2011年CFA 考試 study guides
www.cfainstitute.org/toolkit—Your online preparation resource
The readings in this study session present a framework for ethical conduct in
the investment profession by focusing on the CFA Institute Code of Ethics and
Standards of Professional Conduct as well as the Global Investment Performance
Standards (GIPS®).
The principles and guidance presented in the CFA Institute Standards of
Practice Handbook (SOPH) form the basis for the CFA Institute selfregulatory
program to maintain the highest professional standards among investment
practitioners. “Guidance” in the SOPH addresses the practical application of the
Code and Standards. The guidance reviews the purpose and scope of each
standard, presents recommended procedures for compliance, and provides
examples of the standard in practice.
The GIPS facilitate efficient comparison of investment performance among
investment managers and across country borders by prescribing methodology and
standards that are consistent with a clear and honest presentation of returns.
Having a global standard for reporting investment performance minimizes the
potential for ambiguous or misleading presentations.
READING ASSIGNMENTS
Reading 1 Code of Ethics and Standards of Professional Conduct
Standards of Practice Handbook, Ninth Edition
Reading 2 Guidance for Standards I–VII
Standards of Practice Handbook, Ninth Edition
Reading 3 Introduction to the Global Investment Performance Standards
(GIPS®)
Reading 4 Global Investment Performance Standards (GIPS®)
STUDY SES
Study Session 1
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LEARNING OUTCOMES
Reading 1: Code of Ethics and Standards of Professional Conduct
The candidate should be able to:
a. describe the structure of the CFA Institute Professional Conduct Program and the
process for the enforcement of the Code and Standards;
b. state the six components of the Code of Ethics and the seven Standards of
Professional Conduct;
c. explain the ethical responsibilities required by the Code and Standards, including
the multiple subsections of each Standard.
Reading 2: Guidance for Standards I–VII
The candidate should be able to:
a. demonstrate a thorough knowledge of the Code of Ethics and Standards of
Professional Conduct by applying the Code and Standards to situations involving
issues of professional integrity;
b. distinguish between conduct that conforms to the Code and Standards and
conduct that violates the Code and Standards;
c. recommend practices and procedures designed to prevent violations of the Code
of Ethics and Standards of Professional Conduct.
Reading 3: Introduction to the Global Investment Performance
Standards (GIPS®)
The candidate should be able to:
a. explain why the GIPS standards were created, what parties the GIPS standards
apply to, and who is served by the standards;
b. explain the construction and purpose of composites in performance reporting;
c. explain the requirements for verification of compliance with GIPS standards.
Reading 4: Global Investment Performance Standards (GIPS®)
The candidate should be able to:
a. describe the key characteristics of the GIPS standards and the fundamentals of
compliance;
b. describe the scope of the GIPS standards with respect to an investment firm’s
definition and historical performance record;
c. 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 conflict;
d. characterize the eight major sections of the GIPS standards.
www.cfainstitute.org/toolkit—Your online preparation resource
This introductory study session presents the fundamentals of some of those
quantitative techniques that are essential in almost any type of financial
analysis, and which will be used throughout the remainder of the CFA curriculum.
This session introduces two main building blocks of the quantitative analytical tool
kit: the time value of money and statistics and probability theory.
The time value of money concept is one of the main principles of financial
valuation. The calculations based on this principle (e.g., present value, future
value, and internal rate of return) are the basic tools used to support corporate
finance decisions and estimate the fair value of fixed income, equity, or any other
type of security or investment.
Similarly, the basic concepts of statistics and probability theory constitute the
essential tools used in describing the main statistical properties of a population
and understanding and applying various probability concepts in practice.
READING ASSIGNMENTS
Reading 5 The Time Value of Money
Quantitative Methods for Investment Analysis, Second Edition,
by Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
Reading 6 Discounted Cash Flow Applications
Quantitative Methods for Investment Analysis, Second Edition,
by Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
Reading 7 Statistical Concepts and Market Returns
Quantitative Methods for Investment Analysis, Second Edition,
by Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
Reading 8 Probability Concepts
Quantitative Methods for Investment Analysis, Second Edition,
by Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
STUDY SESSION 2
QUANTITATIVE METHODS:
Basic Concepts
Study Session 2
www.cfainstitute.org/toolkit—Your online preparation resource
LEARNING OUTCOMES
Reading 5: The Time Value of Money
The candidate should be able to:
a. interpret interest rates as required rate of return, discount rate, or opportunity
cost;
b. explain an interest rate as the sum of a real riskfree rate, expected inflation, and
premiums that compensate investors for distinct types of risk;
c. calculate and interpret the effective annual rate, given the stated annual interest
rate and the frequency of compounding;
d. solve time value of money problems when compounding periods are other than
annual;
e. calculate and interpret the future value (FV) and present value (PV) of a single
sum of money, an ordinary annuity, an annuity due, a perpetuity (PV only), and a
series of unequal cash flows;
f. draw a time line and solve time value of money applications (for example,
mortgages and savings for college tuition or retirement).
Reading 6: Discounted Cash Flow Applications
The candidate should be able to:
a. 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
problems associated with the IRR rule;
b. define, calculate, and interpret a holding period return (total return);
c. calculate, interpret, and distinguish between the moneyweighted and timeweighted
rates of return of a portfolio and appraise the performance of
portfolios based on these measures;
d. calculate and interpret the bank discount yield, holding period yield, effective
annual yield, and money market yield for a U.S. Treasury bill;
e. convert among holding period yields, money market yields, effective annual
yields, and bond equivalent yields.
Reading 7: Statistical Concepts and Market Returns
The candidate should be able to:
a. differentiate between descriptive statistics and inferential statistics, between a
population and a sample, and among the types of measurement scales;
b. explain a parameter, a sample statistic, and a frequency distribution;
c. calculate and interpret relative frequencies and cumulative relative frequencies,
given a frequency distribution;
d. describe the properties of a data set presented as a histogram or a frequency
polygon;
e. define, calculate, and interpret measures of central tendency, including the
population mean, sample mean, arithmetic mean, weighted average or mean
(including a portfolio return viewed as a weighted mean), geometric mean,
harmonic mean, median, and mode;
Study Session 2
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f. describe, calculate, and interpret quartiles, quintiles, deciles, and percentiles;
g. define, calculate, and interpret 1) a range and a mean absolute deviation and
2) the variance and standard deviation of a population and of a sample;
h. calculate and interpret the proportion of observations falling within a specified
number of standard deviations of the mean using Chebyshev’s inequality;
i. define, calculate, and interpret the coefficient of variation and the Sharpe ratio;
j. define and interpret skewness, explain the meaning of a positively or negatively
skewed return distribution, and describe the relative locations of the mean,
median, and mode for a nonsymmetrical distribution;
k. define and interpret measures of sample skewness and kurtosis;
l. discuss the use of arithmetic mean or geometric mean when determining
investment returns.
Reading 8: Probability Concepts
The candidate should be able to:
a. define a random variable, an outcome, an event, mutually exclusive events, and
exhaustive events;
b. explain the two defining properties of probability and distinguish among
empirical, subjective, and a priori probabilities;
c. state the probability of an event in terms of odds for or against the event;
d. distinguish between unconditional and conditional probabilities;
e. define and explain the multiplication, addition, and total probability rules;
f. 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;
g. distinguish between dependent and independent events;
h. calculate and interpret, using the total probability rule, an unconditional
probability;
i. explain the use of conditional expectation in investment applications;
j. diagram an investment problem using a tree diagram;
k. calculate and interpret covariance and correlation;
l. calculate and interpret the expected value, variance, and standard deviation of a
random variable and of returns on a portfolio;
m. calculate and interpret covariance given a joint probability function;
n. calculate and interpret an updated probability using Bayes’ formula;
o. identify the most appropriate method to solve a particular counting problem and
solve counting problems using the factorial, combination, and permutation
notations.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session introduces some of the discrete and continuous probability
distributions most commonly used to describe the behavior of random
variables. Probability theory and calculations are widely applied in finance, for
example, in the field of investment and project valuation and in financial risk
management.
Furthermore, this session teaches how to estimate different parameters (e.g.,
mean and standard deviation) of a population if only a sample, rather than the
whole population, can be observed. Hypothesis testing is a closely related topic.
This session presents the techniques that can be applied to accept or reject an
assumed hypothesis (null hypothesis) about various parameters of a population.
Finally, you will also learn about the fundamentals of technical analysis. It is
important that analysts properly understand the assumptions and limitations when
applying these tools as misspecified models or improperly used tools can result in
misleading conclusions.
