CFA® Program

Level II

FORMULA SHEET (2022) Version 1.0

Prepared by: Fabian Moa, CFA, FRM, FMVA, AFM

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
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 CFA Level 2 (2022) Formula Sheet – Noesis Exed

CFA Level 2 – Formula Sheet (2022)

QUANTITATIVE METHODS
Reading 1: Introduction to Linear Regression

𝑌 𝑏 𝑏𝑋 𝜀 𝑖 1, 2, 3, … , 𝑛
where:
𝑌 dependent variable
𝑋 independent variable
𝑏 intercept
𝑏 slope coefficient
𝜀 error term
𝑛 number of observations

Linear least squares

𝐶𝑜𝑣 𝑋, 𝑌 ∑ 𝑋 𝑋 𝑌 𝑌
𝑏
𝑉𝑎𝑟 𝑋 ∑ 𝑋 𝑋

𝑏 𝑌 𝑏𝑋

1
𝐶𝑜𝑣 𝑋, 𝑌 𝑋 𝑋 𝑌 𝑌
𝑛 1
1
𝑉𝑎𝑟 𝑋 𝑋 𝑋
𝑛 1

𝐶𝑜𝑣 𝑋, 𝑌
𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
𝑉𝑎𝑟 𝑋 𝑉𝑎𝑟 𝑌

Note: Correlation coefficient is labelled as Multiple R in regression output.

Coefficient of Determination, R2
Noesis Exed

𝑆𝑢𝑚 𝑜𝑓 𝑆𝑞𝑢𝑎𝑟𝑒𝑠 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑆𝑆𝐸

𝑅 1
𝑆𝑢𝑚 𝑜𝑓 𝑆𝑞𝑢𝑎𝑟𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝑆𝑆𝑇

𝑅 𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡

𝑆𝑢𝑚 𝑜𝑓 𝑆𝑞𝑢𝑎𝑟𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝑆𝑆𝑇 𝑌 𝑌 𝑅𝑆𝑆 𝑆𝑆𝐸

𝑆𝑢𝑚 𝑜𝑓 𝑆𝑞𝑢𝑎𝑟𝑒𝑠 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑆𝑆𝑅 𝑌 𝑌

2
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

𝑆𝑢𝑚 𝑜𝑓 𝑆𝑞𝑢𝑎𝑟𝑒𝑠 𝐸𝑟𝑟𝑜𝑟 𝑆𝑆𝐸 𝑌 𝑌

Confidence interval for slope coefficient:

𝑏 𝑡 𝑠
𝑏 Slope coefficient (using linear regression)
𝑡 critical t value (degrees of freedom 𝑛 2)
𝑠 standard error of slope coefficient

𝑀𝑒𝑎𝑛 𝑆𝑞𝑢𝑎𝑟𝑒 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑆𝑆𝑅 ⁄1

𝐹 𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐
𝑀𝑒𝑎𝑛 𝑆𝑞𝑢𝑎𝑟𝑒 𝐸𝑟𝑟𝑜𝑟 𝑆𝑆𝐸 ⁄ 𝑛 2

𝐹 𝑡 𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐 𝑓𝑜𝑟 𝑏

ANOVA df SS MSS F
𝑆𝑆𝑅⁄1
Regression 1 𝑆𝑆𝑅 𝑆𝑆𝑅⁄1
𝑆𝑆𝐸 ⁄ 𝑛 2
Residual 𝑛 2 𝑆𝑆𝐸 𝑆𝑆𝐸 ⁄ 𝑛 2
Total 𝑛 1 𝑆𝑆𝑇

Standard error of the estimate (𝑠 )

𝑆𝑆𝐸
𝑠 √𝑀𝑆𝐸
𝑛 2

Test statistic for Slope Coefficient:

𝑏 𝐵
𝑡
𝑠
𝐵 Hypothesized slope coefficient (in null and alternative hypotheses)
𝑠
𝑠 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
∑ 𝑋 𝑋
Noesis Exed

Test statistic for Correlation Coefficient:

𝑟√𝑛 2
𝑡
√1 𝑟
𝑛 2 Degrees of freedom
𝐻 :𝜌 0 versus 𝐻 : 𝜌 0

3
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Test statistic for the Intercept:

𝑏 𝛽
𝑡
𝑠

𝐵 Hypothesized intercept (in null and alternative hypotheses)

1 𝑋
𝑠 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡
𝑛 ∑ 𝑋 𝑋

Prediction Interval for 𝒀𝒇

𝑌 𝑡 ⁄ 𝑠

Variance of prediction error

1 𝑋 𝑋 1 𝑋 𝑋
𝑠 𝑠 1 𝑠 1
𝑛 𝑛 1 𝑠 𝑛 ∑ 𝑋 𝑋

Log‐Lin Model
ln 𝑌 𝑏 𝑏𝑋

Lin‐Log Model
𝑌 𝑏 𝑏 ln 𝑋

Lin‐Log Model
ln 𝑌 𝑏 𝑏 ln 𝑋

Reading 2: Multiple Regression

𝑌 𝑏 𝑏𝑋 𝑏 𝑋 ⋯ 𝑏 𝑋 𝜀 𝑖 1, 2, 3, … , 𝑛

where:
𝑌 dependent variable
𝑋 independent variable
𝑏
Noesis Exed

intercept
𝑏 ,𝑏 ,…,𝑏 slope coefficients
𝜀 error term
𝑛 number of observations
𝑘 number of independent variables
𝑏 ,𝑏 ,𝑏 ,…,𝑏 regression coefficients

4
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Test statistic for coefficient 𝑗

𝑏 𝑏
𝑡
𝑠

𝑏 Regression estimate of 𝑏
𝑏 Hypothesized value of coefficient 𝑗
𝑠 Estimated standard error of 𝑏

ANOVA df SS MSS F
𝑆𝑆𝑅⁄1
Regression 𝑘 𝑆𝑆𝑅 𝑆𝑆𝑅⁄𝑘
𝑆𝑆𝐸 ⁄ 𝑛 𝑘 1
Residual 𝑛 𝑘 1 𝑆𝑆𝐸 𝑆𝑆𝐸 ⁄ 𝑛 𝑘 1
Total 𝑛 1 𝑆𝑆𝑇

Adjusted R2
𝑛 1
𝑅 1 1 𝑅
𝑛 𝑘 1

Breusch‐Pagan Test
𝑇𝑒𝑠𝑡 𝑆𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐, χ 𝑛𝑅

𝑅 R‐squared between squared residuals on independent variables

Durbin Watson test

∑ 𝜀̂ 𝜀̂
𝐷𝑊
∑ 𝜀̂

If sample is very large,

𝐷𝑊 2 1 𝑟

where 𝑟 sample correlation between regression residuals from one period and those
from the previous period
Noesis Exed

Logistic Regression (Logit Model)

𝑝
ln 𝑏 𝑏𝑋 𝑏 𝑋 𝑏 𝑋 𝜀
1 𝑝

where 𝑝 probability that event of interest happens

Odds of an event happening

1
𝑝
1 exp 𝑏 𝑏𝑋 𝑏 𝑋 𝑏 𝑋

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 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 3: Time‐Series Analysis

Linear Trend Models

𝑌 𝑏 𝑏𝑡 𝜀 𝑡 1,2, … , 𝑇

𝑡 time (independent variable)

Log‐Linear Trend Models

𝑌 𝑒 𝑡 1,2, … , 𝑇

Growth rate of 𝑦 𝑒 1

p-th order autoregressive model, AR(p):

𝑥 𝑏 𝑏𝑥 𝑏 𝑥 ⋯ 𝑏 𝑥 𝜖

Test statistic for autocorrelation of residuals:

𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑎𝑢𝑡𝑜𝑐𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 0 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑎𝑢𝑡𝑜𝑐𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛
𝑡
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 1⁄√𝑇

Mean reverting level for AR(1) model:

𝑏
𝑥
1 𝑏

Root Mean Squared Error:

𝑆𝑞𝑢𝑎𝑟𝑒𝑑 𝑒𝑟𝑟𝑜𝑟
𝑅𝑀𝑆𝐸
𝑛

ARCH(1):
𝜎 𝑎 𝑎 𝜖̂

Reading 5: Big Data Projects

Normalization of variable X
Noesis Exed

𝑋 𝑋
𝑋
𝑋 𝑋

Standardization of variable X
𝑋 𝜇
𝑋
𝜎

𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒
𝑃𝑟𝑒𝑐𝑖𝑠𝑖𝑜𝑛, 𝑃
𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝐹𝑎𝑙𝑠𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒

6
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒
𝑅𝑒𝑐𝑎𝑙𝑙, 𝑅
𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝐹𝑎𝑙𝑠𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒

𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑇𝑟𝑢𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒

𝐴𝑐𝑐𝑢𝑟𝑎𝑐𝑦
𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝐹𝑎𝑙𝑠𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑇𝑟𝑢𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝐹𝑎𝑙𝑠𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒

2 𝑃𝑟𝑒𝑐𝑖𝑠𝑖𝑜𝑛 𝑅𝑒𝑐𝑎𝑙𝑙
𝐹1 𝑆𝑐𝑜𝑟𝑒
𝑃𝑟𝑒𝑐𝑖𝑠𝑖𝑜𝑛 𝑅𝑒𝑐𝑎𝑙𝑙

𝐹𝑎𝑙𝑠𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒
𝐹𝑎𝑙𝑠𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒, 𝐹𝑃𝑅
𝑇𝑟𝑢𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝐹𝑎𝑙𝑠𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒

𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒
𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒, 𝑇𝑃𝑅
𝑇𝑟𝑢𝑒 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝐹𝑎𝑙𝑠𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒

𝑇𝑜𝑡𝑎𝑙 𝑊𝑜𝑟𝑑 𝐶𝑜𝑢𝑛𝑡

𝑇𝑒𝑟𝑚 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝐿𝑒𝑣𝑒𝑙
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑑𝑠 𝑖𝑛 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛

𝑊𝑜𝑟𝑑 𝐶𝑜𝑢𝑛𝑡 𝑖𝑛 𝑆𝑒𝑛𝑡𝑒𝑛𝑐𝑒

𝑇𝑒𝑟𝑚 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑆𝑒𝑛𝑡𝑒𝑛𝑐𝑒 𝐿𝑒𝑣𝑒𝑙
𝑇𝑜𝑡𝑎𝑙 𝑊𝑜𝑟𝑑𝑠 𝑖𝑛 𝑆𝑒𝑛𝑡𝑒𝑛𝑐𝑒

𝑆𝑒𝑛𝑡𝑒𝑛𝑐𝑒 𝐶𝑜𝑢𝑛𝑡 𝑤𝑖𝑡ℎ 𝑊𝑜𝑟𝑑

𝐷𝑜𝑐𝑢𝑚𝑒𝑛𝑡 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦, 𝐷𝐹
𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆𝑒𝑛𝑡𝑒𝑛𝑐𝑒𝑠

1
𝐼𝑛𝑣𝑒𝑟𝑠𝑒 𝐷𝑜𝑐𝑢𝑚𝑒𝑛𝑡 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦, 𝐼𝐷𝐹 log
𝐷𝐹

