This blog is an extension of our blog on the Importance of Ethics Curriculum.

## Introduction& Overview

The quant section accounts for 12% of questions in the level 1 exam. This section builds your tool-kit for dealing with the mathematical concepts in most other topic areas of the curriculum. Several “back-bone” ideas such as Time Value of Money (TVM), NPV, IRR, Statistics, Returns Calculations, and Probability etc. are laid out here. The mathematics might become overwhelming for some students, however, a systematic review of the topic combined with enough practice can help you greatly improve your score. The syllabus can be broadly classified into the following 3 sections:

• Time Value of Money & DCF Calculations
• Statistics & Probability Basics
• Sampling & Hypothesis Testing

Let’s now look at broad strategies about how to approach each of the above sections.

## Strategy

• Time Value of Money& DCFApplications (Readings 6 & 7): Time value of money is the back-bone of finance. It has been there since the beginning of time, and it will stay there long after you are gone. So, better get along with it, and get a good handle on TVM concepts. At the very basic level, you should be completely familiar with calculation of PV of different Cashflow profiles, be it a perpetuity, annuity, or an annuity due. You should also be able to calculate NPV & IRR (this would be a good time to master your financial calculator). Some of the red-flags in this section, that you must review before the exam are:

• LOS 5.f. Use of timeline – This LOS pertains to questions to determine how much to save annually to meet expenses in an annuity in the future period.
• LOS 6.b. NPV vs. IRR Rule – Which one prevails in case of a conflict, and what is the assumed reinvestment rate in each case.
• LOS 6.e. & 6.f. Yield Calculations– Trust me, no matter how easy it sounds, you will forget the difference between bank discount yield, holding period yield, effective annual yield and other yields etc. on the day of your exam. MUST REVISE THIS, as the odds of a question from these LOSs are very high.

• Statistics & Probability Concepts (Readings 7, 8 & 9): This part of the curriculum is math-heavy, but most of the concepts are very basic. The best way to master these concepts is to read them, and then solve the in-book examples (from whichever prep-provider you are referring to). The reading and solving must go hand in hand. Another point about these reading is that these are progressive readings, and you must master reading 7 before moving on to 8, and 8 before moving on to 9.

Red-flags for this section are:

• LOS 7.h. Chebychev’s Inequality – Student’s generally tend to forget this formula during the exam
• LOS 7.i. Sharpe Ratio – especially understand the concept behind negative returns, and the interpretation of Sharpe Ratio in that case
• LOS 8.n. Baye’s Theorem – Baye’s theorem is one of those concepts, which once mastered, will significantly improve your overall understanding of Probability Concepts
• Reading 9 – Common Probability Distributions – I am including the whole reading as a red-flag because this is a very long reading that might seem like a never-ending barrage of probabilistic missiles! However, remember that a large number of questions will end up coming from this reading.

• Sampling (Reading 10): Sampling is a relatively easier topic, with a few loose ends like Central Limit Theorem, Student’s t-distribution, and Confidence Intervals. Further, most of these are re-applied in Reading 11 where you do Hypothesis Testing. Spend some time on understanding the concepts here, and it will benefit you in Hypothesis Testing Section.

• Hypothesis Testing (Reading 11):This is arguably the hardest analytical reading in this section to get your head around, but it’s not impossible to be on top of. Just remember to keep in mind ‘why’ we are doing hypothesis testing, i.e. to make inferences about means / variances of one or more populations. There is no need to memorize the formulae of some of the exotic tests such as Chi-squared, F-Test & paired differences test etc. Even the LOSs lay stress on the developing the ability to identify the right test-setup and test statistic, rather than actual calculations. So, you should be prepared to read about a situation, and identify the correct test applicable in that situation. The odds of you seeing a question which asks you to calculate Chi-squared statistic by recalling formulae from memory are quite low. However, calculation of t/z statistics is reasonably expected.

• Technical Analysis (Reading 12): The last reading in quant section (!) is somewhat a breather for students. It is a relatively new topic, and most of the material is very basic. Just read the material you have, and remember small nuances e.g. number of up & down waves within each Eliott wave, and you should be fine.

Red flags for above sections are:

• LOS 10.e. Central Limit Theorem – One of the simplest, most important concepts which confuses a lot of students. High probability of encountering on exam day.
• LOS 10.j. Calculation of Confidence Intervals – very important concept, with application across multiple readings
• LOS 11.e. interpretation of p-statistics – simple yet very intuitive concept, high probability of encountering on exam day
• LOS 11.f. – 11.i. Identification of appropriate test statistic & results – this is the essence of the hypothesis testing section, and you must have a good handle on these 4 LOSs

## Other Tips & Tricks

• Know your financial calculator: This is really the best tip that you can get for this section. You must be thoroughly familiar with your TI BA II or HP Pro Plus in order to perform the required calculations.
• Annuity Due: Annuity due calculation is not tough but stumbles many students, especially when you are racing against time in the exam environment. Always make sure whether the question is an Annuity or Annuity Due while reading, and solve accordingly.
• Yield Calculations: Remember to revise the 5-6 different types of yields in given in LOS 6.e. & 6.f.
• Standard Deviation vs.Variance: This is another area where I’ve seen many students make a mistake. Many a times, the question will provide you Variance, however most of the formulae use Standard Deviation. Remember to take the square-root of Variance if Standard Deviation is needed.
• Calculation of Correlation from Covariance: Remember that correlation has a fixed range [-1,+1], whereas Covariance does not. Also, keep in mind that you have to divide the Covariance with Standard Deviation (which is the square root of Variance), and not Variance.
• Tails! Remember to check for the number of tails in questions regarding Confidence Intervals & Hypothesis Testing
• Type I / Type II Errors: Remember what is α (significance), and what is β (1-Power of Test)