CFA Level I 2026 Schweser Quicksheet

LEVEL I SCHWESER’S QuickSheet Critical Concepts for the 2026 CFA® Exam ETHICAL AND PROFESSIONAL STANDARDS I I(A) I(B) I(C) I(D) I(E) II II(A) II(B) III III(A) III(B) III(C) III(D) III(E) IV IV(A) IV(B) IV(C) V V(A) V(B) V(C) VI VI(A) VI(B) VI(C) VII VII(A) VII(B) Professionalism Knowledge of the Law. Independence and Objectivity. Misrepresentation. Misconduct. Competence. Integrity of Capital Markets Material Nonpublic Information. Market Manipulation. Duties to Clients Loyalty, Prudence, and Care. Fair Dealing. Suitability. Performance Presentation. Preservation of Confidentiality. Duties to Employers Loyalty. Additional Compensation Arrangements. Responsibilities of Supervisors. Investment Analysis, Recommendations, and Actions Diligence and Reasonable Basis. Communication with Clients and Prospective Clients. Record Retention. Conflicts of Interest Avoid or Disclose Conflicts. Priority of Transactions. Referral Fees. Responsibilities as a CFA Institute Member or CFA Candidate Conduct as Participants in CFA Institute Programs. Reference to CFA Institute, the CFA Designation, and the CFA Program. Global Investment Performance Standards Definition of firm: Corporation, subsidiary, or division held out to clients as a business entity. All fee-paying discretionary portfolios must be included in at least one composite. Verification: Optional, but if chosen it must be carried out by an independent third party. GIPS standards for firms: 1. Fundamentals of Compliance 2. Input Data and Calculation Methodology 3. Composite and Pooled Fund Maintenance 4. Composite Time-Weighted Return Report 5. Composite Money-Weighted Return Report 6. Pooled Fund Time-Weighted Return Report 7. Pooled Fund Money-Weighted Return Report 8. GIPS Advertising Guidelines QUANTITATIVE METHODS Holding Period Return (HPR) ​ ​ t​​  − ​P​ t−1​​  + ​D​ t​​ P ​ ​ ​​  + ​D​ t​​ P ___________ ​​R​ t​​  = ​   ​ or _ ​ t ​  − 1​ ​P​ t−1​​ ​ ​ t−1​​ P Annualized Return ​​​(1 + HPR)​​​ 365/days​  − 1​ Continuously Compounded Return RCC = ln(1 + HPR) Means Arithmetic mean: sum of all observation values in sample/population, divided by # of observations. KP01121_CFA_L1_2026_QS_Spreads.indd 1 Geometric mean: Used when calculating investment returns over multiple periods or to measure compound growth rates. Geometric mean return: ​​​R̅ ​​ G​​ = ​​[​(1 + ​R​ 1​​)​  × … × ​(1 + ​R​ N​​)​]​​​ ​ ⁄ ​​  − 1​ 1 N N ​​ ​Harmonic mean = ​_ N ​1 ​ ​ ​∑​ ​ _ i=1( ​X​ i​​ ) Normal distribution is completely described by its mean and variance. 68% of observations fall within ± 1s. 90% fall within ± 1.65s. 95% fall within ± 1.96s. 99% fall within ± 2.58s. Computing Z-Scores Trimmed mean (x%): Exclude highest and lowest x/2 percent of observations. Winsorized mean (x%): Substitute values for highest and lowest x/2 percent of observations. Variance and Standard Deviation Variance: average of squared deviations from mean. n ​ ​  ​(​x​ i​​​  − ​x̅​​)​​ 2​ ∑ s​​ ample variance = s​​ 2​ = _ ​i=1 ​ ​ n−1 Standard deviation: square root of variance. Target Downside Deviation ________________ √ Normal Distributions n ​​(​X​ i​​  − target)​​​ 2​ ​S​target​​ = ​    ​ ∑ ___________ ​   ​​​ n−1 ​all X​ ​​ pretax income. Must recognize valuation allowance if more likely than not that DTA will not be realized. Leases Lessee reporting: Under IFRS, lessee recognizes right-of-use asset (amortized straight-line) and liability equal to PV of lease payments. Interest portion of each payment is interest expense, principal portion decreases liability. U.S. GAAP is same except that right-of-use asset is amortized to match the lease liability, and for an operating lease, entire lease payment is an expense. Lessor reporting, finance lease: Remove asset from balance sheet, recognize lease receivable asset, report interest income. Lessor reporting, operating lease: Keep asset on balance sheet, report lease payments as income, record depreciation expense. Pensions For stock grants, performance shares, and employee stock options, the estimated fair value at the grant date is expensed over the vesting period. Sales-Based Pro Forma Model 1. 