CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
1. Addition Rule of Probability: ADDITION: P(A or B) = P(A) + P(B) - P(AB)
2. Roy's Safety First Criterion: Safety First Ratio = (E(R) - Rₜ) / σ
Larger ratio is better
If (Rₜ) is risk free rate, then it becomes Sharpe Ratio
3. Sharpe Ratio: Sharpe Ratio = (E(R) - RFR) / σ
Larger ratio is better
If (Rt) is higher than RFR, then it becomes Safety First Ratio
4. Central Limit Theorem: 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)
5. Standard Error of Sample Mean: σ / n^½
6. Binomial Probability: 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)
7. P - Value: 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"
8. Cumulative Distribution Function: 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
, CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
Standard normal table (z) shows cumulative probabilities
9. Effective Annual Yield: EAY = (1 + (i/n))^n - 1
Stated Rate = (EAY^(1/n) - 1) * n
10. Continuous Compounding: ln(EAY) = continuously compounded stated rate
e^(continuously compounded stated rate) = EAY
11. Type I Error: Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
12. Type II Error: Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
13. Significance Level / Power of a Test: Significance Level = Probability of Type I
Power of a Test = (1 - Probability of Type I)
14. Covariance (Probability Model): 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
15. Covariance (Sample): Covariance of random variables A and B from sample with his torical data with n
observations
16. Correlation Coefficient: COVab / σaσb
17. Bank Discount Yield (Discount basis): (Discount / Face Value) * (360 / Days)
18. Money Market Yield: (HPY) * (360 / Days)
19. Bond Equivalent Yield: (HPY) * (365 / Days)
Most appropriate for comparing yields!
, CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
20. Technical Analysis Indicators: 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)
Trendlines:
SUPPORT / RESISTANCE = Range that stock price trades in based on supply/demand. Stock is "supported" from going
below a certain low price, and "resists" going above a certain high price
21. Price Elasticity: %ΔQuantity / %ΔPrice = (ΔQ / ΔP) * (P₀ / Q₀)
Demand is elastic if less than -1
Demand is inelastic if 0 to -1
22. Income Elasticity: %ΔQuantity / %ΔIncome
Positive for normal good
Negative for inferior good
23. Cross-Price Elasticity: %ΔQuantity / %ΔPriceʳᵉˡᵃᵗᵉᵈ ᵍᵒᵒᵈ
Positive for substitutes
Negative for complements
24. Sources of Economic Growth: Increases in:
- Labor
- Physical Capital
- Technology
- Natural Resources
- Human Capital
(LPT:HN)
"Life Pro Tip: No Hangovers"
, CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
25. Production Function Approach (GDP): Potential GDP = A * f(L,K)
L = Labor
K = Capital
A = "total factor productivity" aka increased growth not explained by growth of labor and capital
This is a proxy for growth of technology
26. Solow (neoclassical) model (GDP): Growth in Potential GDP = growth in technology + Wₗ(growth
in labor) + Wₖ(growth in capital)
Growth in a country's per capita GDP = growth in technology + Wₖ(growth in K/L ratio)
27. No Arbitrage Forward Rate: (1 + price currency int. rate) / (1 + base currency int. rate) = forward
exchange rate / spot exchange rate
((1 + price currency int. rate) / (1 + base currency int. rate)) * spot rate = no arbitrage forward rate
28. Exchange Rate Quotes: Price Currency / Base Currency
Read as "units of price currency for each unit of base currency"
29. Business Cycle - Leading Indicators: Precede:
Weekly Hours Manufacturing
Manufacturing New Orders; Non-defense
Consumer Goods
ISM New Orders Index
Stock Prices
Yield Curve
New Unemployment Ins. Claims
Building Permits
Capital Goods ex. Aircraft
Leading Credit Index
Consumer Expectations
30. Business Cycle - Coincident Indicators: Coincide:
Nonfarm payrolls
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
