CFA® Program

Level III

FORMULA SHEET (2022) Version 1.1

Prepared by: Fabian Moa, CFA, FRM, CTP, FMVA, AFM

FOR REFERENCE ONLY

(Note: Formula Sheet is not provided in the CFA exam)

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CFA Level 3 (2022) Formula Sheet – Noesis Exed

CFA Level 3 – Formula Sheet (2022)

CAPITAL MARKET EXPECTATIONS

Reading 3: Capital Market Expectations, Part 1: Framework and Macro Considerations

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓

= +
𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔ℎ 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

where:
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
= +
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑖𝑖𝑖𝑖 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

= +
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

Aggregate market value of equity

𝑉𝑉𝑡𝑡𝑒𝑒 = 𝐺𝐺𝐺𝐺𝑃𝑃𝑡𝑡 × 𝑆𝑆𝑡𝑡𝑘𝑘 × 𝑃𝑃𝐸𝐸𝑡𝑡

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 + 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

Over a finite horizon:

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = %Δ𝐺𝐺𝐺𝐺𝑃𝑃𝑡𝑡 + %Δ𝑆𝑆𝑡𝑡𝑘𝑘 + %Δ𝑃𝑃𝐸𝐸𝑡𝑡 +
𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

Over the long-term:

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = %Δ𝐺𝐺𝐺𝐺𝑃𝑃𝑡𝑡 +
𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

𝑉𝑉𝑡𝑡𝑒𝑒 = Aggregate market value of equity

𝐺𝐺𝐺𝐺𝑃𝑃𝑡𝑡 = Nominal level of GDP
𝐸𝐸𝐸𝐸𝐸𝐸𝑡𝑡
𝑆𝑆𝑡𝑡𝑘𝑘 = Share of profits in the economy =
𝐺𝐺𝐺𝐺𝑃𝑃𝑡𝑡
𝑃𝑃𝐸𝐸𝑡𝑡 = P/E ratio

Taylor Rule
𝑖𝑖 ∗ = 𝑟𝑟𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝜋𝜋𝑒𝑒 + 0.5�𝑌𝑌�𝑒𝑒 − 𝑌𝑌�𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 � + 0.5(𝜋𝜋𝑒𝑒 − 𝜋𝜋𝑡𝑡𝑡𝑡𝑡𝑡𝑔𝑔𝑔𝑔𝑔𝑔 )

𝑖𝑖 ∗ = target nominal policy rate

𝑟𝑟𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 = real policy rate (if growth is at trend; inflation on target)
𝜋𝜋𝑒𝑒 = expected inflation rate 𝜋𝜋𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 = target inflation rate
𝑌𝑌�𝑒𝑒 = expected real GDP growth rates 𝑌𝑌�𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 = trend real GDP growth rates
𝑖𝑖 ∗ − 𝜋𝜋𝑒𝑒 = real, inflation-adjusted policy rate

2
CFA Level 3 (2022) Formula Sheet – Noesis Exed

𝑋𝑋 − 𝑀𝑀 = (𝑆𝑆 − 𝐼𝐼) + (𝑇𝑇 − 𝐺𝐺)

𝑋𝑋 − 𝑀𝑀 = Net exports
𝑆𝑆 = Savings
𝐼𝐼 = Investment
𝑇𝑇 − 𝐺𝐺 = Government surplus

Reading 4: Capital Market Expectations, Part 2: Forecasting Asset Class Returns

Grinold-Kroner model

Expected equity return

𝐷𝐷
𝐸𝐸(𝑅𝑅𝑒𝑒 ) ≈ + (%Δ𝐸𝐸 − %ΔS) + %Δ 𝑃𝑃⁄𝐸𝐸
𝑃𝑃

𝐷𝐷
= Dividend yield
𝑃𝑃
%Δ𝐸𝐸 = Expected % change in total earnings
%Δ𝐸𝐸 = Expected nominal earnings growth return
%ΔS = Expected % change in shares outstanding (%ΔS < 0: Net share repurchases)
%Δ 𝑃𝑃⁄𝐸𝐸 = Expected % change in price-to-earnings ratio
%Δ 𝑃𝑃⁄𝐸𝐸 = Expected repricing return
%Δ𝐸𝐸 − %ΔS = Growth rate of earnings per share
𝐷𝐷
− %ΔS = Expected cash flow (“income”) return
𝑃𝑃
%Δ𝐸𝐸 + %Δ 𝑃𝑃⁄𝐸𝐸 = Expected capital gains

In the long run, %Δ𝐸𝐸 = Nominal GDP growth, %ΔS = 0, %Δ 𝑃𝑃⁄𝐸𝐸 = 0

Risk Premium Approaches to Equity Returns

Equity-vs-bills premium = Term premium + Equity-vs-bond premium

Term premium = Return on bonds – Return on bills

3
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Singer-Terhaar Approach

Risk premium under full integration:

𝑅𝑅𝑃𝑃𝐺𝐺𝐺𝐺
𝑅𝑅𝑃𝑃𝑖𝑖𝐺𝐺 = 𝜌𝜌𝑖𝑖,𝐺𝐺𝐺𝐺 𝜎𝜎𝑖𝑖 � �
𝜎𝜎𝐺𝐺𝐺𝐺

Risk premium under complete segmentation:

𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑜𝑜𝑜𝑜
𝑅𝑅𝑃𝑃𝑖𝑖𝑆𝑆 = 1 × 𝜎𝜎𝑖𝑖 ×
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚

Note:
• Add liquidity premium where appropriate
• If Sharpe ratio of segmented market not given, use Sharpe ratio of global market
portfolio

Singer-Terhaar risk premium:

𝑅𝑅𝑃𝑃𝑖𝑖 = 𝜙𝜙𝜙𝜙𝑃𝑃𝑖𝑖𝐺𝐺 + (1 − 𝜙𝜙)𝑅𝑅𝑃𝑃𝑖𝑖𝑆𝑆

Expected return
𝐸𝐸(𝑅𝑅𝑖𝑖 ) = 𝑅𝑅𝐹𝐹 + 𝑅𝑅𝑃𝑃𝑖𝑖

𝜌𝜌𝑖𝑖,𝐺𝐺𝐺𝐺 = correlation between ith asset and global market portfolio

𝜎𝜎𝑖𝑖 = standard deviation of ith asset’s return
𝑅𝑅𝑃𝑃𝐺𝐺𝐺𝐺
= Sharpe ratio of global market portfolio
𝜎𝜎𝐺𝐺𝐺𝐺
𝜙𝜙 = Degree of integration
𝑅𝑅𝐹𝐹 = Risk-free rate

Risk Premium (Building Block) Approach to Fixed Income Returns

Bond Required Return

Short-term fixed-rate
Real risk-free rate + Inflation premium
government bill
Long-term fixed-rate
Real risk-free rate + Inflation premium + Maturity premium
government bond
Long-term inflation-linked
Real risk-free rate + Maturity premium
government bond
Long-term fixed-rate Real risk-free rate + Inflation premium + Maturity premium
corporate bond + Credit premium
Long-term callable fixed- Real risk-free rate + Inflation premium + Maturity premium
rate corporate bond + Credit premium + Call risk

4
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Real Estate

Long-run:
𝐸𝐸(𝑅𝑅𝑟𝑟𝑟𝑟 ) = 𝐶𝐶𝐶𝐶𝐶𝐶 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 + 𝑁𝑁𝑁𝑁𝑁𝑁 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

Finite horizon:
𝐸𝐸(𝑅𝑅𝑟𝑟𝑟𝑟 ) = 𝐶𝐶𝐶𝐶𝐶𝐶 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 + 𝑁𝑁𝑁𝑁𝑁𝑁 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − %Δ𝐶𝐶𝐶𝐶𝐶𝐶 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

Capital Flows

In the long run

𝐸𝐸�%Δ𝑆𝑆𝑑𝑑⁄𝑓𝑓 � = (𝑟𝑟 𝑑𝑑 − 𝑟𝑟 𝑓𝑓 ) + (𝑇𝑇𝑇𝑇𝑇𝑇𝑚𝑚𝑑𝑑 − 𝑇𝑇𝑇𝑇𝑇𝑇𝑚𝑚𝑓𝑓 ) + (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 𝑑𝑑 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 𝑓𝑓 )
+(𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑦𝑦 𝑑𝑑 − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑦𝑦 𝑓𝑓 ) + (𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑑𝑑 𝑑𝑑 − 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑑𝑑 𝑓𝑓 )

Currency
1
For a currency pair, 𝑑𝑑⁄𝑓𝑓 , if 𝑓𝑓 changes by 𝑥𝑥% against 𝑑𝑑, then 𝑑𝑑 changes by − 1 against 𝑓𝑓.
1+𝑥𝑥

VCV Matrix with Sample Statistics

With 𝑁𝑁 assets, required:

• 𝑁𝑁 variances
𝑁𝑁(𝑁𝑁−1)
• covariances
2

VCV Matrices from Multi-Factor Models

Return on ith asset:

𝐾𝐾

𝑟𝑟𝑖𝑖 = 𝛼𝛼𝑖𝑖 + � 𝛽𝛽𝑖𝑖𝑖𝑖 𝐹𝐹𝐾𝐾 + 𝜀𝜀𝑖𝑖

𝑘𝑘=1

Variance of the ith asset:

𝐾𝐾 𝐾𝐾

𝜎𝜎𝑖𝑖2 = � � 𝛽𝛽𝑖𝑖𝑖𝑖 𝛽𝛽𝑖𝑖𝑖𝑖 𝜌𝜌𝑚𝑚𝑚𝑚 + 𝜈𝜈𝑖𝑖2

𝑚𝑚=1 𝑛𝑛=1

Covariance between ith and jth asset:

𝐾𝐾 𝐾𝐾

𝜎𝜎𝑖𝑖𝑖𝑖 = � � 𝛽𝛽𝑖𝑖𝑖𝑖 𝛽𝛽𝑗𝑗𝑗𝑗 𝜌𝜌𝑚𝑚𝑚𝑚

𝑚𝑚=1 𝑛𝑛=1

5
CFA Level 3 (2022) Formula Sheet – Noesis Exed

With 𝑁𝑁 assets and 𝐾𝐾 factors, required:

