Formula Sheet

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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

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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)

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Normal Distributions
68% of observations fall within ± 1σ

90% fall within ± 1.65σ
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

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Common Z-values for confidence intervals
Zα/2 = 1.645 for 90% confidence intervals

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

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

(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 )

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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

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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

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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

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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

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Coverage Ratios
Performance Ratios
Activity Turnover Ratios

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“Days of” Ratios *
Liquidity Ratios

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Solvency Ratios
Profitability Ratios

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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

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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)

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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

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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

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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

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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

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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

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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]

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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

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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

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wallstreetnotes.

Frequency of compounding Perpetuity

Pop. variance Sample variance

*For video explanations go to www.wallstreetnotes.com

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 )

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)

*For video explanations go to www.wallstreetnotes.com

68% of observations fall within ± 1σ

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

Roy’s Safety-First Ratio (SFR)

Continuously Compounded Rate Equalities

price relative Holding Continuously

Known population variance à σ/ n

*For video explanations go to www.wallstreetnotes.com

Zα/2 = 1.645 for 90% confidence intervals

Zα/2 = 1.960 for 95% confidence intervals

Zα/2 = 2.575 for 99% confidence intervals

Formulas to calculate confidence intervals *

Total Variation = Explained variation + Unexplained variation

SST SSR SSE

*For video explanations go to www.wallstreetnotes.com

*For video explanations go to www.wallstreetnotes.com

Sum of SQUARED market shares of N largest firms

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

Solow Growth Model

Growth in Growth Growth Growth

*For video explanations go to www.wallstreetnotes.com

Money Initial deposit

Quantity Theory of Money

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

Neutral Interest Rate

Neutral interest rate = trend growth rate + inflation

Current account = Capital account + Financial account

Real Nominal exchange rate x CPI base currency

*For video explanations go to www.wallstreetnotes.com

Rate of final value

(Wx)(Ex) + (WM)(EM – 1) > 0

*For video explanations go to www.wallstreetnotes.com

Financial Statement Analysis

Preferred Net Other comprehensive

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

Financial Statement Analysis

Activity Turnover Ratios

*For video explanations go to www.wallstreetnotes.com

Financial Statement Analysis

*For video explanations go to www.wallstreetnotes.com

Financial Statement Analysis

*For video explanations go to www.wallstreetnotes.com

Financial Statement Analysis