CFA® Program

Level II
FORMULA SHEET (2024) Version 1.0
Prepared by: Fabian Moa, CFA, FRM, CTP, FMVA, AFM, FSA Credential

FOR REFERENCE ONLY

(Note: Formula Sheet is not provided in the CFA exam)

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NOESIS EXED SDN BHD

Block VO2, Level 5, Unit 8, Lingkaran SV, Sunway Velocity, 55100 Kuala Lumpur, Malaysia
Website: www.noesis.edu.sg

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CFA Level 2 (2024) Formula Sheet – Noesis Exed

CFA Level 2 – Formula Sheet (2024)

Setting Up the Texas BA II Plus Financial Calculator

Video: https://youtu.be/0MS8d8QOFmc

QUANTITATIVE METHODS
Learning Module 1 | Basics of Multiple Regression and Underlying Assumptions

= + + + ⋯+ + + = 1, 2, 3, … ,

= dependent variable
where:

= independent variable
= intercept
, , … , = slope coefficients

d
= error term

e
= number of observations
= number of independent variables
Ex
, , , … , = regression coefficients

= −
s
si

"
oe

Learning Module 2 | Evaluating Regression Model Fit and Interpreting Model Results

Coefficient of determination, #
N

$%& $'% () #(* ()) $$# $$-

# = = = 1−
$%& $'% () + , $$+ $$+

$%& $'% () + ,, $$+ = −

"
!

$%& $'% () #(* ()) , $$# = ./ − 0

"
!

$%& $'% () - , $$- = . − /0

"

$$- ⁄ − − 1 −1
123%) (2 # , # = 1 − 4 6=1−7 8 1−#
$$+⁄ − 1 − −1

2
CFA Level 2 (2024) Formula Sheet – Noesis Exed

$%& )'% () (
Akaike’s information criterion (AIC)
19: = ln 7 8+2 +1

= Sample size
where:

= Number of independent variables in the model

Schwarz’s Bayesian information criterion (BIC of SBC)

$%& )'% () (
=9: = ln 7 8 + ln +1

F-distributed test statistic for jointly omitted variables

$%& )'% () ( () ? (2 & 2(, − $%& )'% () % () ? (2 ⁄'

>=
$%& )'% () % () ? (2 & 2(,⁄ − − 1

d
' = Number of restrictions (i.e., number of variables omitted in the restricted model
where:

e
compared to the unrestricted model)
Ex
@ : B = BC = ⋯ = BCDE = 0
@G : At least one of the ' slopes ≠ 0
s
si

F-test for joint test of slope coefficients

I
oe

$$# ⁄
ANOVA df SS MS
$$# $$# ⁄
$$- ⁄ − − 1
Regression
− − 1 $$- $$- ⁄ − −1
N

−1 $$+
Residual
Total

J( $'% ( #(* ()) $$# ⁄

>) ) ?= =
J( $'% ( - $$- ⁄ − − 1

@: = =⋯= =0
@G : At least one K ≠ 0

3
CFA Level 2 (2024) Formula Sheet – Noesis Exed

/K − =K
t-test statistic for slope coefficient

=
)L/M

/K = Regression estimate of K
where:

=K = Hypothesized value of coefficient 3

)L/M = Estimated standard error of /K

Video (Simple Linear Regression): https://youtu.be/uR_9im2JP18

Learning Module 3 | Model Misspecification

+() $ ) ?, χOP, = #
Breusch-Pagan Test

# = #-squared between squared residuals and independent variables

where:

e d
1
Variance Inflation Factor (VIF)
9>K =
Ex
1 − #K

#K = Variation in − 1 independent variables

where:
K explained by the other
s
si

Learning Module 4 | Extensions of Multiple Regression

oe

Sum of individual leverages for all observations = +1

Detecting Influential Points

If observation’s leverage > 3 R S ⇒ Potentially influential observation

C
N

Studentized Deleted Residual, UV∗

(∗ ( − −1
= = [
)X ∗ YJ$- 1 − ℎ $$- 1 − ℎ − (
∗

( ∗ = The residual with the th observation deleted

where:

)X ∗ = The standard deviation of the residuals

= The number of independent variables
J$- = Mean squared error of the regression model that deletes the th observation
ℎ = The leverage value for the th observation

4
CFA Level 2 (2024) Formula Sheet – Noesis Exed

( ℎ
Cook’s Distance

\ = ] ^
+ 1 J$- 1 − ℎ

( = Residual for observation

where:

= The number of independent variables

J$- = Mean square error of the estimated regression model
ℎ = The leverage value for the th observation

If \ > _ ` , then th observation is highly likely to be an influential data point

Logistic Regression (Logit)

a
ln 7 8= + + + ⋯+ +
1−a

d
1
a=
1 + expe− + + +⋯+ + f

e
Ex
a
ln 7 8 = g * 22)
1−a

h22) = ( Li
s
si

Likelihood ratio (LR) test

g# = −2 g * , (, ℎ 2 () ? (2 & 2(, − g * , (, ℎ 2% () ? (2 & 2(,

oe
N

Learning Module 5 | Time-Series Analysis

= + + = 1,2, … , +
Linear Trend Models
j j

= time (independent variable)

= ( LkCLlj = 1,2, … , +
Log-Linear Trend Models
j

ln j = +

Growth rate of = ( Ll − 1

5
CFA Level 2 (2024) Formula Sheet – Noesis Exed

p-th order autoregressive model, mn o

pj = + pjE + pjE + ⋯ + q pjEq + j

Test statistic for autocorrelation of residuals

#() 2% , % ? (, −0 #() 2% , % ? (,
= =
$ 2 2( 1⁄√+

: u j , jE
where:
st, = = jw
2( % ? (, ℎ( () 2% ,
vt

Mean reverting level for AR(1) model

pj =
1−

e d
Root Mean Squared Error
$'% (2 (
#J$- = [
Ex
pj − pjE = + * pjE +
Dickey and Fuller Unit-Root Test
s
j
si

* = −1
where:
oe

vxjC = + ŷj
ARCH(1):
N

Learning Module 6 | Machine Learning

Neural Networks

a , 2( u u( ℎ(
{(| ( |
= h,2 |( *ℎ − g( * (×~ ,( | ℎ ()•(? €
|( *ℎ
ℎ( ,2 |( *ℎ

6
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 7 | Big Data Projects

− B!
Normalization of variable X
=
BG† − B !
!•‚BGƒ „X…

−ˆ
Standardization of variable X
=
‡jG!…G‚… „X…
v

+ %( a ) u(
a (? ) ,a =
+ %( a ) u( + > ,)( a ) u(

+ %( a ) u(
#(? ,,, # =
+ %( a ) u( + > ,)( {(* u(

+ %( a ) u( + + %( {(* u(

d
1??% ?‰ =
+ %( a ) u( + > ,)( a ) u( + + %( {(* u( + > ,)( {(* u(

2 × a (? ) × #(? ,,
e
Ex
>1 $? (=
a (? ) + #(? ,,

> ,)( a ) u(
> ,)( a ) u( # (, >a# =
s

+ %( {(* u( + > ,)( a ) u(

si

+ %( a ) u(
+ %( a ) u( # (, +a# =
oe

+ %( a ) u( + > ,)( {(* u(

$( ( ?( : % | ℎŠ 2
N

\ ?%&( > ('%( ?‰, \> =

+ , {%& ( $( ( ?()

1
9 u( )( \ ?%&( > ('%( ?‰, 9\> = log 7 8
\>

+>-9\> = +> × 9\>

7
CFA Level 2 (2024) Formula Sheet – Noesis Exed

ECONOMICS

Learning Module 1 | Currency Exchange Rates: Understanding Equilibrium Value

Cross Rates

When given Ž and O, then O = Ž × O

• Ž • • Ž

When given Ž and Ž , then O = Ž ×

• O • •
•
R•S

p ‰
Currency pair Bid Bid/Ask

⁄
1 ‰ 1⁄p
A/B
B/A

Video: https://youtu.be/wyDKKPkPhzw

e d
Arbitrage Opportunities Between Dealers and Interbank

Video: https://youtu.be/Lqo9UZ3yyEA
Ex
1? % ,
Covered Interest Rate Parity
1+ R 360 S
‘
>‘⁄… = $‘⁄… ’ ”
s

