Noesis CFA Level 2 Formula Sheet 2024

CFA® Program
Level II
FORMULA SHEET (2024) Version 1.0
Prepared by: Fabian Moa, CFA, FRM, CTP, FMVA, AFM, FSA Credential
FOR REFERENCE ONLY

(Note: Formula Sheet is not provided in the CFA exam)
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Block VO2, Level 5, Unit 8, Lingkaran SV, Sunway Velocity, 55100 Kuala Lumpur, Malaysia
Website: www.noesis.edu.sg
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CFA Level 2 (2024) Formula Sheet – Noesis Exed
CFA Level 2 – Formula Sheet (2024)
Setting Up the Texas BA II Plus Financial Calculator
Video: https://youtu.be/0MS8d8QOFmc
QUANTITATIVE METHODS
Learning Module 1 | Basics of Multiple Regression and Underlying Assumptions
= + + + ⋯+ + + = 1, 2, 3, … ,
= dependent variable
where:
= independent variable
= intercept
, , … , = slope coefficients
d
= error term
e
= number of observations
= number of independent variables
Ex
, , , … , = regression coefficients
= −
s
si
"
oe
Learning Module 2 | Evaluating Regression Model Fit and Interpreting Model Results
Coefficient of determination, #
N
$%& $'% () #(* ()) $$# $$-

# = = = 1−
$%& $'% () + , $$+ $$+
$%& $'% () + ,, $$+ = −

"
!
$%& $'% () #(* ()) , $$# = ./ − 0

"
!
$%& $'% () - , $$- = . − /0

"
$$- ⁄ − − 1 −1
123%) (2 # , # = 1 − 4 6=1−7 8 1−#
$$+⁄ − 1 − −1
2
$%& )'% () (
Akaike’s information criterion (AIC)
19: = ln 7 8+2 +1
= Sample size
where:
= Number of independent variables in the model
Schwarz’s Bayesian information criterion (BIC of SBC)
$%& )'% () (
=9: = ln 7 8 + ln +1
F-distributed test statistic for jointly omitted variables
$%& )'% () ( () ? (2 & 2(, − $%& )'% () % () ? (2 ⁄'

>=
$%& )'% () % () ? (2 & 2(,⁄ − − 1
d
' = Number of restrictions (i.e., number of variables omitted in the restricted model
where:
e
compared to the unrestricted model)
Ex
@ : B = BC = ⋯ = BCDE = 0
@G : At least one of the ' slopes ≠ 0
s
si
F-test for joint test of slope coefficients
I
oe
$$# ⁄
ANOVA df SS MS
$$# $$# ⁄
$$- ⁄ − − 1
Regression
− − 1 $$- $$- ⁄ − −1
N
−1 $$+
Residual
Total
J( $'% ( #(* ()) $$# ⁄

>) ) ?= =
J( $'% ( - $$- ⁄ − − 1
@: = =⋯= =0
@G : At least one K ≠ 0
3
/K − =K
t-test statistic for slope coefficient
=
)L/M
/K = Regression estimate of K
where:
=K = Hypothesized value of coefficient 3

)L/M = Estimated standard error of /K
Video (Simple Linear Regression): https://youtu.be/uR_9im2JP18
Learning Module 3 | Model Misspecification
+() $ ) ?, χOP, = #
Breusch-Pagan Test
# = #-squared between squared residuals and independent variables

where:
e d
1
Variance Inflation Factor (VIF)
9>K =
Ex
1 − #K
#K = Variation in − 1 independent variables

where:
K explained by the other
s
si
Learning Module 4 | Extensions of Multiple Regression

oe
Sum of individual leverages for all observations = +1

Detecting Influential Points
If observation’s leverage > 3 R S ⇒ Potentially influential observation

C
N
Studentized Deleted Residual, UV∗

(∗ ( − −1
= = [
)X ∗ YJ$- 1 − ℎ $$- 1 − ℎ − (
∗
( ∗ = The residual with the th observation deleted

where:
)X ∗ = The standard deviation of the residuals

= The number of independent variables
J$- = Mean squared error of the regression model that deletes the th observation
ℎ = The leverage value for the th observation
4
( ℎ
Cook’s Distance
\ = ] ^
+ 1 J$- 1 − ℎ
( = Residual for observation

where:
= The number of independent variables

J$- = Mean square error of the estimated regression model
ℎ = The leverage value for the th observation
If \ > _ ` , then th observation is highly likely to be an influential data point
Logistic Regression (Logit)
a
ln 7 8= + + + ⋯+ +
1−a
d
1
a=
1 + expe− + + +⋯+ + f
e
Ex
a
ln 7 8 = g * 22)
1−a
h22) = ( Li
s
si
Likelihood ratio (LR) test
g# = −2 g * , (, ℎ 2 () ? (2 & 2(, − g * , (, ℎ 2% () ? (2 & 2(,

oe
N
Learning Module 5 | Time-Series Analysis
= + + = 1,2, … , +
Linear Trend Models
j j
= time (independent variable)
= ( LkCLlj = 1,2, … , +
Log-Linear Trend Models
j
ln j = +
Growth rate of = ( Ll − 1
5
p-th order autoregressive model, mn o
pj = + pjE + pjE + ⋯ + q pjEq + j
Test statistic for autocorrelation of residuals
#() 2% , % ? (, −0 #() 2% , % ? (,
= =
$ 2 2( 1⁄√+
: u j , jE
where:
st, = = jw
2( % ? (, ℎ( () 2% ,
vt
Mean reverting level for AR(1) model

pj =
1−
e d
Root Mean Squared Error
$'% (2 (
#J$- = [
Ex
pj − pjE = + * pjE +
Dickey and Fuller Unit-Root Test
s
j
si
* = −1
where:
oe
vxjC = + ŷj
ARCH(1):
N
Learning Module 6 | Machine Learning
Neural Networks
a , 2( u u( ℎ(
{(| ( |
= h,2 |( *ℎ − g( * (×~ ,( | ℎ ()•(? €
|( *ℎ
ℎ( ,2 |( *ℎ
6
Learning Module 7 | Big Data Projects
− B!
Normalization of variable X
=
BG† − B !
!•‚BGƒ „X…
−ˆ
Standardization of variable X
=
‡jG!…G‚… „X…
v
+ %( a ) u(
a (? ) ,a =
+ %( a ) u( + > ,)( a ) u(
+ %( a ) u(
#(? ,,, # =
+ %( a ) u( + > ,)( {(* u(
+ %( a ) u( + + %( {(* u(
d
1??% ?‰ =
+ %( a ) u( + > ,)( a ) u( + + %( {(* u( + > ,)( {(* u(
2 × a (? ) × #(? ,,
e
Ex
>1 $? (=
a (? ) + #(? ,,
> ,)( a ) u(
> ,)( a ) u( # (, >a# =
s
+ %( {(* u( + > ,)( a ) u(

si
+ %( a ) u(
+ %( a ) u( # (, +a# =
oe
+ %( a ) u( + > ,)( {(* u(
$( ( ?( : % | ℎŠ 2
N
\ ?%&( > ('%( ?‰, \> =

+ , {%& ( $( ( ?()
1
9 u( )( \ ?%&( > ('%( ?‰, 9\> = log 7 8
\>
+>-9\> = +> × 9\>
7
ECONOMICS
Learning Module 1 | Currency Exchange Rates: Understanding Equilibrium Value
Cross Rates
When given Ž and O, then O = Ž × O

• Ž • • Ž
When given Ž and Ž , then O = Ž ×

• O • •
•
R•S
p ‰
Currency pair Bid Bid/Ask
⁄
1 ‰ 1⁄p
A/B
B/A
Video: https://youtu.be/wyDKKPkPhzw
e d
Arbitrage Opportunities Between Dealers and Interbank
Video: https://youtu.be/Lqo9UZ3yyEA
Ex
1? % ,
Covered Interest Rate Parity
1+ R 360 S
‘
>‘⁄… = $‘⁄… ’ ”
s
1? % ,
1+ …R S
360
si
1? % ,
‘−
oe
>‘⁄… − $‘⁄… … R 360 S

=
$‘⁄… 1? % ,
1+ … R 360 S
N
Video: https://youtu.be/9jOzFA9GuHU
Mark-to-Market Value of a Forward Contract
Original position: Long base currency d forward at forward rate > ,‘⁄… (Offer side)
.>j,‘⁄… − > ,‘⁄… 0 × : ? $ •(

