This action might not be possible to undo. Are you sure you want to continue?

“Code of Ethics and Standards of Professional Conduct” The practitioner should be able to: • Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards • State the six components of the Code of Ethics and the seven Standards of Professional Conduct • Explain the ethical responsibilities required by the Code and Standards, including the multiple sub-sections of each Standard “Guidance” for Standards I – VII The practitioner should be able to: • Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations presenting multiple issues of questionable professional conduct • Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards • Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct Introduction to the Global Investment Performance Standards The practitioner should be able to: • Explain why the GIPS standards were created, what parties the GIPS standards apply to, and who is served by the standards • Explain the construction and purpose of composites in performance reporting • Explain the requirements for verification of compliance with GIPS standards Global Investment Performance Standards The practitioner should be able to: • Describe the key characteristics of the GIPS standards and the fundamentals of compliance • Describe the scope of the GIPS standards with respect to an investment firm’s definition and historical performance record • Explain how the GIPS standards are implemented in countries with existing standards for performance reporting and describe the appropriate response when the GIPS standards and local regulations are in conflict • Characterize the eight major sections of the GIPS standards

“The Time Value of Money” The practitioner should be able to: • Explain an interest rate as the sum of a real risk-free rate, expected inflation, and premiums that compensate investors for distinct types of risk • Calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding, and solve time value of money problems when compounding periods are other than annual • Calculate and interpret the FV and PV of a single sum of money, ordinary annuity, a perpetuity (PV only), an annuity due, or a series of uneven cash flows • Draw a time line, specify a time index, and solve problems involving the time value of money as applied, for example, to mortgages and savings for college tuition or retirement “Discounted Cash Flow Applications” The practitioner should be able to: • Calculate and interpret the net present value (NPV) and the internal rate of return (IRR) of an investment, contrast the NPV rule to the IRR rule, and identify any problems associated with the IRR rule • Define, calculate and interpret a holding period return (total return) • Calculate, interpret, and distinguish between the money-weighted and timeweighted rates of return of a portfolio and appraise the performance of portfolios based on these measures • Calculate and interpret the bank discount yield, holding period yield, effective annual yield, and money market yield for a U.S. Treasury bill; and interpret and convert among holding period yields, money market yields, effective annual yields and the bond equivalent yields “Statistical Concepts and Market Returns” The practitioner should be able to: • Differentiate between descriptive statistics and inferential statistics, population and a sample, and among the types of measurement scales • Explain a parameter, a sample statistic, and a frequency distribution • Calculate and interpret relative frequencies and cumulative relative given a frequency distribution, and describe the properties of a dataset as a histogram or a frequency polygon • Define, calculate, and interpret measures of central tendency, including population mean, sample mean, arithmetic mean, weighted average or including a portfolio return viewed as a weighted mean), geometric mean, mean, median, and mode • Describe, calculate, and interpret quartiles, quintiles, deciles, and percentiles • Define, calculate, and interpret 1) a range and a mean absolute deviation, the variance and standard deviation of a population and of a sample • Calculate and interpret the proportion of observations falling within number of standard deviations of the mean, using Chebyshev’s inequality

• • •

Define, calculate, and interpret the coefficient of variation and the Sharpe ratio Define and interpret skewness, explain the meaning of a positively skewed return distribution, and describe the relative locations of the median, and mode for a nonsymmetrical distribution Define and interpret measures of sample skewness and kurtosis

“Probability Concepts” The practitioner should be able to: • Define a random variable, an outcome, an event, mutually exclusive events, and exhaustive events • Explain the two defining properties of probability, and distinguish among empirical, subjective, and a priori probabilities • State the probability of an event in terms of odds for or against the event • Distinguish between unconditional and conditional probabilities • Calculate and interpret 1) the joint probability of two events, 2) the probability that at least one of two events will occur, given the probability of each and the joint probability of the two events, and 3) a joint probability of any number of independent events • Distinguish between dependent and independent events • Calculate and interpret, using the total probability rule, an unconditional probability • Explain the use of conditional expectation in investment applications • Diagram an investment problem, using a tree diagram • Calculate and interpret covariance and correlation • Calculate and interpret the expected value, variance, and standard deviation of a random variable and of returns on a portfolio • Calculate and interpret covariance given a joint probability function • Calculate and interpret an updated probability, using Bayes’ formula • Identify the most appropriate method to solve a particular counting problem, and solve counting problems using the factorial, combination, and permutation notations

“Common Probability Distributions” The practitioner should be able to: • Explain a probability distribution and distinguish between discrete and continuous random variables • Describe the set of possible outcomes of a specified discrete random variable • Interpret a probability function, a probability density function, and a cumulative distribution function, and calculate and interpret probabilities for a random variable, given its cumulative distribution function • Define a discrete uniform random variable and a binomial random variable, calculate and interpret probabilities given the discrete uniform and the binomial distribution functions, and construct a binomial tree to describe stock price movement • Describe the continuous uniform distribution, and calculate and interpret probabilities, given a continuous uniform probability distribution • Explain the key properties of the normal distribution, distinguish between a univariate and a multivariate distribution, and explain the role of correlation in the multivariate normal distribution • Construct and interpret a confidence interval for a normally distributed random variable, and determine the probability that a normally distributed random variable lies inside a given confidence interval • Define the standard normal distribution, explain how to standardize a random variable, and calculate and interpret probabilities using the standard normal distribution • Define shortfall risk, calculate the safety-first ratio, and select an optimal portfolio using Roy’s safety-first criterion • Explain the relationship between normal and lognormal distributions and why the lognormal distribution is used to model asset prices • Distinguish between discretely and continuously compounded rates of return, and calculate and interpret a continuously compounded rate of return, given a specific holding period return • Explain Monte Carlo simulation and historical simulation, and describe their major applications and limitations