𝑇𝐹-𝐼𝐷𝐹 𝑇𝐹 𝐼𝐷𝐹
Noesis Exed

7
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

ECONOMICS

Reading 6: Currency Exchange Rates: Understanding Equilibrium Value

Currency pair Bid Bid/Ask

A/B 𝑥 𝑦
B/A 1⁄𝑦 1⁄𝑥

Covered Interest Rate Parity

𝐴𝑐𝑡𝑢𝑎𝑙
1 𝑖
𝐹 𝑆 360
⁄ ⁄
𝐴𝑐𝑡𝑢𝑎𝑙
1 𝑖
360

𝐴𝑐𝑡𝑢𝑎𝑙
𝐹 𝑆 𝑖 𝑖
⁄ ⁄ 360
𝑆 ⁄ 𝐴𝑐𝑡𝑢𝑎𝑙
1 𝑖
360

Mark‐to‐Market Value of a Forward Contract

Original position: Long base currency d forward at forward rate 𝐹 , ⁄ (Offer side)

𝐹, ⁄ 𝐹, ⁄ 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑆𝑖𝑧𝑒
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑜𝑛𝑔 𝐹𝑜𝑟𝑤𝑎𝑟𝑑
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦
1 𝑖
360

𝐹, ⁄ Forward rate at valuation date, t (Bid side)

Uncovered Interest Rate Parity

𝐴𝑐𝑡𝑢𝑎𝑙
1 𝑖
𝐸 𝑆 𝑆 360
⁄ ⁄
𝐴𝑐𝑡𝑢𝑎𝑙
1 𝑖
360
Noesis Exed

𝐴𝑐𝑡𝑢𝑎𝑙
𝑖 𝑖 𝐴𝑐𝑡𝑢𝑎𝑙
%Δ𝑆 360 𝑖 𝑖
⁄ 𝐴𝑐𝑡𝑢𝑎𝑙
1 𝑖 360
360

Absolute PPP
𝑃
𝑆 ⁄
𝑃

8
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Relative PPP
𝐴𝑐𝑡𝑢𝑎𝑙
𝜋 𝜋 𝐴𝑐𝑡𝑢𝑎𝑙
%Δ𝑆 360 𝜋 𝜋
⁄ 𝐴𝑐𝑡𝑢𝑎𝑙
1 𝜋 360
360

Ex ante PPP
𝐴𝑐𝑡𝑢𝑎𝑙
%Δ𝑆 ⁄ 𝜋 𝜋
360

International Fisher Effect

𝑖 𝑖 𝜋 𝜋

𝜋 Expected inflation rate

𝜋 Actual inflation rate

Reading 7: Economic Growth and the Investment Decision

𝐸 𝑃
𝑃 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐸

Return on aggregate equity market

𝐸 𝑃
%∆𝑃 %∆𝐺𝐷𝑃 %∆ %∆
𝐺𝐷𝑃 𝐸

𝑃 aggregate value of equities

𝐸 aggregate earnings

Cobb-Douglas Production Function

𝑌 𝑇𝐾 𝐿 where a < 1

Y = Output
𝛼 = Share of output allocated to capital (𝐾)
1 𝛼 = share of output allocated to labor (𝐿)
Noesis Exed

𝑇 = total factor productivity (𝑇𝐹𝑃), represents technological progress of the economy

𝑌 𝐾
𝐎𝐮𝐭𝐩𝐮𝐭 𝐩𝐞𝐫 𝐰𝐨𝐫𝐤𝐞𝐫 𝑇
𝐿 𝐿

Marginal product of capital, MPK

𝑌
𝑀𝑃𝐾 𝛼
𝐾

Amount of output that is allocated to providers of capital, a

𝑟𝐾
𝛼
𝑌
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 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Growth Accounting equation:

∆𝑌 ∆𝑇 ∆𝐾 ∆𝐿
𝛼 1 𝛼
𝑌 𝑇 𝐾 𝐿

Growth rate in potential GDP = Long-term growth rate + Long-term growth rate
of labor force in labor productivity

𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

Sustainable growth rate of output per capita

𝜃
𝑔∗
1 𝛼

Sustainable growth rate of output

𝜃
𝐺∗ 𝑛
1 𝛼

Equilibrium output-to-capital ratio (Steady state):

𝑌 1 𝜃
𝑛 𝛿
𝐾 𝑠 1 𝛼

𝜃 growth rate of TFP

𝛼 elasticity of output with respect to capital
𝑠 fraction of income (Y) that is saved
𝛿 rate of depreciation of physical capital stock
𝑛 labor supply growth %∆𝐿

Endogeneous Growth Model

Production function:
𝑦 𝑐𝑘

Growth rate of output per capita:

Δ𝑦 Δ𝑘
𝑠𝑐 𝛿 𝑛
Noesis Exed

𝑦 𝑘

𝑦 output per worker

𝑘 capital per worker
𝑐 marginal product of capital in the aggregate economy (constant)

10
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

FINANCIAL REPORTING AND ANALYSIS

Reading 9: Intercorporate Investments

Financial Assets

Amortized Cost
𝐸𝑛𝑑𝑖𝑛𝑔 𝐷𝑒𝑏𝑡 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐷𝑒𝑏𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝐺𝑎𝑖𝑛 𝑆𝑎𝑙𝑒𝑠 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓

𝑜𝑟 𝐿𝑜𝑠𝑠 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

FVOCI or FVPL
𝑈𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝐺𝑎𝑖𝑛 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓
𝑜𝑟 𝐿𝑜𝑠𝑠 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

Investments in Associates

𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑥𝑐𝑒𝑠𝑠

𝑆ℎ𝑎𝑟𝑒 𝑜𝑓
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒
𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑠 𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

Impact on Investor’s Income Statement

𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑥𝑐𝑒𝑠𝑠 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝑈𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚
𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑑𝑜𝑤𝑛𝑠𝑡𝑟𝑒𝑎𝑚 𝑜𝑟 𝑢𝑝𝑠𝑡𝑟𝑒𝑎𝑚 𝑠𝑎𝑙𝑒

Acquisition Method
Excess purchase price
= Acquisition price – %Ownership × Book value of net identifiable assets

Partial Goodwill
= Acquisition price – (%Ownership × Fair value of net identifiable assets)
= Acquisition price – %Ownership × Book value of identifiable net assets
– %Ownership × Excess purchase price attributable to net identifiable assets
Noesis Exed

𝑁𝑜𝑛 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 %𝑁𝐶𝐼 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑑𝑒𝑛𝑡𝑖𝑓𝑖𝑎𝑏𝑙𝑒 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠

Full Goodwill
= Fair value of entity – Fair value of net identifiable assets

𝑁𝑜𝑛 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 %𝑁𝐶𝐼 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑛𝑡𝑖𝑡𝑦

IFRS
𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓
𝑙𝑜𝑠𝑠 𝑐𝑎𝑠ℎ 𝑔𝑒𝑛𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑢𝑛𝑖𝑡 𝑐𝑎𝑠ℎ 𝑔𝑒𝑛𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑢𝑛𝑖𝑡

11
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

US GAAP
𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑛𝑔 𝑢𝑛𝑖𝑡′𝑠
𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑛𝑔 𝑢𝑛𝑖𝑡 𝑖𝑑𝑒𝑛𝑡𝑖𝑓𝑖𝑎𝑏𝑙𝑒 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠

𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝐼𝑚𝑝𝑙𝑖𝑒𝑑

𝑙𝑜𝑠𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙 𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙

Reading 10: Employee Compensation - Post-Employment and Share-Based

𝐹𝑢𝑛𝑑𝑒𝑑 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑃𝑉 𝑜𝑓 𝑑𝑒𝑓𝑖𝑛𝑒𝑑

𝑠𝑡𝑎𝑡𝑢𝑠 𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 𝑏𝑒𝑛𝑒𝑓𝑖𝑡 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛

𝑁𝑒𝑡 𝑃𝑒𝑛𝑠𝑖𝑜𝑛 𝐴𝑠𝑠𝑒𝑡 𝑀𝑖𝑛 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝐹𝑢𝑛𝑑𝑒𝑑 𝑆𝑡𝑎𝑡𝑢𝑠, 𝐴𝑠𝑠𝑒𝑡 𝐶𝑒𝑖𝑙𝑖𝑛𝑔

𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑝𝑒𝑛𝑠𝑖𝑜𝑛 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑟 𝑬𝒏𝒅𝒊𝒏𝒈 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈

𝑐𝑜𝑠𝑡 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑓𝑢𝑛𝑑𝑒𝑑 𝑠𝑡𝑎𝑡𝑢𝑠 𝑓𝑢𝑛𝑑𝑒𝑑 𝑠𝑡𝑎𝑡𝑢𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑠𝑡
𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑐𝑡𝑢𝑎𝑟𝑖𝑎𝑙
𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑙𝑜𝑠𝑠 𝑔𝑎𝑖𝑛
𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑜𝑠𝑡𝑠 𝑐𝑜𝑠𝑡𝑠

𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔
𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝐴𝑐𝑡𝑢𝑎𝑟𝑖𝑎𝑙
𝑏𝑒𝑛𝑒𝑓𝑖𝑡 𝑏𝑒𝑛𝑒𝑓𝑖𝑡
𝑐𝑜𝑠𝑡 𝑐𝑜𝑠𝑡 𝑝𝑎𝑖𝑑 𝑙𝑜𝑠𝑠/ 𝑔𝑎𝑖𝑛
𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛

𝐸𝑛𝑑𝑖𝑛𝑔 𝑓𝑎𝑖𝑟 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑓𝑎𝑖𝑟

𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑟′𝑠 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓
𝑜𝑛 𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑎𝑖𝑑
𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠

IFRS

𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑝𝑒𝑛𝑠𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑎𝑠𝑡 𝑁𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑖𝑛 𝒊𝒏𝒄𝒐𝒎𝒆 𝒔𝒕𝒂𝒕𝒆𝒎𝒆𝒏𝒕 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 𝑒𝑥𝑝𝑒𝑛𝑠𝑒/ 𝑖𝑛𝑐𝑜𝑚𝑒

𝑁𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔

𝑒𝑥𝑝𝑒𝑛𝑠𝑒⁄ 𝑖𝑛𝑐𝑜𝑚𝑒 𝑟𝑎𝑡𝑒 𝑃𝐵𝑂 𝑃𝑙𝑎𝑛 𝐴𝑠𝑠𝑒𝑡𝑠
Noesis Exed

US GAAP

𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑝𝑒𝑛𝑠𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑒𝑑 𝑝𝑎𝑠𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑖𝑛 𝒊𝒏𝒄𝒐𝒎𝒆 𝒔𝒕𝒂𝒕𝒆𝒎𝒆𝒏𝒕 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑒𝑑 𝐴𝑐𝑡𝑢𝑎𝑟𝑖𝑎𝑙
𝑜𝑛 𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 𝑙𝑜𝑠𝑠/ 𝑔𝑎𝑖𝑛

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔

𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑒 𝑃𝐵𝑂

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑎𝑡𝑒 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔

𝑝𝑙𝑎𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑃𝑙𝑎𝑛 𝐴𝑠𝑠𝑒𝑡𝑠

12
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 12: Analysis of Financial Institutions

𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑒𝑟 1 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑔𝑢𝑙𝑎𝑡𝑜𝑟𝑦 𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑒𝑟 1 𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑒𝑟 2

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

4.5%
𝑇𝑖𝑒𝑟 1 𝑅𝑎𝑡𝑖𝑜 𝑅𝑖𝑠𝑘 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑖𝑒𝑟 1 𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

6.0%
𝑅𝑎𝑡𝑖𝑜 𝑅𝑖𝑠𝑘 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑔𝑢𝑙𝑎𝑡𝑜𝑟𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

8.0%
𝑅𝑎𝑡𝑖𝑜 𝑅𝑖𝑠𝑘 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝐻𝑖𝑔ℎ 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝑅𝑎𝑡𝑖𝑜, 𝐿𝐶𝑅 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠

Bank can withstand a stress level volume of cash outflows for (𝐿𝐶𝑅 30 days.

