CFA LEVEL III 2019 Formula Sheet

Reading 7: The Behavioral Finance Perspective 7*89$:&$- %$$-( #% 0$1* % 11. Procedure of converting nominal, pre-tax
2. ATNominal RR % =
2$& 3%4$(&15"$ 6(($&(
figures into real, after-tax return:
+ Current Annual (Ann) Inflation (Inf) % =
1. Expected utility (U) = Σ (U values of • Real AT R = [Expected total R –
AT real RR% + Current Ann Inf% Or
outcomes × Respective Prob) (Expected total R of Tax-exempt Invst
× wt of Tax-exempt Invst)] × (1 – tax
2. Subjective expected U of an individual =Σ ATNominal RR% = (1 + AT Real RR%) rate) + (Expected total R of Tax-
[u (xi) × Prob (xi)] × (1 + Current Ann Inf %) – 1 exempt Invst × wt of Tax-exempt
Invst) – Inf rate
3. Bayes’ formula = P (A|B) = [P (B|A) / P 3. Total Investable assets = Current Portfolio Or
(B)]× P (A) -Current year cash outflows + Current year • Real AT R =[(Taxable R of asset class
cash inflows 1 × wt of asset class 1) + (Taxable R
4. Risk premium = Diff. b/w Certainty of asset class 2 × wt of asset class 2) +
Equivalent and Expected Value 4. Pre-tax income needed = AT income …+ (Taxable return of asset class n ×
needed / (1-tax rate) wt of asset class n)] × (1 – tax rate) +
5. Perceived value of each outcome = (Expected total R of Tax-exempt Invst
= U = w (p1) v (x1) + w (p2) v (x2) + … + 5. Pre-tax Nominal RR = (Pre-tax income × wt of Tax-exempt Invst) – Infrate
w (pn) v (xn) needed / Total investable assets) + Inf%
Reading 11: Taxes and Private Wealth
6. Abnormal return (R) = Actual R – If Portfolio returns are tax-deferred: Management in a Global Context
Expected R 6. Pre-tax projected expenditure $ = AT
projected expenditure $ / (1 – tax rate) 1. Average tax rate = Total tax liability /
Reading 8: The Behavioral Biases of Total taxable income
Individuals 7. Pre-tax real RR % = Pre-tax projected
-------------------------------------------- expenditures $ / Total investable assets 2. AT Return = r × (1 – ti)
Reading 9: The Behavioral Finance Perspective
-------------------------------------------- 8. Pre-tax nominal RR = (1 + Pre-tax real RR 3. AT Future Accumulations after n years =
Reading 10: Behavioral Finance and %) × (1 + Inflation rate%) – 1 FVIFi= Initial Invst × [1 + r (1 – ti)]n
Investment Processes
1. After-tax (AT)Real required return (RR) % If Portfolio returns are NOT tax-deferred: 4. Tax drag ($) on capital accumulation =
!"#$%&' ( *$+,#*$- $./$%-#&,*$( #% 0$1* % Acc capital without tax – Acc capital with
= = 9. AT real RR% = AT projected expenditures
2$& 3%4$(&15"$ 6(($&(
7*89$:&$- %$$-( #% 0$1* % $ / Total Investable assets tax
2$& 3%4$(&15"$ 6(($&(

10. AT nominal RR% = (1 + AT real RR%) × 5. Tax drag (%) on capital accumulation =
(1 + Inf%) – 1 (Acc capital without tax – Acccapital with
 CFA LEVEL III 2019 Formula Sheet

