Level I Quants: Does This Answer Make Sense?

CFA Level I Quant
#1

The purpose of this thread is to highlight the question posed in the title: does this answer make sense?

When you’re working problems in Quants, that’s the question you should ask yourself after every calculation: is my answer sensible? You don’t want to learn just the mechanics of the calculations; you want to develop a feeling for the right answer.

In another thread, I posed an NPV problem: $100,000 cost, four annual cash flows of $30,000, discount rate of 7%. What’s the NPV?

Before you do any calculations, think about what a reasonable answer would be. If the discount rate were 0%, then you’d just add the numbers and get $20,000. But you’re discounting the cash flows, so the answer should be something less than $20,000. Could it be negative? Possibly. Could it be -$40,000? Unlikely; you’d need the present value of $120,000 in cash flows to be only $60,000; that’s a huge discount in only four years. I’d submit that something between -$20,000 and +$10,000 is reasonable. Now, do the calculation.

The only way to develop a feel for this stuff is to try. Guess at the answer before you calculate it; give yourself a reasonable range, then see if you’re correct. The more you do this, the better you’ll become at it.

And then, on the exam, when you calculate an answer that makes no sense, you’ll know that you goofed up the calculation: hit a wrong button or something. Believe me, it’ll be a lot less frustrating than thinking you did everything right and getting an answer that isn’t close to any of the choices offered.

#2

A lesson learnt. Thank you!

#3

I follow similar concept called: Intelligent guess. Where you focus on just eliminating the options which can not be your answer (as it is easy and quick way to solve)

#4

Just to add to this important point…

The importance of this skill cannot be over emphasised and one that needs real attention.

Most a times candidates tend to go for the lazier / easier approach of rote learning and regurgitating in an AUTO-PILOT fashion….a little twist in questions then its dark days.

This skill, I should think, would be even more important at level 2/3 (?), when you may be required to make sensible/reasonable comments about a scenario or proposition (?).

Without repeating S2000magicians words of wisdom, I would urge that, always think as if you were in a working environment or you were caught off-guard in an interview setting…what would you do? or what would be your best attempt? By doing this, you bring in more depth and thoroughness in your effort which helps in developing ones thought process.

There are a lot of things you could easily score points on or make a reasonable attempt, by simple elimination, without necessarily having much prior knowledge of the theme.

What folks should bear in mind is that professional exams need some practicality attached than the rote style that most people would have used at undergraduate/graduate study environment.

Of course it is important to be also well prepared for facts that are a “must know” for the exam!

Good luck!