FinQuiz Formula Sheet CFA Level III 2016

Reading 14: Linking Pension Liabilities to 5.   Shrinkage estimator of Cov matrix = (Wt 16.   Expected Capital gains R = Expected
Assets of historical Cov × Historical Cov) + (Wt nominal earnings grate + Expected
of Target Cov × Target Cov) repricing R
$%
1.   Value of liability = 𝑉" = ) &'( %
%
6.   Vol in Period t =σ2t = βσ2t-1 + (1 – β) ε2t 17.   Asset’s expected return E (Ri) = Rf +
where, Bt = Benefit payments at time t
(RP) 1 + (RP) 2 + …+ (RP) K
CFt 7.   Multifactor Model: R on Asset i = Ri = ai +
2.   Value of an asset = VB = ∑
t (1 + rt ) t bi1F1 + bi2F2 + … + biK FK + εi 18.   Expected bond R [E (Rb)] = Real Rf + Inf
premium + Default RP + Illiquidity P +
8.   Value of asset at time t0 Maturity P+ Tax P
3.   Intrinsic value of Future wage liability =
= 12  3)  )456  )
=
B ((1+ g)s −1) × ((1+ r)d−s −1) )>& &'7489:;<)  (3)6 %
19.   Inf P = AvgInf rate expected over the
VL−FW = ×
r−g (1+ r)d maturity of the debt + P (or discount) for
9.   Expected RoR on Equity =
?@A  BCD  EFGDC  GH  H@IC  J  (&'LM  N  DGHC)
the prob attached to higher Inf than
where, s = yrs till retirement + LT g rate expected (or greater disinflation)
PQDDCRH  EFGDC  BD@SC
d = yrs till demise and subsequent = Div Yield + Capital Gains Yield
termination of the obligation 20.   Inf P = Yield of conventional Govt. bonds
10.   Nominal GDP = Real g rate in GDP + (at a given maturity) – Yield on Inf-
Reading 15: Capital Market Expectations Expected long-run Inf rate indexed bonds of the same maturity

1.   Precision of the estimate of the population 11.   Earnings g rate = Nominal GDP g rate + 21.   Default RP = Expected default loss in yield
mean ≈ 1 / no  of  obvs Excess Corp g (for the index companies) terms + P for the non-diversifiable risk of
default
7
2.   Multiple-regression analysis: A = β0 + β1 B 12.   Expected RoR on Equity ≈ - ∆S + i + g
T
+ β2 C + ε 22.   Maturity P = Interest rate on longer-
+ ∆PE
maturity, liquid Treasury debt - Interest
-∆S = Positive repurchase yield
3.   Time series analysis: A = β0 + β1 Lagged rate on short-term Treasury debt
+∆S = Negative repurchase yield
values of A + β2 Lagged values of B + β2 23.   Equity RP = Expected ROE (e.g. expected
∆PE = Expected Repricing Return
Lagged values of C + ε return on the S&P 500) – YTM on a long-
13.   Labor supply g = Pop g rate + Labor force
term Govt. bond (e.g. 10-year U.S.
participation g rate
4.   Shrinkage Estimator = (Wt of historical Treasury bond R)
estimate × Historical parameter estimate) + 14.   Expected income R = D/P - ∆S
(Wt of Target parameter estimate × Target 24.   Expected ROE using Bond-yield-plus-RP
parameter estimate) method = YTM on a LT Govt bond +
15.   Expected nominal earnings g R = i + g
Equity RP
 FinQuiz Formula Sheet CFA Level III 2016

