CFA® Program

Level III
FORMULA SHEET (2023) Version 2.0
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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NOESIS EXED SDN BHD

Block VO2, Level 5, Unit 8, Lingkaran SV, Sunway Velocity, 55100 Kuala Lumpur, Malaysia
Website: [Link]

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

CFA Level 3 – Formula Sheet (2023)

Setting Up the Texas BA II Plus Financial Calculator

Video: [Link]

CAPITAL MARKET EXPECTATIONS

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

ℎ ℎ
= +
ℎ

where:
ℎ ℎ ℎ
= +

ℎ ℎ ℎ
= +

Aggregate market value of equity

= × ×

= +

Over a finite horizon:

= %Δ + %Δ + %Δ +

Over the long-term:

= %Δ +
Noesis Exed

= Aggregate market value of equity

= Nominal level of GDP
= Share of profits in the economy =
= P/E ratio

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Taylor Rule (Video: [Link]

∗
= + + 0.5 − + 0.5( − )

∗
= target nominal policy rate
= real neutral policy rate
= expected inflation rate = target inflation rate
= expected real GDP growth rates = trend real GDP growth rates
∗
− = real, inflation-adjusted policy rate

− =( − )+( − )

− = Net exports
= Savings
= Investment
− = Government surplus

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

Grinold-Kroner model

Expected equity return

( )≈ + (%Δ − %ΔS) + %Δ ⁄

= Dividend yield
%Δ = Expected % change in total earnings
%Δ = Expected nominal earnings growth return
%ΔS = Expected % change in shares outstanding (%ΔS < 0: Net share repurchases)
%Δ ⁄ = Expected % change in price-to-earnings ratio
%Δ ⁄ = Expected repricing return
Noesis Exed

%Δ − %ΔS = Growth rate of earnings per share

− %ΔS = Expected cash flow (“income”) return
%Δ + %Δ ⁄ = Expected capital gains

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

Video: [Link]

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Risk Premium Approaches to Equity Returns

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

Term premium = Return on bonds – Return on bills

Singer-Terhaar Approach

Risk premium under full integration:

= ,

Risk premium under complete segmentation:

ℎ
= 1× ×

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, = + (1 − )

Expected return of asset class , ( ) = +

, = correlation between ith asset and global market portfolio

= standard deviation of ith asset’s return
= Sharpe ratio of global market portfolio
= Degree of integration
= Risk-free rate
Noesis Exed

Video: [Link]

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

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

Real Estate

Long-run:
( )= + ℎ

Finite horizon:
( )= + ℎ − %Δ

Capital Flows

In the long run

%Δ ⁄ = ( − )+( − )+( − )
+( − )+( − )

Currency
For a currency pair, ⁄ , if changes by % against , then changes by − 1 against .
Noesis Exed

VCV Matrix with Sample Statistics

With assets, required:

 variances
( )
 covariances

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

VCV Matrices from Multi-Factor Models

Return on ith asset:

= + +

Variance of the ith asset:

= +

Covariance between ith and jth asset:

With assets and factors, required:

 ( × ) factor sensitivities
( )
 factor covariances

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

Video: [Link]
Noesis Exed

Smoothed Returns
= (1 − ) + 0< <1

1+
( )= ( )
1−

= Current observed return = Previous observed return

= Current true return ( ) = True variance

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

ARCH Model

= + + , , ≥ 0, + <1
= +( + ) + ( − )

= Variance in period
= Unexpected component of return in period (mean = 0)
− = Shock to variance in period

Unconditional expected value of variance

1− −

ASSET ALLOCATION

Reading 5: Overview of Asset Allocation

ℎ= −

= +
= +

Reading 6: Principles of Asset Allocation

Mean-Variance Optimization

Utility
= ( ) − 0.005

= Investor’s utility for asset mix,

= Return for asset mix,
= Investor’s risk aversion coefficient
Noesis Exed

= Expected variance of return for asset mix (in %)

= −

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Surplus Optimization
= , − 0.005 ,

= Surplus objective function’s expected value for asset mix m

, = Expected surplus return for asset mix
ℎ − ℎ
, =

, = Surplus return volatility for asset mix

= Investor’s risk aversion

Goals-based Asset Allocation

Video: [Link]

Risk Parity
1
× , =
= Weight of asset
, = Covariance of asset with portfolio
= Number of assets
= Variance of portfolio

Risk Budgeting

Marginal Contribution to Risk

= ×

Actual Contribution to Risk

ℎ
= ×
Noesis Exed

−
=

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Reading 7: Asset Allocation with Real-World Constraints

After-tax Portfolio Optimization

= (1 − )

