FinQuiz Formula Sheet CFA Level III 2019

Reading 23: Liability-driven and Index-based 2. Total return ≈ −1 × 2. Ex post active return =
Strategies 𝑒𝑛𝑑. 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 × 𝑅B = Š ‹𝛽/• − 𝛽=• × 𝐹• + (𝛼 + 𝜀)‘
(𝑒𝑛𝑑. 𝑌𝑇𝑀 − 𝑏𝑒𝑔. 𝑌𝑇𝑀) + 𝑏𝑒𝑔. 𝑌𝑇𝑀
1. Convexity = where,
!"#.%&'"()*+ , -!"#.%&'"()*+-%)./0'.)*+ Reading 25: Fixed Income Active βpk = sensitivity of the portfolio (p) to each
(2-3".4 67*8 9)07:) ,
Management: Credit Strategies rewarded factor (k)
βbk = sensitivity of the benchmark to each
2. Future Contracts=Nf = rewarded factor
<)"=)7)(9 >*'(6*7)* ?>@AB..0( /*'(6*7)* ?>@
1. Excess Return = XR = (𝑠 × 𝑡)−(∆𝑠 ×
𝑆𝐷) Fk = the return of each rewarded factor
C&(&'0. ?>@
?>@EFG
3. Future BPV ≈ 3CEFG ,
2. Expected XR = EXR = (𝑠 × 𝑡)−(∆𝑠 × ∑F
”•€(…“F )
3. Active Risk (𝜎𝑅B ) = „
H×J×8K 2 2 𝑆𝐷) − (𝑡 × 𝑝 × 𝐿) where 𝑝 × 𝐿 = •A2
4. ABO = (2-')F
× L' − '×(2-')N O 𝑒𝑥𝑝. 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑙𝑜𝑠𝑠 × 𝑒𝑥𝑝. 𝑙𝑜𝑠𝑠 where,
𝑅B• = active return at time t
H×J×8K ×(2-8)F 2 Reading 26: Introduction to Equity Portfolio
5. PBO = × L' −
(2-')F
Management 4. E (𝑅B ) = IC–𝐵𝑅—…“ 𝑇𝐶
2
O -------------------------------------------- where,
'×(2-') N
Reading 27: Passive Equity Investing IC = expected information coefficient
6. 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 1. HHI = ∑+)|2 𝑤) ^ BR = Breadth
(>@A)A(>@-) 2. Effective # of shares = ∑~
2 2
= ••‚ TC = Transfer coefficient
,
^×∆3&'`0×(>@K ) }•€ 8} 𝜎𝑅B = Manager’s active risk
3. 𝑇𝑟𝑎𝑐𝑘𝑖𝑛𝑔 𝑒𝑟𝑟𝑜𝑟> = „𝑉𝑎𝑟(…† A…‡ )
c8"/ ?>@ 2
7. Asset BPV + L𝑁𝑃 × 2dd
O=
4. Excess return p = Rp – Rb 5. Active Share = ^ ∑+)|2™𝑤/,) − 𝑤=,) ™
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐵𝑃𝑉 where,
Reading 28: Active Equity Investing: Strategies w = weight, p= portfolio, b = benchmark
8. Asset BPV × ∆𝐴𝑠𝑠𝑒𝑡 𝑦𝑖𝑒𝑙𝑑𝑠 + --------------------------------------------
𝐻𝑒𝑑𝑔𝑒 𝐵𝑃𝑉 × ∆𝐻𝑒𝑑𝑔𝑒 𝑦𝑖𝑒𝑙𝑑𝑠 ≈ Reading 29: Active Equity Investing: Portfolio 6. Active Risk of Portfolio 𝜎…“ =
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐵𝑃𝑉 × ∆𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑦𝑖𝑒𝑙𝑑𝑠 Construction
„𝜎 ^ ›∑›𝛽/• − 𝛽=• œ × 𝐹• œ + 𝜎0^
1. 𝑅B = ∑+)|2 ∆𝑊) 𝑅)
Reading 24: Yield Curve Strategies where, where,
𝑅) = return on society i 𝜎0^ = idiosyncratic risk
1. Effective Portfolio Duration ≈ ∆𝑊) = active weight = diff. b/w portfolio
q*()*+"7 /*'(6*7)* `"7&0 weight and benchmark weight.
