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CONTENTS

How to Use the CFA Program Curriculum   vii

Errata   vii

Quantitative Methods

Learning Module 1 Interest Rates, Present Value, and Future Value   3

Introduction   3
Interest Rates   4
Future Value of a Single Cash Flow   6
Non-Annual Compounding (Future Value)   10
Continuous Compounding   12
Stated and Effective Rates   14
Future Value of a Series of Cash Flows   15
Equal Cash Flows—Ordinary Annuity   15
Unequal Cash Flows   17
Present Value of a Single Cash Flow   18
Non-Annual Compounding (Present Value)   20
Present Value of a Series of Equal and Unequal Cash Flows   21
The Present Value of a Series of Equal Cash Flows   21
The Present Value of a Series of Unequal Cash Flows   25
Present Value of a Perpetuity   26
Present Values Indexed at Times Other than t = 0   27
Solving for Interest Rates, Growth Rates, and Number of Periods   29
Solving for Interest Rates and Growth Rates   29
Solving for the Number of Periods   32
Solving for Size of Annuity Payments   32
Present and Future Value Equivalence and the Additivity Principle   36
The Cash Flow Additivity Principle   38
Summary   39
Practice Problems   40
Solutions   45

Learning Module 2 Organizing, Visualizing, and Describing Data   59

Introduction   59
Data Types   60
Numerical versus Categorical Data   60
Cross-Sectional versus Time-Series versus Panel Data   63
Structured versus Unstructured Data   64
Data Summarization   68
Organizing Data for Quantitative Analysis   68
Summarizing Data Using Frequency Distributions   71
Summarizing Data Using a Contingency Table   77
Data Visualization   80
Histogram and Frequency Polygon   80
Bar Chart   82

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iv Contents

Tree-Map   85
Word Cloud   86
Line Chart   88
Scatter Plot   90
Heat Map   94
Guide to Selecting among Visualization Types   96
Measures of Central Tendency   98
The Arithmetic Mean   99
The Median   103
The Mode   105
Other Concepts of Mean   106
Quantiles   115
Quartiles, Quintiles, Deciles, and Percentiles   115
Quantiles in Investment Practice   121
Measures of Dispersion   122
The Range   122
The Mean Absolute Deviation   122
Sample Variance and Sample Standard Deviation   124
Downside Deviation and Coefficient of Variation   127
Coefficient of Variation   130
Summary   132
Practice Problems   136
Solutions   147

Learning Module 3 Probability Concepts   155

Probability Concepts and Odds Ratios   156
Probability and Odds   156
Conditional and Joint Probability   161
Principles of Counting   173
Summary   179
References   182
Practice Problems   183
Solutions   186

Learning Module 4 Common Probability Distributions   189

Discrete Random Variables   190
Discrete Random Variables   191
Discrete and Continuous Uniform Distribution   195
Continuous Uniform Distribution   197
Binomial Distribution   200
Normal Distribution   208
The Normal Distribution   208
Probabilities Using the Normal Distribution   212
Standardizing a Random Variable   214
Probabilities Using the Standard Normal Distribution   214
Student’s t-, Chi-Square, and F-Distributions   216
Student’s t-Distribution    216
Chi-Square and F-Distribution   218
Summary   223

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Contents v

References   226
Practice Problems   227
Solutions   232

Learning Module 5 Sampling and Estimation   237

Introduction   237
Point Estimates of the Population Mean   238
Point Estimators   238
Confidence Intervals for the Population Mean and Sample Size Selection    242
Selection of Sample Size   248
Sampling-Related Biases   250
Data Snooping Bias   251
Sample Selection Bias   252
Look-Ahead Bias   254
Time-Period Bias   255
Summary   256
References   259
Practice Problems   260
Solutions   263

Learning Module 6 Basics of Hypothesis Testing   267

Introduction   268
Why Hypothesis Testing?   268
Implications from a Sampling Distribution   268
The Process of Hypothesis Testing   270
Stating the Hypotheses   271
Two-Sided vs. One-Sided Hypotheses   271
Selecting the Appropriate Hypotheses   272
Identify the Appropriate Test Statistic   273
Test Statistics   273
Identifying the Distribution of the Test Statistic   273
Specify the Level of Significance   274
State the Decision Rule   276
Determining Critical Values   276
Decision Rules and Confidence Intervals   278
Collect the Data and Calculate the Test Statistic   278
Make a Decision   279
Make a Statistical Decision   279
Make an Economic Decision   279
Statistically Significant but Not Economically Significant?   279
The Role of p-Values   280
Multiple Tests and Significance Interpretation   283
Tests Concerning a Single Mean   286
Test Concerning Differences between Means with Independent Samples   290
Test Concerning Differences between Means with Dependent Samples   292
Testing Concerning Tests of Variances   296
Tests of a Single Variance   296
Test Concerning the Equality of Two Variances (F-Test)   299
Summary   304

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