2. 3. 4. 5. 6. 7. 8. Estimate revenue growth Estimate cost of sales Estimate SG&A expenses Estimate financing costs Estimate taxes Model working capital accounts Estimate PP&E, capital spending Construct pro forma statements CORPORATE ISSUERS Corporate Governance Stakeholder groups: Shareholders, board of directors, senior managers, employees, creditors, suppliers. Key board committees: Audit, nominating/ governance, compensation/remuneration. Types of Capital Investment Projects Going concern: Maintain the business or reduce costs. Regulatory/compliance: Required to meet concerns such as safety or environment. Expansion: Grow the existing business Other: Includes projects outside the existing business. Capital Allocation Administrative steps: 1. Generate ideas 2. Analyze project proposals 3. Create firm-wide capital budget 4. Monitor decisions and conduct post-audit C​F​ 1​​ C​F​ 2​​ C​F​ n​​ ​NPV = C​F​ 0​​  + ​_ ​  + ​_ ​  + ...+ ​_ ​​ ​(1 + k)​​ 1​ ​(1 + k)​​ 2​ ​(1 + k)​​ n​ IRR: discount rate that makes NPV equal to zero. Return on Invested Capital (ROIC) net operating profit after tax ______________________________ ​ROIC = ​       ​​ average book value of invested capital Real Options Timing: Delay investment Abandonment: Exit project Expansion: Follow-on investment Flexibility: Change price or inputs Fundamental: Payoff depends on price of underlying asset Weighted Average Cost of Capital ​WACC = (​w​ d​​)[​k​ d​​(1 − t)] + (​w​ ps​​)(​k​ ps​​) + (​w​ ce​​)(​k​ s​​)​ Capital Structure Theories Modigliani-Miller (MM) with no taxes: Capital structure is irrelevant. MM with taxes but no costs of financial distress: 100% debt maximizes firm value. Static tradeoff theory: Firm value initially increases with debt financing, but decreases when costs of financial distress outweigh tax benefits of additional debt. Pecking order theory: Managers prefer internal capital, then debt, then external equity. Defined contribution: employer contribution expensed in period incurred. Defined benefit: overfunded plan recognized as net pension asset, underfunded plan recognized as net pension liability. 22/04/25 5:33 PM PORTFOLIO MANAGEMENT Types of Orders E(R) Investment Policy Statement Investment objectives: • Return objectives. • Risk tolerance. Constraints: • Liquidity needs. • Time horizon. • Tax concerns. • Legal and regulatory factors. • Unique circumstances. B C SML A Market Structures Quote-driven markets: investors trade with dealers. Order-driven markets: buyers and sellers matched by rules. Brokered markets: brokers find counterparties. RFR Combining Preferences with the Optimal Set of Portfolios 0.8 Markowitz efficient frontier is the set of portfolios that have highest return for given level of risk. E(Rp) Risk Tolerant Investor Y I 2' I 1' 1 Rp Investors should only be compensated for risk relative to market. Unsystematic risk is diversified away; investors are compensated for systematic risk. The equation of the SML is the CAPM, which is a return/systematic risk equilibrium relationship. total risk = systematic + unsystematic risk p } M Rf βp 1 Capital Market Line Efficient Frontier Market Portfolio Cognitive errors, belief perseverance: Conservatism, confirmation, representativeness, control, hindsight Cognitive errors, information processing: Anchoring and adjustment, mental accounting, framing, availability Emotional biases: Loss aversion, overconfidence, self-control, status quo, endowment, regret aversion RFR sP ​CAPM : E​(​R​ i​​)​  = RFR + ​β​i​​​[E​(​R​ mkt​​)​  − RFR]​​ E(Ri) Security Market Line (SML) EQUITY INVESTMENTS Well-Functioning Security Markets • Operational efficiency (lowest possible transactions costs). • Informational efficiency (prices rapidly adjust to new information). Margin Purchases Market Portfolio For margin transactions: • Leverage factor = 1/margin percentage. • Levered return = HPR × leverage factor. Margin Call Price RFR Systematic Risk (Covi, mkt) The SML and Equilibrium Identifying mispriced stocks: Consider three stocks (A, B, C) and SML. Estimated stock returns should plot on SML. • A