wallstreetnotes.

com

Quantitative Methods
Present Value Future Value

PV = FV / ( 1 + r ) n n
FV = PV ( 1 + r )

Frequency of compounding Perpetuity

PMT
PV =
(r/n)

Geometric Mean

1/n
[ ( 1 + r1 ) ( 1 + r ) ( 1 + rn ) ] -1
2

Harmonic Mean

n
Position of an observation
at a given percentile 1 + 1 1
+
x1 x2 xn
y
(n+1) x
100 Population Variance Sample Variance

𝐍
Mean Abs. Deviation (MAD) 𝐍
2 2
!− Xi - 𝛍 !− Xi - x
𝐢"𝟏 𝐢"𝟏
𝐍
n n-1
!− Xi - x
𝐢"𝟏
n
Population stdev. Population stdev.

Pop. variance Sample variance

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Quantitative Methods
Coefficient of Variation Correlation of x & y

Standard Deviation covariance (xy)

Mean (σx) (σy)

Multiplication Rule (Joint Probs.) Addition Rule

P(AB) = P( A I B ) x P(B) P(A or B) = P(A) + P(B) - P(AB)

Total Probability Rule *

P(A) = P(A I B1 ) x P( B1 ) + P(A I B2 ) x P( B2 ) + … + P(A I Bn ) x P( Bn )

Expected Value

EV = (X1)P(X1) + (X2)P(X2) … + (Xn)P(Xn)

Variance of 2-Stock Portfolio

wA2 σA2 + wB2 σB2 + 2wA wB covarianceAB

FOR BINOMIAL RANDOM VARIABLE

Probability of “x” successes in “n” trials

Expected E(x) = (n)(p)

n! x n-x value
p(x) = p (1-p)
(n – x)! x!
Variance Var(x) = (n)(p)(1-p)

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Quantitative Methods
Normal Distributions

68% of observations fall within ± 1σ

90% fall within ± 1.65σ
95% fall within ± 1.96σ
99% fall within ± 2.58σ

Z-score (number of σ a given observation is from the population mean)

observed - population
x-μ
value mean
Z-score = =
σ standard deviation

Roy’s Safety-First Ratio (SFR)

Expected Threshold
E(Rp) - R L
return – level
SFR = =
σ Standard deviation

Continuously Compounded Rate Equalities

price relative Holding Continuously

period return compounded rate
final price
= ( 1 + HPR ) = e RCC
initial price

Standard Error

Known population variance à σ/ n

Unknown population variance à s / n

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Quantitative Methods
Common Z-values for confidence intervals

Zα/2 = 1.645 for 90% confidence intervals

(level of significance is 10%, 5% in each tail)

Zα/2 = 1.960 for 95% confidence intervals

(level of significance is 5%, 2.5% in each tail)

Zα/2 = 2.575 for 99% confidence intervals

(level of significance is 1%, 0.5% in each tail)

Formulas to calculate confidence intervals *

– + Zα/2 σ or – + tα/2 s
x – n x – n

Linear Regression

Total Variation = Explained variation + Unexplained variation

SST SSR SSE

SSR
k
MSR SSR
F-stat = R2 =
MSE SSE SST

n – ( k+1 )

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Quantitative Methods

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Economics
Elasticity Formulas

Own-price %Δ Qty
=
Elasticity %Δ Price
Cross-price = %Δ Qty
Elasticity %Δ Price (related good)
Income %Δ Qty
=
Elasticity %Δ Income
Marginal Product N-firm Concentration Ratio

Marginal
=
Δ output Sum of mkt shares of N largest firms
Product Δ labor
HHI Ratio

Sum of SQUARED market shares of N largest firms

Gross Domestic Product Saving, investment, Fiscal and Trade Balance *

GDP = C + I + G + (X – M) S = I + (G – T) + (X – M)

GDP Deflator

Nominal GDP
x 100
Real GDP

Solow Growth Model

Growth in Growth Growth Growth

potential GDP = + W L + W c
in tech in labor in capital

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Economics
Unemployment Ratios

Unemployment Unemployed
=
rate Labor force

Labor force
Participation =
ratio Working age
population

Money Creation

Money Initial deposit

=
created Reserve requirement

Quantity Theory of Money

(M) x (V) = (P) x (Y)

