Every formula this course teaches and every trap it warns you about, in exam-weight order,
with your own state on each module and the BA II Plus keystrokes beside the ones that need them. One switch cuts
it down to what you still get wrong. It prints on A4.
Kept when the switch is on: any module you have not yet proved at known or mastered, any
module you have been sure and wrong on, and any module you have never answered a question in. A module you have
never touched is not a module you can skip the night before.
Ethical and Professional Standards · 15 to 20 percent of the exam
Code of Ethics and Standards of Professional Conduct
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No formulas in this module. What it is tested on is below.
Code = 6, Standards = 7Never confuse the two counts. Six is the Code of Ethics' principles; seven is the Standards of Professional Conduct, numbered I through VII. A question naming a number and asking which document it describes is testing exactly this pair.
III versus IV: three letters in CLI, four letters in BOSSStandard III covers clients (CLI, three letters). Standard IV covers employers, the boss (BOSS, four letters). When a duties question names a party, match the letter count to the Standard number before answering.
Module: Code of Ethics and Standards of Professional Conduct, Ethical and Professional Standards, 2026 CFA Level I topic outline.
Guidance for Standards I-VII
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No formulas in this module. What it is tested on is below.
Disclosure is not a free passTreat disclosure as necessary but rarely sufficient. It satisfies Standard VI(A)'s duty to reveal a conflict; it never by itself satisfies Standard I(B)'s duty to stay independent, or Standard III(A)'s duty of loyalty.
Employer approval does not equal CFA complianceA firm's policy sets a ceiling on what its own employees may do; it can never lower the floor the CFA Standards require. Any answer choice that leans on "the firm's policy allowed it" is the trap, not the defense.
CPM: Clients, Partners, MeThe Standard VI(B) execution order in one line: clients first, the employer (the firm's own proprietary account) second, the member's own money last.
Is this their money or my money?The family-account test in one question. Their money, managed on their behalf, gets client priority. Money the member has a direct stake in goes last, same as the member's own account.
The 2003 Global Analyst Settlement, $1.4 billionTen major investment banks paid this for analysts who privately called stocks "junk" while publicly rating them Buy, to protect investment-banking fees. Every analyst-independence question on the exam is a miniature version of this case.
Module: Guidance for Standards I-VII, Ethical and Professional Standards, 2026 CFA Level I topic outline.
Introduction to the Global Investment Performance Standards (GIPS)
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No formulas in this module. What it is tested on is below.
Group, Include, Present, StandardizeThe four verbs GIPS forces on a firm: group similar portfolios into composites, include every fee-paying discretionary account without exception, present performance in a standard prescribed way, and standardize the calculation methodology across the firm.
V for Voluntary, V for VerificationBoth words start with the same letter for a reason: verification is never mandatory. If an answer choice says verification is required, it is wrong.
All-or-nothing complianceGIPS is a light switch, not a dimmer. Either the whole firm complies, or none of it does; there is no such thing as 51% compliant.
The three keys of portability: manager, accounts, recordsAll three have to move together for a track record to travel with a manager to a new firm. Two out of three is not enough.
5-year initial, 10-year targetStart at five years of compliant history when first claiming compliance, then build toward ten, one year at a time. Five is the floor, ten is the destination, not the entry requirement.
Module: Introduction to the Global Investment Performance Standards (GIPS), Ethical and Professional Standards, 2026 CFA Level I topic outline.
Ethics Application
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No formulas in this module. What it is tested on is below.
Best efforts, guarantee goneA coverage commitment is fine; a rating guarantee ends careers. The two G's: one gets the mandate, the other gets an analyst barred from the industry.
25 to 40 days versus 180 daysThe analyst quiet period is short (25 days for a lead underwriter, sometimes 30 to 40 by conservative firm policy). The insider lock-up is long, 180 days. Short rule for analysts, long rule for insiders selling their own stock.
Does the research WORK FOR the CLIENT?The one-question soft-dollar filter: W for work, C for client, not the manager. If the answer is no, or only partly, hard dollars must cover the manager's share.
Legal floor, not ethical ceilingSection 28(e) sets the minimum a court requires. The CFA Standards sit above it. Passing 28(e) proves nothing about passing the Standards.
Blodget, $1.435 billionHenry Blodget publicly rated internet stocks Buy while privately calling them a dog. The 2003 Global Analyst Research Settlement, $1.435 billion across ten firms, is the real-world shape of every investment-banking-pressure question on this module.
Module: Ethics Application, Ethical and Professional Standards, 2026 CFA Level I topic outline.
Quantitative Methods · 6 to 9 percent of the exam
Time Value of Money in Finance
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FV = PV x (1+r)^n. PV = FV / (1+r)^n.
Annuity due value = ordinary annuity value x (1+r); never add a payment, multiply the whole stream.
Perpetuity: PV = PMT / r, no N term.
EAR = (1 + stated rate/m)^m - 1; EAR always exceeds the stated rate once m > 1.
The effective annual rate is the true, comparable cost or return; the stated rate is what is advertised
Continuous compounding, FV = PV x e^(rn), is the ceiling of the compounding-frequency order, not an exception to it.
BA II Plus, for this moduleenter N, I/Y, PV or PMT, FV as known, leave the unknown blank, then CPT the unknown key; for an annuity due press 2ND BGN, 2ND SET to toggle BGN, then 2ND QUIT before entering values, and repeat the toggle to return to END mode afterward
BGN before END, alphabeticallyAn annuity due needs BGN mode; an ordinary annuity needs END mode. B comes before E, and beginning-of-period payments come before end-of-period payments in the same alphabetical order.
Continuous compounding is the ceiling, not the exceptionThe order from smallest to largest future value, holding the stated rate fixed, is: simple interest, annual, semiannual, quarterly, monthly, daily, continuous. Continuous compounding, FV = PV x e^(rn), is the mathematical limit as compounding frequency grows without bound, never an unusual special case.
Two 1.96-style numbers to keep straight: EAR always exceeds the stated rate once m > 1A 12% rate compounded monthly has an EAR of 12.68%, not 12%. Any answer choice that just repeats the stated rate as the effective rate is testing whether the candidate remembers that compounding frequency matters.
Module: Time Value of Money in Finance, Quantitative Methods, 2026 CFA Level I topic outline.
Statistical Measures of Asset Returns
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CV = std dev / mean: lower CV is the more risk-efficient asset.
Excess kurtosis above zero means fatter tails, not a taller peak, is the risk that matters
BA II Plus, for this moduleenter each observation with the DATA worksheet (2ND DATA), then 2ND STAT to read x-bar, Sx (sample standard deviation) and sigma-x (population standard deviation) directly; confirm which one the question calls for before reading off a value
H is at most G is at most AHarmonic mean, geometric mean, arithmetic mean: the three always sit in that order from smallest to largest, equal only when every observed value is identical. A question that gives all three and asks which is largest can be answered from this ordering alone, without recomputing anything.
The dollar-cost-averaging trigger phrase is equal dollar amountWhenever a question says the same dollar amount was invested at different prices, or an equal dollar amount was placed in each stock, the harmonic mean is the answer, not the arithmetic mean of the prices or ratios.
Chebyshev's 75% and 88.9% versus the empirical rule's 68/95/99.7Chebyshev's inequality, 1 minus 1 over k squared, gives 75% within 2 standard deviations and 88.9% within 3, for any distribution shape. The empirical rule's 68/95/99.7 figures apply only when the distribution is normal; a question that says unknown or non-normal distribution is signaling Chebyshev, not the empirical rule.
N minus 1 exists because the sample mean already used one degree of freedomBessel's correction, dividing by n - 1 instead of n, corrects for the fact that squared deviations measured from an estimated mean are systematically smaller than deviations from the true, unknown population mean.
Module: Statistical Measures of Asset Returns, Quantitative Methods, 2026 CFA Level I topic outline.