return plot over the line is underpriced. • A return plot under the line is overpriced. ​P​ ​​(1 − initial margin %) ______________________        ​​ 0 ​​ 1 − maintenance margin % Computing Index Prices ∑ stock prices ​ rice-weighted Index = ​_____________ P      ​​ adjusted divisor ​Value-weighted Index ∑ (current prices)(#shares) ______________________________ = ​       ​  × base value​ ∑ (base year prices)(#base year shares) • Weak form. Current stock prices fully reflect available security market info. Volume information/past price do not relate to future direction of security prices. Investor cannot achieve excess returns using tech analysis. • Semi-strong form. Security prices instantly adjust to new public information. Investor cannot achieve excess returns using fundamental analysis. • Strong form. Stock prices fully reflect all information from public and private sources. Assumes perfect markets in which all information is cost free and available to everyone at the same time. Even with inside info, investor cannot achieve excess returns. Industry and Competitive Analysis Jensen’s alpha Behavioral Biases E(Ri) Forms of EMH slope = Treynor measure for Portfolio P SML RM Security Market Line (SML) b risk Sharpe ratio and M-squared measure excess return per unit of total risk. Treynor measure and Jensen’s alpha measure excess return per unit of systematic risk. Efficient Frontier Risk Averse Investor X 1.2 Risk-Adjusted Returns E(R) I2 I1 E(Rmkt) Execution instructions: how to trade; e.g., market orders, limit orders. Validity instructions: when to execute; e.g., stop orders, day orders, fill-or-kill orders. Clearing instructions: how to clear and settle; for sell orders, specify short sale or sale of owned security. β 1. 2. 3. 4. 5. Define the industry Survey industry size, growth, profitability Analyze industry structure (Porter) Examine external influences (PESTLE) Analyze companies’ strategies Five Competitive Forces 1. 2. 3. 4. 5. Rivalry among existing competitors Threat of entry Threat of substitutes Power of buyers Power of suppliers PESTLE Analysis External forces affecting companies and industries: • Political • Economic • Social • Technological • Legal • Environmental Competitive Strategies • Cost leadership • Product or service differentiation • Focus (niche market) One-Period Valuation Model ​D​ 1​​ ​P​ 1​​ ​​V​ 0​​  = ​_ ​  + ​_ ​​ (1 + ​k​ e​​) (1 + ​k​ e​​) Be sure to use expected dividend D1 in calculation. Infinite Period Dividend Discount Models Supernormal growth model (multi-stage) DDM: ​D​ 1​​ ​D​ n​​ ​P​ n​​ ​​V​ 0​​  = ​_ ​  + ......+  ​_ ​  + ​_ ​ (1 + ​k​ e​​) ​​(1 + ​k​ e​​)​​​ n​ (1 + ​k​ e​​ ​)​​ n​ ​D​ n+1​​ where:  ​P​n​​  = ​_ ​ ​ ​(​k​ e​​  − ​g​ c​​)​ Constant growth model: ​D​ 0​​(1 + ​g​ c​​) _ ​D​ ​​ ​ ​V​ 0​​  = ​_ ​  = ​ 1 ​​ ​k​ e​​  − ​g​ c​​ ​k​ e​​  − ​g​ c​​ continued on next page... KP01121_CFA_L1_2026_QS_Spreads.indd 4 22/04/25 5:33 PM EQUITY INVESTMENTS continued... Index-linked: Interest-indexed (coupon rate adjusted) or capital-indexed (principal adjusted). Critical relationship between ke and gc: • As difference between ke and gc widens, value of stock falls. • As difference narrows, value of stock rises. • Small changes in difference between ke and gc cause large changes in stock’s value. Critical assumptions of infinite period DDM: • Stock pays dividends; constant growth rate. • Constant growth rate, gc, never changes. • ke must be greater than gc (or math will not work). Callable: Issuer may repay principal early. Increases yield and decreases duration. Putable: Bondholder may sell bond back to issuer. Decreases yield and duration. Convertible: Bondholder may exchange bond for issuer’s common stock. Warrants: Bondholder may buy issuer’s common stock at exercise price. Warrants are typically detachable from the bond. Earnings Multiplier Model Bond Markets ​D​ ​​ 1 ​ ​ ​​ ​ ⧸​E​ ​​​ payout ratio P ​​_0 ​  = ​_1 ​  = ​_​​ ​E​ 1​​ k−g k−g Price Multiples price per share forecast EPS next 12 mo. ____________________ ​leading P/E =  ​     ​ price per share _________________ trailing P/E =  ​     ​​ EPS