= (1 − )

=
1−

= Expected after-tax return

= Expected pre-tax return
= Expected tax rate
= Expected after-tax standard deviation
= Expected pre-tax standard deviation
= After-tax rebalancing range
= Pre-tax rebalancing range

DERIVATIVES AND CURRENCY MANAGEMENT

Reading 8: Option Strategies

Put-call parity

+ = +
(1 + )

Put-call-forward parity

+ = +
(1 + ) (1 + )
Noesis Exed

Synthetic long forward

−
− =+
(1 + )

Option premium = Time value + Intrinsic value

9
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Covered Calls Video: [Link]

=
− ( − , 0)
= − ( − , 0) + −
= − +
= −
= −

= − = 1−Δ
= − = −Gamma <0
= − = −Vega <0
ℎ = ℎ − ℎ = −Theta >0

Protective Puts Video: [Link]

= + ( − , 0)
= + ( − , 0) − −
=∞
= − +
= +

= + =1+Δ
= + = Gamma >0
= + = Vega >0
ℎ = ℎ + ℎ = Theta <0

Call Bull Spread Video: [Link]

= ( − , 0) − ( − , 0)
= ( − , 0) − ( − , 0) − ( − )
= − −( − )
= −
Noesis Exed

= + −

Put Bull Spread

= ( − , 0) − ( − , 0)
= ( − , 0) − ( − , 0) − ( − )
= −
= − + −
= + −

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Put Bear Spread Video: [Link]

= ( − , 0) − ( − , 0)
= ( − , 0) − ( − , 0) − ( − )
= − −( − )
= −
= − +

Call Bear Spread

= ( − , 0) − ( − , 0)
= ( − , 0) − ( − , 0) − ( − )
= −
= − + −
= + −

Straddle Video: [Link]

= ( − , 0) + ( − , 0)
= ( − , 0) + ( − , 0) − −
∞ >
=
− − − <
= +
= ±( + )

Collar Video: [Link]

Note: < <

=
+ ( − , 0) − ( − , 0)
= + ( − , 0) − ( − , 0) − − +
= − − +
Noesis Exed

=− + + −
= + −

For zero-cost collar, =

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Implied Volatility

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

252
=
21

Delta hedging

× Delta + × =0

Video: [Link]

Reading 9: Swaps, Forwards, and Futures Strategies

Managing Interest Rate Risk

Interest Rate Swaps

−
=

= Swap notional principal

= Target modified duration
= Modified duration of portfolio
= Modified duration of swap
= Market value of portfolio

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

Money Market Instrument

= × × 0.01%
360
Noesis Exed

= 100 −

Treasury Futures

= × ×
100

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Basis Point Value Hedge Ratio (BPVHR)

−
= ×

= × 0.01% ×
= × 0.01% ×
= × 0.01% ×
= ×
100
=

Hedging Currency Risk with Futures

ℎ
=

Hedging Equity Risk with Futures

−
=

= Target beta
= Portfolio beta
= Futures beta
= Portfolio market value
= Futures price

%ΔPortfolio value
=
%ΔIndex value

Note: Beta of cash = 0

Noesis Exed

Video: [Link]

13
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Variance Swap
−
=
2
= ( − )

×( − )
=
−
1+ ×

where:
−
= × (0, ) + × ( , )

Video: [Link]

Probability of a Change in Federal Funds Rate

−
ℎ =
ℎ

Fed funds futures price = 100 – Implied Fed funds rate

Reading 10: Currency Management An Introduction

= (1 + )(1 + )−1

= Domestic-currency return
= Foreign-currency return
= Percentage change in foreign currency against domestic currency
Noesis Exed

(currency quoted as DC/FC)

Video (Unhedged Returns): [Link]

= + +2 ,

For a foreign-risk free asset:

= (1 + )

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Minimum Variance Hedge Ratio

= + +

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

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

( , )
, = = ,
( )

FIXED INCOME PORTFOLIO MANAGEMENT

Reading 11: Overview of Fixed Income Portfolio Management

Expected fixed-income return

( )= +
+ ( ℎ ℎ )
+ ( ℎ )
+ ( ℎ ℎ )

=
( )

−
= ( ℎ )

Rolling yield = Yield income + Rolldown return

ℎ
1
=− ×Δ + × × (Δ )
2
ℎ

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

1
=− ×Δ + × × (Δ )
2

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

For foreign fixed income investments:

= (1 + )(1 + )−1

= +
+ ( ℎ ℎ )
+ ( ℎ )

= Percentage change in exchange rate (DC/FC)

⁄ − , ⁄
= ( ℎ )
, ⁄
⁄ − , ⁄
= (ℎ )
, ⁄

ℎ
= ( ⁄ )
ℎ

Using Leverage in the Bond Portfolio

Leveraged portfolio return

= + ( − )

= return on invested funds

= cost of borrowing
= borrowed funds
= value of portfolio’s equity

Video: [Link]

−
=
Noesis Exed

Repo

= × ×
360

Securities Lending

= −

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Reading 12: Liability-Driven and Index-Based Strategies

Cash Flow Matching

ℎ =
1+ ℎ

Video: [Link]

Macaulay Duration, Dispersion, and Convexity

= ×

Note: To annualize MacDur, divide by periodicity.