READING ASSIGNMENTS
Reading 9 Common Probability Distributions
Quantitative Methods for Investment Analysis, Second Edition, by
Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
Reading 10 Sampling and Estimation
Quantitative Methods for Investment Analysis, Second Edition, by
Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
Reading 11 Hypothesis Testing
Quantitative Methods for Investment Analysis, Second Edition, by
Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E.
Pinto, CFA, and David E. Runkle, CFA
Reading 12 Technical Analysis
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
STUDY SESSION 3
QUANTITATIVE METHODS:
Application
Study Session 3
www.cfainstitute.org/toolkit—Your online preparation resource
LEARNING OUTCOMES
Reading 9: Common Probability Distributions
The candidate should be able to:
a. explain a probability distribution and distinguish between discrete and
continuous random variables;
b. describe the set of possible outcomes of a specified discrete random variable;
c. interpret a probability function, a probability density function, and a cumulative
distribution function;
d. calculate and interpret probabilities for a random variable, given its cumulative
distribution function;
e. define a discrete uniform random variable and a binomial random variable;
f. calculate and interpret probabilities given the discrete uniform and the binomial
distribution functions;
g. construct a binomial tree to describe stock price movement;
h. describe the continuous uniform distribution and calculate and interpret
probabilities, given a continuous uniform probability distribution;
i. 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;
j. determine the probability that a normally distributed random variable lies inside a
given confidence interval;
k. define the standard normal distribution, explain how to standardize a random
variable, and calculate and interpret probabilities using the standard normal
distribution;
l. define shortfall risk, calculate the safetyfirst ratio, and select an optimal portfolio
using Roy’s safetyfirst criterion;
m. explain the relationship between normal and lognormal distributions and why
the lognormal distribution is used to model asset prices;
n. 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;
o. explain Monte Carlo simulation and historical simulation and describe their major
applications and limitations.
Reading 10: Sampling and Estimation
The candidate should be able to:
a. define simple random sampling, sampling error, and a sampling distribution, and
interpret sampling error;
b. distinguish between simple random and stratified random sampling;
c. distinguish between timeseries and crosssectional data;
d. interpret the central limit theorem and describe its importance;
e. calculate and interpret the standard error of the sample mean;
f. distinguish between a point estimate and a confidence interval estimate of a
population parameter;
Study Session 3
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g. identify and describe the desirable properties of an estimator;
h. explain the construction of confidence intervals;
i. describe the properties of Student’s tdistribution and calculate and interpret its
degrees of freedom;
j. 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 a large sample size;
k. discuss the issues regarding selection of the appropriate sample size, datamining
bias, sample selection bias, survivorship bias, lookahead bias, and timeperiod
bias.
Reading 11: Hypothesis Testing
The candidate should be able to:
a. define a hypothesis, describe the steps of hypothesis testing, interpret and
discuss the choice of the null hypothesis and alternative hypothesis, and
distinguish between onetailed and twotailed tests of hypotheses;
b. 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;
c. define and interpret a decision rule and the power of a test, and explain the
relation between confidence intervals and hypothesis tests;
d. distinguish between a statistical result and an economically meaningful result;
e. explain and interpret the pvalue as it relates to hypothesis testing;
f. identify the appropriate test statistic and interpret the results for a hypothesis test
concerning the population mean of both large and small samples when the
population is normally or approximately distributed and the variance is 1) known
or 2) unknown;
g. identify the appropriate test statistic and interpret the results for a hypothesis test
concerning the equality of the population means of two at least approximately
normally distributed populations, based on independent random samples with
1) equal or 2) unequal assumed variances;
h. identify the appropriate test statistic and interpret the results for a hypothesis test
concerning the mean difference of two normally distributed populations (paired
comparisons test);
i. 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;
j. distinguish between parametric and nonparametric tests and describe the
situations in which the use of nonparametric tests may be appropriate.
Reading 12: Technical Analysis
The candidate should be able to:
a. explain the underlying assumptions of technical analysis;
b. discuss the advantages of and challenges to technical analysis;
c. list and describe examples of each major category of technical trading rules and
indicators.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session focuses on microeconomic concepts and how firms are
affected by these concepts. One of the main concepts related to the
equilibrium between demand and supply is elasticity, which measures the rate of
changes on the equilibrium price level. A second key concept is efficiency, which is
a measure of the firm’s “optimal” output given its cost and revenue functions.
Understanding these concepts enables analysts to differentiate among various
companies on an individual level and to determine their attractiveness for
an investor.
READING ASSIGNMENTS
Reading 13 Elasticity
Economics, Eighth Edition, by Michael Parkin
Reading 14 Efficiency and Equity
Economics, Eighth Edition, by Michael Parkin
Reading 15 Markets in Action
Economics, Eighth Edition, by Michael Parkin
Reading 16 Organizing Production
Economics, Eighth Edition, by Michael Parkin
Reading 17 Output and Costs
Economics, Eighth Edition, by Michael Parkin
STUDY SESSION 4
ECONOMICS:
Microeconomic Analysis
LEARNING OUTCOMES
Reading 13: Elasticity
The candidate should be able to:
a. calculate and interpret the elasticities of demand (price elasticity, cross elasticity,
and income elasticity) and the elasticity of supply and discuss the factors that
influence each measure;
b. calculate elasticities on a straightline demand curve, differentiate among elastic,
inelastic, and unit elastic demand, and describe the relation between price
elasticity of demand and total revenue.
Study Session 4
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Reading 14: Efficiency and Equity
The candidate should be able to:
a. explain the various means of markets to allocate resources, describe marginal
benefit and marginal cost, and demonstrate why the efficient quantity occurs
when marginal benefit equals marginal cost;
b. distinguish between the price and the value of a product and explain the
demand curve and consumer surplus;
c. distinguish between the cost and the price of a product and explain the supply
curve and producer surplus;
d. discuss the relationship between consumer surplus, producer surplus, and
equilibrium;
e. 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;
f. explain the two groups of ideas about the fairness principle (utilitarianism and
the symmetry principle) and discuss the relation between fairness and efficiency.
Reading 15: Markets in Action
The candidate should be able to:
a. explain market equilibrium, distinguish between longterm and shortterm
effects 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;
b. describe labor market equilibrium and explain the effects and inefficiencies of a
minimum wage above the equilibrium wage;
c. explain the impact of taxes on supply, demand, and market equilibrium, and
describe tax incidence and its relation to demand and supply elasticity;
d. discuss the impact of subsidies, quotas, and markets for illegal goods on
demand, supply, and market equilibrium.
Reading 16: Organizing Production
The candidate should be able to:
a. explain the types of opportunity cost and their relation to economic profit, and
calculate economic profit;
b. discuss a company’s constraints and their impact on achievability of maximum
profit;
c. differentiate between technological efficiency and economic efficiency and
calculate economic efficiency of various companies under different scenarios;
d. explain command systems and incentive systems to organize production, the
principalagent problem, and measures a firm uses to reduce the principalagent
problem;
e. describe the different types of business organization and the advantages and
disadvantages of each;
f. calculate and interpret the fourfirm concentration ratio and the Herfindahl
Hirschman Index and discuss the limitations of concentration measures;
g. explain why companies are often more efficient than markets in coordinating
economic activity.
www.cfainstitute.org/toolkit—Your online preparation resource
Study Session 4
Reading 17: Output and Costs
The candidate should be able to:
a. differentiate between shortrun and longrun decision time frames;
b. 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;
c. 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;
d. explain the company’s production function, its properties of diminishing returns
and diminishing marginal product of capital, the relation between shortrun and
longrun costs, and how economies and diseconomies of scale affect longrun
costs.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session first compares and contrasts the different market structures
in which companies operate. The market environment influences the price a
company can demand for its goods or services. The most important of these
market forms are monopoly and perfect competition, although monopolistic
competition and oligopoly are also covered.
The study session then introduces the macroeconomic concepts that have
an effect on all companies in the same environment, be it a country, a group
of related countries, or a particular industry. The study session concludes
by describing how an economy’s aggregate supply and aggregate demand
are determined.