previous 12 mo. price per share book value per share ​P/B =  ​________________      ​ price per share ____________ P/S =  ​     ​ sales per share price per share _______________ P/CF =  ​     ​​ cash flow per share FIXED INCOME Price, Yield, Coupon Relationships Bond prices and yields are inversely related. Increase in yield decreases price; decrease in yield increases price. Coupon < yield: Discount to par value. Coupon > yield: Premium to par value. Constant-yield price trajectory: Price approaches par as bond nears maturity from amortization of discounts and premiums. Capital gains and losses are calculated relative to this trajectory. Other things equal, a lower coupon rate and a longer maturity make a bond price more sensitive to changes in yield. Basic Features of Bonds Issuer. Sovereign governments, corporations, local governments, agencies, supranational entities, special purpose entities. Maturity. Money market (one year or less); capital market (greater than one year). Par value. Bond’s principal value (face value). Coupon. Annual percent of par; fixed or floating. Divide by periodicity to get periodic rate. Seniority. Senior > junior (subordinated). Contingency provisions. Callable, putable, convertible. Cash Flow Structures Bullet: All principal repaid at maturity. Fully amortizing: Equal periodic payments include both interest and principal. Partially amortizing: Periodic payments include interest and principal, balloon payment at maturity repays remaining principal. Sinking fund: Schedule for early redemption. Floating-rate: Coupon payments based on reference rate plus margin. Embedded Options Domestic bonds. Domestic issuer and currency. Foreign bonds. Foreign issuer, domestic currency. Eurobond market is outside any one country, with bonds denominated in currencies other than those of countries in which bonds are sold. Global bonds trade in both a national bond market and the eurobond market. Bond Issuance Underwritten offering: Investment banks buy entire issue, sell to public. Best efforts offering: Investment banks act as brokers. Shelf registration: Register entire issue with regulators but sell over a period of time. Repurchase Agreements Short-term borrowing with a fixed income security as collateral. Repo rate: Annualized percent difference between sale and repurchase prices. Initial margin: Extra collateral above loan amount. 1 ​ aircut = 1 − ​___________ H    ​​ initial margin Bond Pricing Full price = PV on last coupon date × days since last coupon __________________    ​ ​ days in coupon period YTM ​​​ 1 + ​_____________    ​ ​​​ ​​ ( periods per year ) Accrued interest = coupon payment × days from last coupon to settlement ____________________________     ​​       ​​ days in coupon period Flat price = full price - accrued interest Bonds are quoted at their flat prices. Matrix pricing: For illiquid bonds, use yields of bonds with same credit quality to estimate yield; adjust for maturity differences with linear interpolation. Yield Measures Effective yield depends on periodicity. YTM = effective yield for annual-pay bonds. Semiannual bond basis: YTM = 2 × semiannual discount rate. Current yield = annual coupon / price. Simple yield = current yield ± amortization. Yield to call is based on call date and call price. Yield to worst is lowest of a bond’s YTCs or YTM. Yield Spreads G-spread: Basis points above government yield. I-spread: Basis points above swap rate. Z-spread: Accounts for shape of yield curve. Option-adjusted spread: Adjusts Z-spread to remove effects of embedded options. Floating-Rate Notes Quoted margin: Fixed margin above the MRR. Required margin or discount margin: Margin above the MRR that would price the note at par. Decrease in credit quality causes the required margin to be greater than the quoted margin. Money market yields may be on a discount or addon basis and may use a 360- or 365-day year. Bondequivalent yield is an annualized add-on yield based on a 365-day year. Forward and Spot Rates Forward rate is a rate for a loan that begins at a future date. “1y3y” = 3-year forward rate 1 year from today. Example of