Hedge fund
Objectives,
legal structure,
fee structure, and
classifications of hedge funds;
CFA LOS
i. discuss the descriptive accuracy of the term “hedge fund,” define hedge fund in
terms of objectives, legal structure, and fee structure, and describe the various
classifications of hedge funds;
Reference/Reading: International Investments, by Bruno Solnik and Dennis McLeavey
Solnik and McLeavey say the original concept of a hedge fund was to offer plays against markets, using short selling, futures and other derivative products.
Today the common denominator of hedge funds is not their investment strategy but the search for absolute returns.
Professional money management has progressively moved toward relative performance, performance relative to a bench mark. A fund manager's performance is evaluated relative to some market index which is assigned as a benchmark in his mandate or investment policy document.
The development of hedge funds can be seen as a reaction against this trend and hedge funds try to achieve absolute returns. This means that hedge funds may be termed more appropriately as isolation funds, funds isolated from market trends..
Legal structure: In USA, there are typically set up as a limited partnership, or as limited liability company or as an offshore corporation. These legal structures provide the flexibility to the fund managers to take short positions in any asset, use all kinds of derivatives, and to leverage without restrictions of regulators. In contrast mutual funds are allowed only long positions.
Hedge funds based in United States most often take the form of a limited partnership organized under section 3(c)(1) of the Investment Company Act, thereby gaining exemption from most U.S. Securites and Exchange Commission (SEC) regulations. The fund is limited to no more than 1,009 partners, who must be accredited investors
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Section 3(c)(1) of the Investment Company Act
c. Further exemptions. Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title:
1. Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities. Such issuer shall be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1) [15 USCS § 80a-12(d)(1)(A)(i), (B)(i)] governing the purchase or other acquisition by such issuer of any security issued by any registered investment company and the sale of any security issued by any registered open-end investment company to any such issuer. For purposes of this paragraph:
A. Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 per centum or more of the outstanding voting securities of the issuer, and is or, but for the exception provided for in this paragraph or paragraph (7), would be an investment company, the beneficial ownership shall be deemed to be that of the holders of such company's outstanding securities (other than short-term paper).
B. Beneficial ownership by any person who acquires securities or interests in securities of an issuer described in the first sentence of this paragraph shall be deemed to be beneficial ownership by the person from whom such transfer was made, pursuant to such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title, where the transfer was caused by legal separation, divorce, death, or other involuntary event.
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Some hedge funds in US are organized under section 3(C)(7) of the Investment Company Act. This form also provide exemption from most SEC regulations. In this case, the fund is limited to no more than 500 investors, who have to be qualified purchasers. The fund is prohibited from advertising.
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Section 3(C)(7) of the Investment Company Act.
7.
A. Any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities. Securities that are owned by persons who received the securities from a qualified purchaser as a gift or bequest, or in a case in which the transfer was caused by legal separation, divorce, death, or other involuntary event, shall be deemed to be owned by a qualified purchaser, subject to such rules, regulations, and orders as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
B. Notwithstanding subparagraph (A), an issuer is within the exception provided by this paragraph if--
i. in addition to qualified purchasers, outstanding securities of that issuer are beneficially owned by not more than 100 persons who are not qualified purchasers, if--
I. such persons acquired any portion of the securities of such issuer on or before September 1, 1996; and
II. at the time at which such persons initially acquired the securities of such issuer, the issuer was excepted by paragraph (1); and
ii. prior to availing itself of the exception provided by this paragraph--
I. such issuer has disclosed to each beneficial owner, as determined under paragraph (1), that future investors will be limited to qualified purchasers, and that ownership in such issuer is no longer limited to not more than 100 persons; and
II. concurrently with or after such disclosure, such issuer has provided each beneficial owner, as determined under paragraph (1), with a reasonable opportunity to redeem any part or all of their interests in the issuer, notwithstanding any agreement to the contrary between the issuer and such persons, for that person's proportionate share of the issuer's net assets.
C. Each person that elects to redeem under subparagraph (B)(ii)(II) shall receive an amount in cash equal to that person's proportionate share of the issuer's net assets, unless the issuer elects to provide such person with the option of receiving, and such person agrees to receive, all or a portion of such person's share in assets of the issuer. If the issuer elects to provide such persons with such an opportunity, disclosure concerning such opportunity shall be made in the disclosure required by subparagraph (B)(ii)(I).
D. An issuer that is excepted under this paragraph shall nonetheless be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1) [15 USCS § 80a-12(d)(1)(A)(i), (B)(i)] relating to the purchase or other acquisition by such issuer of any security issued by any registered investment company and the sale of any security issued by any registered open-end investment company to any such issuer.
E. For purposes of determining compliance with this paragraph and paragraph (1), an issuer that is otherwise excepted under this paragraph and an issuer that is otherwise excepted under paragraph (1) shall not be treated by the Commission as being a single issuer for purposes of determining whether the outstanding securities of the issuer excepted under paragraph (1) are beneficially owned by not more than 100 persons or whether the outstanding securities of the issuer excepted under this paragraph are owned by persons that are not qualified purchasers. Nothing in this subparagraph shall be construed to establish that a person is a bona fide qualified purchaser for purposes of this paragraph or a bona fide beneficial owner for purposes of paragraph (1).
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As the number of partners is limited, the minimum investment is typically more than $200,000.
Institutional investors can also become partners.
For U.S. hedgefund, Delaware is a fund-friendly state and funds prefer fund friendly states for registration.
Offshore funds also have attractive legal structures and U.S. investors are investing in such funds. Offshore funds are incorporated in British Virgin Islands, Cayman Islands, Bermuda, or such locations that offer fiscal and legal benefits.
Fee Structure
The manager is compensated through a base management fee based on the assets under management (AUM) now typically about 1 percent fo the asset base plus an incentive fee - a percentage of the realized profits (ranging from 15% to 30%, the typical value being 20%). In some agreement, the incentive fee is applied to profits in excess of a specified risk-free-rate. In some agreement, a condition is there that if in some years, the fund declines in value, the fund would first have to recover the decline before realized profit is recognized and incentive fee is paid.
Classification:
Solnik and Mcleavey provide the following classificastion
Long/short funds
Market-neutral funds
Global macro funds
Futures funds
Emerging-market funds
Even driven funds
Distressed securities funds
Risk arbitrage in mergers and acquisitions
Thursday, January 31, 2008
Hedge funds - 2
Fund of funds investing;
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LOS
j. explain the benefits and drawbacks to fund of funds investing;
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Fund of funds have been created in hedge funds.
A fund of funds collects money from small investors and in turn invests in various hedge funds.
It provides investors with the following benefits.
Retailing
As noted earlier, hedge funds requier minimum $200,000 per investor. In the case of fund of funds for the same amount, the investor can get exposure to a large number of hedge funds.
Access
FOF managers can invest in highly successful hedge fund which are closed for subscription as old (existing) investors. Because of their relationships, they can buy partnership or shares of investors leaving the hedgefunds.
Diversification
This benefit is similar to the retailing benefit. In the case of retailing even person with minimum amount gets the benefit of diversification. But in this case benefits of diversification are emphasized for even big investors.
Expertise
The fund managers of FOFs have and develop expertise in finding good quality hedgefunds. Information about hedge funds is limited as they do not advertise. FOF managers buy databases and develop more intimate knowledge of strategies, and their advantages and potential pit falls.
Due Diligence process
There is a due diligence process which needs to be done. Individual investors will find it difficult to do. Even institutional investors may find it cumbersome. An FOF can have better staff resources, procedures and systems to perform the due diligenc process compared to typical institutional investors.
Drawbacks
Fee: Additional fee to FOF managers.
While each hedge fund in which FOF invests charges its fee, FOF charges an additional fee on the AUM. So investors in FOF have to pay an additional fee.
Performance: Past performance based selection is generally done by FOFs. There is little scientific evidence of persistence of performance delivered by FOFs.