,%( g *> | 2=
#(& * 2 ‰) & % ‰
1+ ‘7 360 8
>j,‘⁄… = Forward rate at valuation date, t (Bid side)
Video: https://youtu.be/wLqyZRrutAc
8
Uncovered Interest Rate Parity
1? % ,
1+
R 360 S ‘
- $‘⁄… = $‘⁄… ’ ”
1? % ,
1 + … R 360 S
1? % ,
‘ −R 360 S
… 1? % ,
%Δ$‘X⁄… = ≈ − 7 8
1? % , ‘ …
360
1 + … R 360 S
Video (Carry Trade): https://youtu.be/_26fG3Zvzyg
a‘
Absolute PPP
$‘⁄… =
a…
d
1? % ,
Relative PPP
™‘ − ™… R 360 S 1? % ,
e
%Δ$‘⁄… = ≈ ™‘ − ™… 7 8
1? % , 360
1 + ™… R S
Ex
360
1? % ,
Ex ante PPP
%Δ$‘X⁄… ≈ ™‘X − ™…X 7 8
s
360
si
− = ™‘X − ™…X
International Fisher Effect
oe
‘ …
™ X = Expected inflation rate

where:
™ = Actual inflation rate

N
Mundell-Fleming Model
Bonus Video: https://youtu.be/xNo3GpWYgKA
9
Learning Module 2 | Economic Growth and the Investment Decision
- a
a = š\a × 7 8×7 8
š\a -
- a
Return on aggregate equity market
%∆a = %∆š\a + %∆ 7 8 + %∆ 7 8
š\a -
a = aggregate value of equities

where:
- = aggregate earnings
Cobb-Douglas Production Function
= +œ • g E•
where a < 1
where:
d
ž = Share of output allocated to capital (œ)
Y = Output
1 − ž = share of output allocated to labor (g)
e
+ = total factor productivity (+>a), represents technological progress of the economy
Ex
œ •
Ÿ ¡¢ ¡ ¢£¤ ¥¦¤§£¤ = = +7 8
g g
s
si
Marginal product of capital, MPK

Jaœ = ž 7 8
œ
oe
œ
Amount of output that is allocated to providers of capital, a
ž=
N
∆ ∆+ ∆œ ∆g
Growth Accounting equation:
= +ž + 1−ž
+ œ g
Growth rate in potential GDP = Long-term growth rate + Long-term growth rate
of labor force in labor productivity
g ?(
g ?( • ?• =
Š * *( • •%,
10
¨
Sustainable growth rate of output per capita
*∗ =
1−ž
¨
Sustainable growth rate of output (Steady state growth rate)
š∗ = +
1−ž
1 ¨
Equilibrium output-to-capital ratio (in steady state):
= ] + + ©^
œ ) 1−ž
¨ = growth rate of TFP

where:
ž = elasticity of output with respect to capital

) = fraction of income (Y) that is saved
© = rate of depreciation of physical capital stock
= labor supply growth = %∆g
e d
Endogeneous Growth Model Ex
‰X = ?
Production function:
X
s
Δ‰X Δ
Growth rate of output per capita:
= = )? − © −
‰X
si
‰X = output per worker

where:
oe
X = capital per worker

? = marginal product of capital in the aggregate economy (constant)
N
11
FINANCIAL STATEMENT ANALYSIS
Learning Module 1 | Intercorporate Investments
Investments in Associates (Equity Method)
- 2 * =(* * $ℎ ( 1& • (p?())

$ℎ (
u() &( = u() &( + − 2 u 2( 2 −
( ? &( •% ?ℎ )( • ?(
)) ? () )) ? () (?( u(2
$ℎ ( 1& • (p?()) $ℎ ( ª ( , •(2 • &

Impact on Investor’s Income Statement
= − −
( ? &( •% ?ℎ )( • ?( 2 | ) ( & %•) ( & ) ,(
Business Combinations (Acquisition Method)

Excess purchase price
= Acquisition price – %Ownership × Book value of net identifiable assets
e d
Partial Goodwill Ex
= Acquisition price – (%Ownership × Fair value of identifiable net assets)
= Acquisition price – (%Ownership × Book value of identifiable net assets)
– (%Ownership × Excess purchase price attributable to identifiable net assets)
{ ? ,, * ( () = %{:9 × > u ,%( 2( ,( ( ))( )

s
si
Full Goodwill
= Fair value of entity – Fair value of net identifiable assets
oe
{ ? ,, * ( () = %{:9 × > u ,%( ( ‰

N
Video: https://youtu.be/RgxmPbx4-0o
9&• &( : ‰ * u ,%( #(? u( ,( & %

IFRS
= −
, )) ? )ℎ *( ( *% ? )ℎ *( ( *%
9&•, (2 > u ,%( > u ,%( (• * % ′)

US GAAP
= −
* 2| ,, (• *% 2( ,( ( ))( )
9&• &( : ‰ * u ,%( 9&•, (2

= −
, )) * 2| ,, * 2| ,,
12
Learning Module 2 | Employee Compensation - Post-Employment and Share-Based
Share-Based Compensation Accounting
> u ,%( | 2 * 2 (
: &•( ) (p•( )( =
() * •( 2
Treasury Stock Method
a ?((2) &
u( ) (p( ? )( - ¬?
\ ,% (2 = )? $ℎ () ))%(2 &
)ℎ ( )(2 | 2)
)ℎ () = )ℎ () + ? u( ) (p( ? )( −
1u( *( )ℎ ( • ?(
%) 2 * %) 2 * )ℎ ( )(2 | 2)
ℎ( (• * •( 2
1u( *( % (? * •(2
1))%&(2 : )ℎ • ?((2)
= + )ℎ (- )(2
d
• ?((2) & (p( ? )(
? &•( ) (p•( )(
e
Ex
Forecasting Shares Outstanding With Share-Based Awards
= ) ? )ℎ () = ) ? )ℎ ()
%) 2 *, = %) 2 *, $ℎ ( • )
+ #$ª) u() (2 +
( 2 •( 2 (* * •( 2 (p( ? )(2
s
si
$ℎ () ))%(2 &
$ℎ (
+ )(? 2 (), −
(•% ?ℎ )()
?'% ) ), ( ?.
oe
Financial Reporting for Defined Benefit Pension Plans

N
>% 2(2 ) %) = > u ,%( •, ))( ) − a( ) ,*
- 2 * u ,%( =(* * u ,%( 1? % , ( % =( ( )

= +: % )+ −
•, ))( ) •, ))( ) •, ))( ) • 2
- 2 * •( ) =(* * •( ) $( u ?( 9 ( () 1? % , =( ( )
= + + + −
,* ,* ? )) ? ) , ))⁄ * • 2
=(* * •( ) (,2 u() &( * 2(

9 ( () ? ) = ×
,* ? • ( 2
{( ( () =(* * •( ) =(* * u ,%( (,2 u() &(

IFRS Only
? ) ⁄ ? &(
=7 − 8×
* 2( ? • ( 2
,* •, ))( )
13
Learning Module 3 | Multinational Operations
Net assets = Total assets – Total liabilities
Net monetary assets = Monetary assets – Monetary liabilities
Current Rate Method
Currency translation adjustment
− Total liabilities of foreign subsidiary in parent currency terms

= Total assets of foreign subsidiary in parent currency terms
− Shareholder capital of foreign subsidiary in parent currency terms

− Other equity items of foreign subsidiary in parent currency terms
Hyperinflationary Environment
d
#() (&( ? - 2 •( 2 • ?( 2(p
IFRS
=
& ( ‰ ))( ) & , , ()
e
Ex - 2 •( 2 • ?( 2(p
#() (&( ? - 2 •( 2 • ?( 2(p

=
& ( ‰ ))( ) & , , () =(* * •( 2 • ?( 2(p
#() (&( ? - 2 •( 2 • ?( 2(p

s
=
? &( ) (&( (&) 1u( *( • ?( 2(p ℎ( •( 2
si
oe
Learning Module 4 | Analysis of Financial Institutions
+ , + ( 1 : && -'% ‰ 122 ,

