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All CFA Institute members and candidates are required to comply with the Code and Standards Basic structure for enforcing the Code and Standards The CFA Institute Bylaws Rules of Procedure Based on two primary principles Fair process to member and candidate Confidentiality of proceedings

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Maintains oversight and responsibility Structure of the CFA Institute Professional Conduct Program Professional Conduct program (PCP) The CFA Institute Board of Governors Through the Disciplinary Review Committee (DRC) Is responsible for the enforcement of the Code and Standards

The CFA Designated Officer

Directs Professional Conduct Staff Self-disclosure

Conducts professional conduct inquiries

An inquiry can be prompted by several circumstances

Written complaints Evidence of misconduct Report by a CFA exam proctor


Requesting a written explanation from the member or candidate

1. Code Of Ethics And Standards Of Professional Conduct

Process for the enforcement of the Code and Standards

The Professional Conduct staff conducts an investigation that may include When an inquiry is initiated Upon reviewing the material obtained during the investigation, the Designated Officer may

The member or candidate Interviewing Complaining parties Third parties Collecting documents and records in support of its investigation Conclude the inquiry with no disciplinary sanction Issue a cautionary letter Continue proceedings to discipline the member or candidate If finding that a violation of the Code and Standards occurred, the Designated Officer proposes a disciplinary sanction Accepted by member Rejected by member The matter is referred to a hearing by a panel of CFA Institute members

Act with integrity, competence, diligence, respect and in an ethical manner Six components of the Code of Ethics Integrity of investment profession & interest of clients above personal interest Care & judgment Practice ethics & encourage others to practice Integrity & rules of capital markets Professional competence

Seven Standards of Professional Conduct

Professionalism Integrity of Capital markets Duties of Clients Duties to Employers Investment analysis, Recommendations & Actions Conflict of interest Responsibilities as a CFA Institute member or CFA Candidate

Understand and comply with applicable laws and regulations Code and Standards vs. Local law Follow stricter law and regulation knowingly participate or assist ->Leave employers (in extreme cases)

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Responsible for violations in which they Dissociate from illegal, unethical activities Guidance Participation or association with violations by others

Attempt to stop the behavior by bringing it to the attention of employer through a supervisor or compliance department Intermediate steps May consider directly confronting the involved individuals If not successful,-> step away and dissociate from the activity by Removing their name from written reports Asking for a different assignment

A. Knowledge of the law

Inaction with continued association may be construed as knowing participation Not require reporting violations to government, CFAI, but... Stay informed Review procedures Recommended procedures for compliance (RPC) Members and candidates Maintain current files When in doubt,->seek advice of compliance personnel or legal counsel When dissociating from violations,-> Document any violations and urge firms to stop them Develop and/or adopt a code of ethics Firms Application Make available to employees info that highlights applicable laws and regulations Establish written procedures for reporting suspected violation of laws,...

Maintain independence and objectivity in professional activities By benefits External pressures Gifts, Invitations to lavish functions, Tickets, Favors, Job referrals, Allocation of shares in oversubscribed IPOs... To issue favorable reports May try to pressure sell-side analysts

From public companies From Buy-side clients

e.g. to issue favorable research reports/recommendations for certain companies How to cope with external and internal pressures Guidance Internal pressures From their own firms Investment-banking relationships to issue favorable research on current or prospective investment-banking clients Conflicts of interest -->must disclose to employers

-->Modest gifts and entertainment are acceptable but special care must be taken convey true opinions -->Recommendations must

-->Best practice: reject any offer of gift,..threatening independence and objectivity --> free of bias from pressures be stated in clear and unambiguous language -->Portfolio managers must respect and foster honesty of sell-side research Is fraught with conflicts Must engage in thorough, independent, and unbiased analysis Issuer-paid research Must fully disclose potential conflicts, including the nature of compensation -->Analysts Must strictly limit the type of compensation they accept for conducting research Best practice Protect integrity of opinions Create a restricted list Restrict special cost arrangements RPC Limit gifts Restrict employee investments Review procedures Written policies on independence and objectivity of research Equity IPOs Private placements Accept only flat fee for their work prior to writing the report Without regard to conclusions or recommendations

B. Independence and objectivity


Definition of "Misrepresentation" Must not knowingly make misrepresentation or give false impression in Guidance Must not misrepresent any aspect of practice, including

any untrue statement or omission of a fact or any fasle or misleading statement oral representations, advertising electronic communications written materials qualifications or credentials, services performance record characteristics of an investment any misrepresentation relating to member's professional activities

C. Misrepresentation

Must not guarantee clients specific return on investments that are inherently volatile Standard I(C) prohibits plagiarism in preparation of material for distribution to employers, associates, clients, prospects, general publich Written list of available services, description of firm's qualification Designate employees to speak on behalf of firm RPC Prepare summary of qualifications and experience, list of services capable of performing Maintain copies To avoid plagiarism Attribute quotations Attribute summaries

Address conduct related to professional life Guidance Violations Any act involving lying, cheating, stealing, other dishonest conduct that reflects adversely on member's professional activities would be violation Conduct damaging trustworthiness or competence Abuse of the CFA Institute Professional Conduct Program Develop and/or adopt a code of ethics RPC Disseminate to all employee a list of potential violations Check references of potential employees

D. Misconduct

Page 4 Definition of "Material nonpublic information" Must be particularly aware of info selectively disclosed by corporations Guidance Analysis of Public info + nonmaterial nonpublic info --> Investment conclusion Mosaic Theory Analysts are free to act on this collection of info without risking violation Analysts should save and document all their research A. Market manipulation dissemination of false or misleading info including spreading false rumors to induce trading by others Standard II(B) not meant to prohibit legitimate trading strategies prohibit transactions done for tax purposes The intent of action is critical to determining whether it is a violation of this Standard . Must communicate the info only to the designated supervisory and compliance personnel within the firm Must not take investment action on the basis of the info RPC Must not knowingly engage in conduct inducing insiders to privately disclose MNI adopt compliance procedures preventing misuse of MNI Encourage firms to 2. Material nonpublic information (MNI) Make reasonable efforts to achieve public dissemination of material info If public dissemination is not possible.2 Standard II INTEGRITY OF CAPITAL MARKETS Definition develop & follow disclosure policies to ensure proper dissemination use "firewall" Prohibition of all proprietary trading while firm is in possession of MNI may be inappropriate transactions that deceive market participants Transactions that artificially distort prices or volume Securing a controlling. dominant position in a financial instrument to exploit and manipulate price of a related derivative/or underlying asset can be related to B.

Performance presentation Guidance E. Loyalty. accurate. and diligence follow the investment parameters set forth by clients & balancing risk & return a Guidance A. and complete of accuracy of their recommendations If the presentation is brief. Fair dealing 2. must make available to clients and prospects the detailed info upon request RPC GIPS on the basis of their special ability to conduct a portion of clients' business or personal affairs arising from or is relevant to that portion of clients' business that is the subject of special or confidential relationship Comply with applicable laws When in doubt -->consult with compliance department/ outside counsel before disclosing Standard III(E) is applicable when members receive info Standard III(E) does not prevent cooperating with an investigation by CFAI PCP Guidance D. ) Investment actions Treat all clients fairly in light of their investment objectives & circumstances duty of fairness and loyalty to clients can Disclose to clients & never be overridden by client consent to prospects written patently unfair allocation procedures allocation procedures Should not take advantage of their position in the industry to the detriment of clients Guidance C. Preservation of confidentiality RPC . ) Do not discriminate against any clients "Fairly" vs "equally Standard III(B) addresses the manner of disseminating investment recommendations or changes in prior recommendations to clients Ensure fair opportunity to act on Encourage firms to design equitable system to prevent selective. discriminatory disclosure Investment recommendations particularly clients may have acted on Material changes should be communicated to all current clients or been affected by earlier advise Clients who don't know changes and therefore place orders contrary to a current recommendation should be advised of the changed recommendation before the order is accepted RPC Guidance B. prudence. and care Responsibility to a client includes duty of loyalty Determine identity of "client" Must be aware of whether they have "custody" or effective control of client assets Manage pool of assets in accordance with terms of governing documents Put their obligation to client first in all dealings Avoid all real or potential conflicts of interest Forgo using opportunities for their own benefit at the expense of client Follow any guidelines set out by client for the management of assets Judge investment decisions in context of total portfolio Vote proxies in an informed & responsible manner Understand & adhere to fiduciary duties "Soft dollars" Submit to clients at least quarterly itemized statements Separate assets Review investments periodically Establish policies & procedures with respect to proxy voting and the use of client brokerage Encourage firms to address some topics (p. skill.3 Standard III DUTIES TO CLIENTS RPC (p.Page 5 duty to exercise reasonable care Prudence require cautions and discretion act with care. Suitability In investment advisory relationships Be sure to gather client info in the form of an IPS and make suitability analysis prior to making recommendation/taking investment action Inquiry should be repeated at least annually/prior to material changes -->suitability analysis must be If clients withhold info done based on info provided Risk analysis Fund managers Be sure investments are consistent with the stated mandate In case of unsolicited trade requests unsuitable for client RPC -->refrain from making trade or seek affirmative statement from client that suitability is not a consideration Written IPS Investors' objectives and constraints should be maintained and reviewed periodically to reflect any changes in clients' circumstances Standard III(D) prohibits misrepresentations of past performance or reasonably expected performance --> Provide credible performance info -->Should not state or imply that clients will obtain or benefit from rate of return generated in the past --> ensure that their claims are Research analysts promoting the success fair.

must continue to act in employer's best interest Must Firm records or work performed on behalf of firm stored on a home computer should be erased or returned to employer engage in activities conflicting with duty until resignation effective Must not contact existing clients/potential clients prior to leaving for soliciting take records of files to a new employer without written permission Free to make arrangements/preparations provided that not breaching duty of loyalty Applicable non-compete agreement Whistle blowing Nature of employment Leaving an employer 2. In case of employee's violation. documented. -->decline in writing to accept responsibilities C.4 Standard IV DUTIES TO EMPLOYERS Guidance Obtain written consent from employer before accepting compensation or other benefits from third parties. obtain consent from employer in advance A. Loyalty Planning to leave. Responsibilities of supervisors promptly initiate investigation take steps to ensure no repetition Recommend employer to adopt a code of ethics Respond promptly RPC If there is a violation Conduct a thorough investigation Increase supervision or place appropriate limitations on the wrongdoer pending the outcome of the investigation .. members and candidates must not engage in conduct that harms the interests of the employer -->Comply with policies and procedures established by employers that govern employer-employee relationship Standard IV(A) does not require to place employer interests ahead of personal interests in all matters The relationship imposes duties and responsibilities on both parties Employer-employee relationship Independent practice Guidance Abstain from independent competitive activity that could conflict with employer's interests Provide notification to employer. regulations. rules.Page 6 In matters related to their employment.. Additional compensation arrangements RPC Should make an immediate written report to their employers Must have in-depth knowledge of the Code & Standards Apply knowledge in discharging supervisory responsibilities Delegation of supervisory duties does not relieve members of supervisory responsibility -->Instruct subordinates methods to prevent and detect violations Make reasonable efforts to detect violation of laws. communicated to covered personnel and followed Bring an inadequate compliance system to senior managers's attention & recommend corrective action If clearly cannot discharge responsibilities 'cos of absence of compliance system. B. and Code & Standards Must understand what constitutes an adequate compliance system Guidance -->Establish and implementing Compliance procedures Make reasonable efforts to see that appropriate compliance procedures are established.