𝑁𝑒𝑡 𝑆𝑡𝑎𝑏𝑙𝑒 𝐹𝑢𝑛𝑑𝑖𝑛𝑔 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑡𝑎𝑏𝑙𝑒 𝐹𝑢𝑛𝑑𝑖𝑛𝑔

𝑅𝑎𝑡𝑖𝑜, 𝑁𝑆𝐹𝑅 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑆𝑡𝑎𝑏𝑙𝑒 𝐹𝑢𝑛𝑑𝑖𝑛𝑔

Property and Casualty Companies

𝐿𝑜𝑠𝑠 𝑎𝑛𝑑 𝑙𝑜𝑠𝑠 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐿𝑜𝑠𝑠 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝐿𝑜𝑠𝑠 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑖𝑜 𝑁𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠 𝑒𝑎𝑟𝑛𝑒𝑑

𝑈𝑛𝑑𝑒𝑟𝑤𝑟𝑖𝑡𝑖𝑛𝑔 𝑈𝑛𝑑𝑒𝑟𝑤𝑟𝑖𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑖𝑜 𝑁𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠 𝑤𝑟𝑖𝑡𝑡𝑒𝑛

𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐿𝑜𝑠𝑠 𝑎𝑛𝑑 𝑙𝑜𝑠𝑠 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝑈𝑛𝑑𝑒𝑟𝑤𝑟𝑖𝑡𝑖𝑛𝑔

𝑟𝑎𝑡𝑖𝑜 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑖𝑜 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑖𝑜
Noesis Exed

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑡𝑜 𝑝𝑜𝑙𝑖𝑐𝑦ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑡𝑜 𝑝𝑜𝑙𝑖𝑐𝑦ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑟𝑎𝑡𝑖𝑜 𝑁𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠 𝑒𝑎𝑟𝑛𝑒𝑑

𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑟𝑎𝑡𝑖𝑜 𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑡𝑜 𝑝𝑜𝑙𝑖𝑐𝑦ℎ𝑜𝑙𝑑𝑒𝑟𝑠

𝒂𝒇𝒕𝒆𝒓 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔 𝑟𝑎𝑡𝑖𝑜 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑟𝑎𝑡𝑖𝑜

13
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 13: Evaluating Quality of Financial Reports

Beneish Model
𝑀-𝑠𝑐𝑜𝑟𝑒 – 4.84 0.920 𝐷𝑆𝑅 0.528 𝐺𝑀𝐼 0.404 𝐴𝑄𝐼 0.892 𝑆𝐺𝐼
0.115 𝐷𝐸𝑃𝐼 – 0.172 𝑆𝐺𝐴𝐼 4.670 𝐴𝑐𝑐𝑟𝑢𝑎𝑙𝑠 – 0.327 𝐿𝐸𝑉𝐼

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 ⁄𝑆𝑎𝑙𝑒𝑠
DSR day sales receivable index
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 ⁄𝑆𝑎𝑙𝑒𝑠
𝐺𝑀
GMI gross margin index
𝐺𝑀
1 𝑃𝑃𝐸 𝐶𝐴 /𝑇𝐴
AQI asset quality index
1 𝑃𝑃𝐸 𝐶𝐴 /𝑇𝐴
𝑆𝑎𝑙𝑒𝑠
SGI sales growth index
𝑆𝑎𝑙𝑒𝑠
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
DEPI depreciation index
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑆𝐺𝐴 /𝑆𝑎𝑙𝑒𝑠
SGAI sales, general, and administrative expenses index
𝑆𝐺𝐴 /𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑒𝑥𝑡𝑟𝑎𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑖𝑡𝑒𝑚𝑠 𝐶𝑎𝑠ℎ 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠
Accruals
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒
LEVI leverage index
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒

Reading 14: Integration of Financial Statement Analysis Techniques

𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔

𝐴𝑠𝑠𝑒𝑡𝑠 𝑁𝑂𝐴 𝐴𝑠𝑠𝑒𝑡𝑠 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑇𝑜𝑡𝑎𝑙 𝑇𝑜𝑡𝑎𝑙
𝐴𝑠𝑠𝑒𝑡𝑠 𝑆ℎ𝑜𝑟𝑡-𝑡𝑒𝑟𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝐷𝑒𝑏𝑡

𝐵𝑎𝑙𝑎𝑛𝑐𝑒-𝑠ℎ𝑒𝑒𝑡-𝑏𝑎𝑠𝑒𝑑 𝑁𝑂𝐴 𝑁𝑂𝐴

𝑎𝑐𝑐𝑟𝑢𝑎𝑙𝑠 𝑟𝑎𝑡𝑖𝑜 𝑁𝑂𝐴 𝑁𝑂𝐴 ⁄2

𝐶𝑎𝑠ℎ-𝑓𝑙𝑜𝑤-𝑏𝑎𝑠𝑒𝑑 𝑁𝐼 𝐶𝐹𝑂 𝐶𝐹𝐼

𝑎𝑐𝑐𝑟𝑢𝑎𝑙𝑠 𝑟𝑎𝑡𝑖𝑜 𝑁𝑂𝐴 𝑁𝑂𝐴 ⁄2
Noesis Exed

Cash-flow-based accruals = NI – (CFO + CFI)

NI – (CFO + CFI)
Cash-flow-based accruals ratio
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑂𝐴

14
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

CORPORATE FINANCE

Reading 15: Capital Structure

Weighted average cost of capital, 𝑟

𝐷 𝐸
𝑟 𝑟 1 𝑇 𝑟
𝑉 𝑉

Value of levered firm, 𝑉 𝑉 𝑇 𝐷

Cost of equity, 𝑟
𝐷
𝑟 𝑟 𝑟 𝑟 1 𝑇
𝐸

𝐷
𝛽 𝛽 𝛽 𝛽 1 𝑇
𝐸

𝐸𝐵𝐼𝑇 1 𝑇
𝑉
𝑟

𝑟 𝐷 𝐸𝐵𝐼𝑇 𝑟 𝐷 1 𝑇
𝑉 𝐷 𝐸
𝑟 𝑟

Static Trade-off Theory:

𝑉 𝑉 𝑇 𝐷 𝑃𝑉 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐷𝑖𝑠𝑡𝑟𝑒𝑠𝑠

𝑟 Cost of debt (pre-tax)

𝑟 Cost of of an all-equity firm

Reading 16: Dividends and Share Repurchases Analysis

Target payout adjustment model (Lintner model)

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐿𝑎𝑠𝑡 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑎𝑦𝑜𝑢𝑡 𝐿𝑎𝑠𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡
Noesis Exed

𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑟𝑎𝑡𝑖𝑜 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑓𝑎𝑐𝑡𝑜𝑟

𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 1
𝑓𝑎𝑐𝑡𝑜𝑟 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑓𝑜𝑟 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝑡𝑜 𝑡𝑎𝑘𝑒 𝑝𝑙𝑎𝑐𝑒

Constant dividend payout ratio policy

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐶𝑢𝑟𝑟𝑒𝑛𝑡
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠

15
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Share Repurchase
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑓𝑢𝑛𝑑𝑠
𝐸𝑃𝑆 𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘
𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 𝑏𝑢𝑦𝑏𝑎𝑐𝑘

𝐵𝑉𝑃𝑆 𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘
𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘

Analysis of Dividend Safety

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

𝐹𝐶𝐹𝐸
𝐹𝐶𝐹𝐸 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑆ℎ𝑎𝑟𝑒 𝑟𝑒𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

Reading 18: Mergers and Acquisitions

If acquirer pays using shares:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘
𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑠 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 𝑔𝑖𝑣𝑒𝑛 𝑡𝑜
𝐶𝑜𝑠𝑡 𝑟𝑎𝑡𝑖𝑜
𝑜𝑓 𝑡𝑎𝑟𝑔𝑒𝑡 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑡𝑎𝑟𝑔𝑒𝑡 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

Comparable Company Analysis

𝐷𝑃 𝑆𝑃
𝑇𝑎𝑘𝑒𝑜𝑣𝑒𝑟 𝑝𝑟𝑒𝑚𝑖𝑢𝑚, 𝑃𝑅𝑀
𝑆𝑃

𝐷𝑃 Deal price per share of the target company

𝑆𝑃 Stock price of the target company

Bid Evaluation

Target shareholders’ gain = Premium = PT – VT

Noesis Exed

Acquirer’s gain = Synergies – Premium = S – (PT – VT)

VA* = VA + VT + S – C

where:
PT = price paid for the target company
VT = pre-merger value of the target company
VA* = post-merger value of the combined companies
VA = pre-merger value of the acquirer
S = synergies created by the business combination
C = cash paid to target shareholders

16
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 19: Capital Budgeting

Initial Outlay = FCInv + WCInv – Sal0 + T(Sal0 – B0)

Annual after-tax operating cash flows, ATOCF

𝐴𝑇𝑂𝐶𝐹 𝑆 𝐶 𝐷𝑒𝑝 1 𝑇 𝐷𝑒𝑝
𝐴𝑇𝑂𝐶𝐹 𝑆 𝐶 1 𝑇 𝑇 𝐷𝑒𝑝

Terminal year after-tax non-operating cash flow, TNOCF

𝑇𝑁𝑂𝐶𝐹 𝑆𝑎𝑙 𝑊𝐶𝐼𝑛𝑣 𝑇 𝑆𝑎𝑙 𝐵

𝐹𝐶𝐼𝑛𝑣 Fixed capital investment (include equipment cost, delivery and installation cost)
𝑊𝐶𝐼𝑛𝑣 Working capital investment
𝑆𝑎𝑙 Sales proceeds of old equipment (Replacement project)
𝐵 Net book value of old equipment
𝑇 Marginal tax rate

(1 + Nominal rate) = (1 + Real rate)(1 + Inflation rate)

Equivalent Annual Annuity (EAA)

[PV] = -Project NPV
[I/Y] = Project’s discount rate
[N] = Project life
[FV] = 0
[CPT] [PMT] EAA

𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑁𝑃𝑉 𝑁𝑃𝑉 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓

𝑤𝑖𝑡ℎ 𝑟𝑒𝑎𝑙 𝑜𝑝𝑡𝑖𝑜𝑛 𝑛𝑜 𝑟𝑒𝑎𝑙 𝑜𝑝𝑡𝑖𝑜𝑛 𝑟𝑒𝑎𝑙 𝑜𝑝𝑡𝑖𝑜𝑛 𝑟𝑒𝑎𝑙 𝑜𝑝𝑡𝑖𝑜𝑛
Noesis Exed

17
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

EQUITY VALUATION

Reading 20: Equity Valuation Applications and Processes

VE – P = (V – P) + (VE – V)

where: VE = Estimated intrinsic value

P = Market price
V = Intrinsic value

Conglomerate discount = Sum-of-the-parts value – Market value

Reading 21: Return Concepts

𝑉 𝑃
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛
𝑃
V0 = true intrinsic value

Equity risk premium, 𝐸𝑅𝑃 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒

Gordon Growth model:

𝐷
𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑔 𝑟
𝑃

Ibbotson-Chen model:
𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑖𝑠𝑘
1 𝑖 1 𝑔 1 ∆𝑃𝐸 1 𝑌 𝑅
𝑝𝑟𝑒𝑚𝑖𝑢𝑚

𝑖 expected inflation
𝑔 expected real growth in EPS
∆𝑃𝐸 expected changes in the P/E ratio
Y = expected yield on the index
𝑅 = expected risk-free rate

CAPM:
Noesis Exed

𝐸 𝑅 𝑅 𝛽 𝐸 𝑅 𝑅

where: 𝑅 Risk-free rate (tenor matches investment horizon)

𝛽 Beta of security 𝑖 (Systematic risk)
𝐸 𝑅 𝑅 Equity risk premium (or Market risk premium)

18
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Fama-French Model
Required return on stock
=𝑅 +𝛽 , 𝑅 , 𝑅 +𝛽 , 𝑅 𝑅 +𝛽 , 𝑅 𝑅

Pastor-Stambaugh Model
Required return on stock
=𝑅 +𝛽 , 𝑅 , 𝑅 + 𝛽 , 𝑅 𝑅 + 𝛽 , 𝑅 𝑅
+𝛽 𝑅 𝑅

𝑅 1-month T-bill rate (for Fama-French and Pastor-Stambaugh models only)

𝑅 𝑅 return on value-weighted market index minus risk-free rate
𝑅 𝑅 small-cap return premium (𝑅 𝑅 )
𝑅 𝑅 value return premium (𝑅 𝑅 )
𝑅 𝑅 liquidity premium (𝑅 𝑅

Build-up Method:
𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑖𝑠𝑘 𝑆𝑖𝑧𝑒 𝑆𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑐𝑜𝑚𝑝𝑎𝑛𝑦
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 𝑅
𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

Bond-Yield-Plus-Risk-Premium Method:
Required Return = YTM of company’s long-term debt + Risk premium

Blume’s Adjustment for Regression Beta:

2 1
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑏𝑒𝑡𝑎 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑏𝑒𝑡𝑎
3 3

Equity Beta, 𝜷𝑳 Debt-to-Equity

Company
(Levered beta) ratio
𝐷
Benchmark public company (X) 𝛽 (given)
𝐸
𝐷
Nonpublic company (Y) 𝛽 ?
𝐸

𝛽
Unlevered beta Asset beta of public company, 𝛽
Noesis Exed

𝐷
1 1 𝑡
𝐸

𝐷
Levered beta Equity beta of nonpublic company, 𝛽 𝛽 1 1 𝑡
𝐸

19
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Country Spread Model

𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝐶𝑜𝑢𝑛𝑡𝑟𝑦

𝑓𝑜𝑟 𝑒𝑚𝑒𝑟𝑔𝑖𝑛𝑔 𝑚𝑎𝑟𝑘𝑒𝑡 𝑓𝑜𝑟 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑒𝑑 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑌𝑇𝑀 𝑜𝑛 𝑒𝑚𝑒𝑟𝑔𝑖𝑛𝑔 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑜𝑛𝑑 𝑌𝑇𝑀 𝑜𝑛 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑒𝑑 𝑚𝑎𝑟𝑘𝑒𝑡

𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑜𝑓 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑒𝑑 𝑚𝑎𝑟𝑘𝑒𝑡 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑏𝑜𝑛𝑑

Reading 22: Industry and Company Analysis

𝑁𝑂𝑃𝐿𝐴𝑇
Return on invested capital ROIC
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝑁𝑂𝑃𝐿𝐴𝑇 Net operating profit less adjusted taxes

𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐸𝐵𝐼𝑇
Return on capital employed ROCE
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Reading 23: Discounted Dividend Valuation

Discounted Dividend Valuation

𝐶𝐹
𝑉
1 𝑟

𝐷 𝐷 𝐷 𝑃
𝑉 ⋯
1 𝑟 1 𝑟 1 𝑟 1 𝑟

Gordon Growth Model

𝐷 𝐷 1 𝑔
𝑉
𝑟 𝑔 𝑟 𝑔

Fixed-rate perpetual preferred stock

𝐷
𝑉
Noesis Exed

Value of stock = Value of a company + Present value of

with zero-growth growth opportunities (PVGO)
𝐸
𝑉 𝑃𝑉𝐺𝑂
𝑟

𝑉 𝑃 1 𝑃𝑉𝐺𝑂
𝐸 𝐸 𝑟 𝐸

20
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

If dividend and earnings growth rate is constant,

𝐷
𝑟 𝑔
𝑃

Two-Stage Dividend Discount Model

𝐷 1 𝑔 𝐷 1 𝑔 1 𝑔
𝑉
1 𝑟 1 𝑟 𝑟 𝑔

The H-Model
𝐷 1 𝑔 𝐷𝐻 𝑔 𝑔
𝑉
𝑟 𝑔

𝐻 half-life in years of the high-growth period

Sustainable growth rate, 𝑔 𝑏 𝑅𝑂𝐸

PRAT model
𝑁𝐼 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑁𝐼 𝑆𝑎𝑙𝑒𝑠 𝑇𝐴
𝑔
𝑁𝐼 𝑆𝑎𝑙𝑒𝑠 𝑇𝐴 𝑇𝐸

Reading 24: Free Cash Flow Valuation

Free Cash Flow to the Firm (FCFF) Valuation Approach

𝐹𝐶𝐹𝐹
𝐹𝑖𝑟𝑚 𝑉𝑎𝑙𝑢𝑒
1 𝑊𝐴𝐶𝐶

Equity Value = Firm Value – Market Value of Debt

FCFE Valuation Approach

𝐹𝐶𝐹𝐸
𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒
1 𝑟

Single-Stage (Constant Growth) FCFF and FCFE Model

Noesis Exed

FCFF Valuation Approach

𝐹𝐶𝐹𝐹 𝐹𝐶𝐹𝐹 1 𝑔
𝐹𝑖𝑟𝑚 𝑉𝑎𝑙𝑢𝑒
𝑊𝐴𝐶𝐶 𝑔 𝑊𝐴𝐶𝐶 𝑔

FCFE Valuation Approach

𝐹𝐶𝐹𝐸 𝐹𝐶𝐹𝐸 1 𝑔
𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒
𝑟 𝑔 𝑟 𝑔

21
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

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
= EBITDA(1 – Tax Rate) + Dep(Tax Rate) – FCInv – WCInv

where:
NI = Net income available to common shareholders
NCC = Net noncash charges (e.g. depreciation)
Int = Interest expense
FCInv = Investment in fixed capital
= Maintenance Capex + Growth Capex
Δ𝐺𝑟𝑜𝑠𝑠 𝑃𝑃𝐸 Δ𝑁𝑒𝑡 𝑃𝑃𝐸 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
WCInv = Investment in working capital

Free cash flow to the Equity, FCFE

FCFE = FCFF – Int(1 – Tax Rate) + Net borrowing

= CFO – FCInv + Net borrowing

where:
Net borrowing = Debt issued – Debt repaid
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)
𝐷𝑒𝑏𝑡
𝐷𝑅 𝐷𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜
𝐴𝑠𝑠𝑒𝑡𝑠

If company issues preferred shares:

FCFF = CFO + Int(1 – Tax Rate) + Preferred dividends – FCInv

Noesis Exed

Two-Stage Free Cash Flow Models

𝐹𝐶𝐹𝐹 𝐹𝐶𝐹𝐹 1
𝐹𝑖𝑟𝑚 𝑣𝑎𝑙𝑢𝑒
1 𝑊𝐴𝐶𝐶 𝑊𝐴𝐶𝐶 𝑔 1 𝑊𝐴𝐶𝐶

𝐹𝐶𝐹𝐸 𝐹𝐶𝐹𝐸 1
𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒
1 𝑟 𝑟 𝑔 1 𝑟

22
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Value of Firm = Value of operating assets + Value of nonoperating assets

Reading 25: Market-Based Valuation Price and Enterprise Value Multiples

Enterprise value, EV = Market value of common stock + Market value of preferred equity
+ market value of debt + minority interest – cash and investments

Actual Justified
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 1 𝑏 1 𝑔
Trailing P/E
𝐸𝑃𝑆 𝑜𝑣𝑒𝑟 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 12 𝑚𝑜𝑛𝑡ℎ𝑠 𝑟 𝑔
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 1 𝑏
Leading P/E
𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝐸𝑃𝑆 𝑜𝑣𝑒𝑟 𝑛𝑒𝑥𝑡 12 𝑚𝑜𝑛𝑡ℎ𝑠 𝑟 𝑔
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑅𝑂𝐸 𝑔
P/B
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑟 𝑔
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑉 𝐸 1 𝑏 1 𝑔
𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑆 𝑆 𝑟 𝑔
Or
P/S
𝑉 𝐸 1 𝑏
𝑆 𝑆 𝑟 𝑔

4 𝑀𝑜𝑠𝑡 𝑟𝑒𝑐𝑒𝑛𝑡 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟 𝑔

Trailing D/P
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 1 𝑔
𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑜𝑣𝑒𝑟 𝑛𝑒𝑥𝑡 𝑓𝑜𝑢𝑟 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠
Leading D/P 𝑟 𝑔
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Earnings 𝐸𝑃𝑆 𝑟 𝑔
yield 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 1 𝑏 1 𝑔

Underlying Earnings = EPS – non recurring gains + non recurring loss

Normalized Earnings

Method 1: Average EPS Approach

1
Normalized EPS 𝐸𝑃𝑆
Noesis Exed

𝑛
Method 2: Average ROE Approach
1
Normalized EPS 𝑅𝑂𝐸 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑛

𝑃/𝐸 𝑟𝑎𝑡𝑖𝑜
𝑃𝐸𝐺 𝑟𝑎𝑡𝑖𝑜
𝑔 𝑖𝑛 %

Earnings surprise = Reported EPS – Expected EPS

23
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

𝑅𝑒𝑝𝑜𝑟𝑡𝑒𝑑 𝐸𝑃𝑆 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐸𝑃𝑆

𝑺𝒄𝒂𝒍𝒆𝒅 𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒔𝒖𝒓𝒑𝒓𝒊𝒔𝒆
𝜎 𝐴𝑛𝑎𝑙𝑦𝑠𝑡 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝐸𝑃𝑆