= +
: • , + ( 1: • , + ( 1: • ,
N
+ , #(*%, ‰ + ,+ ( 1 + ,+ ( 2
= +
: • , : • , : • ,
: && -'% ‰ : && -'% ‰ + ( 1 : • ,

= ≥ 4.5%
+ ( 1# # ) Š( *ℎ (2 1))( )
+( 1 + ,+ ( 1: • ,
= ≥ 6.0%
# # ) Š( *ℎ (2 1))( )
+ ,: • , + , #(*%, ‰: • ,
= ≥ 8.0%
# # ) Š( *ℎ (2 1))( )
14
g '% 2 ‰ : u( *( @ *ℎ ´% , ‰ g '% 2 1))( )

=
# , g:# -p•(? (2 ? )ℎ % , |)
{%& ( 2 ‰) ℎ ?
| ℎ) 2 ) ()) ,(u(, u ,%&( = g:# × 30
? )ℎ % , |)
(g:# × 30 days.
Number of days that bank can withstand a stress level volume of cash outflows for
{( $ ,( >% 2 * 1u , ,( $ ,( >% 2 *
=
# , {$># #('% (2 $ ,( >% 2 *
Property and Casualty Companies
g )) 2 , )) 23%) &( g )) (p•( )( + g )) 23%) &( (p•( )(

=
(p•( )( {( • (& %&) ( (2
d
ª 2( | * ª 2( | * (p•( )(
e
=
(p•( )( {( • (& %&) | (
Ex
: & (2 g )) 2 , )) 23%) &( ª 2( | *
= +
(p•( )( (p•( )(
\ u 2( 2) • , ?‰ℎ ,2( ) \ u 2( 2) • , ?‰ℎ ,2( ) )ℎ (ℎ ,2( )

s
=
)ℎ (ℎ ,2( ) {( • (& %&) ( (2
si
: & (2 : & (2 \ u 2( 2) • , ?‰ℎ ,2( )

oe
= +
µ¶U·¸ ¹VºV¹·»¹¼ )ℎ (ℎ ,2( )
N
Learning Module 5 | Evaluating Quality of Financial Reports
J-)? ( = – 4.84 + 0.920 \$# + 0.528 šJ9 + 0.404 1´9 + 0.892 $š9
Beneish Model
+ 0.115 \-a9 – 0.172 $š19 + 4.670 1?? % ,) – 0.327 g- 9
#(?( u ,()j ⁄$ ,()j

where:
DSR day sales receivable index =

#(?( u ,()jE ⁄$ ,()jE
šJjE
GMI gross margin index =
šJj
e1 − aa-j + :1j /+1j f
AQI asset quality index =
e1 − aa-jE + :1jE /+1jE f
$ ,()j
SGI sales growth index =
$ ,()jE
15
\(• (?
DEPI depreciation index =
jE
\(• (? j
$š1j /$ ,()j
SGAI sales, general, and administrative expenses index =
$š1jE /$ ,()jE
9 ? &( ( ( (p 2 ‰ (&) − : )ℎ & •( )
Accruals =
+ , ))( )
g(u( *(j
LEVI leverage index =
g(u( *(jE
Earnings Persistence
- *)jC = ž + Ü - *)j +
- *)jC = ž + Ü : )ℎ , |j + Ü 1?? % ,)j +
Cash-flow-based accruals = NI – (CFO + CFI)
e d
Ex
s
si
oe
N
16
Learning Module 6 | Integration of Financial Statement Analysis Techniques
{( h•( * h•( * h•( *

= −
1))( ) {h1 1))( ) g , ()
+ , : )ℎ 2 + , + ,
=R − S−R − S
1))( ) $ℎ - ( & 9 u() &( ) g , () \(
= , ?(-)ℎ(( - )(2 {h1j − {h1jE

=
?? % ,) {h1j + {h1jE ⁄2
: )ℎ- , |- )(2 {9j − :>hj + :>9j

=
?? % ,) {h1j + {h1jE ⁄2
Learning Module 7 | Financial Statement Modeling
Growth Relative to GDP Growth approach
d
If company’s revenue is forecast to grow at K bps above the nominal GDP growth rate
e
(*%), then company’s revenue growth rate = *% + %
Ex Ý
If company’s revenue is forecast to grow @% faster than the nominal GDP growth rate
(*%), then company’s revenue growth rate = *% × R1 + S
Þ
s
si
Market Growth and Market Share approach
> (? ) (u( %( = J ( )ℎ ( % × 9 2%) ‰ (u( %(

oe
{hag1+
Return on Invested Capital
ROIC =
N
9 u() (2 : • ,
{hag1+ = Net operating profit less adjusted taxes

where:
9 u() (2 : • , = h•( * ))( ) − h•( *, , ()
17
CORPORATE ISSUERS
Learning Module 1 | Analysis of Dividends and Share Repurchases
Dividend Payout Policies
Target payout adjustment model (Lintner model)
-p•(? (2 g ) -p•(? (2 + *( • ‰ % g ) 123%) &(

= +7 × − 8×
2 u 2( 2 2 u 2( 2 - *) 2 u 2( 2 ?
1
where:
123%) &( ? =
{%& ( ‰( ) 23%) &( ( •, ?(
\ u 2( 2 :% (
Constant dividend payout ratio policy
d
\ u 2( 2 = ×
• ‰ % ( *)
e
Video: https://youtu.be/hhcvNiTpZX4
Ex
EPS and BVPS After Share Repurchase
- *) ( ( %‰ ? −1 ( p? ) % 2)
s
-a$ ( %‰ ? =
$ℎ () % ) 2 * ( %‰ ?
si
oe
Video: https://youtu.be/Pd0-QQF-VhQ
= ,%( ( ( %‰ ? − ,%( )ℎ ( %‰ ?
= a$ ( %‰ ? =
$ℎ () % ) 2 * ( %‰ ?
N
Analysis of Dividend Safety
\ u 2( 2)
\ u 2( 2 • ‰ % =
{( 9 ? &(
{( 9 ? &(
\ u 2( 2 ? u( *( =
\ u 2( 2)
>:>-
>:>- ? u( *( =
\ u 2( 2) + $ℎ ( (•% ?ℎ )()
18
Learning Module 3 | Cost of Capital: Advanced Topics
Š1:: = |… 1− + |q + |X
Weighted average cost of capital
… q X
|… = Weight of debt in capital structure

where:
|q = Weight of preferred equity in capital structure

|X = Weight of common equity in capital structure
… = Pre-tax cost of debt
q = Cost of preferred equity
X = Cost of common equity
Cost of debt, … = ‘ + : (2 )• ( 2
Cost of equity, X = ‘ + -#a + 9#a
e d
=( ?ℎ& 2(p #) ((
where:
-#a = Equity risk premium = −
(% (
Ex
9#a = Idiosyncratic risk premium
a ()( ,%(
Leases
a ()( ,%(
s
> ,%( g()) ) \ (?

á
+ #() 2% , ,%( = +
g( )( a ‰&( ) g( )(2 1))( 9 ,: ) )
si
g())
oe
Equity Risk Premium
1u( *( ( ?ℎ& 1u( *( )

N
Historical Approach (Ex-Post)

-#a = −
2(p ( % (( (
\
Gordon Growth model
-#a = +*− ‘
19
Grinold-Kroner Model
-#a = e\ + Δ a⁄- + + * + Δ$f − ‘
\ = Dividend yield of market index

where:
Δ a⁄- = Expected growth rate in P/E

Câãäåæçèéêæë ìíîï
= Expected inflation = Câãäåðñò
−1
* = Expected growth rate in real earnings per share
Δ$ = Expected change in shares outstanding
Cost of Equity
\
Gordon Growth Model
= +*
X
a
e d
Two-Stage DDM
!
\j a!
a = +
Ex
1+ X j 1+ X !
"
X = … + # ) • (& %&
Bond Yield Plus Risk Premium Approach (BYPRP)
s
si
X = + Ü × -#a
Capital Asset Pricing Model (CAPM)
oe
Fama-French model
N
= + Ü -#a + Ü $J= + Üó @Jg

Three-factor model
X ‘
= + Ü -#a + Ü $J= + Üó @Jg + Üô #JŠ + Üõ :J1

Five-factor model
X ‘
$J= = Size premium

where:
@Jg = Value premium

#JŠ = Profitability premium
:J1 = Investment premium
20
= + ÜqXX‚ -#a + $a + 9a + $:#a