1? % ,
1+ …R S
360
si

1? % ,
‘−
oe

>‘⁄… − $‘⁄… … R 360 S

=
$‘⁄… 1? % ,
1+ … R 360 S
N

Video: https://youtu.be/9jOzFA9GuHU

Mark-to-Market Value of a Forward Contract

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

.>j,‘⁄… − > ,‘⁄… 0 × : ? $ •(

,%( g *> | 2=
#(& * 2 ‰) & % ‰
1+ ‘7 360 8

>j,‘⁄… = Forward rate at valuation date, t (Bid side)

Video: https://youtu.be/wLqyZRrutAc

8
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Uncovered Interest Rate Parity

1? % ,
1+
R 360 S ‘
- $‘⁄… = $‘⁄… ’ ”
1? % ,
1 + … R 360 S

1? % ,
‘ −R 360 S
… 1? % ,
%Δ$‘X⁄… = ≈ − 7 8
1? % , ‘ …
360
1 + … R 360 S

Video (Carry Trade): https://youtu.be/_26fG3Zvzyg

a‘
Absolute PPP
$‘⁄… =
a…

d
1? % ,
Relative PPP
™‘ − ™… R 360 S 1? % ,

e
%Δ$‘⁄… = ≈ ™‘ − ™… 7 8
1? % , 360
1 + ™… R S
Ex
360

1? % ,
Ex ante PPP
%Δ$‘X⁄… ≈ ™‘X − ™…X 7 8
s

360
si

− = ™‘X − ™…X
International Fisher Effect
oe

‘ …

™ X = Expected inflation rate

where:

™ = Actual inflation rate

N

Mundell-Fleming Model

Bonus Video: https://youtu.be/xNo3GpWYgKA

9
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 2 | Economic Growth and the Investment Decision

- a
a = š\a × 7 8×7 8
š\a -

- a
Return on aggregate equity market
%∆a = %∆š\a + %∆ 7 8 + %∆ 7 8
š\a -

a = aggregate value of equities

where:

- = aggregate earnings

Cobb-Douglas Production Function

= +œ • g E•
where a < 1
where:

d
ž = Share of output allocated to capital (œ)
Y = Output

1 − ž = share of output allocated to labor (g)

e
+ = total factor productivity (+>a), represents technological progress of the economy
Ex
œ •
Ÿ ¡¢ ¡ ¢£¤ ¥¦¤§£¤ = = +7 8
g g
s
si

Marginal product of capital, MPK

Jaœ = ž 7 8
œ
oe

œ
Amount of output that is allocated to providers of capital, a
ž=
N

∆ ∆+ ∆œ ∆g
Growth Accounting equation:
= +ž + 1−ž
+ œ g

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

g ?(
g ?( • ?• =
Š * *( • •%,

10
CFA Level 2 (2024) Formula Sheet – Noesis Exed

¨
Sustainable growth rate of output per capita
*∗ =
1−ž

¨
Sustainable growth rate of output (Steady state growth rate)
š∗ = +
1−ž

1 ¨
Equilibrium output-to-capital ratio (in steady state):
= ] + + ©^
œ ) 1−ž

¨ = growth rate of TFP

where:

ž = elasticity of output with respect to capital

) = fraction of income (Y) that is saved
© = rate of depreciation of physical capital stock
= labor supply growth = %∆g

e d
Endogeneous Growth Model Ex
‰X = ?
Production function:
X
s

Δ‰X Δ
Growth rate of output per capita:
= = )? − © −
‰X
si

‰X = output per worker

where:
oe

X = capital per worker

? = marginal product of capital in the aggregate economy (constant)
N

11
CFA Level 2 (2024) Formula Sheet – Noesis Exed

FINANCIAL STATEMENT ANALYSIS

Learning Module 1 | Intercorporate Investments

Investments in Associates (Equity Method)

- 2 * =(* * $ℎ ( 1& • (p?())

$ℎ (
u() &( = u() &( + − 2 u 2( 2 −
( ? &( •% ?ℎ )( • ?(
)) ? () )) ? () (?( u(2

$ℎ ( 1& • (p?()) $ℎ ( ª ( , •(2 • &

Impact on Investor’s Income Statement
= − −
( ? &( •% ?ℎ )( • ?( 2 | ) ( & %•) ( & ) ,(

Business Combinations (Acquisition Method)

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

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

{ ? ,, * ( () = %{:9 × > u ,%( 2( ,( ( ))( )

s
si

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

{ ? ,, * ( () = %{:9 × > u ,%( ( ‰

N

Video: https://youtu.be/RgxmPbx4-0o

9&• &( : ‰ * u ,%( #(? u( ,( & %

IFRS
= −
, )) ? )ℎ *( ( *% ? )ℎ *( ( *%

9&•, (2 > u ,%( > u ,%( (• * % ′)

US GAAP
= −
* 2| ,, (• *% 2( ,( ( ))( )

9&• &( : ‰ * u ,%( 9&•, (2

= −
, )) * 2| ,, * 2| ,,

12
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 2 | Employee Compensation - Post-Employment and Share-Based

Share-Based Compensation Accounting

> u ,%( | 2 * 2 (
: &•( ) (p•( )( =
() * •( 2

Treasury Stock Method

a ?((2) &
u( ) (p( ? )( - ¬?
\ ,% (2 = )? $ℎ () ))%(2 &
)ℎ ( )(2 | 2)
)ℎ () = )ℎ () + ? u( ) (p( ? )( −
1u( *( )ℎ ( • ?(
%) 2 * %) 2 * )ℎ ( )(2 | 2)
ℎ( (• * •( 2

1u( *( % (? * •(2
1))%&(2 : )ℎ • ?((2)
= + )ℎ (- )(2

d
• ?((2) & (p( ? )(
? &•( ) (p•( )(

e
Ex
Forecasting Shares Outstanding With Share-Based Awards

= ) ? )ℎ () = ) ? )ℎ ()
%) 2 *, = %) 2 *, $ℎ ( • )
+ #$ª) u() (2 +
( 2 •( 2 (* * •( 2 (p( ? )(2
s
si

$ℎ () ))%(2 &
$ℎ (
+ )(? 2 (), −
(•% ?ℎ )()
?'% ) ), ( ?.
oe

Financial Reporting for Defined Benefit Pension Plans

N

>% 2(2 ) %) = > u ,%( •, ))( ) − a( ) ,*

- 2 * u ,%( =(* * u ,%( 1? % , ( % =( ( )

= +: % )+ −
•, ))( ) •, ))( ) •, ))( ) • 2

- 2 * •( ) =(* * •( ) $( u ?( 9 ( () 1? % , =( ( )
= + + + −
,* ,* ? )) ? ) , ))⁄ * • 2

=(* * •( ) (,2 u() &( * 2(

9 ( () ? ) = ×
,* ? • ( 2

{( ( () =(* * •( ) =(* * u ,%( (,2 u() &(

IFRS Only

? ) ⁄ ? &(
=7 − 8×
* 2( ? • ( 2
,* •, ))( )

13
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 3 | Multinational Operations