READING ASSIGNMENTS
Reading 18 Perfect Competition
Economics, Eighth Edition, by Michael Parkin
Reading 19 Monopoly
Economics, Eighth Edition, by Michael Parkin
Reading 20 Monopolistic Competition and Oligopoly
Economics, Eighth Edition, by Michael Parkin
Reading 21 Markets for Factors of Production
Economics, Eighth Edition, by Michael Parkin
Reading 22 Monitoring Jobs and the Price Level
Economics, Eighth Edition, by Michael Parkin
Reading 23 Aggregate Supply and Aggregate Demand
Economics, Eighth Edition, by Michael Parkin
STUDY SESSION 5
ECONOMICS:
Market Structure and Macroeconomic Analysis
Study Session 5
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LEARNING OUTCOMES
Reading 18: Perfect Competition
The candidate should be able to:
a. describe the characteristics of perfect competition, explain why companies in a
perfectly competitive market are price takers, and differentiate between market
and company demand curves;
b. determine the profit maximizing (loss minimizing) output for a perfectly
competitive company and explain marginal cost, marginal revenue, and
economic profit and loss;
c. describe a perfectly competitive company’s shortrun supply curve and explain
the impact of changes in demand, entry and exit of companies, and changes in
plant size on the longrun equilibrium;
d. discuss how a permanent change in demand or changes in technology affect
price, output, and economic profit.
Reading 19: Monopoly
The candidate should be able to:
a. describe the characteristics of a monopoly, including factors that allow a
monopoly to arise and monopoly pricesetting strategies;
b. explain the relation between price, marginal revenue, and elasticity for a
monopoly and determine a monopoly’s profitmaximizing price and quantity;
c. explain price discrimination and why perfect price discrimination is efficient;
d. explain how consumer and producer surplus are redistributed in a monopoly,
including the occurrence of deadweight loss and rent seeking;
e. explain the potential gains from monopoly and the regulation of a natural
monopoly.
Reading 20: Monopolistic Competition and Oligopoly
The candidate should be able to:
a. describe the characteristics of monopolistic competition and an oligopoly;
b. determine the profitmaximizing (lossminimizing) output under monopolistic
competition, explain why longrun economic profit under monopolistic
competition is zero, and determine if monopolistic competition is efficient;
c. explain the importance of innovation, product development, advertising, and
branding under monopolistic competition;
d. explain the kinked demand curve model and the dominant firm model and
determine the profitmaximizing (lossminimizing) output under each model;
e. describe oligopoly games including the Prisoners’ Dilemma.
Reading 21: Markets for Factors of Production
The candidate should be able to:
a. 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;
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Study Session 5
b. describe the factors that cause changes in the demand for labor and the factors
that determine the elasticity of the demand for labor;
c. 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;
d. describe the effects on wages of labor unions and of a monopsony and explain
the possible consequences for a market that offers an efficient wage;
e. differentiate between physical capital and financial capital and explain the
relation between the demand for physical capital and the demand for financial
capital;
f. explain the factors that influence the demand and supply of capital;
g. differentiate between renewable and nonrenewable natural resources and
describe the supply curve for each;
h. differentiate between economic rent and opportunity costs.
Reading 22: Monitoring Jobs and the Price Level
The candidate should be able to:
a. define an unemployed person and interpret the main labor market indicators;
b. define aggregate hours and real wage rates and explain their relation to gross
domestic product (GDP);
c. explain the types of unemployment, full employment, the natural rate of
unemployment, and the relation between unemployment and real GDP;
d. explain and calculate the consumer price index (CPI) and the inflation rate,
describe the relation between the CPI and the inflation rate, and explain the
main sources of CPI bias.
Reading 23: Aggregate Supply and Aggregate Demand
The candidate should be able to:
a. explain the factors that influence real GDP and longrun and shortrun aggregate
supply, explain movement along the longrun and shortrun aggregate supply
curves (LAS and SAS), and discuss the reasons for changes in potential GDP and
aggregate supply;
b. explain the components of and the factors that affect real GDP demand, describe
the aggregate demand curve and why it slopes downward, and explain the
factors that can change aggregate demand;
c. differentiate between shortrun and longrun macroeconomic equilibrium and
explain how economic growth, inflation, and changes in aggregate demand and
supply influence the macroeconomic equilibrium;
d. compare and contrast the classical, Keynesian, and monetarist schools of
macroeconomics.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session focuses on the monetary sector of an economy. It examines
the functions of money and how it is created, highlighting the special role of
the central bank within an economy. Supply and demand for resources, such as
labor and capital, and goods are strongly interrelated. This study session describes
circumstances when this relationship may lead to inflation or unemployment and
how these concepts relate to the business cycle. Finally, the goals and implications
of fiscal and monetary policy are explored by examining some of the main models
of macroeconomic theory (classical, Keynesian, and monetarist).
READING ASSIGNMENTS
Reading 24 Money, the Price Level, and Inflation
Economics, Eighth Edition, by Michael Parkin
Reading 25 U.S. Inflation, Unemployment, and Business Cycles
Economics, Eighth Edition, by Michael Parkin
Reading 26 Fiscal Policy
Economics, Eighth Edition, by Michael Parkin
Reading 27 Monetary Policy
Economics, Eighth Edition, by Michael Parkin
Reading 28 An Overview of Central Banks
International Economic Indicators and Central Banks,
by Anne Dolganos Picker
STUDY SESSION 6
ECONOMICS:
Monetary and Fiscal Economics
LEARNING OUTCOMES
Reading 24: Money, the Price Level, and Inflation
The candidate should be able to:
a. explain the functions of money;
b. describe the components of the M1 and M2 measures of money and discuss why
checks and credit cards are not counted as money;
Study Session 6
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c. describe the economic functions of and differentiate among the various
depository institutions and explain the impact of financial regulation,
deregulation, and innovation;
d. 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;
e. 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;
f. describe the monetary base and explain the relation among the monetary base,
the money multiplier, and the quantity of money;
g. 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;
h. explain interest rate determination and the shortrun and longrun effects of
money on real GDP;
i. discuss the quantity theory of money and its relation to aggregate supply and
aggregate demand.
Reading 25: U.S. Inflation, Unemployment, and Business Cycles
The candidate should be able to:
a. differentiate between inflation and the price level;
b. describe and distinguish among the factors resulting in demandpull and costpush
inflation and describe the evolution of demandpull and costpush
inflationary processes;
c. explain the costs of anticipated inflation;
d. explain the relation among inflation, nominal interest rates, and the demand and
supply of money;
e. explain the impact of inflation on unemployment and describe the shortrun and
longrun Phillips curve, including the effect of changes in the natural rate of
unemployment;
f. explain how economic growth, inflation, and unemployment affect the business
cycle;
g. describe mainstream business cycle theory and real business cycle (RBC) theory
and distinguish between them, including the role of productivity changes.
Reading 26: Fiscal Policy
The candidate should be able to:
a. 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;
b. discuss the sources of investment finance and the influence of fiscal policy on
capital markets, including the crowdingout effect;
c. discuss the generational effects of fiscal policy, including generational accounting
and generational imbalance;
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Study Session 6
d. discuss the use of fiscal policy to stabilize the economy, including the effects of
the government expenditure multiplier, the tax multiplier, and the balanced
budget multiplier;
e. explain the limitations of discretionary fiscal policy and differentiate between
discretionary fiscal policy and automatic stabilizers.
Reading 27: Monetary Policy
The candidate should be able to:
a. discuss the goals of U.S. monetary policy and the Fed’s means for achieving the
goals, including how the Fed operationalizes those goals;
b. describe how the Fed conducts monetary policy and explain the Fed’s decisionmaking
strategy, including an instrument rule, a targeting rule, openmarket
operations, and the market for reserves;
c. discuss monetary policy’s transmission mechanism (chain of events) between
changing the federal funds rate and achieving the ultimate monetary policy goal
when fighting either inflation or recession, and explain loose links and time lags
in the adjustment process;
d. describe alternative monetary policy strategies and explain why they have been
rejected by the Fed.
Reading 28: An Overview of Central Banks
The candidate should be able to:
a. identify the functions of a central bank;
b. discuss monetary policy and the tools utilized by central banks to carry out
monetary policy.
www.cfainstitute.org/toolkit—Your online preparation resource
The readings in this study session discuss the general principles of the financial
reporting system, underscoring the critical role of the analysis of financial
reports in investment decision making.
The first reading introduces the range of information that an analyst may
use in analyzing the financial performance of a company, including the principal
financial statements (the income statement, balance sheet, statement of cash
flows, and statement of changes in owners’ equity), notes to those statements,
and management’s discussion and analysis of results. A general framework for
addressing most financial statement analysis tasks is also presented.
A company’s financial statements are the endproducts of a process for
recording the business transactions of the company. The second reading illustrates
this process, introducing such basic concepts as the accounting equation and
accounting accruals.
The presentation of financial information to the public by a company must
conform to applicable financial reporting standards based on factors such as the
jurisdiction in which the information is released. The final reading in this study
explores the role of financial reporting standardsetting bodies worldwide and the
International Financial Reporting Standards framework promulgated by one key
body, the International Accounting Standards Board. The movement towards
worldwide convergence of financial reporting standards is also introduced.