BA II Plus, for this modulethe calculator does not compute critical values or p-values directly; enter the sample data with 2ND DATA and 2ND STAT to retrieve x-bar and Sx, then build the test statistic by hand as (x-bar minus the hypothesized value) divided by (Sx divided by the square root of n)
Greek letter, z; Roman letter, tIf the problem states sigma, the population standard deviation, use z. If it states s, the sample standard deviation, use t. This single check settles the z-versus-t decision faster than any sample-size rule of thumb.
1.645 and 1.96, memorized coldOne-tailed 5% significance: z = 1.645. Two-tailed 5% significance: z = 1.96. One-tailed 1%: z = 2.326. Two-tailed 1%: z = 2.576. A two-tailed test always has the larger critical value of the pair at the same significance level, because the same alpha is split across two tails instead of concentrated in one.
F has two legs, chi-square has one curveF-test compares two variances against each other; chi-square tests one variance against a stated number. The larger sample variance always goes in the F-statistic's numerator, by convention, so F is never below 1.
Type I is convicting the innocent; Type II is acquitting the guiltyA courtroom analogy for the two error types: Type I error wrongly rejects a true null, like convicting an innocent defendant. Type II error wrongly fails to reject a false null, like acquitting a guilty one.
Module: Hypothesis Testing, Quantitative Methods, 2026 CFA Level I topic outline.
Economics · 6 to 9 percent of the exam
The Firm and Market Structures
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HHI = sum of squared whole-number market shares. <1,500 unconcentrated, 1,500-2,500 moderate, >2,500 highly concentrated.
The Herfindahl-Hirschman Index squares whole-number market shares; concentration ratios simply sum them
Monopolistic does not mean monopolyMonopolistic competition has many sellers and low barriers to entry; a monopoly has exactly one. The shared word in the name is the exam's favorite trap, not a hint that the two structures behave alike.
HHI thresholds: 1,500 and 2,500Below 1,500 is unconcentrated, 1,500 to 2,500 is moderately concentrated, above 2,500 is highly concentrated. Forgetting to square the shares, or squaring decimals instead of whole numbers, is the single most common HHI arithmetic error.
MR = MC sets quantity; the demand curve then sets priceFor a linear demand curve P = a - bQ, marginal revenue is MR = a - 2bQ, twice as steep as demand. Solve MR = MC for quantity first, then plug that quantity back into the demand curve, never into MC, to find price.
Module: The Firm and Market Structures, Economics, 2026 CFA Level I topic outline.
Fiscal Policy
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Spending multiplier = 1/(1-MPC). Tax multiplier = -MPC/(1-MPC), always negative, always 1 less in magnitude than the spending multiplier.
The spending multiplier is 1 / (1 - MPC); the tax multiplier is smaller by exactly one unit
Balanced budget multiplier = 1, never zero.
Total deficit = structural deficit + cyclical deficit.
The total budget deficit splits into a structural piece and a cyclical piece
Open economy multiplier = 1/(1-MPC+MPM), smaller than the closed-economy version because of import leakage.
Spending multiplier minus tax multiplier equals one, always1 / (1 - MPC) minus MPC / (1 - MPC) equals exactly 1, for any MPC. Use this identity to sanity-check a multiplier calculation without redoing the algebra.
Balanced budget multiplier equals oneA same-size increase in spending and taxes raises GDP by exactly the size of that increase, never by zero. The intuitive expectation of full cancellation is the trap.
Crowding out is not monetary offsetCrowding out is the interest-rate and private-investment channel that runs automatically through the loanable funds market. A central bank deliberately tightening policy in response to fiscal stimulus is a separate mechanism the exam labels monetary offset, tested as a distinct answer choice.
Module: Fiscal Policy, Economics, 2026 CFA Level I topic outline.
Exchange Rate Calculations
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CIP exact: F = S x (1 + r_price)/(1 + r_base).
Forward premium/discount = [(F-S)/S] x (360/days); FX and money markets use 360, not 365.
When two quotes share a common currency in the same position, both as X/USD for instance, dividing one by the other cancels USD and leaves the cross rate between the two remaining currencies: EUR/GBP = (EUR/USD) / (GBP/USD)
Cross rates cancel the shared currency by dividing, never by multiplying
The exact CIP formula, F = S x (1 + r_price) / (1 + r_base)
Covered interest rate parity places the price currency's rate on top
The exact CIP formula, F = S x (1 + r_price) / (1 + r_base), forces the higher-yielding currency's forward rate to move in the direction that removes any riskless arbitrage: a currency with the higher interest rate trades forward at a discount, and the currency with the lower interest rate trades forward at a premium, so that borrowing in the low-rate currency to invest in the high-rate one, hedged with a forward, earns no free profit.
The base is the one you are pricingRead X/Y as X per one Y. Y, the second currency, is always the base, the single unit priced in terms of the first.
Cross rates: divide to cancel, never multiplyTwo quotes sharing a common currency in the same slot cancel by division. If both quotes are X/USD, EUR/GBP = (EUR/USD) divided by (GBP/USD).
High rate, forward discountUnder CIP, the currency paying the higher interest rate always trades forward at a discount. A high-rate currency that also traded forward at a premium would hand an arbitrageur a free profit, which CIP rules out by construction.
Annualize on 360, not 365FX and money-market conventions on this exam use a 360-day year for annualizing a forward premium or discount, a different convention than bond-market day counts elsewhere in the curriculum.
Module: Exchange Rate Calculations, Economics, 2026 CFA Level I topic outline.
Understanding Business Cycles
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No formulas in this module. What it is tested on is below.
Two triggers, two definitions of recessionTwo consecutive quarters of negative real GDP growth is the technical definition. A dating committee using a broad indicator set, without requiring that exact GDP pattern, is the alternative, and it can call a recession the technical rule would miss.
The level lags, the flow leadsThe unemployment rate's level is lagging; new claims for unemployment insurance, a flow that reacts immediately to layoffs, behaves as a leading signal instead.
Inflation keeps climbing after growth turnsBecause wage contracts and commodity pricing carry momentum, headline inflation is a lagging indicator that typically keeps rising into early contraction even as real GDP growth has already begun to fall.
Module: Understanding Business Cycles, Economics, 2026 CFA Level I topic outline.
Monetary Policy
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No formulas in this module. What it is tested on is below.
Below neutral is expansionary, whatever the number isA 1.5% policy rate against a 3% neutral rate is expansionary; a 4% policy rate against a 2% neutral rate is contractionary. The comparison to neutral decides the stance, never the absolute level alone.
OMO is the workhorse; the discount rate is the signalOpen market operations do the daily work of moving the actual policy rate; the discount rate mainly announces intent. Reserve requirements are the least-used tool of the three because changing them disrupts bank liquidity planning.
Recognition, response, transmission: three lags in that orderRecognition lag is noticing the problem. Response lag is deciding and acting. Transmission lag is the policy actually working through the economy, typically the longest of the three.
Module: Monetary Policy, Economics, 2026 CFA Level I topic outline.
Financial Statement Analysis · 11 to 14 percent of the exam
Analyzing Income Statements
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Percent complete = cost incurred to date / total estimated cost; never use billings or cost-to-date alone.
A percentage-of-completion calculation uses cost incurred over total estimated cost, never billings
BA II Plus, for this moduleno dedicated EPS or percentage-of-completion function; compute weighted average shares and each adjustment by hand, then divide adjusted net income by adjusted share count directly
Free is a marketing word, not an accounting oneAny bundled item called free still gets a share of the contract price allocated by relative standalone selling price. The exam's telecom-bundle question always tests this directly.
Options: exercise price above market means excludeThe single check for options and warrants: exercise price greater than the average market price makes them anti-dilutive, full stop, regardless of how many are outstanding.
A net loss makes every convertible anti-dilutiveIncluding a convertible security would shrink a loss per share, which is by definition anti-dilutive; diluted EPS equals basic EPS in any loss year, no exceptions.
Percentage of completion divides by total estimated cost, not cost to date and not the contract priceThe denominator is always total estimated costs for the whole project. Using cost to date alone, or the contract price, produces a plausible-looking but wrong answer.
Module: Analyzing Income Statements, Financial Statement Analysis, 2026 CFA Level I topic outline.