spot-forward relationship: (1 + S2)2 = (1 + S1)(1 + 1y1y) Interest Rate Risk Interest rate risk has two components: reinvestment risk and market price risk from YTM changes. These risks have opposing effects on an investor’s horizon yield. • Bond investors with short horizons are more concerned with market price risk. • Bond investors with long horizons are more concerned with reinvestment risk. • The horizon at which market price risk and reinvestment risk just offset is a bond’s Macaulay duration. This is the weighted average of times until a bond’s cash flows are scheduled to be paid. Modified duration is the approximate change in a bond’s price given a 1% change in its YTM: Macaulay duration (​ ​V​ −)​​ ​  − ​(​V​ +​​)​ ​= ​_______________    ​  ≈ ​___________    ​​ (1 + r) 2 ​V​ 0​​​(Δy)​ Price change estimates based on duration only are improved by adjusting for convexity: 1 ​  convexity ​​ Δy ​​​ 2​​ ​%Δprice = − duration​(Δy)​  + ​_ ( ) 2 Approximate convexity: ​V​ −​​  + ​V​ +​​  − 2 ​V​ 0​​ ____________    ​​    ​​ ​​(ΔYTM)​​​ 2​ ​V​ 0​​ Effective duration is required if a bond has embedded options: (​ ​V​ −)​​ ​  − ​(​V​ +)​​ ​ ___________ ​​   ​​ 2​V​ 0​​​(Δcurve)​ Credit Risk and Analysis Bottom-up credit analysis factors: • Capacity • Capital • Collateral • Covenants • Character Top-down credit analysis factors: • Conditions • Country • Currency Expected loss = probability of default × loss given default Credit ratings: Investment grade: Baa3/BBB- or above Non-investment grade: Ba1/BB+ or below Corporate family rating (CFR): issuer rating. Corporate credit rating (CCR): security rating. Secured bonds are backed by specific collateral and senior to unsecured bonds. Unsecured bonds are general claims to issuer’s cash flows and assets. Asset-Backed Securities Residential MBS: Home mortgages are collateral. Agency RMBS include only conforming loans; nonagency RMBS may include nonconforming loans and need credit enhancement. Internal credit enhancement: Excess spread, overcollateralization, waterfall structure. continued on next page... KP01121_CFA_L1_2026_QS_Spreads.indd 5 22/04/25 5:33 PM FIXED INCOME continued... Prepayment risk: Contraction risk from faster prepayments; extension risk from slower prepayments. CMOs: Pass-through MBS are collateral. May have sequential-pay or PAC/support structure. Commercial MBS: Non-recourse mortgages on commercial properties are collateral. Credit card ABS: Credit card receivables are collateral. CDOs: Bonds, bank loans are collateral; employ a collateral manager. DERIVATIVES Arbitrage and Replication • Law of one price: two assets with identical cash flows in the future, regardless of future events, should have the same price. • Two assets with uncertain returns can be combined in a portfolio that will have a certain payoff. If a portfolio has a certain payoff, the portfolio should yield the risk-free rate. For this reason, derivatives values are based on risk-neutral pricing. Derivatives Values vs. Prices The price of a forward, futures, or swap contract is the forward price stated in the contract and is set such that the contract has a value of zero at initiation. Value may change during the contract’s life with opposite gains/losses to the long and short. Fee Structures Factors that Affect Option Values Increase in: Calls Puts Asset price Increase Decrease Exercise price Decrease Increase Risk-free rate Increase Decrease Volatility Increase Increase Time to expiration Increase Increase* Holding costs Increase Decrease Holding benefits Decrease Increase *Except some deep-in-the-money European puts. Put-Call Parity The put-call parity relationship for European options at time t: c + X(1 + Rf )-T = S + p Each security in the put-call parity relationship can be expressed as: S = c - p + X(1 + Rf )-T p = c - S + X(1 + Rf )-T c = S + p - X(1 + Rf )-T X(1 + Rf )-T = S + p - c Put-Call Forward Parity The present value of the forward price of the underlying asset, F0(T)(1 + Rf )-T, can be substituted for S in any of the put-call parity relationships at time 0. Futures vs. Forwards Futures are standardized, exchange-traded