• (𝑁𝑁 × 𝐾𝐾) factor sensitivities
𝐾𝐾(𝐾𝐾+1)
• factor covariances
2

𝛼𝛼𝑖𝑖 = Intercept
𝛽𝛽𝑖𝑖𝑖𝑖 = Asset’s sensitivity to the kth factor
𝐹𝐹𝐾𝐾 = kth common factor return
𝜀𝜀𝑖𝑖 = stochastic term (mean = zero)
𝜌𝜌𝑚𝑚𝑚𝑚 = correlation between mth and nth factors
𝜈𝜈𝑖𝑖2 = variance of unique component of ith asset’s return

Smoothed Returns
𝑅𝑅𝑡𝑡 = (1 − 𝜆𝜆)𝑟𝑟𝑡𝑡 + 𝜆𝜆𝑅𝑅𝑡𝑡−1 0 < 𝜆𝜆 < 1

1 + 𝜆𝜆
𝑣𝑣𝑣𝑣𝑣𝑣(𝑟𝑟) = � � 𝑣𝑣𝑣𝑣𝑣𝑣(𝑅𝑅)
1 − 𝜆𝜆

𝑅𝑅𝑡𝑡 = Current observed return 𝑅𝑅𝑡𝑡−1 = Previous observed return

𝑟𝑟𝑡𝑡 = Current true return 𝑣𝑣𝑣𝑣𝑣𝑣(𝑟𝑟) = True variance

ARCH Model

𝜎𝜎𝑡𝑡2 = 𝛾𝛾 + 𝛼𝛼𝜎𝜎𝑡𝑡−1
2
+ 𝛽𝛽𝜂𝜂𝑡𝑡2 𝛾𝛾, 𝛼𝛼, 𝛽𝛽 ≥ 0, 𝛼𝛼 + 𝛽𝛽 < 1
𝜎𝜎𝑡𝑡2 = 𝛾𝛾 + (𝛼𝛼 + 𝛽𝛽)𝜎𝜎𝑡𝑡−1
2
+ 𝛽𝛽(𝜂𝜂𝑡𝑡2 − 𝜎𝜎𝑡𝑡−1
2
)

𝜎𝜎𝑡𝑡2 = Variance in period 𝑡𝑡

𝜂𝜂𝑡𝑡 = Unexpected component of return in period 𝑡𝑡 (mean = 0)
𝜂𝜂𝑡𝑡2 − 𝜎𝜎𝑡𝑡−1
2
= Shock to variance in period 𝑡𝑡

Unconditional expected value of variance

𝛾𝛾
1 − 𝛼𝛼 − 𝛽𝛽

6
CFA Level 3 (2022) Formula Sheet – Noesis Exed

ASSET ALLOCATION

Reading 5: Overview of Asset Allocation

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑁𝑁𝑁𝑁𝑁𝑁 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ = 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 + 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 + 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿

Reading 6: Principles of Asset Allocation

Mean-Variance Optimization

Utility
2
𝑈𝑈𝑚𝑚 = 𝐸𝐸(𝑅𝑅𝑚𝑚 ) − 0.005𝜆𝜆𝜎𝜎𝑚𝑚

𝑈𝑈𝑚𝑚 = Investor’s utility for asset mix, 𝑚𝑚

𝑅𝑅𝑚𝑚 = Return for asset mix, 𝑚𝑚
𝜆𝜆 = Investor’s risk aversion coefficient
2
𝜎𝜎𝑚𝑚 = Expected variance of return for asset mix 𝑚𝑚 (in %)

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 − 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎

𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙

Surplus Optimization
𝐿𝐿𝐿𝐿 2
𝑈𝑈𝑚𝑚 = 𝐸𝐸�𝑅𝑅𝑠𝑠,𝑚𝑚 � − 0.005𝜆𝜆𝜎𝜎𝑠𝑠,𝑚𝑚

𝐿𝐿𝐿𝐿
𝑈𝑈𝑚𝑚 = Surplus objective function’s expected value for asset mix m
𝐸𝐸�𝑅𝑅𝑠𝑠,𝑚𝑚 � = Expected surplus return for asset mix 𝑚𝑚
𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 − 𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
𝐸𝐸�𝑅𝑅𝑠𝑠,𝑚𝑚 � =
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
𝜎𝜎𝑠𝑠,𝑚𝑚 = Surplus return volatility for asset mix 𝑚𝑚
𝜆𝜆 = Investor’s risk aversion

7
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Risk Parity
1 2
𝑤𝑤𝑖𝑖 × 𝐶𝐶𝐶𝐶𝐶𝐶�𝑟𝑟𝑖𝑖 , 𝑟𝑟𝑝𝑝 � = 𝜎𝜎
𝑛𝑛 𝑝𝑝
𝑤𝑤𝑖𝑖 = Weight of asset 𝑖𝑖
𝐶𝐶𝐶𝐶𝐶𝐶�𝑟𝑟𝑖𝑖 , 𝑟𝑟𝑝𝑝 � = Covariance of asset 𝑖𝑖 with portfolio
𝑛𝑛 = Number of assets
𝜎𝜎𝑝𝑝2 = Variance of portfolio

Risk Budgeting
Marginal Contribution to Risk
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = ×
𝑡𝑡𝑡𝑡 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑

Actual Contribution to Risk

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤ℎ𝑡𝑡
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = × 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀
𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑡𝑡𝑡𝑡 𝑀𝑀𝐶𝐶𝐶𝐶𝐶𝐶 =
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀

Reading 7: Asset Allocation with Real-World Constraints

After-tax Portfolio Optimization

𝑟𝑟𝑎𝑎𝑎𝑎 = 𝑟𝑟𝑝𝑝𝑝𝑝 (1 − 𝑡𝑡)

𝜎𝜎𝑎𝑎𝑎𝑎 = 𝜎𝜎𝑝𝑝𝑝𝑝 (1 − 𝑡𝑡)

𝑅𝑅𝑅𝑅𝑝𝑝𝑝𝑝
𝑅𝑅𝑅𝑅𝑎𝑎𝑎𝑎 =
1 − 𝑡𝑡

𝑟𝑟𝑎𝑎𝑎𝑎 = Expected after-tax return

𝑟𝑟𝑝𝑝𝑝𝑝 = Expected pre-tax return
𝑡𝑡 = Expected tax rate
𝜎𝜎𝑎𝑎𝑎𝑎 = Expected after-tax standard deviation
𝜎𝜎𝑝𝑝𝑝𝑝 = Expected pre-tax standard deviation
𝑅𝑅𝑅𝑅𝑎𝑎𝑎𝑎 = After-tax rebalancing range
𝑅𝑅𝑅𝑅𝑝𝑝𝑝𝑝 = Pre-tax rebalancing range

8
CFA Level 3 (2022) Formula Sheet – Noesis Exed

DERIVATIVES AND CURRENCY MANAGEMENT

Reading 8: Option Strategies

Put-call parity
𝑋𝑋
𝑆𝑆0 + 𝑝𝑝0 = 𝑐𝑐0 +
(1 + 𝑟𝑟)𝑇𝑇

Put-call-forward parity
𝐹𝐹0 𝑋𝑋
+ 𝑝𝑝0 = 𝑐𝑐0 +
(1 + 𝑟𝑟)𝑇𝑇 (1 + 𝑟𝑟)𝑇𝑇

Option premium = Time value + Intrinsic value

Covered Calls

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑆𝑆𝑇𝑇 − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋, 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑆𝑆𝑇𝑇 − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋, 0) + 𝑐𝑐0 − 𝑆𝑆0
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑋𝑋 − 𝑆𝑆0 + 𝑐𝑐0
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑆𝑆0 − 𝑐𝑐0
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑆𝑆0 − 𝑐𝑐0

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑑𝑑𝑑𝑑𝑙𝑙𝑡𝑡𝑡𝑡 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = 1 − Δ𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = −Gamma𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 < 0
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 = −Vega𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 < 0
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑡𝑡ℎ𝑒𝑒𝑒𝑒𝑒𝑒 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑇𝑇ℎ𝑒𝑒𝑒𝑒𝑒𝑒 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑇𝑇ℎ𝑒𝑒𝑒𝑒𝑒𝑒 = −Theta𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 > 0

Protective Puts

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑆𝑆𝑇𝑇 + 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋 − 𝑆𝑆𝑇𝑇 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑆𝑆𝑇𝑇 + 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋 − 𝑆𝑆𝑇𝑇 , 0) − 𝑆𝑆0 − 𝑝𝑝0
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = ∞
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑆𝑆0 − 𝑋𝑋 + 𝑝𝑝0
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑆𝑆0 + 𝑝𝑝0

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 + 𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = 1 + Δ𝑝𝑝𝑝𝑝𝑝𝑝

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 + 𝑃𝑃𝑃𝑃𝑃𝑃 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = Gamma𝑝𝑝𝑝𝑝𝑝𝑝 > 0
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 + 𝑃𝑃𝑃𝑃𝑃𝑃 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 = Vega𝑝𝑝𝑝𝑝𝑝𝑝 > 0
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑡𝑡ℎ𝑒𝑒𝑒𝑒𝑒𝑒 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑇𝑇ℎ𝑒𝑒𝑒𝑒𝑒𝑒 + 𝑃𝑃𝑃𝑃𝑃𝑃 𝑇𝑇ℎ𝑒𝑒𝑒𝑒𝑒𝑒 = Theta𝑝𝑝𝑝𝑝𝑝𝑝 < 0

9
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Bull Call Spread

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐿𝐿 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐻𝐻 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐿𝐿 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐻𝐻 , 0) − (𝑐𝑐𝐿𝐿 − 𝑐𝑐𝐻𝐻 )
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑋𝑋𝐻𝐻 − 𝑋𝑋𝐿𝐿 − (𝑐𝑐𝐿𝐿 − 𝑐𝑐𝐻𝐻 )
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑐𝑐𝐿𝐿 − 𝑐𝑐𝐻𝐻
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 𝑋𝑋𝐿𝐿 + 𝑐𝑐𝐿𝐿 − 𝑐𝑐𝐻𝐻