STUDY SESSION 7
FINANCIAL REPORTING AND ANALYSIS:
An Introduction
Note:
New rulings and/or
pronouncements issued
after the publication of the
readings in Study Sessions 7
through 10 in financial
statement analysis may
cause some of the
information in these
readings to become dated.
Candidates are expected to
be familiar with the overall
analytical framework
contained in the study
session readings, as well as
the implications of
alternative accounting
methods for financial
analysis and valuation, as
provided in the assigned
readings.
For the purpose of
Level I questions on
financial statement
analysis, when a ratio is
defined and calculated
differently in various texts,
candidates should use the
definitions given in the CFA
Institute copyrighted
readings by Robinson, et al.
Variations in ratio
definitions are part of the
nature of practical financial
analysis.
READING ASSIGNMENTS
Reading 29 Financial Statement Analysis: An Introduction
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 30 Financial Reporting Mechanics
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 31 Financial Reporting Standards
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Study Session 7
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LEARNING OUTCOMES
Reading 29: Financial Statement Analysis: An Introduction
The candidate should be able to:
a. discuss the roles of financial reporting and financial statement analysis;
b. discuss the role of key financial statements (income statement, balance sheet,
statement of cash flows, and statement of changes in owners’ equity) in
evaluating a company’s performance and financial position;
c. discuss the importance of financial statement notes and supplementary
information, including disclosures of accounting methods, estimates, and
assumptions, and management’s discussion and analysis;
d. discuss the objective of audits of financial statements, the types of audit reports,
and the importance of effective internal controls;
e. identify and explain information sources other than annual financial statements
and supplementary information that analysts use in financial statement analysis;
f. describe the steps in the financial statement analysis framework.
Reading 30: Financial Reporting Mechanics
The candidate should be able to:
a. explain the relationship of financial statement elements and accounts, and
classify accounts into the financial statement elements;
b. explain the accounting equation in its basic and expanded forms;
c. explain the process of recording business transactions using an accounting
system based on the accounting equations;
d. explain the need for accruals and other adjustments in preparing financial
statements;
e. explain the relationships among the income statement, balance sheet, statement
of cash flows, and statement of owners’ equity;
f. describe the flow of information in an accounting system;
g. explain the use of the results of the accounting process in security analysis.
Study Session 7
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Reading 31: Financial Reporting Standards
The candidate should be able to:
a. explain the objective of financial statements and the importance of reporting
standards in security analysis and valuation;
b. explain the role of standardsetting 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;
c. discuss the ongoing barriers to developing one universally accepted set of
financial reporting standards;
d. describe the International Financial Reporting Standards (IFRS) framework,
including the qualitative characteristics of financial statements, the required
reporting elements, and the constraints and assumptions in preparing financial
statements;
e. explain the general requirements for financial statements;
f. 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;
g. identify the characteristics of a coherent financial reporting framework and
barriers to creating a coherent financial reporting network;
h. discuss the importance of monitoring developments in financial reporting
standards and of evaluating company disclosures of significant accounting
policies.
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Each reading in this study session focuses on one of the three major financial
statements: the balance sheet, the income statement, and the statement of
cash flows. For each financial statement, the chapter details its purpose,
construction, pertinent ratios, and commonsize analysis. Understanding these
concepts allows a financial analyst to evaluate trends in performance for several
measurement periods and to compare the performance of different companies
during the same period(s). Additional analyst tools, such as the earnings per share
calculation, are also described.
READING ASSIGNMENTS
Reading 32 Understanding the Income Statement
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 33 Understanding the Balance Sheet
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 34 Understanding the Cash Flow Statement
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 35 Financial Analysis Techniques
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
STUDY SESSION 8
FINANCIAL REPORTING AND ANALYSIS:
The Income Statement, Balance Sheet,
and Cash Flow Statement
Study Session 8
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LEARNING OUTCOMES
Reading 32: Understanding the Income Statement
The candidate should be able to:
a. describe the components of the income statement, and construct an income
statement using the alternative presentation formats of that statement;
b. explain the general principles of revenue recognition and accrual accounting,
demonstrate specific revenue recognition applications (including accounting for
longterm contracts, installment sales, barter transactions, and gross and net
reporting of revenue), and discuss the implications of revenue recognition
principles for financial analysis;
c. 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;
d. demonstrate the appropriate method of depreciating longterm assets,
accounting for inventory, or amortizing intangibles, based on facts that might
influence the decision;
e. distinguish between the operating and nonoperating components of the income
statement;
f. 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;
g. 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;
h. differentiate between dilutive and antidilutive securities, and discuss the
implications of each for the earnings per share calculation;
i. describe and calculate comprehensive income;
j. 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.
Reading 33: Understanding the Balance Sheet
The candidate should be able to:
a. illustrate and interpret the components of the balance sheet and discuss the uses
of the balance sheet in financial analysis;
b. describe the various formats of balance sheet presentation;
c. explain how assets and liabilities arise from the accrual process;
d. compare and contrast current and noncurrent assets and liabilities;
e. 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;
f. demonstrate the appropriate classifications and related accounting treatments
for marketable and nonmarketable financial instruments held as assets or owed
by the company as liabilities;
Study Session 8
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g. list and explain the components of owners’ equity;
h. interpret balance sheets and statements of changes in equity.
Reading 34: Understanding the Cash Flow Statement
The candidate should be able to:
a. 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;
b. describe how noncash investing and financing activities are reported;
c. compare and contrast the key differences in cash flow statements prepared
under international financial reporting standards and U.S. generally accepted
accounting principles;
d. demonstrate the difference between the direct and indirect methods of
presenting cash from operating activities and explain the arguments in favor of
each;
e. 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;
f. describe the process of converting a cash flow statement from the indirect to the
direct method of presentation;
g. analyze and interpret a cash flow statement using both total currency amounts
and commonsize cash flow statements;
h. explain and calculate free cash flow to the firm, free cash flow to equity, and
other cash flow ratios.
Reading 35: Financial Analysis Techniques
The candidate should be able to:
a. evaluate and compare companies using ratio analysis, commonsize financial
statements, and charts in financial analysis;
b. describe the limitations of ratio analysis;
c. describe the various techniques of commonsize analysis and interpret the results
of such analysis;
d. calculate, classify, and interpret activity, liquidity, solvency, profitability, and
valuation ratios;
e. demonstrate how ratios are related and how to evaluate a company using a
combination of different ratios;
f. demonstrate the application of and interpret changes in the component parts of
the DuPont analysis (the decomposition of return on equity);
g. calculate and interpret the ratios used in equity analysis, credit analysis, and
segment analysis;
h. describe how ratio analysis and other techniques can be used to model and
forecast earnings.
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The readings in this study session examine specific categories of assets and
liabilities that are particularly susceptible to the impact of alternative
accounting policies and estimates. Analysts must understand the effects of
alternative policies on financial statements and ratios and be able to execute
appropriate adjustments to enhance comparability between companies. In
addition, analysts must be alert to differences between a company’s reported
financial statements and economic reality.
The description and measurement of inventories require careful attention
because the investment in inventories is frequently the largest current asset for
merchandizing and manufacturing companies. For these companies, the
measurement of inventory cost (i.e., cost of goods sold) is a critical factor in
determining gross profit and other measures of company profitability. Longterm
operating assets are often the largest category of assets on a company’s balance
sheet. The analyst needs to scrutinize management’s choices with respect to
recognizing expenses associated with the operating assets because of the
potentially large impact such choices can have on reported earnings and the
opportunities for financial statement manipulation during longer time periods.
A company’s accounting policies (such as depreciation choices) can cause
differences in taxes reported in financial statements and taxes reported on tax
returns. The reading “Income Taxes” discusses several issues that arise relating to
deferred taxes.
Both on and offbalance sheet debt affect a company’s liquidity and solvency
and have consequences for its longterm growth and viability. The notes of the
financial statements must be carefully reviewed to ensure that all potential
liabilities (e.g., leasing arrangements and other contractual commitments) are
STUDY SESSION 9
FINANCIAL REPORTING AND ANALYSIS:
Inventories, LongTerm Assets, Deferred Taxes,
and On and OffBalance Sheet Debt
Study Session 9
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appropriately evaluated for their conformity to economic reality. Adjustments to
the financial statements may be required to achieve comparability when
evaluating several companies and may also be required to improve credit and
investment decisionmaking.