Diligence and reasonable basis Using secondary or third-party research -->must make reasonable &diligent efforts to determine whether 2nd/3rd party research is sound Group research and decision making If member does not agree with the independent and objective view of the group -->Not necessarily have to decline to be identified if believing consensus opinion has reasonable & adequate basis -->Should document member's difference of opinion with group RPC (p. consider principal risks in investment analysis. and thorough communication practices is critical distinguish clearly between facts & opinions present basic characteristics of the analyzed security in preparing research report Must adequately illustrate to clients & prospective clients the manner of conducting investment decision-making process keep them informed with respect to changes to the chosen investment process Guidance 2. report RPC In hard copy or electric form Fulfilling regulatory requirements may satisfy the requirements of this Standard Must explicitly determine whether it does Guidance C. Communication with clients and prospective clients Brief communications -->must be supported by background report or data on request Capsule form recommendations -->should notify clients that additional info and analyses are available from the producer of the report Investment advice based on quantitative research and analysis -->must be supported by readily available reference material -->in a manner consistent with previously applied methodology or with changes highlighted Should outline known limitations. Record retention Absence of regulatory guidance RPC CFAI recommends maintaining records for at least 7 yrs .investment philosophy followed The application of Standard V(A) depends on role of member in the investment decision-making process support and resources provided by employer Page 7 Must make reasonable efforts to cover all pertinent issues when arriving at recommendation Provide or offer to provide supporting info to clients when making recommendations/changing recommendations Guidance A. frequent. RECOMMENDATIONS & ACTIONS B. ) Standard V(B) addresses conduct with respect to communicating with clients Communication is not confined to written form but via any means of communication Developing and maintaining clear.5 Standard V INVESTMENT ANALYSIS.

must report them promptly Should disclose special compensation arrangements with employer that might conflict with client interest RPC Document request & may consider dissociating from the activity if firm does not permit disclosure of special compensation arrangements Disclose to clients info that fee based on a share of capital gains Disclose as a footnote to research report published if members have outstanding agent options to buy stocks as a part of compensation package Clients & employers' transactions have priority Co-investment -->personal investment positions or transactions should never adversely affect client investments may occur client is not disadvantaged by the trade Conflicts of interests Guidance investment professional does not benefit personally from trades undertaken for clients investment professional complies with applicable regulatory requirements Having knowledge of pending a critical part of working in investment industry Managing conflicts can take many forms prominent Disclosures must be made in plain language in a manner to effectively communicate the info to clients between member or their firm and issuer Relationships investment banking underwriting and financial relationships Broker/dealer market-making activities Material beneficial ownership of stock All matters may impair objectivity Guidance Disclosure to clients Investment personnel also serves as a director between duties to clients and to shareholders of the company poses conflicts of interest may receive option to purchase securities of the company as compensation MNI -->members providing investment services also serving as directors should be isolated from those making investment decisions -->Sell-side members -->Buy-side members should disclose material beneficial ownership interest in securities/investment recommended should disclose procedures for reporting requirements for personal transactions by firewalls Best practice is to avoid conflicts of interest when possible If not. others how before entry into any formal agreement nature of the consideration or benefit . Disclosure of conflicts What? Disclosure of conflicts to employers Same circumstances with clients Any potential conflict situation Enough info Must comply with employer's restrictions regarding conflict of interest How? 2.6 Standard VI CONFLICTS OF INTEREST Other requirements Must take reasonable steps to avoid conflicts If conflicts occur inadvertently. Priority of transactions May undertake personal transactions after clients & employers have had adequate opportunity to act on recommendation Family accounts (that are client accounts) RPC (p. assess to info during normal preparation of research recommendations -->Must not convey such info -->make sure B. ) should be treated like other accounts if member has beneficial ownership -->may still be subject to pre clearance or reporting requirements employer whom client prospective client compensation Inform C. disclosure is necessary Page 8 A. or paid to. Referral fees what consideration benefit received from.

Conduct as members and candidates in the CFA program a Preventing promotional efforts that make promises or guarantees tied to the CFA designation Over-promise the competence of an individual Over-promise future investment results 2. ) Not following rules and policies of the CFA program Giving confidential info on the CFA Program to candidates or the public . the CFA Designation and the CFA program To maintain CFAI membership Remit annually to CFAI a completed Professional Conduct Statement Pay applicable CFAI membership dues on an annual basis Using the CFA designation (p.7 Standard VII RESPONSIBILITIES AS CFA MEMBER / CANDIDATE Applies to any form of communication B.. Curriculum) Referencing candidacy in the CFA program (p. Curriculum) . Not precluded from expressing opinion regarding the CFA Program or CFAI A. Curriculum) Proper using of the CFA marks (p.. Reference to CFA Institute.Page 9 Cheating on CFA exam or any exam Prohibiting any conduct that undermines the integrity of the CFA charter (p...

Verification The Structure of the GIPS Standards GIPS Objectives 4a. Major sections of GIPS standards a . Who can claim compliance? a3. Introduction to Global Investment Performance Standards (GIPS) a2. Appropriate response when the GIPS standards & local regulations conflict d. Who benefit from Compliance? b. Why were the GIPS Standards created? 3. Key characteristics of the GIPS standards & fundamentals of compliance Key characteristics Fundamentals of compliance Requirements Recommendations 3+4 GIPS Investment firm definition b. Construction & purpose of Composites c. The scope of the GIPS Historical performance record c1.Page 10 a1. How are GIPS standards implemented in countries with existing standards for performance reporting c2.


Loan payment and Amortization Find N Find I/Y Amortization table Rate of compound growth f3. TIME VALUE OF MONEY PV of a Perpetuity Uneven CF f1. considered as Discount rate Opportunity cost = b. Interest rate.Page 12 Required rate of return a. EAR FV= PV= Annuity Ordinary Annuity Annuity Due e. FV & series of CF . Other applications Number of periods for specific growth Funding a future obligation f4. Interest rate c. CF calculations 5. Connection between PV.d. Time index Find PMT f2.

HPR Money Weighted IRR More appropriate if manager has complete control over cash in/out d. Bond equivalent yield . Interpret. Yields of T-bills Effective annual yield Money market yield f1. Convert among these yields f2.Page 13 NPV a. Portfolio rate of return 6. Calculate.b. Decision rule Problems IRR Conflict with NPV due to # Initial costs # timing c. DISCOUNTED CASH FLOW APPLICATIONS Time weighted Compound growth Geometric mean Not affected by cash in/out Preferred method Bank discount yield Holding period yield e.

Quantile Decile (10) Percentile (100) Range Ly =(n+1)*y/100 g. Frequency distribution Definition Construction of a frequency distribution 7 steps Absolute frequency Relative frequency c. Cumulative absolute frequency Cumulative relative frequency Histogram d. trimodal Model interval Quartiles (4) Quintile (5) f. Sample Descriptive statistics Inferential statistics a. Sample statistic b. Relative dispersion MAD Variance & Standard deviation 1-1/(k^2) Population Sample (use n-1) CV (Coefficient of Variation) = StdDev / Average Sharpe Ratio / Reward-to-Variability ratio mean=median=mode Calculate: Sample skewness = =Excess return/ StdDev Symmetrical j.3 Leptokurtic: more peaked. fatter tails (excess kurtosis > 0) --> more risk Platykurtic: less peaked (excess kurtosis < 0) Mesokurtic: identical (excess kurtosis = 0) l. Sample mean Arithmetic mean Weighted mean (portfolio return) Mean Geometric mean (compound growth) e. Types of measurement scales Nominal scales Ordinal scales Interval scales Ratio scales Parameter vs. Chebyshev's inequality i. bimodal.Page 14 Statistical methods Population vs. Frequency polygon Population mean vs. Measures of central tendency Median m. Shape of distribution Nonsymmetrical (Skewness) (b/c of outliers) Positively skewed (Sk>0) Types mode<median<mean mean<median<mode Negatively skewed (Sk<0) --> more risk Calculate Sample kurtosis = Excess kurtosis = sample kurtosis .k. Dispersion (measure of risk) h. Use of arithmetic or geometric mean when determining investment returns Harmonic mean (cost of shares) Harmonic < geometric < arithmetic Odd number of observations Even number of observations No mode Mode Unimodal. Kurtosis Compared with normal distribution .

Use of conditional expectation in investment applications j. PROBABILITY CONCEPTS f. Bayes' formula Factorial Labeling Combination Permutation o. Covariance and Correlation (-1 to 1) Expected return l. Probability rules Addition rule Total probability rule Joint Probability Of 2 events Of any number of independent events 8.Random variable Outcome Event Mutually exclusive events Exhaustive events Page 15 Floating c a. Conditional probabilities Multiplication rule e. Determine probabilities Priori Subjective c. odds against the event Unconditional probabilities d. Dependent events vs. Counting methods . if set of events is mutually exclusive & exhaustive Empirical past data formal reasoning and inspection process personal judgment b. Total probability rule i. Odds for vs. Tree diagram k. Independent events h. Calculate covariance given a joint probability function n. Calculate Probability of at least one event will occur g. 2 defining properties of probability 0<=P(E)<=1 sum of all P(E) =1. Portfolio Variance and standard deviation m.

Tracking error i.r. Multivariate distribution (the role of correlation) 1 --> 68% l. Standard normal distribution and standardize z= Shortfall risk = Probability that (return < threshold) n.g.d. Roy's safety-first criterion SFRatio = Compare to Sharpe o.f.k. Normal distribution Univariate distribution vs. COMMON PROBABILITY DISTRIBUTIONS j. Functions PDF. Simulation Historical simulation .b. Confidence intervals (for normal distribution) 1.Cumulative distribution function F(x)=P(X<=x) Discrete uniform e. Discrete random variables Bernoulli Binomial h. continuous distribution Page 16 a.575 --> 99% m. Probability function p(x) for discrete variable c. Lognormal distribution Discretely compounded EAR= p.Probability distribution Random variables Discrete Continuous Discrete distribution vs. Continuous uniform distribution Normal distribution 9.Probability density function f(x) CDF.96 or 2 --> 95% 2.65 --> 90% 1. Compounded rate of return Continuously compounded From S: HPR= Monte Carlo simulation q.

Estimate a population parameter Confidence interval estimation Unbiased 10. fatter tails than normal Higher n --> approach z Non-Normal AND n<30 Not available --> z test if n >=30 --> t approach z --> both are ok j. but Possible mistake: Observations from a different population may be included Higher Cost Data mining bias k. Calculate confidence interval Other situations Known variance Unknown variance --> t test Sample size n (larger is better). SAMPLING & ESTIMATION g. Central limit theorem f. Sampling methods Stratified random sampling Time. Sampling concepts Sampling error Sampling distribution Simple random sampling c. Set of data Cross. Student's t-distribution Symmetrical Properties Degrees of freedom df=n-1 Less peaked.series d. Desirable properties of an estimator Efficient Consistent Used when Small samples (n<30).sectional n>=30 e. Standard error of the sample mean Point estimation h.b.Page 17 Simple random sampling a. Selection of sample size Sample selection bias Bias Survivorship bias Look-ahead bias Time-period bias . unknown variance Normal (or approximately normal) distribution i.

State decision rule b. Nonparametric test . Test variance Two independent populations F-test Parametric test j. Hypothesis testing steps 4. Make statistical decision Statistical result d. Mean of a normally distributed population with known variance unknown variance Test means g.. Significance level and critical value Reject . Specifying significance level a. The mean difference of 2 normally distributed populations (paired comparisons test) equal assumed variances unequal assumed variances Single population Chi-square test i. Collect data and calculate test statistic 6.. based on independent random samples with h. z.Page 18 Statement about population parameter Hypothesis One-tailed and two-tailed tests of hypotheses 1. Make economic/investment decision Type I (alpha) reject null when it's true b. Distinguish Economically meaningful result 7. The relation between confidence intervals and hypothesis tests e. Test statistic May follow t. c. Identify the test statistic & probability distribution = b. The equality of means of 2 normally distributed populations. State the hypothesis Null hypothesis Alternative hypothesis 2.Chi-square. How to use p-value f. The power of a test c. Decision rule 5. Errors Type II (beta) do not reject null when it's false 11. F distribution 3. HYPOTHESIS TESTING =1-beta c.