Bull Put Spread

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐿𝐿 − 𝑆𝑆𝑇𝑇 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐻𝐻 − 𝑆𝑆𝑇𝑇 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐿𝐿 − 𝑆𝑆𝑇𝑇 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐻𝐻 − 𝑆𝑆𝑇𝑇 , 0) − (𝑝𝑝𝐿𝐿 − 𝑝𝑝𝐻𝐻 )
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑝𝑝𝐻𝐻 − 𝑝𝑝𝐿𝐿
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑋𝑋𝐻𝐻 − 𝑋𝑋𝐿𝐿 + 𝑝𝑝𝐿𝐿 − 𝑝𝑝𝐻𝐻
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑋𝑋𝐻𝐻 + 𝑝𝑝𝐿𝐿 − 𝑝𝑝𝐻𝐻

Bear Put Spread

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐻𝐻 − 𝑆𝑆𝑇𝑇 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐿𝐿 − 𝑆𝑆𝑇𝑇 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐻𝐻 − 𝑆𝑆𝑇𝑇 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐿𝐿 − 𝑆𝑆𝑇𝑇 , 0) − (𝑝𝑝𝐻𝐻 − 𝑝𝑝𝐿𝐿 )
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑋𝑋𝐻𝐻 − 𝑋𝑋𝐿𝐿 − (𝑝𝑝𝐻𝐻 − 𝑝𝑝𝐿𝐿 )
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑝𝑝𝐻𝐻 − 𝑝𝑝𝐿𝐿
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑋𝑋𝐻𝐻 − 𝑝𝑝𝐻𝐻 + 𝑝𝑝𝐿𝐿

Bear Call Spread

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐻𝐻 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐿𝐿 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐻𝐻 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐿𝐿 , 0) − (𝑐𝑐𝐻𝐻 − 𝑐𝑐𝐿𝐿 )
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑐𝑐𝐿𝐿 − 𝑐𝑐𝐻𝐻
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑋𝑋𝐻𝐻 − 𝑋𝑋𝐿𝐿 + 𝑐𝑐𝐻𝐻 − 𝑐𝑐𝐿𝐿
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑋𝑋𝐿𝐿 + 𝑐𝑐𝐿𝐿 − 𝑐𝑐𝐻𝐻

Straddle

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋, 0) + 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋 − 𝑆𝑆𝑇𝑇 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋, 0) + 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋 − 𝑆𝑆𝑇𝑇 , 0) − 𝑐𝑐0 − 𝑝𝑝0
∞ 𝑆𝑆𝑇𝑇 > 𝑋𝑋
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = �
𝑋𝑋 − 𝑆𝑆𝑇𝑇 − 𝑐𝑐0 − 𝑝𝑝0 𝑆𝑆𝑇𝑇 < 𝑋𝑋
𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝑐𝑐0 + 𝑝𝑝0
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑋𝑋 ± (𝑐𝑐0 + 𝑝𝑝0 )

10
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Collar

Note: 𝑋𝑋𝐿𝐿 < 𝑆𝑆0 < 𝑋𝑋𝐻𝐻

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝑆𝑆𝑇𝑇 + 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐿𝐿 − 𝑆𝑆𝑇𝑇 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐻𝐻 , 0)

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑆𝑆𝑇𝑇 + 𝑀𝑀𝑀𝑀𝑀𝑀(𝑋𝑋𝐿𝐿 − 𝑆𝑆𝑇𝑇 , 0) − 𝑀𝑀𝑀𝑀𝑀𝑀(𝑆𝑆𝑇𝑇 − 𝑋𝑋𝐻𝐻 , 0) − 𝑆𝑆0 − 𝑝𝑝0 + 𝑐𝑐0
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 = 𝑋𝑋𝐻𝐻 − 𝑆𝑆0 − 𝑝𝑝0 + 𝑐𝑐0
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = −𝑋𝑋𝐿𝐿 + 𝑆𝑆0 + 𝑝𝑝0 − 𝑐𝑐0
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑆𝑆0 + 𝑝𝑝0 − 𝑐𝑐0

For zero-cost collar, 𝑝𝑝0 = 𝑐𝑐0

Implied Volatility

For 252 trading days in a year and 21 trading days in a month:

252
𝜎𝜎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 𝜎𝜎𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑙𝑙𝑙𝑙 �
21

Reading 9: Swaps, Forwards, and Futures Strategies

Managing Interest Rate Risk

Interest Rate Swaps

𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑇𝑇 − 𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑃𝑃
𝑁𝑁𝑆𝑆 = � � 𝑀𝑀𝑉𝑉𝑃𝑃
𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑆𝑆

𝑁𝑁𝑆𝑆 = Swap notional principal

𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑇𝑇 = Target modified duration
𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑃𝑃 = Modified duration of portfolio
𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑆𝑆 = Modified duration of swap
𝑀𝑀𝑀𝑀𝑃𝑃 = Market value of portfolio

Note: Modified duration of cash = 0 (unless stated otherwise in case)

Money Market Instrument

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
𝐵𝐵𝐵𝐵𝐵𝐵 = 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 × × 0.01%
360

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 100 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

11
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Treasury Futures
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
= × × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 100 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

𝐵𝐵𝐵𝐵𝑉𝑉𝑇𝑇 − 𝐵𝐵𝐵𝐵𝑉𝑉𝑃𝑃
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 = � � × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹
𝐵𝐵𝐵𝐵𝑉𝑉𝐶𝐶𝐶𝐶𝐶𝐶

𝐵𝐵𝐵𝐵𝑉𝑉𝑇𝑇 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑇𝑇 × 0.01% × 𝑀𝑀𝑉𝑉𝑃𝑃

𝐵𝐵𝐵𝐵𝑉𝑉𝑃𝑃 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝑃𝑃 × 0.01% × 𝑀𝑀𝑉𝑉𝑃𝑃
𝐵𝐵𝐵𝐵𝑉𝑉𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑅𝑅𝐶𝐶𝐶𝐶𝐶𝐶 × 0.01% × 𝑀𝑀𝑉𝑉𝐶𝐶𝐶𝐶𝐶𝐶
𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑀𝑀𝑉𝑉𝐶𝐶𝐶𝐶𝐶𝐶 = × 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
100
𝐵𝐵𝐵𝐵𝑉𝑉𝐶𝐶𝐶𝐶𝐶𝐶
𝐵𝐵𝐵𝐵𝑉𝑉𝐹𝐹 =
𝐶𝐶𝐶𝐶

Hedging Currency Risk with Futures

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝑁𝑁𝑓𝑓 =
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠

Hedging Equity Risk with Futures

𝛽𝛽𝑇𝑇 − 𝛽𝛽𝑆𝑆 𝑆𝑆
𝑁𝑁𝑓𝑓 = � �� �
𝛽𝛽𝑓𝑓 𝐹𝐹
𝛽𝛽𝑇𝑇 = Target beta
𝛽𝛽𝑆𝑆 = Portfolio beta
𝛽𝛽𝑓𝑓 = Futures beta
𝑆𝑆 = Portfolio market value
𝐹𝐹 = Futures price

%ΔPortfolio value
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 =
%ΔIndex value

Note: Beta of cash = 0

Variance Swap
𝜎𝜎 2 − 𝑋𝑋 2
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑡𝑡𝑇𝑇 = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 � �
2𝑋𝑋
= 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛(𝜎𝜎 2 − 𝑋𝑋 2 )

Value of a long variance swap at time 𝑡𝑡:

𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 × 𝑃𝑃𝑉𝑉𝑡𝑡 (𝑇𝑇) × (𝜎𝜎𝑡𝑡2 − 𝑋𝑋 2 )

12
CFA Level 3 (2022) Formula Sheet – Noesis Exed

𝑡𝑡 2
𝑇𝑇 − 𝑡𝑡 2
𝜎𝜎𝑡𝑡2 = × 𝜎𝜎𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (0, 𝑡𝑡) + × 𝜎𝜎𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 (𝑡𝑡, 𝑇𝑇)
𝑇𝑇 𝑇𝑇

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜
𝑎𝑎 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖
𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐹𝐹𝐹𝐹𝐹𝐹 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑓𝑓𝑓𝑓𝑓𝑓 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
=
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 ℎ𝑖𝑖𝑖𝑖𝑖𝑖

𝐶𝐶𝑢𝑢𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑓𝑓𝑓𝑓𝑓𝑓 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

Fed funds futures price = 100 – Implied Fed funds rate

Reading 10: Currency Management An Introduction

𝑅𝑅𝐷𝐷𝐷𝐷 = (1 + 𝑅𝑅𝐹𝐹𝐹𝐹 )(1 + 𝑅𝑅𝐹𝐹𝐹𝐹 ) − 1

𝑅𝑅𝐷𝐷𝐷𝐷 = Domestic-currency return

𝑅𝑅𝐹𝐹𝐹𝐹 = Foreign-currency return
𝑅𝑅𝐹𝐹𝐹𝐹 = Percentage change in foreign currency against domestic currency
(currency quoted as DC/FC)

2 2 2
𝜎𝜎𝐷𝐷𝐷𝐷 = 𝜎𝜎𝐹𝐹𝐹𝐹 + 𝜎𝜎𝐹𝐹𝐹𝐹 + 2𝜎𝜎𝐹𝐹𝐹𝐹 𝜎𝜎𝐹𝐹𝐹𝐹 𝜌𝜌𝐹𝐹𝐹𝐹,𝐹𝐹𝐹𝐹

For a foreign-risk free asset:

𝜎𝜎𝐷𝐷𝐷𝐷 = 𝜎𝜎𝐹𝐹𝐹𝐹 (1 + 𝑅𝑅𝐹𝐹𝐹𝐹 )

Minimum Variance Hedge Ratio

𝑦𝑦𝑡𝑡 = 𝛼𝛼 + 𝛽𝛽𝑥𝑥𝑡𝑡 + 𝜀𝜀𝑡𝑡

𝑦𝑦𝑡𝑡 = change in value of asset to be hedged (measured in DC) = 𝑅𝑅𝐷𝐷𝐷𝐷

𝑥𝑥𝑡𝑡 = change in value of hedging instrument (measured in DC) = 𝑅𝑅𝐹𝐹𝐹𝐹

𝐶𝐶𝐶𝐶𝐶𝐶(𝑥𝑥, 𝑦𝑦) 𝜎𝜎𝑦𝑦

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀, 𝛽𝛽 = = 𝜌𝜌𝑥𝑥,𝑦𝑦 � �
𝑉𝑉𝑉𝑉𝑉𝑉(𝑥𝑥) 𝜎𝜎𝑥𝑥

13
CFA Level 3 (2022) Formula Sheet – Noesis Exed

FIXED INCOME PORTFOLIO MANAGEMENT

Reading 11: Overview of Fixed Income Portfolio Management

Expected fixed-income return

𝐸𝐸(𝑅𝑅) = 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
+𝐸𝐸(𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏ℎ𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦)
+𝐸𝐸(𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠)
+𝐸𝐸(𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎)

𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

=
(𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦) 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑒𝑒𝐸𝐸𝐸𝐸𝐸𝐸 − 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑒𝑒0
𝑅𝑅𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = (𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑛𝑛𝑛𝑛 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐)
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑒𝑒0

Rolling yield = Yield income + Rolldown return

𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏

1
𝐸𝐸 � 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 � = −𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 × Δ𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 + × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 × (Δ𝑌𝑌𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖)2
2
𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏ℎ𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

Note: For bonds with embedded options, use effective duration and effective convexity.

𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏

𝐸𝐸 � 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 �
𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
1
= −𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 + × 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × (Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)2
2

Note:
• For fixed-rate bonds, modified duration can be used to replace spread duration (if
spread duration statistic not given)
• For floating rate bonds, spread duration statistic will be given.

For foreign fixed income investments:

𝑅𝑅𝐷𝐷𝐷𝐷 = (1 + 𝑅𝑅𝐹𝐹𝐹𝐹 )(1 + 𝑅𝑅𝐹𝐹𝐹𝐹 ) − 1

𝑅𝑅𝐹𝐹𝐹𝐹 = 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

+𝐸𝐸(𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏ℎ𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦)
+𝐸𝐸(𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠)

14
CFA Level 3 (2022) Formula Sheet – Noesis Exed

𝑅𝑅𝐹𝐹𝐹𝐹 = Percentage change in exchange rate (DC/FC)

𝐸𝐸�𝑆𝑆𝐷𝐷𝐷𝐷 ⁄𝐹𝐹𝐹𝐹 � − 𝑆𝑆0,𝐷𝐷𝐷𝐷 ⁄𝐹𝐹𝐹𝐹
= (𝑢𝑢𝑢𝑢ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒)
𝑆𝑆0,𝐷𝐷𝐷𝐷 ⁄𝐹𝐹𝐹𝐹
𝐹𝐹𝐷𝐷𝐷𝐷 ⁄𝐹𝐹𝐹𝐹 − 𝑆𝑆0,𝐷𝐷𝐷𝐷 ⁄𝐹𝐹𝐹𝐹
= (ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑑𝑑)
𝑆𝑆0,𝐷𝐷𝐷𝐷 ⁄𝐹𝐹𝐹𝐹

𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏

𝐸𝐸 � 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑟𝑟 ′ 𝑠𝑠 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 � = 𝐸𝐸(𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔⁄𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙) = 𝑅𝑅𝐷𝐷𝐷𝐷 − 𝑅𝑅𝐹𝐹𝐹𝐹
𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎

Using Leverage in the Bond Portfolio

Leveraged portfolio return

𝑉𝑉𝐵𝐵
𝑟𝑟𝑃𝑃 = 𝑟𝑟𝐼𝐼 + (𝑟𝑟 − 𝑟𝑟𝐵𝐵 )
𝑉𝑉𝐸𝐸 𝐼𝐼

𝑟𝑟𝐼𝐼 = return on invested funds

𝑟𝑟𝐵𝐵 = cost of borrowing
𝑉𝑉𝐵𝐵 = borrowed funds
𝑉𝑉𝐸𝐸 = value of portfolio’s equity

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 − 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑒𝑒𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 =
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀

Repo
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑖𝑖𝑖𝑖 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 × 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 ×
360

Securities Lending

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

15
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Reading 12: Liability-Driven and Index-Based Strategies

𝑁𝑁

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = � 𝑤𝑤𝑖𝑖 × 𝑡𝑡

𝑡𝑡=1

𝑃𝑃𝑉𝑉𝑖𝑖
𝑤𝑤𝑖𝑖 =
𝑃𝑃𝑃𝑃

Note: To annualize MacDur, divide by periodicity.

𝑁𝑁

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = � 𝑤𝑤𝑖𝑖 × (𝑡𝑡 − 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀)2

𝑡𝑡=1

𝑁𝑁
1
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = � 𝑤𝑤𝑖𝑖 × 𝑡𝑡(𝑡𝑡 + 1)
(1 + 𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦)2
𝑡𝑡=1

Note: To annualize dispersion and convexity, divide by periodicity squared.

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑟𝑟 2 + 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 + 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑥𝑥𝑖𝑖𝑖𝑖𝑖𝑖 =
(1 + 𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦)2

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
1 + 𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 × 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝐵𝐵𝐵𝐵𝐵𝐵 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 × 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 × 0.0001

Note: For zero-coupon bonds, Macaulay duration = Maturity

Number of bond futures contracts required

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐵𝐵𝐵𝐵𝐵𝐵 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐵𝐵𝐵𝐵𝐵𝐵
𝑁𝑁𝑓𝑓 =
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐵𝐵𝐵𝐵𝐵𝐵

𝐵𝐵𝐵𝐵𝑉𝑉𝐶𝐶𝐶𝐶𝐶𝐶
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐵𝐵𝐵𝐵𝐵𝐵 ≈
𝐶𝐶𝐹𝐹𝐶𝐶𝐶𝐶𝐶𝐶

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑔𝑔𝑔𝑔𝑔𝑔 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐵𝐵𝐵𝐵𝐵𝐵 − 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐵𝐵𝐵𝐵𝐵𝐵

16
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Required Swap Notional

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐵𝐵𝐵𝐵𝐵𝐵 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐵𝐵𝐵𝐵𝐵𝐵
𝑁𝑁𝑁𝑁 =
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵 ⁄100

Note: Swap BPV quoted per $100 notional

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 Δ𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 Δ𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 Δ𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿

× + × = ×
𝐵𝐵𝐵𝐵𝐵𝐵 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝐵𝐵𝐵𝐵𝐵𝐵 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝐵𝐵𝐵𝐵𝐵𝐵 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

Reading 13: Yield Curve Strategies

𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

= −
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

=− +2× −
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

1
%ΔPV𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 = −(𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 × Δ𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌) + × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 × (Δ𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌)2
2
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹
ΔPV = %ΔPV × 𝑃𝑃𝑉𝑉 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

Repo carry trade

Repo carry return = Coupon income ± Rolldown Return − Financing cost

Long futures position

Δ𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = − 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
Δ𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌

Receive-fixed interest rate swap

Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑡𝑡𝑡𝑡 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = (𝑆𝑆𝑤𝑤𝑤𝑤𝑤𝑤 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑀𝑀𝑀𝑀𝑀𝑀) +
Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌

Key Rate Duration

1 Δ𝑃𝑃𝑃𝑃
𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝑟𝑟𝑘𝑘 = ×
𝑃𝑃𝑃𝑃 Δ𝑟𝑟𝑘𝑘

17
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Reading 14: Fixed Income Active Management: Credit Strategies

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝑃𝑃𝑃𝑃𝑃𝑃 × 𝐿𝐿𝐿𝐿𝐿𝐿

𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜 𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜

= −
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏ℎ𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏

𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜 𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜

𝐺𝐺-𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = −
𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏

𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

𝐼𝐼-𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = −
𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠, 𝐴𝐴𝐴𝐴𝐴𝐴 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

Discount margin (DM) for floating-rate notes

(𝑀𝑀𝑀𝑀𝑀𝑀 + 𝑄𝑄𝑄𝑄) × 𝐹𝐹𝐹𝐹 (𝑀𝑀𝑀𝑀𝑀𝑀 + 𝑄𝑄𝑄𝑄) × 𝐹𝐹𝐹𝐹 (𝑀𝑀𝑀𝑀𝑀𝑀 + 𝑄𝑄𝑄𝑄) × 𝐹𝐹𝐹𝐹
� � � � � � + 𝐹𝐹𝐹𝐹
𝑚𝑚 𝑚𝑚 𝑚𝑚
𝑃𝑃𝑃𝑃 = + + ⋯ +
𝑀𝑀𝑀𝑀𝑀𝑀 + 𝐷𝐷𝐷𝐷 1 𝑀𝑀𝑀𝑀𝑀𝑀 + 𝐷𝐷𝐷𝐷 2 𝑀𝑀𝑀𝑀𝑀𝑀 + 𝐷𝐷𝐷𝐷 𝑛𝑛
�1 + � �1 + � �1 + �
𝑚𝑚 𝑚𝑚 𝑚𝑚

𝑄𝑄𝑄𝑄 = Quoted margin

𝐷𝐷𝐷𝐷 = Discount margin
𝑚𝑚 = Periodicity
𝑛𝑛 = Tenor of FRN
𝑀𝑀𝑀𝑀𝑀𝑀 = Market reference rate (assume constant)
𝐹𝐹𝐹𝐹 = Face value

𝑁𝑁
𝑀𝑀𝑀𝑀𝑖𝑖
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑂𝑂𝑂𝑂𝑂𝑂 = � × 𝑂𝑂𝑂𝑂𝑆𝑆𝑖𝑖 𝑀𝑀𝑀𝑀 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑀𝑀𝑀𝑀
𝑖𝑖=1

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆, 𝐷𝐷𝐷𝐷𝐷𝐷 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

𝑁𝑁
𝑀𝑀𝑀𝑀𝑖𝑖
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷 = � × (𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑛𝑛𝑖𝑖 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑑𝑑𝑖𝑖 )
𝑀𝑀𝑀𝑀
𝑖𝑖=1