Diversification - a two edged sword: Due to diversification FOFs may invest in some high performing funds and some not so high performance funds. So the realized return can be lower than the return of high performance funds.
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LOS
j. explain the benefits and drawbacks to fund of funds investing;
-----------------------
Fund of funds have been created in hedge funds.
A fund of funds collects money from small investors and in turn invests in various hedge funds.
It provides investors with the following benefits.
Retailing
As noted earlier, hedge funds requier minimum $200,000 per investor. In the case of fund of funds for the same amount, the investor can get exposure to a large number of hedge funds.
Access
FOF managers can invest in highly successful hedge fund which are closed for subscription as old (existing) investors. Because of their relationships, they can buy partnership or shares of investors leaving the hedgefunds.
Diversification
This benefit is similar to the retailing benefit. In the case of retailing even person with minimum amount gets the benefit of diversification. But in this case benefits of diversification are emphasized for even big investors.
Expertise
The fund managers of FOFs have and develop expertise in finding good quality hedgefunds. Information about hedge funds is limited as they do not advertise. FOF managers buy databases and develop more intimate knowledge of strategies, and their advantages and potential pit falls.
Due Diligence process
There is a due diligence process which needs to be done. Individual investors will find it difficult to do. Even institutional investors may find it cumbersome. An FOF can have better staff resources, procedures and systems to perform the due diligenc process compared to typical institutional investors.
Drawbacks
Fee: Additional fee to FOF managers.
While each hedge fund in which FOF invests charges its fee, FOF charges an additional fee on the AUM. So investors in FOF have to pay an additional fee.
Performance: Past performance based selection is generally done by FOFs. There is little scientific evidence of persistence of performance delivered by FOFs.
Diversification - a two edged sword: Due to diversification FOFs may invest in some high performing funds and some not so high performance funds. So the realized return can be lower than the return of high performance funds.
CFA Level 1 Alternative Investments - Hedge Funds - 3
Leverage and unique risks of hedge funds
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LOS
k. discuss the leverage and unique risks of hedge funds;
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Leverage in hedge funds often runs fron 2:1 to 10:1 and can run higher than 100:1.
It is interesting to note that at one point in time, a well known hedge fund that got into problems LTCM, had leverage over 500:1 (Lhabitant, Hedge Funds: Myths and Limits, Jon Wiley, 2002).
Unique risks:
Liquidity risk
The liquidity risk is common to all investors who trade in securities. The risk is much more in the case of trading in illiquid or thin markets. Many hedgefund strategies rely on the presence of liquidity in markets. Because of this, lack of liquidity in extreme market conditions can cause irreversible damage to hedge funds. The failure of the hedge fund Longterm Capital Management (LTCM) was attributed to the unexpected disappearnce of liquidity in the market.
Pricing risk
Hedge funds invest in over the counter traded products. Pricing of those securities or products is a difficult task. In periods of high volatility, broker dealers adopt an extremely conservative policy of pricing them and demand margin based on those prices. This can create severe cash needs for hedge funds to maintain their positions. Pricing risk is more when liquidity is a problem and so they appear together.
Counterparty credit risk
As hedge funds deal in over the counter products, counterparty credit risk arises.
Settlement risk
This is the risk that the counterparty fails to deliver the securities or money involved in a transaction on the settlement day. If the hedge fund planned to utilise the securities or money in turn to settle its other trades, there will be a problem because of settlement failures.
Short squeeze risk
This risk comes into appearance when short sold stock has to be bought at rising prices. This could come about because the lenders of the stock want their stock back. Because some hedge funds use short positions, this can be a risk.
Financing squeeze
If the hedge fund has reached its borrowing limits, and still needs cash to maintain positions by paying margin calls, there is a problem. To tide over the problem, the fund has to square up some its positions under adverse circumstances. This risk is termed financing squeeze risk.
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LOS
k. discuss the leverage and unique risks of hedge funds;
------------------
Leverage in hedge funds often runs fron 2:1 to 10:1 and can run higher than 100:1.
It is interesting to note that at one point in time, a well known hedge fund that got into problems LTCM, had leverage over 500:1 (Lhabitant, Hedge Funds: Myths and Limits, Jon Wiley, 2002).
Unique risks:
Liquidity risk
The liquidity risk is common to all investors who trade in securities. The risk is much more in the case of trading in illiquid or thin markets. Many hedgefund strategies rely on the presence of liquidity in markets. Because of this, lack of liquidity in extreme market conditions can cause irreversible damage to hedge funds. The failure of the hedge fund Longterm Capital Management (LTCM) was attributed to the unexpected disappearnce of liquidity in the market.
Pricing risk
Hedge funds invest in over the counter traded products. Pricing of those securities or products is a difficult task. In periods of high volatility, broker dealers adopt an extremely conservative policy of pricing them and demand margin based on those prices. This can create severe cash needs for hedge funds to maintain their positions. Pricing risk is more when liquidity is a problem and so they appear together.
Counterparty credit risk
As hedge funds deal in over the counter products, counterparty credit risk arises.
Settlement risk
This is the risk that the counterparty fails to deliver the securities or money involved in a transaction on the settlement day. If the hedge fund planned to utilise the securities or money in turn to settle its other trades, there will be a problem because of settlement failures.
Short squeeze risk
This risk comes into appearance when short sold stock has to be bought at rising prices. This could come about because the lenders of the stock want their stock back. Because some hedge funds use short positions, this can be a risk.
Financing squeeze
If the hedge fund has reached its borrowing limits, and still needs cash to maintain positions by paying margin calls, there is a problem. To tide over the problem, the fund has to square up some its positions under adverse circumstances. This risk is termed financing squeeze risk.
CFA Level 1 Alternative Investments - Hedge Funds - 4
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LOS
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;
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Performance of hedge funds
Various indexes of hedge funds are available from consultants and fund managers.
Some of them are:
CISDM
Zurich Capital Management and MAR
CSFB/Tremont
VAN
Henesse
EACM 100
HFR
Carr/Barclays for CTAs
Based on the indices Solnik and Mcleavey conclude that there is a strong case for investing in hedge funds.
Hedge funds tend to have a net return (after fees) higher than equity markets and bond markets.
Hedge funds tend to have lower risk(measured by standard deviation of past returns) than traditional equity investments.
Higher Sharpe ratio indicates higher return for a unit of risk. For hedgefunds, data providers do calculate Sharpe ratio and was found to be higher than that for equity investments for the period 1996-2002. But Solnik and Mcleavey raise the caution that Sharpe ration may not be an appropriate measure for hedge funds as they have option like characteristics.
The correlation of hedge fund returns with conventional bonds and equities is positive but low.
Attraction for talent: The fee structure and flexibility of investment options is attracting talented fund managers. When both and long positions and short positions can be taken research insights can be used either way. Also leverage can be employed to magnify the benefit from an insight.
Caveats or cuations:
Investors need to exercise caution in using the available historical performance data on hedgefunds. The hedge fund industry does not adhere to rigorous performance presentation standards as it is not a regulated activity with uniform reporting formats. While past winners may not repeat, certain known biases can make it difficult to interpret the hedgefund performance data. The biases identified are:
Self selection bias
Instant history bias
Survivorship bias
Smoothed pricing - Infrequently traded assets
Option like investment strategies
Fee structure and gaming
There is a very large pool of capital chasing after what is likely to be a limited supply of pricing inefficiencies. Any successful trading strategy will quickly be imitated by many other fund managers, thereby reducing the profitability of the strategy. Investors need to exercise great caution in interpreting and extrapolating the reported performance of hedge funds; there is possibility of underestimating risk.
LOS
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;
------------------------
Performance of hedge funds
Various indexes of hedge funds are available from consultants and fund managers.
Some of them are:
CISDM
Zurich Capital Management and MAR
CSFB/Tremont
VAN
Henesse
EACM 100
HFR
Carr/Barclays for CTAs
Based on the indices Solnik and Mcleavey conclude that there is a strong case for investing in hedge funds.