Expanded CAPM
X ‘
$a = Size premium (for smaller, privately held companies)

where:
9a = Industry risk premium

$:#a = Company-specific risk premium
= + -#a + $a + $:#a
Build-Up Approach
X ‘
-#a
Country Spread Model
-#a = +ö×: % ‰ ) • (& %&
2(u(, •(2 & (
ö = Level of exposure of the company in the local country

where:
d
: % ‰ ) • (& %& = $ u( ( * ‰ (,2 )• ( 2
e
(,2 (&( * * & ( 2)
$ u( ( * ‰ (,2 (,2 2(u(, •(2 & (
Ex
= 2( & (2 ℎ( ?% ( ?‰ −
)• ( 2 * u( &( 2)
ℎ( 2(u(, •(2 & (
s
v÷Dø jù
Aswath Damodaran’s CRP
: % ‰ ) • (& %& = $ u( ( * ‰ (,2 )• ( 2 ×
vO•!…
si
oe
v÷Dø jù = Volatility of the local country’s equity market

where:
vO•!… = Volatility of the local country’s bond market

N
- = + Üú û-. üB 0 − ‘ý + ÜŽ û- − ‘ý
International CAPM
X ‘ Ž
-. üB 0 − ‘ = Risk premium of a global index

where:
Ž = Wealth-weighted foreign currency index return
21
Learning Module 4 | Corporate Restructuring
Evaluating Materiality Based on Size
,%( ) ?
For Acquisition/Divestiture:
- ( • )( u ,%( ?'% * ? &• ‰
: ) ) u *)
For Cost Restructuring:
$ ,()
\a − $a
Premium Paid Analysis
+ ( u( • (& %&, a#J =
$a
d
\a = Deal price per share of the target company
where:
$a = Unaffected stock price of the target company (i.e., pre-announcement)
e
Ex
s
si
oe
N
22
EQUITY VALUATION
Learning Module 1 | Equity Valuation Applications and Processes
VE – P = (V – P) + (VE – V)
÷ = Estimated intrinsic value

where:
a = Market price
= Intrinsic value
Conglomerate discount = Sum-of-the-parts value – Market value
Learning Module 2 | Discounted Dividend Valuation
Discounted Dividend Valuation

!
:>j
d
=
1+ j
e
j" Ex
\ \ \! a!
= + + ⋯+ +
1+ 1+ 1+ ! 1+ !
s
\ \ 1+*
Gordon Growth Model
= =
−* −*
si
oe
\
Fixed-rate perpetual preferred stock
=
N
Value of stock = Value of a company + Present value of growth
-
with zero-growth opportunities (PVGO)
= + a šh
a 1 a šh
= = +
- - -
\
If dividend and earnings growth rate is constant,
= +*
a
23
Two-Stage Dividend Discount Model

!
\ 1 + *‡ j
\ 1 + *‡ ! 1 + *þ
= +
1+ j 1 + ! − *þ
j"
Video: https://youtu.be/7vXWsTKiSPE
\ 1 + *þ + \ @ * − *þ
The H-Model
=
− *þ
@ = half-life in years of the high-growth period

where:
* = Short-term growth-rate
*þ = Long-term growth rate
d
Video: https://youtu.be/IAMFZXSPKOY
e
PRAT model Ex
Sustainable growth rate, * = × #h-
Video: https://youtu.be/MnfRRRhuGpA
s
{9 − \ u 2( 2) {9 $ ,() +1
*= × × ×
{9 $ ,() +1 +-
si
oe
Learning Module 3 | Free Cash Flow Valuation
Free Cash Flow to the Firm (FCFF) Valuation Approach

N
>:>>j
> & ,%( =
1 + Š1::
If non-operating
j
j"
assets = 0
Equity Value = Firm Value – Market Value of Debt
FCFE Valuation Approach

>:>-j
-'% ‰ ,%( =
1+ j
j"
24
Single-Stage (Constant Growth) FCFF and FCFE Model
>:>> >:>> 1 + *
FCFF Valuation Approach
> & ,%( = =
Š1:: − * Š1:: − *
>:>- >:>- 1 + *
FCFE Valuation Approach
-'% ‰ ,%( = =
−* −*
Free cash flow to the Firm, FCFF
FCFF = NI + NCC + Int(1 – Tax Rate) – FCInv – WCInv

= CFO + Int(1 – Tax Rate) – FCInv
= EBIT(1 – Tax Rate) + Dep – FCInv – WCInv
d
= EBITDA(1 – Tax Rate) + Dep(Tax Rate) – FCInv – WCInv
NI = Net income available to common shareholders
e
where: Ex
NCC = Net noncash charges (e.g. depreciation)
Int = Interest expense
FCInv = Fixed capital investments = Maintenance Capex + Growth Capex
= Δš )) aa- = Δ{( aa- + \(• (?
s
si
WCInv = Investment in working capital

oe
Free cash flow to the Equity, FCFE
FCFE = FCFF – Int(1 – Tax Rate) + Net borrowing

= CFO – FCInv + Net borrowing
N
where:
Net borrowing = Debt issued – Debt repaid
Video: https://youtu.be/rtIvIy6Fl0A
If (FCInv – Dep) and WCInv funded using Debt (based on debt ratio):
FCFE = NI + Dep – FCInv – WCInv + Net borrowing
where:
\(
Net borrowing = DR(FCInv – Dep) + DR(WCInv)
\# = \( =
1))( )
25
If company issues preferred shares:

FCFF = CFO + Int(1 – Tax Rate) + Preferred dividends – FCInv
Two-Stage Free Cash Flow Models

!
>:>>j >:>>!C 1
> & u ,%( = + ] ^
1 + Š1:: j Š1:: − * 1 + Š1:: !
j"
!
>:>-j >:>-!C 1
-'% ‰ u ,%( = + ] ^
1+ j −* 1+ !
j"
Value of Firm = Value of operating assets + Value of nonoperating assets

(PV of FCFF)
Learning Module 4 | Market-Based Valuation Price and Enterprise Value Multiples
d
Enterprise value, EV = Market value of common stock
e
+ Market value of preferred equity
+ Market value of debt + Minority interest
Ex
– Cash and Short-term investments
Actual Justified
J ( • ?( •( )ℎ ( 1− 1+*
s
-a$ u( • (u %) 12 & ℎ) −*
Trailing P/E
si
J ( • ?( •( )ℎ ( 1−
> (? ) (2 -a$ u( (p 12 & ℎ) −*
oe
Leading P/E
#h- − *
N
−*
J ( • ?( •( )ℎ (
= u ,%( •( )ℎ (
P/B
Video:
https://youtu.be/c0vmCUtDpZs
- 1− 1+*
= ×
$ $ −*
J ( • ?( •( )ℎ (
$ ,() •( )ℎ (
- 1−
P/S or
= ×
$ $ −*
26
Actual Justified
4×J ) (?( '% ( ,‰ 2 u 2( 2 −*
J ( • ?( •( )ℎ ( 1+*
Trailing D/P
> (? ) 2 u 2( 2) u( ℎ( (p ‰(
−*
J ( • ?( •( )ℎ (
Leading D/P
-a$ −*
a ?( •( )ℎ ( 1− 1+*
Earnings yield
Underlying Earnings = EPS – non recurring gains + non recurring loss
Normalized Earnings
Method 1: Average EPS Approach

!
1
Normalized EPS = -a$
"
e d
Method 2: Average ROE Approach
!
1
Normalized EPS =
Ex
#h- × :% ( = u ,%( •( )ℎ (
"
a/-
s
Price-to-Earnings Growth (PEG) Ratio
a-š =
* %
si
oe
Momentum Indicators
Earnings surprise = Reported EPS – Expected EPS

N
#(• (2 -a$ − -p•(? (2 -a$

µ ·¹ ·µ¸»V» ¼ ¼ ¸o¸V¼· =
v 1 ,‰) (? ) -a$
Standardized unexpected earnings (SUE) =

÷G‚! !ü‡ ø‚q‚ ‡X
÷G‚! !ü‡ ø‚q‚ ‡X
1
Portfolio P/E
Š( *ℎ (2 ℎ & ? &( = |
∑!"
| = Weight of stock i in portfolio

where:
= P/E of stock i
27
Learning Module 5 | Residual Income Valuation
- 1j = -=9+j 1 − + − Š1:: × 9 u() (2 : • ,jE

