-security analysis: rS =
∑%#wXW[WxS − WgS ^ × (rS − rg )_
R(re-priced securities) - R of entire
Treasury universe
36. Sector/quality return = Gross R - External
interest rate effect - Interest rate Mgmt
effect
37. Security selection effect for each security =
Total R of a security - all the other
components.
38. Portf security selection effect = Mkt value
WghtdAvg of all individual security
selection effects

30. Value-added return under Holdings-based 39. Trading activity = Total Portf R – (Interest
or “buy-and-hold” attribution= ∑y9wX Wx6 × rate mgmt effect + sector/quality effect +
rx6 − ∑¤9wX Wg6 × rg6 security selection effect)

31. Value-added Return = Pure sector 40. Alpha = a = rP - [r f + b P (rM - r f )]

allocation + Allocation/selection
interaction + Within sector selection GTH \P̅|
41. Treynor’s measure = 𝑇„ = WH
V
32. Pure sector Allocation = ∑nS\X[Wx6 −
Wg6 ^ × (rg6 − rg ) GTH \P̅ |
42. Sharpe ratio =
¿
XH