25.   Expected ROA E (Ri) = Domestic Rf R + ⎛ σ 1 × ρ (1, m) ⎞ 40.   GDP g = α + β1Consumer spending g +
(βi) × [Expected R on the world market 31.   Beta of asset 1 = ⎜⎜ ⎟⎟ β2Investment g
portfolio – Domestic Rf rate of R] ⎝ σ m ⎠
41.   Consumer spending g = α + β1Lagged
Where,βi = The asset’s sensitivity to R on the ⎛ σ 2 × ρ (2, m) ⎞ consumer income g + β2Interest rate
world mktportf = Cov (Ri, RM) / Var (RM) 32.   Beta of asset 2 = ⎜⎜ ⎟⎟
⎝ σ m ⎠ 42.   Investment g = α + β1Lagged GDP g+
26.   Asset class RPi= Sharpe ratio of the world β2Interest rate
market portfolio × Asset’s own volatility 33.   GDP (using expenditure approach) =
(σi) × Asset class’s correlation with the Consumption + Invst + Δ in Inventories + 43.   Consumer Income g = Consumer spending
world mktportf (ρi,M) Govt spending + (Expo- Impo) growth lagged one period
RPi = (RPM / σM) × σi × ρi,M
34.   Output Gap = Potential value of GDP – Reading 16: Equity Market Valuation
Where, Sharpe Ratio of the world market Actual value of GDP
portfolio = Expected excess R / S.D of the 1.   Cobb-Douglas Production Function Y =
world mktportfà represents systematic or non- 35.   Neutral Level of Interest Rate = Target Inf A× Kα× Lβ
diversifiable risk = RPM / σM Rate + Eco g
Where,Y = Total real economic output
27.   RP for a completely segmented market 36.   Taylor rule equation: Roptimal =Rneutral + [0.5 A = Total factor productivity (TFP)
(RPi) = Asset’s own volatility (σi) × Sharpe × (GDPgforecast – GDPgtrend)] K = capital stock
ratio of the world mktportf + [0.5 × (Iforecast – Itarget)] α = Output elasticity of K
L = Labor input
28.   RP of the asset class, assuming partial 37.   Trend g in GDP = g from labor inputs + g β = Output elasticity of L
segmentation = (Degree of integration × from Δ in labor productivity
RP under perfectly integrated markets) + 2.   Cobb-Douglas Production Function Y
({1 - Degree of integration} × RP under 38.   g from labor inputs = g in potential labor (assuming constant R to Scale) = ln (Y) =
completely segmented markets) force size + g in actual labor force ln (A) + αln (K) + (1 – α) ln (L)
participation Or
29.   Illiquidity P = Required RoR on an illiquid ∆V ∆X ∆[ ∆L
  ≈   +α +   1 −  α
V X [ L
asset at which its Sharpe ratio = mkt’s 39.   g from Δ in labor productivity = g from
Sharpe ratio – ICAPM required RoR capital inputs + TFP g* 3.   Solow Residual = %∆TFP = %∆Y – α
•   TFP g = g associated with increased (%∆K) – (1 – α) %∆L
30.   Cov b/w any two assets = Asset 1 beta × efficiency in using capital inputs.
Asset 2 beta × Var of the mkt
 FinQuiz Formula Sheet CFA Level III 2016

4.   H-Model: Value per share at time 0 = 9.   Yardeni estimated fair value of P/E ratio = Reading 17: Asset Allocation
?J
× 1+ P0 1
?@ES^QRH  DGHC_LM  EQEHG@R`aC  ?@A  N  DGHC   = 1.   Req R = [(1 + Spending rate) × (1 +
 LT  sustainable  Div  g  rate + E1 yB − d × LTEG Expected Inf %) × (1 + Cost of earning
 