Fundamentalists Page 19 Floating Topic Overview: 3 views Technicians EMH advocates TA is the study of collective market sentiment Principles Prices are determined by the interaction of Supply & Demand a. can be used to forecast Closing prices as a continuous line Line chart OHLC chart Bar chart 12. Charts Candlestick chart Plot only price reversals Point & figure chart X: increases O: decreases Scale Volume chart Time intervals Relative strength analysis . Technical analysis Applications Market price reflects both rational & irrational investor behavior (EMH does not hold) Assumptions Trends & Patterns exist & tend to repeat. TECHNICAL ANALYSIS (part 1) b.

Page 20 Definition: a trend approaches a range of prices but fails to continue beyond that range Floating Topic Head & Shoulders Reversal patterns Head & shoulders Inverse head & shoulders Double tops & bottoms Definition: a pause in a trend rather than a reversal d. Chart patterns 12. TECHNICAL ANALYSIS (part 2) Triangles Continuation patterns Rectangle Flags & Pennants .

.g.Page 21 Floating Topic c.recent low) / (recent high . đối lập) --> to smooth fluctuations --> trends are easier to see =mean of the last n closing prices (n=20.: bollinger band (20. 250.recent low) %D line: 3-period average of %K line Fast %K = %K basic calculation Fast %D = 3-period SMA of Fast %K Slow %K = Fast %K smoothed with 3-period SMA Slow %D = 3-period SMA of Slow %K If %K line crosses up %D line --> buy signal Stochastic oscillator Fast stochastic oscillator Slow stochastic oscillator Opinion polls (survey) =put vol / call vol Put/Call ratio Calculated statistical indices Sentiment indicators Margin debt Short interest ratio Non-price-based indicators viewed as contrarian indicator: if very high --> __________ (bearish/bullish) investor sentiment --> over_______ (bought/sold) market =volatility of options on S&P 500 CBOE Volatility Index (VIX) if high --> investors ____ (bearish/bullish) --> we should be______ (bearish/bullish) if increase --> investors are ________ (bearish/bullish) --> prices are __________ (increasing/decreasing) short interest = number of shares that investors have borrowed and sold short =short interest / average daily trading volume contrarian indicator of follow the smart money indicator? =(number of advancing issues/number of declining issues) / (volume of advancing issues / volume of declining issues) Arms index or TRIN (short-term TRading INdex) Compare to 1: Spikes upward = daily ____ (gain/loss) Spikes downward = daily ______ (gain/loss) Flow of funds indicators Margin debt if increase --> investors _________ (buy/sell) more = mutual fund cash / total assets viewed as contrarian indicator =market _________ (peak/trough) because Issuers sell new shares when stock prices are thought to be _____ (high/low) Mutual fund cash position New equity issuance (IPO) and Secondary offerings .g.) Moving average lines ______ (smoother/less smooth) line larger n --> if overly long n --> may obscure price trend (obscure = hide) viewed as support or resistance level ST average line crosses LT average line above below --> golden cross --> _________ (buy/sell) signal --> dead cross --> _________ (buy/sell) signal Price-based SMA (Simple Moving Average) vs.12): ExpMA(26)-ExpMA(12) Signal line: ExpMA(9) of MACD MACD line crossing above Signal line (or divergence histogram crosses up) --> buy signal Lines %K line: (latest price . EMA (Exponential) (place more weigts on recent data) e.1/ (1 + RS)) x 100 between 0 & 100 compare to 30 and 70 RS = Total price increases / Total price decreases Oscillators (dao động) Moving average convergence/ divergence oscillator MACD line (e.past day) x 100 2 formulas today / past day Relative strength index --> oscillate around 0 --> oscillate around 100 RSI = (1 . Trends breakout vs. breakdown Trend Support & Resistance lines Support & Resistance lines Change in polarity (Polarity= phân cực.2) means 2 standard deviations above and below the 20-day moving average line viewed as contrarian indicator: if price at or above upper band --> over___ (bought/sold) market --> we should ____ (buy/sell) Bollinger bands 12.: MACD (26. Common TA indicators Momentum (đà) oscillator (or Rate of Change oscillator) closing price today & n days earlier (today . TECHNICAL ANALYSIS (part 3) e..

1.Page 22 Kondratieff Wave (40 to 60 years) f. 2=pullback Downward moves: 3 waves (A. commodities. Golden ratio: 1..5=impulses.618 of the previous high Different waves Grand Supercycle (centuries) Supercycle Cycle Primary Intermediate Minor Minute Minuette Sub-Minuette (few minutes) Major asset classes: stocks. upward moves (3 waves) Fibonacci numbers Size of waves correspond with Fibonacci ratios 0. 2.1.4=corrective.13.21.C) (A=bulltrap) Uptrend g..3. Intermarket analysis interrelationships (relative strength ratios) among Equity sectors/ industries International markets Floating Topic . currencies h. bonds.618 Price target can be 1.2. TECHNICAL ANALYSIS (part 4) Decennial (10-year) pattern 4-year Presidential cycle Upward moves: 5 waves (1.5. Cycles 18-year cycle 12.8. Elliott Wave Theory Downtrend: downward moves (5 waves).B.3.618 or 0.

Page 23 CFA LEVEL 1    STUDY SESSION 04. 05 & 06    ECONOMICS .

Equilibria Unstable Individual and aggregate inverse demand and supply functions 13. Winning price Consumer surplus l. Types of markets Markets for services and finished goods Capital markets a b. Calculate and interpret Producer surplus Total surplus i.price elasticity .Page 24 Markets for factors of production a. Effect of introduction and removal of a mkt interference Price elasticity of demand m. Process of aggregating Demand and Supply Stable e. Principles of demand and supply Shifts c. Causes of demand or supply imbalance Impact of govt regulation and intervention j.k.g.d. Elasticity Income elasticity Cross. Calculate and interpret Individual and aggregate demand and supply curves Amount of excess demand Amount of excess supply Types of auctions h. Demand & Supply Curves Movement along d. Demand And Supply Analysis: Introduction f.

Giffen goods Explain Veblen goods . Consumer's equilibrium bundle of goods Substitution effects e.c. Demand And Supply Analysis: Consumer Demand d.Page 25 Consumer choice theory a Consumer utility theory a Indifference curves Use of Opportunity sets b. Budget constraints Calculate and interpret a budget constraint 14. Compare Income effects normal goods Distinguish inferior goods f.

Profit-maximizing utilization level of an input Optimal combination of resources-->Minimize cost . Revenue Average revenue Marginal revenue a c. Diseconomies of scale g.l. Costs Marginal costs Fixed costs Variable costs Breakeven points e. Determine profit-maximizing level of output SR profit maximization h. Product of labor Marginal Average Diminishing marginal returns k. Demand And Supply Analysis: The Firm Economies of scale f. Concepts Normal profit Economic profit Total revenue b. Shutdown points 15. Factors of production Total costs Average costs d. Distinguish LR profit maximization Decreasing-cost industries i. Distinguish Constant-cost Industries Increasing-cost industries Total j.Accounting profit Page 26 a.

Concentration measures Limitations g.c.e OLIGOPOLY 16.d.b.Page 27 PERFECT COMPETITION a MONOPOLISTIC COMPETITION a. The Firm And Market Structures MONOPOLY Use f. Identify type of market structure .

Compare Personal income Personal disposable income Saving Investment e. Fundamental relationship among Fiscal balance Trade balance 17. Compare Value-of-final-output method a GDP c. IS curve LM curve Aggregate demand curve Aggregate Demand and Supply SR g. Components of economic growth Growth of total factor productivity . Fluctuations in aggregate D & S --> SR changes in econ & biz cycle Sources j. Aggregate Output. Aggregate supply curve in LR h. Calculate GDP using Expenditure approach Income approach Page 28 Sum-of-value-added method b. Price. Measurement Sustainability Economic growth k.a. And Economic Growth f. Production function approach Input growth l. GDP deflator Compare Nominal GDP Real GDP GDP National income d. Shifts and movements along D & S curves i.

Explain Disinflation Deflation 18. Theories of Biz Cycle Types d. Identify Current biz cycle Expected future biz cycle . Describe economic indicators Uses Limitations Economic indicators Past biz cycle j. Describe Phases of Biz Cycle a Business cycle b. Indices used to measure inflation g. Understanding Business Cycles Inflation f. Factors --> affect price levels Cost push inflation Demand-pull inflation i. Economy moving through biz Cycle --> Inventory levels Labor Physical capital utilization levels c.Page 29 Biz Cycle a. Unemployment Measures Inflation e. Inflation measures Uses Limitations h.

Interaction of monetary and fiscal policy . Central banks Roles Objectives f. Compare Fiscal policy b Definition. Describe Objectives l. Qualities of effective central banks economic growth h. Contractionary fiscal policy p. Theories of Supply of money d. Relationships between monetary policy and inflation interest exchange rate 19. Tools of fiscal policy Spending tools Revenue tools Fiscal policy m. Implementation of monetary policy Monetary policy g. Monetary And Fiscal Policy Expansionary monetary policy i. Limitations of monetary policy Roles k. Being concerned with Size of a fiscal debt Arguments for Arguments against implementation of fiscal policy n. Explain difficulties of implementation Expansionary fiscal policy o.Monetary policy Page 30 a. qualities and functions of money Money creation process Demand for money a c. Fisher effect e. Contractionary monetary policy j.

Restrictions Capital restrictions Trading blocs 20. International trade Costs Comparative advantage b. Functions and objectives of international organizations IMF WTO . Influenced by Firms Govt World Bank h. Components Current account Capital account Financial account Balance of payments Consumers g.Page 31 Warm-Up: International Trade a Benefits a. Models of trade Heckscher-Ohlin Trade restrictions d. Distinguish Absolute advantage Ricardian c. Motivations for and Advantages of Common markets Economic unions Description f. International Trade And Capital Flows e.

Define an exchange rate Nominal exchange rates Page 32 a. Exchange rate regimes Countries that have their own currency International trade j. Impact of exchange rates on countries' Capital flows . Currency Exchange Rates e.g. % change in a currency relative to another currency 21. Distinguish Real exchange rates Spot exchange rates Forward exchange rates a Functions b. Currency cross-rates Forward quotations Forward discount or premium f. h. Calculate and interpret Forward rate consistent with spot rate and interest rate Countries that do not have their own currency i. FOREX market Participants d.

9.Page 33 CFA LEVEL 1    STUDY SESSION 7.10    FRA .8.