“Sampling and Estimation” The practitioner should be able to: • Define simple random sampling, sampling error, and a sampling distribution, and interpret sampling error • Distinguish between simple random and stratified random sampling • Distinguish between time-series and cross-sectional data • Interpret the central limit theorem and describe its importance • Calculate and interpret the standard error of the sample mean • Distinguish between a point estimate and a confidence interval estimate of a population parameter • Identify and describe the desirable properties of an estimator • Explain the construction of confidence intervals • Describe the properties of Student’s t-distribution, and calculate and interpret its degrees of freedom • Calculate and interpret a confidence interval for a population mean, given a normal distribution with 1) a known population variance, 2) an unknown population variance, or 3) an unknown variance and the sample size is large • Discuss the issues regarding selection of the appropriate sample size, datamining bias, sample selection bias, survivorship bias, look-ahead bias, and time-period bias “Hypothesis Testing” The practitioner should be able to: • Define a hypothesis, describe the steps of hypothesis testing, interpret and discuss the choice of the null hypothesis and alternative hypothesis, and distinguish between one-tailed and two-tailed tests of hypotheses • Define and interpret a test statistic, a Type I and a Type II error, and a significance level, and explain how significance levels are used in hypothesis testing • Define and interpret a decision rule and the power of a test, and explain the relation between confidence intervals and hypothesis tests • Distinguish between a statistical result and an economically meaningful result • Identify the appropriate test statistic and interpret the results for a hypothesis test concerning 1) the population mean of a normally distributed population with a) known or b) unknown variance, 2) the equality of the population means of two normally distributed populations, based on independent random samples with a) equal or b) unequal assumed variances, and 3) the mean difference of two normally distributed populations (paired comparisons test) • Identify the appropriate test statistic and interpret the results for a hypothesis test concerning 1) the variance of a normally distributed population, and 2) the equality of the variances of two normally distributed populations, based on two independent random samples • Distinguish between parametric and nonparametric tests and describe the situations in which the use of nonparametric tests may be appropriate

“Technical Analysis” The practitioner should be able to: • Explain the underlying assumptions of technical analysis • Discuss the advantages of and challenges to technical analysis • List and describe examples of each major category of technical trading rules and indicators “Elasticity” The practitioner should be able to: • Calculate and interpret the elasticities of demand (price elasticity, cross elasticity, income elasticity) and the elasticity of supply, and discuss the factors that influence each measure • Calculate elasticities on a straight-line demand curve, differentiate among elastic, inelastic, and unit elastic demand and describe the relation between price elasticity of demand and total revenue “Efficiency and Equity” The practitioner should be able to: • Explain allocative efficiency, marginal benefit and marginal cost, and demonstrate why the efficient quantity occurs where marginal benefit equals marginal cost • Distinguish between the price and the value of a product and explain the demand curve and consumer surplus • Distinguish between the cost and the price of a product and explain the supply curve and producer surplus • Discuss the relationship between consumer surplus, producer surplus, and equilibrium • Explain 1) how efficient markets ensure optimal resource utilization and 2) the obstacles to efficiency and the resulting underproduction or overproduction, including the concept of deadweight loss • Explain the two groups of ideas about the fairness principle (utilitarianism and the symmetry principle) and discuss the relation between fairness and efficiency “Markets in Action” The practitioner should be able to: • Explain market equilibrium, distinguish between long-term and short-term impacts of outside shocks, and describe the effects of rent ceilings on the existence of black markets in the housing sector and on the market’s efficiency • Describe labor market equilibrium and explain the effects and inefficiencies of a minimum wage above the equilibrium wage • Explain the impact of taxes on supply, demand, and market equilibrium, and describe tax incidence and its relation to demand and supply elasticity • Discuss the impact of subsidies, quotas, and markets for illegal goods on demand, supply, and market equilibrium

“Organizing Production” The practitioner should be able to: • Explain the types of opportunity cost and their relation to economic profit, and calculate economic profit • Discuss a firm’s constraints and their impact on achievability of maximum profit • Differentiate between technological efficiency and economic efficiency, and calculate economic efficiency of various firms under different scenarios • Explain command systems and incentive systems to organize production, the principal-agent problem, and measures a firm uses to reduce the principalagent problem • Describe the different types of business organization and the advantages and disadvantages of each • Characterize the four market types • Calculate and interpret the four-firm concentration ratio and the HerfindahlHirschman Index, and discuss the limitations of concentration measures • Explain why firms are often more efficient than markets in coordinating economic activity “Output and Costs” The practitioner should be able to: • Differentiate between short-run and long-run decision time frames • Describe and explain the relations among total product of labor, marginal product of labor, and average product of labor, and describe increasing and decreasing marginal returns • Distinguish among total cost (including both fixed cost and variable cost), marginal cost, and average cost, and explain the relations among the various cost curves • Explain the firm’s production function, its properties of diminishing returns and diminishing marginal product of capital, the relation between short-run and long-run costs, and how economies and diseconomies of scale affect long-run costs "Perfect Competition" The practitioner should be able to: • Describe the characteristics of perfect competition, explain why firms in a perfectly competitive market are price takers, and differentiate between market and firm demand curves • Determine the profit maximizing (loss minimizing) output for a perfectly competitive firm, and explain marginal cost, marginal revenue, and economic profit and loss • Describe a perfectly competitive firm’s short-run supply curve and explain the impact of changes in demand, entry and exit of firms, and changes in plant size on the long-run equilibrium • Discuss how a permanent change in demand or changes in technology affect price, output, and economic profit

