CFA Level I

GIPS requires that terminated portfolios remain in a composite's historical performance through their last full period under management, preventing survivorship bias.

• Excluding terminated accounts overstates composite returns (survivorship bias)
• Weighted average calc: sum(weight × return)
• Violates both GIPS standards and CFA Standard III(D)

The stock price at which an investor's equity percentage falls to the maintenance margin, triggering a margin call.

• Formula: P0 × (1 − initial margin)/(1 − maintenance margin)
• Loan amount is fixed in dollar terms as price falls
• Lower maintenance margin means price can fall further before a call

A depreciation method that allocates the depreciable cost of an asset based on actual usage or output rather than time.

• Rate per unit = (Cost − Salvage)/Total estimated units
• Expense = Rate per unit × units produced in period
• Depreciation varies with production activity, unlike straight-line

An asset is current if expected to be converted to cash, sold, or consumed within one year or the operating cycle, whichever is longer.

• Use the LONGER of 1 year or operating cycle
• Applies mainly when operating cycle exceeds 12 months
• Strategic investments and PP&E are generally noncurrent

Members must use client brokerage commissions only to benefit clients (e.g., research or execution quality), not for personal gain, as part of the duty of loyalty, prudence, and care.

• Directing trades for personal perks at client expense is a violation
• Best execution and research benefits are legitimate uses of soft dollars
• Excess commission cost = (paid rate − market rate) × share volume

An index weighting method that uses only the publicly tradable (float-adjusted) shares of each constituent rather than total shares outstanding.

• Float-adjusted market cap = shares outstanding × float % × price
• Excludes closely held or restricted shares from weighting
• Most major broad market indexes use this method today

The order in which creditors and shareholders are paid in liquidation, based on seniority and whether the claim is secured or unsecured.

• Secured debt > unsecured debt > subordinated debt > preferred equity > common equity
• Collateral pledges create priority within the same seniority class
• Bond indentures specify seniority ranking

The three-factor DuPont model breaks ROE into net profit margin, asset turnover, and financial leverage to analyze the sources of equity returns.

• ROE = Net Profit Margin × Asset Turnover × Financial Leverage
• Net Profit Margin = Net Income/Sales
• Financial Leverage = Average Total Assets/Average Total Equity

Economic variables that tend to change before the overall economy changes direction, used to forecast future business cycle turning points.

• Examples: building permits, stock prices, new orders for capital goods
• Coincident indicators move with the economy (e.g., industrial production)
• Lagging indicators confirm trends after they occur (e.g., unemployment duration)

The compound annual growth rate that accounts for the effects of compounding over multiple periods, calculated as the nth root of the product of (1+return) terms minus 1.

• Geometric mean ≤ arithmetic mean whenever returns vary
• Best measure for reporting historical compound performance
• Formula: [(1+R1)(1+R2)...(1+Rn)]^(1/n) - 1

A measure of risk-adjusted return that divides excess return over the risk-free rate by total portfolio risk (standard deviation).

• Formula: (Rp − Rf) / σp
• Uses total risk, appropriate for non-diversified or total portfolios
• Higher Sharpe ratio indicates better risk-adjusted performance

An accelerated depreciation method that applies a constant rate (double the straight-line rate) to the declining book value each year, ignoring salvage value until the final years.

• Rate = 2 × (1/useful life)
• Applied to beginning-of-year book value, not depreciable base
• Salvage value only matters as a floor near the end of useful life

The anticipated loss on a credit exposure, calculated as Exposure at Default × Probability of Default × Loss Given Default (1 − recovery rate).

• LGD = 1 − Recovery Rate
• Higher PD or lower recovery rate increases expected loss
• Used by lenders and bond investors to price credit risk

A rule for updating the probability of an event based on new information, combining prior probabilities with conditional likelihoods to produce a posterior probability.

• Updated Probability = [P(new info|event)×P(event)] / P(new info)
• Denominator computed via the total probability rule across all mutually exclusive scenarios
• Widely used in credit risk, diagnostic testing, and Bayesian statistics

A bond's price equals the present value of its future coupon and principal payments discounted at the market yield to maturity.

• Coupon < YTM → bond trades at a discount
• Coupon > YTM → bond trades at a premium
• Coupon = YTM → bond trades at par

Members must not copy or use, without acknowledgment, the work, ideas, or specific data of others as though it were their own original work.

• Licensing/subscription rights allow use but not uncredited authorship claims
• Applies to reports, models, and specific data/analysis
• Proper attribution avoids the violation

Capitalizing a lease (recognizing a right-of-use asset and lease liability) increases both total assets and total liabilities, which raises leverage ratios and lowers asset turnover and return on assets, compared to expensing lease payments as incurred.

• Right-of-use asset and lease liability recognized at present value of payments
• Increases total assets and total liabilities symmetrically at inception
• Raises debt-to-equity and debt-to-assets; lowers asset turnover and ROA

The LIFO reserve is the difference between LIFO and FIFO inventory values; its change is used to convert LIFO COGS to an equivalent FIFO basis.

• FIFO Inventory = LIFO Inventory + LIFO Reserve
• FIFO COGS = LIFO COGS − Increase in LIFO Reserve
• Used to compare firms using different inventory methods

Beta measures an asset's systematic risk relative to the market and can be calculated as correlation with the market times the ratio of the asset's standard deviation to the market's standard deviation.

• Formula: β = ρ(i,m) × (σi/σm) = Cov(i,m)/σm²
• Beta of 1.0 means the asset moves in line with the market
• Beta > 1 indicates higher systematic risk than the market

Jensen's alpha measures a portfolio's risk-adjusted excess return relative to the return predicted by CAPM, given its beta.

• Alpha = Actual return − [Rf + β(Rm − Rf)]
• Positive alpha = outperformance vs. CAPM benchmark
• Requires knowing beta, risk-free rate, and market return

Members must not allow gifts, compensation, or favors from third parties to compromise the independence of their investment analysis or recommendations.

• Issuer-paid travel should be modest and, ideally, self-funded
• Business-class travel and lavish entertainment are red flags
• Standard applies to research analysts, especially issuer-paid research

A liquidity ratio measuring a firm's ability to meet short-term obligations using its most liquid assets, excluding inventory and prepaid expenses.

• Quick assets = cash + marketable securities + receivables
• Formula: Quick assets / Current liabilities
• More conservative than the current ratio

A market condition where security prices fully reflect all past trading information (prices and volume), implying technical analysis cannot generate abnormal returns.

• Weak form: past prices/volume already reflected
• Semi-strong form: all public information reflected
• Strong form: all information, public and private, reflected

When a stock in a price-weighted index splits or a constituent changes, the divisor must be adjusted so the index level does not change due to the mechanical event.

• Index level = sum of prices / divisor
• Splits and constituent changes require divisor recalculation
• Only price changes (not corporate actions) should move the index