Money Velocity of $ Price Real
supply in circulation level output

Neutral Interest Rate

Neutral interest rate = trend growth rate + inflation

Balance of Payments

Current account = Capital account + Financial account

Real Exchange Rates

Real Nominal exchange rate x CPI base currency

exchange rate = (spot rate) CPI price currency

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Economics
No Arbitrage Forward Exchange Rates *

(1 + r price)
Forward price = Spot price x
(1 + r base)
base base

Rate of Change

Rate of final value

= -1
change initial value

Marshall-Lerner Condition

(Wx)(Ex) + (WM)(EM – 1) > 0

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Financial Statement Analysis

Basic EPS Comprehensive Income

Preferred Net Other comprehensive

Net income - Income +
dividends income

Weighted avg # of
common shares

Diluted EPS

Calculating Inventory

Beginning inventory
+ Purchases (cash paid to suppliers)
- Cogs (cost inventory sold)
Ending inventory

Free Cash Flows *

FCFF = NI + NCC + Interest (1-t) - FC Inv - WC Inv

FCFF = CFO + Interest (1-t) - FC Inv

FCFE = CFO - FC Inv + Net borrowing

FCFE = FCFF - Interest (1-t) + Net borrowing

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Financial Statement Analysis

Coverage Ratios

Performance Ratios

Activity Turnover Ratios

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Financial Statement Analysis

“Days of” Ratios *

Liquidity Ratios

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Financial Statement Analysis

Solvency Ratios

Profitability Ratios

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Financial Statement Analysis

Straight-line Depreciation

Original cost – salvage value

Useful life

Double-declining Balance Depreciation

2 Cost – Accumulated
x
useful life depreciation

Deferred Tax Liability *

DTL = (CV – TB) x Tax rate

• If taxable income < pre-tax income, deferred tax liability

• If taxable income > pre-tax income, deferred tax asset

Effective Interest Method

Interest CV of bond liability Mkt rate

expense
= @ beg. of yr at issuance

Amount = Int. expense – Int. payment

amortized (coupon)

Retirement Plans

Funded Fair value of _ PV of estimated

=
status fund’s asset pension liabilities

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Financial Statement Analysis

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Corporate Issuers
Weighted Average Cost of Capital

WACC = (Wd)(rd)(1-t) + (Wp)(rp) + (We)(re)

Cost of Preferred Stock CAPM

Dividend re = rf + B(rm – rf)

rp =
Current
MRP
share price

Levered Beta Unlevered Beta

1
D’
B’e = Bu 1 + (1-t) Bu = Be D
E’ 1 + (1-t)
E

Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL)

Q (P - V) Q (P - V) - F
Q (P - V) - F Q (P - V) – F - I

Degree of Total Leverage Break-even Quantity *

Q (P – V) Fixed operating Fixed

+ interests (I)
costs (F)
Q (P - V) – F - I QBE =
(P – V) Contribution margin

P = price per unit

Operating Break-even Quantity V = variable cost per unit

Fixed operating costs (F)

QoBE =
(P – V)

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Equity Investments
Leverage Ratio

Value of asset 1
or
Investor’s equity position initial margin requirement

Margin Call Price Market Cap

(1 - initial margin)
P0 (# of shares)(price per share)
(1 – maintenance margin)

Price-to-book Ratio Free Cash Flow to Equity *

Market cap
NI + depr – ΔinWC – FCInv + net borrowing
Book value
or
CFO – FCInv + net borrowing

Price at t=0

D1 D1 = (D0)(1+g)
P0 =
r-g

g = (ROE)(RR)

RR = ( 1 – div. payout ratio)

Enterprise Value

mkt value of common mkt value of cash and short

+ -
and preferred equity debt term investments

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Fixed Income
Full Price of a Bond Flat Price of a Bond

Full price – Accrued interest

YTM t T
PV x 1+
n
Full price – (coupon)( t T )

Effective Yield Periodic Rate

n YTM
EFF = ( 1 + r ) - 1 r =
n
Money Market Instruments *

Money FV - PV 360
market = x
yield PV n

Bond FV - PV 365
equivalent = x
yield PV n

Discount FV - PV 360
= x
yield FV n

Z-spread
Yield or Bond with an embedded option

Yield on
+ OAS + Option value
government bonds

OAS = z-spread – option value

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Fixed Income
Single Monthly Mortality (SMM) rate

Prepayment for the month

Mortgage balance _ Scheduled principal
at the beginning of month repayments that month