"Monopoly" The practitioner should be able to: • Describe the characteristics of a monopoly, including factors that allow a monopoly to arise, and monopoly price-setting strategies • Explain the relation between price, marginal revenue, and elasticity for a monopoly, and determine a monopoly’s profit-maximizing price and quantity • Explain price discrimination, and why perfect price discrimination is efficient • Explain how consumer and producer surplus are redistributed in a monopoly, including the occurrence of deadweight loss and rent seeking • Explain the potential gains from monopoly and the regulation of a natural monopoly "Monopolistic Competition and Oligopoly" The practitioner should be able to: • Describe the characteristics of monopolistic competition and oligopoly • Determine the profit-maximizing (loss-minimizing) output under monopolistic competition and oligopoly, explain why long-run economic profit under monopolistic competition is zero, and determine if monopolistic competition is efficient • Explain the importance of innovation, product development, advertising, and branding under monopolistic competition • Explain the kinked demand curve model and the dominant firm model, and describe oligopoly games including the Prisoners’ Dilemma “Demand and Supply in Factor Markets” The practitioner should be able to: • Explain why demand for the factors of production is called derived demand, differentiate between marginal revenue and marginal revenue product (MRP), and describe how the MRP determines the demand for labor and the wage rate • Describe the factors that cause changes in the demand for labor and the factors that determine the elasticity of the demand for labor • Describe the factors determining the supply of labor, including the substitution and income effects, and discuss the factors related to changes in the supply of labor, including capital accumulation • Differentiate between physical capital and financial capital, and explain the relation between the demand for physical capital and the demand for financial capital • Discuss the role of the present value technique in determining the demand for capital • Explain the factors that influence the supply of capital • Differentiate between renewable and non-renewable natural resources and describe the supply curve for each • Differentiate between economic rent and opportunity costs “Monitoring Cycles, Jobs, and the Price Level” The practitioner should be able to:

• • • •

Describe the phases of the business cycle, define an unemployed person, and interpret the main labor market indicators and their relation to the business cycle Define aggregate hours and real wage rates, and explain their relation to gross domestic product (GDP) Explain the types of unemployment, full employment, the natural rate of unemployment, and the relation between unemployment and real GDP Explain and calculate the consumer price index (CPI), describe the relation between the CPI and the inflation rate, and explain the main sources of CPI bias

“Aggregate Supply and Aggregate Demand” The practitioner should be able to: • Explain the factors that influence real GDP and long-run and short-run aggregate supply, explain movement along the long-run and short-run aggregate supply curves (LAS and SAS), and discuss the reasons for changes in potential GDP and aggregate supply • Explain the components of and the factors that affect real GDP demanded, describe the aggregate demand curve and why it slopes downward, and explain the factors that can change aggregate demand • Differentiate between short-run and long-run macroeconomic equilibrium, and explain how economic growth, inflation, and changes in aggregate demand and supply influence the macroeconomic equilibrium and the business cycle • Compare and contrast the Keynesian, Classical, and Monetarist schools of macroeconomics "Money, Banks, and the Federal Reserve" The practitioner should be able to: • Explain the functions of money • Describe the components of the M1 and M2 measures of money, and discuss why checks and credit cards are not counted as money • Describe the economic functions of and differentiate among the various depository institutions, and explain the impact of financial regulation, deregulation, and innovation • Discuss the creation of money, including the role played by excess reserves, and calculate the amount of loans a bank can generate, given new deposits • Explain the goals of the U.S. Federal Reserve (Fed) in conducting monetary policy and how the Fed uses its policy tools to control the quantity of money, and describe the assets and liabilities on the Fed’s balance sheet • Describe the monetary base, and explain the relation among the monetary base, the money multiplier, and the quantity of money "Money, Interest, Real GDP, and the Price Level" The practitioner should be able to: • Explain the factors that influence the demand for money, and describe the demand for money curve, including the effects of changes in real GDP and financial innovation • Explain interest rate determination and the short-run and long-run effects of money on real GDP • Discuss the quantity theory of money and its relation to aggregate supply and aggregate demand

"Inflation" The practitioner should be able to: • Differentiate between inflation and the price level, and calculate an inflation rate • Describe and distinguish among the factors resulting in demand-pull and cost-push inflation, and describe the evolution of demand-pull and cost-push inflationary processes • Explain the effects of unanticipated inflation in the labor market and the market for financial capital • Distinguish between anticipated and unanticipated inflation, and explain the costs of anticipated inflation • Explain the impact of inflation on unemployment, and describe the short-run and long-run Phillips curve, including the effect of changes in the natural rate of unemployment • Explain the relation among inflation, nominal interest rates, and the demand and supply of money "Fiscal Policy" The practitioner should be able to: • Explain supply-side effects on employment, potential GDP, and aggregate supply, including the income tax and taxes on expenditure, and describe the Laffer curve and its relation to supply-side economics • Discuss the sources of investment finance and the influence of fiscal policy on capital markets, including the crowding-out effect • Discuss the generational effects of fiscal policy, including generational accounting and generational imbalance • Discuss the use of fiscal policy to stabilize the economy, including the effects of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier • Explain the limitations of discretionary fiscal policy, and differentiate between discretionary fiscal policy and automatic stabilizers "Monetary Policy" The practitioner should be able to: • Discuss the U.S. Federal Reserve’s primary goal of price stability, the secondary goal of maintaining sustainable real GDP growth, and the intermediate targets of monetary policy, and compare and contrast the policies that can be used to achieve price level stability • Compare and contrast fixed-rule and feedback-rule monetary policies to stabilize aggregate demand, and explain the problem of monetary policy lags • Discuss the fixed-rule and feedback-rule policies to stabilize aggregate supply in response to a productivity shock and a cost-push inflation shock • Discuss the importance of policy credibility in monetary policy implementation • Compare and contrast the new monetarist and new Keynesian feedback rules

"Financial Statement Analysis: An Introduction" The practitioner should be able to: • Discuss the roles of financial reporting and financial statement analysis • Discuss the role of key financial statements (income statement, balance sheet, cash flow statement and statement of changes in owners’ equity) in evaluating a company’s performance and financial position • Discuss the importance of financial statement notes and supplementary information (including disclosures of accounting methods, estimates and assumptions), and management’s discussion and analysis • Discuss the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls • Identify and explain information sources other than annual financial statements and supplementary information that analysts use in financial statement analysis • Describe the steps in the financial statement analysis framework "Financial Reporting Mechanics" The practitioner should be able to: • Identify the groups (operating, investing, and financing activities) into which business activities are categorized for financial reporting purposes and classify any business activity into the appropriate group • Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements • Explain the accounting equation in its basic and expanded forms • Explain the process of recording business transactions using an accounting system based on the accounting equations • Explain the need for accruals and other adjustments in preparing financial statements • Prepare financial statements, given account balances or other elements in the relevant accounting equation, and explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity • Describe the flow of information in an accounting system • Explain the use of the results of the accounting process in security analysis