Roles of FR and FSA a Roles of FSA Income Statement (financial performance) Revenues Expenses Gains and Losses Assets Balance Sheet (financial position) (A=L+OE) Liabilities Owners' equity b. events.g. E.Role of FiR Fin position Provide info about Fin performance Page 34 of an entity that is useful to a wide range of users in making economic decisions Changes in fin position Use info in a company's Fin Statements Use other relevant info To evaluate past. Role of key FS CF statement Operating CF Investing CF Financing CF Statement of changes in Owners' equity accounting methods. bank credit Analysts: form opinions about company's ability to earn profits and generate CF a. FSA Introduction MD&A assessment of financial performance and condition of a company from the perspective of its management Results from operations. transactions or events with liquidity implications Discontinued operations. Other info sources than annual FS and supplementary info Proxy statements Filed with SEC About election of board members. "no material errors" Independent review though FS prepared by mgmt and are its responsibility 3 parts Reasonable assurance of no material errors (follow generally accepted auditing standards) FS prepared in accordance with accepted accounting principles. Importance of 22. uncertainties liquidity and capital resource issues. estimates acquisitions or disposals legal actions employee benefit plans contingencies and commitments significant customers sales to related parties segments of firm FS notes (footnotes) Additional items: are audited Supplementary schedules not audited operating income or sales by region or business segments reserves for an oil and gas company info about hedging activities and financial instruments c. and prospective performance and fin position Invest in securities To make economic decisions. extraordinary items. consistency Explanatory paragraph: when a material loss is probable but amount cannot be reasonably estimated. but not audited) from EDGAR to shareholders when there are matters that require a shareholder vote e. Steps in FSA framework . with trends in sales and expenses Publicly held companies in US Capital resources and liquidity. unusual or infrequent events Extensive disclosures in interim financial statements disclosure of a segment's need for CF or its contribution to revenues or profit = independent review of an entity's FS objective: auditor's opinion on fairness and reliability of FS. management and qualifications and issuance of stock options Corporate reports and press releases Viewed as PR or sales materials State the objective and context Gather data Process data Analyze and interpret data Report the conclusions or recommendations Update the analysis f. Uncertainties may relate to the going concern assumption --> signal serious problems and need close examination by analyst (under US GAAP): Opinion on internal controls Unqualified opinion: auditor believes statements are free from material omissions and errors 3 types of Opinions Qualified opinion: if statements make any exceptions to accounting principles --> explain these exceptions Adverse opinion: if statements are not presented fairly or are materially nonconforming with accounting standards d. with trends in CF General business overview discuss accounting policies that require significant judgements by management discuss significant effects of trends.: Recommend to investors Whether to extend trade. compensation. assumptions. reasonable accounting principles and estimates. Audits of FS Standard auditor's opinion Interim reports SEC filings Quarterly or Semiannual reports (update FS and footnotes. current.

BS. Flow of Info in Accounting system Initial trial balance-->adjusted trial balance FSs g.23) General Journal (Journal entries) General ledger (sort entries by account) f.Assets Liabilities Page 35 a. OE (p. Financial Reporting Mechanics d. Accruals and other adjustments Accruals Accrued revenue Prepaid expenses Accrued expenses Other adjustments Historical vs Current costs --> Valuation adjustments --> income statement or in "other comprehensive income e. Recording process Double entry accounting Unearned revenue 23. Accounting equation Extended forms c. Relationship among IS. CF. Fin Statement elements and accounts 5 Elements Owners' equity Revenue Expenses a Basic form A=L+OW A=L+CC+Ending Retained Earnings A=L+CC+Beginning RE+R-X-D b. Use of results of accounting process in security analysis .

expenses Historical cost: amount originally paid for the asset Current cost: would have to pay today for the same asset Realizable value: amount for which firm could sell the asset Present value: discounted future cash flows Fair value: 2 parties in an arm's length transaction would exchange the asset Measurement bases Constraints reliability and relevance (timely) cost Intangible and non-quantifiable info Accrual basis Going concern Required financial statements BS. Gains. IFRS (by IASB) # US GAAP (by FASB) Financial statement elements IASB: income+expenses Performance FASB: Revenues. Expenses. Importance of monitoring developments in financial reporting standards In the footnotes & in MD&A (management judgment) i. Losses. Barriers to developing one universally accepted set of financial reporting standards political pressures from business groups and others Objective of financial statements Understandability Comparability Qualitative characteristics Relevance consistent among firms and time periods info timely and sufficiently detailed -> influence decision faithful representation substance over form neutrality prudence and conservatism in estimates completeness Reliability d. equity.Financial Services Authority US SEC. CFS. General requirements for Financial Statements Objectives of financial statements Primary characteristics f. income. Financial Reporting Standards e. Importance of reporting standards in security analysis and valuation Of standard-setting bodies (establishing standards) IASB (International Accounting Standards Board) US FASB (Financial Accounting Standards Board) b. comprehensive income IASB: resource from which future economic benefit is expected FASB: future economic benefit "Probable" IASB: define criteria for recognition FASB: define assets and liabilities IASB: allow FASB: not allow Asset definition Values of assets to be adjusted upward Reconciliation statement Characteristics of a coherent financial reporting framework Transparency Comprehensiveness Consistency Valuation Barriers to creating a coherent financial reporting framework Principles-based Standard setting Rules-based IFRS relies on broad framework FASB in the past specific guidance how to classify trx FASB moving now blend the other two www. IS. IFRS framework Required reporting elements assets. Role Of regulatory authorities (enforcing standards) IOSCO (International Organization of Securities Commissions) UK FSA. Explanatory notes (incl. understandability also 24.iasb. reliability IASB: comparability.Objective of Fin statements Page 36 a.Securities and Exchange Commission Status of global convergence of accounting standards a disagree standard setting bodies regulatory authorities c. Objectives oriented Measurement update h. Evaluate company disclosures of significant accounting policies & estimates new accounting standards --> 3 statements standard does not apply will not affect the FS materially are still evaluating the effects of the new standards . OE. accounting policies) Assumptions Fair presentation Principles for PREPARING Going concern basis Accrual basis Consistency Materiality Aggregation Principles for PRESENTING No offsetting Classified balance sheet Minimum information is required Comparative information Purpose of framework IASB requires mgmt to consider the framework if no explicit standard exists IASB same objective FASB different objectives for biz and non-biz Assumptions Qualitative characteristics IASB emphasizes going concern FASB: relevance. liabilities.fasb.

EPS Diluted EPS h. IS Accrual accounting unearned revenue IASB General principles of Revenue recognition FASB evidence of arrangement btw buyer and seller SEC product delivered or service rendered price is determined or determinable seller reasonably sure of collecting money Long term contracts Percentage-of-completion method Completed-contract method Certain collectibility -> normal method b. Expense recognition Bad debt. Items excluded from IS but affect OE. Common size IS & financial ratios FX translation gains and losses Adjustments for minimum pension liability l.j. Revenue recognition Installment sales Applications Barter transactions Not reasonably estimated collectibility -> installment method Highly uncertain collectibility -> cost recovery method Round trip transactions primary obligator bear inventory & credit risk ability to choose supplier reasonable latitude to establish prices Gross revenue reporting (vs. Distinguish Nonoperating components Capital structure Simple Complex Basic EPS Formula: Effect of: Stock dividends and Stock splits g.other comprehensive income Unrealized gains and losses from CF hedging derivatives Available-for-sale securities k.g. Comprehensive income: e.c. Financial reporting treatment and analysis of Operating components f. Understanding The Income Statement Implications for Financial Analysis Discontinued operations Nonrecurring items Unusual or infrequent items Extraordinary items Changes in accounting standards Change in accounting principle Change in accounting estimate Prior-period adjustment e.. net revenue reporting) Implications for Financial Analysis Inventories Matching principle Depreciation Long-lived assets Depletion Amortization d. on page __ . Formula: Dilutive securities Antidilutive securities Treasury stock method i.Revenues Components Expenses Gross profit Presentation formats Page 37 a a. warranty expenses estimation Period costs Admin 25.

non current Current liabilities Non current assets Non current liabilities Liquidity-based presentation Reporting noncontrolling/ minority interest d. Formats of BS Current assets Current vs. Elements Liabilities Equity b1. Limitations of BS in financial analysis Account format Report format Classified BS 2 common formats c. Uses of BS in financial analysis b2. Liquidity & solvency ratios . except legal costs Goodwill Non-current assets Contributed capital Minority (noncontrolling) interest Retained earnings f. Understanding The Balance Sheet e. Common-size balance sheet i. but tested for impairment at least annually Internally produced -> not recorded. Measurement bases Current liabilities Note payables Current portion of long term debt Tax payables Accrued liabilities Unearned revenue/income Tangible assets Used in operations Not used in operation -> investment assets Identifiable (finite period) -> amortized Intangible assets Unidentifiable (infinite) -> not amortized. Classifying Historical cost Bases Fair value Replacement cost PV of future CF Cash and cash equivalent Account receivable Current assets lower of cost or net realizable value Inventories standard costing retail method Marketable securities Prepaid expenses and others Accounts payable 26. Analyse Statement of changes in OE h. Components of OE Treasury stock Accumulated other comprehensive income BS g.Assets Page 38 a.

CFF b.The CF statement CFO CFI Page 39 a affect Net Income affect Long term assets and certain investments affect capital structure a. IFRS vs. divided by Revenue Total cash inflow (for inflows) and Total cash outflow (for outflows) Free cash flow to Firm: FCFF=NI+NCC+Int*(1-t)-FCInv-WCInv=CFO+Int*(1-t)-FCInv to Equity: FCFE=CFO-FCInv+NetBorrowing CF to revenue =CFO/net revenue =CFO/average total assets =CFO/average total equity available to Stockholders Debt holders Cash return-on-asset Performance ratios Cash return-on-equity Cash-to-income Cash flow per share CF ratios Debt coverage Interest coverage Reinvestment ratio Coverage ratios Debt payment ratio Dividend payment Investing and financing ratio =CFO/Operating income =(CFO-preferred dividends)/ Weighted average number of common shares) i. f. US GAAP interest and dividend received US GAAP: CFO IFRS: CFO or CFI taxes paid US GAAP: CFO IFRS: CFO or CFF or CFI Direct 27. Understanding The CF Statement d. CF methods Indirect Total currency amounts Major sources and uses of cash CFO CFI CFF h.e. Noncash investing. financing activities Not reported Disclosed in footnote or supplemental schedule to CF statement dividends paid US GAAP: CFF IFRS: CFF or CFO interest paid US GAAP: CFO IFRS: CFO or CFF c. Analyse and interpret Common-size CF statement.g. =CFO/Total debt =(CFO+Interest paid+taxes paid)/interest paid =CFO/cash paid for long term assets =CFO/cash long term debt repayment =CFO/dividends paid =CFO/cash outflows from investing and financing activities .


Page 41 .

line graph Balance sheet Income statement Page 42 a a. Financial Analysis Techniques Gross profit margin= (Net sales .preferred dividends)/ Average common equity Ratio analysis Valuation Sales per share.COGS)/ Revenue Operating profitability Operating profit margin = EBIT/ Revenue Pretax margin= EBT/ Revenue Profitability Profitability relative to funds ROA Formula 1: ROA= Net income/ Average total assets Formula 2: ROA= (Net income + int exp (1.Ratio analysis Common size Vertical Horizontal Charts: stacked column graph. Analyses Receivables management Receivables T. Ratios used in Capital adequacy VaR For Banks. simulation . debt-to-assets. Altman Z-score Business segment Segment analysis Geographic segment f.O = purchases/average trade payables Number of days of payables = 365/payables T.O = revenue/average working capital Inventory management Activity Trade credit management Total assets management Fixed assets management Working capital management Current ratio = current assets/current liabilities Quick ratio = (cash + marketable securities + receivables)/current liabilities Liquidity Cash ratio= (cash + marketable securities)/ current liabilities Defensive interval= (cash + marketable securities + receivables)/ average daily expenditures Cash conversion cycle = days sales outstanding + days of inventory on hand .O Payables T.O = annual sales/average receivables Days of sales outstanding or average collection period = 365/ receivables T. scenario analysis.O Total asset rate))/ Average total assets Operating ROA = EBIT / Average total assets ROTC (Return on Total Capital) = EBIT/ Average total capital ROE = Net income/ Average total equity Return on common equity = (Net income .number of days of payables b.O Inventory T.. return on capital.O = COGS/average inventory Days of inventory on hand = 365/inventory T..O = revenue/average total assets Fixed asset T.c. (in Equity study section) Original approach d. CF to total debt . Insurance companies.O = revenue/average net fixed assets Working capital T. P/CF . EPS... Model and forecast earnings Using ratio analysis Using techniques: sensitivity analysis. Classes of ratios Use of debt financing Debt-to-equity = D/E Debt-to-capital = D/(D+E) Debt-to-assets = D/A Solvency Ability to repay debt obligations Financial leverage = A/E Interest coverage = EBIT/Interest payments Fixed charge coverage= (EBIT + lease payments) / (interest payments+lease payments) Net profit margin= Net income/ Revenue 28. DuPont analysis Extended (5-way) DuPont Valuation ratios Dividends and Retention Rate Net income per employee and Sales per employee Industry-specific ratios Growth in same-store sales Sales per square foot Equity analysis Business risk Revenue Coefficients of variation of Operating income Net income for service and consulting firms for restaurants and retail industries for retail industry e. financial firms Reserve requirements Liquid asset requirement Net interest margin Credit analysis Ratios: interest coverage ratios.