Net assets = Total assets – Total liabilities

Net monetary assets = Monetary assets – Monetary liabilities

Current Rate Method

Currency translation adjustment

− Total liabilities of foreign subsidiary in parent currency terms

= Total assets of foreign subsidiary in parent currency terms

− Shareholder capital of foreign subsidiary in parent currency terms

− Other equity items of foreign subsidiary in parent currency terms

Hyperinflationary Environment

d
#() (&( ? - 2 •( 2 • ?( 2(p
IFRS
=
& ( ‰ ))( ) & , , ()

e
Ex - 2 •( 2 • ?( 2(p

#() (&( ? - 2 •( 2 • ?( 2(p

=
& ( ‰ ))( ) & , , () =(* * •( 2 • ?( 2(p

#() (&( ? - 2 •( 2 • ?( 2(p

s

=
? &( ) (&( (&) 1u( *( • ?( 2(p ℎ( •( 2
si
oe

Learning Module 4 | Analysis of Financial Institutions

+ , + ( 1 : && -'% ‰ 122 ,

= +
: • , + ( 1: • , + ( 1: • ,
N

+ , #(*%, ‰ + ,+ ( 1 + ,+ ( 2
= +
: • , : • , : • ,

: && -'% ‰ : && -'% ‰ + ( 1 : • ,

= ≥ 4.5%
+ ( 1# # ) Š( *ℎ (2 1))( )

+( 1 + ,+ ( 1: • ,
= ≥ 6.0%
# # ) Š( *ℎ (2 1))( )

+ ,: • , + , #(*%, ‰: • ,
= ≥ 8.0%
# # ) Š( *ℎ (2 1))( )

14
CFA Level 2 (2024) Formula Sheet – Noesis Exed

g '% 2 ‰ : u( *( @ *ℎ ´% , ‰ g '% 2 1))( )

=
# , g:# -p•(? (2 ? )ℎ % , |)

{%& ( 2 ‰) ℎ ?
| ℎ) 2 ) ()) ,(u(, u ,%&( = g:# × 30
? )ℎ % , |)

(g:# × 30 days.
Number of days that bank can withstand a stress level volume of cash outflows for

{( $ ,( >% 2 * 1u , ,( $ ,( >% 2 *
=
# , {$># #('% (2 $ ,( >% 2 *

Property and Casualty Companies

g )) 2 , )) 23%) &( g )) (p•( )( + g )) 23%) &( (p•( )(

=
(p•( )( {( • (& %&) ( (2

d
ª 2( | * ª 2( | * (p•( )(

e
=
(p•( )( {( • (& %&) | (
Ex
: & (2 g )) 2 , )) 23%) &( ª 2( | *
= +
(p•( )( (p•( )(

\ u 2( 2) • , ?‰ℎ ,2( ) \ u 2( 2) • , ?‰ℎ ,2( ) )ℎ (ℎ ,2( )

s

=
)ℎ (ℎ ,2( ) {( • (& %&) ( (2
si

: & (2 : & (2 \ u 2( 2) • , ?‰ℎ ,2( )

oe

= +
µ¶U·¸ ¹VºV¹·»¹¼ )ℎ (ℎ ,2( )
N

Learning Module 5 | Evaluating Quality of Financial Reports

J-)? ( = – 4.84 + 0.920 \$# + 0.528 šJ9 + 0.404 1´9 + 0.892 $š9
Beneish Model

+ 0.115 \-a9 – 0.172 $š19 + 4.670 1?? % ,) – 0.327 g- 9

#(?( u ,()j ⁄$ ,()j

where:

DSR day sales receivable index =

#(?( u ,()jE ⁄$ ,()jE
šJjE
GMI gross margin index =
šJj
e1 − aa-j + :1j /+1j f
AQI asset quality index =
e1 − aa-jE + :1jE /+1jE f
$ ,()j
SGI sales growth index =
$ ,()jE

15
CFA Level 2 (2024) Formula Sheet – Noesis Exed

\(• (?
DEPI depreciation index =
jE
\(• (? j
$š1j /$ ,()j
SGAI sales, general, and administrative expenses index =
$š1jE /$ ,()jE
9 ? &( ( ( (p 2 ‰ (&) − : )ℎ & •( )
Accruals =
+ , ))( )
g(u( *(j
LEVI leverage index =
g(u( *(jE

Earnings Persistence

- *)jC = ž + Ü - *)j +

- *)jC = ž + Ü : )ℎ , |j + Ü 1?? % ,)j +

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

e d
Ex
s
si
oe
N

16
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 6 | Integration of Financial Statement Analysis Techniques

{( h•( * h•( * h•( *

= −
1))( ) {h1 1))( ) g , ()
+ , : )ℎ 2 + , + ,
=R − S−R − S
1))( ) $ℎ - ( & 9 u() &( ) g , () \(

= , ?(-)ℎ(( - )(2 {h1j − {h1jE

=
?? % ,) {h1j + {h1jE ⁄2

: )ℎ- , |- )(2 {9j − :>hj + :>9j

=
?? % ,) {h1j + {h1jE ⁄2

Learning Module 7 | Financial Statement Modeling

Growth Relative to GDP Growth approach

d
If company’s revenue is forecast to grow at K bps above the nominal GDP growth rate

e
(*%), then company’s revenue growth rate = *% + %
Ex Ý

If company’s revenue is forecast to grow @% faster than the nominal GDP growth rate
(*%), then company’s revenue growth rate = *% × R1 + S
Þ
s
si

Market Growth and Market Share approach

> (? ) (u( %( = J ( )ℎ ( % × 9 2%) ‰ (u( %(

oe

{hag1+
Return on Invested Capital
ROIC =
N

9 u() (2 : • ,

{hag1+ = Net operating profit less adjusted taxes

where:

9 u() (2 : • , = h•( * ))( ) − h•( *, , ()

17
CFA Level 2 (2024) Formula Sheet – Noesis Exed

CORPORATE ISSUERS

Learning Module 1 | Analysis of Dividends and Share Repurchases

Dividend Payout Policies

Target payout adjustment model (Lintner model)

-p•(? (2 g ) -p•(? (2 + *( • ‰ % g ) 123%) &(

= +7 × − 8×
2 u 2( 2 2 u 2( 2 - *) 2 u 2( 2 ?

1
where:
123%) &( ? =
{%& ( ‰( ) 23%) &( ( •, ?(

\ u 2( 2 :% (
Constant dividend payout ratio policy

d
\ u 2( 2 = ×
• ‰ % ( *)

e
Video: https://youtu.be/hhcvNiTpZX4
Ex
EPS and BVPS After Share Repurchase

- *) ( ( %‰ ? −1 ( p? ) % 2)
s

-a$ ( %‰ ? =
$ℎ () % ) 2 * ( %‰ ?
si
oe

Video: https://youtu.be/Pd0-QQF-VhQ

= ,%( ( ( %‰ ? − ,%( )ℎ ( %‰ ?
= a$ ( %‰ ? =
$ℎ () % ) 2 * ( %‰ ?
N

Analysis of Dividend Safety

\ u 2( 2)
\ u 2( 2 • ‰ % =
{( 9 ? &(

{( 9 ? &(
\ u 2( 2 ? u( *( =
\ u 2( 2)

>:>-
>:>- ? u( *( =
\ u 2( 2) + $ℎ ( (•% ?ℎ )()

18
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 3 | Cost of Capital: Advanced Topics

Š1:: = |… 1− + |q + |X
Weighted average cost of capital
… q X

|… = Weight of debt in capital structure

where:

|q = Weight of preferred equity in capital structure

|X = Weight of common equity in capital structure
… = Pre-tax cost of debt
q = Cost of preferred equity
X = Cost of common equity

Cost of debt, … = ‘ + : (2 )• ( 2

Cost of equity, X = ‘ + -#a + 9#a

e d
=( ?ℎ& 2(p #) ((
where:
-#a = Equity risk premium = −
(% (
Ex
9#a = Idiosyncratic risk premium

a ()( ,%(
Leases
a ()( ,%(
s

> ,%( g()) ) \ (?

