LOS Keywords & Formulas

In case you didn’t know, there are 362 Learning Objective Statements for the Level 3 curriculum. How many of these do you think use the word “Calculate”?

50? 60? 80?

Try 9, or just less than 2.5% of all LOSs.

I understand that Level 3 is less quantitative than the earlier exams, and I have even heard (almost certainly false) stories of Level 3 candidates who didn’t even bother to bring a calculator to the exam. But, c’mon, there is no way this exam will be that devoid of calculations. I have noticed that LOSs that start with “Demonstrate” show up on old exams and the answers require calculations, but these are like Gordon Growth model calculations, which any Level 3 candidate can do in his or her sleep.

I don’t want to give the impression that I think this exam shouldn’t be quantitative, because it should. What annoys me is that the curriculum is full of formulas that the various authors use to demonstrate what they are trying to teach (some more successfully than others). However, there is no hard-and-fast rule for which formulas you just need to “get” in the sense of knowing whether increasing X will lead to a higher or lower ratio, and those that you absolutely must commit to memory.

I never worried about this at Levels 1 and 2 because I pretty much assumed that you had to know everything, and if I didn’t remember a formula completely, I could always “reverse engineer” it by plugging in the multiple choice answers.

But I don’t want to end up in a situation on June 1st where an answer requires a formula that I can’t remember exactly and I end up having to essentially write off all the associated points.

Advice?

There’s still a lot of calculation on the exam. Don’t take the LOS lilterally – it’s a trap. You have to know everything in those 2,500 pages of materials.

The default safe bet is to remember all formulas.

However, when taking practice exams, I have fallen back on deriving formulas that I could not remember exactly, but knew the fundamentals. Examples:

  1. all option strategies. Pointless to memorize formulas here. Know the strategy (what you buy and sell), know the shape of the payoff as a sanity check, know that if you buy an option, the initial value is positive; if you sell it then negative; and know that a call is worth max(0, St - X) and a put is worth max(0, X - St).

  2. Duration of equity: I like to remember ADa = BDb + EDe where A = assets, B = borrowed funds, E = equity.

  3. M^2 (Modigliani and Modigliani): I find it easier to remember as “what the market return would be if the market and the portfolio had equal Sharpe ratios” i.e. (M^2 - Rf)/sd(M) = (Rp - Rf)/sd§ and then find M^2.

1recho is correct. The exam evaluates your understanding of fundamentals and relationships, not verbatim formulas.