P=10m Cost of goods sold: Cost=5m SG&A EBIT Interest expense EBT Income tax Net income Dividends Increase/Decrease in Retained earnings 100% 25% VND 3.0% -5. Financial analysis techniques INCOME STATEMENT Sales: 1 laptop per day.2% 2.600 400 1.Page 43 28.650 (1.825) (210) 1.9% .200 -50.4% 8.8% BALANCE SHEET Cash Account receivable Inventory Total current assets Net PPE Total assets Account payable Short-term debt Long-term debt Equity Total liabilities+equity 10 days 7 days on credit 5 days in store 105 70 25 200 300 500 50 150 300 500 1.200 1.615 (15) 1.

FR presentation & disclosures of inventories Profitability h.COGS Inventory accounting a product cost --> capitalized period cost --> expensed a. Inventory systems Perpetual 29. Effects of different inventory accounting methods on Liquidity Activity Solvency a .c. IFRS & GAAP rules for determining Inventory cost Specification Indication b. Effects of different inventory accounting methods on COGS Inventory balances Other FS items: taxes . working capital . Computing ending inventory and COGS FIFO LIFO Weighted average cost Periodic d. Inventories e. Inventory reporting Exception Commodity-like products g.Page 44 Inventory cost flow methods Inventory valuation methods IFRS-> Lower of cost or NRV US GAAP -> LCM=lower of cost or market ending = beginning + purchases . cash flows IFRS GAAP Lower of cost or NRV Lower of cost or market No write-up f. net income .

Part1Capitalization a3. Capitalized interest Interest incurred during construction --> capitalize What interest rate to use? required by both US GAAP & IFRS i/r on debt related to construction if no construction debt outstanding-> based on existing unrelated borrowings Interest costs in excess of project construction -> expensed reported in FSs Unidentifiable: Goodwill GW=Purchase price -Fair value Not amortized but impairment test IFRS: R&D anything Created internally --> EXPENSED except for Identifiable R: Expense D: Capitalise Software for sale --> similar to IFRS Software for use Before technical feasibility: expense After technical feasibility: capitalize Capitalize all b. Accounting standards Expense NI Shareholders' equity CFO CFI CF a2.Page 45 Capitalize a1.1. Intangible assets US GAAP: R&D software Purchased externally --> CAPITALIZED (asset at cost) USGAAP --> expense Obtained in business acquisition IFRS --> not expense . Long-lived Assets. Effects of capitalizing vs expensing on Financial ratios Profitability Interest coverage ratio Implications for analysis 30.

Page 46
Carrying Value (or Book value)

c1. Concepts

Historical cost Economic depreciation

SL (Straight Line) depr=2/n* book value Accelerated depreciation DDB (Double Declining Balance) or final year: depr=book value - salvage Units-of-production

d. Depreciation methods

c2. Effect on net income

c3. Useful lives and Salvage Values

Component depreciation

e,f. Amortization of intangible assets

Cost model

30.2. Long-lived Assets- Part2 Depreciation And Impairment


Revaluation model (land, buildings...)

Reversal of previous loss --> gain in IS Above historical cost --> revaluation surplus in equity


Recoverable amount = max (value in use, fair value - selling cost) If carrying value > recoverable amount --> impair

Value in use = PV of future CF stream

Step 1: Recoverability test US GAAP Tangible assets Step 2: Loss measurement Intangible assets

h. Impairment

Reversing an impairment loss

Asset for sale Asset held for use

Sales --> Gains/ Losses

i. Derecognition of PPE & intangible assets

Abandoned --> no proceeds, loss=carrying value Exchange --> equivalent to sell and buy another

j. FS presentation & disclosures of PPE & intangible assets


k. Financial reporting of investment property

Taxable income Taxes payable TAX RETURN Income tax paid current tax expense actual cash flow =past or current loss --> create DTA

Page 47


Tax loss carryforward

Tax base = net amount of asset/liability used for tax reporting purposes Accounting profit Income tax expense FINANCIAL REPORTING DTL Income before tax Earnings before tax =Taxes payable + change in DTL - change in DTA

a. Terminology

= Income tax expense - Taxes payable Cause: depreciation =Taxes payable - income tax expense Causes: Warranty expenses, Tax-loss carry forwards


Valuation allowance: contra account to DTA Carrying value = net balance sheet value of asset/liability Permanent difference vs. Temporary difference DTL Revenues/Gains recognized in IS before in tax return Expenses/Losses tax deductible before recognized in IS (depreciation) Revenues/Gains taxable before recognized in IS

Income tax exp. > Current tax exp.



Income tax exp. < Current tax exp.

Expenses/Losses recognized in IS before tax deductible (warranty expenses, post-employment benefits) Tax loss carryforwards

Treatment for analytical purpose: DTL not expected to reverse --> equity Definition Assets Examples Definition Liabilities Examples Customer advance Warranty liability Note payable Depreciable equipment R&D AR

31. Income Taxes

c. Tax base of

d. Calculation
Adjustment to FS =Taxes payable + change in DTL - change in DTA

e. Income tax rate changes

Impact on FS and ratios Temporary differences between tax base and carrying value will reverse result in DTA or DTL

f. Differences

Permanent differences

between taxable income and pretax income not reverse makes effective tax rate different from statutory tax rate >50% probability effective tax rate = income tax expense / pretax income

g. Valuation allowance for DTA
Depreciation --> DTL (if reverse, if not --> equity) Impairments --> DTA Restructuring --> DTA

h. Deferred tax items

LIFO, FIFO Post-employment benefits and deferred compensation --> DTA Unrealized gains/losses on available-for-sale marketable securities

Analyze disclosures relating to

deferred tax items effective tax rate reconciliation


How disclosures affect FS and ratios

j. IFRS vs. US GAAP (see table in Schweser)

Page 48

Bond terminology a




Par bond a,b. Recognition & measurement

Premium bond

Discount bond (incl. zero-coupon debt)

32.1. Long-term LiabilitiesPart1Financing Liabilities b.

Amortization methods

IFRS: effective interest rate method US GAAP prefers: effective interest rate method allows: straight line depreciation

Issuance costs

IFRS: increase liability --> increase effective i/r US GAAP: capitalize as an asset (prepaid exp.)

Fair value reporting option

c. Derecognition of debt

d. Debt covenants

e. Presentation and disclosures

Reporting by Lessee FS & ratio effects of finance lease compared to operating lease Balance sheet Income statement Cash flow Finance lease Salestype lease Direct financing lease h2. Two types Interest cost Defined benefit Expected return on plan assets Actuarial G/L Prior service costs k. with 1 additional criterion: leased asset is specialized collectability of lease payments is reasonably certain lessor has substantially completed performance Lessor US GAAP: like lessee with added conditions: IFRS: like lessee with added condition: substantially all rights & risks of ownership are transferred to lessee Operating lease Finance lease 32. Reporting by Lessor's Operating lease i. Motivations for leasing vs. Types of lease Finance lease (capital lease) IFRS: similar to US GAAP but less specific. purchasing Reduced risk of obsolescence Less restrictive provisions OBS financing Tax reporting advantages Operating lease Transfer of title US GAAP: If meets one of the criteria Bargain purchase option Lease period >=75% economic life PV(lease pmts)>=90% fair value Lessee g. Long-term LiabilitiesPart2.Leases & Pension Plans h1.Page 49 Less costly financing f. Leverage & coverage ratios .2. Presentation & disclosure Pension Plans l. Disclosures of lease Defined contribution Service cost j.

Activities--> Low quality of earnings Structuring transactions --> achieve desired outcomes Aggressive unrealistic assumptions. "Fraud triangle" =mindset that fraudulent behavior is justified Inappropriate ethical standards Excessive participation by nonfinancial mgmt in the selection of accounting standards Attitudes or rationalization risk factors Known history of violations by mgmt or board members Obsession with increasing firm's stock price or earnings trend Commitments to third parties Failing to correct known reportable conditions Inappropriately minimizing earnings for tax purposes Use of materiality as a basis to justify inappropriate or questionable accounting methods Strained relationship between mgmt & auditor Aggressive revenue recognition CFO growth rate # Earnings growth rate Abnormal sales growth as compared to economy.Page 50 a Meet earnings expectations overreport earnings Lending covenants Incentive compensation Trade relief (quotas. estimates Exploit intent of an accounting principle: apply narrow rule to broad range of transactions =motives Threats to financial stability or profitability Incentives or pressure risk factors Excessive third-party pressures Personal net worth of mgmt or BOD is threatened Excessive pressure to meet internal financial goals =weakness in internal control Nature of the firm's industry or operations Opportunity Ineffective mgmt monitoring Complex or unstable organizational structure Deficient internal control 33. industry or peers Abnormal inventory growth as compared to sales growth Boosting revenue with nonoperating income and nonrecurring gains Delaying expense recognition d. Common accounting warning signs & detecting methods Abnormal use of operating leases by lessees Hiding expenses by classifying them as extraordinary or nonrecurring LIFO liquidations Abnormal gross margin & operating margin as compared to industry peers Extending the useful lives of LT assets Aggressive pension assumptions Year-end surprises Equity method investments & OBS special purpose entities Other OBS financing arrangements including debt guarantees . tariffs) underreport earnings a. Incentives to Negotiable favorable terms from creditors Negotiable favorable terms from labor contracts More solvent Manage the BS Less solvent Enhance performance ratios Select acceptable accounting --> misrepresent economics of transactions b. Financial Reporting Quality: Red Flags And Accounting Warning Signs risk factors c.

Accounting Shenanigans On The Cash Flow Statement Repurchasing stock to offset dilution .Page 51 Stretching Accounts Payables Financing Accounts Payables Ways to manipulate CFS Securitizing Accounts Receivables 34.

FSA: Applications c. FSA in assessing credit quality for DEBT investment Credit rating agencies use formulas that include Scale and diversification Operational efficiency Margin stability Leverage d. Adjustments for comparing different companies . Basic projection of future net income and CF Character Three C's Collateral Capacity 35. Past financial performance of a company Evaluating Reflecting company's strategy a b. FSA in screening for EQUITY investments e.Page 52 a.