á
+ #() 2% , ,%( = +
g( )( a ‰&( ) g( )(2 1))( 9 ,: ) )
si

g())
oe

Equity Risk Premium

1u( *( ( ?ℎ& 1u( *( )

N

Historical Approach (Ex-Post)

-#a = −
2(p ( % (( (

\
Gordon Growth model
-#a = +*− ‘

19
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Grinold-Kroner Model

-#a = e\ + Δ a⁄- + + * + Δ$f − ‘

\ = Dividend yield of market index

where:

Δ a⁄- = Expected growth rate in P/E

Câãäåæçèéêæë ìíîï
= Expected inflation = Câãäåðñò
−1
* = Expected growth rate in real earnings per share
Δ$ = Expected change in shares outstanding

Cost of Equity

\
Gordon Growth Model
= +*
X
a

e d
Two-Stage DDM
!
\j a!
a = +
Ex
1+ X j 1+ X !
"

X = … + # ) • (& %&
Bond Yield Plus Risk Premium Approach (BYPRP)
s
si

X = + Ü × -#a
Capital Asset Pricing Model (CAPM)
oe

Fama-French model
N

= + Ü -#a + Ü $J= + Üó @Jg

Three-factor model
X ‘

= + Ü -#a + Ü $J= + Üó @Jg + Üô #JŠ + Üõ :J1

Five-factor model
X ‘

$J= = Size premium

where:

@Jg = Value premium

#JŠ = Profitability premium
:J1 = Investment premium

20
CFA Level 2 (2024) Formula Sheet – Noesis Exed

= + ÜqXX‚ -#a + $a + 9a + $:#a

Expanded CAPM
X ‘

$a = Size premium (for smaller, privately held companies)

where:

9a = Industry risk premium

$:#a = Company-specific risk premium

= + -#a + $a + $:#a
Build-Up Approach
X ‘

-#a
Country Spread Model
-#a = +ö×: % ‰ ) • (& %&
2(u(, •(2 & (

ö = Level of exposure of the company in the local country

where:

d
: % ‰ ) • (& %& = $ u( ( * ‰ (,2 )• ( 2

e
(,2 (&( * * & ( 2)
$ u( ( * ‰ (,2 (,2 2(u(, •(2 & (
Ex
= 2( & (2 ℎ( ?% ( ?‰ −
)• ( 2 * u( &( 2)
ℎ( 2(u(, •(2 & (
s

v÷Dø jù
Aswath Damodaran’s CRP
: % ‰ ) • (& %& = $ u( ( * ‰ (,2 )• ( 2 ×
vO•!…
si
oe

v÷Dø jù = Volatility of the local country’s equity market

where:

vO•!… = Volatility of the local country’s bond market

N

- = + Üú û-. üB 0 − ‘ý + ÜŽ û- − ‘ý
International CAPM
X ‘ Ž

-. üB 0 − ‘ = Risk premium of a global index

where:

Ž = Wealth-weighted foreign currency index return

21
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 4 | Corporate Restructuring

Evaluating Materiality Based on Size

,%( ) ?
For Acquisition/Divestiture:

- ( • )( u ,%( ?'% * ? &• ‰

: ) ) u *)
For Cost Restructuring:

$ ,()

\a − $a
Premium Paid Analysis
+ ( u( • (& %&, a#J =
$a

d
\a = Deal price per share of the target company
where:

$a = Unaffected stock price of the target company (i.e., pre-announcement)

e
Ex
s
si
oe
N

22
CFA Level 2 (2024) Formula Sheet – Noesis Exed

EQUITY VALUATION

Learning Module 1 | Equity Valuation Applications and Processes

VE – P = (V – P) + (VE – V)

÷ = Estimated intrinsic value

where:

a = Market price
= Intrinsic value

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

Learning Module 2 | Discounted Dividend Valuation

Discounted Dividend Valuation

!
:>j

d
=
1+ j

e
j" Ex
\ \ \! a!
= + + ⋯+ +
1+ 1+ 1+ ! 1+ !
s

\ \ 1+*
Gordon Growth Model
= =
−* −*
si
oe

\
Fixed-rate perpetual preferred stock
=
N

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

-
with zero-growth opportunities (PVGO)
= + a šh

a 1 a šh
= = +
- - -

\
If dividend and earnings growth rate is constant,
= +*
a

23
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Two-Stage Dividend Discount Model

!
\ 1 + *‡ j
\ 1 + *‡ ! 1 + *þ
= +
1+ j 1 + ! − *þ
j"

Video: https://youtu.be/7vXWsTKiSPE

\ 1 + *þ + \ @ * − *þ
The H-Model

=
− *þ

@ = half-life in years of the high-growth period

where:

* = Short-term growth-rate
*þ = Long-term growth rate

d
Video: https://youtu.be/IAMFZXSPKOY

e
PRAT model Ex
Sustainable growth rate, * = × #h-

Video: https://youtu.be/MnfRRRhuGpA
s

{9 − \ u 2( 2) {9 $ ,() +1
*= × × ×
{9 $ ,() +1 +-
si
oe

Learning Module 3 | Free Cash Flow Valuation

Free Cash Flow to the Firm (FCFF) Valuation Approach

N

>:>>j
> & ,%( =
1 + Š1::
If non-operating
j
j"
assets = 0

Equity Value = Firm Value – Market Value of Debt

FCFE Valuation Approach

>:>-j
-'% ‰ ,%( =
1+ j
j"

24
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Single-Stage (Constant Growth) FCFF and FCFE Model

>:>> >:>> 1 + *
FCFF Valuation Approach
> & ,%( = =
Š1:: − * Š1:: − *

>:>- >:>- 1 + *
FCFE Valuation Approach
-'% ‰ ,%( = =
−* −*

Free cash flow to the Firm, FCFF

FCFF = NI + NCC + Int(1 – Tax Rate) – FCInv – WCInv

= CFO + Int(1 – Tax Rate) – FCInv
= EBIT(1 – Tax Rate) + Dep – FCInv – WCInv

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

NI = Net income available to common shareholders

e
where: Ex
NCC = Net noncash charges (e.g. depreciation)
Int = Interest expense
FCInv = Fixed capital investments = Maintenance Capex + Growth Capex
= Δš )) aa- = Δ{( aa- + \(• (?
s
si

WCInv = Investment in working capital

oe

Free cash flow to the Equity, FCFE

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

= CFO – FCInv + Net borrowing
N

where:
Net borrowing = Debt issued – Debt repaid

Video: https://youtu.be/rtIvIy6Fl0A

If (FCInv – Dep) and WCInv funded using Debt (based on debt ratio):

FCFE = NI + Dep – FCInv – WCInv + Net borrowing

where:

\(
Net borrowing = DR(FCInv – Dep) + DR(WCInv)
\# = \( =
1))( )

25
CFA Level 2 (2024) Formula Sheet – Noesis Exed

If company issues preferred shares:

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

Two-Stage Free Cash Flow Models

!
>:>>j >:>>!C 1
> & u ,%( = + ] ^
1 + Š1:: j Š1:: − * 1 + Š1:: !
j"

!
>:>-j >:>-!C 1
-'% ‰ u ,%( = + ] ^
1+ j −* 1+ !
j"

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

(PV of FCFF)

Learning Module 4 | Market-Based Valuation Price and Enterprise Value Multiples

d
Enterprise value, EV = Market value of common stock

e
+ Market value of preferred equity
+ Market value of debt + Minority interest
Ex
– Cash and Short-term investments

Actual Justified
J ( • ?( •( )ℎ ( 1− 1+*
s

-a$ u( • (u %) 12 & ℎ) −*
Trailing P/E
si

J ( • ?( •( )ℎ ( 1−
> (? ) (2 -a$ u( (p 12 & ℎ) −*
oe

Leading P/E

#h- − *
N

−*
J ( • ?( •( )ℎ (
= u ,%( •( )ℎ (
P/B
Video:
https://youtu.be/c0vmCUtDpZs

- 1− 1+*
= ×
$ $ −*

J ( • ?( •( )ℎ (
$ ,() •( )ℎ (
- 1−
P/S or

= ×
$ $ −*

26
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Actual Justified
4×J ) (?( '% ( ,‰ 2 u 2( 2 −*
J ( • ?( •( )ℎ ( 1+*
Trailing D/P

