Uppe Mark.

C A IA L e v e l II
FORMULASHEET
Chapter 6 Chapter 8
Vasicek model
Ex-ante: E (R i ) - R / = [e ^ - R J
n +i = n + * t « -r,) + OE,+1; E [rM ] = r, + at( / z - r,) Multi-factor i=i
asset pricing model
CIR model rt+i = r t + > c(M -rt ) + ylrtO£t+1 Ex-post: ^ - Rf = £ |>W -
7=1
Ho and Lee model rM = r t + 0 t +OEt+1
Averaged short-rate Fama-French £(*,) - Rf = P, |>( A ) -Rf ] +A |>(A - A )]
total return
0 .5 (1 + r0) [ ( 1 + ru) + ( 1 + )] - 1 (Ex-ante)
+ A ,-1 > ( * * - * , ) ]
Short-term rate ru = rde2<T Fama-French-
£(A)-*/=A[*(A)--*/]+A|>(A-A)]
Carhart

Chapter 7
(Ex-ante) +A[*(A-A)]+A|>(A-A)]
PV of
Recovery rate (RR) (P V of s u m to be re c o v e re d )/E A D expected CFs x = > Disc.factor: ( l + k )f = P V /E (x)

Loss given default L G D = E A D ( l —R R ) PV of E (x -n i) , m is stochastic discount factor

stochastic CFs x For 2 outcomes: PV = 7tuXumu + Jti Xi mi
Expected loss L G D x P D = E A D (1 —R R )x P D

Merton's firm
A sset = D eb t + E q u ity ( At = D, + E ,) Chapter 9
capital structure
Equity value (Er) m a x ( A , —R , 0 ) [= payoff of call on firm's assets]
“ S S S sd r ( K ) = Z ™ ,x K ,;
K —m a x (K —A r ,0 ) [= payoff of put on firm's assets]
Risky debt value (DT Expected utility E [U (W )] = X1U(W1) + X2U(W2), ^ prob. of W
=> P u t valu e = Risk-free debt - Risky debt
Expected utility ^
Call price: A tN [d ) —Ke~rrN^d —CTAy[T^, Using expected fx ----- (J2 , 1 is risk aversion level.
return & variance 2
Black-Scholes model where d = |^ln(A(/l<C) + ( r + 0.5fT^)rJ^<TylV rj (G) With higher
moments
fX-^-O2 +A2S-A3K
Prob. of default: P r(A j. < K ) = l - N ^ d - a A4r^

Ke~n - Put price,,

Using VaR A-fv aRa
Risky debt price (D )
w h e re Putt = Ke~r*N \-d + <TAy jT ]-A tN (-d ) V x E (R V a rlV x R - L x G l (G)
With liability 1 ^ 2 L p J
Risky debt price (D.) V'p~(r+st)T , . ... , growth , 1 E [ R - R 0] t S
1 r \ Au s is cred it spread. Optimal nsky asset weight: w = -------— --- - + L —-
A <T2 <7
Credit spread (s) x ln N (d -< T AV r ) + A - e~ x N (_ d ) (G) Degree of A = Te ( R p ) - R f ]/c72
p
T nsk aversion L v *7 / J/ ^
Firm's equity Portfolio return
volatility (cr£)
( A , / E , ) x A x (ta ( R , - R 0 ) + R0 ; riskless asset: zv0 = l - ^ z v j
(Kp) i=1
Distance to default
(DD)
(A ~ K ) / ( A t<TA) ; K = default trigger Variance-covariance °ii
■ Oit :
‘ °ij«
(G)
matrix =
Expected default # of firm s defaulted in 1 y e a r w ith D D = n of N risky assets Pm '' * CTv-
frequency (EDF) Total # of firm s in p op ulation w ith D D = n A 2
MVO m axR p -y < T p subject to w, > 0; i = l,...,N
Probability —
Jit
*■+-

e objective function
II

; Probability of default = l - p
of surviving t years (G)
maxE 5 X * , - * . ) + * , — Var
Conditional Unconditional 1=1 2
Probability of default
between t & Af AAt e~AtM t E [^ -^ ]

Probability of default
Optimal weights of
risky assets 4r (G)
i

p(s)~
ru

ru
1
II

between s & t E[Kn --Ro1

Optimal weight 1 E [ R Rq]
Bond price (D0)
Kb ^ ^ , A = default intensity of risky asset (u>) ^ ^.2

e~rT ( Ke~XT + R R x K ( l - e~2T W Hurdle rate criterion E ( R new ) > Ry + /?ncw [ E ( R p ) _ R / ]

