Critica CONCEPTS FOR ETHICAL AND PROFESSIONAL SY Professionalism Keowiedge of the Law Independence and Object: 5) Misepresentation. Miconduce Incerity of Capital Markets Maceral Nonpublic Informacion Market Manipulation Ml” Dates to Chics IIL (A) Loyal, Prodence, and Care MI @) Fa Deng. L(G) Sabi I (D) Peformance Presoeaon IIL (E) Preservation of Confidential TV Dats to Employers IV (A) Loyal IV (B) Aldional Compensation Amangements IV (C) Responsibilities of Supervisors 'V" Investment Analysis, Recommendations, and Action V (A) Diligence and Reasonable Basi ¥ (8) Commanicaton wih Cie and Pronpective Client V (C) Record Retention Vi Conflicts of Inerest VI (A) Disclonare of Contes. Vi (8) Proc of Trsnections Vi (C) Refer Fees. Vil Responsible a4 CEA Incite Member or CFA Candidate VII (A) Conder as Member and Candida in the CEA Program, ‘VIL (8) Reference ro CEA Insite, the CEA Designation, and the CFA Program, Global Investment Peformance Standards cas») * Conlin mn se neo os reparel and presented this eport in compliance tw the Global Investment Peformance Standard (GIPS)." Compliance must be applied con a rm-ide basis + Rinestionfondamental of complies, input dat, calculation methodology composite ctastrcton, dsdonares, preenttoon and reporting el eae, private equity and wrap felupurtly managed acount porfloe Oa sy ‘Time Value of Money Basics + Fucwe value (FV); amount to which investment rows after one of more compounding periods, + Burue salu FV = PV(L + UY) + Praent value (PV): crten value of some future ‘ash flow PV = FV/(L +1 + Annas series of equal cash flows tha occu at ‘evenly spaced isterval overtime + Ondinary annuity cash How a end of time peti. * Annuity de: cach ow at beginning of ime prio. + Perpeniies annuities with infinite lives, PV cpu * PMT discount rte). Required Rate of Retuen Components: 1. Real isk-fre rate (RER). 2. Expected inflation rate premium (IP). 3. Risk premium, E(R) = (14+ RFR )(1-+1P)0+RP)—1 A 2013 Approximation formula for nominal requited rate: (R) = RER +I + RP i aaa ee ete eee Geueeeanre yey cence (ear a ae ara See ae oe Re | +R). (14 Ry) —1 harmonic mea en Xs) Variance and Standard Deviation Variance: average of equated deviations fom mean, Den population variance = o= N Sanat sample vatiance «s'=: Si Standard deviation: square toot of variance. Holding Period Return (HPR) penn Coefficient of Variation offciens of ariaion (CY): expresses how much Alspersion exits relative to mean ofa distribution allows fo ditet comparison of dispersion across diffrent daa ses, CV is calulaed by dividing standard deviation of distribution by the mean ot expected vale ofthe distribution: Gynt x Sharpe Ratio Sharpe ratio: measstes exces recur per unit of sk Sharpe ai Roy safe frs rai: * Teepe bee eee Expected Retumn/Standand Deviation speed ere B(X) = DP) x E(X) = P(x) + P(x )xs +. P(x) Probab nto 2 (X)=D PCa —EXN = Plas, EQ) +P(eIea EX) tot Play ta BOX) Standard devin take spate oo of aia (Correlation and Covtiance Corelaoncvaiance divide by product of the two sandard deviations. cov(R,.R,) a(R )o(R)) Expected eurn, variance of 2-tackporaio: E(R,) sw aEURy) + wy (Ry) ») = who? (Ry) + wie? (Ry) 42 qmye(Rq}o(Re)e(RarRa) Normal Distributions Normal dtribution is completely described by its ‘mean and variance 689% of observations fll within + Lo. 909% fill within + 1.650, 9506 fill within # 1.960. 999% fill witin 4 2.58 Computing Z-Scores Zascore “sandandiaes” observation from normal diseibution: represents #of standard deviations ven observation is fom population mean, ‘observation population mean _x— 1 standard deviation 2° nial Models Binomial daribuion sume avaiable can take ‘onc of two values (scene) o, in the case of 2 stock, movements (upldown)- binomial model «an describe changes inthe valu ofan ase or portfolio; it can be used vo compute its expected value over sveal petods Sampling Distribution Sampling ditribucion: probability disibution of all posble sample tatstice computed from a set of. ‘equal-size samples randomly drawn from the same population. The sampling daributin ofthe mean is the distbution of erimates of the mes, ‘Central Limit Theorem (Central lime theorem: when selecting siraple random samples oF ize from population with mean and finite variance othe sampling distribution of sample mean approaches normal probability distibution with mean and variance ‘ual to o'/n a the sample size becomes large. Standard Error Standard ero ofthe sample ean isthe standard 0 + “Twortlled rs: Ho j= 0 versus Hp» 0. ‘Type Land Type Il Errors Tipe I err section of null hypothesis when eis actualy tue. + Tipe error falar wsejec ull hypothesis when itis actualy fae “Types of Hypothesis Tests Use rita fr tests involving the population mean (location of