"Financial Reporting Standards" The practitioner should be able to: • Explain the objective of financial statements and the importance of reporting standards in security analysis and valuation • Explain the role of standard-setting bodies, such as the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, and regulatory authorities such as the International Organization of Securities Commissions, the U.K. Financial Services Authority, and the U.S. Securities and Exchange Commission in establishing and enforcing financial reporting standards • Discuss the ongoing barriers to developing one universally accepted set of financial reporting standards • Describe the International Financial Reporting Standards (IFRS) framework, including the objective of financial statements, their qualitative characteristics, required reporting elements, and the constraints and assumptions in preparing financial statements • Explain the general requirements for financial statements • Compare and contrast key concepts of financial reporting standards under IFRS and alternative reporting systems, and discuss the implications for financial analysis of differing financial reporting systems • Identify the characteristics of a coherent financial reporting framework and barriers to creating a coherent financial reporting network • Discuss the importance of monitoring developments in financial reporting standards and evaluate company disclosures of significant accounting policies

"Understanding the Income Statement" The practitioner should be able to: • Describe the components of the income statement and construct an income statement using the alternative presentation formats of that statement • Explain the general principles of revenue recognition and accrual accounting, demonstrate specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, and gross and net reporting of revenue), and discuss the implications of revenue recognition principles for financial analysis • Discuss the general principles of expense recognition, such as the matching principle, specific expense recognition applications (including depreciation of longterm assets and inventory methods), and the implications of expense recognition principles for financial analysis • Determine which method of depreciation, accounting for inventory, or amortizing intangibles is appropriate, based on facts that might influence the decision • Demonstrate the depreciation of long-term assets using each approved method, accounting for inventory using each approved method, and amortization of intangibles • Distinguish between the operating and nonoperating components of the income statement • Discuss the financial reporting treatment and analysis of nonrecurring items (including discontinued operations, extraordinary items, and unusual or infrequent items), and changes in accounting standards • Describe the components of earnings per share and calculate a company’s earnings per share (both basic and diluted earnings per share) for both a simple and complex capital structure • Distinguish between dilutive and antidilutive securities, and discuss the implications of each for the earnings per share calculation • Evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement • State the accounting classification for items that are excluded from the income statement but affect owners’ equity, and list the major types of items receiving that treatment • Describe and calculate comprehensive income "Understanding the Balance Sheet" The practitioner should be able to: • Illustrate and interpret the components of the assets, liabilities, and equity sections of the balance sheet, and discuss the uses of the balance sheet in financial analysis • Describe the various formats of balance sheet presentation • Explain how assets and liabilities arise from the accrual process • Compare and contrast current and noncurrent assets and liabilities

• • • • •

Explain the measurement bases (e.g., historical cost and fair value) of assets and liabilities, including current assets, current liabilities, tangible assets, and intangible assets Discuss off-balance-sheet disclosures Demonstrate the appropriate classifications and related accounting treatments for marketable and non-marketable financial instruments held as assets or owed by the company as liabilities List and explain the components of owners’ equity Interpret balance sheets, common-size balance sheets, the statement of changes in equity, and commonly used balance sheet ratios

"Understanding the Cash Flow Statement" The practitioner should be able to: • Compare and contrast cash flows from operating, investing, and financing activities, and classify cash flow items as relating to one of these three categories, given a description of the items • Describe how noncash investing and financing activities are reported • Compare and contrast the key differences in cash flow statements prepared under international financial reporting standards and U.S. generally accepted accounting principles • Demonstrate the difference between the direct and indirect methods of presenting cash from operating activities and explain the arguments in favor of each • Demonstrate how the cash flow statement is linked to the income statement and balance sheet • Demonstrate the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data • Describe the process of converting a statement of cash flows from the direct to the indirect method of presentation • Analyze and interpret a cash flow statement using both total currency amounts and common-size cash flow statements • Explain and calculate free cash flow to the firm, free cash flow to equity, and other cash flow ratios “Analysis of Inventories” The practitioner should be able to: • Compute ending inventory balances and cost of goods sold using the LIFO, FIFO, and average cost methods to account for product inventory and explain the relationship among and the usefulness of inventory and cost of goods sold data provided by the LIFO, FIFO, and average cost methods when prices are 1) stable or 2) changing • Analyze the financial statements of companies using different inventory accounting methods to compare and describe the effect of the different methods on cost of goods sold and inventory balances, discuss how a company’s choice of inventory accounting method affects other financial items such as income, cash flow, and working capital, and compute and describe the effects of the choice of inventory method on profitability, liquidity, activity, and solvency ratios • Discuss the reasons that a LIFO reserve might decline during a given period and discuss the implications of such a decline for financial analysis • Discuss how inventories are reported in the financial statements and how the lower of cost or market principle is used and applied

"Long-Term Assets” The practitioner should be able to: • Describe the factors that distinguish long-term assets from other assets and identify the common types of long-term assets and how carrying value is determined on the balance sheet • Determine the costs that are capitalized to property, plant and equipment and determine which costs are expensed as incurred • Explain depreciation accounting (including the reasons for depreciation), calculate depreciation using the straight-line, production (also known as units-of-production), and declining-balance methods, and calculate depreciation after revising the estimated useful life of an asset • Describe how to account for the sale, exchange, or disposal of depreciable assets, and determine whether a gain or loss is recorded • Identify assets that should be classified as natural resources, determine their carrying values on the balance sheet and calculate depletion • Identify the types of intangible assets and describe how the accounting treatment for goodwill under U.S. GAAP differs from the accounting treatment for other intangible assets “Analysis of Long-Lived Assets: Part I – The Capitalization Decision” The practitioner should be able to: • Compute and describe the effects of capitalizing versus expensing on net income, shareholders’ equity, cash flow from operations, and financial ratios including the effect on the interest coverage ratio (times interest earned) of capitalizing interest costs • Explain the circumstances in which intangible assets, including software development costs and research and development costs are capitalized • Calculate and describe both the initial and long-term effects of asset revaluations on financial ratios “Analysis of Long-Lived Assets: Part II – Analysis of Depreciation and Impairment” The practitioner should be able to: • Identify the different depreciation methods and discuss how the choice of depreciation method affects a company’s financial statements, ratios, and taxes • Explain the role of depreciable lives and salvage values in the computation of depreciation expenses, and compute and describe how changing depreciation methods or changing the estimated useful life or salvage value of an asset affects financial statements and ratios • Discuss the use of fixed asset disclosures to compare companies’ average age of depreciable assets, and calculate, using such disclosures, the average age and average depreciable life of fixed assets • Define impairment of long-lived assets and explain what effect such impairment has on a company’s financial statements and ratios