Standardized unexpected earnings (SUE)

Portfolio P/E
1
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 ℎ𝑎𝑟𝑚𝑜𝑛𝑖𝑐 𝑚𝑒𝑎𝑛 𝑤
∑
𝑋
𝑤 Weight of stock i in portfolio
𝑋 P/E of stock i

Reading 26: Residual Income Valuation

Economic Value Added (EVA)

𝐸𝑉𝐴 𝐸𝐵𝐼𝑇 1 𝑇 𝑊𝐴𝐶𝐶 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Market Value Added (MVA)

𝑀𝑉𝐴 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Residual Income, RI
𝑅𝐼 𝐸 𝑟 𝐵 𝑅𝑂𝐸 𝑟 𝐵
Residual Income Model
𝑅𝐼 𝑅𝐼 𝑅𝐼
𝑉 𝐵 ⋯
1 𝑟 1 𝑟 1 𝑟

Single-stage residual income valuation model

𝑅𝑂𝐸 𝑟 𝐵 𝑅𝐼
𝑉 𝐵 𝐵
𝑟 𝑔 𝑟 𝑔

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦

𝑇𝑜𝑏𝑖𝑛 𝑠 𝑄
𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Continuing Residual Income

Noesis Exed

𝑅𝐼 𝑅𝐼
𝑉 𝐵 0 𝜔 1
1 𝑟 1 𝑟 𝜔 1 𝑟

If RI declines to Long-run level in mature industry, with premium over book value
𝑅𝐼 𝑃 𝐵
𝑉 𝐵
1 𝑟 1 𝑟

Clean surplus relationship:

𝐵 𝐵 𝐸 𝐷𝑖𝑣

24
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 27: Private Company Valuation

Capitalized Cash Flow Method (CCM)

𝐹𝐶𝐹𝐹 1 𝑔 𝐸𝑞𝑢𝑖𝑡𝑦 𝐹𝑖𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒

𝐹𝑖𝑟𝑚 𝑣𝑎𝑙𝑢𝑒 →
𝑊𝐴𝐶𝐶 𝑔 𝑣𝑎𝑙𝑢𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡

𝐹𝐶𝐹𝐸 1 𝑔
𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒
𝑟 𝑔

Excess Earnings Method (EEM)

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑡𝑜 𝑝𝑟𝑜𝑣𝑖𝑑𝑒

𝑬𝒙𝒄𝒆𝒔𝒔 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑
𝑡ℎ𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛
𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝑙 𝑎𝑛𝑑 𝒇𝒊𝒙𝒆𝒅 𝒂𝒔𝒔𝒆𝒕𝒔

𝐸𝑥𝑐𝑒𝑠𝑠 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠
𝑘 𝑔

Value of the firm = Working capital + Fixed assets + Intangible Assets

Discount for Lack of Control and Marketability

Discount for Lack of Control (DLOC)

1
𝐷𝐿𝑂𝐶 1
1 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

Total discount = 1 – (1 – DLOC)(1 – DLOM)

Noesis Exed

25
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

FIXED INCOME

Reading 28: The Term Structure and Interest Rate Dynamics

Forward pricing model

𝐷𝐹 𝐷𝐹 𝐹 ,
where:
1
𝐷𝐹
1 𝑧
1
𝐹 ,
1 𝑓,

Forward rate model

1 𝑧 1 𝑧 1 𝑓,

𝑧 Spot rate for period 𝐵

𝑓, 𝐵 𝐴 forward rate that starts in period 𝐴

Calculating spot rate from one-period forward rates

⁄
𝑧 1 𝑧 1 𝑓, 1 𝑓, … 1 𝑓 , 1

Fixed swap rate

1 𝐷𝐹 1 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟 𝑜𝑓 𝐿𝑎𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑠
∑ 𝐷𝐹 𝑆𝑢𝑚 𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟𝑠

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:

Noesis Exed

%∆𝑃𝑉 𝑀𝑜𝑑𝐷𝑢𝑟 ∆𝑌𝑇𝑀 ∆𝑃𝑉 𝑀𝑜𝑑𝐷𝑢𝑟 ∆𝑌𝑇𝑀 𝑃𝑉

%∆𝑃𝑉 𝐸𝑓𝑓𝐷𝑢𝑟 ∆𝐶𝑢𝑟𝑣𝑒 ∆𝑃𝑉 𝐸𝑓𝑓𝐷𝑢𝑟 ∆𝐶𝑢𝑟𝑣𝑒 𝑃𝑉

Non-parallel shifts (i.e. change in slope or curvature):

%∆𝑃𝑉 𝐾𝑒𝑦𝑅𝑎𝑡𝑒𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 ∆𝐾𝑒𝑦 𝑅𝑎𝑡𝑒

26
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 29: The Arbitrage-Free Valuation Framework

Arbitrage-free value of bond:

𝐶 𝐶 𝐹𝑉 𝐶
𝑉 ⋯
1 𝑆 1 𝑆 1 𝑆

𝑆 Spot rate for period n

Backward Induction Valuation Methodology

0.5 𝑉 0.5 𝑉 𝐶
𝐵𝑜𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑎𝑛𝑦 𝑛𝑜𝑑𝑒
1 𝑖

𝑉 bond’s value if the higher forward rate is realized one year hence
𝑉 bond’s value if the lower forward rate is realized one year hence
𝐶 coupon payment that is not dependent on interest rates

𝑖 , 𝑖, 𝑒

𝑖 , 𝑖 , 𝑒 𝑖 , 𝑖 , 𝑒

𝑖 , 𝑖 , 𝑒 𝑖 , 𝑖 , 𝑒 𝑖 , 𝑖 , 𝑒

Cox-Ingersoll-Ross (CIR) Model

𝑑𝑟 𝑘 𝜃 𝑟 𝑑𝑡 𝜎 𝑟 𝑑𝑧

Vasicek Model
𝑑𝑟 𝑘 𝜃 𝑟 𝑑𝑡 𝜎𝑑𝑧

𝑎 Speed of reversion (> 0)

𝑏 Long-run interest rate
𝜎 Interest rate volatility

Ho-Lee Model
Noesis Exed

𝑑𝑟 𝜃 𝑑𝑡 𝜎𝑑𝑧

𝜃 Time-dependent drift term

Kalotay-Williams-Fabozzi (KWF) Model

𝑑 ln 𝑟 𝜃 𝑑𝑡 𝜎𝑑𝑧

27
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 30: Valuation and Analysis - Bonds with Embedded Options

Value of callable bond = Value of straight bond – Value of issuer call option

Value of putable bond = Value of straight bond + Value of investor put option

𝑃𝑉 𝑃𝑉
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
2 Δ𝐶𝑢𝑟𝑣𝑒 𝑃𝑉

𝑃𝑉 𝑃𝑉 2 𝑃𝑉
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦
𝑃𝑉 Δ𝐶𝑢𝑟𝑣𝑒

Convertible Bonds

𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛

𝑣𝑎𝑙𝑢𝑒 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 𝑟𝑎𝑡𝑖𝑜

𝑴𝒊𝒏𝒊𝒎𝒖𝒎 𝒗𝒂𝒍𝒖𝒆 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔

𝑴𝒂𝒙 ,
𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑏𝑜𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑏𝑜𝑛𝑑

𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒

𝑝𝑟𝑖𝑐𝑒 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜

𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒

𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 𝑝𝑟𝑖𝑐𝑒

𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑟𝑎𝑡𝑖𝑜 𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒

𝑃𝑟𝑒𝑚𝑖𝑢𝑚 𝑜𝑣𝑒𝑟 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒

1
𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑣𝑎𝑙𝑢𝑒 𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑣𝑎𝑙𝑢𝑒

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑎𝑙𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓
𝑜𝑝𝑡𝑖𝑜𝑛 𝑜𝑛 𝑖𝑠𝑠𝑢𝑒𝑟 𝑐𝑎𝑙𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑝𝑢𝑡
𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑏𝑜𝑛𝑑 𝑠𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑏𝑜𝑛𝑑
𝑖𝑠𝑠𝑢𝑒𝑟 𝑠 𝑠𝑡𝑜𝑐𝑘 𝑜𝑝𝑡𝑖𝑜𝑛 𝑜𝑝𝑡𝑖𝑜𝑛
Noesis Exed

Reading 31: Credit Analysis Models

𝐺-𝑠𝑝𝑟𝑒𝑎𝑑 𝑌𝑇𝑀 𝑜𝑓 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑏𝑜𝑛𝑑 𝑌𝑇𝑀 𝑜𝑓 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑏𝑜𝑛𝑑

𝐿𝑜𝑠𝑠 𝑔𝑖𝑣𝑒𝑛 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦

1
𝑑𝑒𝑓𝑎𝑢𝑙𝑡 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒 𝑟𝑎𝑡𝑒

𝐿𝑜𝑠𝑠 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦
1
𝑠𝑒𝑣𝑒𝑟𝑖𝑡𝑦 𝑟𝑎𝑡𝑒

Expected Loss = Probability of Default × Loss Given Default

28
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 𝐶𝑟𝑒𝑑𝑖𝑡 𝑉𝑎𝑙𝑢𝑒

𝑉𝑁𝐷 𝐶𝑉𝐴
𝑜𝑓 𝑐𝑟𝑒𝑑𝑖𝑡 𝑟𝑖𝑠𝑘𝑦 𝑏𝑜𝑛𝑑 𝑎𝑠𝑠𝑢𝑚𝑖𝑛𝑔 𝑛𝑜 𝑑𝑒𝑓𝑎𝑢𝑙𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡

𝑛
𝐸𝐿 𝑃𝑂𝐷𝑡 𝐿𝐺𝐷𝑡
𝐶𝑉𝐴 𝑡
1 𝑟𝑓 1 𝑟𝑓𝑡
𝑡 1

𝐸𝐿 Expected loss of bond at time t

𝑃𝑂𝐷 Probability of default of bond at time t
𝐿𝐺𝐷 Loss given default at time t 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦
𝑟𝑓 Risk-free rate at time t
𝑛 Bond’s remaining tenor

𝐸𝐿
𝑃𝑉 𝑜𝑓 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑜𝑠𝑠 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
1 𝑟𝑓

𝑃𝑂𝐷 1 𝐻𝑎𝑧𝑎𝑟𝑑 𝑟𝑎𝑡𝑒 𝐻𝑎𝑧𝑎𝑟𝑑 𝑟𝑎𝑡𝑒

Approximation of credit spread Annual hazard rate × (1 – Recovery rate)

Expected percentage price change of a corporate bond

𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑐𝑟𝑒𝑑𝑖𝑡 𝑚𝑖𝑔𝑟𝑎𝑡𝑖𝑜𝑛 %∆𝑃

where %∆𝑃 𝐷𝑢𝑟 ∆𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑝𝑟𝑒𝑎𝑑

Structural Model
𝐴 𝐷 𝑡, 𝑇 𝑆

In terms of… Call options Put options

Equity 𝐸 𝑇 𝑀𝑎𝑥 𝐴 𝑇 𝐾, 0 𝐸 𝑇 𝐴 𝑇 𝐾 𝑀𝑎𝑥 𝐾 𝐴 𝑇 , 0
Debt 𝐷 𝑇 𝐴 𝑇 𝑀𝑎𝑥 𝐴 𝑇 𝐾, 0 𝐷 𝑇 𝐾 𝑀𝑎𝑥 𝐾 𝐴 𝑇 , 0