× 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛
>*'(6*7)* 0r&)(9
 FinQuiz Formula Sheet CFA Level III 2019

2 2 interest(%) discount = (investor’s interest ending NAV and HWM NAV) × incentive
7. Max ‹∑q
)|2 • 𝑆𝑖𝑧𝑒) + • 𝑉𝑎𝑙𝑢𝑒) +
2
in equity × total equity value) × minority fee %.
𝑀𝑜𝑚𝑒𝑛𝑡𝑢𝑚) ‘ interest discount(%)
•
11. Hedge Fund R = [(End value) – (Beg
8. Total Portfolio Variance = 2. Marketable minority interest ($) = value)] / (Beg value)
𝑉> = ∑+)|2 ∑+|2 𝑥) 𝑥 𝐶) Marketable controlling interest value ($) –
minority interest discount ($) 12. Rolling R = RR n,t = (Rt + Rt-1 + Rt-2 + … +
9. Contribution of each asset to portfolio R t –(n-1) / n
variance = 𝐶𝑉) = ∑+|2 𝑥) 𝑥 𝐶) = 𝑥) 𝐶)/ 3. Marketability discount ($) = Marketable
minority interest ($) × marketability 13. Downside Deviation = =
10. 𝑉/ = 𝑉𝑎𝑟›∑¡)|2›𝛽)/ × 𝐹) œœ + 𝑉𝑎𝑟›𝜀/ œ discount (%) ∑~ ∗
}•€[H)+('” A' ,d)]
,
„
+A2
4. Non-Marketable minority interest ($) = where, r* = threshold
11. Variance of the portfolio’s active return =
Marketable minority interest ($) -
𝐴𝑉> = ∑+)|2 ∑+|2 (𝑥) − 𝑏) )(𝑥 − 𝑏 )𝑅𝐶)
marketability discount ($) 14. Semi-deviation =
where,
5. Total R on Commodity Index = Collateral ∑~
}•€[H)+('” A"`¢. H*+(479 '0(&'+,d)]
,
𝑥) = asset’s weight, „
R + Roll R + Spot R +A2
𝑏) = benchmark weight
𝑅𝐶) = covariance of relative return b/w 6. Monthly Roll R = ∆ in futures contract 15. Sharpe ratio = (Annualized RoR –
asset i and j. price over the month - ∆ in spot price over Annualized Rf rate) / Annualized S.D.
12. 𝐶𝐴𝑉) = (𝑥) − 𝑏) )𝑅𝐶)/ the month
where, 𝑅𝐶) = covariance of relative 7. Compensation structure of Hedge Funds 16. Sortino Ratio = (Annualized RoR –
return b/w asset i and the portfolio. (comprises of ) Management fee (or AUM Annualized Rf*) / Downside Deviation
fee) + Incentive fee
13. Expected compounded geometric return = 17. Gain-to-loss Ratio =
—, 8. Management fee= % of NAV (net asset ¦§ §¨ ©§ª«¬- ®¯«¬-°± ²
𝑅¢ = 𝑅" − ‹¦§ §¨ ©§ª«¬- ®¯«¬A°± ² ‘ ×
^
value generally ranges from 1-2%)
where, 𝑅" = arithmetic return and 𝜎 = ³°´ µ¶ ©§ª«¬ ²
‹³°´ ·§®ª ©§ª«¬ ²‘
expected volatility.
