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.
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