𝑆 𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

𝐴 𝐴𝑠𝑠𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑇
Noesis Exed

𝐾 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡

Present Value of Expected Loss (PVOEL) = PV of risk-free bond – PV of risky bond

29
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 32: Credit Default Swaps

CDS payout amount = Payout ratio × Notional

= (1 – Recovery rate) × Notional

Upfront payment = PV of protection leg – PV of premium leg

𝑈𝑝𝑓𝑟𝑜𝑛𝑡 𝑃𝑉 𝑜𝑓 𝑃𝑉 𝑜𝑓
𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑝𝑟𝑒𝑎𝑑 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑢𝑝𝑜𝑛
𝐶𝑟𝑒𝑑𝑖𝑡 𝐹𝑖𝑥𝑒𝑑
𝐶𝐷𝑆 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛
𝑆𝑝𝑟𝑒𝑎𝑑 𝐶𝑜𝑢𝑝𝑜𝑛

𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐶𝐷𝑆 100 𝑈𝑝𝑓𝑟𝑜𝑛𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛
𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛
𝐶𝐷𝑆 𝑝𝑟𝑖𝑐𝑒 𝑠𝑝𝑟𝑒𝑎𝑑 𝑖𝑛 𝑏𝑝𝑠
Noesis Exed

30
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

DERIVATIVES

Reading 33: Pricing and Valuation of Forward Commitments

Forward Pricing:
𝐹 𝑆 1 𝑟

𝐹 𝑆 𝐶𝐶 𝐶𝐵 1 𝑟

where: 𝐶𝐶 PV of Carry cost 𝐶𝐵 PV of carry benefits

𝐹 𝑆 𝑒 𝑟 continuously compounded risk-free rate

𝐹 𝑆 𝑒

Note: CC and CB are continuously compounded rates

Forward Valuation (Long Position):

𝑉 0

𝐹 𝐹 𝐹
𝑉 𝑆
1 𝑟 1 𝑟

𝑉 𝑆 𝐹

Forward Rate Agreement (FRA)

Payoff at expiration:
𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝐿 𝐹𝑅𝐴 𝑡
𝑳𝒐𝒏𝒈 𝐹𝑅𝐴 𝑝𝑎𝑦𝑜𝑓𝑓 𝑎𝑡 𝒆𝒙𝒑𝒊𝒓𝒂𝒕𝒊𝒐𝒏 𝑜𝑓 𝐹𝑅𝐴
1 𝐷 𝑡

Pricing:
1 𝐿 𝑡 1
𝐹𝑅𝐴 1
1 𝐿 𝑡 𝑡
Noesis Exed

Valuation (prior to FRA expiration):

𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝐹𝑅𝐴 𝐹𝑅𝐴 𝑡
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑜𝑛𝑔 𝐹𝑅𝐴 𝑎𝑡 𝑔
1 𝐷 𝑡

𝐷 Discount rate for m periods at t = h

ℎ FRA tenor
𝑚 Tenor of the underlying rate (e.g. LIBOR)
𝑇 ℎ 𝑚 Maturity of underlying instrument

31
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Fixed Income Forwards and Futures

Pricing:
𝑄𝑢𝑜𝑡𝑒𝑑 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛
𝐹
𝑝𝑟𝑖𝑐𝑒 𝑓𝑎𝑐𝑡𝑜𝑟
𝐹𝑉 𝐵 𝐴𝐼 𝐴𝐼 𝐹𝑉𝐶𝐼

Valuation for fixed income forward contracts:

𝑉 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑓𝑜𝑟𝑤𝑎𝑟𝑑 𝑝𝑟𝑖𝑐𝑒𝑠
𝑃𝑉 𝐹 𝐹

Valuation for fixed income futures contracts:

𝑉 Price change since previous day’s settlement

𝐵 Quoted bond price

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑑𝑎𝑦𝑠 𝑠𝑖𝑛𝑐𝑒 𝑙𝑎𝑠𝑡 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑢𝑝𝑜𝑛
𝐴𝐼
𝑇𝑜𝑡𝑎𝑙 𝑑𝑎𝑦𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝐶𝑜𝑢𝑝𝑜𝑛 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦

Interest Rate Swaps (IRS)

Pricing:
1 𝑃𝑉
𝐹𝑆
∑ 𝑃𝑉

1
𝑃𝑉
𝐷𝑎𝑦𝑠 𝑡𝑜 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦
1 𝑆𝑝𝑜𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
360

Valuation:
Pay-fixed, receive-floating IRS

𝑉 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝐹𝑆 𝑭𝑺𝟎 𝑃𝑉

Receive-fixed, pay-floating IRS

𝑉 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑭𝑺𝟎 𝐹𝑆 𝑃𝑉
Noesis Exed

32
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Currency Swap
Pricing for fixed leg of currency swap in currency 𝑎
1 𝑃𝑉 ,
𝐹𝑆
∑ 𝑃𝑉 ,

Value of a fixed-for-fixed currency swap

𝑉 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑉 𝑆 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑉

𝑉 𝐹𝑆 𝑃𝑉 , 𝑃𝑉 , 𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑎 𝑙𝑒𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑒

𝑉 𝐹𝑆 𝑃𝑉 , 𝑃𝑉 , 𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑏 𝑙𝑒𝑔 𝑝𝑎𝑦

𝑆 Spot exchange rate at time 𝑡 (quoted as 𝑎⁄𝑏)

Equity Swap
Value of equity swap (receive fixed-rate, pay equity return)
𝑆
𝑉 , 𝑉 𝐶 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑉 𝑃𝑎𝑟 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙
𝑆

𝑆
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝐿𝑒𝑔 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙
𝑆

Cash flow for equity leg 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑒𝑡𝑢𝑟𝑛

𝑉 𝐶 Value at time 𝑡 of a fixed-rate bond initiated with coupon 𝐶 at Time 0

𝑆 Current equity index level
𝑆 = Equity index level at last reset date

Reading 34: Valuation of Contingent Claims

𝑐 𝑐
ℎ 0
𝑆 𝑆
Noesis Exed

𝑝 𝑝
ℎ 0
𝑆 𝑆

No-arbitrage Approach:

𝑐 ℎ 𝑆 𝑃𝑉 ℎ 𝑆 𝑐 ℎ 𝑆 𝑃𝑉 ℎ 𝑆 𝑐

𝑝 ℎ 𝑆 𝑃𝑉 ℎ 𝑆 𝑝 ℎ 𝑆 𝑃𝑉 ℎ 𝑆 𝑝

33
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Expectations Approach:

1 𝑟 𝑑
𝜋
𝑢 𝑑

One-period binomial model:

𝜋𝑐 1 𝜋 𝑐
𝑐
1 𝑟

𝜋𝑝 1 𝜋 𝑝
𝑝
1 𝑟

Note: For interest rate options, 𝜋 0.5 and discount expected option payoff using the
1-period forward rates.

Two-period binomial model:

𝜋 𝑐 2𝜋 1 𝜋 𝑐 1 𝜋 𝑐
𝑐
1 𝑟

𝜋 𝑝 2𝜋 1 𝜋 𝑝 1 𝜋 𝑝
𝑝
1 𝑟

For 2-period American-styled call option with dividend in t = 1:

𝑆 𝑢 𝑆 𝑃𝑉 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑎𝑡 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒

𝑆 𝑑 𝑆 𝑃𝑉 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑎𝑡 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒

Black-Scholes Option Pricing Model

𝑐 𝑆𝑁 𝑑 𝑋𝑒 𝑁 𝑑

𝑝 𝑋𝑒 𝑁 𝑑 𝑆𝑁 𝑑
Noesis Exed

𝑆 1
ln 𝑟 𝜎 𝑇
𝑑 𝑋 2
𝜎√𝑇

𝑑 𝑑 𝜎√𝑇

34
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Put-call parity: 𝑝 𝑆 𝑐 𝑋𝑒

• Hedge ratio for calls = N(d1)

• Probability that the call option expires in the money = N(d2) = Prob(ST > X)
• Hedge ratio for puts = N(d1) – 1 = -N(-d1)
• Probability that the put option expires in the money = 1 – N(d2)
= N(-d2) = Prob(ST < X)

BSM model with carry benefits

𝑐 𝑆𝑒 𝑁 𝑑 𝑋𝑒 𝑁 𝑑

𝑝 𝑋𝑒 𝑁 𝑑 𝑆𝑒 𝑁 𝑑

𝑆 1
ln 𝑟 𝛾 𝜎 𝑇
𝑑 𝑋 2
𝜎√𝑇

𝑑 𝑑 𝜎√𝑇

Put-call parity: 𝑝 𝑆𝑒 𝑐 𝑋𝑒

Black Option Valuation Model: European Options on Futures

𝑐 𝑒 𝐹 𝑇 𝑁 𝑑 𝑋𝑁 𝑑
𝑝 𝑋𝑒 𝑁 𝑑 𝑆𝑒 𝑁 𝑑

𝐹 𝑇 1
ln 𝜎 𝑇
𝑋 2
𝑑
𝜎 √𝑇

𝑑 𝑑 𝜎√𝑇

Put-call parity: 𝑐 𝑒 𝐹 𝑇 𝑋 𝑝

Interest Rate Options:

Noesis Exed

𝑐 𝐴𝑃 𝑒 𝐹𝑅𝐴 0, 𝑡 ,𝑡 𝑁 𝑑 𝑅 𝑒 𝑁 𝑑

𝑝 𝐴𝑃 𝑒 𝑅 𝑒 𝑁 𝑑 𝐹𝑅𝐴 0, 𝑡 ,𝑡 𝑁 𝑑

𝐹𝑅𝐴 0, 𝑡 ,𝑡 1
ln 𝑋 2𝜎 𝑡
𝑑
𝜎 𝑡

𝑑 𝑑 𝜎 𝑡

35
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Payer Swaption

𝑃𝐴𝑌 𝐴𝑃 𝑅 𝑁 𝑑 𝑅 𝑁 𝑑 𝑃𝑉 1

Receiver Swaption

𝑅𝐸𝐶 𝐴𝑃 𝑅 𝑁 𝑑 𝑅 𝑁 𝑑 𝑃𝑉 1

𝑅 1
ln 𝜎 𝑇
𝑅 2
𝑑
𝜎√𝑇

𝑑 𝑑 𝜎√𝑇

Optimal Number of Hedging Units

𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑑𝑒𝑙𝑡𝑎
𝑁
𝐷𝑒𝑙𝑡𝑎

𝑒
𝐺𝑎𝑚𝑚𝑎 𝐺𝑎𝑚𝑚𝑎 𝑛 𝑑
𝑆𝜎√𝑇

1
𝑐 𝑐 𝐷𝑒𝑙𝑡𝑎 𝛥𝑆 𝐺𝑎𝑚𝑚𝑎 𝛥𝑆
2

1
𝑝 𝑝 𝐷𝑒𝑙𝑡𝑎 𝛥𝑆 𝐺𝑎𝑚𝑚𝑎 𝛥𝑆
2
Noesis Exed

36
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

ALTERNATIVE INVESTMENTS

Reading 35: Real Estate Investments

Net lease = Gross lease – operating expense

Appraisal-based index
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔
𝑁𝑂𝐼
𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒
𝑅𝑒𝑡𝑢𝑟𝑛
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒

Highest and Best Use

Implied land value = Value after construction – Cost to construct building

Direct Capitalization Method

𝑁𝑂𝐼
Value of property at the time of purchase
𝐶𝑎𝑝 𝑟𝑎𝑡𝑒

𝑅𝑒𝑛𝑡
Value of property at the time of purchase
𝐴𝑙𝑙 𝑟𝑖𝑠𝑘 𝑦𝑖𝑒𝑙𝑑

𝑁𝑂𝐼
𝐶𝑎𝑝 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑐𝑜𝑚𝑝𝑎𝑟𝑎𝑏𝑙𝑒
𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑚𝑝𝑎𝑟𝑎𝑏𝑙𝑒

𝐼𝑅𝑅 𝐶𝑎𝑝 𝑟𝑎𝑡𝑒 𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑁𝑂𝐼

If property under renovation,

Value of property = Value if renovated – Loss in value due to renovation

𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒
Gross income multiplier
𝐺𝑟𝑜𝑠𝑠 𝑖𝑛𝑐𝑜𝑚𝑒
Noesis Exed

37
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Discounted Cash Flow Method

Constant growth rate:

𝑁𝑂𝐼
𝑉
𝑟 𝑔

Appraisal with Terminal Value (or Resale/Reversion Value):

𝑁𝑂𝐼 𝑉𝑎𝑙𝑢𝑒
𝑉
1 𝑟 1 𝑟

𝑁𝑂𝐼 𝑁𝑂𝐼
𝑉𝑎𝑙𝑢𝑒
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑐𝑎𝑝 𝑟𝑎𝑡𝑒 𝑟 𝑔

𝑁 Investor’s holding period

𝑁𝑂𝐼
𝐺𝑜𝑖𝑛𝑔 𝑖𝑛 𝐶𝑎𝑝 𝑅𝑎𝑡𝑒
𝑉

Private Market Real Estate Debt

𝐿𝑜𝑎𝑛
𝐿𝑇𝑉 𝑟𝑎𝑡𝑖𝑜
𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑣𝑎𝑙𝑢𝑒

𝑁𝑂𝐼
𝐷𝑒𝑏𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜, 𝐷𝑆𝐶𝑅
𝐷𝑒𝑏𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒

𝐹𝑖𝑟𝑠𝑡 𝑦𝑒𝑎𝑟 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑁𝑂𝐼 𝑀𝑜𝑟𝑔𝑎𝑔𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝐸𝑞𝑢𝑖𝑡𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟𝑎𝑡𝑒
𝐸𝑞𝑢𝑖𝑡𝑦 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡

Note: Equity dividend rate also called “cash-on-cash” return.

Net Asset Value approach:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑠𝑡𝑎𝑡𝑒 𝑜𝑡ℎ𝑒𝑟 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑛𝑑 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝐴𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Noesis Exed

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

where:
𝑁𝑂𝐼
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑠𝑡𝑎𝑡𝑒
𝐶𝑎𝑝 𝑟𝑎𝑡𝑒

Funds from Operations:

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐺𝑎𝑖𝑛𝑠 𝑜𝑛 𝑠𝑎𝑙𝑒 𝐿𝑜𝑠𝑠 𝑜𝑛 𝑠𝑎𝑙𝑒
𝐹𝐹𝑂 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑎𝑛𝑑 𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦

38
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Adjusted Funds from Operations:

𝑁𝑜𝑛 𝑐𝑎𝑠ℎ 𝑅𝑒𝑐𝑢𝑟𝑟𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒
𝐴𝐹𝐹𝑂 𝐹𝐹𝑂
𝑟𝑒𝑛𝑡 𝑎𝑛𝑑 𝑙𝑒𝑎𝑠𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠

Reading 36: Private Equity Investments

Venture Capital Method

Pre-money valuation New equity injection Post-money valuation

𝑷𝒐𝒔𝒕 𝒎𝒐𝒏𝒆𝒚 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑡 𝑒𝑥𝑖𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑡 𝑒𝑥𝑖𝑡

𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑅𝑂𝐼 1 𝐼𝑅𝑅

𝑉𝐶 𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑁𝑒𝑤 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑗𝑒𝑐𝑡𝑖𝑜𝑛

𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 𝑷𝒐𝒔𝒕 𝒎𝒐𝒏𝒆𝒚 𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛

𝑉𝐶 𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑁 𝑛𝑒𝑤 𝑠ℎ𝑎𝑟𝑒𝑠

𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 𝑁 𝑜𝑙𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 𝑁 𝑜𝑝𝑡𝑖𝑜𝑛 𝑝𝑜𝑜𝑙 𝑁 𝑛𝑒𝑤 𝑠ℎ𝑎𝑟𝑒𝑠

𝑃𝑟𝑖𝑐𝑒 𝑝𝑎𝑖𝑑 𝑁𝑒𝑤 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑗𝑒𝑐𝑡𝑖𝑜𝑛

𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑁 𝑛𝑒𝑤 𝑠ℎ𝑎𝑟𝑒𝑠

For two stages of financing (Stage A and Stage B)

𝑆𝑒𝑟𝑖𝑒𝑠 𝐴 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠 𝑆𝑒𝑟𝑖𝑒𝑠 𝐴 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠
𝑆𝑒𝑟𝑖𝑒𝑠 𝐵 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠
𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 1
𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝
𝑎𝑓𝑡𝑒𝑟 𝑆𝑒𝑟𝑖𝑒𝑠 𝐵 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑎𝑓𝑡𝑒𝑟 𝑆𝑒𝑟𝑖𝑒𝑠 𝐴 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔

𝑆𝑒𝑟𝑖𝑒𝑠 𝐴 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠
𝑈𝑝𝑑𝑎𝑡𝑒𝑑 𝐸𝑥𝑖𝑡 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝
𝑆𝑒𝑟𝑖𝑒𝑠 𝐴 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠
𝑎𝑓𝑡𝑒𝑟 𝑆𝑒𝑟𝑖𝑒𝑠 𝐵 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔
𝑖𝑚𝑝𝑙𝑖𝑒𝑑 𝑅𝑂𝐼
𝑎𝑓𝑡𝑒𝑟 𝑆𝑒𝑟𝑖𝑒𝑠 𝐵 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑆𝑒𝑟𝑖𝑒𝑠 𝐴 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑗𝑒𝑐𝑡𝑖𝑜𝑛

Return Multiples for Private Equity Funds

𝑃𝑎𝑖𝑑 𝑖𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑜 𝑑𝑎𝑡𝑒
𝑃𝑎𝑖𝑑 𝑖𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙, 𝑃𝐼𝐶
𝐶𝑜𝑚𝑚𝑖𝑡𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
Noesis Exed

𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑝𝑎𝑖𝑑 𝑜𝑢𝑡 𝑡𝑜 𝐿𝑃𝑠

𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑡𝑜 𝑝𝑎𝑖𝑑 𝑖𝑛, 𝐷𝑃𝐼
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑡𝑜 𝑝𝑎𝑖𝑑 𝑖𝑛,

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑃 𝑠 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑖𝑛𝑔 ℎ𝑒𝑙𝑑 𝑤𝑖𝑡ℎ 𝑡ℎ𝑒 𝑃𝐸 𝑓𝑢𝑛𝑑
𝑅𝑉𝑃𝐼
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑡𝑜 𝑝𝑎𝑖𝑑 𝑖𝑛, 𝑇𝑉𝑃𝐼 𝐷𝑃𝐼 𝑅𝑉𝑃𝐼

39
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

𝑁𝐴𝑉 𝒃𝒆𝒇𝒐𝒓𝒆 𝑁𝐴𝑉 𝒂𝒇𝒕𝒆𝒓 𝐶𝑎𝑙𝑙𝑒𝑑 𝑑𝑜𝑤𝑛 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡

𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑠𝑢𝑙𝑡𝑠 𝑓𝑒𝑒

𝑁𝐴𝑉 𝒂𝒇𝒕𝒆𝒓 𝑁𝐴𝑉 𝒃𝒆𝒇𝒐𝒓𝒆 𝐶𝑎𝑟𝑟𝑖𝑒𝑑

𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠
𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

Reading 37: Introduction to Commodities and Commodity Derivatives

𝐹𝑢𝑡𝑢𝑟𝑒𝑠 𝑆𝑝𝑜𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑆𝑡𝑜𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑣𝑒𝑛𝑖𝑒𝑛𝑐𝑒

𝑝𝑟𝑖𝑐𝑒 𝑝ℎ𝑦𝑠𝑖𝑐𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑐𝑜𝑠𝑡𝑠 𝑦𝑖𝑒𝑙𝑑

𝑁𝑒𝑎𝑟 𝑡𝑒𝑟𝑚 𝐹𝑎𝑟𝑡ℎ𝑒𝑟 𝑡𝑒𝑟𝑚

𝐶𝑎𝑙𝑒𝑛𝑑𝑎𝑟
𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
𝑠𝑝𝑟𝑒𝑎𝑑
𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑟𝑖𝑐𝑒

𝑃𝑟𝑖𝑐𝑒 𝑟𝑒𝑡𝑢𝑟𝑛
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑟𝑖𝑐𝑒

𝑁𝑒𝑎𝑟 𝑡𝑒𝑟𝑚 𝐹𝑎𝑟𝑡ℎ𝑒𝑟 𝑡𝑒𝑟𝑚

𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛
𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
𝑅𝑜𝑙𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑖𝑛 𝑡ℎ𝑒 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
𝑁𝑒𝑎𝑟 𝑡𝑒𝑟𝑚
𝑏𝑒𝑖𝑛𝑔 𝑟𝑜𝑙𝑙𝑒𝑑
𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 𝑅𝑜𝑙𝑙 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 𝑅𝑒𝑏𝑎𝑙𝑎𝑛𝑐𝑖𝑛𝑔

𝑟𝑒𝑡𝑢𝑟𝑛 𝑟𝑒𝑡𝑢𝑟𝑛 𝑟𝑒𝑡𝑢𝑟𝑛 𝑟𝑒𝑡𝑢𝑟𝑛 𝑟𝑒𝑡𝑢𝑟𝑛 𝑓𝑜𝑟 𝑖𝑛𝑑𝑒𝑥 𝑜𝑛𝑙𝑦
Noesis Exed

40
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

PORTFOLIO MANAGEMENT

Reading 38: Exchange-Traded Funds: Mechanics and Applications

End-of-day ETF premium or discount (%)

𝐸𝑇𝐹 𝑝𝑟𝑖𝑐𝑒 𝑁𝐴𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑁𝐴𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Intraday ETF premium or discount (%)

𝐸𝑇𝐹 𝑝𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑒𝑑 𝑁𝐴𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑒𝑑 𝑁𝐴𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑 𝑐𝑜𝑠𝑡 % 𝑅𝑜𝑢𝑛𝑑 𝑡𝑟𝑖𝑝 𝑡𝑟𝑎𝑑𝑒 𝑐𝑜𝑠𝑡 % 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒 %

𝑅𝑜𝑢𝑛𝑑 𝑡𝑟𝑖𝑝 𝑡𝑟𝑎𝑑𝑒 𝑐𝑜𝑠𝑡 % 𝑂𝑛𝑒 𝑤𝑎𝑦 𝑐𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 % 2 𝐵𝑖𝑑 𝑎𝑠𝑘 𝑠𝑝𝑟𝑒𝑎𝑑 %

Reading 39: Using Multifactor Models

Arbitrage Pricing Theory (APT)

𝐸 𝑅 𝑅 𝜆 𝛽 , ⋯ 𝜆 𝛽 ,

𝐸 𝑅 the expected return to portfolio p

𝑅 the risk-free rate
𝛽, the sensitivity of the portfolio to factor j
𝜆 the expected reward for bearing the risk of factor j
𝐾 the number of factors

Carhart Four-Factor Model

𝐸 𝑅 𝑅 𝛽 , 𝑅𝑀𝑅𝐹 𝛽 , 𝑆𝑀𝐵 𝛽 , 𝐻𝑀𝐿 𝛽 , 𝑊𝑀𝐿

𝑅𝑀𝑅𝐹 Return on a value-weighted equity index minus one-month T-bill rate

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
Noesis Exed

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.