READING ASSIGNMENTS
Reading 36 Inventories
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 37 LongLived Assets
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 38 Income Taxes
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 39 LongTerm Liabilities and Leases
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
LEARNING OUTCOMES
Reading 36: Inventories
The candidate should be able to:
a. explain IFRS and U.S. GAAP rules for determining inventory cost, including which
costs are capitalized and methods of allocating costs between cost of goods sold
and inventory;
b. discuss how inventories are reported on the financial statements and how the
lower of cost or net realizable value is used and applied;
c. compute ending inventory balances and cost of goods sold using the FIFO,
weighted average cost, and LIFO 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 FIFO, weighted average cost, and LIFO methods
when prices are 1) stable, 2) decreasing, or 3) increasing;
d. discuss and calculate ratios useful for evaluating inventory management;
e. analyze the financial statements of companies using different inventory
accounting methods by comparing and describing the effect of the different
methods on cost of goods sold, inventory balances, and other financial
statement items;
f. compute and describe the effects of the choice of inventory method on
profitability, liquidity, activity, and solvency ratios;
g. calculate adjustments to reported financial statements related to inventory
assumptions to aid in comparing and evaluating companies;
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Study Session 9
h. discuss the reasons that a LIFO reserve might rise or decline during a given period
and discuss the implications for financial analysis.
Reading 37: LongLived Assets
The candidate should be able to:
a. explain the accounting standards related to the capitalization of expenditures as
part of longlived assets, including interest costs;
b. 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 of capitalizing interest costs;
c. explain the circumstances in which software development costs and research and
development costs are capitalized;
d. identify the different depreciation methods for longlived tangible assets, and
discuss how the choice of method, useful lives, and salvage values affect a
company’s financial statements, ratios, and taxes;
e. 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;
f. describe amortization of intangible assets with finite useful lives and the
estimates that affect the amortization calculations;
g. 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;
h. discuss the impact of sales or exchanges of longlived assets on financial
statements;
i. define impairment of longlived tangible and intangible assets and explain what
effect such impairment has on a company’s financial statements and ratios;
j. calculate and describe both the initial and longlived effects of asset revaluations
on financial ratios.
Reading 38: Income Taxes
The candidate should be able to:
a. explain the differences between accounting profit and taxable income, and
define key terms, including deferred tax assets, deferred tax liabilities, valuation
allowance, taxes payable, and income tax expense;
b. explain how deferred tax liabilities and assets are created and the factors that
determine how a company’s deferred tax liabilities and assets should be treated
for the purposes of financial analysis;
c. determine the tax base of a company’s assets and liabilities;
d. calculate income tax expense, income taxes payable, deferred tax assets, and
deferred tax liabilities, and calculate and interpret the adjustment to the financial
statements related to a change in the income tax rate;
e. evaluate the impact of tax rate changes on a company’s financial statements and
ratios;
f. distinguish between temporary and permanent items in pretax financial income
and taxable income;
Study Session 9
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g. discuss the valuation allowance for deferred tax assets—when it is required and
what impact it has on financial statements;
h. compare and contrast a company’s deferred tax items;
i. analyze disclosures relating to deferred tax items and the effective tax rate
reconciliation, and discuss how information included in these disclosures affects
a company’s financial statements and financial ratios;
j. identify the key provisions of and differences between income tax accounting
under IFRS and U.S. GAAP.
Reading 39: LongTerm Liabilities and Leases
The candidate should be able to:
a. compute the effects of debt issuance and amortization of bond discounts and
premiums on financial statements and ratios;
b. explain the role of debt covenants in protecting creditors by restricting a
company’s ability to invest, pay dividends, or make other operating and strategic
decisions;
c. describe the presentation of, and disclosures relating to, financing liabilities;
d. determine the effects of changing interest rates on the market value of debt and
on financial statements and ratios;
e. describe two types of debt with equity features (convertible debt and debt with
warrants) and calculate the effect of issuance of such instruments on a
company’s debt ratios;
f. discuss the motivations for leasing assets instead of purchasing them and the
incentives for reporting the leases as operating leases rather than finance leases;
g. determine the effects of finance and operating leases on the financial statements
and ratios of the lessees and lessors;
h. distinguish between a salestype lease and a direct financing lease, and
determine the effects on the financial statements and ratios of the lessors;
i. describe the types and economic consequences of offbalance sheet financing
and determine how takeorpay contracts, throughput arrangements, and the
sale of receivables affect financial statements and selected financial ratios.
www.cfainstitute.org/toolkit—Your online preparation resource
The readings in this study session discuss financial statement analysis
applications and the international convergence of accounting standards.
The most frequently used tools and techniques to evaluate companies include
common size analysis, crosssectional analysis, trend analysis, and ratio analysis.
Beyond mere knowledge of these tools, however, the analyst must recognize the
implications of accounting choices on the quality of a company’s reported financial
results. Then the analyst can apply these financial analysis techniques to major
analyst tasks including the evaluation of past and future financial performance,
credit risk, and the screening of potential equity investments. The readings also
discuss analyst adjustments to reported financials. Such adjustments are often
needed to put companies’ reported results on a comparable basis.
This study session concludes with a reading on convergence of international
and U.S. accounting standards. Although there has been much progress in
harmonizing accounting standards globally, as this reading discusses, significant
variations still exist among generally accepted accounting principles from one
country to another.
STUDY SESSION 10
FINANCIAL REPORTING AND ANALYSIS:
Applications and International Standards
Convergence
Study Session 10
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READING ASSIGNMENTS
Reading 40 Financial Reporting Quality: Red Flags and Accounting Warning
Signs
Commercial Lending Review, by Thomas R. Robinson, CFA
and Paul Munter
Reading 41 Accounting Shenanigans on the Cash Flow Statement
The CPA Journal, by Mark A. Siegel
Reading 42 Financial Statement Analysis: Applications
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
Reading 43 International Standards Convergence
International Financial Statement Analysis, by Thomas R.
Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry,
CFA, and Michael A. Broihahn, CFA
LEARNING OUTCOMES
Reading 40: Financial Reporting Quality: Red Flags and Accounting
Warning Signs
The candidate should be able to:
a. describe incentives that might induce a company’s management to overreport or
underreport earnings;
b. describe activities that will result in a low quality of earnings;
c. describe the “fraud triangle”;
d. describe the risk factors that may lead to fraudulent accounting related to
1) incentives and pressures, 2) opportunities, and 3) attitudes and
rationalizations;
e. describe common accounting warning signs and methods for detecting each;
f. describe the accounting warning signs related to the Enron accounting scandal;
g. describe the accounting warning signs related to the Sunbeam accounting
scandal.
Reading 41: Accounting Shenanigans on the Cash Flow Statement
The candidate should be able to analyze and discuss the following ways to
manipulate the cash flow statement:
_ stretching out payables,
_ financing of payables,
_ securitization of receivables, and
_ using stock buybacks to offset dilution of earnings.
Reading 42: Financial Statement Analysis: Applications
The candidate should be able to:
a. evaluate a company’s past financial performance and explain how a company’s
strategy is reflected in past financial performance;
Study Session 10
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b. prepare a basic projection of a company’s future net income and cash flow;
c. describe the role of financial statement analysis in assessing the credit quality of
a potential debt investment;
d. discuss the use of financial statement analysis in screening for potential equity
investments;
e. determine and justify appropriate analyst adjustments to a company’s financial
statements to facilitate comparison with another company.
Reading 43: International Standards Convergence
The candidate should be able to:
a. 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);
b. 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;
c. identify and explain the major differences between international and U.S. GAAP
accounting standards concerning the treatment of interest and dividends on the
statement of cash flows;
d. 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.
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This study session covers the principles that corporations use to make their
investing and financing decisions. Capital budgeting is the process of making
decisions about which longterm projects the corporation should accept for
investment and which it should reject. Both the expected return of a project and
the financing cost should be taken into account. The cost of capital, or the rate
of return required for a project, must be developed using economically sound
methods. Corporate managers are also concerned with shorterterm liquidity and
solvency and use financial statements to evaluate performance as well as to
develop and communicate future plans.
The final reading in this study session is on corporate governance practices,
which can expose the firm to a heightened risk of ethical lapses. Although these
practices may not be inherently unethical, they create the potential for conflicts of
interest to develop between shareholders and managers, and the extent of that
conflict affects the company’s valuation.