Δ𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑖𝑖𝑖𝑖 (𝑖𝑖𝑖𝑖 𝑏𝑏𝑏𝑏𝑏𝑏) = −𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷 ×
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠

18
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Impact of Yield Spreads on Portfolio Return

1
% Δ𝑃𝑃𝑉𝑉𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 ≈ −𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 × Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 + × 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 × (Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)2
2

(𝑃𝑃𝑉𝑉− ) − (𝑃𝑃𝑉𝑉+ )
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 =
2 × (Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) × 𝑃𝑃𝑉𝑉0
(𝑃𝑃𝑉𝑉− ) + (𝑃𝑃𝑉𝑉+ ) − 2(𝑃𝑃𝑉𝑉0 )
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 =
(Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)2 × 𝑃𝑃𝑉𝑉0

Excess return on credit risky bond

𝐸𝐸(𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸) ≈ 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑑𝑑0 − (𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 × 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥) − (𝑃𝑃𝑃𝑃𝑃𝑃 × 𝐿𝐿𝐿𝐿𝐿𝐿)

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑑𝑑0 = Initial yield spread per annum

Δ𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = Change in spread over holding period
𝑃𝑃𝑃𝑃𝑃𝑃 = Annualized expected probability of default
𝐿𝐿𝐿𝐿𝐿𝐿 = Expected loss severity
𝑃𝑃𝑃𝑃𝑃𝑃 × 𝐿𝐿𝐿𝐿𝐿𝐿 = expected annual credit loss

Floating-rate Note (FRN)

Effective rate duration

(𝑃𝑃𝑉𝑉− ) − (𝑃𝑃𝑉𝑉+ )
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑟𝑟𝐹𝐹𝐹𝐹𝐹𝐹 =
2 × (Δ𝑀𝑀𝑀𝑀𝑀𝑀) × 𝑃𝑃𝑉𝑉0

Effective spread duration

(𝑃𝑃𝑉𝑉− ) − (𝑃𝑃𝑉𝑉+ )
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑟𝑟𝐹𝐹𝐹𝐹𝐹𝐹 =
2 × (Δ𝐷𝐷𝐷𝐷) × 𝑃𝑃𝑉𝑉0

Expected change in YTM based on a x% confidence interval over one month

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑜𝑜𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

= Daily interest rate volatility × � × 𝑍𝑍 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑖𝑖𝑖𝑖 𝑎𝑎 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ

Credit Default Swap (CDS)

For a $1 notional:
𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 ≈ 1 + [(𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) × 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑟𝑟𝐶𝐶𝐶𝐶𝐶𝐶 ]

If fixed coupon > CDS Spread, protection buyer receives upfront premium from protection
seller
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝐶𝐶𝐶𝐶𝐶𝐶 𝑠𝑠𝑠𝑠𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟) × 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑟𝑟𝐶𝐶𝐶𝐶𝐶𝐶

19
CFA Level 3 (2022) Formula Sheet – Noesis Exed

If fixed coupon < CDS Spread, protection buyer pays upfront premium to protection seller
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = (𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 − 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) × 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑟𝑟𝐶𝐶𝐶𝐶𝐶𝐶

%Δ𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 ≈ −Δ(𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) × 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑟𝑟𝐶𝐶𝐶𝐶𝐶𝐶

Δ𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 ≈ 𝐶𝐶𝐶𝐶𝐶𝐶 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 × %Δ𝐶𝐶𝐶𝐶𝐶𝐶 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

Note:
• Buy protection  CDS Notional < 0 (Short risk position)
• Sell protection  CDS Notional > 0 (Long risk position)

EQUITY PORTFOLIO MANAGEMENT

Reading 16: Passive Equity Investing

Herfindahl Hirschman Index (HHI)

𝑛𝑛

𝐻𝐻𝐻𝐻𝐻𝐻 = � 𝑤𝑤𝑖𝑖2
𝑖𝑖=1

𝑤𝑤𝑖𝑖 = Weight of stock 𝑖𝑖 in portfolio

1
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 =
𝐻𝐻𝐻𝐻𝐻𝐻

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟𝑝𝑝 = √𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑅𝑅𝑝𝑝 −𝑅𝑅𝑏𝑏

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑛𝑛𝑝𝑝 = 𝑅𝑅𝑝𝑝 − 𝑅𝑅𝑏𝑏

Reading 17: Active Equity Investing: Strategies

Growth at a Reasonable Price (GARP)

𝑃𝑃⁄𝐸𝐸
𝑃𝑃𝑃𝑃𝑃𝑃 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑜𝑜 =
𝑔𝑔 (𝑖𝑖𝑖𝑖 %)

Information Coefficient

Pearson IC = Correlation between factor score and subsequent month return

Spearman rank IC = Correlation between rank of factor score and rank of subsequent month
return

20
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Returns-based Style Analysis

𝑚𝑚

𝑟𝑟𝑡𝑡 = 𝛼𝛼 + � 𝛽𝛽 𝑠𝑠 𝑅𝑅𝑡𝑡𝑠𝑠 + 𝜀𝜀𝑡𝑡

𝑠𝑠=1

𝑟𝑟𝑡𝑡 = fund return within period ending at time 𝑡𝑡

𝑅𝑅𝑡𝑡𝑠𝑠 = return of style index 𝑠𝑠 in same period
𝛽𝛽 𝑠𝑠 = fund exposure to style 𝑠𝑠 (∑𝑚𝑚 𝑠𝑠 𝑠𝑠
𝑠𝑠=1 𝛽𝛽 = 1; 𝛽𝛽 > 0 for long-only)
𝛼𝛼 = manager’s value added
𝜀𝜀𝑡𝑡 = residual return that cannot be explained by the styles used

Reading 18: Active Equity Investing: Portfolio Construction

Active Return
𝑁𝑁

𝑅𝑅𝐴𝐴 = � Δ𝑊𝑊𝑖𝑖 𝑅𝑅𝑖𝑖

𝑖𝑖=1

𝑅𝑅𝑖𝑖 = return on security 𝑖𝑖

Δ𝑊𝑊𝑖𝑖 = active weight = 𝑊𝑊𝑝𝑝𝑝𝑝 − 𝑊𝑊𝐵𝐵𝐵𝐵

𝑁𝑁

𝑅𝑅𝐴𝐴 = ��𝛽𝛽𝑝𝑝𝑝𝑝 − 𝛽𝛽𝑏𝑏𝑏𝑏 � × 𝐹𝐹𝑘𝑘 + (𝛼𝛼 + 𝜀𝜀)

𝑖𝑖=1

𝛽𝛽𝑝𝑝𝑝𝑝 = sensitivity of portfolio (𝑝𝑝) to rewarded factor (𝑘𝑘)

𝛽𝛽𝑏𝑏𝑏𝑏 = sensitivity of benchmark (𝑏𝑏) to rewarded factor (𝑘𝑘)
𝐹𝐹𝑘𝑘 = return of each rewarded factor
𝛼𝛼 = active return that can be attributed to manger’s specific skill/strategies (security
selection, factor timing)
𝜀𝜀 = idiosyncratic return

𝑀𝑀𝑀𝑀𝑀𝑀(𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎, 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑙𝑙𝑙𝑙 𝑛𝑛𝑛𝑛𝑛𝑛 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎

21
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Fundamental Law of Active Management

𝐸𝐸(𝑅𝑅𝐴𝐴 ) = 𝐼𝐼𝐼𝐼 × √𝐵𝐵𝐵𝐵 × 𝜎𝜎𝑅𝑅𝐴𝐴 × 𝑇𝑇𝑇𝑇

𝐼𝐼𝐼𝐼 = Information coefficient

𝐵𝐵𝐵𝐵 = Breadth (Number of independent decisions made per year)
𝑇𝑇𝑇𝑇 = Transfer coefficient (Unconstrained portfolio  TC = 1)
𝜎𝜎𝑅𝑅𝐴𝐴 = Manager’s active risk

𝑛𝑛
1
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎 = ��𝑤𝑤𝑝𝑝,𝑖𝑖 − 𝑤𝑤𝐵𝐵,𝑖𝑖 �
2
𝑖𝑖=1

𝑛𝑛 = number of securities in either portfolio or benchmark

∑𝑇𝑇𝑡𝑡=1(𝑅𝑅𝐴𝐴𝐴𝐴 )2
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸, 𝜎𝜎𝑅𝑅𝐴𝐴 = �
𝑇𝑇 − 1

𝑁𝑁

𝜎𝜎𝑅𝑅2𝐴𝐴 = 𝜎𝜎 2 ���𝛽𝛽𝑝𝑝𝑝𝑝 − 𝛽𝛽𝑏𝑏𝑏𝑏 � × 𝐹𝐹𝑘𝑘 � + 𝜎𝜎𝜀𝜀2

𝑖𝑖=1

𝑁𝑁
2
𝜎𝜎 ���𝛽𝛽𝑝𝑝𝑝𝑝 − 𝛽𝛽𝑏𝑏𝑏𝑏 � × 𝐹𝐹𝑘𝑘 � = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡 𝑓𝑓𝑎𝑎𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝑖𝑖=1

𝜎𝜎𝜀𝜀2 = Variance attributed to idiosyncratic risk

Absolute Risk Attribution

𝑛𝑛 𝑛𝑛

𝑉𝑉𝑝𝑝 = � � 𝑥𝑥𝑖𝑖 𝑥𝑥𝑗𝑗 𝐶𝐶𝑖𝑖𝑖𝑖

𝑖𝑖=1 𝑗𝑗=1

𝑛𝑛

𝐶𝐶𝐶𝐶𝑖𝑖 = � 𝑥𝑥𝑖𝑖 𝑥𝑥𝑗𝑗 𝐶𝐶𝑖𝑖𝑖𝑖 = 𝑥𝑥𝑖𝑖 𝐶𝐶𝑖𝑖𝑖𝑖

𝑗𝑗=1

𝑉𝑉𝑝𝑝 = Portfolio variance

𝐶𝐶𝐶𝐶𝑖𝑖 = Contribution of asset 𝑖𝑖 to portfolio variance
𝑥𝑥𝑖𝑖 = weight of asset 𝑖𝑖 in portfolio
𝐶𝐶𝑖𝑖𝑖𝑖 = Covariance of returns between asset 𝑖𝑖 and 𝑗𝑗
𝐶𝐶𝑖𝑖𝑖𝑖 = Covariance of returns between asset 𝑖𝑖 and portfolio