Macroeconomic Factor Model

𝑅 𝑎 𝑏 𝐹 𝑏 𝐹 ⋯ 𝑏 𝐹 𝜀

𝐹 the surprise in the factor k

𝑏 the sensitivity of the return on asset i to a surprise in factor k, k = 1, 2, …,
𝑎 Expected return on the portfolio

41
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Fundamental Factor Model

Value of attribute 𝑘 for asset 𝑖 Average value of attribute 𝑘
𝑏
𝜎 Values of attribute 𝑘

Return Attribution
𝐴𝑐𝑡𝑖𝑣𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 𝑅 𝑅
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝐹𝑎𝑐𝑡𝑜𝑟 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦
𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑟𝑒𝑡𝑢𝑟𝑛 𝑠𝑒𝑙𝑒𝑐𝑡𝑖𝑜𝑛

𝑇𝑟𝑎𝑐𝑘𝑖𝑛𝑔 𝑒𝑟𝑟𝑜𝑟, 𝑇𝐸 𝑠 𝑅 𝑅

𝑅 𝑅
𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜, 𝐼𝑅
𝑠 𝑅 𝑅

Active risk squared = Active factor risk + Active specific risk

Reading 40: Measuring and Managing Market Risk

Parametric VaR (Using Normal Distribution)

𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜
𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝑅𝑖𝑠𝑘, 𝑉𝑎𝑅 𝐸 𝑅 𝑧 𝜎
𝑉𝑎𝑙𝑢𝑒

𝐸 𝑅 Portfolio expected return

𝜎 Portfolio standard deviation

Two-asset portfolio:
𝐸 𝑅 𝑤𝐸 𝑅 𝑤 𝐸 𝑅

𝜎 𝑤 𝜎 𝑤 𝜎 2𝑤 𝑤 𝜌 , 𝜎 𝜎

Scaling from daily returns to annual returns:

𝑅 250 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑑𝑎𝑦𝑠

Scaling from daily standard deviation to annual standard deviaton:

Noesis Exed

𝜎 √250

𝐼𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑉𝑎𝑅 𝐼𝑉𝑎𝑅 𝑉𝑎𝑅 𝑎𝑓𝑡𝑒𝑟 𝑐ℎ𝑎𝑛𝑔𝑒 𝑉𝑎𝑅 𝑏𝑒𝑓𝑜𝑟𝑒 𝑐ℎ𝑎𝑛𝑔𝑒

Percentage change in bond price:

ΔB Δ𝑦 1 Δy
𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦
𝐵 1 𝑦 2 1 𝑦

New call price: 𝑐 Δ𝑐 𝑐 Delta Δ𝑆 Gamma Δ𝑆 𝑉𝑒𝑔𝑎 Δ𝜎

New put price: 𝑝 Δ𝑝 𝑝 Delta Δ𝑆 Gamma Δ𝑆 𝑉𝑒𝑔𝑎 Δ𝜎

42
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 42: Economics and Investment Markets

One-period real-risk free rate:

1
𝑙 , 1
𝐸 𝑚 ,

𝐸 𝑚 , Inter-temporal rate of substitution

𝐸𝑃 ,
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑖𝑠𝑘𝑦 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑣 𝑃 , ,𝑚 ,
1 𝑙,

where:
,
risk neutral present value
,

𝑐𝑜𝑣 𝑃 , ,𝑚
covariance between investor’s inter-temporal rate of substitution and
,
the random future price the investment at t + 1, based on the
information available to investor today.
𝑠 time to maturity of investment

Default-free nominal coupon-paying bond:

𝐶𝐹
𝑃
1 𝑙 , 𝜃, 𝜋 ,

𝑙, real-risk free rate

𝜃, expected inflation rate
𝜋, uncertainty in future inflation rate
𝜃, 𝜋, Breakeven rate of inflaton

Short-dated nominal zero-coupon government bonds (T-bills)

𝐶𝐹
𝑃
1 𝑙, 𝜃,

Taylor Rule:
Noesis Exed

𝑝𝑟 𝐼 𝜋 0.5 𝜋 𝜋∗ 0.5 𝑌 𝑌∗

𝑝𝑟 policy rate at time t

𝐼 level of real short-term interest rates that balance long-term savings and borrowing in
the economy
𝜋 rate of inflation
𝜋 ∗ target rate of inflation
𝑌 logarithmic level of actual GDP
𝑌 ∗ logarithmic level of potential real GDP
𝑌 𝑌 ∗ output gap

43
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Corporate bond:
𝐸 𝐶𝐹
𝑃
1 𝑙 , 𝜃, 𝜋 , 𝛾,

𝛾, Credit premium

Equity:
𝐸 𝐶𝐹
𝑃
1 𝑙 , 𝜃, 𝜋 , 𝛾, 𝜅 ,

𝐸 𝐶𝐹
𝑃
1 𝑙 , 𝜃, 𝜋 , 𝜆 ,

𝜅 , Equity premium relative to risky bonds

𝜆 , 𝛾, 𝜅, Equity risk premium

Commercial Real Estate:

𝐸 𝐶𝐹
𝑃
1 𝑙 , 𝜃, 𝜋 , 𝛾, 𝜅 , 𝜙,

𝜙 , liquidity risk premium

Reading 43: Analysis of Active Portfolio Management

Active return, 𝑅 𝑅 𝑅

𝐴𝑙𝑝ℎ𝑎, 𝛼 𝑅 𝛽 𝑅

𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑, 𝑅 ∆𝑤 𝑅 , 𝑤 ,𝑅 ,
Noesis Exed

𝑆𝑅 𝑆𝑅 𝐼𝑅

𝜎 𝑅 𝜎 𝑅 𝜎 𝑅

For optimal Sharpe ratio,

𝐼𝑅
𝜎 𝑅 𝜎 𝑅
𝑆𝑅

44
 CFA Level 2 (2022) Formula Sheet – Noesis Exed

𝜇
𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡, 𝑇𝐶 𝐶𝑜𝑟𝑟 , ∆𝑤 𝜎
𝜎

𝑅 𝜇
𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡, 𝐼𝐶 𝐶𝑜𝑟𝑟 ,
𝜎 𝜎

𝐼𝐶 2 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡 𝑐𝑎𝑙𝑙 1

Forecasted active return, 𝜇 𝐼𝐶 𝜎 𝑆

where 𝑆 is set of standardized forecasts of expected returns across securities

Mean-variance optimal weights:

𝜇𝜎
∆𝑤 ∗
𝜎 𝐼𝐶 √𝐵𝑅

Full Fundamental Law:

𝐸 𝑅 𝑇𝐶 𝐼𝐶 √𝐵𝑅𝜎

𝐼𝑅 𝑇𝐶 𝐼𝐶 √𝐵𝑅

𝐼𝑅∗
𝜎 𝑅 𝑇𝐶 𝜎 𝑅
𝑆𝑅

𝑆𝑅 𝑆𝑅 𝑇𝐶 𝐼𝑅∗

𝜎 𝜎 𝜎

Performance Measurement
𝑅 𝐸 𝑅 |𝐼𝐶 𝑁𝑜𝑖𝑠𝑒

𝑇𝐶 Proportion of variation in realized performance attributed to realized information

coefficient

𝑤ℎ𝑒𝑟𝑒 𝐼𝐶 realized information coefficient

Noesis Exed

Ex-ante measurement of skill:

𝐼𝐶
𝐸 𝑅 𝜎
𝜎

Independence of Investment Decision:

𝑁
𝐵𝑅
1 𝑁 1 𝜌

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 CFA Level 2 (2022) Formula Sheet – Noesis Exed

Reading 44: Trading Costs and Electronic Markets

𝐵𝑖𝑑 𝑝𝑟𝑖𝑐𝑒 𝐴𝑠𝑘 𝑝𝑟𝑖𝑐𝑒

𝑀𝑖𝑑𝑞𝑢𝑜𝑡𝑒 𝑝𝑟𝑖𝑐𝑒
2

Effective spread transaction cost estimate

For buy orders:

𝑇𝑟𝑎𝑑𝑒 𝑠𝑖𝑧𝑒 𝑇𝑟𝑎𝑑𝑒 𝑝𝑟𝑖𝑐𝑒 𝑀𝑖𝑑𝑞𝑢𝑜𝑡𝑒 𝑝𝑟𝑖𝑐𝑒

For sell orders:

𝑇𝑟𝑎𝑑𝑒 𝑠𝑖𝑧𝑒 𝑀𝑖𝑑𝑞𝑢𝑜𝑡𝑒 𝑝𝑟𝑖𝑐𝑒 𝑇𝑟𝑎𝑑𝑒 𝑝𝑟𝑖𝑐𝑒

Note: Midquote price calculated based on bid and ask prices at the time order was entered.

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑠𝑝𝑟𝑒𝑎𝑑 2 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑠𝑝𝑟𝑒𝑎𝑑 𝑡𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒

VWAP transaction cost estimate

For buy orders:

𝑇𝑟𝑎𝑑𝑒 𝑠𝑖𝑧𝑒 𝑇𝑟𝑎𝑑𝑒 𝑉𝑊𝐴𝑃 𝑉𝑊𝐴𝑃 𝑏𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘

For sell orders:

𝑇𝑟𝑎𝑑𝑒 𝑠𝑖𝑧𝑒 𝑉𝑊𝐴𝑃 𝑏𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑇𝑟𝑎𝑑𝑒 𝑉𝑊𝐴𝑃
Noesis Exed

46