> (? ) 2 u 2( 2) u( ℎ( (p ‰(
−*
J ( • ?( •( )ℎ (
Leading D/P

-a$ −*
a ?( •( )ℎ ( 1− 1+*
Earnings yield

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

Normalized Earnings

Method 1: Average EPS Approach

!
1
Normalized EPS = -a$
"

e d
Method 2: Average ROE Approach
!
1
Normalized EPS =
Ex
#h- × :% ( = u ,%( •( )ℎ (
"

a/-
s
Price-to-Earnings Growth (PEG) Ratio
a-š =
* %
si
oe

Momentum Indicators

Earnings surprise = Reported EPS – Expected EPS

N

#(• (2 -a$ − -p•(? (2 -a$

µ ·¹ ·µ¸»V» ¼ ¼ ¸o¸V¼· =
v 1 ,‰) (? ) -a$

Standardized unexpected earnings (SUE) =

÷G‚! !ü‡ ø‚q‚ ‡X
÷G‚! !ü‡ ø‚q‚ ‡X

1
Portfolio P/E
Š( *ℎ (2 ℎ & ? &( = |
∑!"

| = Weight of stock i in portfolio

where:

= P/E of stock i

27
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 5 | Residual Income Valuation

- 1j = -=9+j 1 − + − Š1:: × 9 u() (2 : • ,jE

Economic Value Added (EVA)

J 1j = J ( u ,%( > &j − 9 u() (2 : • ,j

Market Value Added (MVA)

#9j = -j − × =jE = #h- − × =jE

Residual Income, RI

#9 #9 #9ó
Residual Income Model
== +] + + +⋯^
1+ 1+ 1+ ó

Video: https://youtu.be/O0KTBkEtP9M

d
#h- − × = #9
Single-stage residual income valuation model

== + == +
−* −*

e
Ex
Video: https://youtu.be/82GJu5umrB0

J ( u ,%( 2( + J ( u ,%( ('% ‰

Tobin’s Q
+ )´ =
s
á
#(•, ?(&( ? ) , ))( )
si
oe

Continuing Residual Income

ãE
#9j #9ã
== + + 0≤ ≤1
1+ j 1+ − 1+ ãE
j"
N

= Persistence factor

If RI declines to Long-run level in mature industry, with premium over book value
ã
#9j aã − =ã
== + +
1+ j 1+ ã
j"

Video: https://youtu.be/vhRW3q70E0w

=j = =jE + -j − \ uj
Clean surplus relationship:

28
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 6 | Private Company Valuation

Capitalized Cash Flow Method (CCM)

>:>> 1 + * -'% ‰ > & J ( u ,%(

> & u ,%( = = −
Š1:: − * u ,%( u ,%( \(
→

>:>- 1 + *
-'% ‰ u ,%( =
−*

Excess Earnings Method (EEM)

- *) ('% (2 • u 2(
·¼¼ { & , •(2
= − ℎ( ('% (2 ( (%
·µ¸»V» ¼ ( *)
¸ V» µoVUµ, 2 ¶V ·¹ µ¼¼·U¼

-p?()) - *)
,%( ℎ( * ,( ))( ) =

d
−*

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

Video: https://youtu.be/137ga1xgAbA
s
Control Premium

-'% ‰ u ,%( -'% ‰ u ,%(

si

= × 1+: , • (& %&

| ℎ? , • (& %& | ℎ % ? , • (& %&
oe

\(
123%) (2 ? , • (& %& = : , • (& %& × 71 + 8
1))( )
N

Discount for Lack of Control and Marketability

1
Discount for Lack of Control (DLOC)
\gh: = 1 −
1+: , • (& %&

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

,%( 1+J •
\ghJ =
$ℎ ( • ?(

29
CFA Level 2 (2024) Formula Sheet – Noesis Exed

FIXED INCOME

Learning Module 1 | The Term Structure and Interest Rate Dynamics

\>O = \>• × >•,OE•

Forward Pricing Model

1
where:
\>O =
1 + •O O

1
>•,OE• = OE•
.1 + •,OE• 0

Forward Rate Model

OE•
1 + •O O
= 1 + •• •
.1 + •,OE• 0

e d
•O = Spot rate for period =
where: Ex
•,OE• = = − 1 forward rate that starts in period 1

Calculating spot rate from one-period forward rates

ڋ
•ã = û 1 + • .1 + 0.1 + 0 … .1 + 0ý −1
s
, , ãE ,
si

Boostrapping Spot Rates From Par Rates

oe

Video: https://youtu.be/-FnweFO172Q
N

1 − \>ã 1 − \ )? % > ? g ) a ‰&(

Fixed swap rate
)ã = =
∑ãj" \>j $%& \ )? % > ? )

Swap spread = YTM of swap rate – YTM of government bond (same maturity)

TED spread = LIBOR – YTM of T-bill (same maturity)

LIBOR-OIS spread = LIBOR – OIS Fixed rate

For Parallel shifts in yield curve:

%∆a = −J 2\% × ∆ +J ∆a = −J 2\% × ∆ +J × a

%∆a = −- \% × ∆:% u( ∆a = −- \% × ∆:% u( × a

30
CFA Level 2 (2024) Formula Sheet – Noesis Exed

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

%∆a = −œ(‰# (\% × ∆œ(‰ # (

Learning Module 2 | The Arbitrage-Free Valuation Framework

: : > +:
Arbitrage-free Value of Bond
= + + ⋯+
1+• 1+• 1 + •! !

•! = Spot rate for period n

where:

0.5 × + 0.5 × +:
Backward Induction Valuation Methodology

= 2 u ,%( ‰ 2( =
Þ þ
1+

d
Þ = bond’s value if the higher forward rate is realized one year hence
where:

e
þ = bond’s value if the lower forward rate is realized one year hence
Ex
: = coupon payment that is not dependent on interest rates

Video (Backward Induction Valuation): https://youtu.be/DhAVQ3hIXlQ

s
si

Video (Backward Induction with Financial Calculator): https://youtu.be/FycX2UwJxCM

oe

Video (Pathwise Valuation): https://youtu.be/3oM-220oi7o

Binomial Interest Rate Tree

N

,Þ = ,þ (

,ÞÞ = ,þþ (
ô
,Þþ = ,þþ (

ó,ÞÞÞ = ó,þþþ ( ó,ÞÞþ = ó,þþþ (

ô
ó,þþÞ = ó,þþþ (

31
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Equilibrium Term Structure Models

Cox-Ingersoll-Ross (CIR) Model

2 = ¨− j 2 + v Y j 2•

2 = ¨− 2 + v2•
Vasicek Model
j

= Speed of reversion (> 0)

where:

¨ = Long-run interest rate

v = Interest rate volatility

Arbitrage Free Models

2 = ¨j 2 + v2•j
Ho-Lee Model

d
j

2 ln j = ¨j 2 + v2•j

e
Kalotay-Williams-Fabozzi (KWF) Model
Ex
¨j = Time-dependent drift term
where:
s
si

Learning Module 3 | Valuation and Analysis - Bonds with Embedded Options

oe

Callable and Putable Bonds

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

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

Video (Valuing a callable bond): https://youtu.be/lWLSodiqZaM

Video (Valuing a putable bond): https://youtu.be/qmUnAtpXIAg

aE − a C
- (? u( 2% =
2 × Δ:% u( × a

a + a C −2×a
- (? u( ? u(p ‰ =
E
a × Δ:% u(

32
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Capped and Floored Floaters

Value of capped floater = Value of straight floater – Value of cap

Value of floored floater = Value of straight floater + Value of floor

Video (Valuing a capped floater): https://youtu.be/d4LNMdXV9vU

Video (Valuing a floored floater): https://youtu.be/YJZU0THHBNE

Convertible Bonds

: u( ) ª 2( ,‰ * : u( )
= ×
u ,%( )ℎ ( • ?(

V»V ºµ · : u( ) ,%( % 2( ,‰ *
= µ ] , ^
? u( ,( 2 u ,%( $ *ℎ 2

d
J ( ? u( ) : u( ,( 2 • ?(

e
=
• ?( : u( )
Ex
J ( ? u( ) J ( ? u( ) ª 2( ,‰ * )ℎ (
= −
• (& %& •( )ℎ ( • ?( • ?(

J ( ? u( ) J ( ? u( ) • (& %& •( )ℎ (
s

=
• (& %& ª 2( ,‰ * )ℎ ( • ?(
si

a (& %& u( : u( ,( 2 • ?(
oe

= −1
$ *ℎ u ,%( $ *ℎ u ,%(
N

,%( ? ,,
Convertible Bond (With No Additional Options)
,%( ,%(
= + •
? u( ,( 2 ) *ℎ 2
))%( á ) ) ?