Analyzing Statements of Cash Flows I
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Cash from customers (direct method) = revenue - increase in AR (or + decrease).
Asset up, cash out. Liability up, cash inThe one-line rule for every working capital adjustment in the indirect method. Apply it mechanically to receivables, inventory, and payables and the sign is never in doubt.
GAAP is rigid; IFRS is flexible, on exactly four itemsInterest paid, interest received, dividends paid, dividends received. GAAP fixes all four (operating, operating, operating, financing respectively for received-received-paid-received... memorize as: interest paid=operating, interest received=operating, dividends received=operating, dividends paid=financing). IFRS lets the company choose for each of the four, consistently applied.
A gain subtracts, a loss adds, and the full proceeds always go to investingRemoving the gain (or adding back the loss) from CFO and posting the entire sale proceeds to investing is the only way to avoid double-counting the disposal in two sections at once.
Module: Analyzing Statements of Cash Flows I, Financial Statement Analysis, 2026 CFA Level I topic outline.
Converting a LIFO reporter to a FIFO basis uses the disclosed LIFO reserve, not a guess
After-tax equity adjustment = LIFO Reserve x (1 - tax rate); remainder is deferred tax liability.
Add the reserve to inventory, subtract the change from COGSThe two LIFO-to-FIFO formulas move in different directions: inventory gets the full reserve added; COGS gets only the period's change in the reserve subtracted. Confusing ending balance with the period's change is the most common arithmetic slip.
IFRS means no LIFO, full stopAny question naming IFRS eliminates LIFO from consideration immediately; IAS 2 prohibits it with no grandfathering or exception.
LIFO liquidation raises profit; it does not hurt itThe word liquidation sounds bad, but the mechanical effect is a temporary, unsustainable improvement in reported gross margin from selling through old cheap inventory layers.
Module: Analysis of Inventories, Financial Statement Analysis, 2026 CFA Level I topic outline.
Analysis of Long-Term Assets
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IFRS impairment: one-step; recoverable amount = MAX(fair value less costs to sell, value in use); loss = carrying amount - recoverable amount.
Disposal gain/loss = proceeds - carrying amount at disposal date; treat as non-recurring.
IFRS: MAX of two figures. GAAP: two DIFFERENT figures for two DIFFERENT stepsIFRS recoverable amount takes the higher of fair value less costs to sell and value in use. GAAP never takes a maximum; it uses undiscounted cash flow only to trigger the test, then fair value only to size the loss.
IFRS reverses (except goodwill); GAAP never reversesThe single asymmetry most worth memorizing on this topic: a recovered asset value can be written back up under IFRS, capped at the no-impairment carrying amount, but never under US GAAP.
Module: Analysis of Long-Term Assets, Financial Statement Analysis, 2026 CFA Level I topic outline.
A temporary difference eventually reverses; a permanent difference never does, and only temporary differences create deferred tax
DTL: defer to later. DTA: down payment on taxA deferred tax liability means the company deferred paying tax to a later period. A deferred tax asset means the company has effectively made a down payment on future tax it will recover.
Always the enacted future rate, never the current rateWhenever a question supplies both a current rate and a newly enacted rate for deferred tax measurement, the enacted rate is always the one that applies, and the remeasurement of existing balances hits income tax expense the moment the new rate is enacted.
A permanent difference moves the effective rate but never touches the balance sheetOnly ask whether the difference will ever reverse. If never, it is permanent: it changes the effective tax rate relative to statutory, but it creates no deferred tax asset or liability.
Module: Analysis of Income Taxes, Financial Statement Analysis, 2026 CFA Level I topic outline.
Financial Analysis Techniques
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DuPont: ROE = net margin x asset turnover x equity multiplier; equity multiplier = 1 + D/E.
ROE = net profit margin x asset turnover x equity multiplier
DuPont decomposes ROE into margin, turnover, and leverage, and the exam tests reading, not just computing, the split
ROE = net profit margin x asset turnover x equity multiplier, where the equity multiplier (average total assets over average equity) equals one plus the debt-to-equity ratio.
Two balance sheet dates in the data means average, alwaysWhenever a problem supplies both a beginning and an ending balance sheet figure, that is the signal to average them for any ratio's denominator; using only the ending figure is the single most repeated calculation error across this whole topic.
Quick ratio subtracts inventory AND prepaid expensesPrepaid expenses are just as illiquid as inventory for the quick ratio's purpose; leaving them in overstates the ratio.
COGS goes with inventory; revenue goes with receivablesBoth assets are activity-ratio denominators built from the numerator that matches how the asset itself is valued: inventory at cost, receivables at the sale price.
Equity multiplier equals 1 + D/E, never D/E itselfA debt-to-equity ratio of 1.0 gives an equity multiplier of 2.0, not 1.0; confusing the two produces an ROE calculation off by a predictable, testable margin.
Module: Financial Analysis Techniques, Financial Statement Analysis, 2026 CFA Level I topic outline.
Financial Reporting Quality
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No formulas in this module. What it is tested on is below.
Capitalizing an operating expense raises CFO; it does not lower itThe counterintuitive WorldCom mechanism: reclassifying an operating cost as capital expenditure removes it from operating cash outflows and moves it to investing, so CFO goes up, not down, even though total cash paid is unchanged.
Bill-and-hold accelerates revenue; the word hold is the trapHold sounds like delay, but bill-and-hold means the seller has already booked the sale while physically retaining the goods, an acceleration of revenue recognition, not a postponement.
A growing accruals ratio scales for growth already; genuine growth should not inflate itBecause the accruals ratio divides by average net operating assets, honest, cash-backed growth does not mechanically raise it. A rising ratio despite that scaling means accruals are genuinely outrunning cash generation.
An off-balance-sheet operating lease flatters leverage AND coverage ratios, not just oneHiding the lease liability lowers reported debt-to-equity, and because no separate interest charge appears on the income statement (only the lease payment as an operating expense), interest coverage looks better too, both ratios move in the company's favor.
Module: Financial Reporting Quality, Financial Statement Analysis, 2026 CFA Level I topic outline.
Corporate Issuers · 6 to 9 percent of the exam
Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
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Statutory voting: majority wins every seat. Cumulative voting: votes = shares x seats, can be concentrated on one candidate.
Statutory: straight, one vote per share per seat. Cumulative: concentrateStatutory voting is straightforward, majority wins every seat. Cumulative voting lets a shareholder concentrate all of their multiplied votes on one candidate, the mechanism minority shareholders rely on to win a seat at all.
Same person, judge and defendantCEO duality means the person the board is supposed to monitor also runs the meeting where that monitoring happens. Any answer treating this as a neutral efficiency choice rather than a governance concern is the trap.
Independent of management AND of major shareholders, bothThe exam routinely plants a director who is not a former employee but is a relative of, or has a financial tie to, a large shareholder. That director still fails the independence test.
Module: Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits, Corporate Issuers, 2026 CFA Level I topic outline.
Working Capital and Liquidity
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CCC = DIO + DSO - DPO. DIO and DPO use COGS; DSO uses revenue.
CCC = DIO + DSO minus DPO, and the denominator choice is not interchangeable
Drag on liquidity = slow-converting assets (high DSO/DIO). Pull on liquidity = fast-approaching obligations.
A drag on liquidity is slow cash coming in; a pull on liquidity is fast cash going out
DIO and DPO use COGS; DSO uses revenueInventory and payables sit on the books at cost, so their day counts use cost of goods sold. Receivables represent sales at the selling price, so DSO uses revenue. Mixing these is the recurring exam trap.
DPO subtracts because it is borrowed timeEvery day of extra supplier credit is a day the company's own cash is not tied up. That is why a rising DPO lowers, not raises, the cash conversion cycle.
Drag is slow money in; pull is fast money outA drag on liquidity is an asset side problem, slow receivables or excess inventory. A pull on liquidity is a demand side problem, obligations that need cash sooner than the company would like.
Commercial paper: big and creditworthy onlyOnly issuers with strong, established credit can sell commercial paper, since it is unsecured and sold without a per-issuance credit check. Smaller or weaker issuers rely on bank lines or factoring instead.