READING ASSIGNMENTS
Reading 44 Capital Budgeting
by John D. Stowe, CFA and Jacques R. Gagne, CFA
Reading 45 Cost of Capital
by Yves Courtois, CFA, Gene C. Lai, and Pamela P. Peterson, CFA
Reading 46 Working Capital Management
by Edgar A. Norton, Jr., CFA, Kenneth L. Parkinson,
and Pamela P. Peterson, CFA
Reading 47 Financial Statement Analysis
by Pamela P. Peterson, CFA
Reading 48 The Corporate Governance of Listed Companies: A Manual
for Investors
STUDY SESSION 11
CORPORATE FINANCE
Study Session 11
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LEARNING OUTCOMES
Reading 44: Capital Budgeting
The candidate should be able to:
a. explain the capital budgeting process, including the typical steps of the process,
and distinguish among the various categories of capital projects;
b. discuss the basic principles of capital budgeting, including the choice of the
proper cash flows;
c. 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;
d. 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, and profitability index (PI);
e. explain the NPV profile, compare and contrast the NPV and IRR methods when
evaluating independent and mutually exclusive projects, and describe the
problems associated with each of the evaluation methods;
f. 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.
Reading 45: Cost of Capital
The candidate should be able to:
a. calculate and interpret the weighted average cost of capital (WACC) of a
company;
b. describe how taxes affect the cost of capital from different capital sources;
c. describe alternative methods of calculating the weights used in the WACC,
including the use of the company’s target capital structure;
d. explain how the marginal cost of capital and the investment opportunity
schedule are used to determine the optimal capital budget;
e. explain the marginal cost of capital’s role in determining the net present value of
a project;
f. calculate and interpret the cost of fixed rate debt capital using the yieldtomaturity
approach and the debtrating approach;
g. calculate and interpret the cost of noncallable, nonconvertible preferred stock;
h. calculate and interpret the cost of equity capital using the capital asset pricing
model approach, the dividend discount model approach, and the bondyieldplus
riskpremium approach;
i. calculate and interpret the beta and cost of capital for a project;
j. explain the country equity risk premium in the estimation of the cost of equity
for a company located in a developing market;
k. describe the marginal cost of capital schedule, explain why it may be upwardsloping
with respect to additional capital, and calculate and interpret its breakpoints;
l. explain and demonstrate the correct treatment of flotation costs.
Study Session 11
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Reading 46: Working Capital Management
The candidate should be able to:
a. describe primary and secondary sources of liquidity and factors that influence a
company’s liquidity position;
b. compare a company’s liquidity measures with those of peer companies;
c. evaluate overall working capital effectiveness of a company, using the operating
and cash conversion cycles, and compare its effectiveness with other peer
companies;
d. identify and evaluate the necessary tools to use in managing a company’s net
daily cash position;
e. compute and interpret comparable yields on various securities, compare portfolio
returns against a standard benchmark, and evaluate a company’s shortterm
investment policy guidelines;
f. assess the performance of a company’s accounts receivable, inventory
management, and accounts payable functions against historical figures and
comparable peer company values;
g. evaluate the choices of shortterm funding available to a company and
recommend a financing method.
Reading 47: Financial Statement Analysis
The candidate should be able to demonstrate the use of pro forma income
and balance sheet statements.
Reading 48: The Corporate Governance of Listed Companies: A Manual
for Investors
The candidate should be able to:
a. define and describe corporate governance;
b. 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;
c. describe board independence and explain the importance of independent board
members in corporate governance;
d. identify factors that indicate a board and its members possess the experience
required to govern the company for the benefit of its shareowners;
e. 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;
f. 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;
g. evaluate, from a shareowner’s perspective, company policies related to voting
rules, shareowner sponsored proposals, common stock classes, and takeover
defenses.
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As the first discussion in the CFA curriculum on portfolio management, this
study session provides the critical framework and context for subsequent
Level I study sessions covering equities, fixed income, derivatives, and alternative
investments. Furthermore, this study session provides the underlying theories and
tools for portfolio management at Levels II and III.
The first reading discusses the asset allocation decision and the portfolio
management process—they are an integrated set of steps undertaken in a
consistent manner to create and maintain an appropriate portfolio (combination
of assets) to meet clients’ stated goals. The last two readings focus on the design
of a portfolio and introduce the capital asset pricing model (CAPM), a centerpiece
of modern financial economics that relates the risk of an asset to its expected
return.
READING ASSIGNMENTS
Reading 49 The Asset Allocation Decision
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 50 An Introduction to Portfolio Management
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 51 An Introduction to Asset Pricing Models
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
STUDY SESSION 12
PORTFOLIO MANAGEMENT
Study Session 12
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LEARNING OUTCOMES
Reading 49: The Asset Allocation Decision
The candidate should be able to:
a. describe the steps in the portfolio management process and explain the reasons
for a policy statement;
b. 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;
c. describe the return objectives of capital preservation, capital appreciation, current
income, and total return;
d. describe the investment constraints of liquidity, time horizon, tax concerns, legal
and regulatory factors, and unique needs and preferences;
e. 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.
Reading 50: An Introduction to Portfolio Management
The candidate should be able to:
a. define risk aversion and discuss evidence that suggests that individuals are
generally risk averse;
b. list the assumptions about investor behavior underlying the Markowitz model;
c. compute and interpret the expected return, variance, and standard deviation for an
individual investment and the expected return and standard deviation for a portfolio;
d. compute and interpret the covariance of rates of return and show how it is
related to the correlation coefficient;
e. list the components of the portfolio standard deviation formula;
f. describe the efficient frontier and explain the implications for incremental returns
as an investor assumes more risk;
g. explain the concept of an optimal portfolio and show how each investor may
have a different optimal portfolio.
Reading 51: An Introduction to Asset Pricing Models
The candidate should be able to:
a. 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 riskfree asset is combined with a
portfolio of risky assets;
b. identify the market portfolio and describe the role of the market portfolio in the
formation of the capital market line (CML);
c. define systematic and unsystematic risk and explain why an investor should not
expect to receive additional return for assuming unsystematic risk;
d. explain the capital asset pricing model, including the security market line (SML)
and beta and describe the effects of relaxing its underlying assumptions;
e. calculate, using the SML, the expected return on a security and evaluate whether
the security is overvalued, undervalued, or properly valued.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session addresses how securities are bought and sold and what
constitutes a wellfunctioning securities market. The reading on market indices
gives an understanding of how indices are constructed and calculated and the
biases inherent in each of the weighting schemes used.
Some of the most interesting and important work in the investment field
during the past several decades revolves around the efficient market hypothesis
(EMH) and its implications for active versus passive equity portfolio management.
The readings on this subject provide an understanding of the EMH and the
seemingly persistent anomalies to the theory, an understanding that is necessary
to judge the value of fundamental or technical security analysis.
READING ASSIGNMENTS
Reading 52 Organization and Functioning of Securities Markets
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 53 SecurityMarket Indexes
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 54 Efficient Capital Markets
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 55 Market Efficiency and Anomalies
Beyond The Random Walk: A Guide to Stock Market Anomalies
and Low Risk Investing, by Vijay Singal, CFA
STUDY SESSION 13
EQUITY:
Securities Markets
Study Session 13
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LEARNING OUTCOMES
Reading 52: Organization and Functioning of Securities Markets
The candidate should be able to:
a. describe the characteristics of a wellfunctioning securities market;
b. distinguish between primary and secondary capital markets and explain how
secondary markets support primary markets;
c. distinguish between call and continuous markets;
d. compare and contrast the structural differences among national stock exchanges,
regional stock exchanges, and the overthecounter (OTC) markets;
e. compare and contrast major characteristics of various exchange markets,
including exchange membership, types of orders, and market makers;
f. describe the process of selling a stock short and discuss an investor’s likely
motivation for selling short;
g. 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.
Reading 53: SecurityMarket Indexes
The candidate should be able to:
a. 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 indices and compute a priceweighted, a valueweighted,
and an unweighted index series for three stocks;
b. compare and contrast major structural features of domestic and global stock
indices, bond indices, and composite stockbond indices;
c. state how low correlations between global markets support global investment.
Reading 54: Efficient Capital Markets
The candidate should be able to:
a. define an efficient capital market and describe and contrast the three forms of
the efficient market hypothesis (EMH);
b. 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;
c. 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;
d. define behavioral finance and describe prospect theory, overconfidence bias,
confirmation bias, and escalation bias.
Reading 55: Market Efficiency and Anomalies
The candidate should be able to:
a. explain the three limitations to achieving fully efficient markets;
Study Session 13
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b. describe four problems that may prevent arbitrageurs from correcting anomalies;
c. explain why an apparent anomaly may be justified and describe the common
biases that distort testing for mispricings;
d. explain why a mispricing may persist and why valid anomalies may not be
profitable.
www.cfainstitute.org/toolkit—Your online preparation resource
STUDY SESSION 14
EQUITY:
Industry and Company Analysis
This study session focuses on industry and company analysis and describes the
tools used in forming an opinion about investing in a particular stock or group
of stocks.