Hedge funds tend to have a net return (after fees) higher than equity markets and bond markets.
Hedge funds tend to have lower risk(measured by standard deviation of past returns) than traditional equity investments.
Higher Sharpe ratio indicates higher return for a unit of risk. For hedgefunds, data providers do calculate Sharpe ratio and was found to be higher than that for equity investments for the period 1996-2002. But Solnik and Mcleavey raise the caution that Sharpe ration may not be an appropriate measure for hedge funds as they have option like characteristics.
The correlation of hedge fund returns with conventional bonds and equities is positive but low.
Attraction for talent: The fee structure and flexibility of investment options is attracting talented fund managers. When both and long positions and short positions can be taken research insights can be used either way. Also leverage can be employed to magnify the benefit from an insight.
Caveats or cuations:
Investors need to exercise caution in using the available historical performance data on hedgefunds. The hedge fund industry does not adhere to rigorous performance presentation standards as it is not a regulated activity with uniform reporting formats. While past winners may not repeat, certain known biases can make it difficult to interpret the hedgefund performance data. The biases identified are:
Self selection bias
Instant history bias
Survivorship bias
Smoothed pricing - Infrequently traded assets
Option like investment strategies
Fee structure and gaming
There is a very large pool of capital chasing after what is likely to be a limited supply of pricing inefficiencies. Any successful trading strategy will quickly be imitated by many other fund managers, thereby reducing the profitability of the strategy. Investors need to exercise great caution in interpreting and extrapolating the reported performance of hedge funds; there is possibility of underestimating risk.
CFA Level 1 Alternative Investments - Closely Held Companies - 1
Closely held companies
LOS
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;
Reference/Reading" Solnik and McLeavey
Closely held companies are those that are not publicly traded. Inactive traded securities are securities that are infrequently traded; Normally, they are securities traded on minor stock exchanges.
Limited information availability is an issue for analysis of such companies. Illiquidity is an obvious issue. In the valuation of such securites minority ownership issue needs to be brought in.
So the analysis of these securities require evaluation of legal, financial, ownership and illiquidty issues.
Legal Issues:
Closely held companies may be organized in a variety of ways. The options include: special tax advantaged corporations (subchapter S corporations in US), regular coprorations, general partnerships, limited partnerships, and sole proprietorships.
Case law defines terms such as intrinsic value, fundamental value an fair value. Valuation of closely held and inactively traded securities requires extensive knowledge of concerned law and the purposes of valuation.
[Reference: Pratt, s.P., Reilly, R.F., and Schweihs, R.P. Valuing a Business, 3rd ed., Chicago; Irwin, 1996]
LOS
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;
Reference/Reading" Solnik and McLeavey
Closely held companies are those that are not publicly traded. Inactive traded securities are securities that are infrequently traded; Normally, they are securities traded on minor stock exchanges.
Limited information availability is an issue for analysis of such companies. Illiquidity is an obvious issue. In the valuation of such securites minority ownership issue needs to be brought in.
So the analysis of these securities require evaluation of legal, financial, ownership and illiquidty issues.
Legal Issues:
Closely held companies may be organized in a variety of ways. The options include: special tax advantaged corporations (subchapter S corporations in US), regular coprorations, general partnerships, limited partnerships, and sole proprietorships.
Case law defines terms such as intrinsic value, fundamental value an fair value. Valuation of closely held and inactively traded securities requires extensive knowledge of concerned law and the purposes of valuation.
[Reference: Pratt, s.P., Reilly, R.F., and Schweihs, R.P. Valuing a Business, 3rd ed., Chicago; Irwin, 1996]
Wednesday, January 30, 2008
CFA Level 1 Alternative Investments - Closely Held Companies
Closely held companies
LOS
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;
Reference/Reading" Solnik and McLeavey
Closely held companies are those that are not publicly traded. Inactive traded securities are securities that are infrequently traded; Normally, they are securities traded on minor stock exchanges.
Limited information availability is an issue for analysis of such companies. Illiquidity is an obvious issue. In the valuation of such securites minority ownership issue needs to be brought in.
So the analysis of these securities require evaluation of legal, financial, ownership and illiquidty issues.
Legal Issues:
Closely held companies may be organized in a variety of ways. The options include: special tax advantaged corporations (subchapter S corporations in US), regular coprorations, general partnerships, limited partnerships, and sole proprietorships.
Case law defines terms such as intrinsic value, fundamental value an fair value. Valuation of closely held and inactively traded securities requires extensive knowledge of concerned law and the purposes of valuation.
[Reference: Pratt, s.P., Reilly, R.F., and Schweihs, R.P. Valuing a Business, 3rd ed., Chicago; Irwin, 1996]
Alternative Valuation Methods Applicable
The cost approach: Determining what it would cost to replace the assets of the firm or company in their present form and state.
The comparables approach: This approach involves developing a bench mark value based on the market price of similar but actively traded company, or the average or median value of the market prices of similar companies, in transactions made in the period close to the time of appraisal.
To derive the value of the firm or security or company concerned, the benchmark price/value needs to be adjusted for market conditions (there is a possibility that tbere is mispricing either on the lower side or higher side) and the unique features of the firm that differ from benchmark.
The income approach: Methods that Estimate any anticipated future economic income stream and discount them to find the value fall under this approach.
LOS
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;
Reference/Reading" Solnik and McLeavey
Closely held companies are those that are not publicly traded. Inactive traded securities are securities that are infrequently traded; Normally, they are securities traded on minor stock exchanges.
Limited information availability is an issue for analysis of such companies. Illiquidity is an obvious issue. In the valuation of such securites minority ownership issue needs to be brought in.
So the analysis of these securities require evaluation of legal, financial, ownership and illiquidty issues.
Legal Issues:
Closely held companies may be organized in a variety of ways. The options include: special tax advantaged corporations (subchapter S corporations in US), regular coprorations, general partnerships, limited partnerships, and sole proprietorships.
Case law defines terms such as intrinsic value, fundamental value an fair value. Valuation of closely held and inactively traded securities requires extensive knowledge of concerned law and the purposes of valuation.
[Reference: Pratt, s.P., Reilly, R.F., and Schweihs, R.P. Valuing a Business, 3rd ed., Chicago; Irwin, 1996]
Alternative Valuation Methods Applicable
The cost approach: Determining what it would cost to replace the assets of the firm or company in their present form and state.
The comparables approach: This approach involves developing a bench mark value based on the market price of similar but actively traded company, or the average or median value of the market prices of similar companies, in transactions made in the period close to the time of appraisal.
To derive the value of the firm or security or company concerned, the benchmark price/value needs to be adjusted for market conditions (there is a possibility that tbere is mispricing either on the lower side or higher side) and the unique features of the firm that differ from benchmark.
The income approach: Methods that Estimate any anticipated future economic income stream and discount them to find the value fall under this approach.
CFA Alternative Investment - Distressed Securities
Reference/Reading: Solnik and McLeavey
Distressed securities are the securities of companies that have filed or are close to filing for bankruptcy court protection, or that are seeking out-of-court debt restructuring to avoid bankruptcy.
Valuation of distressed securities requires legal, operational, and financial analysis.
Distressed securities are the securities of companies that have filed or are close to filing for bankruptcy court protection, or that are seeking out-of-court debt restructuring to avoid bankruptcy.
Valuation of distressed securities requires legal, operational, and financial analysis.