•

Discuss the liability for closure, removal, and environmental effects of longlived operating assets, and discuss the financial statement impact and ratio effects of that liability

"Financial Analysis Techniques" The practitioner should be able to: • Evaluate and compare companies using ratio analysis, common-size financial statements, and charts in financial analysis • Describe the limitations of ratio analysis • Explain and demonstrate the classification of financial ratios • Calculate and interpret activity, liquidity, solvency, profitability, and valuation ratios • Demonstrate how ratios are related and how to evaluate a company using a combination of different ratios • Demonstrate the application of DuPont analysis (the decomposition of return on equity) • Calculate and interpret the ratios used in equity analysis, credit analysis, and segment analysis • Describe how the results of common-size and ratio analysis can be used to model and forecast earnings "Financial Statement Analysis: Applications" The practitioner should be able to: • Evaluate a company’s past financial performance and explain how a company’s strategy is reflected in past financial performance • Prepare a basic projection of a company’s future net income and cash flow • Describe the role of financial statement analysis in assessing the credit quality of a potential debt investment • Discuss the use of financial statement analysis in screening for potential equity investments • Determine and justify appropriate analyst adjustments to a company’s financial statements to facilitate comparison with another company "International Standards Convergence" The practitioner should be able to: • Identify and explain the major international accounting standards for each asset and liability category on the balance sheet and the key differences from U.S. generally accepted accounting principles (GAAP) • Identify and explain the major international accounting standards for major revenue and expense categories on the income statement, and the key differences from U.S. GAAP • Identify and explain the major differences between international and U.S. GAAP accounting standards concerning the treatment of interest and dividends on the cash flow statement • Interpret the effect of differences between international and U.S. GAAP accounting standards on the balance sheet, income statement, and the statement of changes in equity for some commonly used financial ratios

"Capital Budgeting" The practitioner should be able to: • Explain the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects • Discuss the basic principles of capital budgeting, including the choice of the proper cash flows and determining the proper discount rate • Explain how the following project interactions affect the evaluation of a capital project: (1) independent versus mutually exclusive projects, (2) project sequencing, and (3) unlimited funds versus capital rationing • Calculate and interpret the results using each of the following methods to evaluate a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, average accounting rate of return (AAR), and profitability index (PI) • Explain the NPV profile, compare and contrast the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems that can arise when using an IRR • Describe and account for the relative popularity of the various capital budgeting methods, and explain the relation between NPV and company value and stock price "Cost of Capital" The practitioner should be able to: • Calculate and interpret the weighted average cost of capital (WACC) of a company • Describe how taxes affect the cost of capital from different capital sources • Describe alternative methods of calculating the weights used in the weighted average cost of capital, including the use of the company’s target capital structure • Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget • Explain the marginal cost of capital’s role in determining the net present value of a project • Calculate and interpret the cost of fixed rate debt capital using the yield-tomaturity approach and the debt-rating approach • Calculate and interpret the cost of noncallable, nonconvertible preferred stock • Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach • Explain the country equity risk premium in the estimation of the cost of equity for a company located in a developing market • Describe the marginal cost of capital schedule, explain why it may be upward-sloping with respect to additional capital, and calculate and interpret its breakpoints • Explain and demonstrate the correct treatment of flotation costs

"Working Capital Management" The practitioner should be able to: • Calculate and interpret liquidity measures using selected financial ratios for a company and compare the company with peer companies • Evaluate overall working capital effectiveness of a company, using the operating and cash conversion cycles, and compare the company’s effectiveness with other peer companies • Classify the components of a cash forecast and prepare a cash forecast, given estimates of revenues, expenses, and other items • Identify and evaluate the necessary tools to use in managing a company’s net daily cash position • Compute and interpret comparable yields on various securities, compare portfolio returns against a standard benchmark, and evaluate a company’s short-term investment policy guidelines • Evaluate the performance of a company’s accounts receivable, inventory management, and accounts payable functions against historical figures and comparable peer company values • Evaluate the choices of short-term funding available to a company and recommend a financing method "Financial Statement Analysis" The practitioner should be able to: • Calculate, interpret, and discuss the DuPont expression and extended DuPont expression for a company’s return on equity and demonstrate its use in corporate analysis • Demonstrate the use of pro forma income and balance sheet statements "The Corporate Governance of Listed Companies: A Manual for Investors" The practitioner should be able to: • Define and describe corporate governance • Discuss and critique characteristics and practices related to board and committee independence, experience, compensation, external consultants, and frequency of elections, and determine whether they are supportive of shareowner protection • Describe board independence and explain the importance of independent board members in corporate governance • Identify factors that indicate a board and its members possess the experience required to govern the company for the benefit of its shareowners • Explain the provisions that should be included in a strong corporate code of ethics and the implications of a weak code of ethics with regard to relatedparty transactions and personal use of company assets • State the key areas of responsibility for which board committees are typically created, and explain the criteria for assessing whether each committee is able to adequately represent shareowner interests

•

Evaluate, from a shareowner’s perspective, company policies related to voting rules, shareowner-sponsored proposals, common stock classes, and takeover defenses