,%( ? ,, ,%(
Callable Convertible Bond
,%( ,%(
= + • − ))%( ? ,,
? u( ,( 2 ) *ℎ 2
))%( á ) ) ? •

,%( ? ,, ,%(
Putable Convertible Bond
,%( ,%(
= + • + u() •%
? u( ,( 2 ) *ℎ 2
))%( ) ) ?
á •

33
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 4 | Credit Analysis Models

š-)• ( 2 = +J : • ( 2 − +J š u( &( 2

g )) * u( -p•(? (2 #(? u( ‰
= × R1 − S
2( %, (p• )% ( (

g )) #(? u( ‰
=1−
)(u( ‰ (

Expected Loss = Probability of Default × Loss Given Default

> u ,%( > u ,%( 2 : (2 ,%

= −
? (2 ) ‰ 2 ))%& * 2( %, 123%) &(

!
-gj ah\ × gš\
: (2 u ,% 23%) &( , : 1= =
1+ j j 1+

d
j" =1

e
-gj = Expected loss of bond at time t
where:

ah\j = Probability of default of bond at time t

Ex
gš\j = Loss given default at time t = -p•(? (2 -p• )% (j − #(? u( ‰j
j = Risk-free rate at time t
= Bond’s remaining tenor
s

-gj
a (p•(? (2 , )) •( 2 =
1+ j j
si

ah\j = 1 − @ • 2 ( jE
×@ • 2 (
oe

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

N

Video (Probability of Default): https://youtu.be/e7K4x48Eg4U

Video (Valuing a Credit Risky Bond – Zero Interest Rate Volatility):

https://youtu.be/2I9bgu-o7aI

Video (YTM of Corporate Bonds – Default and Non-Default):

https://youtu.be/K253Y7c2Yto

Expected percentage price change of a corporate bond

a , ‰ ? (2 & * × %∆a

%∆a = −J 2\% × ∆? (2 )• ( 2
where:

34
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Structural Model

1j = \ , + + $j

In terms of… Call options Put options

Equity - + = J pe1 + − œ, 0f - + = 1 + − œ + J peœ − 1 + , 0f

Debt \ + = 1 + − J pe1 + − œ, 0f \ + = œ − J peœ − 1 + , 0f

$j = -'% ‰ u ,%( &(

where:

1ã = 1))( u ,%( &( +

œ = > ?( u ,%( 2(

Learning Module 5 | Credit Default Swaps

d
CDS payout amount = Payout ratio × Notional
= (1 – Recovery rate of CTD bond) × Notional

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

ª• a a
= −
• (& %& : (2 $• ( 2 > p(2 : %•
s

: (2 > p(2
≈7 − 8 × :\$ \%
si

$• ( 2 : %•
oe

a ?( :\$ •( 100 , = 100 − ª• • (& %&

% :ℎ *( :ℎ *(
= × \%
N

:\$ • ?( )• ( 2 •)

35
CFA Level 2 (2024) Formula Sheet – Noesis Exed

DERIVATIVES

Learning Module 1 | Pricing and Valuation of Forward Commitments

Forward Contracts

> =$ 1+ ã
Forward Pricing:

> = $ + :: − := 1+ ã

> = $ (‚ ã

> =$ ( ‚ CŽŽEŽO ã

$ = Current spot price

where:

d
> = Forward price (set today)
= Annually compounded risk-free rate
= Continuously compounded risk-free rate

e
Ex
:: = PV of Carry cost
:= = PV of carry benefits
:: = Continuously compounded cost of carry
:= = Continuously compounded carry benefit
s
si

=0
Forward Valuation (Long Position):
oe

>j − > >

= = $j −
j
1+ ãEj 1+ ãEj
N

ã = $ã − >

36
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Forward Rate Agreement (FRA)

{ ,egB − >#1 f
» >#1 • ‰ · oV¸µUV » >#1 =
B
1 + \B B

1 + gã 1
>#1 = 7 − 18 7 8
ã
1 + gw w B

Valuation at time = * (prior to FRA expiration):

{ ,.>#1ü − >#1 0
,%( g * >#1 * =
B
1 + \ãEü ãEü

\B = Discount rate for m periods at t = h

where:

ℎ = FRA tenor
& = Tenor of the underlying rate
+ = ℎ + & = Maturity of underlying instrument

e d
Video (Pricing an FRA): https://youtu.be/uBmAt_z9f3Y
Ex
Video (Valuing an FRA): https://youtu.be/AYKRVdaYvxY

Fixed Income Forwards and Futures

s

´% (2 % % () : u( )
Pricing:
> = ×
si

• ?( ?
= > = + 19 − 19ã − > :9
oe

j = a ()( u ,%( 2 ( ( ?( | 2 • ?()

Valuation for fixed income forward contracts:
N

= a e>j − > f

j = Price change since previous day’s settlement

Valuation for fixed income futures contracts:

= = Quoted bond price

where:

{%& ( ?? %(2 2 ‰) ) ?( , ) ? %• • ‰&( 1 % , ? %•

19 = ×
+ , 2 ‰) 2% * ℎ( ? %• • ‰&( •( 2 : %• ('%( ?‰

37
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Interest Rate Swaps (IRS)

1−a !
>$ =
∑!" a

1
a =
\ ‰) J % ‰
1 + $• ( R 360 S

Pay-fixed, receive-floating IRS

!

,%( $| • = { , × >$j − I a
"

Receive-fixed, pay-floating IRS

!

,%( $| • = { ,× I − >$j a
"

e d
Video (Pricing an Interest Rate Swap) : https://youtu.be/0QvtKZutr5E
Ex
Video (Valuing an Interest Rate Swap): https://youtu.be/_A2a909etvg

Currency Swap
s

1 − a !,G
Pricing for fixed leg of currency swap in currency
>$G = !
si

∑ " a ,G
oe

Ž = { ,G × − $j × { ,L ×
Value of a fixed-for-fixed currency swap
G L
N

G = >$G a ,G +a !,G ×a G = ,%( ?% ( ?‰ ,(* (?( u(

"
!