mQBCD  R^DIGa  N  BCD@^n
 × Invst R)] – 1
o
  ST  higher  Div  g  rate − 10.   Fair value of equity mkt under Yardeni 2.   Risk-adj Expected R = Expected return for
LT  sustainable  Div  g  rate E1 mix ‘m’* – (0.005 × Investor’s risk
Model (P0) = P0 = aversion × Var of R for mix ‘m’*)
yB − d × LTEG
5.   Gordon g Div discount model: Value per 3.   Risk Penalty = 0.005 × Investor’s risk
?s × &'N 11.   Discount/weighting factor (d) = aversion × Var of R for mix ‘m’*
share at time 0 =
D_  N  
E1 *expressed as % rather than as
yB − decimals
6.   Forward justified P/E = P0
d=
tRHD@RE@S  AGaQC  
LTEG 4.   Safety First Ratio =
VD  GFCGn  CuBCSHCn  vGDR@RNE   vuBCSHCn  z^DH|^a@^  {_  MFDCEF^an  aCACa
z^DH|^a@^  m.?.
12.   10-year Moving Average Price/Earnings [P
7.   Fed Model:
/ 10-year MA (E)] = 5.   Include asset in the portfolio when:
wxn  yBCDGH@RN  vGDR@RNE   v&
=Long-term US {CGa   ^D  tR|_Gn}QEHCn∗ m&T  €JJ  T(496  •<‚6ƒ
Œ •Ž•• _•‘
>
tRnCu  LCACa   zJ
„^A@RN  XAN  ^|  BDCSCn@RN  &J  …DE  ^|  {CGa  ^D  tR|  Gn}  vGDR@RNE ’Ž••
Treasury securities Œ •Ž•• _•‘
𝐶𝑜𝑟𝑟 𝑅<6˜  , 𝑅š
’Ž••
*The stock index and reported earnings are
E1 adjusted for Inflation using the CPI 6.   Contribution of Currency risk =
8.   Yardeni Model: = = yB − d × LTEG
P0 Vol  of  asset  R  in  domestic  ¢  –  Vol  of  asset  R  in  local  ¢
Where Vol = volatility
Where,E1/P0=Justified (forward) earnings yield 13.   Real Stock Price Index t = (Nominal SPIt ×
on equities CPI base yr) / CPI t 7.   Funding Ratio =
„GD¢CH  †GaQC  ^|  zCRE@^R  XEECHE
yB=Moody’s A-rated corporate bond yield
14.   Real Earnings t = (Nominal Earnings t × zDCECRH  †GaQC  ^|  zCRE@^R  L@G`@a@H@CE
LTEG= Consensus 5-yr earnings g forecast for
the S&P 500 CPI base year) / CPI t+1 8.   𝑈5 ¤"¥
= 𝐸 𝑆𝑅5 − 0.005𝑅¤ 𝜎 o 𝑆𝑅5  
¤"¥
d=Discount or Weighting factor that represents •   𝑈5 = Surplus objective function’s
„†^|  nC`H'„†  ^|  C‡Q@H…
the weight assigned by the market to the 15.   Tobin’s q = expected value for a particular asset
{CBaGSCICRH  S^EH  ^|  GEECHE
earnings projections v‡Q@H…  „[H  PGB mix m, for a particular investor with
Equity q = =
ˆCH  ‰^DHF the specified risk aversion.
zD@SC  BCD  EFGDC  ×  ˆ^  ^|  mFGDCE  y/m
{CBaGSICRH  S^EH  ^|  GEECHE_„†  ^|  a@G`@a@H@CE
 FinQuiz Formula Sheet CFA Level III 2016

•   E (SRm)= Expected surplus return for 6.   CF at settlement = Original contract size × 15.   Long Straddle = Long atm put opt (with
asset mix ‘m’ = (All-in-fwd rate for new, offsetting fwd delta of -0.5) + Long atm call opt (with
∆  @R  GEECH  AGaQC_∆  @R  a@G`@a@H…  AGaQC position – Original fwd rate) delta of +0.5)
tR@H@Ga  XEECH  †GaQC
•   σ2 (SRm) =Varof the surplus R for the
7.   Hedge Ratio = 16.   Short Straddle = Short ATM put opt (with
asset mix m in %. ˆ^I@RGa  †GaQC  ^|  nCD@AGH@ACE  S^RHDGSH delta of -0.5) + Short ATM call opt (with
•   RA=Risk-aversion level „†  ^|  HFC  FCnNCn  GEECH
delta of +0.5)
9.   Human Capital (t)
ATM = at the money
M vuBCSHCn  vGDR@RNE  GH  GNC  } 8.   RDC =(1 + RFC)(1 + RFX)–1
= }>H opt = option
&'n@ES^QRH  DGHC «¬-
t = current age T = life expectancy
9.   RDC (for multiple foreign assets) =
17.   Long Strangle: Long OTM put option +
n
Reading 18: Currency Management: An Long OTM call opt
Introduction
∑ω (1+ R ) (1+ R ) −1
i FC,i FX,i
OTM = out of the money
i=1