Bond price (D0)
(with recovery rate) 'r+A(l-RR))T MV adjusted - A — -
~ K e" , A (l —RR j = credit spread m a x R p —— 0Lp; Replace R, with R,
for illiquidity
Altman model
Z 1 2 Work™S caP- |i i Ret-eammgs | EBIT | Equity value |Sales (Q MV adjusted For R ,f = fl. + fc.F( + w fr ;
Total assets TA TA BV of liabs TA for factor exposure j=1
Add constraint: bp < targ et fc .
(G) = Equation will likely be given on exam if needed for a calculation.

Copyright © UpperMark, Inc. All rights reserved. www.uppermark.com

 Uppe Mark. C A IA L e v e l II
Chapter 10 Chapter 17 (cont.)
<Tp = V a r Final hypothetical CF Previous hypoth. market accumul. amount
= Y ? L w iw j°ij (for PME) - PE fund's NAV
Portfolio variance i=1 J i=l ;=1
,2_2 , _2_2
2-assetportfolio: <Tp = w f o f + WjO] + 2wiwjOij NOI ^ Proncrtv Value NQI
Cap rate
Property value Cap rate
Marg. contribution
— X lP f = ------ HI; = A W Risk premium
of i to P's total risk OW{ <Tp E(R; ) = Rf + Risk premium,
approach
Total risk of
<TP = S u m o f m a rg in a l co n trib u tio n s
Chapter 18
Portfolio's total risk
(in risk factor 0-p = ( p h ^ K ) + ( p Fl (Th b2 ) + ( p ea e ) Trading level Funding level + Notional funding
contributions)
Margin-to-equity
Margin requirement/NAV
Volatility-weighted ratio
weight (to.) V « /p l;
Capital at risk (Loss if hit stop-loss price)/NAV

Chapter 11 ( a x cr) + jU where a = 1.645 for 95% VaR

Short-term real risk-free rate VaR a = 1.96 for 97.5% VaR

Asset class return
+ Expected inflation + Risk premium P r(z< o r) = l - c
Mean return
Chapter 12 & Variance
P of f { R t ft)
1 <=i f - i <=i
Change in Income from gifts - Spending Exponentially
endowment value + Net investment returns smoothed mean Mt-i — ( l — Z ) f i t_2 + ^ R f-i
Returns from SAA + Security selection Exponentially
Total return
+ Market timing/TAA smoothed variance o f = ( 1 - X ) a f _ 1 + A ( R t - p t_x f

Chapter 13 r. ' . , V m a x fR . - T , 0 )
Sum of upper partial moment v ’
Omega (Q)
% Change in Sum of lower partial moment ^ m ax( j gj
liabilities
-Modified duration x Change in yield
t=l
Market value Reported price
(OAt - O L t) + (A i - L i )
of equity (Et) r1 pt,reportediI aPt,tTue + a ( l - a ) Pt_Urue + a ( 1 - o f Pt_2tme + ...
OAJL = operating assets/liabilities
h f True price -1
Economic life (EL) Payment - (R x Assets)
(in years) ln (l + R)
In
Payment
P
^\IPt,reported - Pt-1,reported )J
t-1,reported + —
[* U ]
PV of growth annuity
(Ordinary annuity:
Initial payment (lis t True & reported B t,true “ {^t,reported ~ P^t-l,reported ) / ( 1 P)
g = 0) r ~g ,1 +r, returns
“^ ^t,reported jP^t-1,reported P } ^t,true

Chapter 14 Correlation coefficient

Pi.i =C7m / ( ^ )
Change in
ACurrent account + ACapital account
reserve account < 4u e= p o rte d (1 + P ) / ( 1 - P )
Variance & volatility
of true returns
Chapter 15 a true = 17reported + P )/(1 _ P )
Beta
Asset class return Real return + Inflation + Growth + Risk premium /^reported/(l ~ P)
of true returns
Blended tax rate 0 .4 0 T Short-term
q, , . + 0 .6 0 T Long-term
r .
on Section 1256
Chapter 19
Chapter 16 Beta F

