CFA Level I 2027 Cheat Sheet: Formulas and Key Distinctions
Review CFA Level I 2027 formulas, valuation assumptions, accounting distinctions and common reasoning traps across all ten topics.
Use this original reference to check a relationship, its assumptions and the mistake it helps prevent. It supports the 2027 curriculum, effective from February 2027; it is selective, not a replacement for the assigned curriculum. Topic names and scope follow CFA Institute’s 2027 Level I outline .
Before calculating, identify the required quantity, cash-flow date, units and perspective. Use decimal rates in formulas: 5% is 0.05; 25 basis points is 0.0025.
Ethical and Professional Standards
| Case signal | Decision and common trap |
|---|---|
| Law and professional duties differ | Follow the stricter applicable requirement; dissociate from a violation. Avoid: Assuming local legal permission settles the ethical question. |
| Material nonpublic information | Do not trade or cause others to trade on it. Avoid: Treating a credible private tip as ordinary public research. |
| Investment recommendation | Establish a reasonable basis, then consider suitability in the client’s portfolio context. Avoid: Treating a well-researched investment as suitable for every client. |
| Conflict of interest | Avoid the conflict or disclose it fully and fairly where permitted. Avoid: Assuming disclosure cures conduct that is independently prohibited. |
| Trade allocation | Give client and employer transactions priority over beneficial personal transactions. Avoid: Treating every family client as a personal account, regardless of ownership or control. |
Competence must match the work undertaken. Communicate material service terms, costs, risks and limitations clearly; separate facts from opinions. Use the current Code and Standards and 12th-edition Handbook , rather than memorizing only older rule summaries.
Quantitative Methods
For one holding period with income \(I\) received at its end:
\[ R=\frac{P_1-P_0+I}{P_0} \]For returns over \(n\) equal periods, the geometric mean compounds wealth:
\[ R_G=\left[\prod_{t=1}^{n}(1+R_t)\right]^{1/n}-1 \]The arithmetic mean describes the average observed period return; it does not reproduce compounded growth. Time-weighted return links subperiod returns around external cash flows. Money-weighted return reflects the amount and timing of the investor’s cash flows.
\[ PV=\sum_{t=1}^{n}\frac{CF_t}{(1+r)^t} \]Here \(r\) is the discount rate per cash-flow period, with payments at period ends. Match the rate to the cash flows’ currency, risk, inflation basis and timing.
| Evidence | Interpretation check |
|---|---|
| A low p-value | Evidence against the null under the test assumptions; not the probability the null is true. |
| Type I / Type II errors | Reject a true null / fail to reject a false null. Test power is one minus the Type II error probability. |
| Correlation or regression fit | Association and model fit do not establish causation. Inspect residuals and assumptions. |
| Simulation or machine learning result | Evaluate data coverage, leakage, overfitting and out-of-sample performance. More simulated paths do not repair a wrong model. |
Economics
For a quote of domestic currency per one unit of foreign currency, covered interest parity with effective annual rates gives:
\[ F_{D/F}=S_{D/F}\frac{(1+r_D)^T}{(1+r_F)^T} \]This is a no-arbitrage relationship under the stated financing assumptions, not an exchange-rate forecast. Reverse the quote and the ratio reverses. Use the specified day count and compounding convention when rates are quoted differently.
- For a price-taking firm, short-run shutdown is relevant when price is below minimum average variable cost. Accounting losses alone do not imply immediate shutdown.
- Expansionary fiscal policy and expansionary monetary policy use different tools. Trace their effects through demand, financing conditions and expectations; policy transmission is not instantaneous.
- Distinguish a change in a currency’s value from a change in its quoted exchange rate. State which currency strengthens before interpreting an importer’s or exporter’s exposure.
Financial Statement Analysis
A three-part DuPont decomposition, using consistent average balances, is:
\[ ROE=\frac{NI}{Sales}\times\frac{Sales}{\overline{Assets}} \times\frac{\overline{Assets}}{\overline{Equity}} \]Higher return on equity may come from profit margin, asset use or leverage; those explanations imply different risks.
| Comparison | What to inspect |
|---|---|
| Capitalizing versus immediately expensing a qualifying cost | Initial profit, asset balance and later depreciation or amortization; total cash paid is not changed by the accounting label. |
| Earnings versus operating cash flow | Working-capital movements, noncash expenses and non-operating items. A profitable company can still face a cash shortage. |
| Basic versus diluted EPS | Potential common shares, numerator adjustments and exclusion of antidilutive instruments. |
| Temporary versus permanent tax differences | Temporary differences may create deferred tax balances; permanent differences do not. Assess deferred-tax-asset recoverability. |
| Reported versus recurring performance | Accounting policies, estimates, unusual items and management’s adjustments. A non-GAAP measure is not automatically more informative. |
CFA Level I uses IFRS unless U.S. GAAP is specified. Read the stated reporting period and standard: do not apply a remembered cash-flow classification rule across different regimes. CFA Institute’s financial-statement guidance confirms the default reporting basis.
Corporate Finance
\[ NPV=CF_0+\sum_{t=1}^{n}\frac{CF_t}{(1+r)^t} \]Use incremental after-tax cash flows, including opportunity costs and working-capital investment. Exclude sunk costs. A positive NPV adds value at the appropriate required return; the highest IRR need not identify the best mutually exclusive project. Nonconventional cash flows can produce multiple IRRs.