“The Asset Allocation Decision” The practitioner should be able to: • Describe the steps in the portfolio management process, and explain the reasons for a policy statement • Explain why investment objectives should be expressed in terms of risk and return, and list the factors that may affect an investor’s risk tolerance • Describe the return objectives of capital preservation, capital appreciation, current income, and total return • Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique needs and preferences • Describe the importance of asset allocation, in terms of the percentage of a portfolio’s return that can be explained by the target asset allocation, and explain how political and economic factors result in differing asset allocations by investors in various countries "An Introduction to Portfolio Management” The practitioner should be able to: • Define risk aversion and discuss evidence that suggests that individuals are generally risk averse • List the assumptions about investor behavior underlying the Markowitz model • Compute and interpret the expected return, variance, and standard deviation for an individual investment and the expected return and standard deviation for a portfolio • Compute and interpret the covariance of rates of return, and show how it is related to the correlation coefficient • List the components of the portfolio standard deviation formula, and explain the relevant importance of these components when adding an investment to a portfolio • Describe the efficient frontier, and explain the implications for incremental returns as an investor assumes more risk • Explain the concept of an optimal portfolio, and show how each investor may have a different optimal portfolio “An Introduction to Asset Pricing Models” The practitioner should be able to: • Explain the capital market theory, including its underlying assumptions, and explain the effect on expected returns, the standard deviation of returns, and possible risk/return combinations when a risk-free asset is combined with a portfolio of risky assets • Identify the market portfolio, and describe the role of the market portfolio in the formation of the capital market line (CML) • Define systematic and unsystematic risk, and explain why an investor should not expect to receive additional return for assuming unsystematic risk • Explain the capital asset pricing model, including the security market line (SML) and beta, and describe the effects of relaxing its underlying assumptions

•

Calculate, using the SML, the expected return on a security, and evaluate whether the security is overvalued, undervalued, or properly valued

“Organization and Functioning of Securities Markets” The practitioner should be able to: • Describe the characteristics of a well-functioning securities market • Distinguish between primary and secondary capital markets, and explain how secondary markets support primary markets • Distinguish between call and continuous markets • Compare and contrast the structural differences among national stock exchanges, regional stock exchanges, and over-the-counter (OTC) markets • Compare and contrast major characteristics of exchange markets, including exchange membership, types of orders, and market makers • Describe the process of selling a stock short and discuss an investor’s likely motivation for selling short • Describe the process of buying a stock on margin, compute the rate of return on a margin transaction, define maintenance margin, and determine the stock price at which the investor would receive a margin call “Security-Market Indexes” The practitioner should be able to: • Compare and contrast the characteristics of, and discuss the source and direction of bias exhibited by, each of the three predominant weighting schemes used in constructing stock market indexes, and compute a priceweighted, valueweighted, and unweighted index series for three stocks • Compare and contrast major structural features of domestic and global stock indexes, bond indexes, and composite stock-bond indexes • State how low correlations between global markets support global investment “Efficient Capital Markets” The practitioner should be able to: • Define an efficient capital market and describe and contrast the three forms of the efficient market hypothesis (EMH) • Describe the tests used to examine each of the three forms of the EMH, identify various market anomalies and explain their implications for the EMH, and explain the overall conclusions about each form of the EMH • Explain the implications of stock market efficiency for technical analysis, fundamental analysis, the portfolio management process, the role of the portfolio manager, and the rationale for investing in index funds • Define behavioral finance and describe overconfidence bias, confirmation bias, and escalation bias “Market Efficiency and Anomalies” The practitioner should be able to: • Explain the three limitations to achieving fully efficient markets • Describe four problems that may prevent arbitrageurs from correcting anomalies • Explain why an apparent anomaly may be justified, and describe the common biases that distort testing for mispricings

•

Explain why a mispricing may persist and why valid anomalies may not be profitable

“An Introduction to Security Valuation: Part I” The practitioner should be able to explain the top-down approach, and its underlying logic, to the security valuation process. “Industry Analysis” The practitioner should be able to describe how structural economic changes (e.g., demographics, technology, politics, and regulation) may affect industries. “Equity: Concepts and Techniques” The practitioner should be able to: • Classify business cycle stages and identify attractive investment opportunities for each stage • Discuss, with respect to global industry analysis, the key elements related to return expectations • Describe the industry life cycle and identify an industry’s stage in its life cycle • Discuss the specific advantages of both the concentration ratio and the Herfindahl index • Discuss, with respect to global industry analysis, the elements related to risk, and describe the basic forces that determine industry competition. “Company Analysis and Stock Valuation” The practitioner should be able to: • Differentiate between 1) a growth company and a growth stock, 2) a defensive company and a defensive stock, 3) a cyclical company and a cyclical stock, 4) a speculative company and a speculative stock, and 5) a value stock and a growth stock • Describe and estimate the expected earnings per share (EPS) and earnings multiplier for a company and use the multiple to make an investment decision regarding the company "An Introduction to Security Valuation: Part II" The practitioner should be able to: • State the various forms of investment returns • Calculate and interpret the value both of a preferred stock and a common stock using the dividend discount model (DDM) • Show how to use the DDM to develop an earnings multiplier model, and explain the factors in the DDM that affect a stock’s price-to-earnings (P/E) ratio • Explain the components of an investor’s required rate of return (i.e., the real riskfree rate, the expected rate of inflation, and a risk premium) and discuss the risk factors to be assessed in determining a country risk premium for use in estimating the required return for foreign securities • Estimate the implied dividend growth rate, given the components of the required return on equity and incorporating the earnings retention rate and current stock price

•

Describe a process for developing estimated inputs to be used in the DDM, including the required rate of return and expected growth rate of dividends