Which methods are popular? Public vs Private Management education g. Interactions Unlimited funds vs. Capital Budgeting NPV IRR d. Capital Rationing 36. company value and stock price . IRR Private: PP Public: NPV. Methods Payback period Discounted payback period PI NPV profile Advantage of NPV Advantage of IRR e.Capital budgeting process Step 1: Idea generation Step 2: Analyzing project proposal Step 3: Create firm-wide capital budget Step 4: Monitoring decisions and conducting a post audit Replacement To maintain business For cost reduction Page 54 a a. Conflicting project rankings Problems with IRR Multiple IRR and No IRR problems Location Europe: PP more than IRR and NPV Larger: NPV. IRR More educated -> NPV. Basic principles Opportunity cost --> include ! Timing of CF is important After tax basis Financing costs Exclude ! because Reflected in required rate of return Independent vs. Mutually exclusive projects Project sequencing c. Relationship between NPV. IRR Company Size f. Project Categories Expansion New product/market development Mandatory Other pet project high risk (R&D) Base on incremental CF # accounting income sunk cost --> exclude ! externalities Cannibalization --> include ! b.

Optimal capital budget MCC & Investment opportunity schedule Incorrect adjust cost of equity adjust initial project cost l. Cost of fixed rate debt Debt rating approach g. Cost of equity capital --> 3 approaches j.b. Treatment of Flotation cost Correct . Cost Of Capital h. Formula & tax effects: Page 55 c. Weights = Target capital structure (Market values) If lack information --> use Current capital structure + Trend or use Industry average a Yield to maturity approach f. Country equity risk premium CRP = Sovereign yield spread x (stddev equity/stddev bond) Dividend Discount Model g=retention rate * ROE Bond yield plus risk premium approach e. Role of MCC in NPV Discount rate =WACC if project same risk level Assumption: same capital structure over the life of project MCC k. Cost of preferred stocks (noncallable.a. non convertible) WACC Formula: i. Pure-play method to calculate beta of a project CAPM pure play Relationship between asset beta & equity beta 37. MCC schedule Upward sloping with additional capital Breakpoints d.

financial leverage DOL 38.Page 56 Leverage or Gearing Business risk Sales risk Operating risk <-. Define a Financial risk <-. Breakeven quantity .e. Effect of financial leverage on Net income & ROE d. Calculate DFL DTL c. Measures Of Leverage b.operating leverage a.

Why share repurchase is equivalent to Cash dividend . Share repurchase methods Buy a fixed number of shares at a fixed price Repurchase by direct negotiation when the repurchase is financed with company's excess cash d. Effect of share repurchase on BV per share f. Dividends And Share Repurchases: Basics Buy in the open market c. Dividend payment chronology Holder-of-record date Payment date 39. Effects of share repurchase on EPS when the repurchase is financed with debt if after-tax borrowing cost > earnings yield if after-tax borrowing cost < earnings yield e.Page 57 Regular dividends Cash dividends Extra/ Irregular/ Special dividends Liquidating dividends a a. Explain Stock dividends Stock splits Reverse stock splits Declaration date Ex-dividend date b.

lines of credit from banks) Effective CF management Liquidating assets (short term or long lived) Renegotiating debt agreements Filing for bankruptcy Reorganizing company Factors that influence company's liquidity position Drags on liquidity: delay/reduce cash inflows or increase borrowing cost Pulls on liquidity: accelerate cash outflows Current ratio = CA/CL Quick ratio = (Cash + ST marketable securities + Receivables) / CL Receivables Receivables turnover = Credit sales/receivables Number of days of receivables = =365/receivable turnover a a. Cash Management Investment Policy Receivables weighted average collection period Inventory Accounts payable 2/10 net 60 Trade credit Cost of trade credit Number of days of payables Uncommitted line of credit Lines of credit Committed (regular) line of credit (overdraft) Revolving line of credit From banks Fixed assets Inventory Account receivables Blanket lien f. Working capital effectiveness Cash conversion cycle or net operating cycle turn cash investment in inventory back into cash collected =Operating cycle . from short term investments) Primary sources Sources of liquidity Secondary sources Short term funding (trade credit from vendors. Short term funding choices Short term bank loans. b. Evaluate performance of g. collecting receivables. collateralized by Banker's acceptances Factoring Non bank Nonbank finance companies direct placement Commercial paper through dealers .rate preferred stock % discount e1. Comparable yields (already in Quantitative ) Discount basis yield Money market yield Bond equivalent yield Purpose and objective Guidelines Who does that Responsibilities Steps to make investment Limitations and constraints aging schedule e2. Liquidity measures Inventory Inventory turnover = COGS/average inventory Number of days of inventory = 365/inventory turnover Payables Payables turnover ratio = purchases/average trade payable Number of days of payables = 365/payables turnover Operating cycle turn raw materials into cash proceeds from sales =days of inventory + days of receivables c. Working Capital Management d.days of payables US T bills 40.Page 58 Cash balances (selling goods. Tools to manage net daily cash position (more details in Fixed Income) Short term federal agency securities Bank CD Banker's acceptances Time deposits Repurchase agreements Commercial paper MM mutual funds Adjustable.

FSA (Pro Forma IS & BS) Estimating sales economic cycles regression analysis of GDP growth and sales growth seasonality new product introductions specific events changes in regulation competing products pay down debt entirely reduce L+E pay down debt + buy back common stocks L+E > A --> surplus Reconcile IS and BS increase A L+E < A --> deficit CAPEX a .Page 59 Steps to construct sales-drven pro forma FSs See the example on the next page average compound growth rate of sales over 5-10 years 41.

0% -20.0% -40.800 2.000 100 500 100 300 1.0% 180.000 20.Page 60 41.0% sales projected to increase 100% 100% 1.450 .000 (400) (200) (50) 350 350 350 Yr 2012 (1st trial) Yr 2012 (2nd trial) Yr 2012 (final) INCOME STATEMENT Sales Cost of goods sold SG&A Interest expense Nonoperating income Earnings before tax Income tax Net income Dividends Increase/Decrease in Retained earnings BALANCE SHEET Current assets Net PPE Total assets Current liabilities Long-term debt Common stock Retained earnings Total liabilities+equity 100 900 1.0% (assume full capacity) 200 1. CONSTRUCTING PRO-FORMA FINANCIAL STATEMENTS ($ millions) Yr 2011 Proportional to sales 500 (200) (100) 10% (50) 150 0% 150 0% 150 0.0% 20.000 200 500 100 650 1.

auditors & their families Entity with a cross directorship with the firm b. qualifications Care & competence d. Related party transactions and personal use of company assets --> should discourage: Finder's fees for identifying M&A targets Other compensation Related party transactions Personal use of company's assets Confidential voting Voting Rules Cumulative voting Voting for other corporate changes Shareowner-sponsored proposals Shareowner-sponsored board nominations proxy statement Shareowner-sponsored resolutions g. executives & their families Individuals or groups with a controlling interest c. Resources Audit Committee Financial information to shareholders Remuneration / Compensation Committee set executive compensation. commensurate with responsibilities and performance make sure independence link compensation to firm performance and profitability 42. not 2-3 years. share-option plan. Define "independence" no material relationship with Executive management & their families Firm's advisers. Corporate Governance e. Independence Able to hire external consultants without management approval firm & subsidiaries. Experience Ethical stances Other board experience Regularly attend meetings If served on the board for more than 10 years --> not very independent c.internal controls Definition processes procedures Describe good CG (p. not staggered (classified) Effective BOD Skills. independent board members should have a primary or leading board member a Board members should not be closely aligned with supplier. former employees. Provisions of a strong corporate code of ethics Consultancy contracts f2.113) Page 61 a. Evaluate policies Advisory or Binding Shareowner proposals Common stock classes dual classes of common stock Shareowner Legal Rights Golden parachutes Takeover defenses Poison pills Greenmail . experience. customer. Board committees Nominations Committee recruit new independent board members Other Board Committees f1. pension adviser b. Frequency of Board Elections annual. Corporate governance Majority of BOD is independent Meets regularly outside the presence of management Chairman of BOD should not be CEO or former CEO otherwise.


Steps in PM process Execution step Feedback step What is it? 43.An Overview d1. Portfolio approach to investing Individual investors Page 63 DC pension plans DB pension plans Endowment Foundation Bank Insurance companies Investment companies/ Mutual funds Sovereign wealth funds b. Other forms of pooled investments Hedge funds Strategies Event-driven funds Fixed income arbitrage funds Convertible bond arbitrage funds Global macro funds Buyout funds (Private equity funds) Venture capital funds . PM. Mutual funds 2 categories Open-end funds Closed-end funds No-load funds Load funds Money market funds Types Bond mutual funds Stock mutual funds Index funds Actively managed funds ETF Separately managed account Long/Short funds Equity market-neutral funds Long bias. Types of investors Institutional investors Planning step Investment Policy Statement (IPS) c. Short bias d2.a.

If rho<1 --> Effect on portfolio's risk: Minimum variance frontier of risky assets g. Interpret Efficient frontier of risky assets Global minimum variance portfolio Investor's utility h.HPR Arithmetic mean return Page 64 Geometric mean return Average returns a. Risk aversion Risk. Portfolio standard deviation f. Major return measures Money weighted rate of return Gross return Pretax nominal return Other return measures After tax nominal return Real return Leveraged return Asset classes with greatest average return also have highest standard deviation b. Calculate Covariance Correlation Risk averse investor d. Selection of an optimal portfolio Capital allocation line (CAL) . Characteristics of major asset classes considered in Mean-Variance portfolio theory: Real return much more stable than nominal returns Returns distributions are negatively skewed greater kurtosis (fatter tails than normal distribution) Liquidity is a major concern in emerging markets & thinly-traded securities 44. Portfolio Risk & ReturnPart 1 Mean Variance c.seeking (risk-loving) Risk neutral e.

CML (Capital Market Line) Systematic c. Portfolio Risk & ReturnPart 2 d.g. Return generating models Fama & French three-factor model Carhart suggest 4th factor: prior period returns --> to measure price momentum Market model = covar / variance of market portfolio e. Calculate Beta Slope of regression of returns on market index Equation: Sharpe ratio f. Rm-Rf 45. Firm B/P. CAPM & SML M-square Treynor measure Jensen's alpha . Risk free asset + Portfolio of risky assets --> Standard deviation = CAL (Capital Allocation Line) b. Risks Nonsystematic Macroeconomic Types of Factors Fundamental Statistical Multifactor models Formula with k factors Factor sensitivity of Factor loading Firm size.h.Page 65 Return = a.

: benchmark) Correlations within a class should be very high Correlations between classes should be low Equities Definition & Specification Appendices Strategic (baseline) asset allocation f. commodity funds.. Reasons for a written IPS Page 66 Description of Client Circumstances & Situation Investment objectives Statement of the purpose of the IPS Statement of duties & responsibilities of Investment manager Custodian of assets Client Procedures to update IPS & to respond to various possible situations Forms Absolute Relative Ability Willingness c. Return. asset types permitted. artwork. Asset classes Categories Bonds Cash Real estate Alternative Hedge funds.g.a. Investment objectives (derived from communications with the client) Risk objectives d. Correlation Efficient frontier Identify portfolio which best meets risk & requirement of investor (based on IPS) to take advantage of perceived short term opportunities success depends on manager's ability to identify short term opportunities the existence of such short term opportunities manager's skill opportunities (mispricing or inefficiencies) g. Major components of an IPS e. Basics Of Portfolio Planning & Construction Investment guidelines (how the policy will be executed. Security selection Risk budgeting Role of asset allocation success depends on . PE funds. leverage) Evaluation of performance (e. intellectual property rights Tactical asset allocation (deviate from strategic asset allocation) Rebalancing: how & when Identify investable asset classes Strategic asset allocation Principles of portfolio construction Tactical asset allocation Risk. Investment constraints Time horizon Tax situation Legal & regulatory Unique circumstances 46. Risk tolerance Return objective Liquidity b.


