Study Session 2 CFA Book 1
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3 Types of Risk a security can experience
Default Risk, liquidity risk, maturity risk
Effective Annual Rate Definition and Formula
Annual rate of return being earned after adjustments have been made for different compounding periods.
Diff Between Ordinary Anuity and Annuity Due
Annuity due pays at Beg of year
PV of a perpetuity?
Required Rate of return =?
= Default+Liquidity+Maturity risk premiums +Risk Free+Expected Inflation
How Do you Calculate Time Weighted rate of return?
Break down into periods, get HPR for each holding period, Find compound rate of return using geometric mean. Which is (1+HPRRate1)x(1+Rate2)^1/N
Bank Discount Yield Formula and Negatives
(Face Value - Price Bought)/Face Value times 360/t(time left until maturity)
- -Uses Simple Interest, Not Compound
- -Based only 360 days
- -Based on Face Value of Bond, not purchase price
Holding Period Yield
(Price Received at Maturity - Intitial Price)+Dividends/Price bought at
Effective Annual Yield
Money Market Yield
Characteristic of population called?
What are 4 measurable scales?
Descriptive v. Inferential
Descriptive summarize a data set, inferential use probabilities about a population based on a sample
NSquare root X1(1+Rate)*X2(1+Rate)*X3
N/Sum of 1/xi
Mean Absolute Deveiation Formula
Sum of absolute value of (xi-Mean)/N
1-1/K^2 k= number of deviations away
Coefficient of Variation. Better if # increasing or decreasing.
CV=S/mean , Closer to 0 the better.
Sharpe Ratio increase better or worse? Formula?
- Rate-Risk Free/ Standard Deviation
- Larger the $ the better you get premium per unit.
Skew Formula What is normal #. How much over standard is excessive?
Sum of (1/n)*((Xi-Mean)^3/S^3). Normal is 0. .5 or more is excessive
Kurtosis Formula What is normal # and what's it called. How much over standard is excessive and what does it look like? Over is called, and description. Under is called.
Sum of (1/n)*((Xi-Mean)^4/S^4). Normal is 3 Over 1 is excessive. Under is called Platykurtik less peaked thinner tail. Leptokurtic is over has fat tail more peaked. Mesokurtic is normal.
Arithmetic Mean appropriate for forecasting single period returns or multiple periods?
Single Period Returns, while geometric is good for comopound returns over multiple periods
What would you like to do?
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