Readings CFA Level I
“Code of Ethics and Standards of Professional Conduct”
Standards of Practice Handbook, 9th edition (CFA Institute, 2005)
“Guidance” for Standards I – VII
Standards of Practice Handbook, 9th edition (CFA Institute, 2005)
Introduction to the Global Investment Performance Standards
Global Investment Performance Standards
(CFA Institute, 2005)
"The Time Value of Money"
Ch. 1, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Discounted Cash Flow Applications"
Ch. 2, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Statistical Concepts and Market Returns"
Ch. 3, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Probability Concepts"
Ch. 4, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
“Common Probability Distributions”
Ch. 5, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
“Sampling and Estimation”
Ch. 6, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Hypothesis Testing"
Ch. 7, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
“Technical Analysis”
Ch. 15, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Elasticity”
Ch. 4, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Efficiency and Equity”
Ch. 5, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Markets in Action”
Ch. 6, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Organizing Production”
Ch. 9, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Output and Costs”
Ch. 10, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Perfect Competition”
Ch. 11, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monopoly”
Ch. 12, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monopolistic Competition and Oligopoly”
Ch. 13, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Demand and Supply in Factor Markets”
Ch. 17, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monitoring Cycles, Jobs, and the Price Level”
Ch. 22, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Aggregate Supply and Aggregate Demand”
Ch. 23, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Money, Banks, and the Federal Reserve”
Ch. 26, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Money, Interest, Real GDP, and the Price Level”
Ch. 27, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Inflation”
Ch. 28, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Fiscal Policy”
Ch. 31, pp. 740 – 758, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monetary Policy”
Ch. 32, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
"Financial Statement Analysis: An Introduction"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Financial Reporting Mechanics"
Thomas R. Robinson, Hennie van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Financial Reporting Standards"
Thomas R. Robinson, Hennie van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Understanding the Income Statement"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Understanding the Balance Sheet"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Understanding the Cash Flow Statement"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
“Analysis of Inventories”
Ch. 6, pp. 192-215 and pp. 219-220, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Long-Lived Assets: Part I – The Capitalization Decision”
Ch. 7, pp. 227-240, including Box 7-1, and pp. 242-244, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Long-Lived Assets: Part II – Analysis of Depreciation and Impairment”
Ch. 8, pp. 257-278 and pp. 280-282, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Income Taxes”
Ch. 9, pp. 290-314, including Boxes 9-1 and 9-2, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Financing Liabilities”
Ch. 10, pp. 322-332 and pp. 337-352, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Leases and Off-Balance-Sheet Debt”
Ch. 11, pp. 363-383, including Box 11-1, and pp. 386-393, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
"Financial Analysis Techniques"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Financial Statement Analysis: Applications"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"International Standards Convergence"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
“Capital Budgeting”
Ch. 2, pp. 1-22, John Stowe and Jacques R. Gagne, Corporate Finance for the CFA Program (CFA Institute, forthcoming)
“Cost of Capital"
Ch. 3, pp. 1-20, Yves Courtois, Gene C. Lai and Pamela P. Peterson, Corporate Finance for the CFA Program (CFA Institute, forthcoming)
Member download (PDF)
"Working Capital Management"
Edgar A. Norton, Jr., Kenneth L. Parkinson, and Pamela P. Peterson (CFA Institute, 2006)
"Financial Statement Analysis"
Pamela P. Peterson (CFA Institute, 2006)
“The Corporate Governance of Listed Companies: A Manual for Investors”
(CFA Institute, 2005)
“The Asset Allocation Decision”
Ch. 2, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“An Introduction to Portfolio Management”
Ch. 7, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“An Introduction to Asset Pricing Models”
Ch. 8, pp. 229-252, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Organization and Functioning of Securities Markets”
Ch. 4, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Security-Market Indexes”
Ch. 5, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Efficient Capital Markets”
Ch. 6, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Market Efficiency and Anomalies”
Ch. 1, Beyond The Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing, Vijay Singal (Oxford University Press, 2004)
“An Introduction to Security Valuation: Part I”
Ch. 11, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Industry Analysis”
Ch. 13, pp. 466–468, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Equity: Concepts and Techniques”
Ch. 6, pp. 256–273, International Investments, 5th edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2003)
“Company Analysis and Stock Valuation”
Ch. 14, pp. 513–516 and 533–548, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“An Introduction to Security Valuation: Part II”
Ch. 11, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Introduction to Price Multiples”
John D. Stowe, Thomas R. Robinson, Jerald E. Pinto, and Dennis W. McLeavey (AIMR, 2003)
“Features of Debt Securities”
Ch. 1, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Risks Associated with Investing in Bonds”
Ch. 2, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Overview of Bond Sectors and Instruments”
Ch. 3, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Understanding Yield Spreads”
Ch. 4, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Monetary Policy in an Environment of Global Financial Markets”
European Central Bank, Press Division, Otmar Issing, Capital Markets and Financial Integration in Europe, 2002
“Introduction to the Valuation of Debt Securities”
Ch. 5, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Yield Measures, Spot Rates, and Forward Rates”
Ch. 6, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Introduction to the Measurement of Interest Rate Risk”
Ch. 7, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
"Derivative Markets and Instruments"
Ch. 1, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Forward Markets and Contracts"
Ch. 2, pp. 25-37, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Futures Markets and Contracts"
Ch. 3, pp. 81-103, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Option Markets and Contracts"
Ch. 4, pp. 159-194, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Swap Markets and Contracts"
Ch. 5, pp. 269-285, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Risk Management Applications of Option Strategies"
Ch. 7, pp. 411-429, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Alternative Investments"
Ch. 8, International Investments, 5th edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2004)
Standards of Practice Handbook, 9th edition (CFA Institute, 2005)
“Guidance” for Standards I – VII
Standards of Practice Handbook, 9th edition (CFA Institute, 2005)
Introduction to the Global Investment Performance Standards
Global Investment Performance Standards
(CFA Institute, 2005)
"The Time Value of Money"
Ch. 1, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Discounted Cash Flow Applications"
Ch. 2, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Statistical Concepts and Market Returns"
Ch. 3, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Probability Concepts"
Ch. 4, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
“Common Probability Distributions”
Ch. 5, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
“Sampling and Estimation”
Ch. 6, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
"Hypothesis Testing"
Ch. 7, Quantitative Investment Analysis, 2nd edition, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle, and Mark J.P. Anson (Wiley, 2007)
“Technical Analysis”
Ch. 15, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Elasticity”
Ch. 4, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Efficiency and Equity”
Ch. 5, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Markets in Action”
Ch. 6, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Organizing Production”
Ch. 9, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Output and Costs”
Ch. 10, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Perfect Competition”
Ch. 11, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monopoly”
Ch. 12, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monopolistic Competition and Oligopoly”
Ch. 13, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Demand and Supply in Factor Markets”
Ch. 17, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monitoring Cycles, Jobs, and the Price Level”
Ch. 22, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Aggregate Supply and Aggregate Demand”
Ch. 23, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Money, Banks, and the Federal Reserve”
Ch. 26, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Money, Interest, Real GDP, and the Price Level”
Ch. 27, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Inflation”
Ch. 28, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Fiscal Policy”
Ch. 31, pp. 740 – 758, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
“Monetary Policy”
Ch. 32, Economics, 7th edition, Michael Parkin (Pearson Addison-Wesley, South-Western, 2005)
"Financial Statement Analysis: An Introduction"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Financial Reporting Mechanics"
Thomas R. Robinson, Hennie van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Financial Reporting Standards"
Thomas R. Robinson, Hennie van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Understanding the Income Statement"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Understanding the Balance Sheet"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Understanding the Cash Flow Statement"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
“Analysis of Inventories”
Ch. 6, pp. 192-215 and pp. 219-220, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Long-Lived Assets: Part I – The Capitalization Decision”
Ch. 7, pp. 227-240, including Box 7-1, and pp. 242-244, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Long-Lived Assets: Part II – Analysis of Depreciation and Impairment”
Ch. 8, pp. 257-278 and pp. 280-282, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Income Taxes”
Ch. 9, pp. 290-314, including Boxes 9-1 and 9-2, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Analysis of Financing Liabilities”
Ch. 10, pp. 322-332 and pp. 337-352, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
“Leases and Off-Balance-Sheet Debt”