22
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Relative Risk Attribution

𝑛𝑛 𝑛𝑛

𝐴𝐴𝐴𝐴𝑝𝑝 = � �(𝑥𝑥𝑖𝑖 − 𝑏𝑏𝑖𝑖 )(𝑥𝑥𝑗𝑗 − 𝑏𝑏𝑗𝑗 )𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖

𝑖𝑖=1 𝑗𝑗=1

𝑛𝑛

𝐶𝐶𝐴𝐴𝐴𝐴𝑖𝑖 = �(𝑥𝑥𝑖𝑖 − 𝑏𝑏𝑖𝑖 )(𝑥𝑥𝑗𝑗 − 𝑏𝑏𝑗𝑗 )𝐶𝐶𝑖𝑖𝑖𝑖 = (𝑥𝑥𝑖𝑖 − 𝑏𝑏𝑖𝑖 )𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖

𝑗𝑗=1

𝐴𝐴𝐴𝐴𝑝𝑝 = Variance of portfolio’s active return

𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 = Contribution of asset 𝑖𝑖 to portfolio active variance
𝑏𝑏𝑖𝑖 = benchmark weight in asset 𝑖𝑖
𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 = Covariance of relative returns between asset 𝑖𝑖 and 𝑗𝑗
𝐶𝐶𝑖𝑖𝑖𝑖 = Covariance of returns between asset 𝑖𝑖 and portfolio

1
𝑅𝑅𝑔𝑔 = 𝑘𝑘 × 𝑅𝑅𝑎𝑎 − (𝑘𝑘 − 1)𝑅𝑅𝑑𝑑 − (𝑘𝑘𝑘𝑘)2
2

𝑅𝑅𝑔𝑔 = Compounded/geometric return

𝑅𝑅𝑎𝑎 = Arithmetic/periodic return
𝑘𝑘 = Leverage factor = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴⁄𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
𝑅𝑅𝑑𝑑 = Cost of funding leverage

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 + |𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝|

𝑁𝑁𝑁𝑁𝑁𝑁 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 − |𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝|

23
CFA Level 3 (2022) Formula Sheet – Noesis Exed

ALTERNATIVE INVESTMENTS FOR PORTFOLIO MANAGEMENT

Reading 19: Hedge Fund Strategies

Equity market neutral

𝑤𝑤𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 × 𝐵𝐵𝐵𝐵𝐵𝐵𝑎𝑎𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 + 𝑤𝑤𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 × 𝐵𝐵𝐵𝐵𝐵𝐵𝑎𝑎𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 = 0

where 𝑤𝑤𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝑤𝑤𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜

Merger arbitrage
For a stock-for-stock deal:
Cash flow
Buy 𝑁𝑁 shares of target company −𝑁𝑁 × 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
Short (𝑁𝑁 × 𝑒𝑒𝑒𝑒𝑒𝑒ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟) shares of acquiring company +𝑁𝑁 × 𝑅𝑅 × 𝑃𝑃𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

If deal is successful,
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = �𝑁𝑁 × 𝑅𝑅 × 𝑃𝑃𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 � − �𝑁𝑁 × 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 � 𝑅𝑅 = Exchange ratio

Convertible Arbitrage

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 =
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

Conditional Risk Factor Model

𝐻𝐻𝐹𝐹𝑖𝑖 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑖𝑖,1 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 1)𝑡𝑡 + 𝛽𝛽𝑖𝑖,2 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 2)𝑡𝑡 + ⋯ + 𝛽𝛽𝑖𝑖,𝐾𝐾 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐾𝐾)𝑡𝑡 +
+𝐷𝐷𝑡𝑡 𝛽𝛽𝑖𝑖,1 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 1)𝑡𝑡 + 𝐷𝐷𝑡𝑡 𝛽𝛽𝑖𝑖,2 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 2)𝑡𝑡 + ⋯ + 𝐷𝐷𝑡𝑡 𝛽𝛽𝑖𝑖,𝐾𝐾 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐾𝐾)𝑡𝑡 + 𝜀𝜀𝑖𝑖,𝑡𝑡

𝐻𝐻𝐹𝐹𝑖𝑖 = Return of hedge fund i in period t

𝛽𝛽𝑖𝑖,𝐾𝐾 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐾𝐾)𝑡𝑡 = Exposure to risk factor 𝐾𝐾 for hedge fund 𝑖𝑖 in period 𝑡𝑡 (normal times)
𝐷𝐷𝑡𝑡 𝛽𝛽𝑖𝑖,𝐾𝐾 (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐾𝐾)𝑡𝑡 = Incremental exposure to risk factor 𝐾𝐾 for hedge fund 𝑖𝑖 in period 𝑡𝑡
(financial crisis periods)
1 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝐷𝐷𝑡𝑡 = �
0 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝛼𝛼 = intercept for hedge fund 𝑖𝑖
𝜀𝜀𝑖𝑖,𝑡𝑡 = random error with mean zero and standard deviation of 𝜎𝜎𝑖𝑖

24
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Reading 20: Asset Allocation to Alternative Investments

𝑟𝑟𝑡𝑡,𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑠𝑠 × 𝑟𝑟𝑡𝑡−1,𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝑟𝑟𝑡𝑡,𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢ℎ𝑒𝑒𝑒𝑒 =
1 − 𝑠𝑠

𝑠𝑠 = serial correlation of time series

Liquidity Planning
𝐶𝐶𝑡𝑡 = 𝑅𝑅𝐶𝐶𝑡𝑡 × (𝐶𝐶𝐶𝐶 − 𝑃𝑃𝑃𝑃𝐶𝐶𝑡𝑡 )

𝐷𝐷𝑡𝑡 = 𝑅𝑅𝐷𝐷𝑡𝑡 × [𝑁𝑁𝑁𝑁𝑉𝑉𝑡𝑡−1 × (1 + 𝐺𝐺)]

𝑁𝑁𝑁𝑁𝑉𝑉𝑡𝑡 = 𝑁𝑁𝑁𝑁𝑉𝑉𝑡𝑡−1 × (1 + 𝐺𝐺) + 𝐶𝐶𝑡𝑡 − 𝐷𝐷𝑡𝑡

𝐶𝐶𝑡𝑡 = Capital contribution in year 𝑡𝑡 𝑅𝑅𝐶𝐶𝑡𝑡 = Rate of contribution in year 𝑡𝑡

𝐶𝐶𝐶𝐶 = Committed capital 𝑃𝑃𝑃𝑃𝐶𝐶𝑡𝑡 = Paid in capital in year 𝑡𝑡
𝑅𝑅𝐷𝐷𝑡𝑡 = Rate of distribution in year 𝑡𝑡 𝐺𝐺 = Growth rate
𝑁𝑁𝑁𝑁𝑉𝑉𝑡𝑡 = Net asset value in year 𝑡𝑡

25
CFA Level 3 (2022) Formula Sheet – Noesis Exed

PRIVATE WEALTH MANAGEMENT

Reading 23: Topics in Wealth Management

After-Tax Holding Period Return, 𝑅𝑅′

(𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑒𝑒1 − 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑒𝑒0 ) + 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 − 𝑇𝑇𝑇𝑇𝑇𝑇
𝑅𝑅′ =
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑒𝑒0

𝑇𝑇𝑇𝑇𝑇𝑇
𝑅𝑅′ = 𝑅𝑅 −
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑒𝑒0

𝑅𝑅 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝑁𝑁

𝑇𝑇𝑇𝑇𝑇𝑇 = � 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑛𝑛𝑖𝑖 × 𝑡𝑡𝑡𝑡𝑡𝑡 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖

𝑖𝑖=1

Annualized after-tax holding period return

𝑅𝑅𝐺𝐺′ = [(1 + 𝑅𝑅1′ )(1 + 𝑅𝑅2′ ) … (1 + 𝑅𝑅𝑛𝑛′ )]1⁄𝑛𝑛 − 1

Modified Dietz method

𝑇𝑇𝑇𝑇𝑇𝑇
𝑅𝑅′ = 𝑅𝑅 −
𝐶𝐶𝑗𝑗 (𝑁𝑁 − 𝑗𝑗)
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑒𝑒0 + ∑𝑁𝑁
𝑗𝑗=1 𝑁𝑁

𝑇𝑇𝑇𝑇𝑇𝑇 = Cumulative tax liability for all transactions during the month
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑒𝑒0 = Initial value at the beginning of the month
𝐶𝐶𝑗𝑗 = Cash flow on day 𝑗𝑗
𝑁𝑁 = Number of calendar days in a month
𝑁𝑁 − 𝑗𝑗 = Number of days from cash flow to end of month

After-tax Post Liquidation return

⁄𝑛𝑛
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑡𝑡𝑡𝑡𝑡𝑡 1
𝑅𝑅𝑃𝑃𝑃𝑃 = �(1 + 𝑅𝑅1′ )(1 + 𝑅𝑅2′ ) … (1 + 𝑅𝑅𝑛𝑛′ ) − � −1
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑡𝑡𝑡𝑡𝑡𝑡 = (𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑣𝑣𝑣𝑣𝑣𝑣𝑢𝑢𝑢𝑢 − 𝑇𝑇𝑇𝑇𝑇𝑇 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏) × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑡𝑡𝑡𝑡𝑡𝑡 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

26
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Taxable Account
𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃[1 + 𝑟𝑟(1 − 𝑡𝑡𝑖𝑖 )]𝑛𝑛

Tax-Deferred Accounts (TDA)

𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃(1 + 𝑟𝑟)𝑛𝑛 (1 − 𝑡𝑡𝑛𝑛 )

Tax-Exempt Accounts
𝐹𝐹𝐹𝐹 = 𝑃𝑃𝑃𝑃(1 + 𝑟𝑟)𝑛𝑛

𝑡𝑡𝑖𝑖 = ordinary income tax rate

𝑡𝑡𝑛𝑛 = Tax rate at withdrawal

Potential Capital Gain Exposure (PCGE)