Economic Value Added (EVA)
J 1j = J ( u ,%( > &j − 9 u() (2 : • ,j

Market Value Added (MVA)
#9j = -j − × =jE = #h- − × =jE

Residual Income, RI
#9 #9 #9ó
Residual Income Model
== +] + + +⋯^
1+ 1+ 1+ ó
Video: https://youtu.be/O0KTBkEtP9M
d
#h- − × = #9
Single-stage residual income valuation model
== + == +
−* −*
e
Ex
Video: https://youtu.be/82GJu5umrB0
J ( u ,%( 2( + J ( u ,%( ('% ‰

Tobin’s Q
+ )´ =
s
á
#(•, ?(&( ? ) , ))( )
si
oe
Continuing Residual Income

ãE
#9j #9ã
== + + 0≤ ≤1
1+ j 1+ − 1+ ãE
j"
N
= Persistence factor
If RI declines to Long-run level in mature industry, with premium over book value
ã
#9j aã − =ã
== + +
1+ j 1+ ã
j"
Video: https://youtu.be/vhRW3q70E0w
=j = =jE + -j − \ uj
Clean surplus relationship:
28
Learning Module 6 | Private Company Valuation
Capitalized Cash Flow Method (CCM)
>:>> 1 + * -'% ‰ > & J ( u ,%(

> & u ,%( = = −
Š1:: − * u ,%( u ,%( \(
→
>:>- 1 + *
-'% ‰ u ,%( =
−*
Excess Earnings Method (EEM)
- *) ('% (2 • u 2(
·¼¼ { & , •(2
= − ℎ( ('% (2 ( (%
·µ¸»V» ¼ ( *)
¸ V» µoVUµ, 2 ¶V ·¹ µ¼¼·U¼
-p?()) - *)
,%( ℎ( * ,( ))( ) =
d
−*
e
Ex
Value of the firm = Working capital + Fixed assets + Intangible Assets
Video: https://youtu.be/137ga1xgAbA
s
Control Premium
-'% ‰ u ,%( -'% ‰ u ,%(

si
= × 1+: , • (& %&

| ℎ? , • (& %& | ℎ % ? , • (& %&
oe
\(
123%) (2 ? , • (& %& = : , • (& %& × 71 + 8
1))( )
N
Discount for Lack of Control and Marketability
1
Discount for Lack of Control (DLOC)
\gh: = 1 −
1+: , • (& %&
Total discount = 1 – (1 – DLOC)(1 – DLOM)
,%( 1+J •
\ghJ =
$ℎ ( • ?(
29
FIXED INCOME
Learning Module 1 | The Term Structure and Interest Rate Dynamics
\>O = \>• × >•,OE•

Forward Pricing Model
1
where:
\>O =
1 + •O O
1
>•,OE• = OE•
.1 + •,OE• 0
Forward Rate Model

OE•
1 + •O O
= 1 + •• •
.1 + •,OE• 0
e d
•O = Spot rate for period =
where: Ex
•,OE• = = − 1 forward rate that starts in period 1
Calculating spot rate from one-period forward rates

⁄ã
•ã = û 1 + • .1 + 0.1 + 0 … .1 + 0ý −1
s
, , ãE ,
si
Boostrapping Spot Rates From Par Rates

oe
Video: https://youtu.be/-FnweFO172Q
N
1 − \>ã 1 − \ )? % > ? g ) a ‰&(

Fixed swap rate
)ã = =
∑ãj" \>j $%& \ )? % > ? )
Swap spread = YTM of swap rate – YTM of government bond (same maturity)
TED spread = LIBOR – YTM of T-bill (same maturity)
LIBOR-OIS spread = LIBOR – OIS Fixed rate
For Parallel shifts in yield curve:
%∆a = −J 2\% × ∆ +J ∆a = −J 2\% × ∆ +J × a
%∆a = −- \% × ∆:% u( ∆a = −- \% × ∆:% u( × a
30
Non-parallel shifts (i.e. change in slope or curvature):
%∆a = −œ(‰# (\% × ∆œ(‰ # (
Learning Module 2 | The Arbitrage-Free Valuation Framework
: : > +:
Arbitrage-free Value of Bond
= + + ⋯+
1+• 1+• 1 + •! !
•! = Spot rate for period n

where:
0.5 × + 0.5 × +:
Backward Induction Valuation Methodology
= 2 u ,%( ‰ 2( =
Þ þ
1+
d
Þ = bond’s value if the higher forward rate is realized one year hence
where:
e
þ = bond’s value if the lower forward rate is realized one year hence
Ex
: = coupon payment that is not dependent on interest rates
Video (Backward Induction Valuation): https://youtu.be/DhAVQ3hIXlQ

s
si
Video (Backward Induction with Financial Calculator): https://youtu.be/FycX2UwJxCM

oe
Video (Pathwise Valuation): https://youtu.be/3oM-220oi7o
Binomial Interest Rate Tree

N
,Þ = ,þ (
,ÞÞ = ,þþ (
ô
,Þþ = ,þþ (
ó,ÞÞÞ = ó,þþþ ( ó,ÞÞþ = ó,þþþ (

ô
ó,þþÞ = ó,þþþ (
31
Equilibrium Term Structure Models
Cox-Ingersoll-Ross (CIR) Model

2 = ¨− j 2 + v Y j 2•
2 = ¨− 2 + v2•
Vasicek Model
j
= Speed of reversion (> 0)

where:
¨ = Long-run interest rate

v = Interest rate volatility
Arbitrage Free Models
2 = ¨j 2 + v2•j
Ho-Lee Model
d
j
2 ln j = ¨j 2 + v2•j
e
Kalotay-Williams-Fabozzi (KWF) Model
Ex
¨j = Time-dependent drift term
where:
s
si
Learning Module 3 | Valuation and Analysis - Bonds with Embedded Options

oe
Callable and Putable Bonds
Value of callable bond = Value of straight bond – Value of issuer call option
N
Value of putable bond = Value of straight bond + Value of investor put option
Video (Valuing a callable bond): https://youtu.be/lWLSodiqZaM
Video (Valuing a putable bond): https://youtu.be/qmUnAtpXIAg
aE − a C
- (? u( 2% =
2 × Δ:% u( × a
a + a C −2×a
- (? u( ? u(p ‰ =
E
a × Δ:% u(
32
Capped and Floored Floaters
Value of capped floater = Value of straight floater – Value of cap
Value of floored floater = Value of straight floater + Value of floor
Video (Valuing a capped floater): https://youtu.be/d4LNMdXV9vU
Video (Valuing a floored floater): https://youtu.be/YJZU0THHBNE
Convertible Bonds
: u( ) ª 2( ,‰ * : u( )
= ×
u ,%( )ℎ ( • ?(
V»V ºµ · : u( ) ,%( % 2( ,‰ *
= µ ] , ^
? u( ,( 2 u ,%( $ *ℎ 2
d
J ( ? u( ) : u( ,( 2 • ?(
e
=
• ?( : u( )
Ex
J ( ? u( ) J ( ? u( ) ª 2( ,‰ * )ℎ (
= −
• (& %& •( )ℎ ( • ?( • ?(
J ( ? u( ) J ( ? u( ) • (& %& •( )ℎ (
s
=
• (& %& ª 2( ,‰ * )ℎ ( • ?(
si
a (& %& u( : u( ,( 2 • ?(
oe
= −1
$ *ℎ u ,%( $ *ℎ u ,%(
N
,%( ? ,,
Convertible Bond (With No Additional Options)
,%( ,%(
= + •
? u( ,( 2 ) *ℎ 2
))%( á ) ) ?
,%( ? ,, ,%(
Callable Convertible Bond
,%( ,%(
= + • − ))%( ? ,,
? u( ,( 2 ) *ℎ 2
))%( á ) ) ? •
,%( ? ,, ,%(
Putable Convertible Bond
,%( ,%(
= + • + u() •%
? u( ,( 2 ) *ℎ 2
))%( ) ) ?
á •
33
Learning Module 4 | Credit Analysis Models
š-)• ( 2 = +J : • ( 2 − +J š u( &( 2
g )) * u( -p•(? (2 #(? u( ‰
= × R1 − S
2( %, (p• )% ( (
g )) #(? u( ‰
=1−
)(u( ‰ (
Expected Loss = Probability of Default × Loss Given Default
> u ,%( > u ,%( 2 : (2 ,%