Financial intermediaries Securitizers Depository institutions Insurance companies Arbitrageurs Clearinghouses and Custodians Clearinghouses Custodians . Main functions of financial system Financial vs. Derivative Common stock Equity Preferred stock Warrants Fixed income Securities Convertible debt Mutual funds ETFs and ETNs (depositories) ABS Hedge funds Currencies Forward. bids. Asset classes Pooled investment vehicles Spot vs.. Distinguish Order-driven markets (rules are used to match buyers & sellers) Brokered markets Order matching rules Trade pricing rules j3. Primary vs. Swap. Equity vs. real estate. Option Contracts Commodities Real assets Insurance Credit default swap b1. Market information Brokers Brokers. Secondary issues (or seasoned offerings) Primary market Public offerings vs Private placements & other transactions Securities trade after initial offerings provide liquidity 47. commodities.. Secondary markets Secondary market--> importance: Money vs. Classification of markets Call market Traders/investors indicate their bids and asks NOT a dealer or quote-driven market in smaller markets used to set opening prices and prices after trading halts on major exchanges Trade occur any time the market is open j1. Market Organization & Structure (part 1) i. Distinguish Continuous market Price is set by auction process dealer bid-ask quote Quote-driven markets (dealer markets. Real assets Public vs. OTC markets) j2. Alternative market (hedge funds. Capital markets Traditional investment market (debt. and then one negotiated price is set to clear the market for the stock b2. Derivative markets IPO vs. price-driven markets. Dealers & Exchanges Pre-trade transparent Post-trade transparent Block brokers Investment banks Exchanges Alternative trading systems (ATS) Dealers d. Classification of assets c. Futures.1.) Trades occur at specific times All trades. equity) vs. asks are declared.Saving Borrowing Allow entities to Issuing equity Risk management Exchanging assets Utilizing information Supply & demand determine returns (i/r) Allocate capital to most efficient uses Equilibrium interest rate Page 68 a a. Private securities Debt vs.

IM) / (1 .Long position Page 69 e. new ideas go unfunded. firms shun risky projects.functioning financial system Allocationally efficient Allowing entities to achieve their purposes Without regulation --> Problems Fraud & theft Insider trading Costly information Defaults Consequences liquidity declines. Margin transaction Margin requirement Margin call price = Po * (1 . day order Validity instructions Stop-buy & Stop-sell orders good-till-cancelled immediate or cancel order (fill or kill order) good-on-close order market-on-close order 47. Objectives of market regulation Regulation can be provided by Governments Industry groups Protect unsophisticated investors --> preserve trust Market regulation should Require minimum standards of competency and make it easier for investors to evaluate performance Prevent insiders from exploiting other investors Financial reporting requirements Require minimum levels of capital .2. Market Organization & Structure (part 2) good-on-open order Clearing instructions Commissions Operationally efficient low trading costs Bid-ask spreads Price impact Prices that rapidly adjust to new info The prevailing price is fair since it reflects all available info regarding the asset Investors can save at fair rates of return Creditworthy borrowers can obtain funds Hedgers can manage risks Traders can obtain assets they need Having financial intermediaries that Informationally efficient k.MM) Bid-ask Market order Limit order Execution instructions All-or-nothing order Hidden order Iceberg order Stop order Stop loss orders To prevent losses or To protect profits g. Positions Short position Leveraged position a The investor pays for the stock with some cash and borrow the rest through the broker The broker keeps the stock as collateral Leverage ratio Margin lending rate The proportion of total transaction value that must be paid in cash Initial margin (IM) Maintenance margin (MM) -->margin call f.h. economic growth slows l. Characteristics of well.

Page 70 a. dividends. Weighting methods Equal weighted index equivalent to a portfolio that has equal dollar amounts invested in each stock in the index The Value Line (VL) Composite average Examples Financial Times Ordinary Share Index 30 stocks on LSE 1695 stock returns Market. cash flow) Example .e. Calculate for an index Price return Total return Which target market Which securities c. Security Market Indices (part 1) Price weighted index arithmetic average =sum of stock prices / number of stocks adjusted for splits -->Index movements are influenced by the differential prices of the components A percentage change in a high-priced stock will have a relatively greater effect on the index 30 stocks arithmetic 2 major indexes DJIA criticisms limited number of stock downward bias large growing firms --> splits --> lose weights Nikkei Dow Jones Stock Average arithmetic average return of the index stocks 225 stocks d.1. Index construction & management Weighting Rebalancing frequency Re-examining selection & weighting 48.cap weighted index (or value weighted index) = Criticism: large company has greater impact Float-adjusted market cap.weighted index Fundamental weighting (earnings. Describe a security market index Value b.

Security Market Indices (part 2) Characteristics Large universe of securities Dealer markets and infrequent trading i. style indexes & other specialized indexes Commodity indexes j. sector indexes. Types of equity indices Multi-market index with fundamental weighting Sector index Style index 48. type of issuers or collateral. Types of fixed income indices Sectors. default risk. Rebalancing & reconstitution Reflection of market sentiment Benchmark of manager performance g. Compare & contrast types of security market indices . coupon.Page 71 f. levels of country economic development. Indices representing alternative investments Real estate indexes Hedge fund indexes k. Uses of security market indices Measure of market return and risk Measure of beta and risk-adjusted return Model portfolio for index funds Broad market index Multi-market index h.2. maturity. inflation protection Broad market indexes. geographic regions.

Behavioral finance Conservatism Disposition effect Narrow framing Information cascades Herding behavior . Forms of EMH Semi-strong form Strong-form Fundamental analysis e. Distinguish Intrinsic value Number of market participants c. Factors affecting a market's efficiency Availability of information Impediments to trading Transaction and information costs Weak form d. Market pricing anomalies Anomalies in cross-sectional data Size effect Value effect Other anomalies Closed-end investment funds Earnings announcements IPO Economic fundamentals Implications for investors Loss aversion Investor overconfidence Representativeness Gambler's fallacy g.Page 72 a. Implications of each form of EMH for Technical analysis Choosing between active and passive portfolio management January effect (or turn-of-the-year effect) Turn-of-the-month effect Anomalies in Time-series data Calendar anomalies Day-of-the-week effect Weekend effect Holiday effect Overreaction and momentum anomalies 49. Concepts a Market value b. Market Efficiency f.

Characteristics of Preference shares Cumulative preference shares Convertible preference shares b. Role of equity securities in financing company's assets & creating company value Market value of equity securities g. Contrast Investors' required rates of return depends on estimates of firm's future CF & risk . Overview Of Equity Securities Depository receipts (DRs) d. Distinguish Book value of equity securities Company's accounting ROE = Company's cost of equity rate of return required by investors h. Equity classes Public equity securities Characteristics Private equity securities 3 main types Venture capital Leveraged buyouts (LBO) Private investment in public equity (PIPE) c. Risk and Return characteristics of various types of equity securities f. Distinguish Direct investing 50. Methods for investing in non-domestic equity securities Global depository receipts (GDRs) American depository receipts (ADRs) Global registered shares (GRS) Basket of listed depository receipts (BLDR) e.Page 73 Common shares Callable common shares a Putable common shares a.

1. Elements of an industry analysis Macroeconomic factors Technology Demographic factors Governments Social influence f. Sensitivity to business cycle Cyclical sectors Sectors Non-cyclical sectors Defensive (stable) Growth d. Introduction To Industry And Company Analysis (part 1) Firms Cyclical firms Non-cyclical firms c. Industry analysis Grouping companies by Products & services Sensitivity to business cycles Statistical methods (cluster) different sectors Cyclical Non-cyclical firms with highly correlated returns --> same group Limitations GICS Systems RGS Industry Classification Benchmark by DJ & FTSE Basic material and processing firms b. Peer group e. profitability and risk .Page 74 a. External influences on industry growth. Mexico) 51. Canada. Industry classification Industry classification systems Commercial classifications Classification Consumer discretionary Consumer staples Energy Financial services Industrial and producer durables Technology Telecommunications United Nations Government classifications European Community Australia & New Zealand North America (US.

Product demand. Product differentiation Firm overview. Principles of strategic industry analysis. Example of the candy/confections industry Financial condition Analyze Products and services Competitive strategy Should include ROE (DuPont) k. Effects on return on invested capital and pricing power of Ease of entry Capacity Market share stability Rivalry among existing competitors Threat of new entrants i. Elements of a company analysis Defensive vs. Product costs. Product & industry life cycle Shakeout stage Industry concentration 51. Projected financial statements and firm valuation .2. Offensive Cost leadership vs. Financial ratios. Introduction To Industry And Company Analysis (part 2) h.Slow growth Embryonic stage High prices Large investment required High risk of failure Rapid growth Growth stage Limited competitive pressures Falling prices Increasing profitability Growth has slowed Intense competition Increasing industry overcapacity Declining profitability Increased cost cutting Increased failures Slow growth Consolidation Mature stage High barriers to entry Stable pricing Superior firms gain market share Negative growth Decline stage Declining prices Consolidation Page 75 g.Michael Porter's five forces Threat of substitute products Bargaining power of buyers Bargaining power of suppliers j. Industry characteristics. Pricing environment.

Free cash flow to equity models Advantages Disadvantages b. Appropriate for companies that are Stable & mature Non-cyclical Dividend-paying 52. Factors to consider when exploiting mispricing Confidence about valuation model Confidence about the inputs Why stock is mispriced If market price will move toward intrinsic value a c. Disadvantages Explain j. Disadvantages . Preferred stock Dividend discount models Discounted cash flow models Types of models e. Stock price / fundamentals Types of models Multiplier models (or market multiple models) e. Equity Valuation: Concepts And Basic Tools k. Equity valuation models g. Enterprise value / EBITDA or revenue Advantages k. Common stock f. Rationale h. Rationale d.Page 76 Size of differences between market price and intrinsic value a. Assetbased models Advantages k.


Provisions for redemption and retirement of bonds Nonrefundable bonds Sinking fund provisions Cash payment Delivery of securities Accelerated sinking fund provision Redemption price Regular Special Security owner (bondholders) options Conversion option Put provision Floors e. Methods to finance the purchase of a security Repo . Embedded options Security issuer (borrowers) options Call provision Prepayment options Accelerated sinking fund provisions Caps Margin buying f. Bond's indenture Covenants Negative Affirmative a Basic features of a bond Zero coupon Coupon rate structures Step-up notes Deferred coupon bonds b. Ex-coupon Trading flat Nonamortizing/ Bullet bond/ Bullet maturity Amortizing securities Prepayment options 53.Rights and obligations Page 78 a. Floating-rate securities Coupon formula Inverse floater Inflation-indexed bonds Caps and floors Full (dirty) price = Clean Price + Accrued interest c. Bond trades between coupon dates Cum coupon vs. Features Of Debt Securities Call provisions d.

Volatility risk Disaster o. Factors affecting reinvestment risk Call feature Amortizing Prepayment option Page 79 a Default risk Credit risk j. Duration and Yield curve risk for a portfolio of bonds . Risks Associated With Investing In Bonds Coupon rate Market yield b. Exchange-rate risk m.h.n. Duration g.g.k.m. Callable bond h. Meaning and role of credit rating a. why important even hold to maturity l.o. Risks Liquidity risk k. Forms Credit spread risk Downgrade risk j.Interest rate risk Yield curve risk Call risk Prepayment risk Coupon Reinvestment risk i.i.l. Event risk Corporate restructuring Regulatory issues Sovereign risk 54. Floating rate security Reasons Price # Par Cap risk Margin Duration = Dollar duration = f. Effect on interest rate risk of Call Put value of option-free bond Value = minus value of embedded call risk/prepayment risk Reinvestment risk Potential price appreciation < option free securities Interest rate risk e. Disadvantages of a callable or prepayable security to investors Less certain CF.j. Inflation risk n. Relations among Bond's price relative to par value Discount Premium Equal to par Maturity Coupon Embedded options Yield c.