𝑁𝑁𝑁𝑁𝑁𝑁 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 =
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑛𝑛𝑛𝑛𝑛𝑛 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎

Gifts versus Bequests

Tax-Free Gift
𝐹𝐹𝑉𝑉𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
𝑅𝑅𝑉𝑉𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = =
𝐹𝐹𝑉𝑉𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵
𝑛𝑛
�1 + 𝑟𝑟𝑔𝑔 �1 − 𝑡𝑡𝑔𝑔 ��
[1 + 𝑟𝑟𝑒𝑒 (1 − 𝑡𝑡𝑒𝑒 )]𝑛𝑛 (1 − 𝑇𝑇𝑒𝑒 )

Taxable Gift (Recipient pays gift tax)

𝑛𝑛
𝐹𝐹𝑉𝑉𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 �1 + 𝑟𝑟𝑔𝑔 �1 − 𝑡𝑡𝑔𝑔 �� (1 − 𝑇𝑇𝑔𝑔 )
𝑅𝑅𝑉𝑉𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = =
𝐹𝐹𝑉𝑉𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 [1 + 𝑟𝑟𝑒𝑒 (1 − 𝑡𝑡𝑒𝑒 )]𝑛𝑛 (1 − 𝑇𝑇𝑒𝑒 )

𝑟𝑟𝑔𝑔 = pre-tax return of recipient’s portfolio

𝑟𝑟𝑒𝑒 = pre-tax return of donor’s portfolio/estate
𝑡𝑡𝑔𝑔 = income tax rate on recipient’s return 𝑡𝑡𝑒𝑒 = income tax rate on donor’s return
𝑇𝑇𝑔𝑔 = Tax rate on gift 𝑇𝑇𝑒𝑒 = Tax rate on estate
𝑛𝑛 = Donor’s life expectancy
𝑇𝑇𝑜𝑜𝑜𝑜 = Ordinary income tax rate

Mortgage Financing
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 × 𝐿𝐿𝐿𝐿𝐿𝐿

27
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Reading 24: Risk Management for Individuals

𝑁𝑁
𝑝𝑝(𝑠𝑠𝑡𝑡 )𝑤𝑤𝑡𝑡−1 (1 + 𝑔𝑔𝑡𝑡 )
𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶, 𝐻𝐻𝐶𝐶0 = � 𝑡𝑡
𝑡𝑡=1 �1 + 𝑟𝑟𝑓𝑓 + 𝑦𝑦�

𝑝𝑝(𝑠𝑠𝑡𝑡 ) = probability of survival in year 𝑡𝑡

𝑤𝑤𝑡𝑡−1 = wages in year 𝑡𝑡 − 1
𝑔𝑔𝑡𝑡 = growth rate of wages in year 𝑡𝑡
𝑟𝑟𝑓𝑓 = risk free rate
𝑦𝑦 = volatility of occupational income

𝑁𝑁𝑁𝑁𝑁𝑁 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 − 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑒𝑒𝑠𝑠

𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑁𝑁𝑁𝑁𝑁𝑁 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ = 𝑁𝑁𝑁𝑁𝑁𝑁 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ + 𝑛𝑛𝑛𝑛𝑛𝑛 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 − 𝑛𝑛𝑛𝑛𝑛𝑛 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚
𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑁𝑁𝑁𝑁𝑁𝑁 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 + 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑓𝑓𝑓𝑓𝑓𝑓 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑎𝑎𝑎𝑎𝑎𝑎 𝑃𝑃𝑟𝑟𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 − 𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑛𝑛𝑛𝑛𝑛𝑛 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

For annuity with growth, set [I/Y] to:

1 + 𝑟𝑟
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟, 𝑖𝑖 ∗ = −1
1 + 𝑔𝑔

28
CFA Level 3 (2022) Formula Sheet – Noesis Exed

PORTFOLIO MANAGEMENT FOR INSTITUTIONAL INVESTORS

Reading 25: Portfolio Management for Institutional Investors

Constant Growth rule:

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑔𝑔𝑡𝑡+1 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑔𝑔𝑡𝑡 × (1 + 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑜𝑜𝑜𝑜 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅)

Market Value rule:

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑔𝑔𝑡𝑡+1 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 × 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴

Hybrid rule:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ (1 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑔𝑔𝑡𝑡+1 = 𝑤𝑤 × + − 𝑤𝑤) ×
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

Bank and Insurance

Duration of equity capital, 𝐷𝐷𝐸𝐸

𝐴𝐴 𝐴𝐴 Δ𝑖𝑖
𝐷𝐷𝐸𝐸 = � � 𝐷𝐷𝐴𝐴 − � − 1� 𝐷𝐷𝐿𝐿 � �
𝐸𝐸 𝐸𝐸 Δ𝑦𝑦

2 𝐴𝐴 2 2 𝐴𝐴 2
2 𝐴𝐴 𝐴𝐴
𝜎𝜎Δ𝐸𝐸 ⁄𝐸𝐸 = � � 𝜎𝜎Δ𝐴𝐴⁄𝐴𝐴 + � − 1� 𝜎𝜎Δ𝐿𝐿 ⁄𝐿𝐿 − 2 � � � − 1� 𝜌𝜌𝜎𝜎Δ𝐴𝐴⁄𝐴𝐴 𝜎𝜎Δ𝐿𝐿⁄𝐿𝐿
𝐸𝐸 𝐸𝐸 𝐸𝐸 𝐸𝐸

𝐸𝐸
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐴𝐴

𝐷𝐷𝐴𝐴 = Duration of assets

𝐷𝐷𝐿𝐿 = Duration of liabilities
𝑖𝑖 = Effective yield on liabilities
𝑦𝑦 = Effective yield on assets
2
𝜎𝜎Δ𝐸𝐸 ⁄𝐸𝐸 = Variance of change in value of equity capital
2
𝜎𝜎Δ𝐴𝐴 ⁄𝐴𝐴 = Variance of change in value of assets
2
𝜎𝜎Δ𝐿𝐿 ⁄𝐿𝐿 = Variance of change in value of liabilities
𝜌𝜌 = Correlation between percentage value changes of assets and liabilities

29
CFA Level 3 (2022) Formula Sheet – Noesis Exed

TRADING, PERFORMANCE EVALUATION, AND MANAGER SELECTION

Reading 26: Trade Strategy and Execution

Implementation Shortfall
𝐼𝐼𝐼𝐼 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = (𝑃𝑃𝑛𝑛 − 𝑃𝑃𝑑𝑑 )𝑆𝑆

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = �� 𝑠𝑠𝑗𝑗 � 𝑃𝑃𝑛𝑛 − � 𝑠𝑠𝑗𝑗 𝑝𝑝𝑗𝑗 − 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝑃𝑃𝑑𝑑 × 𝑆𝑆

𝐼𝐼𝐼𝐼 = 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = � 𝑠𝑠𝑗𝑗 𝑝𝑝𝑗𝑗 − �� 𝑠𝑠𝑗𝑗 � 𝑃𝑃𝑑𝑑

𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = �𝑆𝑆 − � 𝑠𝑠𝑗𝑗 � (𝑃𝑃𝑛𝑛 − 𝑃𝑃𝑑𝑑 )

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐼𝐼𝐼𝐼 = 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = �� 𝑠𝑠𝑗𝑗 � 𝑃𝑃0 − �� 𝑠𝑠𝑗𝑗 � 𝑃𝑃𝑑𝑑

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = � 𝑠𝑠𝑗𝑗 𝑝𝑝𝑗𝑗 − �� 𝑠𝑠𝑗𝑗 � 𝑃𝑃0

𝑃𝑃𝑛𝑛 = Current price

𝑃𝑃𝑑𝑑 = Decision price (Benchmark price)
𝑃𝑃0 = Arrival price
𝑆𝑆 = Total order of shares (𝑆𝑆 > 0 for buy order; 𝑆𝑆 < 0 for sell order)
𝑠𝑠𝑗𝑗 = Number of shares executed in 𝑗𝑗th trade
𝑝𝑝𝑗𝑗 = Transaction price of 𝑗𝑗th trade
∑ 𝑠𝑠𝑗𝑗 = Total number of shares executed

30
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Trade Evaluation

+1 𝐵𝐵𝐵𝐵𝐵𝐵 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = � 𝑃𝑃� = Average execution price
−1 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

𝑃𝑃� − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × × 10,000
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

𝑃𝑃� − 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × × 10,000
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉

𝑃𝑃� − 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × × 10,000
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇

𝑃𝑃� − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝐶𝐶𝐶𝐶𝑜𝑜𝑜𝑜𝑜𝑜 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × × 10,000
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) − 𝛽𝛽 × 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏)

where:
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 − 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 × × 10,000
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 (𝑏𝑏𝑏𝑏𝑏𝑏) = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏) − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑝𝑝𝑝𝑝𝑝𝑝 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑏𝑏𝑏𝑏𝑏𝑏)

Reading 27: Portfolio Performance Evaluation

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴ℎ𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = 𝑅𝑅 − 𝐵𝐵

𝑅𝑅 − 𝐵𝐵
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
1 + 𝐵𝐵

Brinson-Fachler Model

Allocation effect:
𝐴𝐴𝑖𝑖 = (𝑤𝑤𝑖𝑖 − 𝑊𝑊𝑖𝑖 )(𝐵𝐵𝑖𝑖 − 𝐵𝐵)

Selection effect:
𝑆𝑆𝑖𝑖 = 𝑊𝑊𝑖𝑖 (𝑅𝑅𝑖𝑖 − 𝐵𝐵𝑖𝑖 )

Interaction effect:
𝐼𝐼𝑖𝑖 = (𝑤𝑤𝑖𝑖 − 𝑊𝑊𝑖𝑖 )(𝑅𝑅𝑖𝑖 − 𝐵𝐵𝑖𝑖 )

