I don't believe I can fly. But I think I can pass the exam.

My lousy photography skills (ha ha! what skills?) totally don’t do justice to the picture, but somehow I feel more peaceful. Even though I don’t have 100% confidence in passing, I kinda have a perspective that failing this exam in the bigger picture is not that big of a deal.

I’ll just have to use these last 3 days as best as I can. Good luck to you all, fellow candidates.

Here, take a look.

Lousy Scores!

And I’d taken the L1 sample exam even later last year too!

Let’s see how this correlates to my actual L2 exam score in August!

1. Common stock: always use historical rate
2. Monetary asset/liabilities: always use current rate
3. Current rate method: except for rule #1, always use current rate for balance sheet accounts, and average rate for income statement accounts.
4. Temporal rate (I) — Revenues and SG&A use average rate, and as a consequence:
5. Temporal rate (II) — Net income and Equity are mixed, because Revenues & SG&A use average rate (and COGS use historical rate).
6. Temporal rate (III) — everything else use historical rate.

Can you guys come up with more compact rules?

Me, here’s what I’m gonna do:

All the best, folks.

See you on June 6th, fellow candidates

I’m just thinking about the format of Level 2 exam. There will be 20 item sets of 6 questions each. If we look at the topic area weights, the topic weights vary (e.g.: Equity can be 20 – 30 percent). Let’s assume that one item can only cover one area. This brings the approximate number of items for each area to be like this:

In any case, I’m back after such a long, long hiatus. There’s a rather long story behind that, but for some other time perhaps. Today I just want to derive the formula for the variance of an n-asset portfolio when it is equally weighted (i.e.: each asset has a weight of 1/w). In CFA Level II 2010 volume 6, page 392, the formula is stated to be this:

Yes... but how?

But how did we get there? The derivation is relegated into a footnote in the book, but we can derive this ourselves. Let’s do this, won’t take more than 10 minutes, I promise.

What is the formula for the variance of a portfolio with 2 assets? It’s this:

Covariance of a portfolio with 2 assets

This can be generalized into (where ):

Covariance of a portfolio with n assets, i <> j

So for portfolios with n assets, there will be n terms in the form of , and terms in the form of . The is our old friend from level 1 permutation. Specifically, the number of ways of obtaining an ordered subset of 2 elements (covariance between 2 assets) from a set of n elements (n assets).

Since this permutation always takes the form of , we can simplify it to be .

Let’s confirm this with the covariance formula for a portfolio of 3 assets (that is, n = 3):

We can see that there are 3 terms, and there are 6 (that is, ) terms in the form of .

For a portfolio of 4 assets, there will be 4 and terms, respectively.

Now, remember that our portfolio is equally weighted–meaning the weight of each asset is 1/n. So the formula becomes:

Substitute each asset's weight with (1/n), each asset's variance with average variance, and each covariance with average covariance

Which by simple multiplication becomes our original formula:

Q.E.D. Now off to Derivatives!

Congratulations! You've been selected to be our slave for the next one year!

Pure Unadulterated Awesomeness

Obviously the big major humongous thanks go to:

1. My wife, who’d been very patient with me for geeking out for many, many weekends, and was supportive through and through. My parents, who had been very supportive and were obviously very proud to hear that I passed this
2. My bosses! Who have been very understanding and very supportive through and through. Better bosses than you guys, I can’t really find!
3. My fellow CFA candidates over at CFA Email Study Group! You guys have been AWESOME Congrats to all of you who have passed! Those of you who didn’t, I’m looking forward to see you in June 2010 for L2 anyway, because I KNOW YOU WILL KILL L1 IN DECEMBER!
4. His Awesomeness, His Coolness, His Hipness, my one and only:

This thing? IT ROCKS, BABY.

I have to say I hesitated for a while before I signed up for Level 2. Do I really want to burn all those weekends away again? Really? Really really? For another year until June 2010? What am I thinking?

Unfortunately, my fingers are faster than my doubts. There goes my weekends again in 2010…

Man, I Must Love CFA Really Bad To Do This...

See you all in Level 2, folks