Module: Working Capital and Liquidity, Corporate Issuers, 2026 CFA Level I topic outline.
Capital Investments and Capital Allocation
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NPV = sum of discounted incremental cash flows, net of initial outlay; accept if NPV > 0.
NPV discounts every cash flow at the required return and sums the present values; accept when NPV is positive
ROIC = realized return on capital already deployed; a different question from forward-looking NPV/IRR.
Return on invested capital measures realized return on capital already deployed, a different question from NPV or IRR
BA II Plus, for this moduleenter CF0 as the negative initial outlay, then C01 through Cnn for each period's incremental cash flow, set I to the required rate, then NPV, CPT for net present value, or IRR, CPT for internal rate of return
NPV is wealth; IRR is a rateA project creating $200,000 of value at 14% is worth more to owners than one creating $100,000 at 18%. When NPV and IRR disagree on a mutually exclusive choice, the dollar figure wins every time.
The Concorde test for sunk costsMoney already spent does not belong in the decision no matter how large it was or how tempting it feels to justify past spending. Continuing a project purely because of what has already been spent on it is the sunk cost trap in its purest form.
PI is the capital-rationing tool, not the mutually-exclusive toolProfitability index ranks independent projects competing for a limited budget. It does not fix the scale problem when two mutually exclusive projects of different sizes are compared; NPV still governs that decision.
Module: Capital Investments and Capital Allocation, Corporate Issuers, 2026 CFA Level I topic outline.
Capital Structure
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WACC = (E/V)Re + (D/V)Rd(1-T) [+ (P/V)Rp, no tax adjustment on preferred].
WACC weights each capital source by its market value, and applies the tax shield to debt alone
M-M Prop II (no tax): re_L = re_U + (re_U - rd)(D/E); cost of equity rises to exactly offset cheaper debt, leaving WACC flat.
Without taxes, re_L = re_U + (re_U - rd) x (D/E): as a firm substitutes debt for equity
M-M Proposition II says cost of equity rises linearly with leverage, exactly offsetting cheaper debt
Without taxes, re_L = re_U + (re_U - rd) x (D/E): as a firm substitutes debt for equity, the remaining equity becomes riskier and its required return rises by precisely enough to leave WACC unchanged, which is the mechanism behind Proposition I's value-invariance result.
BA II Plus, for this moduleno direct WACC function; compute each cost component and weight independently, use the bond-price-to-YTM solve (N, PV, PMT, FV, CPT I/Y) for the cost of debt when only price and coupon are given
D/E is not D/(D+E)A debt-to-equity ratio of 0.5 means debt is one-third of total capital, not one-half. Reading D/E as if it were the debt weight in WACC is the most common arithmetic slip on Proposition II questions.
Coupon is bait; YTM is the answerThe exam routinely supplies both the coupon rate and the current bond price. The coupon rate is the trap; the cost of debt for WACC is always the yield to maturity, then adjusted by (1 - T).
(1-T) touches debt onlyInterest is tax-deductible; dividends, preferred or common, are not. Applying (1-T) to a preferred or common equity cost is a structural error, not a rounding one.
No taxes: WACC flat. With taxes, no distress: WACC falls with debt. With distress: WACC is U-shapedThree distinct frameworks give three distinct answers to what happens to WACC as leverage rises. The exam signals which one applies by explicitly naming its assumptions.
Module: Capital Structure, Corporate Issuers, 2026 CFA Level I topic outline.
Short margin calls use plus signs, because rising prices hurt shorts
Leverage ratio = 1 / initial margin
Leverage is the reciprocal of initial margin, and it cuts both ways
BA II Plus, for this module['Margin call price: no TVM worksheet needed, just P0 x (1 - IM) / (1 - MM) for a long position, or P0 x (1 + IM) / (1 + MM) for a short position, computed directly.', "Return on margin investment: compute equity invested = initial margin x position value, then gain / equity invested; cross-check with leverage ratio (1 / IM) x the stock's own percentage return."]
Who receives the money?The one-question test for primary versus secondary markets. The issuer, primary. Anyone else, secondary. Apple's IPO in 1980 was primary; every NYSE trade in Apple since then is secondary.
A stop order becomes a market orderNot a price guarantee, a trigger. Once hit, it fills at whatever the next available price is, which is why gapping markets can produce ugly surprises.
LONG uses MINUS, SHORT uses PLUSThe margin-call formulas' sign direction follows the direction of pain. Falling prices hurt longs (subtract), rising prices hurt shorts (add).
Leverage ratio = 1 / initial margin50% margin doubles exposure, 40% margin gives 2.5x, 25% margin gives 4x. Multiply the stock's own return by this ratio to get the return on the equity actually invested.
I owe youA short seller owes borrowed shares back, owes any dividends paid in the meantime, and can owe an unlimited amount if the price keeps rising. Three separate obligations, one mnemonic.
Module: Market Organization and Structure, Equity Investments, 2026 CFA Level I topic outline.
Equity Valuation: Concepts and Basic Tools
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The Gordon Growth Model is V0 = D1 / (r - g)
Value what you will receive, never what was just paid
The Gordon Growth Model is V0 = D1 / (r - g), where D1 is next year's dividend.
the dividend already paid, it must first be grown one period: D1 = D0 x (1 + g)
Value what you will receive, never what was just paid
If a question gives D0, the dividend already paid, it must first be grown one period: D1 = D0 x (1 + g).
The sustainable growth rate is g = ROE x retention ratio
Sustainable growth comes from what a company keeps, not what it pays out
The sustainable growth rate is g = ROE x retention ratio, where retention ratio equals one minus the payout ratio.
EV = market capitalization + total debt + preferred stock + minority interest - cash and cash equivalents
Enterprise value belongs to every capital provider, not just equity holders
PEG = P/E divided by the earnings growth rate expressed as a percentage number (12, not 0.12).
PEG divides by the growth rate as a whole number, not a decimal
BA II Plus, for this module["Two-stage or multi-year dividend problems can be run on the BA II Plus's CF worksheet: CF0 = 0, enter each projected dividend as C01, C02, ... and the terminal value as an addition to the final cash flow, set I = r, then CPT NPV for the present value sum.", 'For a single Gordon Growth Model value, a plain calculator is faster: compute D1, compute (r - g), then divide; there is no TVM-worksheet shortcut for a perpetuity with growth.']
You value what you WILL receive, not what was just paidD0 is gone. D1 is next. If the question says a dividend "just paid," grow it one period before the formula touches it.
If growth beats your required return forever, the stock is worth infinityThat is impossible, so g must always be strictly less than r for the Gordon Growth Model to produce a sane answer.
What you KEEP grows the company, what you PAY OUT leavesSustainable growth is ROE times the retention ratio, not the payout ratio. Retention is one minus payout; do not swap the two.
P/B below 1 does not mean cheapIt means ROE is below the required return. The market is saying this company destroys value per dollar of book assets, and the justified-P/B formula proves the below-1.0 result is often the correct, fair price.
EV is what you'd pay to own it allAdd debt and preferred stock, since an acquirer inherits them; subtract cash, since the acquirer gets it back immediately. Forgetting minority interest is the most common formula gap.
Module: Equity Valuation: Concepts and Basic Tools, Equity Investments, 2026 CFA Level I topic outline.
Security Market Indexes
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No formulas in this module. What it is tested on is below.
Dollars in an averageDJIA: it literally averages prices. A high dollar price means a high weight, with company size never entering the calculation.
Size paysS&P 500: the biggest companies by market cap get the biggest weight. A $500 billion company matters more than a $500 stock ever could on its own.
Same index, lower price, lower divisorAfter a split, the price falls, so the divisor falls proportionally to keep the index reading unchanged. The divisor moving down, not up, after a split is the exam's favorite trap.
What you can actually buyFloat adjustment counts only freely tradeable shares. Government-locked or founder-locked shares do not affect the index, because ordinary investors could never buy them anyway.
Who's in versus how muchReconstitution is who's in the index. Rebalancing is how much weight each existing member gets. Two different processes, on two different schedules.