Ch. 11, pp. 363-383, including Box 11-1, and pp. 386-393, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003)
"Financial Analysis Techniques"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"Financial Statement Analysis: Applications"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
"International Standards Convergence"
Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. Broihahn (CFA Institute, 2007)
“Capital Budgeting”
Ch. 2, pp. 1-22, John Stowe and Jacques R. Gagne, Corporate Finance for the CFA Program (CFA Institute, forthcoming)
“Cost of Capital"
Ch. 3, pp. 1-20, Yves Courtois, Gene C. Lai and Pamela P. Peterson, Corporate Finance for the CFA Program (CFA Institute, forthcoming)
Member download (PDF)
"Working Capital Management"
Edgar A. Norton, Jr., Kenneth L. Parkinson, and Pamela P. Peterson (CFA Institute, 2006)
"Financial Statement Analysis"
Pamela P. Peterson (CFA Institute, 2006)
“The Corporate Governance of Listed Companies: A Manual for Investors”
(CFA Institute, 2005)
“The Asset Allocation Decision”
Ch. 2, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“An Introduction to Portfolio Management”
Ch. 7, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“An Introduction to Asset Pricing Models”
Ch. 8, pp. 229-252, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Organization and Functioning of Securities Markets”
Ch. 4, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Security-Market Indexes”
Ch. 5, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Efficient Capital Markets”
Ch. 6, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Market Efficiency and Anomalies”
Ch. 1, Beyond The Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing, Vijay Singal (Oxford University Press, 2004)
“An Introduction to Security Valuation: Part I”
Ch. 11, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Industry Analysis”
Ch. 13, pp. 466–468, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Equity: Concepts and Techniques”
Ch. 6, pp. 256–273, International Investments, 5th edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2003)
“Company Analysis and Stock Valuation”
Ch. 14, pp. 513–516 and 533–548, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“An Introduction to Security Valuation: Part II”
Ch. 11, Investment Analysis and Portfolio Management, 8th edition, Frank K. Reilly and Keith C. Brown (South-Western, 2006)
“Introduction to Price Multiples”
John D. Stowe, Thomas R. Robinson, Jerald E. Pinto, and Dennis W. McLeavey (AIMR, 2003)
“Features of Debt Securities”
Ch. 1, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Risks Associated with Investing in Bonds”
Ch. 2, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Overview of Bond Sectors and Instruments”
Ch. 3, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Understanding Yield Spreads”
Ch. 4, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Monetary Policy in an Environment of Global Financial Markets”
European Central Bank, Press Division, Otmar Issing, Capital Markets and Financial Integration in Europe, 2002
“Introduction to the Valuation of Debt Securities”
Ch. 5, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Yield Measures, Spot Rates, and Forward Rates”
Ch. 6, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
“Introduction to the Measurement of Interest Rate Risk”
Ch. 7, Fixed Income Analysis, 2nd edition, Frank J. Fabozzi (Wiley, 2007)
"Derivative Markets and Instruments"
Ch. 1, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Forward Markets and Contracts"
Ch. 2, pp. 25-37, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Futures Markets and Contracts"
Ch. 3, pp. 81-103, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Option Markets and Contracts"
Ch. 4, pp. 159-194, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Swap Markets and Contracts"
Ch. 5, pp. 269-285, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Risk Management Applications of Option Strategies"
Ch. 7, pp. 411-429, Analysis of Derivatives for the CFA® Program, Don Chance (AIMR, 2003)
"Alternative Investments"
Ch. 8, International Investments, 5th edition, Bruno Solnik and Dennis McLeavey (Addison Wesley, 2004)
CFA Level 1 Topic details
Study Session 1
Ethical and Professional Standards
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 self-regulatory program to maintain the highest professional standards among investment practitioners. “Guidance” in the SOPH addresses the practical application of the Code of Ethics and Standards of Professional Conduct. The guidance reviews the purpose and scope of each standard, presents recommended procedures for compliance, and provides examples of the standard in practice.
The Global Investment Performance Standards (GIPS) facilitate efficient comparison of investment performance across investment managers and 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.
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 self-regulatory program to maintain the highest professional standards among investment practitioners. “Guidance” in the SOPH addresses the practical application of the Code of Ethics and Standards of Professional Conduct. The guidance reviews the purpose and scope of each standard, presents recommended procedures for compliance, and provides examples of the standard in practice.
The Global Investment Performance Standards (GIPS) facilitate efficient comparison of investment performance across investment managers and 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.
Study Session 2
Quantitative Methods: Basic Concepts
This introductory study session presents the fundamentals 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: (1) the time value of money and (2) 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.
Study Session 3
Quantitative Methods: Application
This study session introduces the discrete and continuous probability distributions that are 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 the assumed hypothesis (null hypothesis) about various parameters of the 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 mis-specified models or improperly used tools can result in misleading conclusions.
Study Session 4
Microeconomic Analysis
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 dependency between demand and supply and the impact of changes in either on the equilibrium price level. A second key concept is efficiency, which is 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.
Study Session 5
Market Structure and Macroeconomic Analysis
This study session first compares and contrasts the different market structures in which firms operate. The market environment influences the price a firm can demand for its goods or services. Among 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 impact on all firms in the same environment, be it a country, a group of related countries, or a particular industry. The readings explain the business cycle, and how to forecast changes in the business cycle and the impact on, among other things, price levels and profitability. The study session concludes by describing how an economy’s aggregate supply and aggregate demand are determined.
Study Session 6
Monetary and Fiscal Economics
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, and this study session describes circumstances when this may lead to inflation and the transmission mechanisms between the monetary sector and the real part of the economy. Finally, the goals and implications of fiscal and monetary policy are explored by examining some of the main models of macroeconomic theory (Keynesian, classical, and monetarist).
Study Session 7
Financial Statement Analysis: An Introduction
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, cash flow statement, and statement of changes in owners’ equity), notes to those statements, and management 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 end-products 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 the governing set of financial reporting standards applying in the jurisdiction in which the information is released. The final reading in this study explores the role of financial reporting standard-setting 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 8
Financial Statement Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
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 common-size analysis. Understanding these concepts allows a financial analyst to evaluate trends in performance over several measurement periods and to compare the performance of different companies over the same period(s). Additional analyst tools such as the earnings per share calculation are also described.
The readings in this study session discuss and illustrate the earnings analysis of financial statements and the critical role that financial ratio analysis plays in making investment or credit decisions through the measurement of financial performance and risk.
Financial ratios may be used to compare the risk and return of a company with that of other companies of different sizes. A significant hurdle in applying ratio analysis is the difficulty of comparing companies that use alternative accounting policies and estimates. To achieve appropriate comparability, the accounting differences must be identified and then the financial statement balances adjusted for those differences.
Basic and diluted earnings per share are important and widely used performance statistics for publicly traded companies. Unlike other ratios presented in this study session, the measurement and calculation of the earnings per share ratio is strictly determined by the regulatory requirements of U.S. GAAP.
Study Session 9
Financial Statement Analysis: Inventories, Long-Term Assets, Deferred Taxes, and On- and Off-Balance-Sheet Debt
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. Long-term 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.
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 “Analysis of Income Taxes” discusses several issues that arise relating to deferred taxes.
Both on- and off-balance-sheet debt affect a company's liquidity and solvency, and have consequences for its long-term 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 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 decision-making.
Study Session 10
Financial Statement Analysis: Techniques, Applications, and International Standards Convergence
The readings in this study session discuss financial analysis techniques, financial statement analysis applications, and the international convergence of accounting standards.
The first reading presents the most frequently used tools and techniques used to evaluate companies, including common size analysis, cross-sectional analysis, trend analysis, and ratio analysis. The second reading then shows the application of 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 reading also discusses 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, there are still significant variations between generally accepted accounting principles from one country to another.
Study Session 11
Corporate Finance
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 long-term 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 concerned with 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 firm’s valuation.
Study Session 12
Portfolio Management
As the first discussion within 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 introduces the capital asset pricing model (CAPM), a centerpiece of modern financial economics that relates the risk of an asset to its expected return.