9. Incentive fee = % of profits (specified by
the investment terms) 18. Calmar ratio = Compound Annualized
Reading 30: Alternative Investments Portfolio
ROR / ABS* (Maximum Drawdown)
Management
10. Incentive fee (when High Water mark
Provision) = (positive difference between
1. Minority interest discount ($) = marketable
controlling interest value ($) × minority
 FinQuiz Formula Sheet CFA Level III 2019

19. Sterling ratio= Compound Annualized c/*( …"(0G/Ì ×±-¯Õ±· å±«Ô æ¬Ôª´±
7. Fwd contract valueɧª´| Ê ” − Nf = 絫µÕ±- 屫Ô
×
ROR / ABS* (2-…CÌ)FÍ”ÎÏ ”}ÐÑ è§Õ«¨§Ú¯§ éÔÚµ±
(Average Drawdown - 10%) C8: …"(0 絫µÕ±- اª«ÕÔØ« èկر
” Ò × 𝑁𝑃
where, *ABS = Absolute Value (2-…CG )FÍ”ÎÏ ”}ÐÑ *Actual futures price = Quoted futures
price × Multiplier
Ó±Ôª ¶§Õ«¨ ²A²¨
Reading 31: Risk Management 8. Sharpe Ratio = Ö.× §¨ ¶§Õ«¨ ² Aåê Ö
5. Reducing β to zero: N¨ = ‹ åë
‘ ‹ ¨ ‘ and βT
1. Delta Normal Method: VAR = E(R) – z- Ó±Ôª ¶§Õ«¨ ²AÓ¯ª ÔØر¶«ÔÙÚ± ²
9. Sortino Ratio = =0
value (S.D) ק®ª-¯·± ·±°¯Ô«¯§ª
6. Effective β = Combined position R in % /
• Daily E(R) = Annual E(R) / 250 10. Risk Adjusted R on Capital =
Ûܶ±Ø«±· ² §ª Ôª ¯ª°-« Market R in %
• Daily S.D = Annual S.D. / √250
ØÔ¶¯«ÔÚ Ô« Õ¯-Ý ©±Ô-µÕ±
• Monthly E(R) = Annual E(R) / 12 7. Synthetic Cash: Long Stock + Short
• Monthly S.D = Annual S.D. / √12 11. R over Max Drawdown = Futures = Long risk-free bond
• Daily E(R) = Monthly E(R) / 22 Ûܶ±Ø«±· ³°±ÕÔ´± ² §ª Ôª ¯ª°-« ¯ª Ô ´¯°±ª ÞÕ
©ÔÜ ·ÕÔ®·§®ª
• Daily S.D = Monthly S.D. / √22 8. Synthetic Stock: Long Stock = Long Rf
• Annual VAR = Daily VAR×√250 bond + Long Futures
Reading 32: Risk Management Applications of
Forward and Futures Strategies
2. Diversification effect = Sum of individual 9. Creating a Synthetic Index Fund:
VARs – Total VAR • No of futures contract = Nf* =
1. β = CovSI / σ2I
{V ×(1 + r) T}/ (q×f)
• CovSI= covariance b/w stock portf&
3. Incremental VAR=Portf’s VAR inclu a where,
index
specified asset – Portf’s VAR exclu that Nf* = No of futures contracts
• σ2I= var of index.
