CFA Level 1 FRA

Elasticity of demand

A measure of how consumers respond to price changes; Perfectly elastic is when the demand curve is horizontal; Perfectly inelastic is when the demand curve is perfectly vertical

Margin Debt

An increase in the number indicates bullish sentiment; Sentiment indicator

Contents of Auditor's Opinion

+Independent view of the firms financial statements +Generally accepted accounting policies were used and judgements were reasonable +Explanation when accounting policies change from year to year

Cycle Theory

+Presidential Cycle = 4 years +Decennial Cycle = 10 years +Kondratieff Wave = 54 years

Objectives of International Organization of Securities Commissions

+Protect investors +Ensure market fairness, efficiency and transparency +Reduce systemic risk

SEC Forms

+S-1 +10-K +10-Q +DEF-14A +8-K +144 +Forms 3, 4, 5

Process for Testing Hypothesis

+State Hypothesis +Select Test Statistic +Specify Level of Significance +State Decision Rule Regarding Hypothesis +Calculate Sample Statistics +Make a Decision about Hypothesis +Make a Decision Based on Test

Steps of Financial Statement Analysis Framework

+State the objective and context +Gather data +Process data +Analyze and interpret data +Report conclusions and recommendations +Update analysis

Contents of Footnotes

+The basis of presentation such as the accounting period +Information about the accounting methods used +Additional information about extraordinary events

Contents of Management Discussion and Analysis

+The basis of presentation such as the accounting period +Information about the accounting methods used +Additional information about extraordinary events

Auditor's Opinions

+Unqualified opinion +A qualified opinion +An adverse opinion +A disclaimer opinion

Oligopoly models

-Kinked demand curve -Cournot duopoly -Nash equilibrium -Dominant firm model

Accounting Information Flow

1. Journal record every transaction by order of date in the general journal 2. The general ledger sorts the entries in the general journal by account 3. An initial trade balance is prepared at the end of the period to show the balance of each account and adjustments are then made 4. Financial statements are made from the adjusted trial balances

T-Distribution

A bell shaped distribution symmetrical about its median used to make confidence intervals with small samples (<30) and unknown population variance; Degrees of freedom = # of Observations - 1

Confidence Interval

A range of values the population parameter is expected to fall under; When a distribution has a known population variance, found by: (sample mean) (+\-) (z-statistic) * (standard error); When distribution population variance is not known, found by: (sample mean) (+\-) (t-statistic) * (standard error)

Giffen good

An inferior good for which the income effect outweighs the substitution effect so that the demand curve is positively sloped (higher the price, higher the demand)

Form 10-K

Annual report

Relationship cost curves

AFC slopes downward Vertical distance between ATC and AVC equals AFC MC initially declines, then rises MC intersects AVC and ATC at their minimums ATC and AVC are u-shaped The MC above the AVC is the firm's short-rum supply curve

Herfindahl-Hirschman Index

Adds up the sum of the squares of the largest firms in the market

Substitution effect

Always acts to increase the consumption of a good that has fallen in price

Kinked demand curve

Based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a price decrease will; Firms assume that demand is more elastic above a certain price than below it; Firms produce the quantity at the kink, assuming if they increase production, their revenues will be eroded by decreased prices and if they decrease production the price won't go up much; Model doesn't account for cause of kinks

Descending price (Dutch) auction

Begins with a price greater than what any bidder will pay and the price is reduced until a bidder agrees to pay it; If there are multiple units available, each bidder and specify how many they want to buy; Can be modified so that winning bidders all pay the same price

Ascending price (English) auction

Bidders can bid amounts greater than the previous bid, and the bidder that first offers the highest bid wins the item and pays the amount

Bernoulli Random Variable

Binomial random variable with only one trial

Simple Random Sampling

Completely random, systemic sampling is picking every nth member of a population; Sampling error is the difference between the sample statistic and the population's statistic

Positive substitution, negative income greater than positive substitution

Consumption decreases

Positive substitution, negative income smaller than positive substitution

Consumption increases

Positive substitution, positive income

Consumption increases

Nth firm indicator

How much market share is held by the top N firms in the market; Isn't affected by two large companies merging

Sentiment Indicators

Discern the potential views of buyers and sellers

Form 8-K

Discloses material events

Standard Error

Dividing the sample variance by the square root of the number of observations since the populations standard deviation is rarely known

Nonparametric Tests

Do not make any assumptions about the population and are used when parametric tests cannot be

Sealed bid auction

Each bidder submits one bid, which is unknown to the other bidders and the bidder with the highest bid wins the item and pays the price; The reservation price is the highest price that a bidder is willing to pay; The optimal bid for the bidder with the highest reservation price is just slightly above the bidder with the second highest reservation price; Bids are not necessarily equal to reservation price

Income effect

Either increase or decrease a good that has fallen in price; Typical of normal good to have a positive income effect; Typical of inferior good to have negative substitution effect

Price elasticity

How responsive the quantity demanded is to a change in price

F-Test Statistic

Examines two sample variances, with the larger in the denominator and smaller in the numerator

Tax Burden

Falls on the party with less elastic curve

Form S-1

Filed before sale of a new security

Average Revenue > AVC

Firm continue production

Average Revenue < AVC

Firm should shut down

Average Revenue > ATC

Firm should stay in business for long-run

Central Limit Theorem

For simple random samples of size n from a population with a mean u and a finite variance o, the sampling distribution of the sample mean x approaches a normal distribution with mean u and a variance equal to the population variance divided by the number of sample observations

Marginal cost pricing

Forces the monopoly to reduce price to the point where the firms marginal cost curve intersects the market demand curve

Causes of demand changes

Income Increases as prices of substitute goods increase Decreases as the prices of complement goods increases