Module: Security Market Indexes, Equity Investments, 2026 CFA Level I topic outline.
Market Efficiency
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No formulas in this module. What it is tested on is below.
TFI: Technical, Fundamental, InsiderMatch the analysis type to the form it tests. Technical analysis tests weak form. Fundamental analysis tests semi-strong. Insider information tests strong form.
WSS: Weak, Semi-strong, StrongEach form adds a larger information set, like layers of an onion, weak is the smallest, strong is the largest. Larger information set does not mean more evidence in its favor.
SPAM: Size, Post-earnings drift, Anomaly (value), MomentumThe recurring cast of semi-strong-form anomalies, plus the January effect. All rely on publicly available data, which is exactly why they are semi-strong challenges, not weak or strong.
"Consistently" is the load-bearing wordEMH never claims nobody can get lucky once. It claims nobody can reliably, repeatedly beat the market using information that is already priced in. A single good year proves nothing either way.
Strong form is REJECTED, remember the actual insiders who profitedThe empirical record on legal insider trading is the direct, real-world evidence that strong-form efficiency does not hold, even though weak and semi-strong retain reasonable support.
Module: Market Efficiency, Equity Investments, 2026 CFA Level I topic outline.
Overview of Equity Securities
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No formulas in this module. What it is tested on is below.
Cumulative arrears must clear before any common dividendEvery skipped cumulative preferred dividend stacks up as a debt-like obligation to preferred holders that must be paid in full before a single dollar reaches common shareholders.
Callable = issuer's option. Putable = investor's optionWhichever side holds the embedded option benefits from it. Issuers call when rates fall; investors put when rates rise.
ADR levels: I trades OTC only, II lists on an exchange, III raises new capitalOnly a Level III, fully SEC-registered ADR lets a foreign issuer sell new shares into the US public market; Levels I and II only facilitate secondary trading of existing shares.
Module: Overview of Equity Securities, Equity Investments, 2026 CFA Level I topic outline.
Industry and Competitive Analysis
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No formulas in this module. What it is tested on is below.
Substitute threat comes from outside the industry, not from a rival inside itA luxury watchmaker competing against another luxury watchmaker is rivalry. A watchmaker losing customers to smartphones is a substitute threat. The line is whether the competing product is even classified in the same industry.
Cost leadership means low cost, not low priceA cost leader can price at the industry average and still out-earn every rival, because its margin is wider at the same price point. Confusing the strategy (cost structure) with the tactic (pricing decision) is the recurring trap.
A concentrated (few-competitor) industry is not automatically a profitable oneWeak rivalry from having few competitors says nothing about supplier or buyer power; an oligopoly can still be squeezed hard by a powerful supplier or a powerful buyer, exactly the airline industry's fuel-supplier problem.
Module: Industry and Competitive Analysis, Equity Investments, 2026 CFA Level I topic outline.
Fixed Income · 11 to 14 percent of the exam
Fixed-Income Bond Valuation: Prices and Yields
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Price = PV of coupons + PV of par redemption, discounted at the periodic required yield.
Bond price is the present value of every promised cash flow, coupons and the final par redemption, discounted at the required yield
Semi-annual: N = years x 2, PMT = annual coupon / 2, I/Y = annual yield / 2.
Full (dirty) price = flat (clean) price + accrued interest. Accrued interest = period coupon x (days elapsed / days in period).
Pricing between coupon dates requires the full price, built from the flat price plus accrued interest
BA II Plus, for this moduleenter N (periods), I/Y (periodic yield), PMT (periodic coupon), FV (par value), then CPT PV for price; for semi-annual bonds enter N as years x 2, I/Y as annual yield / 2, and PMT as annual coupon / 2
Price versus par tells you the coupon-versus-yield relationship for freeAbove par means coupon rate exceeds yield; below par means yield exceeds coupon rate; at par means they are equal. No calculation is needed, only a comparison to $1,000.
Semi-annual bonds: double N, halve the coupon, halve the yieldThe three adjustments needed whenever a bond pays semi-annually rather than annually, applied together, before any present-value step.
Longer maturity AND lower coupon both push sensitivity the same directionWhen comparing bonds, check both dimensions; a bond that is longer AND lower-coupon dominates in sensitivity over one that is only longer or only lower-coupon.
Module: Fixed-Income Bond Valuation: Prices and Yields, Fixed Income, 2026 CFA Level I topic outline.
Yield and Yield Spread Measures for Fixed-Rate Bonds
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EAY = (1 + nominal yield/m)^m - 1; always exceeds the nominal yield when m > 1.
G-spread = bond YTM - government bond yield (single benchmark). I-spread = bond YTM - swap rate. Z-spread = constant spread added across the whole zero-coupon curve.
G-spread and I-spread each use a single benchmark yield; Z-spread respects the full shape of the yield curve
BA II Plus, for this modulefor YTM, enter N, PV (as a negative, the price paid), PMT (periodic coupon), FV (par), then CPT I/Y; multiply by the number of periods per year for the nominal annual yield
Discount bond: yields climb from coupon to YTM. Premium bond: yields fall from coupon to YTMDiscount: coupon < current yield < YTM. Premium: coupon > current yield > YTM. The direction flips entirely between the two cases; memorize both, not just one and its reverse.
Callable: OAS is smaller than Z-spread. Putable: OAS is larger than Z-spreadThe issuer's call option costs the investor value, so it is subtracted out. The investor's put option adds value to the investor, so it is added back. Option-free bonds need no adjustment at all: OAS = Z-spread.
G for Government, I for Interest-rate swap, Z for Zero-coupon curveG-spread benchmarks against a government bond's yield; I-spread benchmarks against the swap curve; Z-spread benchmarks against the full zero-coupon government curve, one point per cash flow date.
Module: Yield and Yield Spread Measures for Fixed-Rate Bonds, Fixed Income, 2026 CFA Level I topic outline.
The Term Structure of Interest Rates: Spot, Par, and Forward Curves
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Forward rate: (1+S(j+k))^(j+k) = (1+Sj)^j (1+f(j,k))^k. Never average spot rates; take the k-th root when k>1.
Bootstrapping: 1-year spot = 1-year par rate; solve each longer maturity in sequence using only already-solved spot rates.
a k-year rate starting j years from now, is the rate that makes an investor exactly indifferent between investing at the spot rate for j+k years versus investing at the spot rate for j years and then rolling over into the forward-implied rate for the remaining k years: (1+S(j+k))^(j+k) = (1+Sj)^j x (1+f(j,k))^k
A forward rate is the break-even reinvestment rate implied by two points on today's spot curve, not a forecast of the future
The forward rate f(j,k), a k-year rate starting j years from now, is the rate that makes an investor exactly indifferent between investing at the spot rate for j+k years versus investing at the spot rate for j years and then rolling over into the forward-implied rate for the remaining k years: (1+S(j+k))^(j+k) = (1+Sj)^j x (1+f(j,k))^k.
Forward rates are compounded from spot rates, never averaged(3%+4%)/2 = 3.5% is always a wrong-answer trap when the exam asks for a forward rate from two spot rates; the correct method is (1+S_long)^n / (1+S_short)^m, minus one, with an (n-m)-th root taken whenever the forward period itself spans more than one year.
f(j,k) reads left to right as 'starting in j years, lasting k years'f(1,2) is a 2-year rate starting 1 year from now; f(2,1) is a 1-year rate starting 2 years from now. These use different exponents in the compounding equation and produce different numbers; drawing a small timeline before setting up the equation prevents the swap.
Curve ordering on a sloped curve: upward means forward > spot > par; downward means the exact reverseMemorize the upward case (forward highest, par lowest) and simply flip it for the downward case; on a flat curve all three curves collapse into one line and there is nothing to order.
Module: The Term Structure of Interest Rates: Spot, Par, and Forward Curves, Fixed Income, 2026 CFA Level I topic outline.
Yield-Based Bond Duration Measures and Properties
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Modified Duration = Macaulay Duration / (1 + y/m); always smaller than Macaulay duration for positive yields.