Return on equity of new portfolio ^New ^Port p ^Futures

(RO A x L) - r (L - 1 )
(ROE)
# of futures contracts V alu e of p ositio n h ed g ed x Beta
for portable alpha In d ex v alu e x m u ltip lier
Chapter 17
Put-call parity
CAPM Bond = +Stock + P u t - Call
Rit = R f + f i i ( R mt- R f } + £it (Hedged portfolio)
market model
Market model Delta of AOptionPrice
(Ex-post) R it - R f = fl, + B , ( R mt - R f ) + e it put & call option AStockPrice
Benchmark model Rc ^ R - ( o 2/2 )
R t —R f = a + B^RBenchmark,t ~ R f^ j + St Geometric mean
(Ex-post)

Copyright © UpperMark, Inc. All rights reserved. www.uppermark.com

 Uppe Mark. C A IA L e v e l II
Chapter 21 Chapter 23 (cont.)
V0 = $1(1 - p ) , p probability of default Quadratic model
Defaultable zero-cpn
(market-timing test)
R it Rf — + bim(Pmf R j j + e it
bond value
V0 = $ le , 5 default rate; n risk premium
Rolling windows
Binomial tree up («) N=T-m+1
u = ea^ ■ d -l/u (# of subsamples)
& down (d) factors
Up risk-neutral
■xs

1
II

probability Chapter 24
Current stock price S ([p xSu ] + [ ( l- p ) x S d ] ) / r Co-integrated prices In (pt ) —a In (sf ) = Ut (stationary process)

Calendar spread
Payoff at expiration Top node Bottom node Profit/Loss x Units per Contract x Position size
profit/loss per unit
Call: Max(Su - K, 0) Max(Sd - K, 0)
Put: Max(fC - Su, 0) Max(fC - Sd, 0) Substitute test statistic
ln(Closing price of A/Closing price of B)
(SS)

Option value
r _ P fu + {1 - p ) fd
100-day SS-100-day MVA of SS
r
Test statistic 100-day SD of SS
Parity Stock price x Conversion ratio
Covered
Interest rate in tree *(1 ,1 7 ,1 -2 ) = i { l , L , l - 2 ) e 2a interest rate parity Ft /S0 = ( 1 + rFCU ) / ( l + rDcu )

Call option value Non-callable bond value - Callable bond value Chapter 25
PV of depreciation D eprec. tax shield ^ D eprec.( x T ax rate
Chapter 22 tax shield 1 (i + R J « ( i +Rd)
Profit/loss ^(+i if Sj > St_t
(Momentum trade) Without tax deferral
St - SM if S, < SM
Signal-to-noise ratio (SNR) Market divergence index (MDI)
After-tax rate r (1 - Tax rate)
-1 M After-tax FV PV l + r ( l- T a x ) ]
JTO

— YSN RU n)
1
3

m £i v
With tax deferral r
~ E [divt] r t i i 1/T
div,
{1+ ( l + r) - 1 1 ( 1 -T a x ra te )! -1
T7
Asset value VQ= ------— ; g = growth rate After-tax rate
0 . 7 '
f=i (1 + k) *-g
( f v / p v )1,t - 1
Total value of assets Enterprise Value + Cash [= Debt + Equity]

Equity value Enterprise Value + Cash - Debt After-tax FV PV- l + j j l + r )T - l J ( l - T a x rate)J

Net income + Non-cash charges
Free cash flow to firm = P V |(l + r )T (1 - Tax rate) + Tax r a te jj
+[lnterest expense(l-Tax rate)]
(FCFF)
-Investmts in fixed assets & working capital
Profit FV --P V
Enterprise value EV, = ± ^ Operating
(EV) EBIT + D epreciation
cash flow
Profit margin x Asset turnover x Leverage
Return on equity (ROE) Net income 1 (R ev en u es, Assets Chapter 26
x — --------- x
Revenues Assets Book equity Linear
P-t.HP rf - f r ( F lr ) + ...+ f3K(FKt ? / ! + £■(
replication model

Chapter 23 Cash weight of

replic. product; R2
Marginal %age of i=1
variance explained by Return on
PC's eigenvalue / Sum of eigenvalues
principal component replicating portfolio ■^Re,r+i = + - - + A c/ t ^jc/ t+i
(PC)
# of shares to short
Delta x Convertible bond price/S tock price
Cumulative %age of PC's marginal %age (for convertible arb.)
var. explained by a PC + Sum of previous marginal %ages

Empirical (ex-post) R it~R f = ai bmi {P-mt ^1i (R st —Ru )

Chapter 27
Fama-French
+ K {Ru - Ru) + eu Equal risk weight (V ° i)/2 j(V ° i)

Dummy variable model

<G)
(market-timing test)
Chapter 28
Di is dummy variable Basis Spot p rice - Fu tu res price

Copyright © UpperMark, Inc. All rights reserved. www.uppermark.com

 Uppe Mark. C A IA Level II
Chapter 29 Chapter 37
Over-commitment Total comm itments Theta of -SN'(d)cr
ratio Resources available for com m itm ent call & put options ^r=0
2\jr
Secondary price f
30-Day T, - 3 0 r 3 0 -T s
z CFt t + P,
(Po) VIX contract price
« > (i+ m ^ ) VT
1 ! - T' . y VT - T1s

Fund's discount (N A V - P )/N A V , P is secondary price.