= −
? (2 ) ‰ 2 ))%& * 2( %, 123%) &(
!
-gj ah\ × gš\
: (2 u ,% 23%) &( , : 1= =
1+ j j 1+
d
j" =1
e
-gj = Expected loss of bond at time t
where:
ah\j = Probability of default of bond at time t

Ex
gš\j = Loss given default at time t = -p•(? (2 -p• )% (j − #(? u( ‰j
j = Risk-free rate at time t
= Bond’s remaining tenor
s
-gj
a (p•(? (2 , )) •( 2 =
1+ j j
si
ah\j = 1 − @ • 2 ( jE
×@ • 2 (
oe
Approximation of credit spread ≈ Annual hazard rate × (1 – Recovery rate)

N
Video (Probability of Default): https://youtu.be/e7K4x48Eg4U
Video (Valuing a Credit Risky Bond – Zero Interest Rate Volatility):

https://youtu.be/2I9bgu-o7aI
Video (YTM of Corporate Bonds – Default and Non-Default):

https://youtu.be/K253Y7c2Yto
Expected percentage price change of a corporate bond

a , ‰ ? (2 & * × %∆a
%∆a = −J 2\% × ∆? (2 )• ( 2
where:
34
Structural Model
1j = \ , + + $j
In terms of… Call options Put options
Equity - + = J pe1 + − œ, 0f - + = 1 + − œ + J peœ − 1 + , 0f
Debt \ + = 1 + − J pe1 + − œ, 0f \ + = œ − J peœ − 1 + , 0f
$j = -'% ‰ u ,%( &(

where:
1ã = 1))( u ,%( &( +

œ = > ?( u ,%( 2(
Learning Module 5 | Credit Default Swaps
d
CDS payout amount = Payout ratio × Notional
= (1 – Recovery rate of CTD bond) × Notional
e
Ex
Upfront payment = PV of protection leg – PV of premium leg
ª• a a
= −
• (& %& : (2 $• ( 2 > p(2 : %•
s
: (2 > p(2
≈7 − 8 × :\$ \%
si
$• ( 2 : %•
oe
a ?( :\$ •( 100 , = 100 − ª• • (& %&
% :ℎ *( :ℎ *(
= × \%
N
:\$ • ?( )• ( 2 •)
35
DERIVATIVES
Learning Module 1 | Pricing and Valuation of Forward Commitments
Forward Contracts
> =$ 1+ ã
Forward Pricing:
> = $ + :: − := 1+ ã
> = $ (‚ ã
> =$ ( ‚ CŽŽEŽO ã
$ = Current spot price

where:
d
> = Forward price (set today)
= Annually compounded risk-free rate
= Continuously compounded risk-free rate
e
Ex
:: = PV of Carry cost
:= = PV of carry benefits
:: = Continuously compounded cost of carry
:= = Continuously compounded carry benefit
s
si
=0
Forward Valuation (Long Position):
oe
>j − > >

= = $j −
j
1+ ãEj 1+ ãEj
N
ã = $ã − >
36
Forward Rate Agreement (FRA)
{ ,egB − >#1 f
» >#1 • ‰ · oV¸µUV » >#1 =
B
1 + \B B
1 + gã 1
>#1 = 7 − 18 7 8
ã
1 + gw w B
Valuation at time = * (prior to FRA expiration):

{ ,.>#1ü − >#1 0
,%( g * >#1 * =
B
1 + \ãEü ãEü
\B = Discount rate for m periods at t = h

where:
ℎ = FRA tenor
& = Tenor of the underlying rate
+ = ℎ + & = Maturity of underlying instrument
e d
Video (Pricing an FRA): https://youtu.be/uBmAt_z9f3Y
Ex
Video (Valuing an FRA): https://youtu.be/AYKRVdaYvxY
Fixed Income Forwards and Futures

s
´% (2 % % () : u( )
Pricing:
> = ×
si
• ?( ?
= > = + 19 − 19ã − > :9
oe
j = a ()( u ,%( 2 ( ( ?( | 2 • ?()

Valuation for fixed income forward contracts:
N
= a e>j − > f
j = Price change since previous day’s settlement

Valuation for fixed income futures contracts:
= = Quoted bond price

where:
{%& ( ?? %(2 2 ‰) ) ?( , ) ? %• • ‰&( 1 % , ? %•

19 = ×
+ , 2 ‰) 2% * ℎ( ? %• • ‰&( •( 2 : %• ('%( ?‰
37
Interest Rate Swaps (IRS)
1−a !
>$ =
∑!" a
1
a =
\ ‰) J % ‰
1 + $• ( R 360 S
Pay-fixed, receive-floating IRS

!
,%( $| • = { , × >$j − I a
"
Receive-fixed, pay-floating IRS

!
,%( $| • = { ,× I − >$j a
"
e d
Video (Pricing an Interest Rate Swap) : https://youtu.be/0QvtKZutr5E
Ex
Video (Valuing an Interest Rate Swap): https://youtu.be/_A2a909etvg
Currency Swap
s
1 − a !,G
Pricing for fixed leg of currency swap in currency
>$G = !
si
∑ " a ,G
oe
Ž = { ,G × − $j × { ,L ×
Value of a fixed-for-fixed currency swap
G L
N
G = >$G a ,G +a !,G ×a G = ,%( ?% ( ?‰ ,(* (?( u(

"
!
L = >$L a ,L +a !,L ×a L = ,%( ?% ( ?‰ ,(* • ‰

"
$j = Spot exchange rate at time (quoted as ⁄ )
Video (Pricing a currency swap): https://youtu.be/XZlxcVByc00
Video (Valuing a currency swap): https://youtu.be/3h4mElS48aA
38
Equity Swap
$j
Value of equity swap (receive fixed-rate, pay equity return)
÷ ,j = : − ×{ ,−a j a −{ ,
$jE
$j
,%( -'% ‰ g(* = ×{ ,
$jE
Cash flow for equity leg = { , × a( 2 ? ('% ‰ ( %
: = Value at time of a fixed-rate bond initiated with coupon : at Time 0

where:
$j = Current equity index level

$jE = Equity index level at last reset date
d
Learning Module 2 | Valuation of Contingent Claims
e
?C − ?E
Hedge Ratio
ℎ = ≥0
Ex
Gƒƒ
$C − $E
•C − •E
ℎqøj = ≤0
$C − $E
s
si
No-arbitrage Approach:
oe
?=ℎ Gƒƒ $ +a −ℎ Gƒƒ $

C
+ ?C = ℎ Gƒƒ $ +a −ℎ Gƒƒ $
E
+ ?E
• = ℎqøj $ + a .−ℎqøj $ C + •C 0 = ℎqøj $ + a .−ℎqøj $ E + •E 0

N
Expectations Approach:
1+ −2
™=
%−2
% = Up factor
where:
2 = Down factor
= Risk-free rate
39
™? C + 1 − ™ ? E
One-period Binomial Model
?=
1+
™•C + 1 − ™ •E
•=
1+
™ = Risk-neutral probability of an up-move

where:
Note: For interest rate options, ™ = 0.5 and discount expected option payoff using the
1-period forward rates.
Video (Valuing interest rate options): https://youtu.be/X4R8j_cf8SA
Two-period Binomial Model:
d
™ ? CC + 2™ 1 − ™ ? CE + 1 − ™ ? EE
?=
1+
e
Ex
™ •CC + 2™ 1 − ™ •CE + 1 − ™ •EE
•=
1+
s
For 2-period American-styled call option with dividend in t = 1:
si
$C = % × $ − a 2 u 2( 2) ) (( (
oe
$E = 2 × $ − a 2 u 2( 2) ) (( (
N
Video: https://youtu.be/U_XkIZjJIAU
40
Black-Scholes Option Pricing Model
? = ${ 2 − ( E‚ã { 2
• = ( E‚ã { −2 − ${ −2
$ 1
ln R S + R + v S +
2 = 2
v √+
2 = 2 − v √+
Put-call parity: • + $ = ? + ( E‚ã
Hedge ratio for calls = { 2

Probability that the call option expires in the money = { 2 = a $ã >
•
Hedge ratio for puts = { 2 − 1 = −{ −2