Modified duration converts the time-based Macaulay duration into a direct price-sensitivity measure
Money Duration = Modified Duration x full price; dollar change for a 100 bp move.
Money duration and PVBP translate the same percentage sensitivity into dollar terms, at two different scales
PVBP = Money Duration / 10,000; dollar change for a 1 bp move; total dollar change = PVBP x number of basis points.
Money duration and PVBP translate the same percentage sensitivity into dollar terms, at two different scales
Basis-point conversion trap: 75 bps = 0.0075, not 0.75, not 75.
BA II Plus, for this moduleduration itself is not a single keystroke output; compute bond price at the given yield, then at yield plus and minus a small shift, to approximate duration numerically if the exam question requires derivation rather than a stated duration figure
Modified duration, not Macaulay duration, goes into the price-change formulaThe two numbers are close in size and easy to swap under time pressure; only modified duration is a direct measure of price sensitivity, Macaulay duration is a time-weighted average of when cash flows arrive.
Basis-point conversion is the number-one arithmetic trap on this module75 basis points is 0.0075 in the formula, never 0.75 and never 75; misplacing the decimal produces an answer off by a factor of 100 or 10,000 that often still matches a wrong answer choice exactly.
PVBP is money duration divided by 10,000, nothing more exoticMoney duration gives the dollar move for a full 100 basis points; PVBP gives the dollar move for one basis point, the same number simply rescaled, so a portfolio's total dollar loss for any number of basis points is PVBP times that number.
Module: Yield-Based Bond Duration Measures and Properties, Fixed Income, 2026 CFA Level I topic outline.
Yield-Based Bond Convexity and Portfolio Properties
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Convexity rises with: longer maturity, lower coupon, lower yield; scales roughly with duration squared. Zero-coupon bond = highest convexity at a given maturity/yield.
The convexity adjustment is always added, never subtracted, for a bond with positive convexitySquaring delta-Y removes its sign, so 0.5 x Convexity x (delta-Y)^2 is positive whether yields rose or fell; a candidate who subtracts this term when yields rise has the direction of the correction backward.
Zero-coupon = zero coupons paid early = maximum convexity, not zero convexityThe word 'zero' describes the coupon, not the convexity; with all cash flow concentrated at a single maturity date, a zero-coupon bond has the highest convexity of any bond sharing that maturity and yield.
Callable-bond negative convexity is conditional on the call being near the money, not a permanent labelThe same callable bond has ordinary positive convexity when yields are high (call far out of the money) and negative convexity only once yields have fallen enough to put the call at or in the money; 'callable bonds always have negative convexity' is a false absolute the exam tests directly.
Module: Yield-Based Bond Convexity and Portfolio Properties, Fixed Income, 2026 CFA Level I topic outline.
Credit Risk
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Expected Loss = Probability of Default x Loss Given Default; LGD = 1 - Recovery Rate. Convert recovery to LGD before multiplying.
Credit risk decomposes into a probability and a severity, and expected loss multiplies the two together
Credit risk = default risk (missed payment) + credit spread risk (price falls on reassessment, no default required).
Credit risk decomposes into a probability and a severity, and expected loss multiplies the two together
Expected loss requires converting recovery rate to LGD before multiplying by PDLGD = 1 - recovery rate, then Expected Loss = PD x LGD. Skipping the subtraction step and multiplying PD directly by the recovery rate is the most common calculation error on this module.
A downgrade is credit migration risk, not default risk, unless a payment was actually missedDefault risk requires an actual missed payment. A rating change alone, even crossing the investment-grade boundary (a fallen angel), is credit migration risk, a distinct and earlier-arriving risk.
Negative covenants protect bondholders; the word 'negative' describes the grammar, not the effectA negative covenant prohibits an issuer action (no dividends above a threshold, no new senior debt); it exists specifically to protect bondholders, it is not a harmful term despite the word 'negative.'
Module: Credit Risk, Fixed Income, 2026 CFA Level I topic outline.
Mortgage-Backed Security (MBS) Instrument and Market Features
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CMO = redistributes (never eliminates) prepayment risk via tranching. PAC tranche = stable, lower yield, protected within a prepayment band. Support/companion tranche = absorbs variability, higher yield.
A CMO uses tranching to redistribute, not eliminate, the prepayment risk of its underlying pool
Falling rates = contraction (shorter life, reinvest lower). Rising rates = extension (longer life, stuck low)The direction is the opposite of ordinary bond-pricing intuition; for a straight bond, falling rates are simply good news, for an MBS, falling rates trigger the prepayment option against the investor.
CMOs redistribute prepayment risk; the word 'eliminates' in an answer choice about CMOs is always wrongTotal pool prepayment risk is conserved across all the tranches combined; a PAC tranche's stability is funded by pushing more variability onto the support tranche, not by destroying risk.
CMBS prepayment protection comes from loan-level structural features, not the absence of a prepayment optionLockout periods, yield maintenance, and defeasance are the mechanisms that suppress contraction risk in commercial mortgages; residential mortgages generally lack these restrictions, which is exactly why residential MBS carry substantial prepayment risk and CMBS carry comparatively little.
Module: Mortgage-Backed Security (MBS) Instrument and Market Features, Fixed Income, 2026 CFA Level I topic outline.
Fixed-Income Instrument Features
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No formulas in this module. What it is tested on is below.
Callable = issuer's phone. Putable = investor's phoneThe party who holds the option is the party who decides when to use it. Callable bonds get called by the issuer; putable bonds get put by the investor.
Affirmative = must do. Negative = must not doThe words describe grammatical form, not harshness. A negative covenant is not automatically the more restrictive one.
Zero-coupon bonds carry the highest rate sensitivity of any bond at the same maturityWith no coupon cash flows to offset the terminal payment, a zero-coupon bond's entire value sits at maturity, making it maximally sensitive to changes in the discount rate compared to any coupon-paying bond of the same maturity.
Module: Fixed-Income Instrument Features, Fixed Income, 2026 CFA Level I topic outline.
Fixed-Income Securitization
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No formulas in this module. What it is tested on is below.
The SPE's purpose is legal isolation, not diversification or a credit-rating boost by itselfBankruptcy remoteness, separating the asset pool from the originator's own solvency risk, is the primary legal function; any diversification or rating benefit is a secondary effect of pooling, not the SPE's defining purpose.
Four benefits, four different beneficiaries: issuer capital relief, investor access, economy-wide credit expansion, market depthWhen a question asks 'who benefits and how,' match the benefit to the correct party rather than listing benefits generically; the exam rewards knowing which benefit belongs to which participant.
Module: Fixed-Income Securitization, Fixed Income, 2026 CFA Level I topic outline.
Derivatives · 5 to 8 percent of the exam
Forward Commitment and Contingent Claim Features and Instruments
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Call value at expiration = max(0, S - X). Put value at expiration = max(0, X - S).
Profit (buyer) = expiration value - premium paid. Profit (seller/writer) = premium received - expiration value.
Forward/futures profit: long = expiration price - contracted price; short = exact negative of the long's profit.
Ask one question first: does the buyer have a choice? Yes means option, no means forward, futures, or swapThis single question resolves the most common classification error on the exam, mistaking a forward's binding obligation for an option's discretionary right, or the reverse.
Only contingent claims require an upfront premium; forward commitments generally do notA forward, a future, and a swap are each priced so that their value is zero to both sides at initiation, no cash changes hands upfront; an option's premium exists specifically because the seller accepts an obligation the buyer does not share.
Option profit is expiration value minus (or plus) the premium, never the expiration value aloneA call worth $8 at expiration that cost a $3 premium nets a $5 profit to the buyer, not $8; forgetting to net out the premium is a frequent numerical error on payoff questions.
Module: Forward Commitment and Contingent Claim Features and Instruments, Derivatives, 2026 CFA Level I topic outline.
Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
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Mid-life valuation, three steps: (1) reprice, Ft = St(1+r)^(T-t); (2) subtract, Ft - F0; (3) discount, divide by (1+r)^(T-t). Never shortcut to St - F0 before expiration.
