9 Formulas You Must Know To Pass Wall Street's Hardest Exam

taking test

Photo: peruisay on flickr

The Chartered Financial Analyst (CFA) exams are this Saturday.  They are commonly known as the most difficult exams taken by Wall Street professionals. Fewer than 20 per cent of candidates pass all three tests in the first attempt at each.There are several formulas a candidate must know and understand to pass the exams, far too many to be included in one small slideshow.

With that said, here are 9 formulas candidates are likely to need on any of the three levels of the CFA exam, the test that validates the Wall Street analyst.

NOTE: We don’t claim to be an expert in offering exam advice.

Capital Asset Pricing Model (CAPM): Attempts to explain the relationship excess market risk and expected return.

Black-Scholes Model: Applies theoretical physics when pricing options.

Duration With Convexity Adjustment: Duration is the average time until all cash flows from a bond are delivered. The convexity adjustment helps determine the change in price that is not explained by duration.

DuPont Identity Of Return On Equity (ROE): This breaks ROE into profit margin, total asset turnover, and financial leverage. It explains the operating efficiency, asset-use efficiency, and overall financial leverage of a company.

Source: Investopedia

Weighted Average Cost of Capital (WACC): The firm's overall cost of capital considering all of the components of the capital structure.

Source: Investopedia

Free Cash Flow to Firm (FCFF): Measures firm's cash flow after paying expenses, taxes, and financing costs.

Source: Investopedia

Put-Call Parity: Refers to the static price relationship between the prices of put and call options of an asset with the same strike price and expiration date.

Variance of a Two Asset Portfolio: Measures the fluctuation of the returns of a portfolio with two assets.

Jensen's Alpha: One way of measuring alpha, or the risk-adjusted return.

BONUS: The Herfindahl Index measures market concentration, and is used by regulators to determine whether a company has a monopoly on a market.

The CFA program isn't the only way to learn about finance.

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