Study Session 13
Securities Markets
This study session addresses how securities are bought and sold and what constitutes a well-functioning securities market. The reading on market indexes gives an understanding of how indexes 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.
Study Session 14
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 reasonable price for a stock. The readings on industry analysis are an important element in the valuation process,providing the top–down 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.
Study Session 15
Fixed Income Investments: Basic Concepts
This study session presents the foundation for fixed income 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 fixed income 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 fixed income securities.
Study Session 16
Fixed Income Investments: Analysis and Evaluation
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 in-depth explanation of the primary tools for fixed income investment valuation, specifically, interest rate and yield valuation and interest rate risk measurement and analysis.
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.
Study Session 18
Alternative Investments
Due to 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 one 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.
Ethical and Professional Standards
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 self-regulatory program to maintain the highest professional standards among investment practitioners. “Guidance” in the SOPH addresses the practical application of the Code of Ethics and Standards of Professional Conduct. The guidance reviews the purpose and scope of each standard, presents recommended procedures for compliance, and provides examples of the standard in practice.
The Global Investment Performance Standards (GIPS) facilitate efficient comparison of investment performance across investment managers and 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.
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 self-regulatory program to maintain the highest professional standards among investment practitioners. “Guidance” in the SOPH addresses the practical application of the Code of Ethics and Standards of Professional Conduct. The guidance reviews the purpose and scope of each standard, presents recommended procedures for compliance, and provides examples of the standard in practice.
The Global Investment Performance Standards (GIPS) facilitate efficient comparison of investment performance across investment managers and 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.
Study Session 2
Quantitative Methods: Basic Concepts
This introductory study session presents the fundamentals 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: (1) the time value of money and (2) 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.
Study Session 3
Quantitative Methods: Application
This study session introduces the discrete and continuous probability distributions that are 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 the assumed hypothesis (null hypothesis) about various parameters of the 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 mis-specified models or improperly used tools can result in misleading conclusions.
Study Session 4
Microeconomic Analysis
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 dependency between demand and supply and the impact of changes in either on the equilibrium price level. A second key concept is efficiency, which is 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.
Study Session 5
Market Structure and Macroeconomic Analysis
This study session first compares and contrasts the different market structures in which firms operate. The market environment influences the price a firm can demand for its goods or services. Among 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 impact on all firms in the same environment, be it a country, a group of related countries, or a particular industry. The readings explain the business cycle, and how to forecast changes in the business cycle and the impact on, among other things, price levels and profitability. The study session concludes by describing how an economy’s aggregate supply and aggregate demand are determined.
Study Session 6
Monetary and Fiscal Economics
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, and this study session describes circumstances when this may lead to inflation and the transmission mechanisms between the monetary sector and the real part of the economy. Finally, the goals and implications of fiscal and monetary policy are explored by examining some of the main models of macroeconomic theory (Keynesian, classical, and monetarist).
Study Session 7
Financial Statement Analysis: An Introduction
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, cash flow statement, and statement of changes in owners’ equity), notes to those statements, and management 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 end-products 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 the governing set of financial reporting standards applying in the jurisdiction in which the information is released. The final reading in this study explores the role of financial reporting standard-setting 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 8
Financial Statement Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
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 common-size analysis. Understanding these concepts allows a financial analyst to evaluate trends in performance over several measurement periods and to compare the performance of different companies over the same period(s). Additional analyst tools such as the earnings per share calculation are also described.
The readings in this study session discuss and illustrate the earnings analysis of financial statements and the critical role that financial ratio analysis plays in making investment or credit decisions through the measurement of financial performance and risk.
Financial ratios may be used to compare the risk and return of a company with that of other companies of different sizes. A significant hurdle in applying ratio analysis is the difficulty of comparing companies that use alternative accounting policies and estimates. To achieve appropriate comparability, the accounting differences must be identified and then the financial statement balances adjusted for those differences.
Basic and diluted earnings per share are important and widely used performance statistics for publicly traded companies. Unlike other ratios presented in this study session, the measurement and calculation of the earnings per share ratio is strictly determined by the regulatory requirements of U.S. GAAP.
Study Session 9
Financial Statement Analysis: Inventories, Long-Term Assets, Deferred Taxes, and On- and Off-Balance-Sheet Debt
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. Long-term 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.
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 “Analysis of Income Taxes” discusses several issues that arise relating to deferred taxes.
Both on- and off-balance-sheet debt affect a company's liquidity and solvency, and have consequences for its long-term 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 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 decision-making.
Study Session 10
Financial Statement Analysis: Techniques, Applications, and International Standards Convergence
The readings in this study session discuss financial analysis techniques, financial statement analysis applications, and the international convergence of accounting standards.
The first reading presents the most frequently used tools and techniques used to evaluate companies, including common size analysis, cross-sectional analysis, trend analysis, and ratio analysis. The second reading then shows the application of 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 reading also discusses 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, there are still significant variations between generally accepted accounting principles from one country to another.
Study Session 11
Corporate Finance
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 long-term 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 concerned with 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 firm’s valuation.
Study Session 12
Portfolio Management
As the first discussion within 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 introduces the capital asset pricing model (CAPM), a centerpiece of modern financial economics that relates the risk of an asset to its expected return.
Study Session 13
Securities Markets
This study session addresses how securities are bought and sold and what constitutes a well-functioning securities market. The reading on market indexes gives an understanding of how indexes 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.
Study Session 14
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 reasonable price for a stock. The readings on industry analysis are an important element in the valuation process,providing the top–down 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.
Study Session 15
Fixed Income Investments: Basic Concepts
This study session presents the foundation for fixed income 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 fixed income 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 fixed income securities.
Study Session 16
Fixed Income Investments: Analysis and Evaluation
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 in-depth explanation of the primary tools for fixed income investment valuation, specifically, interest rate and yield valuation and interest rate risk measurement and analysis.
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.
Study Session 18
Alternative Investments
Due to 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 one 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.
CAF level 1 Alternative Investments - Commodities - 1
CFA Learning outcome statements
Commodities
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 commodity-linked securities;
r. discuss the sources of return on a collateralized commodity futures position.
Commodities are raw materials that are sold in bulk, such as oil, wheat, silver, gold, oranges and cocoa. They are generally raw materials that are eventually used to produce other goods such as oil for gasoline, cocoa for chocolate, wheat for bread, etc. There is trade in commodities within a country as well as across countries. Most large manufacturers buy the commodities they need on the "spot market," where the full cash price is usually paid on the spot. Speculators typically buy and sell commodities with options and futures contracts.As such, they give an investor/speculator the opportunity to invest in the materials that a country produces and in the materials it consumes.
Commodities
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 commodity-linked securities;
r. discuss the sources of return on a collateralized commodity futures position.
Commodities are raw materials that are sold in bulk, such as oil, wheat, silver, gold, oranges and cocoa. They are generally raw materials that are eventually used to produce other goods such as oil for gasoline, cocoa for chocolate, wheat for bread, etc. There is trade in commodities within a country as well as across countries. Most large manufacturers buy the commodities they need on the "spot market," where the full cash price is usually paid on the spot. Speculators typically buy and sell commodities with options and futures contracts.As such, they give an investor/speculator the opportunity to invest in the materials that a country produces and in the materials it consumes.
CFA Level 1 Alternative Investments - Commodities - 2
Commodities are raw materials that are sold in bulk, such as oil, wheat, silver, gold, pork bellies, oranges and cocoa. They are generally raw materials that are eventually used to produce other goods such as oil for gasoline, cocoa for chocolate, wheat for bread, etc. As such, they give an investor the opportunity to invest in the materials that a country (or corporation) produces as well as those that it consumes. Most larger manufacturers buy the commodities they need on the "spot market," where the full cash price is usually paid on the spot. Speculators typically buy and sell commodities with options and futures contracts.