For a company financed only by debt and common equity:
\[ WACC=w_Dr_D(1-t_c)+w_Er_E \]Use appropriate market-value weights. The debt tax adjustment assumes the interest tax benefit is available; a project’s discount rate must reflect its risk.
\[ CCC=DIO+DSO-DPO \]The cash conversion cycle adds inventory days and receivable days, then subtracts payable days. Shorter is not always operationally better if it comes from stock shortages or damaged supplier relationships.
Equities
For dividends growing perpetually at a constant rate:
\[ V_0=\frac{D_1}{r-g},\qquad r>g \]Use next period’s dividend \(D_1\), a sustainable growth assumption and a compatible required equity return. A large terminal value makes the estimate especially sensitive to \(r\) and \(g\).
| Cash flow or multiple | Match it with |
|---|---|
| Dividends or free cash flow to equity | Cost of equity; value belongs to equity holders. |
| Free cash flow to the firm | WACC; reconcile the resulting firm value to equity using debt and other relevant claims or assets. |
| Price / earnings | Equity price and earnings attributable to common shareholders; distinguish trailing from forward earnings. |
| Enterprise value / EBITDA | A measure spanning financing claims and an operating earnings measure; check accounting and capital-intensity differences between peers. |
Net borrowing belongs in free cash flow to equity; an equity issue is not borrowing. Separate an analyst’s estimated value from market price and from a guarantee of future returns.
Fixed Income
For an option-free bond valued on a coupon date:
\[ P=\sum_{t=1}^{N}\frac{C}{(1+i)^t} +\frac{M}{(1+i)^N} \]\(C\) is the coupon per period, \(i\) the yield per period, \(N\) the number of periods and \(M\) principal. Between coupon dates, account for fractional periods and accrued interest. Full price = clean price + accrued interest.
\[ \frac{\Delta P}{P}\approx-D_{mod}\Delta y +\tfrac12 Conv(\Delta y)^2 \]Use consistent yield conventions and decimal yield changes. This is an approximation, not an exact repricing. Embedded options call for effective measures that reflect changing cash flows; one duration number does not capture every yield-curve movement.
- Price and yield move inversely for fixed, positive promised cash flows.
- Yield to maturity is not a guaranteed holding-period return: default, sale price and reinvestment matter.
- Separate benchmark-rate risk, credit-spread changes and default loss. In securitizations, inspect payment priority and prepayment assumptions.
Derivatives and Risk Management
At expiry, before premiums or financing costs, a long call and long put have payoffs:
\[ Call=\max(S_T-K,0) \]\[ Put=\max(K-S_T,0) \]Option profit includes the premium; short positions reverse the payoff sign. A long forward’s expiry payoff is \(S_T-K\), not the underlying asset’s entire value.
European put–call parity, with identical strike and expiry and a non-income-paying underlying, is:
\[ c+PV(K)=p+S_0 \]Distinguish contract price from current contract value. A newly agreed fair forward can have zero initial value without having a zero delivery price. Income, carry costs, collateral and exercise features can change the applicable valuation relationship.
Alternative Investments
| Comparison | Interpretation check |
|---|---|
| Committed versus invested capital | A commitment is a funding obligation; uncalled capital has not yet been invested. |
| Money multiple versus IRR | A multiple measures value relative to invested capital; IRR also reflects cash-flow timing. |
| Gross versus net return | Apply the stated management-fee base, incentive-fee sequence, hurdle and high-water mark. |
| Appraised versus traded values | Infrequent or smoothed marks can make measured volatility and correlation look artificially low. |
| Diversification versus liquidity | A different return driver does not guarantee liquidity during stress. |
Assess strategy and vehicle together: leverage, redemption terms, valuation discretion and fees can materially change the investor’s result. A digital asset’s technology does not by itself establish a contractual cash-flow claim.
Portfolio Construction
Expected return is a weighted average; portfolio volatility generally is not:
\[ E(R_p)=\sum_i w_iE(R_i) \]For two assets:
\[ \begin{aligned} \sigma_p^2={}&w_1^2\sigma_1^2+w_2^2\sigma_2^2\\ &+2w_1w_2\sigma_1\sigma_2\rho_{12} \end{aligned} \]Covariance drives diversification. Lower correlation can reduce portfolio risk, but adding assets does not eliminate systematic risk.
The capital asset pricing model relates required return to market exposure:
\[ E(R_i)=R_f+\beta_i[E(R_m)-R_f] \]Beta measures market sensitivity, not total volatility. Distinguish the security market line’s beta axis from the capital market line’s total-risk axis. Portfolio selection must also respect the investor’s liquidity needs, horizon, tax circumstances and constraints; an optimizer’s answer depends on its estimated inputs.
Turn recall into practice
Choose one weak topic, answer a fresh set without this reference, then explain both the selected answer and why the alternatives fail. Use the 180-question free practice exam for a broader check. Keep an error note for the specific assumption or distinction you missed.
This is an independent Finance Prep study reference, not an official CFA Institute formula sheet or a complete syllabus. Scope and source links checked October 5, 2026; consult the official resources and curriculum errata for your sitting.