Variance of portfolio —Z i p f o f Z Z ; (T, <7, p j;
1>'
Chapter 30 Pairwise n
correlation coefficient ^average
D. NAV.
(l-t-ERR*.)' (l+ IIR R r)T (1+IIRR,.) Chapter 38
Interim IRR
Fixed charge
CFt NAK (EBIT + Fixed charge)/(Interest-1-Fixed charge)
= 0 coverage ratio
t i ( l + IIRRT)1 ( 1 +IIRRTf
Distribution to paid-in (DPI) ratio Residual value to paid-in (RVPI) ratio Chapter 39
Cat bond
± D t/± C t NAVT/ ± C t LIBOR + Spread
t=0 / t=0 total coupon rate
Cat bond
Total value to
Constant + [Loss multiplierxExpected loss (%)]
exposure spread
y d ,+ n a k 1 /T C , [= D P I + R V P I]
paid-in (TVPI) ratio f=0
\f=o Cat bond
(Prob. of eventxAnnual monetary loss)/Prindpal
FVs of all X f 'rl j > X expected loss (%)
iT
distributions and
contributions t=0 UJ and FV C = X Q
f=0 UJ Parties benefit from
life settlement if:
Surrender value < Purchase price
< NPV of non-surrender cash flows
PME ratio (FV d + N A V )/F V c
Simple average IIRR Commitment-weighted IIRR Chapter 40
1 N Property value in v _v V0 ( l + r ) ( l + fic)-V 0
1 7 “ ---- Z C C , x7IR R i T international ----------- —----------------------------------
n I !IRR- investment V0 V0
Z e e , i=1
i-1
o l = o% + o? + 2 C o v ( f a ,r )
Pooled average CF„ NAK,
IIRR z z
*i=o (1 + IIRR p t )
+1=1(1
Z: + IIRR p t ) ■= 0 Variance & SD of
international fo r p (fic ,r ) = 0
^ = K + < t'
real estate investment
return a , = 0^ + 0; tor p (fic ,r ) = l
Chapter 31
fo r p ( f x ,r ) = - l
b\

la

b*
ii

IR = IC x J B R IR = A l p h a / a a
Information ratio
IR = IC x y fB R x T C
CIT1
Secondary price
i ^ , E = m (A - F ) ; m > 1 a n d F = F0eTt
(Po) ‘^ ( l + I R R ^ )
CPH exposure E = m in (A ,m (A -F )), if n o lev erag e.
Fund's discount (N A V - P ) /N A V , P is secondary price.
p ,yoft A = F + ( ^ - r 0 ) ( s / s 0 f c<, - > l '* “ “ , >

Chapter 32 Buy & hold: m = 1. Constant mix: m < 1 and F = 0.

Volatility Perfect autocorrelation: CT —(jfT
over T periods
No autocorrelation: C IT 5
Unlevered ER
rum«, = y ldun^+gro™thEpS
Chapter 33 (Dividend disc.model)

Leverage ratio A s s e ts / E q u ity Net-of-fee public

yldruh + grow th^ + mult. ex p .wi - f e e ^
equity excess return

Chapter 36 Net-of-fee PE
excess return (ER)
runuv + ^ ( L „ !eo- k ^ + n d L e x p ^ - f e e ^
Vega of
v = dp/d(T = S N ' ( d ) ' J r ; A p -v A c r
put & call options Vpat + grow th^ - d ^ + mpDt - fe e ^
Gamma of N '(d) v With: Levered yield Levered growth rate Interest
put & call options 1 S<Jy/f CrS2T
Process for change
tr(+A —<Tt = }A + SAY + t/AJ (diffusion & jump) Vpvt Vunleo ( 1 + t ) gpvt ~ (1+ e ) ^ ~~ x E
in volatility

Copyright © UpperMark, Inc. All rights reserved. 321.1220 www.uppermark.com