asset. q = multiplier
V = Portfolio value
2. $β of stock portf = β of stock portf × MV
4. Tail Value at Risk (TVAR) or Conditional • Amount needed to invest in bonds = V* =
of stock portf = βs S
Tail Expectation = VAR + expected loss in (Nf*× q× f) / (1 + r)T
excess of VAR • Equity purchased = (Nf* ×q) / (1 + δ) T
3. Future $ β = βf × f
where, βf = Futures contract beta
5. Value Long = Spot t – [Forward / (1 + r) n] where, δ = dividend yield
4. Target level of beta exposure: βT S = βs S + • Pay-off of Nf* futures contracts = Nf*× q
6. Swap ValueLong = PV inflows – PV outflows Nfβf f ×(ST –f)
Bâ − BÖ S
N¨ = à ãà ã where, ST = Index value at time T
B¨ F
 FinQuiz Formula Sheet CFA Level III 2019

Reading 33: Risk Management Applications of 4. Bull Put spread = Long Put (lower XP) + a) Value at expiration: VT = max (0, ST –
Options Strategies Short Put (higher XP). Identical to the sale X1) – 2 max (0, ST – X2) + max (0, ST
of Bear Put Spread – X3)
1. Covered Call = Long stock position + XP = exercise price b) Profit = VT – c1 + 2c2 - c3
Short call position c) Max Profit = X2 – X1 – c1 + 2c2 – c3
a) Value at expiration = VT = ST – 5. Bear Put Spread = Long Put (higher XP) + d) Maximum Loss = c1 – 2c2 + c3
max (0, ST – X) Short Put (lower XP) e) Two breakeven points
b) Profit = VT – S0 + c0 a) Initial value = V0 = p2 – p1 i. Breakeven =ST* = X1 + net
c) Maximum Profit = X – S0 + c0 b) Value at expiration: VT = value of premium = X1 + c1 – 2c2 + c3
d) Max loss (when ST = 0) = S0 – c0 long put – value of short put = max (0, ii. Breakeven = ST* = 2X2 – X1 –
e) Breakeven =ST* = S0 – c0 X2 - ST) - max (0, X1 - ST) Net premium = 2X2 – X1 – (c1 –
c) Profit = VT – p2 + p1 2c2 + c3 ) = 2X2 – X1 – c1 + 2c2 - c3
2. Protective Put = Long stock position + d) Max Profit = X2 – X1 – p2 + p1
Long Put position e) MaxLoss = p2 – p1 8. Short Butterfly Spread (Using Call) =
a) Value at expiration: VT = ST + f) Breakeven =ST* = X2 – p2 + p1 Selling calls with XP of X1 and X3 and
max (0, X - ST) buying two calls with XP of X2.
b) Profit = VT – S0 - p0 6. Bear Call Spread = Short Call (lower XP) • Max Profit = c1 + c3 – 2c2
c) Maximum Profit = ∞ + Long Call (higher XP). Identical to the
d) Maximum Loss = S0 + p0 – X sale of Bull Call Spread. 9. Long Butterfly Spread (Using Puts) = (Buy
e) Breakeven =ST* = S0 + p0 put with XP of X3 and sell put with XP of
7. Long Butterfly Spread (Using Call) = Long X2) + (Buy the put with XP of X1 and sell
3. Bull Call Spread = Long Call (lower Butterfly Spread = Long Bull call spread + the put with XP of X2)
exercise price) + Short Call (higher Short Bull call spread (or Long Bear call where,X1< X2 < X3 and Cost of X1 (p1) <
exercise price) spread) Cost of X2 (p2) <Cost of X3 (p3)

a) Initial value = V0 = c1 – c2 Long Butterfly Spread = (Buy the call with 10. Short Butterfly Spread (Using Puts) =
b) Value at expiration: VT = value of XP of X1 and sell the call with XP of X2) + Short butterfly spread = Selling puts with
long call – Value of short call = (Buy the call with XP of X3 and sell the XPs of X1 and X3 and buying two puts
max (0, ST – X1) - max (0, ST – X2) call with XP of X2). with XP of X2.
c) Profit = VT – c1 + c2 • Max Profit = p3 + p1 – 2p2
d) Maximum Profit = X2 – X1 – c1 + where, X1< X2 < X3 and Cost of X1 (c1) >
c2 Cost of X2 (c2) > Cost of X3 (c3) 11. For zero-cost collar
e) Maximum Loss = c1 – c2 a) Initial value of position = V0 = S0
f) Breakeven =ST* = X1 + c1 – c2