•
d
Probability that the put option expires in the money = 1 − { 2
•
a $ã < = { −2
•
e
Ex
? = $( E ã { 2 − ( E‚ã { 2
BSM model with carry benefits
• = ( E‚ã { −2 − $( E ã { −2
s
$ 1
si
ln R S + R − ! + 2 v S +
2 =
v √+
oe
2 = 2 − v √+
N
Put-call parity: • + $( E ã
= ? + ( E‚ã
41
Black Option Valuation Model
European Options on Futures
? = ( E‚ã e> + { 2 − { 2 f
• = ( E‚ã { −2 − $( E ã { −2
> + 1
ln ] ^+ 2v +
2 =
v √+
2 = 2 − v √+
Put-call parity: ? = ( E‚ã e> + − f + •
d
Interest Rate Options
? = 1a ( E‚.jM"lCj# 0 û>#1.0, , 2 − # ( E‚ã { 2 ý
e
KE B 0{
Ex
• = 1a ( E‚.jM"l Cj#0 û# ( E‚ã { −2 − >#1.0, KE , B 0{ −2 ý
>#1.0, , B0 1
ln 4 6 + R2 v S
KE
s
KE
2 =
v Y KE
si
oe
2 = 2 − v Y KE
N
Payer Swaption
!
a1 $% = 1a × e# { 2 −# { 2 f× a K 1
K"
Receiver Swaption
!
#-: $% = 1a × e# { −2 −# { −2 f × a K 1
K"
# 1
ln R + v +
# S R2 S
2 =
v √+
2 = 2 − v √+
42
Video (Interest Rate Options & Swaptions Equivalences:

https://youtu.be/uZQO50sEzso
Optimal Number of Hedging Units (for Delta Hedging)
a , 2(,
{Þ = −
\(, Þ
Video: https://youtu.be/v8RcvkQKFpw
Option Greeks
\(, Gƒƒ = ( E&ã { 2
\(, qøj = −( E&ã { −2
d
© = Continuously compounded dividend yield
where:
( E&ã
e
Ex
š && Gƒƒ = š && qøj = { 2
$v √+
1
? = ? + \(, × '$ + š && × '$
2
s
Gƒƒ Gƒƒ
si
1
• = • + \(, × '$ + š && × '$
qøj
2 qøj
oe
N
43
ALTERNATIVE INVESTMENTS
Learning Module 1 | Introduction to Commodities and Commodity Derivatives
>% % () $• • ?( $ *( : u( ( ?(
= + −
• ?( •ℎ‰) ? , ? && 2 ‰ ? )) ‰ (,2
{( ( & g *( ( &
: ,( 2
= % % () ? ? − % % () ? ?
)• ( 2
?, ) * • ?( ?, ) * • ?(
:% ( • ?( − a (u %) • ?(
a ?( ( % =
a (u %) • ?(
{( ( & g *( ( &
¬ % % () ? ? − % % () ? ? -
a( ?( *( ℎ( • )
?, ) * • ?( ?, ) * • ?(
# ,, ( % = × ℎ( % % () ? ?
{( ( &
d
( * ,,(2
% % () ? ?
e
?, ) * • ?( Ex
+ , a ?( # ,, : ,, ( , #( , ? *
= + + +
(% (% (% (% (% 2(p ,‰
s
Learning Module 2 | Overview of Types of Real Estate Investment
si
Net and Gross Leases

oe
{( ( =š )) ( − h•( * (p•( )()

N
Retail Rent
#( •( J &%& ( #(u( %( •( { % , ( •
= + $ℎ (% × −
)'% ( •( )'% ( )'% ( •( )'% (
Appraisal-based index
: • , - 2 * =(* *
{h9 − +R − S
-p•( 2 % () & ( u ,%( & ( u ,%(
#( % =
=(* *& ( u ,%(
44
Learning Module 3 | Investments in Real Estate Through Publicly Traded Securities
,%( ,%( + , 2(
Net Asset Value Approach
+ −
•( * () ( ℎ( ))( ) 2, , ()
{1 •( )ℎ (=
{%& ( )ℎ () % ) 2 *
{h9
If valuation of operating real estate is not provided:
,%( •( * () (=
: • (
Video: https://youtu.be/WncC3BZmfs8
š )) ( , -) & (2 u ? ?‰ 2 h•( *
{h9 = − −
(u( %( ? ,,(? ) , )) (p•( )()
d
Relative Value Approach
e
\(• (? š ) ) ,( g )) ) ,(
Funds from Operations:
>>h = {( ? &( + − +
2 & • • •( ‰ • •( ‰
Ex
{ ? )ℎ #(?% * ? • , (p•( 2 % (
Adjusted Funds from Operations:
1>>h = >>h − −
( 2 ,( ) * ? ) )
s
si
Two-Stage Dividend Discount Model

oe
,%( #-9+ )ℎ (=a 2 u 2( 2) + a ( & , u ,%(

N
45
Learning Module 4 | Hedge Fund Strategies
Equity Market Neutral Pairs Trading
1& % $ℎ a ) =( % 2( u ,%(2 ) ? × 1& % 9 u() (2

=−
hu( u ,%(2 $ ? =( u( u ,%(2 ) ?
Merger Arbitrage Strategy
For a stock-for-stock deal:
a ‰ &( *( ) )%??()) %, = {• × a• − {ã × aã
{• = Number of acquirer’s shares to short sell

where:
a• = Share price of acquirer post announcement

{ã = Number of target’s shares to buy
d
aã = Share price of target post announcement
e
Conditional Factor Risk Model
Ex
# ,j = ž + Ü , > ? 1 j+Ü, > ? 2 j + ⋯ + Ü ,Ý > ? œ j+
+\j Ü , > ? 1 j + \j Ü , > ? 2 j + ⋯ + \j Ü ,Ý > ? œ j + ( ,j
s
si
# ,j = Return of hedge fund in period

where:
Ü ,Ý > ? œ j = Exposure to risk factor œ for hedge fund in period during

oe
\j Ü ,Ý > ? œ j = Incremental exposure to risk factor œ for hedge fund in period

normal times
N
\j = Dummy variable that equals 1 during financial crisis periods (0 otherwise)

during financial crisis periods
ž = Intercept for hedge fund

( ,j = Random error with zero mean and standard deviation v
46
PORTFOLIO MANAGEMENT
VOLUME 5
Learning Module 1 | Exchange-Traded Funds: Mechanics and Applications
End-of-day ETF premium or discount (%)
-+> • ?( − {1 •( )ℎ (
{1 •( )ℎ (
Intraday ETF premium or discount (%)
-+> • ?( − 9 2 ? (2 {1 •( )ℎ (
9 2 ? (2 {1 •( )ℎ (
@ ,2 * •( 2? ) % =# % 2 • 2( ? ) % +J *(&( (( %
d
# % 2 • 2( ? ) % = h ( | ‰ ? && )) % × 2 + = 2 ) )• ( 2 %
e
Learning Module 2: Using Multifactor Models
Ex
Arbitrage Pricing Theory (APT)
- #q = # + ö Üq, + ⋯ + öÝ Üq,Ý
s
si
- #q = the expected return to portfolio p

where:
oe
# = the risk-free rate

Üq,K = the sensitivity of the portfolio to factor j
öK = the expected reward for bearing the risk of factor j
N
œ = the number of factors
Carhart Four-Factor Model
-.#q 0 = # + Üq, #J#> + Üq, $J= + Üq,ó @Jg + Üq,ô ŠJg
#J#> = Return on a value-weighted equity index minus one-month T-bill rate

where:
SMB = small minus big; average return on three small-cap portfolios minus the
average return on three large-cap portfolios
HML = high minus low; average return on two high book-to-market portfolios minus
average return on two low book-to-market portfolios
WML = winners minus losers, a momentum factor; return on a portfolio of past year’s
winners minus return on a portfolio of past year’s losers.
47
Macroeconomic Factor Model
# = + > + > +⋯+ Ý >Ý +
> = the surprise in the factor k

where:
= the sensitivity of the return on asset i to a surprise in factor k, k = 1, 2, …,

= Expected return on the portfolio
Value of attribute for asset − Average value of attribute