31
CFA Level 3 (2022) Formula Sheet – Noesis Exed

𝑛𝑛 𝑛𝑛 𝑛𝑛

𝑅𝑅 − 𝐵𝐵 = � 𝐴𝐴𝑖𝑖 + � 𝑆𝑆𝑖𝑖 + � 𝐼𝐼𝑖𝑖

𝑖𝑖=1 𝑖𝑖=1 𝑖𝑖=1

𝑤𝑤𝑖𝑖 = Weight of asset 𝑖𝑖 in portfolio 𝑊𝑊𝑖𝑖 = Weight of asset 𝑖𝑖 in benchmark

𝑅𝑅𝑖𝑖 = Return of asset 𝑖𝑖 in portfolio 𝐵𝐵𝑖𝑖 = Return of asset 𝑖𝑖 in benchmark

Brinson-Hood-Beebower Model (BHB)

Allocation effect:
𝐴𝐴𝑖𝑖 = (𝑤𝑤𝑖𝑖 − 𝑊𝑊𝑖𝑖 )𝐵𝐵𝑖𝑖

Selection effect:
𝑆𝑆𝑖𝑖 = 𝑊𝑊𝑖𝑖 (𝑅𝑅𝑖𝑖 − 𝐵𝐵𝑖𝑖 )

Interaction effect:
𝐼𝐼𝑖𝑖 = (𝑤𝑤𝑖𝑖 − 𝑊𝑊𝑖𝑖 )(𝑅𝑅𝑖𝑖 − 𝐵𝐵𝑖𝑖 )

Decomposing Portfolio Returns

𝑃𝑃 = 𝑀𝑀 + 𝑆𝑆 + 𝐴𝐴

𝑃𝑃 = Portfolio return 𝑀𝑀 = Market index return 𝐵𝐵 = Benchmark return

𝑆𝑆 = 𝐵𝐵 − 𝑀𝑀 = Style return (Misfit active return)
𝐴𝐴 = 𝑃𝑃 − 𝐵𝐵 = Active return (True active return)

Performance Appraisal
𝑅𝑅𝑝𝑝 − 𝑟𝑟𝑓𝑓
𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝜎𝜎𝑝𝑝

𝑅𝑅𝑝𝑝 − 𝑟𝑟𝑓𝑓
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝛽𝛽𝑝𝑝

𝑅𝑅𝑝𝑝 − 𝑅𝑅𝐵𝐵
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝜎𝜎𝑅𝑅𝑝𝑝 −𝑅𝑅𝐵𝐵

𝛼𝛼
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 (𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟) =
𝜎𝜎𝜀𝜀

𝜎𝜎𝜀𝜀 = Standard error of regression (from factor model)

= �𝜎𝜎𝑃𝑃2 − 𝛽𝛽𝑖𝑖2 𝜎𝜎𝑀𝑀2

𝛼𝛼 = 𝑅𝑅𝑖𝑖 − �𝑅𝑅𝑓𝑓 + 𝛽𝛽𝑖𝑖 �𝑅𝑅𝑀𝑀 − 𝑅𝑅𝑓𝑓 ��

32
CFA Level 3 (2022) Formula Sheet – Noesis Exed

𝑅𝑅𝑝𝑝 − 𝑟𝑟𝑇𝑇
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝜎𝜎𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝑟𝑟𝑇𝑇 = investor’s minimum acceptable return/target return

𝑁𝑁
1
𝜎𝜎𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = � � min(𝑟𝑟𝑡𝑡 − 𝑟𝑟𝑇𝑇 , 0)2
𝑁𝑁
𝑡𝑡=1

𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶

𝑅𝑅𝑚𝑚
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑅𝑅𝐵𝐵 ≥ 0
𝑅𝑅𝐵𝐵
𝑅𝑅𝑚𝑚
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑅𝑅𝐵𝐵 < 0
𝑅𝑅𝐵𝐵

𝑉𝑉(𝑚𝑚, 𝑡𝑡) − 𝑉𝑉(𝑚𝑚, 𝑡𝑡 ∗ )

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = min �� � , 0�
𝑉𝑉(𝑚𝑚, 𝑡𝑡 ∗ )

𝑉𝑉(𝑚𝑚, 𝑡𝑡) = portfolio value of manager 𝑚𝑚 at time 𝑡𝑡

𝑉𝑉(𝑚𝑚, 𝑡𝑡 ∗ ) = peak portfolio value of manager 𝑚𝑚
𝑡𝑡 > 𝑡𝑡 ∗

33
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Reading 35: Overview of the Global Investment Performance Standards

Time-weighted return
𝑟𝑟𝑡𝑡𝑡𝑡𝑡𝑡 = �1 + 𝑟𝑟𝑡𝑡,1 � × �1 + 𝑟𝑟𝑡𝑡,2 � × … × �1 + 𝑟𝑟𝑡𝑡,𝑛𝑛 � − 1

𝑟𝑟𝑡𝑡,1 through 𝑟𝑟𝑡𝑡,𝑛𝑛 = Sub-period returns

Modified Dietz method

𝑉𝑉1 − 𝑉𝑉0 − 𝐶𝐶𝐶𝐶
𝑟𝑟𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 =
𝑉𝑉0 + ∑𝑛𝑛𝑖𝑖=1(𝐶𝐶𝐹𝐹𝑖𝑖 × 𝑤𝑤𝑖𝑖 )

Modified IRR method

𝑛𝑛

𝑉𝑉1 = �[𝐶𝐶𝐹𝐹𝑖𝑖 × (1 + 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀)𝑤𝑤𝑖𝑖 ] + 𝑉𝑉0 (1 + 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀)

𝑖𝑖=1

𝑤𝑤𝑖𝑖 = Proportion of period (in days) that each cash flow has been in the portfolio
𝐶𝐶𝐶𝐶 − 𝐷𝐷𝑖𝑖
=
𝐶𝐶𝐶𝐶
𝐶𝐶𝐶𝐶 = Total number of calendar days in the period
𝐷𝐷𝑖𝑖 = Number of calendar days from the beginning of the period to the time cash flow 𝐶𝐶𝐹𝐹𝑖𝑖
occurs
𝑛𝑛

𝐶𝐶𝐶𝐶 = � 𝐶𝐶𝐹𝐹𝑖𝑖
𝑖𝑖=1

Composite Time-Weighted Return

Asset-weight individual portfolio returns using beginning-of-period values

𝑛𝑛
𝑉𝑉0,𝑝𝑝𝑝𝑝
𝑟𝑟𝐶𝐶 = � 𝑟𝑟𝑝𝑝𝑝𝑝 × 𝑛𝑛
∑𝑝𝑝𝑝𝑝=1 𝑉𝑉0,𝑝𝑝𝑝𝑝
𝑝𝑝𝑝𝑝=1

𝑟𝑟𝐶𝐶 = Composite return

𝑟𝑟𝑝𝑝𝑝𝑝 = Return of an individual portfolio 𝑖𝑖
𝑉𝑉0,𝑝𝑝𝑝𝑝 = Beginning value of portfolio 𝑖𝑖
∑𝑛𝑛𝑝𝑝𝑝𝑝=1 𝑉𝑉0,𝑝𝑝𝑝𝑝 = Total beginning fair value of all individual portfolios in the composite

34
CFA Level 3 (2022) Formula Sheet – Noesis Exed

Use a method that reflects both beginning-of-period values and external cash flows
𝑛𝑛
𝑉𝑉𝑝𝑝𝑝𝑝
𝑟𝑟𝐶𝐶 = � 𝑟𝑟𝑝𝑝𝑝𝑝 ×
∑𝑛𝑛𝑝𝑝𝑝𝑝=1 𝑉𝑉𝑝𝑝𝑝𝑝
𝑝𝑝𝑝𝑝=1

𝑉𝑉𝑝𝑝𝑝𝑝 = Beginning value of portfolio 𝑖𝑖 + Weighted external cash flows

∑𝑛𝑛𝑝𝑝𝑝𝑝=1 𝑉𝑉𝑝𝑝𝑝𝑝 = Total beginning fair value and weighted external cash flows of all individual
portfolios in the composite

Aggregate Return method

𝑉𝑉1 − 𝑉𝑉0 − 𝐶𝐶𝐶𝐶
𝑟𝑟𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 =
𝑉𝑉0 + ∑𝑛𝑛𝑖𝑖=1(𝐶𝐶𝐹𝐹𝑖𝑖 × 𝑤𝑤𝑖𝑖 )

𝑉𝑉1 = Ending value of composite

𝑉𝑉0 = Beginning value of composite
𝑛𝑛
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝐶𝐶𝐶𝐶 = = � 𝐶𝐶𝐹𝐹𝑖𝑖
𝑐𝑐𝑐𝑐𝑐𝑐ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝑖𝑖=1
𝑛𝑛 𝑛𝑛
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑜𝑜𝑜𝑜 𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘𝒘 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
�(𝐶𝐶𝐹𝐹𝑖𝑖 × 𝑤𝑤𝑖𝑖 ) = = � 𝑉𝑉𝑝𝑝𝑝𝑝
𝑐𝑐𝑐𝑐𝑐𝑐ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝑖𝑖=1 𝑝𝑝𝑝𝑝=1

Equal-weighted standard deviation

∑𝑛𝑛𝑖𝑖=1(𝑟𝑟𝑖𝑖 − 𝑟𝑟̅𝑐𝑐 )2
𝑆𝑆𝑐𝑐 = �
𝑛𝑛

𝑟𝑟𝑖𝑖 = return for portfolio i

𝑟𝑟̅𝑐𝑐 = equal-weighted mean
𝑛𝑛 = number of portfolios in composite

Asset-weighted standard deviation

𝑛𝑛
2
𝑆𝑆𝑐𝑐,𝑎𝑎𝑎𝑎 = �� 𝑤𝑤𝑖𝑖 × �𝑟𝑟𝑖𝑖 − 𝑟𝑟̅𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 �
𝑖𝑖=1

𝑟𝑟̅𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = asset-weighted mean return = ∑𝑛𝑛𝑖𝑖=1 𝑤𝑤𝑖𝑖 × 𝑟𝑟𝑖𝑖

𝑉𝑉0,𝑖𝑖
𝑤𝑤𝑖𝑖 = weight of portfolio 𝑖𝑖 =
𝑉𝑉0,𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇

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