tax) / (Acc capital without tax – Initial a) Proportion of total return from 15. Accrual Equivalent Tax Rates = r (1 – TAE)
investment) Dividends (pd), taxed at a rate of td. GHI
= RAE = TAE = 1− G
pd = Dividends ($) / Total dollar return
6. Returns-Based Taxes: Deferred Capital b) % of total return from Interest income
16. In Tax Deferred accounts (TDAs) Future
Gains: (pi), taxed at a rate of ti.
AT Acc = FVIF TDA = Initial Invst[(1 + r) n
• AT Future Accumulations after n pi = Interest ($) / Total dollar return
(1 – Tn)]
years = FVIFcg= InitialInvst. × [(1 + r) c) % of total return from Realized capital
17. In Tax-exempt accounts FVIF taxEx = Initial
n
(1 – tcg) + tcg] gain (pcg), taxed at a rate of tcg.
Invst (1 + r) n
• Value of a capital gain tax deferral = pcg = Realized Capital gain ($) / Total
• FVIF TDA = FVIF taxEx (1 – Tn)
AT future accumulations in deferred dollar return
taxes – AT future accumulations in d) Unrealized capital gain return: Total
18. AT asset wt of an asset class (%) = AT
accrued annually taxes Dollar Return = Dividends + Interest
MV of asset class ($) / Total AT value of
income + Realized Capital gain +
Portfolio ($)
7. Cost Basis Unrealized capital gain
• Capital gain/loss = Selling price – Total realized tax rate = [(pi× ti) + (pd×
19. AT Initial invst in tax-exempt accounts =
Cost basis td)+ (pcg× tcg)]
(1 – T0)
• AT Future Accumulation = FVIFcgb=
Initial Invst × [(1 + r) n (1 – tcg) + tcg – 10. Effective Ann AT R = r* = r (1 – piti – pdtd
20. FV of a pretax $ invested in a tax-exempt
(1 – B) tcg] =Initial Invst × [(1 + r) n (1 – pcgtcg) = r (1 – total realized tax rate)
account = (1 – T0) (1 + r) n
– tcg) + (tcg × B)] Where, r = Pre-tax overall return on the
Where, B = Cost basis portfolio and r*= Effective ann AT R
21. FV of a pretax $ invested in a TDA = (1 +
tcg × B = Return of basis at the end of r) n (1 – Tn)
the Invst.horizon. 11. Effective Capital Gains Tax = T* = tcg (1 –
When cost basis = initial InvstèB=1, pi – pd – pcg) / (1 – piti – pdtd – pcgtcg)
22. Investors AT risk = S.D of pre-tax R (1 –
FVIFcg=Initial investment × [(1 + r) n Tax rate) = σ(1 – T)
(1 – tcg) + tcg] 12. Future AT acc. = FVIF Taxable = Initial Invst
[(1 + r*)n (1 – T*) + T* – (1 – B) tcg]
23. Tax alpha from tax-loss harvesting (or Tax
8. Wealth-Based Taxes savings) =Capital gain tax with unrealized
• AT Future Acc = FVIF w = Initial 13. Initial Invst (1 + Accrual Equivalent R)n =
losses – Capital gain tax with realized
Invst [(1 + r) (1 – tw)] n Future AT Acc
losses Or
Where, tw = Ann wealth tax rate Tax alpha from tax-loss harvesting =
14. Accrual Equivalent R = (Future AT Acc /
Capital loss × Tax rate
9. Blended Taxing Environments Initial Invst) 1/n– 1
 CFA LEVEL III 2019 Formula Sheet

24. Pretax R taxed as a short-term gain needed 8. Taxable Gifts = 𝑅𝑉LMNMdeQRSTU = 15. Exemption method = TE = TS
`
to generate the AT R equal to long-term WXYPZ [X\U]Z ^_ [X\LZ^
AT R = Long-term gain after-tax return / [XYPb (X\U]b )]` (X\Lb ) 16. Deduction method = TD = TR + TS– TRTS
(1 –short-term gains tax rate)
9. Value of a taxable gift (if gift & asset Reading 13: Concentrated Single Asset
Reading 12: Estate Planning in a Global (bequeathed) have equal AT R ) = (1 – Tg) Positions
Context / (1 – Te) --------------------------------------------
10. The relative after-tax value of the when the Reading 14: Risk Management for Individuals
1. Estate =Financial assets + Tangible donor pays gift tax and when the
personal assets + Immoveable property + recipient’s estate will not be taxable t
1. Human Capital 𝐻𝐶r = ∑v u
UwX (XYP)u
Intellectual property (assuming rg = re and tig = tie): x(yu ) tuz{ (XYlu )
extended model 𝐻𝐶r = ∑v
UwX (XYP| Y})u
2. Discretionary wealth or Excess capital = 𝐹𝑉RSTU 2. Income yield (payout) =
𝑅𝑉LMNMdeQRSTU =
Assets – Core capital 𝐹𝑉gQhiQjU U~UMe ~nl~Snl MnniMe Sn•~€Q
n SnSUSMe xiP••MjQ xPS•Q
W1 + 𝑟l [1 − 𝑡Sl ^_ [1 − 𝑇l + 𝑇l 𝑇Q ^
3. Core Capital (CC) Spending Needs = =
[1 + 𝑟Q (1 − 𝑡SQ )]n (1 − 𝑇Q )
N 3. Mortality wghtd. NPV = mNPV0 = =
p(Survival j ) × Spending j
∑ (1+ r) j 11. Size of the partial gift credit = Size of the ∑v
UwX
x(ju ) du
(XYP)u
j−1
gift × TgTe

4. Expected Real spending = Real annual 12. Relative value of generation skipping = 1 / Reading 15: Managing Institutional Investor
spending × Combined probability (1 – T1) Portfolio

5. CC needed to maintain given spending 13. Charitable Gratuitous Transfers = Defined-Benefit Plans:
pattern = Annual Spending needs / 1. Funded Status of Pension Plan (PP) = MV
FVCharitableGift
Sustainable Spending rate RVCharitableGift = of PP assets – PV of PP liabilities
FVBequest
6. Tax-Free Gifts = 𝑅𝑉LMNOPQQRSTU = n 2. Min RR for a fully-funded PP = Discount
WXYPZ [X\U]Z ^_
` (1+ rg )n + Toi [1+ re (1− tie )] (1− Te ) rate used to calculate the PV of plan
= n
[XYPb(X\U]b)]` (X\Lb ) liabilities
[1+ re (1− tie )] (1− Te )
7. Relative value of the tax-free gift = 3. Desired R for a fully-funded PP =
1 / (1 – Te) 14. Credit method = TC = Max [TR, TS]
Discount rate used to calculate the PV of
plan liabilities + Excess Target return