Types of Commodity Investments
A commodity-linked security refers to a security whose return is dependent to a certain extent on the price level of a commodity, such as crude oil, gold, or silver, at maturity. For example, the principal of a commodity-linked bond is indexed to movements of a commodity index such as precious metal or oil.
Commodity derivatives include both exchange-traded and over-the-counter commodity derivatives such as swaps, futures and forwards. They are used to hedge risk and to take advantage of arbitrage opportunities.
Collateralized Commodity Futurespositions involve taking a long position in the futures contract of your choice and then purchasing the amount equal to your futures position in T-bills. The source of return comes from the interest you earn on your T-bill position and the movement of the futures price.
Motivations for Investing in Commodities, Commodity Derivatives, and Commodity-linked Securities
Commodities offer investors a number of benefits:
Hedge Against Inflation: Commodity cash prices may benefit from periods of unexpected inflation, whereas stocks and bonds may suffer. Commodities are "real assets", unlike stocks and bonds, which are "financial assets". Commodities, therefore, tend to react to changing economic fundamentals in ways that are different from traditional financial assets, particularly with respect to inflation. Commodity prices usually rise when inflation is accelerating, so investing in commodities can give portfolios a hedge against inflation. Conversely, stocks and bonds tend to perform better when the rate of inflation is stable or slowing. Faster inflation lowers the value of future cash flows paid by stocks and bonds because those future dollars will be able to buy fewer goods and services than they would today.
However, this inflation advantage is captured more efficiently by direct investment in commodities than, for example, investment in commodity-related equities whose prices also reflect the financial prospects of the issuer or actively managed commodity futures accounts, which tend to reflect the manager's skills at selecting the right commodities.
Performance/Return: Investor interest in commodities has soared in recent years as the asset class has outperformed traditional assets such as stocks and bonds. Over the five-year period ended March 31, 2006, the Dow Jones AIG Commodity Index has returned 10.6%, versus 2.6% for the S&P 500. Part of this superior performance is attributable to a rise in commodity prices driven by increased demand from China and other emerging countries.
Enhanced Diversification: Portfolio diversification is the primary benefit of holding commodities. The reason for that is the commodity investor is exposed to commodity futures prices. Changes in those prices reflect changing expectations about future supply and demand for commodities. Factors that change expectations - such as a weather event in the Midwest or a strike in a copper mine in Chile - typically don't have anything to do with stock and bond markets.
Forms of Commodity Investing
Investing in commodities comes in two forms: passive and active:
Passive investing is a strategy used by investors who are using commodities as a risk diversification tool. For example, when inflation picks up, it tends to hurt fixed income securities and equities to some extent. However, prices of commodities tend to rise during these periods. This helps diversify your portfolio. Commodity investing has long had a reputation for exceptional volatility and risk but there is now a small but growing number of excellent, high-quality index-based commodity funds available that provide a relatively conservative way to invest in commodities. The management attempts to minimize price fluctuations and provide overall risk management in several ways. The selection and weighting of assets in a portfolio are typically reviewed annually or when there is a major change in an industry or even a drastic change in usage of any given commodity. This provides some overall risk reduction in commodity index funds and makes them suitable for investment by investors with limited commodity backgrounds.
Index funds usually consist of long positions on the contracts. Short positions are usually not taken.
Active investing or actively managing a position in the commodities market can provide good performance results. In periods of economic growth, commodities are in strong demand to satisfy production needs. Because commodity or raw material prices tend to move more quickly in reaction to economic fluctuations than do the prices of the related finished goods, an active approach could lead to economic gains if trading activities are closely monitored and managed by the investor.
Types of Commodity Investments
A commodity-linked security refers to a security whose return is dependent to a certain extent on the price level of a commodity, such as crude oil, gold, or silver, at maturity. For example, the principal of a commodity-linked bond is indexed to movements of a commodity index such as precious metal or oil.
Commodity derivatives include both exchange-traded and over-the-counter commodity derivatives such as swaps, futures and forwards. They are used to hedge risk and to take advantage of arbitrage opportunities.
Collateralized Commodity Futurespositions involve taking a long position in the futures contract of your choice and then purchasing the amount equal to your futures position in T-bills. The source of return comes from the interest you earn on your T-bill position and the movement of the futures price.
Motivations for Investing in Commodities, Commodity Derivatives, and Commodity-linked Securities
Commodities offer investors a number of benefits:
Hedge Against Inflation: Commodity cash prices may benefit from periods of unexpected inflation, whereas stocks and bonds may suffer. Commodities are "real assets", unlike stocks and bonds, which are "financial assets". Commodities, therefore, tend to react to changing economic fundamentals in ways that are different from traditional financial assets, particularly with respect to inflation. Commodity prices usually rise when inflation is accelerating, so investing in commodities can give portfolios a hedge against inflation. Conversely, stocks and bonds tend to perform better when the rate of inflation is stable or slowing. Faster inflation lowers the value of future cash flows paid by stocks and bonds because those future dollars will be able to buy fewer goods and services than they would today.
However, this inflation advantage is captured more efficiently by direct investment in commodities than, for example, investment in commodity-related equities whose prices also reflect the financial prospects of the issuer or actively managed commodity futures accounts, which tend to reflect the manager's skills at selecting the right commodities.
Performance/Return: Investor interest in commodities has soared in recent years as the asset class has outperformed traditional assets such as stocks and bonds. Over the five-year period ended March 31, 2006, the Dow Jones AIG Commodity Index has returned 10.6%, versus 2.6% for the S&P 500. Part of this superior performance is attributable to a rise in commodity prices driven by increased demand from China and other emerging countries.
Enhanced Diversification: Portfolio diversification is the primary benefit of holding commodities. The reason for that is the commodity investor is exposed to commodity futures prices. Changes in those prices reflect changing expectations about future supply and demand for commodities. Factors that change expectations - such as a weather event in the Midwest or a strike in a copper mine in Chile - typically don't have anything to do with stock and bond markets.
Forms of Commodity Investing
Investing in commodities comes in two forms: passive and active:
Passive investing is a strategy used by investors who are using commodities as a risk diversification tool. For example, when inflation picks up, it tends to hurt fixed income securities and equities to some extent. However, prices of commodities tend to rise during these periods. This helps diversify your portfolio. Commodity investing has long had a reputation for exceptional volatility and risk but there is now a small but growing number of excellent, high-quality index-based commodity funds available that provide a relatively conservative way to invest in commodities. The management attempts to minimize price fluctuations and provide overall risk management in several ways. The selection and weighting of assets in a portfolio are typically reviewed annually or when there is a major change in an industry or even a drastic change in usage of any given commodity. This provides some overall risk reduction in commodity index funds and makes them suitable for investment by investors with limited commodity backgrounds.
Index funds usually consist of long positions on the contracts. Short positions are usually not taken.
Active investing or actively managing a position in the commodities market can provide good performance results. In periods of economic growth, commodities are in strong demand to satisfy production needs. Because commodity or raw material prices tend to move more quickly in reaction to economic fluctuations than do the prices of the related finished goods, an active approach could lead to economic gains if trading activities are closely monitored and managed by the investor.
CFA LEVEL 1 STUDY SESSION 18 ALTERNATIVE INVESTMENTS
STUDY SESSION 18
ALTERNATIVE INVESTMENTS
Due to 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 one 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.
LEARNING OUTCOMES
Reading 76: Alternative Investments
The candidate should be able to:
a. differentiate between an open-end and a closed-end fund, and explain how net
asset value of a fund is calculated and the nature of fees charged by investment
companies;
b. distinguish among style, sector, index, global, and stable value strategies in
equity investment and among exchange traded funds (ETFs), traditional mutual
funds, and closed end funds;
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
after-tax 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. discuss the descriptive accuracy of the term “hedge fund,” define hedge fund in
terms of objectives, legal structure, and fee structure, and describe the various
classifications of hedge funds;
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 commodity-linked securities;
r. discuss the sources of return on a collateralized commodity futures position.