1.   Bid Fwd rate = Bid Spot exchange (X) rate 10.   Total risk of DC returns =
+
®@n  wxn  B^@RHE 18.   Long Risk reversal = Long Call opt +
&J,JJJ
o 𝜎 o 𝑅21 + 𝜎 o 𝑅2¸ + Short Put opt
= 𝜎 𝑅71 ≈
2𝜎 𝑅21 𝜎 𝑅2¸ 𝜌 𝑅21 , 𝑅2¸
2.   Offer Fwd rate = Offer Spot X rate + 19.   Short Risk reversal = Long Put opt + Short
y||CD  wxnn  B^@RHE
&J,JJJ 11.   % Δ in spot X rate (%∆SH/L) = Interest rate Call opt
on high-yield currency (iH) – Interest rate
EB^H  ¯  DGHC_(
°±²  ³´-µ
) on low-yield currency (iL) 20.   Short seagull position = Long protective
¶s,sss
3.   FwdPrem/Disc % = –1 (ATM) put + Short deep OTM Call opt +
EB^H  ¯  DGHC
w»/¼ _m»/¼ Short deep OTM Put opt
12.   Forward Rate Bias = =
4.   To convert spot rate into a forward quote m»/¼
-
when points are represented as %, @» _@¼
½¾s
21.   Long seagull position = Short ATM call +
-
Spot X rate × (1 + % prem) &'@¼
½¾s
Long deep-OTM Call opt + Long deep-
Spot X rate × (1 - % disct) OTM Put opt
13.   Net delta of the combined position =
5.   Mark-to-MV on dealer’s position = Option delta + Delta hedge 22.   Hedge ratio =
mCHHaCICRH  nG…  Pw zD@RS@BGa  |GSC  AGaQC  ^|  HFC  nCD@AGH@ACE  
- S^RHDGSH  QECn  GE  G  FCnNC  
&'?@ESH  DGHC∗  
· 14.   Size of Delta hedge (that would set net zD@RS@BGa  |GSC    ^|  HFC  FCnNCn  GEECH

delta of the overall position to 0) =

Option’s delta × Nominal size of the
contract
 FinQuiz Formula Sheet CFA Level III 2016

23.   Min or Optimal hedge ratio = ρ (RDC; RFX) b)   Contribution of each period’s CFs to 11.   Spread D of a Portfolio = Market wgtdavg
! S.D (RDC ) $ portfolio D = D of each period × Wght of of the sector spread D of the individual
×# & index CFs in specific period securities
" S.D (RFX ) %
c)   Benchmark’s PVD = 12.   Net safety rate of return (Cushion Spread)
Reading 19: Market Indexes and Benchmarks P^RH  ^|  CGSF  BCD@^n’E  PwE  H^  B^DH|^a@^  ?   = Immunized Rate – Min acceptable R
EQI  ^|  Gaa  HFC  BCD@^nE’  ?  S^RH

1.   Periodic R (Factor model based) = Rp = ap 13.   Dollar safety margin = Current bond
+ b1F1 + b2F2+…+ bKFK+ εp 2.   Active R = Portfolio’s R – B Index’s R
portfolio value - PV of the required
terminal value at new interest rate
2.   For one factor model Rp = ap + βpRI + εp 3.   Tracking Risk = S.D of Active R =
¶
Where,RI = periodic R on mktindex XSH@AC  {_„CGR  XSH@AC  { À À 14.   Economic Surplus = MV of assets – PV of
ap = “zero factor” R_&
liabilities
βp = beta = sensitivity
4.   Semi-annual Total R =
εp = residual return ¶ 15.   Confidence Interval =Target Return +/- (k)
M^HGa  wQHQDC  ?^aaGDE   Ž × (S.D of Target R)
−  1
wQaa  zD@SC  ^|  HFC  ®^Rn
3.   MV of stock = No of Shares Outstanding × where, k = number of S.D around the expected
Current Stock Mkt Price target R
5.   Dollar D = D × Portfolio Value × 0.01

4.   Stock wgt(float-weighted index) = Mkt- Reading 22: Fixed-Income Portfolio

6.   Portfolio’s Dollar D = Sum of dollar D of
cap wght × Free-float adjustment factor Management – Part II
securities in portfolio
5.   Price-weighted index (PWI) = yD@N@RGa  ?^aaGD  ? 1.   D of Equity =
(P1+P2+…+Pn) /n 7.   Rebalancing Ratio = ?  ^|  XEECHE  ×XEECHE _ ?  ^|  L@G`  ×L@G`
ˆCx  ?^aaGD  ?
v‡Q@H…  

Reading 20: Fixed-Income Portfolio 8.   Cash required for rebalancing =

Management – Part I (Rebalancing ratio – 1) × (total new MV of 2.   Rp = Portfolio RoR =
zD^|@H  ^R  `^DD^xCn  |QRnE  '  
portfolio) zD^|@H  ^R  v‡Q@H…  
=
1.   Steps to calculate PVdistribution (PVD) of XI^QRH  ^|  v‡Q@H…