FRA: settles at the START of the covered period; payoff = notional x rate differential x period fraction, discounted back using the realized reference rate.
To value a long forward position at some time t before expiration: first, reprice the forward for the remaining term using the current spot price, Ft = St x (1+r)^(T-t)
Valuing a forward before expiration requires three steps, none of which can be skipped
Price is fixed forever at initiation; value starts at zero and moves every day after thatThe apartment-lease analogy: a lease signed at $2,000/month stays $2,000/month (the price), but if market rent rises to $2,500, the lease itself has become valuable to hold (the value), even though the contracted price never changed.
Mid-life valuation is always three steps: reprice, subtract, discount; never subtract spot minus F0 directlySt - F0 is only correct exactly at expiration; before expiration it skips repricing the forward for the remaining term and skips discounting the result back to today, both required steps.
Dividends and convenience yield both push the forward price down; storage costs and the risk-free rate both push it upThe forward buyer never receives a dividend or the convenience of physical possession, so both are subtracted from carry; storage costs and financing costs are both borne by whoever carries the asset, so both are added.
Module: Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities, Derivatives, 2026 CFA Level I topic outline.
Pricing and Valuation of Futures Contracts
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Forward value: accumulates unrealized (Vt = discounted Ft - F0) until settled in full at expiration.
Forward price = futures price when interest rates are constant/deterministic over the contract's life.
Under constant, deterministic interest rates, the no-arbitrage forward price and futures price on the same underlying and maturity are equal
so its value, Vt = (Ft - F0) discounted back to today, accumulates and can grow substantially away from zero well before expiration, only settling in full at the end
Daily mark-to-market resets a futures contract's value to zero, while a forward's value accumulates unrealized until expiration
A forward contract has no such daily cash settlement, so its value, Vt = (Ft - F0) discounted back to today, accumulates and can grow substantially away from zero well before expiration, only settling in full at the end.
Futures value resets to zero every day; forward value accumulates until expirationImmediately after daily settlement a futures position's carried-forward value is approximately zero; a forward's unrealized value can be large right up until the moment it finally settles.
Forward price equals futures price only under one specific assumption: constant, deterministic interest ratesThis equality is not automatic or a given; the exam tests the precise condition under which it holds, and the precise condition under which it breaks.
Price divergence comes from the correlation between interest rates and the underlying, not from credit risk or contract structureA candidate who answers a forward-versus-futures price divergence question by citing counterparty credit risk or margin has answered a different, related question; the specific driver here is the reinvestment effect of daily settlement under stochastic, correlated rates.
Module: Pricing and Valuation of Futures Contracts, Derivatives, 2026 CFA Level I topic outline.
Pricing and Valuation of Options
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Option price = intrinsic value + time value. Intrinsic (call) = max(0, S-X); Intrinsic (put) = max(0, X-S). Time value can be positive even when intrinsic value is zero (at-the-money).
Zero intrinsic value does not mean zero total valueAn at-the-money option has zero intrinsic value by definition, but it still has positive time value right up until expiration, since there remains a real chance it finishes in the money; the two components are separate.
Moneyness direction flips between calls and putsCall ITM: S > X. Put ITM: S < X. A candidate who has just worked several call-moneyness questions is primed to misapply that same direction to a put question.
Only time and volatility move calls and puts the same direction; the other four factors splitUnderlying price, strike, rate, and dividends each help one option type and hurt the other; time and volatility are the two factors that help both, since both simply widen the range of favorable outcomes for any option holder.
Module: Pricing and Valuation of Options, Derivatives, 2026 CFA Level I topic outline.
Option Replication Using Put-Call Parity
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Put-call parity: C + PV(X) = P + S (European options, non-dividend-paying underlying). PV(X) = X/(1+r)^T discrete, or X e^(-rT) continuous. Never use raw X.
Fiduciary call (left side) = long call + invest PV(X) in a risk-free bond. Protective put (right side) = long put + long stock.
Forward parity: C - P = S - PV(X). Synthetic positions: read the PV(X) sign literally, positive = invest/lend (long bond), negative = borrow (short bond).
The formula is C + PV(X) = P + S for European options on a non-dividend-paying underlying
Put-call parity links a call, a put, the underlying, and a risk-free bond into one equation because two specific portfolios must have identical payoffs at expiration
The formula is C + PV(X) = P + S for European options on a non-dividend-paying underlying, where PV(X) is the present value of the strike price.
PV(X) = X / (1+r)^T under discrete compounding, or X multiplied by e^(-rT) under continuous compounding
The strike price must always be discounted to its present value before entering the formula, never used at face value
PV(X) = X / (1+r)^T under discrete compounding, or X multiplied by e^(-rT) under continuous compounding, whichever convention the question specifies.
Subtracting P + PV(X) from both sides of C + PV(X) = P + S gives C - P = S - PV(X)
Rearranging the parity equation produces a forward-parity relationship and a set of named synthetic positions, each with a specific sign for the bond leg
Subtracting P + PV(X) from both sides of C + PV(X) = P + S gives C - P = S - PV(X), the put-call forward parity relationship, stating that a synthetic forward (long call, short put, same strike and expiration) replicates a position economically equivalent to holding the underlying financed at the risk-free rate.
Always discount the strike to PV(X); using X directly is the exam's most common trapWrite PV(X) = X/(1+r)^T (or X e^(-rT) for continuous compounding) as a first, separate step before substituting into the parity formula, rather than plugging the strike price straight in.
Fiduciary call = call plus cash (bond); protective put = put plus price (stock); the labels are easy to reverseThe left side of C + PV(X) = P + S contains no put at all, it is a call and a bond; the right side contains no call, it is a put and the stock.
In an arbitrage question, sell the entire overpriced portfolio and buy the entire underpriced portfolio, never just the single option that looks mispricedThe trade is always four legs; identifying which whole side is more expensive, then executing all of that side's legs together, is what locks in the riskless profit.
Module: Option Replication Using Put-Call Parity, Derivatives, 2026 CFA Level I topic outline.
Derivative Instrument and Derivative Market Features
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No formulas in this module. What it is tested on is below.
Exchange = standardized + cleared + no credit risk. OTC = customized + bilateral + credit risk. This pairing is fixed and never reversesThe exam's most repeated question offers the reversed pairing as a wrong answer; write the correct pairing down before reading the choices whenever a question mentions exchange-traded versus OTC.
Notional principal is a calculation input, not what determines a derivative's valueA $10 million interest rate swap's value moves with interest rates, not with the stated $10 million figure; confusing 'prominently mentioned' with 'determines value' is a direct exam trap.
Classify a market participant by asking one question: does a pre-existing exposure exist?Exposure present and being offset = hedger. No exposure, new directional bet = speculator. No net investment, riskless offsetting trade = arbitrageur. This single question resolves nearly every participant-classification item.
Module: Derivative Instrument and Derivative Market Features, Derivatives, 2026 CFA Level I topic outline.
Pricing and Valuation of Interest Rates and Other Swaps
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No formulas in this module. What it is tested on is below.
Swap price is fixed forever at initiation; swap value starts at zero and moves with rates afterwardThe same price-versus-value distinction that governs forward contracts applies to swaps: the contracted fixed rate never changes, but what the contract is worth to hold changes continuously as market rates move.
Zero value at initiation is a calibration, not a lifetime guaranteeCandidates who correctly recall 'a swap has zero value at initiation' sometimes over-generalize it to 'a swap always has zero value'; the equality holds only at the moment of entry, before any rate movement.
A swap resembles a series of forwards structurally, but is priced as one package, not as separately-quoted individual forwardsThe single fixed swap rate applied across every settlement period is chosen so the whole multi-period package nets to zero value, not because each period's implied forward rate independently equals that fixed rate.
Module: Pricing and Valuation of Interest Rates and Other Swaps, Derivatives, 2026 CFA Level I topic outline.
Alternative Investments · 7 to 10 percent of the exam
Real Estate and Infrastructure
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Real estate: heterogeneous, high transaction costs, illiquid; total return = income return + capital appreciation. Value (income approach) = NOI / Cap Rate; higher cap rate -> lower value (inverse relationship). NOI = gross rental income - vacancy - operating expenses, EXCLUDING financing costs and depreciation.