Grouped contents
Mutual fund
a. differentiate between an open-end and a closed-end fund, and explain how net
asset value of a fund is calculated and the nature of fees charged by investment
companies;
b. distinguish among style, sector, index, global, and stable value strategies in
equity investment and among exchange traded funds (ETFs), traditional mutual
funds, and closed end funds;
ETFs
c. explain the advantages and risks of ETFs;
Real estae
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
after-tax cash flows, net present value, and yield of a real estate investment;
venute capital
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;
Hedge fund
i. discuss the descriptive accuracy of the term “hedge fund,” define hedge fund in
terms of objectives, legal structure, and fee structure, and describe the various
classifications of hedge funds;
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;
closely held companies
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;
distressed
o. discuss distressed securities investing and compare venture capital investing with
distressed securities investing;
Commodities
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 commodity-linked securities;
r. discuss the sources of return on a collateralized commodity futures position.
ALTERNATIVE INVESTMENTS
Due to 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 one 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.
LEARNING OUTCOMES
Reading 76: Alternative Investments
The candidate should be able to:
a. differentiate between an open-end and a closed-end fund, and explain how net
asset value of a fund is calculated and the nature of fees charged by investment
companies;
b. distinguish among style, sector, index, global, and stable value strategies in
equity investment and among exchange traded funds (ETFs), traditional mutual
funds, and closed end funds;
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
after-tax 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. discuss the descriptive accuracy of the term “hedge fund,” define hedge fund in
terms of objectives, legal structure, and fee structure, and describe the various
classifications of hedge funds;
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 commodity-linked securities;
r. discuss the sources of return on a collateralized commodity futures position.
Grouped contents
Mutual fund
a. differentiate between an open-end and a closed-end fund, and explain how net
asset value of a fund is calculated and the nature of fees charged by investment
companies;
b. distinguish among style, sector, index, global, and stable value strategies in
equity investment and among exchange traded funds (ETFs), traditional mutual
funds, and closed end funds;
ETFs
c. explain the advantages and risks of ETFs;
Real estae
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
after-tax cash flows, net present value, and yield of a real estate investment;
venute capital
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;
Hedge fund
i. discuss the descriptive accuracy of the term “hedge fund,” define hedge fund in
terms of objectives, legal structure, and fee structure, and describe the various
classifications of hedge funds;
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;
closely held companies
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;
distressed
o. discuss distressed securities investing and compare venture capital investing with
distressed securities investing;
Commodities
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 commodity-linked securities;
r. discuss the sources of return on a collateralized commodity futures position.
Tuesday, January 29, 2008
Study Session 2 syllabus
STUDY SESSION 2
QUANTITATIVE METHODS:
Basic Concepts
This introductory study session presents the fundamentals 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: (1) the time
value of money and (2) 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.
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 risk-free 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, and solve time value of money problems
when compounding periods are other than annual;
d. 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;
e. draw a time line, specify a time index, and solve time value of money applications
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 money-weighted 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; and 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, and describe the properties of a dataset presented
as a histogram or a frequency polygon;
d. 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;
e. describe, calculate, and interpret quartiles, quintiles, deciles, and percentiles;
f. 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;
g. calculate and interpret the proportion of observations falling within a specified
number of standard deviations of the mean, using Chebyshev’s inequality;
h. define, calculate, and interpret the coefficient of variation and the Sharpe ratio;
i. 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;
j. define and interpret measures of sample skewness and kurtosis.
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;
Study Session 2 169
www.cfainstitute.org/toolkit—Your online preparation resource
d. distinguish between unconditional and conditional probabilities;
e. 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;
f. distinguish between dependent and independent events;
g. calculate and interpret, using the total probability rule, an unconditional probability;
h. explain the use of conditional expectation in investment applications;
i. diagram an investment problem, using a tree diagram;
j. calculate and interpret covariance and correlation;
k. calculate and interpret the expected value, variance, and standard deviation of a
random variable and of returns on a portfolio;
l. calculate and interpret covariance given a joint probability function;
m. calculate and interpret an updated probability, using Bayes’ formula;
n. identify the most appropriate method to solve a particular counting problem,
and solve counting problems using the factorial, combination, and permutation
notations.
QUANTITATIVE METHODS:
Basic Concepts
This introductory study session presents the fundamentals 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: (1) the time
value of money and (2) 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.
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 risk-free 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, and solve time value of money problems
when compounding periods are other than annual;
d. 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;
e. draw a time line, specify a time index, and solve time value of money applications
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 money-weighted 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; and 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, and describe the properties of a dataset presented
as a histogram or a frequency polygon;
d. 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;
e. describe, calculate, and interpret quartiles, quintiles, deciles, and percentiles;
f. 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;
g. calculate and interpret the proportion of observations falling within a specified
number of standard deviations of the mean, using Chebyshev’s inequality;
h. define, calculate, and interpret the coefficient of variation and the Sharpe ratio;
i. 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;
j. define and interpret measures of sample skewness and kurtosis.
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;
Study Session 2 169
www.cfainstitute.org/toolkit—Your online preparation resource
d. distinguish between unconditional and conditional probabilities;
e. 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;
f. distinguish between dependent and independent events;
g. calculate and interpret, using the total probability rule, an unconditional probability;
h. explain the use of conditional expectation in investment applications;
i. diagram an investment problem, using a tree diagram;
j. calculate and interpret covariance and correlation;
k. calculate and interpret the expected value, variance, and standard deviation of a
random variable and of returns on a portfolio;
l. calculate and interpret covariance given a joint probability function;
m. calculate and interpret an updated probability, using Bayes’ formula;
n. identify the most appropriate method to solve a particular counting problem,
and solve counting problems using the factorial, combination, and permutation
notations.
STUDY SESSION 1
ETHICAL AND PROFESSIONAL
STANDARDS
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 self-regulatory
program to maintain the highest professional standards among investment
practitioners. “Guidance” in the SOPH addresses the practical application of the
Code of Ethics and Standards of Professional Conduct. The guidance reviews
the purpose and scope of each standard, presents recommended procedures for
compliance, and provides examples of the standard in practice.
The Global Investment Performance Standards (GIPS) facilitate efficient comparison
of investment performance across investment managers and 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.
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 specific situations
presenting multiple issues of questionable professional conduct;
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.
STANDARDS
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 self-regulatory
program to maintain the highest professional standards among investment
practitioners. “Guidance” in the SOPH addresses the practical application of the
Code of Ethics and Standards of Professional Conduct. The guidance reviews
the purpose and scope of each standard, presents recommended procedures for
compliance, and provides examples of the standard in practice.
The Global Investment Performance Standards (GIPS) facilitate efficient comparison
of investment performance across investment managers and 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.
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 specific situations
presenting multiple issues of questionable professional conduct;
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.
CFA Level 1 Study Sessions
Ethical and Professional Standards Study Session 1, 2
Quantitative Analysis Study Session 3,4
Economics Study Session 5-8
Financial Statement Analysis Study Session 9,10
Corporate Finance Study Session 11
Portfolio Management Portfolio Management Study Session 12,13
Equity Study Session 14,15
Fixed Income Study Session 16
Derivatives Study Session 17
Alternative Investments Study Session 18
http://cfainstitute.org/cfaprog/resources/l1_outline.html
Quantitative Analysis Study Session 3,4
Economics Study Session 5-8
Financial Statement Analysis Study Session 9,10
Corporate Finance Study Session 11
Portfolio Management Portfolio Management Study Session 12,13
Equity Study Session 14,15
Fixed Income Study Session 16
Derivatives Study Session 17
Alternative Investments Study Session 18
http://cfainstitute.org/cfaprog/resources/l1_outline.html
Beginning of the Blog
I studied the full material of the CFA level 1, 2 and 3. I started the study in 2001-02. With some experience of writing blogs accumulated so far, I am initiating this blog. I shall slowly try to develop material that will be of use to CFA aspirants
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