1. Addition Rule of Probability: ADDITION: P(A or B) = P(A) + P(B) - P(AB)
2. Roy's Safety First Criterion: Safety First Ratio = (E(R) - Rₜ) / σ
Larger ratio is better
If (Rₜ) is risk free rate, then it becomes Sharpe Ratio
3. Sharpe Ratio: Sharpe Ratio = (E(R) - RFR) / σ
Larger ratio is better
If (Rt) is higher than RFR, then it becomes Safety First Ratio
4. Central Limit Theorem: 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)
5. Standard Error of Sample Mean: σ / n^½
6. Binomial Probability: 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)
7. P - Value: 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"
8. Cumulative Distribution Function: 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
, CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
Standard normal table (z) shows cumulative probabilities
9. Effective Annual Yield: EAY = (1 + (i/n))^n - 1
Stated Rate = (EAY^(1/n) - 1) * n
10. Continuous Compounding: ln(EAY) = continuously compounded stated rate
e^(continuously compounded stated rate) = EAY
11. Type I Error: Incorrectly rejecting a true null hypothesis
(convicting an innocent person is Type I)
12. Type II Error: Failure to reject a false null hypothesis
(failure to convict a guilty person is Type II)
13. Significance Level / Power of a Test: Significance Level = Probability of Type I
Power of a Test = (1 - Probability of Type I)
14. Covariance (Probability Model): 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
15. Covariance (Sample): Covariance of random variables A and B from sample with his torical data with n
observations
16. Correlation Coefficient: COVab / σaσb
17. Bank Discount Yield (Discount basis): (Discount / Face Value) * (360 / Days)
18. Money Market Yield: (HPY) * (360 / Days)
19. Bond Equivalent Yield: (HPY) * (365 / Days)
Most appropriate for comparing yields!
, CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
20. Technical Analysis Indicators: 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)
Trendlines:
SUPPORT / RESISTANCE = Range that stock price trades in based on supply/demand. Stock is "supported" from going
below a certain low price, and "resists" going above a certain high price
21. Price Elasticity: %ΔQuantity / %ΔPrice = (ΔQ / ΔP) * (P₀ / Q₀)
Demand is elastic if less than -1
Demand is inelastic if 0 to -1
22. Income Elasticity: %ΔQuantity / %ΔIncome
Positive for normal good
Negative for inferior good
23. Cross-Price Elasticity: %ΔQuantity / %ΔPriceʳᵉˡᵃᵗᵉᵈ ᵍᵒᵒᵈ
Positive for substitutes
Negative for complements
24. Sources of Economic Growth: Increases in:
- Labor
- Physical Capital
- Technology
- Natural Resources
- Human Capital
(LPT:HN)
"Life Pro Tip: No Hangovers"
, CFA LEVEL I – 101 MUST KNOW CONCEPTS IN FINANCIAL REPORTING, CORPORATE
FINANCE, FIXED INCOME & ETHICS – COMPLETE STUDY NOTES A+ VERIFIED LATEST
VERSION (2026-2027)
25. Production Function Approach (GDP): Potential GDP = A * f(L,K)
L = Labor
K = Capital
A = "total factor productivity" aka increased growth not explained by growth of labor and capital
This is a proxy for growth of technology
26. Solow (neoclassical) model (GDP): Growth in Potential GDP = growth in technology + Wₗ(growth
in labor) + Wₖ(growth in capital)
Growth in a country's per capita GDP = growth in technology + Wₖ(growth in K/L ratio)
27. No Arbitrage Forward Rate: (1 + price currency int. rate) / (1 + base currency int. rate) = forward
exchange rate / spot exchange rate
((1 + price currency int. rate) / (1 + base currency int. rate)) * spot rate = no arbitrage forward rate
28. Exchange Rate Quotes: Price Currency / Base Currency
Read as "units of price currency for each unit of base currency"
29. Business Cycle - Leading Indicators: Precede:
Weekly Hours Manufacturing
Manufacturing New Orders; Non-defense
Consumer Goods
ISM New Orders Index
Stock Prices
Yield Curve
New Unemployment Ins. Claims
Building Permits
Capital Goods ex. Aircraft
Leading Credit Index
Consumer Expectations
30. Business Cycle - Coincident Indicators: Coincide:
Nonfarm payrolls