"Introduction to Price Multiples" The practitioner should be able to: • Discuss the rationales for, and the possible drawbacks to, the use of price to earnings (P/E), price to book value (P/BV), price to sales (P/S), and price to cash flow (P/CF) in equity valuation • Calculate and interpret P/E, P/BV, P/S, and P/CF “Features of Debt Securities” The practitioner should be able to: • Explain the purposes of a bond’s indenture, and describe affirmative and negative covenants • Describe the basic features of a bond, the various coupon rate structures, and the structure of floating-rate securities • Define accrued interest, full price, and clean price • Explain the provisions for redemption and retirement of bonds • Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or the bondholder • Describe methods used by institutional investors in the bond market to finance the purchase of a security (i.e., margin buying and repurchase agreements) “Risks Associated with Investing in Bonds” The practitioner should be able to: • Explain the risks associated with investing in bonds • Identify the relations among a bond’s coupon rate, the yield required by the market, and the bond’s price relative to par value (i.e., discount, premium, or equal to par) • Explain how features of a bond (e.g., maturity, coupon, and embedded options) and the level of a bond’s yield affect the bond’s interest rate risk • Identify the relationship among the price of a callable bond, the price of an option-free bond, and the price of the embedded call option • Explain the interest rate risk of a floating-rate security and why such a security’s price may differ from par value • Compute and interpret the duration and dollar duration of a bond • Describe yield curve risk and explain why duration does not account for yield curve risk for a portfolio of bonds • Explain the disadvantages of a callable or prepayable security to an investor • Identify the factors that affect the reinvestment risk of a security and explain why prepayable amortizing securities expose investors to greater reinvestment risk than nonamortizing securities • Describe the various forms of credit risk and describe the meaning and role of credit ratings • Explain liquidity risk and why it might be important to investors even if they expect to hold a security to the maturity date

• • • •

Describe the exchange rate risk an investor faces when a bond makes payments in a foreign currency Explain inflation risk Explain how yield volatility affects the price of a bond with an embedded option and how changes in volatility affect the value of a callable bond and a putable bond Describe the various forms of event risk

“Overview of Bond Sectors and Instruments” The practitioner should be able to: • Describe the features, credit risk characteristics, and distribution methods for government securities • Describe the types of securities issued by the U.S. Department of the Treasury (e.g., bills, notes, bonds, and inflation protection securities), and differentiate between on-the-run and off-the-run Treasury securities • Describe how stripped Treasury securities are created and distinguish between coupon strips and principal strips • Describe the types and characteristics of securities issued by U.S. federal agencies • Describe the types and characteristics of mortgage-backed securities and explain the cash flow, prepayments, and prepayment risk for each type • State the motivation for creating a collateralized mortgage obligation • Describe the types of securities issued by municipalities in the United States, and distinguish between tax-backed debt and revenue bonds • Describe the characteristics and motivation for the various types of debt issued by corporations (including corporate bonds, medium-term notes, structured notes, commercial paper, negotiable CDs, and bankers acceptances) • Define an asset-backed security, describe the role of a special purpose vehicle in an asset-backed security’s transaction, state the motivation for a corporation to issue an asset-backed security, and describe the types of external credit enhancements for asset-backed securities • Describe collateralized debt obligations • Describe the mechanisms available for placing bonds in the primary market and differentiate the primary and secondary markets in bonds “Understanding Yield Spreads” The practitioner should be able to: • Identify the interest rate policy tools available to a central bank (e.g., the U.S. Federal Reserve) • Describe a yield curve and the various shapes of the yield curve • Explain the basic theories of the term structure of interest rates and describe the implications of each theory for the shape of the yield curve • Define a spot rate • Compute, compare, and contrast the various yield spread measures • Describe a credit spread and discuss the suggested relation between credit spreads and the well-being of the economy • Identify how embedded options affect yield spreads • Explain how the liquidity or issue-size of a bond affects its yield spread relative to risk-free securities and relative to other securities • Compute the after-tax yield of a taxable security and the tax-equivalent yield of a tax-exempt security • Define LIBOR and explain its importance to funded investors who borrow short term

“Monetary Policy in an Environment of Global Financial Markets” The practitioner should be able to: • Identify how central bank behavior affects short-term interest rates, systemic liquidity, and market expectations, thereby affecting financial markets • Describe the importance of communication between a central bank and the financial markets • Discuss the problem of information asymmetry and the importance of predictability, credibility, and transparency of monetary policy “Introduction to the Valuation of Debt Securities” The practitioner should be able to: • Explain the steps in the bond valuation process • Identify the types of bonds for which estimating the expected cash flows is difficult, and explain the problems encountered when estimating the cash flows for these bonds • Compute the value of a bond and the change in value that is attributable to a change in the discount rate • Explain how the price of a bond changes as the bond approaches its maturity date, and compute the change in value that is attributable to the passage of time • Compute the value of a zero-coupon bond • Explain the arbitrage-free valuation approach and the market process that forces the price of a bond toward its arbitrage-free value, and explain how a dealer can generate an arbitrage profit if a bond is mispriced “Yield Measures, Spot Rates, and Forward Rates” The practitioner should be able to: • Explain the sources of return from investing in a bond • Compute and interpret the traditional yield measures for fixed-rate bonds, and explain their limitations and assumptions • Explain the importance of reinvestment income in generating the yield computed at the time of purchase, calculate the amount of income required to generate that yield, and discuss the factors that affect reinvestment risk • Compute and interpret the bond equivalent yield of an annual-pay bond and the annual-pay yield of a semiannual-pay bond • Describe the methodology for computing the theoretical Treasury spot rate curve, and compute the value of a bond using spot rates • Differentiate between the nominal spread, the zero-volatility spread, and the option-adjusted spread • Describe how the option-adjusted spread accounts for the option cost in a bond with an embedded option • Explain a forward rate, and compute spot rates from forward rates, forward rates from spot rates, and the value of a bond using forward rates

“Introduction to the Measurement of Interest Rate Risk” The practitioner should be able to: • Distinguish between the full valuation approach (the scenario analysis approach) and the duration/convexity approach for measuring interest rate risk, and explain the advantage of using the full valuation approach • Demonstrate the price volatility characteristics for option-free, callable, prepayable, and putable bonds when interest rates change • Describe positive convexity, negative convexity, and their relation to bond price and yield • Compute and interpret the effective duration of a bond, given information about how the bond’s price will increase and decrease for given changes in interest rates, and compute the approximate percentage price change for a bond, given the bond’s effective duration and a specified change in yield • Distinguish among the alternative definitions of duration, and explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options • Compute the duration of a portfolio, given the duration of the bonds comprising the portfolio, and explain the limitations of portfolio duration • Describe the convexity measure of a bond, and estimate a bond’s percentage price change, given the bond’s duration and convexity and a specified change in interest rates • Differentiate between modified convexity and effective convexity • Compute the price value of a basis point (PVBP), and explain its relationship to duration “Derivative Markets and Instruments” The practitioner should be able to: • Define a derivative and differentiate between exchange-traded and over-thecounter derivatives • Define a forward commitment and a contingent claim, and describe the basic characteristics of forward contracts, futures contracts, options (calls and puts), and swaps • Discuss the purposes and criticisms of derivative markets • Explain arbitrage and the role it plays in determining prices and promoting market efficiency “Forward Markets and Contracts” The practitioner should be able to: • Differentiate between the positions held by the long and short parties to a forward contract in terms of delivery/settlement and default risk • Describe the procedures for settling a forward contract at expiration, and discuss how termination alternatives prior to expiration can affect credit risk • Differentiate between a dealer and an end user of a forward contract • Describe the characteristics of equity forward contracts and forward contracts on zero-coupon and coupon bonds

