CFA Level 1 - 101 Must Knows / Strategies Review of Key Quizzes & Correct Answers.
Quiz____?Addition Rule of Probability - Answer✓✓
ADDITION: P(A or B) = P(A) + P(B) - P(AB)
Quiz____?Roy's Safety First Criterion - Answer✓✓ Safety First Ratio = (E(R) - Rₜ) / σ Larger ratio is better If (Rₜ) is risk free rate, then it becomes Sharpe Ratio Quiz____?Sharpe Ratio - Answer✓✓ Sharpe Ratio = (E(R) - RFR) / σ Larger ratio is better Page 1 of 113 1 / 4
If (Rt) is higher than RFR, then it becomes Safety First Ratio Quiz____?Central Limit Theorem - Answer✓✓ If we take samples of a population, with a large enough sample size, the
distribution of all sample means is normal with:
- A mean equal to the population mean
- A variance equal to the population variance divided by sample size (σ² /
n) Quiz____?Standard Error of Sample Mean - Answer✓✓ σ / n^½ Quiz____?Binomial Probability - Answer✓✓ One of two possible outcomes (i.e. success/failure) Possible outcomes can be demonstrated in binomial tree
Use "nCr" on calculator to solve:
nCr = P(success)^x * P(failure)^(n-x) Page 2 of 113 2 / 4
Quiz____?P - Value - Answer✓✓ Based on a calculated test statistic, rather than a significance level (which is chosen) p-value = smallest significance level at which an analyst can reject the null hypothesis one-tailed test - "less than or equal to" two-tailed test - "equal to" Quiz____?Cumulative Distribution Function - Answer✓✓ Gives the probability that a random variable will have an outcome less than or equal to a specific value (represented by F(x)) F(x) = probability of an outcome less than or equal to x Standard normal table (z) shows cumulative probabilities Quiz____?Effective Annual Yield - Answer✓✓ EAY = (1 + (i/n))^n - 1 Page 3 of 113 3 / 4
Stated Rate = (EAY^(1/n) - 1) * n Quiz____?Continuous Compounding - Answer✓✓ ln(EAY) = continuously compounded stated rate e^(continuously compounded stated rate) = EAY Quiz____?Type I Error - Answer✓✓ Incorrectly rejecting a true null hypothesis (convicting an innocent person is Type I) Quiz____?Type II Error - Answer✓✓ Failure to reject a false null hypothesis (failure to convict a guilty person is Type II) Quiz____?Significance Level / Power of a Test - Page 4 of 113
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