Fundamental Factor Model
=
v Values of attribute
Return Attribution
1? u( ( % = #P − #O
Ý
a , =( ?ℎ& > ? $(?% ‰
d
= 47 8 −7 8 6 ×R S +
)( ) u ‰ )( ) u ‰ (% )(,(?
e
" Ex
+ ? *( , +- = ) #P − #O
#P − #O
9 & , 9# =
) #P − #O
s
si
Active risk squared = Active factor risk + Active specific risk

oe
N
48
Learning Module 3 | Measuring and Managing Market Risk
Parametric VaR (Using Normal Distribution)
a ,
,%( #) , # = −û-.#q 0 − • × vq ý ×
,%(
-.#q 0 = Portfolio expected return

where:
vq = Portfolio standard deviation
Two-asset portfolio:
-.#q 0 = | - # +| - #
vq = | v + | v + 2| | s , v v
e d
#…G ƒù × 250 2 * 2 ‰)
Scaling from daily returns to annual returns (Assuming 1 year = 250 trading days):
Ex
Scaling from daily standard deviation to annual standard deviaton:
v…G ƒù × √250
9 ? (&( , # 9 # = # ( ?ℎ *( − # ( ( ?ℎ *(
s
si
ΔB Δ‰ 1 Δy
Percentage change in bond price:
oe
≈ −\% + : u(p ‰ 7 8
= 1+‰ 2 1+‰
New call price: ? + Δ? ≈ ? + Delta Δ$ + Gamma Δ$ + (* Δv

N
New put price: • + Δ• ≈ • + Deltaq Δ$ + Gammaq Δ$ + (* q Δv
Learning Module 4 | Backtesting and Simulation
No formula.
49
VOLUME 6
Learning Module 1 | Economics and Investment Markets
1
One-period real-risk free rate:
,j, = −1
-j û&
) j, ý
-j û&
) j, ý = Inter-temporal rate of substitution
where:
-ûa*jC ,‡E ý
a ?( ) ‰ ))( = + ? uj ûa*jC ,&
) j, ý
1 + ,j, ,‡E
where:
= risk neutral present value
÷ûP*+,l,é"l ý
Cƒ+,l
? uj ûa*jC ,&
) j, ý = covariance between investor’s inter-temporal rate of substitution
,‡E
d
and the random future price the investment at t + 1, based on the
e
) = time to maturity of investment
information available to investor today.
Ex
Default-free nominal coupon-paying bond
:>jC‡
aj =
%
s
‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ ‡
si
oe
,j,‡ = Real-risk free rate

where:
¨j,‡ = Expected inflation rate

™j,‡ = Uncertainty in future inflation rate
N
¨j,‡ + ™j,‡ = Breakeven rate of inflaton
Short-dated nominal zero-coupon government bonds (e.g., T-bills)
:>jC‡
aj =
1 + ,j,‡ + ¨j,‡ ‡
50
• = 9j + ™j + 0.5 ™j − ™j∗ + 0.5 −

Taylor Rule
∗
j j j
• j = policy rate at time t

where:
9j = level of real short-term interest rates that balance long-term savings and borrowing
™j = rate of inflation
in the economy
™j∗ = target rate of inflation

j = logarithmic level of actual GDP
j = logarithmic level of potential real GDP
∗
j − j = output gap
∗
Corporate bond
-j û:>
- jC‡ ý
aj =
%
‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ + !j,‡ ‡
e d
!j,‡ = Credit premium
where: Ex
Equity
-j û:>
- jC‡ ý
s
aj =
1 + ,j,‡ + ¨j,‡ + ™j,‡ + !j,‡ + .j,‡ ‡
si
‡"
-j û:>
- jC‡ ý
aj =
oe
‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ + öj,‡ ‡
N
.j,‡ = Equity premium relative to risky bonds

where:
öj,‡ = !j,‡ + .j,‡ = Equity risk premium
Commercial Real Estate
-j û:>
- jC‡ ý
aj =
%
‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ + !j,‡ + .j,‡ + /j,‡ ‡
/j,‡ = liquidity risk premium

where:
51
Learning Module 2 | Analysis of Active Portfolio Management
Active return, #• = #P − #O
1,•ℎ , žq = #q − Üq #O
ä ä
,%( 22(2, #• = ∆|K #O,K + |P,K #•,K

K" K"
$#P = $#O + 9#
v #P = v #O + v #•
9#
For optimal Sharpe ratio,
v #• = v #O
$#O
d
ˆ
e
+ ) ( : ( ?( , +: = : 7 , ∆| v 8
v
Ex
#• ˆ
9 & : ( ?( , 9: = : 7 , 8
v v
s
9: ≈ 2 a , ‰ *ℎ ? ,, − 1
si
Forecasted active return, ˆ = 9: × v × $

oe
where: $ is set of standardized forecasts of expected returns across securities

N
ˆ v•
Mean-variance optimal weights
∆| ∗ =
v 9: √=#
Full Fundamental Law

- #• = +: × 9: √=#v•
9# = +: × 9: √=#
9# ∗
v #• = +: × v #O
$#O
$#P = $#O + +: 9#∗
52
#• = - #• |9:1 + { )(
Performance Measurement
+: = Proportion of variation in realized performance attributed to realized information

coefficient
9:1 = realized information coefficient

where:
9:
Ex-ante measurement of skill
- #• = v
vŽ •
{
Independence of Investment Decision
=# =
1+ {−1 s
e d
Ex
s
si
oe
N
53

Noesis CFA Level 2 Formula Sheet 2024

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CFA® Program

FOR REFERENCE ONLY

NOESIS EXED SDN BHD

CFA Level 2 – Formula Sheet (2024)

Setting Up the Texas BA II Plus Financial Calculator

$%& $'% () #(* ()) $$# $$-

$%& $'% () + ,, $$+ = −

$%& $'% () #(* ()) , $$# = ./ − 0

$%& $'% () - , $$- = . − /0

= Number of independent variables in the model

Schwarz’s Bayesian information criterion (BIC of SBC)

F-distributed test statistic for jointly omitted variables

$%& )'% () ( () ? (2 & 2(, − $%& )'% () % () ? (2 ⁄'

F-test for joint test of slope coefficients

J( $'% ( #(* ()) $$# ⁄

=K = Hypothesized value of coefficient 3

Video (Simple Linear Regression): https://youtu.be/uR_9im2JP18

Learning Module 3 | Model Misspecification

# = #-squared between squared residuals and independent variables

#K = Variation in − 1 independent variables

Learning Module 4 | Extensions of Multiple Regression

Sum of individual leverages for all observations = +1

If observation’s leverage > 3 R S ⇒ Potentially influential observation

Studentized Deleted Residual, UV∗

( ∗ = The residual with the th observation deleted

)X ∗ = The standard deviation of the residuals

( = Residual for observation

= The number of independent variables

If \ > _ ` , then th observation is highly likely to be an influential data point

Logistic Regression (Logit)

Likelihood ratio (LR) test

g# = −2 g * , (, ℎ 2 () ? (2 & 2(, − g * , (, ℎ 2% () ? (2 & 2(,

Learning Module 5 | Time-Series Analysis

= time (independent variable)

p-th order autoregressive model, mn o

pj = + pjE + pjE + ⋯ + q pjEq + j

Test statistic for autocorrelation of residuals

Mean reverting level for AR(1) model

Learning Module 6 | Machine Learning

Learning Module 7 | Big Data Projects

+ %( {(* u( + > ,)( a ) u(

+ %( a ) u( + > ,)( {(* u(

\ ?%&( > ('%( ?‰, \> =

+>-9\> = +> × 9\>

Learning Module 1 | Currency Exchange Rates: Understanding Equilibrium Value

When given Ž and O, then O = Ž × O

When given Ž and Ž , then O = Ž ×

>‘⁄… − $‘⁄… … R 360 S

Mark-to-Market Value of a Forward Contract

.>j,‘⁄… − > ,‘⁄… 0 × : ? $ •(

>j,‘⁄… = Forward rate at valuation date, t (Bid side)

Uncovered Interest Rate Parity

Video (Carry Trade): https://youtu.be/_26fG3Zvzyg

™ X = Expected inflation rate

™ = Actual inflation rate

Bonus Video: https://youtu.be/xNo3GpWYgKA

Learning Module 2 | Economic Growth and the Investment Decision

a = aggregate value of equities

Cobb-Douglas Production Function

g '% 2 ‰ : u( ( @ ℎ ´% , ‰ g '% 2 1))( )

1u( ( ( ?ℎ& 1u( ( )