CFs: 9.   Controlling Position = Target Dollar D – = [B ×(rF – k) + E× rF] / E

$
a)   Wght of Index’s total MV attributable to Current Dollar D =rF + [ × (rF – k)]
Œ
CFs in each period =
z†  ^|  PwE  |D^I  ®  @RnCu  |^D  EBCS@|@S  BCD@^n   10.   Contribution of bond/sector to the portfolio 3.   Dollar interest =
z†  ^|  M^HGa  PwE  |D^I  ®   „†  ^|  `^Rn  ^D  ECSH^D  @R  HFC  z^DH|^a@^   XI^QRH  `^DD^xCn  ×  {CB^  DGHC  ×  {CB^  HCDI
where B = Benchmark D= ×
M^HGa  z^DH|^a@^  †GaQC ÁÂJ
Effective D of bond or sector
 FinQuiz Formula Sheet CFA Level III 2016

?É _zÉ
13.   Hedge ratio = × Conversion
?^aaGD  ?  ^|  yan  ®^Rn ?Ê·Ë zÊ·Ë
4.   New bond MV = ×100 20.   Payout to Opt Buyer or Opt value = MAX
?QDGH@^R  ^|  ˆCx  ®^Rn factor for CTD Issue × Yield Beta
[(Strike value – Value at maturity), 0]
5.   New bond Par value = 14.   Interest rate Swap (fixed-rate
?^aaGD  ?  ^|  yan  ®^Rn 21.   Credit spread call Opt value/Payoff = Max
 ×100 receiver/floating rate payer) = Long a
ˆCx  ?^aaGD  ?  BCD  ®^Rn [(Spread at the opt maturity – Strike
fixed-rate bond + Short a floating-rate
spread) × NP × Risk factor, 0]
ˆ^  ^|  ^`E  `Ca^x  HFC  MGDNCH  {  
bond
6.   Shortfall risk =
M^HGa  ˆ^  ^|  y`ECDAGH@^RE
22.   Credit Forward Payoff = (Credit spread at
15.   $ D of a swap for a fixed-rate receiver
the forward contract at maturity –
7.   Target dollar D = Current dollar D without (floating rate payer) = $ D of a fixed-rate
Contracted credit spread) × NP× Risk
futures + Dollar D of futures position bond − $ D of a floating-rate bond
factor
OR
8.   No of Futures Contracts = $ D of a swap for a fixed-rate receiver ≈ $
MGDNCH  $  ?_PQDDCRH  $  ?  x@HF^QH  |QHQDCE 23.   Change in Foreign bond Value (In terms of
D of a fixed-rate bond
$  ?  BCD  |QHQDCE  S^RHDGSH change in foreign yield only) = Duration ×
∆ Foreign yield × 100
16.   Interest Rate Swap (fixed-rate
9.   Dollar duration of futures contract =
payer/floating rate receiver) = Long a
$  D  of  Cheapest  to 24.   Change in Foreign bond Value (when
×CF  for  CTD  Issue floating-rate bond + short a fixed-rate bond
 Deliver  issue domestic rates change) = Duration × Yield
10.   Hedge Ratio = beta × ∆ Domestic yield × 100
wGSH^D  CuB^EQDC  ^|  HFC   17.   $ D of a swap for a fixed-rate payer = $ D
`^Rn   B^DH|^a@^ H^  `C  FCnNCn
of a floating-rate bond − $ D of a fixed-
wGSH^D  CuB^EQDC  ^|  ÈCnN@RN  @REHDQICRH   25.   ∆ Yield Foreign = α + Yield beta or country
rate bond
or beta (β) (∆ yield Domestic) + ε
OR
Hedge Ratio =
?QDGH@^R  ^|  HFC  `^Rn  H^  `C  FCnNCn  × $ D of a swap for a fixed-rate payer ≈ −$ D
26.   Estimated % ∆ Value Foreign = Yield beta ×
zD@SC  ^|  HFC  `^Rn  H^  `C  FCnNCn
× of a fixed-rate bond
?QDGH@^R  ^|  HFC  PM?  `^Rn  × ∆ Domestic yield
zD@SC  ^|  HFC  PM?
(Conversion factor for CTD bond) 18.   $ D of a portfolio that includes a swap = $
27.   D Cont of Domestic Bond = Wght of
D of assets − $ D of liabilities + $ D of a
domestic bond in Portfolio × D of
swap position
Domestic Bond
11.   Basis = Cash (spot) price – Futures price
19.   D for an Option = Delta of Option × D of
28.   D Cont of Foreign Bond = Wght of foreign
12.   Yield on bond to be hedged = a + (Yield Underlying Instrument × (Price of
bond in Portfolio × D of Foreign Bond ×
Beta × yield on CTD Issue) + Error underlying) / (price of Opt instrument)
Country beta
where Opt = Option