mean, difference in means, paired comparisons) Use oh-aquare tai for te ofa single population variance. Use Estate fr tests comparing rwo population ‘Technical Analysis. ‘Reversal partes: head and shoulders, inverse HRS, ‘doubletiple top or bottom. Continuation paternswanges, ecangles, pennants, fags. Price based indicators moving averages, Bollingst bands, momentum oscillators (rate of change, RST, stochastic, MACD). Sentiment indicators opinion polls, puleall aio, VIX, margin dbs, shor interes aio, Flow of funds indicator TRIN, margin deb, ‘mural fund cas position, new equity issuance, secondary offerings TS Elasticity %A quantity demanded Qu price lacy = A suey demanded a Bs ‘6A price absolute vale > 1, demand is elastic. absolute vale «1, demand is inelastic. (On a sigh ine demand cure, otal revenue is maximized where price clastic = 1 Thcome ea 8 suanity demanded ‘6d income If positive, the good is anormal good. TE neatve, che good isan inferior good 86d, quantity demanded 56d price of related good If postive, related good isa subsite. negative, elated good isa complement. ‘Types of Auctions Ascending price (Empl): Highest bid wins, pays Aamoune bid: ll bids known to al bidders. Sealed bid: Highest bid wins, pays amount bid bids are unknown to other bidders. ‘Second price sealed bid (Vier): Highest bid wins, pays amount bid by second high bidder Descending price (Dusc)Price declines uni all ‘units ean he sold each bidder pays pree bid, ‘Modified Dut: Price declines unci all units can be Sold: all bidders pay last bid pice. Revenues and Costs Tal even ‘units sold, Cr price elaticiy = price x quantity, summed across all Average revenue = worl even quanti sold. ‘Marginal meense = otal rvense! pansy sd. Taal fied ctr ate cons that do noe vary with ‘ouput in the short run. Taal variable cos ate cot that vary with ouput. Tal vt = tral ied cost + tral variable costs, Average otal crt = tol cost I oxtp. “veage ised co» ttl fixed cots / output “Average variable cos = otal viable costs / output ‘Marginal cat = & orl cost | ouput. Breakeven and Shutdown, Breakeven: tal revere = total cot. Operate in shar ran if TR < TC but TR > TVC. ‘Shutdown in short ran TR _ Sess = den fiery coheed ee 365 umber of ay of ee as onto cxhcomein re ortiz) op ain fone Saale ial ane, isedaset, and working capital turnover is: net proc margin = Rerum om ass [return on total capital (ROTC): return on asics EBIT (coral capital) ~ Syerage otal capital Debt te eit aio and otal debt ratio roca debe eb ey = Ta EBIT + lease Gh Praesent yd = inert + lease payments Growth rate (@: = RR x ROE. dividends declased operating income afer Ges iy masini company itt pai short-tem liabilities, Opening performance ratios indicate how well, ‘management operates the busines, DuPont Analysis Trudivonal DuPont equation: renter (| ee] ‘You may also se it presented as: rar si serum on exuity = [Tharpia, ip senda Daon oan fer dng nt pro magi etincome) (EBT) ( EBIT woe = (yar (tar (amen aie You may alo set presented 38: [ROE « tax burden + inerest burden EEBIT margin «ase turnover x leverage Marketable Security Clasifiations Heléfor-nading fi value on balance sheet, dividend, interes, relied and unrealized G/L ‘recognized on income statement. Availabe forsale fir value on balance shee dividends, interes, relied GIL recognized ‘0 income statement; unrealized GIL is other ‘comprehensive income, ‘Held-te-maturity amortized cos on balance ‘sheet interest, ealiaed G/L recognized on income In period of sing pies and sable or ncresing avery quan UFO ruts int FIFO ran Hee COS we COGS" Laver gos pre Higher gos Lewertventry, Hie ventory tales alice Basic and Diluted EPS Eee content pee tealnes eee eee fees eae are Ten dh oes fe Sgt Ef -9 ra (at i Ae ee een an pe ereseeee ss eee. See Lens =i Dada basic EPS. diluted EPS (cont accum, depreciation (cna! =a) Units of production ome aing re ef if in unis Revaluation of Long-Lved Avsts ZTFRS: olution ga copped in et income only tothe etent reverses prevouly ecognaed impairment lon Further ais recognized in ey a reahaton surplus. (For inerment propery Al gins and lowe from marking wo fr ve recone as income) US GAAP: evakation st permed Defer Tes ‘Created when taxable income (on tx return) = pra income (on Sinancial statement) due ro femporary diferenees. + Defered tex lables ar created when table income < prea income. Treat DTL a equity if ne expected to reve «Defi exacts are created when aable income > prt income. Mart recognize raluaion “licence more ikl than not that DTA will te beveled. Long Tem Ln «+ Dromium bond: coupon rate > matt tea + Discount bond coupon rate < mathe ate a + Inet expe equals book vale x the beginning ofthe year lpi bythe market rte of interest atthe tne the bonds were rd output units