This study session begins with the essential tools of equity valuation: the
discounted cash flow technique and the relative valuation approach. These
techniques provide the means to estimate a reasonable price for a stock. The
readings about industry analysis are an important element in the valuation
process, providing the topdown context crucial to estimating a company’s
potential. Also addressed is estimating a company’s earnings per share by
forecasting sales and profit margins.
The last reading in this study session focuses on price multiples, one of the
most familiar and widely used tools in estimating the value of a company, and
introduces the application of four commonly used price multiples to valuation.
READING ASSIGNMENTS
Reading 56 An Introduction to Security Valuation
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 57 Industry Analysis
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 58 Company Analysis and Stock Valuation
Investment Analysis and Portfolio Management, Eighth Edition,
by Frank K. Reilly, CFA and Keith C. Brown, CFA
Reading 59 Introduction to Price Multiples
by John D. Stowe, CFA, Thomas R. Robinson, CFA, Jerald E.
Pinto, CFA, and Dennis W. McLeavey, CFA
Study Session 14
www.cfainstitute.org/toolkit—Your online preparation resource
LEARNING OUTCOMES
Reading 56: An Introduction to Security Valuation
The candidate should be able to:
a. explain the topdown approach, and its underlying logic, to the security valuation
process;
b. state the various forms of investment returns;
c. calculate and interpret the value of both a preferred stock and a common stock
using the dividend discount model (DDM);
d. show how to use the DDM to develop an earnings multiplier model and explain
the factors in the DDM that affect a stock’s pricetoearnings (P/E) ratio;
e. 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 an equity risk premium for use in
estimating the required return for the investment in each country;
f. estimate the dividend growth rate, given the components of the required rate of
return incorporating the earnings retention rate and current stock price;
g. 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.
Reading 57: Industry Analysis
The candidate should be able to describe how structural economic changes
(e.g., demographics, technology, politics, and regulation) may affect industries.
Reading 58: Company Analysis and Stock Valuation
The candidate should be able to:
a. 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;
b. 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.
Reading 59: Introduction to Price Multiples
The candidate should be able to:
a. discuss the rationales for, and the possible drawbacks to, the use of pricetoearnings
ratio (P/E), pricetobook value (P/BV), pricetosales ratio (P/S), and
pricetocash flow (P/CF) in equity valuation;
b. calculate and interpret P/E, P/BV, P/S, and P/CF.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session presents the foundation for fixedincome investments, one of
the largest and fastest growing segments of global financial markets. It begins
with an introduction to the basic features and characteristics of fixedincome
securities and the associated risks. The session then builds by describing the
primary issuers, sectors, and types of bonds. Finally, the study session concludes
with an introduction to yields and spreads and the effect of monetary policy on
financial markets. These readings combined are the primary building blocks for
mastering the analysis, valuation, and management of fixedincome securities.
READING ASSIGNMENTS
Reading 60 Features of Debt Securities
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
Reading 61 Risks Associated with Investing in Bonds
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
Reading 62 Overview of Bond Sectors and Instruments
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
Reading 63 Understanding Yield Spreads
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
STUDY SESSION 15
FIXED INCOME:
Basic Concepts
LEARNING OUTCOMES
Reading 60: Features of Debt Securities
The candidate should be able to:
a. explain the purposes of a bond’s indenture and describe affirmative and negative
covenants;
b. describe the basic features of a bond, the various coupon rate structures, and the
structure of floatingrate securities;
Study Session 15
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c. define accrued interest, full price, and clean price;
d. explain the provisions for redemption and retirement of bonds;
e. 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;
f. describe methods used by institutional investors in the bond market to finance
the purchase of a security (i.e., margin buying and repurchase agreements).
Reading 61: Risks Associated with Investing in Bonds
The candidate should be able to:
a. explain the risks associated with investing in bonds;
b. 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);
c. 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;
d. identify the relationship among the price of a callable bond, the price of an
optionfree bond, and the price of the embedded call option;
e. explain the interest rate risk of a floatingrate security and why such a security’s
price may differ from par value;
f. compute and interpret the duration and dollar duration of a bond;
g. describe yieldcurve risk and explain why duration does not account for yieldcurve
risk for a portfolio of bonds;
h. explain the disadvantages of a callable or prepayable security to an investor;
i. 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;
j. describe the various forms of credit risk and describe the meaning and role of
credit ratings;
k. explain liquidity risk and why it might be important to investors even if they
expect to hold a security to the maturity date;
l. describe the exchange rate risk an investor faces when a bond makes payments
in a foreign currency;
m. explain inflation risk;
n. 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;
o. describe the various forms of event risk.
Reading 62: Overview of Bond Sectors and Instruments
The candidate should be able to:
a. describe the features, credit risk characteristics, and distribution methods for
government securities;
b. 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 ontherun and offtherun Treasury securities;
Study Session 15
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c. describe how stripped Treasury securities are created and distinguish between
coupon strips and principal strips;
d. describe the types and characteristics of securities issued by U.S. federal
agencies;
e. describe the types and characteristics of mortgagebacked securities and explain
the cash flow, prepayments, and prepayment risk for each type;
f. state the motivation for creating a collateralized mortgage obligation;
g. describe the types of securities issued by municipalities in the United States and
distinguish between taxbacked debt and revenue bonds;
h. describe the characteristics and motivation for the various types of debt issued by
corporations (including corporate bonds, mediumterm notes, structured notes,
commercial paper, negotiable CDs, and bankers acceptances);
i. define an assetbacked security, describe the role of a special purpose vehicle in
an assetbacked security’s transaction, state the motivation for a corporation to
issue an assetbacked security, and describe the types of external credit
enhancements for assetbacked securities;
j. describe collateralized debt obligations;
k. describe the mechanisms available for placing bonds in the primary market and
differentiate the primary and secondary markets in bonds.
Reading 63: Understanding Yield Spreads
The candidate should be able to:
a. identify the interest rate policy tools available to a central bank (e.g., the U.S.
Federal Reserve);
b. describe a yield curve and the various shapes of the yield curve;
c. 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;
d. define a spot rate;
e. compute, compare, and contrast the various yield spread measures;
f. describe a credit spread and discuss the suggested relation between credit
spreads and the wellbeing of the economy;
g. identify how embedded options affect yield spreads;
h. explain how the liquidity or issuesize of a bond affects its yield spread relative to
riskfree securities and relative to other securities;
i. compute the aftertax yield of a taxable security and the taxequivalent yield of a
taxexempt security;
j. define LIBOR and explain its importance to funded investors who borrow short
term.
www.cfainstitute.org/toolkit—Your online preparation resource
This study session illustrates the primary tools for valuation and analysis of fixed
income securities and markets. It begins with a study of basic valuation theory
and techniques for bonds and concludes with a more indepth explanation of the
primary tools for fixedincome investment valuation, specifically, interest rate and
yield valuation and interest rate risk measurement and analysis.
READING ASSIGNMENTS
Reading 64 Introduction to the Valuation of Debt Securities
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
Reading 65 Yield Measures, Spot Rates, and Forward Rates
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
Reading 66 Introduction to the Measurement of Interest Rate Risk
Fixed Income Analysis for the Chartered Financial Analyst®
Program, Second Edition, by Frank J. Fabozzi, CFA, editor
STUDY SESSION 16
FIXED INCOME:
Analysis and Valuation
LEARNING OUTCOMES
Reading 64: Introduction to the Valuation of Debt Securities
The candidate should be able to:
a. explain the steps in the bond valuation process;
b. 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;
c. compute the value of a bond and the change in value that is attributable to a
change in the discount rate;
d. 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;
e. compute the value of a zerocoupon bond;
Study Session 16
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f. explain the arbitragefree valuation approach and the market process that forces
the price of a bond toward its arbitragefree value and explain how a dealer can
generate an arbitrage profit if a bond is mispriced.
Reading 65: Yield Measures, Spot Rates, and Forward Rates
The candidate should be able to:
a. explain the sources of return from investing in a bond;
b. compute and interpret the traditional yield measures for fixedrate bonds and
explain their limitations and assumptions;
c. 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;
d. compute and interpret the bond equivalent yield of an annualpay bond and the
annualpay yield of a semiannualpay bond;
e. describe the methodology for computing the theoretical Treasury spot rate curve
and compute the value of a bond using spot rates;
f. differentiate between the nominal spread, the zerovolatility spread, and the
optionadjusted spread;
g. describe how the optionadjusted spread accounts for the option cost in a bond
with an embedded option;
h. 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.