= ×( − )

1
= × ( + 1)
(1 + ℎ )

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

+ +
=
(1 + ℎ )

Video: [Link]
Noesis Exed

=
1+ ℎ

= ×

= × × 0.0001

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

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Number of bond futures contracts required to close the duration gap

−
=

where:

= −

Video (Derivatives overlay with futures): [Link]

Video (Contingent immunization): [Link]

Required Swap Notional to close the duration gap

−
=
⁄100

Note: Swap BPV quoted per $100 notional

Video: [Link]

Δ Δ Δ
× + × = ×

Reading 13: Yield Curve Strategies

ℎ
= −

ℎ
=− +2× −
Noesis Exed

1
%ΔPV = −( ×Δ )+ × × (Δ )
2
= %ΔPV ×

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Repo carry trade

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

Long futures position

= %Δ −

Video: [Link]

Receive-fixed interest rate swap

=( − ) + %Δ

Key Rate Duration

1 Δ
= ×
Δ

Reading 14: Fixed Income Active Management: Credit Strategies

= ×

= −
ℎ

- = −

- = −

, = −

Discount margin (DM) for floating-rate notes

( + )× ( + )× ( + )×
+
Noesis Exed

= + + ⋯+
+ + +
1+ 1+ 1+

= Quoted margin
= Discount margin
= Periodicity
= Tenor of FRN
= Market reference rate (assume constant)
= Face value

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

= × =

, = ×

= ×( × )

Δ
ℎ ( )=− ×

Impact of Yield Spreads on Portfolio Return

1
%Δ ≈− ×Δ + × × (Δ )
2

( )−( )
=
2 × (Δ )×
( )+( ) − 2( )
=
(Δ ) ×

Excess return on credit risky bond

( )≈( × )−( × )−( × × )

= Initial yield spread per annum

Δ = Change in spread over holding period
= Annualized expected probability of default
= Expected loss severity
× = expected annual credit loss
= Holding period (in years)

Video: [Link]
Noesis Exed

Floating-rate Note (FRN)

Effective rate duration

( )−( )
=
2 × (Δ )×

Effective spread duration

( )−( )
=
2 × (Δ )×

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

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

= Daily interest rate volatility × ×

ℎ

Credit Default Swap (CDS)

For a $1 notional:
≈ 1 + [( − )× ]

If fixed coupon > CDS Spread, protection buyer receives upfront premium from protection
seller
=( − )×

If fixed coupon < CDS Spread, protection buyer pays upfront premium to protection seller
=( − )×

%Δ ≈ −Δ( )×

Δ ≈ × %Δ

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)

=
Noesis Exed

= Weight of stock in portfolio

1
=

=√

= −

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Reading 17: Active Equity Investing: Strategies

Growth at a Reasonable Price (GARP)

⁄
=
( %)

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

Returns-based Style Analysis

= + +

= fund return within period ending at time

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

Reading 18: Active Equity Investing: Portfolio Construction

Active Return

= Δ

= return on security
Δ = active weight = −
Noesis Exed

= − × +( + )

= sensitivity of portfolio ( ) to rewarded factor ( )

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

22
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

( ℎ , )
=
ℎ

Fundamental Law of Active Management

( )= ×√ × ×

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

1
ℎ = , − ,
2

= number of securities in either portfolio or benchmark

∑ ( )
, =
−1

= − × +

− × =

= Variance attributed to idiosyncratic risk

Absolute Risk Attribution Video: [Link]

Noesis Exed

= =

= Portfolio variance
= Contribution of asset to portfolio variance
= weight of asset in portfolio
= Covariance of returns between asset and
= Covariance of returns between asset and portfolio

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Relative Risk Attribution

= ( − )( − )

= ( − )( − ) =( − )

= Variance of portfolio’s active return

= Contribution of asset to portfolio active variance
= benchmark weight in asset
= Covariance of relative returns between asset and
= Covariance of returns between asset and portfolio