Motivation for creating CMO Stripped mortgage-backed securities .1 Overview Of Bond Sectors And Instruments d.single price Distribution methods Regular cycle auction. Types of US Fed agencies Federally related institutions (owned by US Gov. Stripped Treasury securities Coupon strips Principal strips STRIPS 55. publicly chartered) (commonly issue debentures) Federal Farm Credit System Federal home Loan Bank System Federal National Mortgage Association (Fannie Mae) Federal Home Loan Bank Corporation (Freddie Mac) Student Loan Marketing Association (Sallie Mae) Debentures (unsecured. Treasury securities (Treasuries) Two categories (vintage) On-the-run Off-the-run c.f.notes T.) Ginnie Mae (Government National Mortgage Association) TVA (Tennessee Valley Authority) GSEs (Government Sponsored Enterprises) (privately owned.multiple price Ad hoc auction system Tap system T-bills TREASURIES Instruments T.bonds TIPS b. not backed by collateral) Characteristics Periodic interest AGENCY BONDS CF Scheduled repayments of principal Principal repayments in excess of scheduled principal payments Instruments e. Government securities (sovereign debt) Regular cycle auction.Features Credit risk characteristics Page 80 a a.c. MBS (Mortgagebacked securities) Types Mortgage passthrough security Tranche I 3 tranches CMOs (Collateralized mortgage obligations) Tranche II Tranche III f.

Unsecured Debt Credit enhancements Medium term notes Shelf registration (sold over time) Maturity ranges Best effort underwriting 55. CORPORATE ISSUES Instruments Commercial paper Directly placed Dealer placed Negotiable CDs Bankers Acceptances Role of a SPV i.) = typical bond + derivative Purpose: get around restrictions Step-up notes Structured notes Inverse floaters Structured medium term notes Deleveraged floaters Dual-indexed floaters Range notes Index amortizing notes h. Bonds Primary market Secondary market Mechanism for placing bonds .2 Overview Of Bond Sectors And Instruments (cont.backed bonds or GO (General Obligation) bonds Instruments Revenue bonds Insured bonds Prerefunded bonds Unlimited tax GO debt Double-barreled bonds Appropriation-backed obligations (or Moral obligation bonds) Rating agencies and Credit ratings Secured vs.k. MUNIS (Municipal securities) Tax. CDO (Collateralized debt obligation) k.j.Tax Tax exempt Taxable Page 81 a Limited tax GO debt g. Asset-backed securities Motivation External credit enhancements Corporate guarantees LC Bond insurance j.i.

Page 82 Discount rate OMO Banks borrow reserves from Fed a Buy/Sell Treasuries by Fed Most commonly used a. Effect of embedded options Relation with the well-being of the economy Issue size h. Credit (quality) spread Yield spread g. Liquidity spread Maturity spread After tax yield of a taxable security i. Yield curve / Term structure of interest rate Flat Humped Pure expectation c. Understanding Yield Spread d. Tax Tax equivalent yield of a tax-exempt security j. Basic theories of term structure of interest rate Liquidity preference Market segmentation theory 56. LIBOR . Interest rate policy tools Bank reserve requirement % of deposits banks must retain Persuading banks to tighten/loosen credit policies Normal / Upward Inverted / Downward b. Measures Relative yield spread = Yield ratio = = yield difference b/c of credit rating f. Define a spot rate Absolute yield spread = e.

Calculate present value Defaults and potential credit problems Embedded options -> uncertain principal repayment b.Page 83 1. Yield and value of bond f. Introduction To The Valuation Of Debt Securities Compute value of bonds c. Time and value of bond Price-yield profile e. Determine appropriate discount rate 3. Steps in bond valuation process 2. Arbitrage free valuation approach . Estimate CFs Coupons Principal a a. Value of zero coupon bonds d. Difficulties in estimating CFs Floating rate securities -> uncertain coupons Convertible or Exchangeable bonds 57.

Page 84 Coupons a.d. Forward rates. Calculate BEY and EAY Assumptions CF will be reinvested at YTM Bond will be held till maturity Reinvestment income YTM Limitations c. Sources of return from investing in bond Principal + Capital gain/loss Reinvestment income a Current yield d. Traditional yield measures Realized yield can be different from YTM BEY 58.Option cost g.c. Theoretical Treasury spot rate curveBOOTSTRAPPING Nominal spread Zero-volatility spread (Z-spread) f. Spot Rates And Forward Rates Yield to call Yield to worst Yield to refunding YTP CFY e. Yield Measures. Spot rates. Reinvestment Reinvestment risk increases with Higher coupons Longer maturities b. Spreads Option-adjusted spread (OAS) OAS = Z spread . Value of bonds .

Types k. Portfolio duration Limitations = j. Introduction To The Measurement Of Interest Rate Risk Duration f.i. Convexity i.Full valuation approach (scenario analysis) Page 85 a. Types of duration Macaulay duration Modified duration 59. Calculation Modified convexity Effective convexity Can be c. Interpreting duration = g. Measuring interest rate Duration/ convexity approach a Option-free bonds Callable bonds b. Impact of yield volatility on i/r risk of bonds .e. Price volatility characteristics for Prepayable bonds Putable bonds d. Effective duration d.h.e. PVBP Relationship to duration What is it? Positive Negative Relation to bond price and yield h.


OTC a Forward contracts Forward commitment Futures contracts Swaps b.traded vs. Exchange. Calls Contingent claim Options Puts Convertible.Page 87 Derivative a. Derivative markets Purposes - Law of one price 2 securities/portfolios with identical cash flows d. callable bonds 60. Derivatives Markets And Instruments Criticisms - c. Arbitrage 2 securities with uncertain returns combined in a portfolio a .

published by ECB 3. Positions Short position Settling Deliverable forward contracts Cash settlement a b.g.Page 88 Long position a.. Equity forward (LOS d) Portfolio of stocks Stock index With or without dividends Settled before bonds mature Quote: annualized % discount from FACE Zero-coupon bonds (T-bills) 61. Parties Corporations End user Gov. Features Settle in cash No actual loan Long=borrower Formula: g. Loan forward (FRA) f. Rates Euribor Euro lending rate. embedded options Can be on individual or portfolio of bonds Large banks outside of US Denominated in U$ Published daily by British Banker's Association Eurodollar time deposit Compiled from quotes from large banks E. established in Frankfurt. Bond Forward (LOS d) Types Coupon bonds Quote: yield to maturity Exclusive of accrued interest Include provisions for default.g. units Non-profit Single stocks 1. Currency Forward (LOS h) . Payoff of an FRA Term of FRA # Term of loan Quote E.: 2x5 FRA Off-the-run FRA 4. Settling Basics Terminating a position prior to expiration with same party (offsetting) with other party Dealer Banks/Financial institutions Bid-ask prices c.: LIBOR Annualized 360-day/year Add-on rate (# T-bill) = reference/benchmark rate e. Forward 2.

traded >< Forwards are private.b. Delivery time. Speculator # margins in securities markets Initial margin Types of margins Maintenance margin Variation margin Settlement price How a futures trade takes place c.Page 89 Similar to forward Deliverable or cash settlement Zero value at beginning a Differ from forward Futures : exchange. where (gold. Quantity. minimum price fluctuation Uniformity promotes market liquidity Hedger vs. Characteristics of futures (vs. do NOT trade Futures are highly standardized >< Forwards are customized Futures: clearinghouse as counterparty --> reduce credit risk Futures market regulated by government a. Terminate a futures Ex-pit transactions Delivery options in futures contracts For short position What (T-bonds). Forward) Standardization Long vs. Futures d. Marking to market adjust margin balance on daily basis (or more frequent in chaotic situations) Delivery 4 ways Cash settlement Reverse/ Offsetting/ Closing out e. manner. T-bond futures Stock Index futures Currency futures . when to deliver T-bill futures Eurodollar futures f. Short Quality. corn). Margins Price limits Limit move Locked limit Limit up Limit down 62.

. Interest rate . Options characteristics Long vs. Exchange-traded vs. European options In-the-money c. Floor Collar . Put Page 90 a. OTC options 63. Moneyness Out-of-the-money At-the-money d.1. Compare FRAs Cap g.Definition Call vs. Short Option premium a b. Underlying instruments interest rate options f.. American vs. Option (part 1) Equity Financial options Bond Interest rate Currencies Options on futures Commodity options Stock indices contract multiplier e.

Option price affected by Interest rate Volatility m. Option value = + Time value European call European put j. Option (part 2) Exercise price Time to expiration l.2.Call parity Put-Call parity n.k. Option payoffs for interest rate options Intrinsic value i.o.Page 91 a for a stock option h. CF on the underlying asset affect Lower bounds . Put. Rules for minimum values and lower bounds American call American put 63.

How swaps are terminated Offsetting contract Resale Swaption 64. Plain vanilla interest rate swaps Equity swaps a .Page 92 Characteristics a Mutual termination a. Swap Currency swaps b.

Simple Call & Put Breakeven underlying price General shape of the graph Market outlook of investors b1. Protective put a .Page 93 a Value at expiration Profit Maximum profit/loss a. Covered call b2.

Page 94



Page 95

Open- end vs. Closed- end NAV


a. Managed investment companies (mutual funds)

Investment company fees

one-time fees ongoing annual fees

Style Sector

b. Strategies

Index Global Stable Value


mimic an index

In-kind process


price tax


66.1. Alternative InvestmentsPart 1

Exchange traded Better risk management Composition is known Operating expense ratio No trading at a discount or premium Tax

b,c,d. ETF

Dividend Few indices Disadvantages Intraday trade Inefficient markets Larger investors Market risk Asset class/ sector risk Risks Trading prices # NAV (depth and liquidity) Tracking errors Derivative risks --> credit risk Currency and country risks

Outright ownership Leveraged equity position Mortgages Aggregation vehicles

Page 96



e,f,g. Real Estate Investment

Cost method

f,g. Approaches to the valuation of real estate

Sales comparison method

Income method

Discounted after tax cash flow model

Seed stage


66.2. Alternative InvestmentsPart 2

Formative stage Early stage

Start-up financing

Initial marketing


Balanced stage

First stage financing Second stage investing

Commercial production

Producing and selling products Not yet generating income

Later stage

Expansion stage financing

Third stage financing

Major expansion

h,i. Venture capital investing
Illiquidity Long term horizon

Mezzanine (bridge financing)


Difficulty in valuation Limited data Characteristics Entrepreneurial / Management mismatches Fund Manager incentive mistakes Timing in the business cycle Requirement for extensive operations analysis i. NPV of a venture capital project

Hedge fund l. Valuation methods Cost approach Comparable approach Income approach describe p. Distressed securities investing compare with VC Commodities Motivation for investing in Commodities derivatives Commodity-linked securities q.driven funds Leverage Illiquidity Potential for mispricing Page 97 a j. Alternative InvestmentsPart 3 k.3. Biases 66. Fund of funds investing Fund to invest in hedge funds Benefits Drawbacks n.o. How legal issues affect valuation n.r Commodities Sources of return on Collateralized commodity futures position . Unique risks Counterparty credit risk Settlement errors Short covering Margin calls Performance Self-selection bias Backfilling bias Survivorship bias Smoothed pricing Option-like strategies Fee structures and gaming Effect of survivorship bias m.Absolute return Limited partnership Forms Limited liability corporation Offshore corporation Long/short funds Classifications Market-neutral funds Global macro funds Event. Closely held companies o.

Investing In Commodities Sources of return b.Page 98 a. Commodity index strategy Active investment . Relationship between spot prices and expected future prices Contango Backwardation a 67. Commodity investment Risk Effect on portfolio c.

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