L = >$L a ,L +a !,L ×a L = ,%( ?% ( ?‰ ,(* • ‰

"
$j = Spot exchange rate at time (quoted as ⁄ )

Video (Pricing a currency swap): https://youtu.be/XZlxcVByc00

Video (Valuing a currency swap): https://youtu.be/3h4mElS48aA

38
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Equity Swap

$j
Value of equity swap (receive fixed-rate, pay equity return)

÷ ,j = : − ×{ ,−a j a −{ ,
$jE

$j
,%( -'% ‰ g(* = ×{ ,
$jE

Cash flow for equity leg = { , × a( 2 ? ('% ‰ ( %

: = Value at time of a fixed-rate bond initiated with coupon : at Time 0

where:

$j = Current equity index level

$jE = Equity index level at last reset date

d
Learning Module 2 | Valuation of Contingent Claims

e
?C − ?E
Hedge Ratio

ℎ = ≥0
Ex
Gƒƒ
$C − $E

•C − •E
ℎqøj = ≤0
$C − $E
s
si

No-arbitrage Approach:
oe

?=ℎ Gƒƒ $ +a −ℎ Gƒƒ $

C
+ ?C = ℎ Gƒƒ $ +a −ℎ Gƒƒ $
E
+ ?E

• = ℎqøj $ + a .−ℎqøj $ C + •C 0 = ℎqøj $ + a .−ℎqøj $ E + •E 0

N

Expectations Approach:

1+ −2
™=
%−2

% = Up factor
where:

2 = Down factor
= Risk-free rate

39
CFA Level 2 (2024) Formula Sheet – Noesis Exed

™? C + 1 − ™ ? E
One-period Binomial Model

?=
1+

™•C + 1 − ™ •E
•=
1+

™ = Risk-neutral probability of an up-move

where:

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

Video (Valuing interest rate options): https://youtu.be/X4R8j_cf8SA

Two-period Binomial Model:

d
™ ? CC + 2™ 1 − ™ ? CE + 1 − ™ ? EE
?=
1+

e
Ex
™ •CC + 2™ 1 − ™ •CE + 1 − ™ •EE
•=
1+
s
For 2-period American-styled call option with dividend in t = 1:
si

$C = % × $ − a 2 u 2( 2) ) (( (
oe

$E = 2 × $ − a 2 u 2( 2) ) (( (
N

Video: https://youtu.be/U_XkIZjJIAU

40
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Black-Scholes Option Pricing Model

? = ${ 2 − ( E‚ã { 2

• = ( E‚ã { −2 − ${ −2

$ 1
ln R S + R + v S +
2 = 2
v √+

2 = 2 − v √+

Put-call parity: • + $ = ? + ( E‚ã

Hedge ratio for calls = { 2

Probability that the call option expires in the money = { 2 = a $ã >
•

Hedge ratio for puts = { 2 − 1 = −{ −2

•

d
Probability that the put option expires in the money = 1 − { 2
•

a $ã < = { −2
•

e
Ex
? = $( E ã { 2 − ( E‚ã { 2
BSM model with carry benefits

• = ( E‚ã { −2 − $( E ã { −2
s

$ 1
si

ln R S + R − ! + 2 v S +
2 =
v √+
oe

2 = 2 − v √+
N

Put-call parity: • + $( E ã
= ? + ( E‚ã

41
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Black Option Valuation Model

European Options on Futures

? = ( E‚ã e> + { 2 − { 2 f

• = ( E‚ã { −2 − $( E ã { −2

> + 1
ln ] ^+ 2v +
2 =
v √+

2 = 2 − v √+

Put-call parity: ? = ( E‚ã e> + − f + •

d
Interest Rate Options

? = 1a ( E‚.jM"lCj# 0 û>#1.0, , 2 − # ( E‚ã { 2 ý

e
KE B 0{
Ex
• = 1a ( E‚.jM"l Cj#0 û# ( E‚ã { −2 − >#1.0, KE , B 0{ −2 ý

>#1.0, , B0 1
ln 4 6 + R2 v S
KE
s
KE
2 =
v Y KE
si
oe

2 = 2 − v Y KE
N

Payer Swaption
!

a1 $% = 1a × e# { 2 −# { 2 f× a K 1
K"

Receiver Swaption
!

#-: $% = 1a × e# { −2 −# { −2 f × a K 1
K"

# 1
ln R + v +
# S R2 S
2 =
v √+

2 = 2 − v √+

42
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Video (Interest Rate Options & Swaptions Equivalences:

https://youtu.be/uZQO50sEzso

Optimal Number of Hedging Units (for Delta Hedging)

a , 2(,
{Þ = −
\(, Þ

Video: https://youtu.be/v8RcvkQKFpw

Option Greeks

\(, Gƒƒ = ( E&ã { 2

\(, qøj = −( E&ã { −2

d
© = Continuously compounded dividend yield
where:

( E&ã

e
Ex
š && Gƒƒ = š && qøj = { 2
$v √+

1
? = ? + \(, × '$ + š && × '$
2
s
Gƒƒ Gƒƒ
si

1
• = • + \(, × '$ + š && × '$
qøj
2 qøj
oe
N

43
CFA Level 2 (2024) Formula Sheet – Noesis Exed

ALTERNATIVE INVESTMENTS

Learning Module 1 | Introduction to Commodities and Commodity Derivatives

>% % () $• • ?( $ *( : u( ( ?(
= + −
• ?( •ℎ‰) ? , ? && 2 ‰ ? )) ‰ (,2

{( ( & g *( ( &
: ,( 2
= % % () ? ? − % % () ? ?
)• ( 2
?, ) * • ?( ?, ) * • ?(

:% ( • ?( − a (u %) • ?(
a ?( ( % =
a (u %) • ?(

{( ( & g *( ( &
¬ % % () ? ? − % % () ? ? -
a( ?( *( ℎ( • )
?, ) * • ?( ?, ) * • ?(
# ,, ( % = × ℎ( % % () ? ?
{( ( &

d
( * ,,(2
% % () ? ?

e
?, ) * • ?( Ex
+ , a ?( # ,, : ,, ( , #( , ? *
= + + +
(% (% (% (% (% 2(p ,‰
s
Learning Module 2 | Overview of Types of Real Estate Investment
si

Net and Gross Leases

oe

{( ( =š )) ( − h•( * (p•( )()

N

Retail Rent

#( •( J &%& ( #(u( %( •( { % , ( •
= + $ℎ (% × −
)'% ( •( )'% ( )'% ( •( )'% (

Appraisal-based index

: • , - 2 * =(* *
{h9 − +R − S
-p•( 2 % () & ( u ,%( & ( u ,%(
#( % =
=(* *& ( u ,%(

44
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 3 | Investments in Real Estate Through Publicly Traded Securities

,%( ,%( + , 2(
Net Asset Value Approach
+ −
•( * () ( ℎ( ))( ) 2, , ()
{1 •( )ℎ (=
{%& ( )ℎ () % ) 2 *

{h9
If valuation of operating real estate is not provided:
,%( •( * () (=
: • (

Video: https://youtu.be/WncC3BZmfs8

š )) ( , -) & (2 u ? ?‰ 2 h•( *
{h9 = − −
(u( %( ? ,,(? ) , )) (p•( )()

d
Relative Value Approach

e
\(• (? š ) ) ,( g )) ) ,(
Funds from Operations:
>>h = {( ? &( + − +
2 & • • •( ‰ • •( ‰
Ex
{ ? )ℎ #(?% * ? • , (p•( 2 % (
Adjusted Funds from Operations:
1>>h = >>h − −
( 2 ,( ) * ? ) )
s
si

Two-Stage Dividend Discount Model

oe

,%( #-9+ )ℎ (=a 2 u 2( 2) + a ( & , u ,%(

N

45
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 4 | Hedge Fund Strategies

Equity Market Neutral Pairs Trading

1& % $ℎ a ) =( % 2( u ,%(2 ) ? × 1& % 9 u() (2

=−
hu( u ,%(2 $ ? =( u( u ,%(2 ) ?

