Wednesday, August 29, 2012

9 important formulas to pass the CFA Chartered Financial Analyst Examination

The CFA "Chartered Financial Analyst" is one of the toughest examination about finance and investment, only few people manage to pass  the 3 levels of the CFA at the first attempt.
Each of the 3 CFA level requires you to study at least 250 hours, and dozen of formulas that you will have to learn but here are 10 important formulas  that you must learn and understand to pass the CFA Chartered Financial Analyst.

CFA formulas to remember

Formulas CFA 1. Pricing Call and Put option with Black-Scholes model
Price of Call option=S*N(d1)-Xe^(-rT)N(d2)
Price of Put Option=Xe^(-rT)N(-d2)-SN(-d1)
S: Price of underlying stock
N(): Area under normal distribution
X: exercise price of the option
r: Risk free rate
T: time until expiration of the option

Formulas CFA  2.  CAPM: Capital asset pricing model
    ra=  rf+  β (rm-rf)
ra: expected return of the security
rf: risk free rate

β: Beta of the stock
rm: market return (expected)

Formulas CFA  3. WACC: Weighted Average Cost of Capital:

WACC= We*Ke + Wps*Kps + Wd*Kd*(1-T)

We: weight of equity
Wps: weight of preferred stock
Wd: weight of debt
Ke: cost of equity ( you guess for Kps and Kd)
T: corporate tax rate

 Formulas CFA 4. Free cash flow to firm (FCFF)


OCF:operating cash flow
EXP: expenses
T: Taxes
ΔNWC: change in net working capital
ΔInvestment: change in investments

Formulas CFA 5. Put-Call parity

c + PV(x) = p + s 
c = current price for European call option  (we wrote c not C :american call option)
PV(x) =Present value of Strike price discounted at the risk free rate
p = the current price for European put option
s = current price of the underlying asset

Formulas CFA 6. Portfolio variance of a 2 assets portfolio:

Port. Variance = w2A2(RA) + w2B2(RB) + 2*(wA)*(wB)*Cov(RA, RB)

wa: weight of asset a
σ2(RA): variance of asset a
Cov(RA, RB) covariance of asset a and b

Formulas CFA 7.ROE (Return on equity) Dupont analysis:

ROE = (net income / sales) * (sales / assets) * (assets / equity)
ROE = (EBIT / sales * sales / total assets - interest / total assets] * total assets / equity * [1 - tax / net before tax]

So we get:

ROE = operating profit margin * asset turnover - interest expense rate * equity multiplier * tax retention rate
Formulas CFA  8. Free Cash Flow to equity

FCFE = FCFF - [Int x (1-tax rate)] + Net Borrowing
Cash available to shareholders

Formulas CFA 9.EAR Effective Annual Rate:

Effective annual rate (EAR) = (1 + Periodic interest rate)m - 1
m = number of compounding periods in 1 year
periodic interest rate = interest rate divided by number of periods.


Alex Bandit said...

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