1
= × − ( − 1) − ( × )
2

= Compounded/geometric return
= Arithmetic/periodic return
= Leverage factor = ⁄
= Cost of funding leverage

= +| ℎ |

= −| ℎ |
Noesis Exed

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

ALTERNATIVE INVESTMENTS FOR PORTFOLIO MANAGEMENT

Reading 19: Hedge Fund Strategies

Equity market neutral

× + × =0

where =

Video: [Link]

Merger arbitrage
For a stock-for-stock deal:
Cash flow
Buy shares of target company − ×
Short ( × ℎ ) shares of acquiring company + × ×

If deal is successful,
= × × − × = Exchange ratio

Convertible Arbitrage

= ×

Conditional Risk Factor Model

= + , ( 1) + , ( 2) + ⋯ + , ( ) +
+ , ( 1) + , ( 2) + ⋯ + , ( ) + ,
Noesis Exed

= Return of hedge fund i in period t

, ( ) = Exposure to risk factor for hedge fund in period (normal times)
, ( ) = Incremental exposure to risk factor for hedge fund in period
(financial crisis periods)
1
=
0
= intercept for hedge fund
, = random error with mean zero and standard deviation of

25
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Reading 20: Asset Allocation to Alternative Investments

, − × ,
, =
1−

= serial correlation of time series

Liquidity Planning
= ×( − )

= ×[ × (1 + )]

= × (1 + ) + −

= Capital contribution in year = Rate of contribution in year

= Committed capital = Paid in capital in year
= Rate of distribution in year = Growth rate
= Net asset value in year

PRIVATE WEALTH MANAGEMENT

Reading 22: Topics in Wealth Management

After-Tax Holding Period Return,

( − )+ −
=

= −

=
Noesis Exed

= ×

Annualized after-tax holding period return

⁄
= [(1 + )(1 + ) … (1 + )] −1

26
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Modified Dietz method

= −
( − )
+∑

= Cumulative tax liability for all transactions during the month

= Initial value at the beginning of the month
= Cash flow on day
= Number of calendar days in a month
− = Number of days from cash flow to end of month

After-tax Post Liquidation return

⁄
= (1 + )(1 + ) … (1 + ) 1− −1

= × ×
( %)
=( − )×

Video: [Link]

Taxable Account
= [1 + (1 − )]

Tax-Deferred Accounts (TDA)

= (1 + ) (1 − )

Tax-Exempt Accounts
= (1 + )

= ordinary income tax rate

= Tax rate at withdrawal
Noesis Exed

Potential Capital Gain Exposure (PCGE)

27
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Gifts versus Bequests

Tax-Free Gift
1+ 1−
= =
[1 + (1 − )] (1 − )

Taxable Gift (Recipient pays gift tax)

1+ 1− (1 − )
= =
[1 + (1 − )] (1 − )

= pre-tax return of recipient’s portfolio

= pre-tax return of donor’s portfolio/estate
= income tax rate on recipient’s return = income tax rate on donor’s return
= Tax rate on gift = Tax rate on estate
= Donor’s life expectancy
= Ordinary income tax rate

Mortgage Financing
= ×

Reading 23: Risk Management for Individuals

( ) (1 + )
, =
1+ +

( ) = probability of survival in year

= wages in year − 1
= growth rate of wages in year
= risk free rate
= volatility of occupational income
Noesis Exed

ℎ= −

ℎ= ℎ+ −

= +

= −

28
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

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

∗
1+
, = −1
1+

Video: [Link]

Net Payment Cost Index & Surrender Cost Index

= −
1+

ℎ
= −

Assumptions:

 Premium is paid at the beginning of the period

 Dividend is received at the end of the period
 Cash value (for surrender cost index only)

Video (Net payment cost index): [Link]

Video (Surrender cost index): [Link]

Human Life Value Method

After-tax/Non-taxable salary of deceased xxx

Plus: After-tax/Non-taxable employee benefits that
xxx
family will no longer receive
Less: Expenses attributable to the deceased that will
(xxx)
cease to exist
After-tax income to be generated from insurance yyy
Pre-tax income from insurance to replace income =
(1 − )
Noesis Exed

In the financial calculator, set MODE to BGN (if case states that insurance payout is based on
annuity due).