Infrastructure's stage of development and payment structure each independently determine how much risk an investor bears, and inflation protection comes from a specific contractual mechanism, not merely from being a real asset
Under the income approach, Value = NOI / Capitalization Rate
The income approach values a property by capitalizing its net operating income, and the cap rate moves inversely with value
Under the income approach, Value = NOI / Capitalization Rate, so for a fixed NOI, a higher cap rate always produces a lower value and a lower cap rate always produces a higher value, an inverse relationship, not a direct one, that the exam tests as a core numerical fact.
Cap rate is a divisor: higher cap rate means lower value, alwaysValue = NOI / Cap Rate. The exam consistently offers a wrong-answer choice built by multiplying instead of dividing, or by pairing a higher cap rate with a higher value.
NOI excludes financing costs and depreciation; it is not the same number as accounting net incomeNOI measures property-level operating performance before any capital-structure decisions; mixing it up with post-financing, post-depreciation net income produces a materially wrong valuation.
Greenfield is about construction phase, not environmental friendliness; user-pay carries demand risk, government-pay availability contracts do notA new coal plant under construction is greenfield; an existing solar farm is brownfield. A toll road (user-pay) bears traffic volume risk even though it is 'essential'; a government availability-payment contract (many social infrastructure deals) shifts that specific demand risk away from the investor.
Module: Real Estate and Infrastructure, Alternative Investments, 2026 CFA Level I topic outline.
Hedge Funds
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Net exposure = long $ - short $ (relative to capital). Market-neutral requires net exposure near zero, not merely holding both longs and shorts.
Net market exposure, not the mere presence of both long and short positions, is what determines whether a strategy is market-neutral
Both longs and shorts does not automatically mean market-neutral; check the net dollar exposureA fund holding 130% long and 60% short is 70% net long and carries real market beta; only a fund with long and short positions of approximately equal size is genuinely market-neutral.
Fund liquidity (what the fund trades) is not the same as investor liquidity (when you can redeem)A hedge fund can hold highly liquid, actively traded securities while still imposing lockups and gates that severely restrict how and when an investor can get their own capital back.
Relative value bets on convergence between related instruments; event-driven bets on a specific corporate event; global macro bets on broad directional variablesLTCM is the canonical relative value failure (convergence bet that instead diverged under stress), not a global macro failure, despite its global reach across many countries' bond markets, a frequently tested classification point.
Module: Hedge Funds, Alternative Investments, 2026 CFA Level I topic outline.
Alternative Investment Features, Methods, and Structures
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No formulas in this module. What it is tested on is below.
Direct control, fund diversification, co-investment splits the differenceDirect investment maximizes control and capital requirement; fund investment maximizes diversification and fee drag; co-investment trades some of the fund's diversification for lower fees on a single deal, while shifting due diligence work back onto the investor.
A high water mark stops new fees; it does not claw back old feesConfusing the high water mark (forward-looking, prevents double-charging on a recovery) with a clawback provision (backward-looking, returns fees already paid) is one of the most consistently tested distinctions in this area.
Performance fee applies only to gains above the hurdle, never to total returnA fund earning 15% with an 8% hurdle owes a performance fee on the 7% excess only, not on the full 15%; applying the fee percentage to total return is a frequent numerical error.
Module: Alternative Investment Features, Methods, and Structures, Alternative Investments, 2026 CFA Level I topic outline.
Portfolio Management · 8 to 12 percent of the exam
Portfolio Risk and Return: Part I
Not started
This module needs the calculator, and our own written lesson states its relationships in words rather than as formulas. That is a gap in our material, said plainly rather than filled in from memory.
BA II Plus, for this module['This module is conceptual and arithmetic, not a time-value-of-money calculation, so there is no BA II Plus worksheet for it.', 'For the variance arithmetic itself, a plain calculator is enough: compute each of the three terms separately, write each one down, then sum.']
Return is additive, risk is notExpected return is a plain weighted average, correlation-free. Standard deviation is not additive except in the special case of correlation exactly +1. That gap between the two formulas is diversification, in one sentence.
The factor of twoThe variance formula's cross-product term is doubled because there are two cross-pairings, A-with-B and B-with-A, that collapse into one term. Forgetting the 2 is the single most common arithmetic error on this topic.
Systematic risk is the floor you cannot diversify throughIt is the market itself. Twenty to thirty stocks captures most of the ceiling (unsystematic risk); nothing captures the floor.
Same correlation, same sigma, no benefitAt correlation +1, portfolio standard deviation is just the weighted average of the two assets' own standard deviations. No arithmetic trick reduces risk when correlation is a perfect +1.
Module: Portfolio Risk and Return: Part I, Portfolio Management, 2026 CFA Level I topic outline.
Portfolio Risk and Return: Part II
Not started
This module needs the calculator, and our own written lesson states its relationships in words rather than as formulas. That is a gap in our material, said plainly rather than filled in from memory.
BA II Plus, for this module['CAPM and the four risk ratios are single-line arithmetic, not TVM worksheet problems, so there is no N / I/Y / PV / PMT / FV sequence here.', "Work each calculation in the same three lines every time: (1) market risk premium or excess return, (2) the ratio's own denominator (beta, standard deviation, or tracking error), (3) the final division or addition, written out rather than done in one mental step."]
You earn the risk-free rate, plus your beta times the excess market returnRead the CAPM formula in English before touching numbers. It stops the single most common exam error: multiplying beta by the full market return instead of the market risk premium.
SML uses beta, CML uses sigmaSystematic Measures Line for beta, Complete-sigma Measures Line for total standard deviation. If the axis label in a question is standard deviation, it is the CML; if it is beta, it is the SML.
Positive alpha, above the line, good deal, buyA stock plotting above the SML is giving more return than its systematic risk requires. Above the line is always the favorable direction.
Sharpe: S for Single portfolio. Treynor: T for Two or more holdingsSharpe is for when the fund is the investor's whole portfolio. Treynor is for when it is one holding among several, so only its systematic risk matters to the investor.
Jensen's alpha: did you clear the CAPM hurdle?Always calculate the CAPM-required return as its own separate step before subtracting it from actual return. Skipping the intermediate step is where arithmetic errors creep in.
Module: Portfolio Risk and Return: Part II, Portfolio Management, 2026 CFA Level I topic outline.
The Behavioral Biases of Individuals
Not started
No formulas in this module. What it is tested on is below.
CAFE: Cognitive biases Adjusted with education, Emotional biases need AccommodationThe advisor-response rule in one word. Cognitive gets data and frameworks; emotional gets portfolio design that works around the feeling.
RICH: Representativeness, Illusion of control, Conservatism, Hindsight biasThe four belief-perseverance cognitive errors, one mnemonic. All four involve clinging to an existing belief against new evidence.
Reminds me of" versus "based on recent newsThe verbal tell that separates representativeness (resemblance to a prototype) from availability bias (an easily recalled recent event). Read the language of the question stem, not just the topic.
Barber and Odean, roughly 6.5 percentage pointsThe most active individual traders underperformed the market by about this much annually, driven by overconfidence-fueled excess trading and its transaction costs. The canonical real-world number for this bias.
"Their money or my money" does not apply here, but the same discipline doesFraming versus loss aversion: identical outcomes described differently is framing; an investor holding losers or selling winners asymmetrically is loss aversion. Ask whether the facts changed or only the wording did.
Module: The Behavioral Biases of Individuals, Portfolio Management, 2026 CFA Level I topic outline.
What this sheet does not have
81 formulas and 177 traps, across 51 of the
93 modules in the 2026 outline. The modules missing from this sheet are the ones whose written
lesson has not been written yet; the map on your cockpit names every one of them. Two gaps are worth calling
out by name because they are ours, not the exam's: Portfolio Risk and Return, parts one and two, needs the
calculator and our own lesson states its relationships in words rather than as formulas, and Security Market
Indexes does the same with the price-weighted divisor. Those are written here as a gap rather than filled in
from memory.