Reading 66: Introduction to the Measurement of Interest Rate Risk
The candidate should be able to:
a. 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;
b. demonstrate the price volatility characteristics for optionfree, callable,
prepayable, and putable bonds when interest rates change;
c. describe positive convexity, negative convexity, and their relation to bond price
and yield;
d. 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;
e. 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;
f. compute the duration of a portfolio, given the duration of the bonds comprising
the portfolio, and explain the limitations of portfolio duration;
g. 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;
h. differentiate between modified convexity and effective convexity;
i. compute the price value of a basis point (PVBP), and explain its relationship to
duration.
www.cfainstitute.org/toolkit—Your online preparation resource
STUDY SESSION 17
DERIVATIVE INVESTMENTS
Derivatives—financial instruments that offer a return based on the return
of some underlying asset—have become increasingly important and
fundamental in effectively managing financial risk and creating synthetic
exposures to asset classes. As in other security markets, arbitrage and market
efficiency play a critical role in establishing prices and maintaining parity.
This study session builds the conceptual framework for understanding
derivative investments (forwards, futures, options, and swaps), derivative markets,
and the use of options in risk management.
READING ASSIGNMENTS
Reading 67 Derivative Markets and Instruments
Analysis of Derivatives for the Chartered Financial Analyst®
Program, by Don M. Chance, CFA
Reading 68 Forward Markets and Contracts
Analysis of Derivatives for the Chartered Financial Analyst®
Program, by Don M. Chance, CFA
Reading 69 Futures Markets and Contracts
Analysis of Derivatives for the Chartered Financial Analyst®
Program, by Don M. Chance, CFA
Reading 70 Option Markets and Contracts
Analysis of Derivatives for the Chartered Financial Analyst®
Program, by Don M. Chance, CFA
Reading 71 Swap Markets and Contracts
Analysis of Derivatives for the Chartered Financial Analyst®
Program, by Don M. Chance, CFA
Reading 72 Risk Management Applications of Option Strategies
Analysis of Derivatives for the Chartered Financial Analyst®
Program, by Don M. Chance, CFA
Study Session 17
www.cfainstitute.org/toolkit—Your online preparation resource
LEARNING OUTCOMES
Reading 67: Derivative Markets and Instruments
The candidate should be able to:
a. define a derivative and differentiate between exchangetraded and overthecounter
derivatives;
b. define a forward commitment and a contingent claim;
c. differentiate the basic characteristics of forward contracts, futures contracts,
options (calls and puts), and swaps;
d. discuss the purposes and criticisms of derivative markets;
e. explain arbitrage and the role it plays in determining prices and promoting
market efficiency.
Reading 68: Forward Markets and Contracts
The candidate should be able to:
a. explain delivery/settlement and default risk for both long and short positions in a
forward contract;
b. describe the procedures for settling a forward contract at expiration and discuss
how termination alternatives prior to expiration can affect credit risk;
c. differentiate between a dealer and an end user of a forward contract;
d. describe the characteristics of equity forward contracts and forward contracts on
zerocoupon and coupon bonds;
e. describe the characteristics of the Eurodollar time deposit market and define
LIBOR and Euribor;
f. describe the characteristics and calculate the gain/loss of forward rate
agreements (FRAs);
g. calculate and interpret the payoff of an FRA, and explain each of the component
terms;
h. describe the characteristics of currency forward contracts.
Reading 69: Futures Markets and Contracts
The candidate should be able to:
a. describe the characteristics of futures contracts;
b. distinguish between futures contracts and forward contracts;
c. differentiate between margin in the securities markets and margin in the futures
markets, and explain the role of initial margin, maintenance margin, variation
margin, and settlement in futures trading;
d. 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 change in
the futures price;
e. describe how a futures contract can be terminated at or prior to expiration;
f. describe the characteristics of the following types of futures contracts: Eurodollar,
Treasury bond, stock index, and currency.
Study Session 17
www.cfainstitute.org/toolkit—Your online preparation resource
Reading 70: Option Markets and Contracts
The candidate should be able to:
a. define European option, American option, and the concept of moneyness of an
option;
b. differentiate between exchangetraded options and overthecounter options;
c. identify the types of options in terms of the underlying instruments;
d. compare and contrast interest rate options with forward rate agreements (FRAs);
e. define interest rate caps, floors, and collars;
f. compute and interpret option payoffs, and explain how interest rate option
payoffs differ from the payoffs of other types of options;
g. define intrinsic value and time value and explain their relationship;
h. determine the minimum and maximum values of European options and
American options;
i. calculate and interpret the lowest prices of European and American calls and
puts based on the rules for minimum values and lower bounds;
j. explain how option prices are affected by the exercise price and the time to
expiration;
k. explain put–call parity for European options, and relate put–call parity to
arbitrage and the construction of synthetic options;
l. contrast American options with European options in terms of the lower bounds
on option prices and the possibility of early exercise;
m. explain how cash flows on the underlying asset affect put–call parity and the
lower bounds of option prices;
n. indicate the directional effect of an interest rate change or volatility change on
an option’s price.
Reading 71: Swap Markets and Contracts
The candidate should be able to:
a. describe the characteristics of swap contracts and explain how swaps are
terminated;
b. define, calculate, and interpret the payment of currency swaps, plain vanilla
interest rate swaps, and equity swaps.
Reading 72: Risk Management Applications of Option Strategies
The candidate should be able to:
a. 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;
b. 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.
www.cfainstitute.org/toolkit—Your online preparation resource
Because of diversification benefits and higher expectations of investment
returns, investors are increasingly turning to alternative investments. This
study session describes the common types of alternative investments, methods
for their valuation, unique risks and opportunities associated with them, and the
relation between alternative investments and traditional investments.
Although finding a single definition of an “alternative” investment is difficult,
certain features (e.g., limited liquidity, infrequent valuations, and unique legal
structures) are typically associated with alternative investments. This study session
discusses these features and how to evaluate their impact on expected returns
and investment decisions in more detail. The reading provides an overview of the
major categories of alternative investments, including real estate, private equity,
venture capital, hedge funds, closely held companies, distressed securities, and
commodities.
Each of these categories has several unique characteristics, and the readings
discuss valuation methods for illiquid assets (such as direct real estate or closely
held companies), performance measures for private equity and venture capital
investments, differences between various hedge fund strategies, and
implementation vehicles for investments in alternative assets.
READING ASSIGNMENTS
Reading 73 Alternative Investments
Global Investments, Sixth Edition, by Bruno Solnik
and Dennis McLeavey, CFA
Reading 74 Investing in Commodities
Global Perspectives on Investment Management: Learning from
the Leaders, edited by Rodney N. Sullivan, CFA
STUDY SESSION 18
ALTERNATIVE INVESTMENTS
Study Session 18
www.cfainstitute.org/toolkit—Your online preparation resource
LEARNING OUTCOMES
Reading 73: Alternative Investments
The candidate should be able to:
a. differentiate between an openend and a closedend fund, and explain how net
asset value of a fund is calculated and the nature of fees charged by investment
companies;
b. distinguish among style, sector, index, global, and stable value strategies in
equity investment and among exchange traded funds (ETFs), traditional mutual
funds, and closedend funds;
c. explain the advantages and risks of ETFs;
d. describe the forms of real estate investment and explain their characteristics as
an investable asset class;
e. describe the various approaches to the valuation of real estate;
f. 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 aftertax
cash flows, net present value, and yield of a real estate investment;
g. explain the stages in venture capital investing, venture capital investment
characteristics and challenges to venture capital valuation and performance
measurement;
h. calculate the net present value (NPV) of a venture capital project, given the
project’s possible payoff and conditional failure probabilities;
i. define hedge fund in terms of objectives, legal structure, and fee structure, and
describe the various classifications of hedge funds;
j. explain the benefits and drawbacks to fund of funds investing;
k. discuss the leverage and unique risks of hedge funds;
l. 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;
m. explain how the legal environment affects the valuation of closely held
companies;
n. describe alternative valuation methods for closely held companies and distinguish
among the bases for the discounts and premiums for these companies;
o. discuss distressed securities investing and compare venture capital investing with
distressed securities investing;
p. discuss the role of commodities as a vehicle for investing in production and
consumption;
q. explain the motivation for investing in commodities, commodities derivatives,
and commoditylinked securities;
r. discuss the sources of return on a collateralized commodity futures position.
Reading 74 Investing in Commodities
The candidate should be able to:
a. explain the relationship between spot prices and expected future prices in terms
of contango and backwardation;
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Study Session 18
b. describe the sources of return and risk for a commodity investment and the
effect on a portfolio of adding an allocation to commodities;
c. explain why a commodity index strategy is generally considered an active
investment.
2010年 LOS 請洽本會 022358212 cfa@tfra.org