= Number of years to retirement (for deceased)

1+
⁄ = −1
1+ ℎ
=0
[CPT] [PV]  Life insurance needed

Additional life insurance required = Life insurance needed – Existing life insurance

29
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Needs Analysis Method

Life Insurance Needed = Cash Needs + Capital Needs – Capital Available

Financial Needs = Cash Needs + Capital Needs

Capital Needs = PV of survivors’ expenses – PV of survivor’s income (Human capital)

PORTFOLIO MANAGEMENT FOR INSTITUTIONAL INVESTORS

Reading 24: Portfolio Management for Institutional Investors

Constant Growth rule:

= × (1 + )

Market Value rule:

= ×

Hybrid rule:
ℎ
= × + (1 − ) ×

Bank and Insurance

Duration of equity capital,

Δ
= − −1
Δ

⁄ = ⁄ + −1 ⁄ −2 −1 ⁄ ⁄

=
Noesis Exed

= Duration of assets
= Duration of liabilities
= Effective yield on liabilities
= Effective yield on assets
⁄ = Variance of change in value of equity capital

⁄ = Variance of change in value of assets

⁄ = Variance of change in value of liabilities
= Correlation between percentage value changes of assets and liabilities

30
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

TRADING, PERFORMANCE EVALUATION, AND MANAGER SELECTION

Reading 25: Trade Strategy and Execution

Implementation Shortfall
= −

=( − )
= − −
= ×

= + +

= −

= − ( − )

= + + +

= −

= −

= Current price
= Decision price (Benchmark price)
= Arrival price
= Total order of shares ( > 0 for buy order; < 0 for sell order)
= Number of shares executed in th trade
= Transaction price of th trade
Noesis Exed

∑ = Total number of shares executed

Video (Buy order): [Link]

Video (Sell order): [Link]

31
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Trade Evaluation

+1
= = Average execution price
−1

−
( )= × × 10,000

−
( )= × × 10,000

−
( )= × × 10,000

−
( )= × × 10,000

( )= ( )− × ( )

where:
−
( )= × × 10,000

( )= ( )− ( )

Reading 26: Portfolio Performance Evaluation

ℎ = −

−
=
1+

Attribution based on Factor Models

Noesis Exed

= +

− = , − , × +

where:
, = Sensitivity of the portfolio to the given factor
, = Sensitivity of the benchmark to the given factor
= Factor return

32
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Micro and Macro Return Attribution

− = + +

where:
= Weight of asset in portfolio
= Weight of asset in benchmark
= Return of asset in portfolio
= Return of asset in benchmark

Video: [Link]

Brinson-Fachler Model

Allocation effect: =( − )( − )

Selection effect: = ( − )

Interaction effect: =( − )( − )

Brinson-Hood-Beebower Model (BHB)

Allocation effect: =( − )

Selection effect: = ( − )

Interaction effect: =( − )( − )

Decomposing Portfolio Returns

Noesis Exed

= + +

where:
= Portfolio return
= Market index return
= Benchmark return
= − = Style return (Misfit active return)
= − = Active return (True active return)

33
 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Performance Appraisal

−
ℎ =

−
=

−
=

( )=

where:
= Standard error of regression (from factor model)

= −

= − + −

−
=

where:
= investor’s minimum acceptable return/target return

1
= min( − , 0)

=
Noesis Exed

= ≥0

= <0

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Maximum Drawdown

( , ) − ( , ∗)
= min ,0
( , ∗)

where:
( , ) = portfolio value of manager at time
( , ∗ ) = peak portfolio value of manager
> ∗

Video: [Link]

Reading 35: Overview of the Global Investment Performance Standards

Time-weighted return
= 1+ , × 1+ , × …× 1 + , −1

, through , = Sub-period returns

Modified Dietz method

− −
=
+∑ ( × )

Video: [Link]

Modified IRR method

= [ × (1 + ) ]+ (1 + )

= Proportion of period (in days) that each cash flow has been in the portfolio
−
Noesis Exed

=
= Total number of calendar days in the period
= Number of calendar days from the beginning of the period to the time cash flow
occurs

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 CFA Level 3 (2023) Formula Sheet – Noesis Exed

Composite Time-Weighted Return

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

,
= ×
∑ ,

= Composite return
= Return of an individual portfolio
, = Beginning value of portfolio
∑ , = Total beginning fair value of all individual portfolios in the composite

Use a method that reflects both beginning-of-period values and external cash flows

= ×
∑

= Beginning value of portfolio + Weighted external cash flows

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

Aggregate Return method

− −
=
+∑ ( × )

= Ending value of composite = Beginning value of composite

= =
ℎ

( × )= =
ℎ
Noesis Exed

Equal-weighted standard deviation Asset-weighted standard deviation

∑ ( − ̅)
=
, = × − ̅

̅ = asset-weighted mean return

= return for portfolio
=∑ ×
,
̅ = equal-weighted mean = weight of portfolio =
,

= number of portfolios in composite

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