Loan-to-value (LTV) Ratio * Debt-Service coverage (DSCR) ratio

Loan amount Net operating

LTV = Market value DSCR = income
of collateral Debt service

Modified Duration % Change in Bond Price

Macaulay Duration _ Annual modified

(1 + YTM) x ΔYTM
duration
n
Approximate Modified Duration Effective Duration

_ _
V_ V+ V_ V+
2 x V 0 x ΔYTM 2 x V 0 x ΔCurve

Money Duration Price Value of a Basis Point

Annual _
Full price of V_ V+
Modified x PVBP =
a bond 2
Duration

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Fixed Income
Approximate Convexity Effective Convexity

V_ + V + _ 2V0 V_ + V + _ 2V0
(ΔYTM) 2 V0 (Δcurve) 2 V0

Change in Bond’s Full Price *

2
_ Annual modified 1 Annual
x ΔYTM + ΔYTM
duration 2 convexity
Duration Convexity

Duration Gap

Macaulay _ Investment
Duration Horizon

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Derivatives
Spot Price Contract Value at time = t

F0(T)
S0 = Vt = St _ PVt [F0(T)]
( 1 + rf ) T

Spot price at initiation with cost of carry

F0(T)
S0 = + PV(Benefits) - PV(Costs)
( 1 + rf ) T
“Cost of carry”

Contract Value at time = t with Costs and Benefits

_ PVt [F0(T)] + PVt (Benefits) – PVt (Costs)

St

Put-Call parity *

X
S + P = C + (1 + r)T
Underlying Risk-free
Put Call
asset bond

Forward Put-Call parity

Fwd price X
(1 + r)T + P = C + (1 + r)T
Forward Put Risk-free
Call
contract bond

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Portfolio Management
Diversification Ratio

Risk of equally weighted portfolio of “n” securities

Risk of a single random security

Holding Period Return (HPR) Portfolio Variance

Final price wA2 σA2 + wB2 σB2 + 2wA wB covarianceAB

-1
Initial price

Covariance of x and y

covariance (xy) = (σy) (σx) (correlation of x & y)

For any point on the Capital Allocation Line (CAL) *

E(r)p = ( W Rf ) ( Rf ) + ( W Rp ) [E(Rp)] σp = ( W Rp ) ( σRp )

For any point on the Capital Market Line (CML)

E(r)p = ( W Rf ) ( Rf ) + ( Wm ) [E(Rm)] σp = ( W m ) ( σm )

Beta of Stock “i”

Beta i =
covariance i,mkt
or
ρ i,mkt σi
σ 2 mkt σ mkt
Market Model CAPM

Ri = B(Rm) + αi + ei E(r) = Rf + B [E(Rm) – Rf]

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Portfolio Management
Sharpe Ratio For any point on the Capital Market Line (CML)

(Rp – Rf) [E(Rm) – Rf ]

E(Rp) = σp + Rf
σp σm
Treynor Ratio Security Market Line (SML)

(Rp – Rf)
E(r) = [E(Rm) – Rf] B + Rf
B

M2 ratio Jensen’s Alpha

(Rp – Rf)
σm - (Rm – Rf) Rp – [ Rf + B (Rm – Rf)
σp

*For video explanations go to www.wallstreetnotes.com

 wallstreetnotes.com

Ethical and Professional

Standards
5: Investment analysis,
1: Professionalism
recommendations, and actions

1A. Knowledge of the law 5A. Diligence & reasonable basis

1B. Independence & Objectivity 5B. Communication with clients

and prospective clients
1C. Misrepresentation
5C. Record retention
1D. Misconduct

6: Conflicts of interest *
2: Integrity of capital markets
6A. Disclosure of conflicts
2A. Material nonpublic information
6B. Priority of transactions
2B. Market manipulation
6C. Referral fees

3: Duties to clients
7: Responsibilities as a CFA®
institute member / candidate
3A. Loyalty, prudence and care
7A. Conduct as participants in
3B. Fair dealing CFA® programs
3C. Suitability
7B. Reference to CFA® institute,
3D. Performance presentation the CFA® designation, and the CFA ®
CFA® program
3E. Preservation of confidentiality

4. Duties to employers

4A. Loyalty

4B. Additional compensation

arrangements

4C. Responsibilities of supervisors

*For video explanations go to www.wallstreetnotes.com