CFA Level 1 Formulas – Complete Exam Study Guide 2026/2027 with Verified Answers | Newest Version. A+

CFA Level 1 Formulas- -Complete Exam Study
Guide with Verified Answers | Guaranteed A+

Addition Rule of Probability ------- ✔ CORRECT ANSWER ✓✓ADDITION: P(A or B) = P(A) + P(B) -
P(AB)



Roy's Safety First Criterion ------- ✔ CORRECT ANSWER ✓✓Safety First Ratio = (E(R) - Rₜ) / σ



Larger ratio is better



If (Rₜ) is risk free rate, then it becomes Sharpe Ratio



Sharpe Ratio ------- ✔ CORRECT ANSWER ✓✓Sharpe Ratio = (E(R) - RFR) / σ



Larger ratio is better



If (Rt) is higher than RFR, then it becomes Safety First Ratio



Central Limit Theorem ------- ✔ CORRECT 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)



Standard Error of Sample Mean ------- ✔ CORRECT ANSWER ✓✓σ / n^½

, Binomial Probability ------- ✔ CORRECT 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)



P - Value ------- ✔ CORRECT 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"



Cumulative Distribution Function ------- ✔ CORRECT 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



Effective Annual Yield ------- ✔ CORRECT ANSWER ✓✓EAY = (1 + (i/n))^n - 1

,Stated Rate = (EAY^(1/n) - 1) * n



Continuous Compounding ------- ✔ CORRECT ANSWER ✓✓ln(EAY) = continuously compounded
stated rate



e^(continuously compounded stated rate) = EAY



Type I Error ------- ✔ CORRECT ANSWER ✓✓Incorrectly rejecting a true null hypothesis



(convicting an innocent person is Type I)



Type II Error ------- ✔ CORRECT ANSWER ✓✓Failure to reject a false null hypothesis



(failure to convict a guilty person is Type II)



Significance Level / Power of a Test ------- ✔ CORRECT ANSWER ✓✓Significance Level =
Probability of Type I



Power of a Test = (1 - Probability of Type I)



Covariance (Probability Model) ------- ✔ CORRECT ANSWER ✓✓Covariance of random variables
A and B from probability model



On the calculator:

1) Enter returns for set A and joint probabilities for AB; find mean A

2) Enter returns for set B and joint probabilities for AB; find mean B

, 3) Multiply each joint probability AB by each set's returns minus means

(ex: P(AB1)(A1 - Mean A)(B1 - Mean B) + P(AB2)(A2 - Mean A)(B2 - Mean B) + ... + P(ABn)(An -
Mean A)(Bn - Mean B))

4) The summed total is your covariance



Covariance (Sample) ------- ✔ CORRECT ANSWER ✓✓Covariance of random variables A and B
from sample with historical data with n observations



Correlation Coefficient ------- ✔ CORRECT ANSWER ✓✓COVab / σaσb



Bank Discount Yield (Discount basis) ------- ✔ CORRECT ANSWER ✓✓(Discount / Face Value) *
(360 / Days)



Money Market Yield ------- ✔ CORRECT ANSWER ✓✓(HPY) * (360 / Days)



Bond Equivalent Yield ------- ✔ CORRECT ANSWER ✓✓(HPY) * (365 / Days)



Most appropriate for comparing yields!



Technical Analysis Indicators ------- ✔ CORRECT ANSWER ✓✓Continuation:

TRIANGLE (or pennant) = Suggests a pause in the stock price movement that will be followed by
a continuation of the previous trend



Reversal:

HEAD AND SHOULDERS = Suggests a future decline in the stock price regardless of prior trend



DOUBLE BOTTOM = Increasing stock price in the future (reversal of a downtrend)