Merger Arbitrage Strategy

For a stock-for-stock deal:

a ‰ &( *( ) )%??()) %, = {• × a• − {ã × aã

{• = Number of acquirer’s shares to short sell

where:

a• = Share price of acquirer post announcement

{ã = Number of target’s shares to buy

d
aã = Share price of target post announcement

e
Conditional Factor Risk Model
Ex
# ,j = ž + Ü , > ? 1 j+Ü, > ? 2 j + ⋯ + Ü ,Ý > ? œ j+
+\j Ü , > ? 1 j + \j Ü , > ? 2 j + ⋯ + \j Ü ,Ý > ? œ j + ( ,j
s
si

# ,j = Return of hedge fund in period

where:

Ü ,Ý > ? œ j = Exposure to risk factor œ for hedge fund in period during

oe

\j Ü ,Ý > ? œ j = Incremental exposure to risk factor œ for hedge fund in period

normal times
N

\j = Dummy variable that equals 1 during financial crisis periods (0 otherwise)

during financial crisis periods

ž = Intercept for hedge fund

( ,j = Random error with zero mean and standard deviation v

46
CFA Level 2 (2024) Formula Sheet – Noesis Exed

PORTFOLIO MANAGEMENT

VOLUME 5
Learning Module 1 | Exchange-Traded Funds: Mechanics and Applications

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

-+> • ?( − {1 •( )ℎ (
{1 •( )ℎ (

Intraday ETF premium or discount (%)

-+> • ?( − 9 2 ? (2 {1 •( )ℎ (
9 2 ? (2 {1 •( )ℎ (

@ ,2 * •( 2? ) % =# % 2 • 2( ? ) % +J *(&( (( %

d
# % 2 • 2( ? ) % = h ( | ‰ ? && )) % × 2 + = 2 ) )• ( 2 %

e
Learning Module 2: Using Multifactor Models
Ex
Arbitrage Pricing Theory (APT)

- #q = # + ö Üq, + ⋯ + öÝ Üq,Ý
s
si

- #q = the expected return to portfolio p

where:
oe

# = the risk-free rate

Üq,K = the sensitivity of the portfolio to factor j
öK = the expected reward for bearing the risk of factor j
N

œ = the number of factors

Carhart Four-Factor Model

-.#q 0 = # + Üq, #J#> + Üq, $J= + Üq,ó @Jg + Üq,ô ŠJg

#J#> = Return on a value-weighted equity index minus one-month T-bill rate

where:

SMB = small minus big; average return on three small-cap portfolios minus the
average return on three large-cap portfolios
HML = high minus low; average return on two high book-to-market portfolios minus
average return on two low book-to-market portfolios
WML = winners minus losers, a momentum factor; return on a portfolio of past year’s
winners minus return on a portfolio of past year’s losers.

47
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Macroeconomic Factor Model

# = + > + > +⋯+ Ý >Ý +

> = the surprise in the factor k

where:

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

= Expected return on the portfolio

Value of attribute for asset − Average value of attribute

Fundamental Factor Model
=
v Values of attribute

Return Attribution

1? u( ( % = #P − #O
Ý
a , =( ?ℎ& > ? $(?% ‰

d
= 47 8 −7 8 6 ×R S +
)( ) u ‰ )( ) u ‰ (% )(,(?

e
" Ex
+ ? *( , +- = ) #P − #O

#P − #O
9 & , 9# =
) #P − #O
s
si

Active risk squared = Active factor risk + Active specific risk

oe
N

48
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 3 | Measuring and Managing Market Risk

Parametric VaR (Using Normal Distribution)

a ,
,%( #) , # = −û-.#q 0 − • × vq ý ×
,%(

-.#q 0 = Portfolio expected return

where:

vq = Portfolio standard deviation

Two-asset portfolio:

-.#q 0 = | - # +| - #

vq = | v + | v + 2| | s , v v

e d
#…G ƒù × 250 2 * 2 ‰)
Scaling from daily returns to annual returns (Assuming 1 year = 250 trading days):
Ex
Scaling from daily standard deviation to annual standard deviaton:
v…G ƒù × √250

9 ? (&( , # 9 # = # ( ?ℎ *( − # ( ( ?ℎ *(
s
si

ΔB Δ‰ 1 Δy
Percentage change in bond price:
oe

≈ −\% + : u(p ‰ 7 8
= 1+‰ 2 1+‰

New call price: ? + Δ? ≈ ? + Delta Δ$ + Gamma Δ$ + (* Δv

N

New put price: • + Δ• ≈ • + Deltaq Δ$ + Gammaq Δ$ + (* q Δv

Learning Module 4 | Backtesting and Simulation

No formula.

49
CFA Level 2 (2024) Formula Sheet – Noesis Exed

VOLUME 6
Learning Module 1 | Economics and Investment Markets

1
One-period real-risk free rate:
,j, = −1
-j û&
) j, ý

-j û&
) j, ý = Inter-temporal rate of substitution
where:

-ûa*jC ,‡E ý
a ?( ) ‰ ))( = + ? uj ûa*jC ,&
) j, ý
1 + ,j, ,‡E

where:
= risk neutral present value
÷ûP*+,l,é"l ý
Cƒ+,l
? uj ûa*jC ,&
) j, ý = covariance between investor’s inter-temporal rate of substitution
,‡E

d
and the random future price the investment at t + 1, based on the

e
) = time to maturity of investment
information available to investor today.
Ex
Default-free nominal coupon-paying bond

:>jC‡
aj =
%
s

‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ ‡
si
oe

,j,‡ = Real-risk free rate

where:

¨j,‡ = Expected inflation rate

™j,‡ = Uncertainty in future inflation rate
N

¨j,‡ + ™j,‡ = Breakeven rate of inflaton

Short-dated nominal zero-coupon government bonds (e.g., T-bills)

:>jC‡
aj =
1 + ,j,‡ + ¨j,‡ ‡

50
CFA Level 2 (2024) Formula Sheet – Noesis Exed

• = 9j + ™j + 0.5 ™j − ™j∗ + 0.5 −

Taylor Rule
∗
j j j

• j = policy rate at time t

where:

9j = level of real short-term interest rates that balance long-term savings and borrowing

™j = rate of inflation
in the economy

™j∗ = target rate of inflation

j = logarithmic level of actual GDP
j = logarithmic level of potential real GDP
∗

j − j = output gap
∗

Corporate bond
-j û:>
- jC‡ ý
aj =
%

‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ + !j,‡ ‡

e d
!j,‡ = Credit premium
where: Ex
Equity

-j û:>
- jC‡ ý
s

aj =
1 + ,j,‡ + ¨j,‡ + ™j,‡ + !j,‡ + .j,‡ ‡
si

‡"
-j û:>
- jC‡ ý
aj =
oe

‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ + öj,‡ ‡
N

.j,‡ = Equity premium relative to risky bonds

where:

öj,‡ = !j,‡ + .j,‡ = Equity risk premium

Commercial Real Estate

-j û:>
- jC‡ ý
aj =
%

‡"
1 + ,j,‡ + ¨j,‡ + ™j,‡ + !j,‡ + .j,‡ + /j,‡ ‡

/j,‡ = liquidity risk premium

where:

51
CFA Level 2 (2024) Formula Sheet – Noesis Exed

Learning Module 2 | Analysis of Active Portfolio Management

Active return, #• = #P − #O

1,•ℎ , žq = #q − Üq #O

ä ä

,%( 22(2, #• = ∆|K #O,K + |P,K #•,K

K" K"

$#P = $#O + 9#

v #P = v #O + v #•

9#
For optimal Sharpe ratio,
v #• = v #O
$#O

d
ˆ

e
+ ) ( : ( ?( , +: = : 7 , ∆| v 8
v
Ex
#• ˆ
9 & : ( ?( , 9: = : 7 , 8
v v
s

9: ≈ 2 a , ‰ *ℎ ? ,, − 1
si

Forecasted active return, ˆ = 9: × v × $

oe

where: $ is set of standardized forecasts of expected returns across securities

N

ˆ v•
Mean-variance optimal weights
∆| ∗ =
v 9: √=#

Full Fundamental Law

- #• = +: × 9: √=#v•

9# = +: × 9: √=#

9# ∗
v #• = +: × v #O
$#O

$#P = $#O + +: 9#∗

52
CFA Level 2 (2024) Formula Sheet – Noesis Exed

#• = - #• |9:1 + { )(
Performance Measurement

+: = Proportion of variation in realized performance attributed to realized information

coefficient

9:1 = realized information coefficient

where:

9:
Ex-ante measurement of skill
- #• = v
vŽ •

{
Independence of Investment Decision
=# =
1+ {−1 s

e d
Ex
s
si
oe
N

53