• • • •

Describe the characteristics of the Eurodollar time deposit market, define LIBOR and Euribor Describe the characteristics of forward rate agreements (FRAs) Calculate and interpret the payoff of an FRA and explain each of the component terms Describe the characteristics of currency forward contracts

“Futures Markets and Contracts” The practitioner should be able to: • Describe the characteristics of futures contracts, and distinguish between futures contracts and forward contracts • Differentiate between margin in the securities markets and margin in the futures markets; and define initial margin, maintenance margin, variation margin, and settlement price • Describe price limits and the process of marking to market, and compute and interpret the margin balance, given the previous day’s balance and the new change in the futures price • Describe how a futures contract can be terminated by a close-out (i.e., offset) at expiration (or prior to expiration), delivery, an equivalent cash settlement, or an exchange-for-physicals • Describe the characteristics of the following types of futures contracts: Eurodollar, Treasury bond, stock index, and currency “Option Markets and Contracts” The practitioner should be able to: • Define European option, American option, and moneyness, and differentiate between exchange-traded options and over-the-counter options • Identify the types of options in terms of the underlying instruments • Compare and contrast interest rate options to forward rate agreements (FRAs) • Define interest rate caps, floors, and collars • Compute and interpret option payoffs, and explain how interest rate option payoffs differ from the payoffs of other types of options • Define intrinsic value and time value, and explain their relationship • Determine the minimum and maximum values of European options and American options • Calculate and interpret the lowest prices of European and American calls and puts based on the rules for minimum values and lower bounds • Explain how option prices are affected by the exercise price and the time to expiration • Explain put-call parity for European options, and relate put-call parity to arbitrage and the construction of synthetic options • Contrast American options with European options in terms of the lower bounds on option prices and the possibility of early exercise • Explain how cash flows on the underlying asset affect put-call parity and the lower bounds of option prices • Indicate the directional effect of an interest rate change or volatility change on an option’s price “Swap Markets and Contracts” The practitioner should be able to: • Describe the characteristics of swap contracts and explain how swaps are terminated

•

Define and give examples of currency swaps, plain vanilla interest rate swaps, and equity swaps, and calculate and interpret the payments on each

“Risk Management Applications of Option Strategies” The practitioner should be able to: • Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of the strategies of buying and selling calls and puts, and indicate the market outlook of investors using these strategies • Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of a covered call strategy and a protective put strategy, and explain the risk management application of each strategy “Alternative Investments” The practitioner should be able to: • Differentiate between an open-end and a closed-end fund, and explain how net asset value of a fund is calculated and the nature of fees charged by investment companies • Distinguish among style, sector, index, global, and stable value strategies in equity investment and among exchange traded funds (ETFs), traditional mutual funds, and closed end funds • Explain the advantages and risks of ETFs • Describe the forms of real estate investment and explain their characteristics as an investable asset class • Describe the various approaches to the valuation of real estate • Calculate the net operating income (NOI) from a real estate investment, the value of a property using the sales comparison and income approaches, and the after-tax cash flows, net present value, and yield of a real estate investment • Explain the stages in venture capital investing, venture capital investment characteristics, and challenges to venture capital valuation and performance measurement • Calculate the net present value (NPV) of a venture capital project, given the project’s possible payoff and conditional failure probabilities • Discuss the descriptive accuracy of the term “hedge fund,” define hedge fund in terms of objectives, legal structure, and fee structure, and describe the various classifications of hedge funds • Explain the benefits and drawbacks to fund of funds investing • Discuss the leverage and unique risks of hedge funds • Discuss the performance of hedge funds, the biases present in hedge fund performance measurement, and explain the effect of survivorship bias on the reported return and risk measures for a hedge fund database • Explain how the legal environment affects the valuation of closely held companies • Describe alternative valuation methods for closely held companies and distinguish among the bases for the discounts and premiums for these companies

• • • •

Discuss distressed securities investing and compare venture capital investing with distressed securities investing Discuss the role of commodities as a vehicle for investing in production and consumption Explain the motivation for investing in commodities, commodities derivatives, and commodity-linked securities Discuss the sources of return on a collateralized commodity futures position

Sign up to vote on this title

UsefulNot usefulLearning Outcome Statements for CFA Level 1

Learning Outcome Statements for CFA Level 1

- Bentham - Emancipate Your Colonies!
- What is a Just Price
- Baye All
- Creative_Disruption.pdf
- Free ECO 365 Final Exam Tutorial | UOP Students
- MonopoliscitCompetition
- 11-3ProfMax
- Oz Shy - Industrial Organization
- On the Welfare Benefits of Taxation
- Short Run Equilibrium
- LESSON 22 - Perfect Competition and Mono
- AB0901 Principles of Economics. a Singapore Perspective
- Fw Market Place Competition 2
- Chap 17
- syll201
- natural monopoly
- ch12
- History Review
- Problem Set 5
- ClassOf1 Monopoly Profitmax
- Tutorial on Basic Principles of Accounting
- FA BR 100 Application Setup (1).docx
- Nominal Code Structure
- Taq Property, Plant & Equipment
- Micro Chapter 1-4 Question for Quiz
- Comprehensive Problem
- QA Accounting for Depreciation
- Lesson 04
- Multiple Choice Questions for Ch
- AP-59-FinPB_5.06
- LEARNING OUTCOME STATEMENTS-FULL