forward contracts that require daily cash settlement of mark-to-market gains and losses. Forward Rate Agreements (FRA) Can be viewed as a forward contract to borrow/ lend money at a certain rate at some future date. Interest Rate Swaps May be replicated by a series of FRAs with present values at swap initiation that sum to zero. Options • Buyer of a call option—long asset exposure. • Writer (seller) of a call option—short asset exposure. • Buyer of a put option—short asset exposure. • Writer (seller) of a put option—long asset exposure. intrinsic value of a call option = Max[0, S - X] intrinsic value of a put option = Max[0, X - S] American vs. European Options American options allow the owner to exercise the option any time before or at expiration. European options can be exercised only at expiration. Hedge Funds Event-driven strategies: merger arbitrage; distressed/ restructuring; activist shareholder; special situations. Relative value strategies: convertible arbitrage; specific fixed income; general fixed income; multi-strategy. Equity strategies: market neutral; fundamental growth; fundamental value; fundamental long/ short; short bias. Opportunistic strategies: macro; managed futures. Private Capital Forward Contract Value At time t: Vt(T) =  [St + PVt(costs) - PVt(benefits)]    - F0(T)(1 + Rf )-(T-t) • Management fee and performance fee, for example “2 and 20”: 2% management fee plus 20% performance fee. Management fee is typically a percentage of assets under management for hedge funds, percentage of committed capital for private equity. • Hard hurdle rate: incentive fee only on return above hurdle rate. • Soft hurdle rate: incentive fee on whole return, but only paid if return is greater than hurdle rate. • High water mark: no incentive fee until value exceeds previous high. • Clawback provision: limited partners can recover performance fees if earlier gains are reversed • Deal-by-deal (American) waterfall: profits distributed as each investment is sold. • Whole-of-fund (European) waterfall: limited partners receive all distributions until they have recovered their initial investment plus the hurdle rate. ALTERNATIVE INVESTMENTS Alternative Investment Life Cycle Capital commitment phase: Managers identify investments and make capital calls from partners. Capital deployment phase: Managers fund and involve themselves in projects. Capital distribution phase: Successful investments generate income and cash flows. Fair Value Hierarchy Level 1: Active market, quoted prices readily available. Level 2: Can be valued based on observable inputs or with models. Level 3: Require unobservable inputs to establish a fair value; few or no market transactions. Redemption Restrictions Lockup period: Time after initial investment during which limited partners cannot request redemptions or incur significant penalties. Notice period: Time within which a fund must fulfill a redemption (typically 30–90 days). Gate: Temporary restriction of redemptions. Leveraged buyouts: management buyouts (existing managers), management buy-ins (new managers) Venture capital stages of development: • Formative stage: angel investing, seed stage, early stage. • Later stage: expand production, increase sales. • Mezzanine stage: prepare for IPO. Exit strategies: trade sale; IPO; recapitalization; secondary sale; write-off. Real Estate Includes residential property; commercial property; real estate investment trusts (REITs); whole loans; construction loans. Commodities Contango: futures price > spot price. Backwardation: futures price < spot price. futures price ≈ spot price(1 + Rf ) + storage costs - convenience yield Infrastructure Long-lived assets for public use, including transportation, utility, communications, social. Greenfield: Invest in new infrastructure assets, often on a “Build-Operate-Transfer” basis. Brownfield: Develop existing infrastructure assets. Second-stage: Invest in infrastructure assets that do not need further development. ISBN: 978-1-0788-5118-3 9 781078 851183 © 2025 Kaplan, Inc. All Rights Reserved. KP01121_CFA_L1_2026_QS_Spreads.indd 6 22/04/25 5:33 PM