Unqualified auditor's opinion

Indicates the auditor believes the statements are fine

Perfect competition

Many firms compete with identical products, low barriers to entry, and the only way to compete is on price; Perfectly elastic demand curves for each firm; A firm will continue to expand production until marginal revenue equals marginal cost, which maximizes profit or where MR = MC; Economic loss occurs when marginal revenue is less than marginal cost; Firm can't make economic profit in long-run; Long-run equilibrium output is where marginal revenue equals marginal cost equals average total cost ; An increase/decrease in market demand will increase/decrease both equilibrium price and quantity; Short-run supply curve is the marginal cost curve above the average variable cost

Monopolistic competition

Many firms that compete with differentiated products; Demand curve is downward sloping and is highly elastic; Quality, Price and Marketing are key differentiators ; Low barriers to entry; Firms must advertise and innovate; In short run maximize economic profits by producing where marginal revenue equals marginal cost ; In long run, price equals average total cost and economic profits are 0

Volatility Index (VIX)

Measures the volatility of options on the S&P 500 index; The higher the level, the more scared the market; Sentiment indicator

Type II Error

Not rejecting a false null

Concentration measures

Nth firm indicator Herfindahl-Hirschman Index

Panel Data

Observations of the same characteristic of multiple entities over time

Longitudinal Data

Observations over time of multiple characteristics of the same entity

Cournot duopoly

One firm will look at the other's price and production and adjust accordingly until both firms meet at an equilibrium of the same price and quantity

Oligopoly

Only a few firms compete and each must consider the actions of others when setting price and strategy; High barriers to entry; Demand is less elastic than monopolistic competition

Monopoly

Only one seller in the market and there are no good substitutes; High barriers to entry; Maximize profit, not price; Profit maximized when marginal revenue equals marginal cost when demand curve is above ATC

Spearman Rank Correlation Test

Order all of the data and examine its correlation to see if there is any relationship at the extremes ; Used when data isn't normal

Power of Test

Probability of correctly rejecting the null; Found by subtracting the probability of a Type II error from 1

Profit maximized

Producing up to but not over MR=MC; Producing quantity where TR-TC is at a maximum

Form DEF-14A

Proxy statement

Put/Call Ratio

Put volume divided by the call volume; The higher the ratio, the more negative the sentiment; Sentiment indicator

Form 10-Q

Quarterly report

Mutual Fund Cash Position

Ratio of a mutual fund's cash to its total positions; Increases in a down market, decreases in an up market

Type I Error

Rejecting the null when it is true; Significance level is probability of Type I error

Parametric Tests

Rely on assumptions regarding the distribution of the population and are specific to population parameters

Causes of supply changes

Rises if technology increases; Rises if input prices decrease

Point and Figure Chart

Shows price movement by having price on the vertical axis and the number of changes in direction on the horizontal axis; X = increase one box size O = decrease one box size

Point Estimates

Single values used to estimate population parameters

Coefficient of Variation

Standard deviation divided by the mean

Relative Strength

The asset's price charted against the index price

Second sealed bid auction (Vickrey auction)

The bidder with the highest bid wins the item but pays the price bid by the second highest bidder; No reason for a bidder not to bid his reserve price; Similar to a an ascending price auction, the winning bidder tends to pay one increment of price more than the bidder who values the time the second most

Lognormal Distribution

The function e^x where x is normally distributed; Positively skewed; Bound to the left by 0 ;Price relative is the ending price divided by the starting price

Z-Value of Normal Distribution

The number of standard deviations away a random variable is from the population mean ; z = (variable - population mean)\(standard deviation)

Roy's Safety First Criterion

The optimal portfolio minimizes the probability that the return of the portfolio falls below A minimum acceptable level; = (Historical Return - Return Threshold)/(Volatility) Shortfall risk is the probability of being to the left of the minimum return

Test's Significance

The probability that a true null hypothesis will be rejected by chance

Short Interest Ratio

The short interest divided by the average daily trading volume; Can indicate a bearish sentiment but also an upcoming spike from shorts closing positions; Sentiment indicator

Adverse auditor's opinion

The statements are not presented fairly or don't conform to standards

Qualified auditor's opinion

There is an exception to accounting principles

Oligopolists and Collusion Agreements

There is an incentive to cheat and raise your share of the joint profit

Properties of Estimators

Unbiased - Low sampling error Efficient - Small variance Consistent - Accuracy increases as sample size increases

Z-Test

Used to calculate a mean when population is known to be normally distributed

T-Test

Used to compare two means when population is known to be normally distributed

F-Test

Used to compare two variances

Chi-Squared Test

Used to test hypothesis about one variance

Private value auctions

Value is subjective and different to each bidder

Binomial Random Variable

Variable may be defined as the number of successes in a given number of trials where the outcome can be either a success or failure; Expected value = (probability of success) * (number of trials); Variance = (expected value) * (1 - probability of success)

Discrete Uniform Random Variable

Variable where all possible outcomes for a discrete random variable are equal

Discrete Random Variable

Variable where the number of outcomes can be counted and each outcome has a measurable and positive probability

Continuous Random Variable

Variable where the number of possible outcomes is infinite, even if upper and lower bounds exist

Alternative Hypothesis

What is concluded if null is rejected

Null Hypothesis

What you are testing

Dominant firm model

When a firm with the vast majority prices smaller firms out of the market over time by lowering prices to the point where it falls below the average total cost of smaller competitors

Stratified Random Sampling

When a population is divided up into smaller groups based on distinguishing characteristics; Proportions of groups in sample same as in population

Unstable equilibrium

When a supply curve intersects a demand curve more than once, the unstable equilibrium is an equilibrium where supply can increase towards another equilibrium that results in a lower price; Caused by a nonlinear supply function

Reversal Pattern

When a trend approaches a range of prices but fails to continue beyond that range

Disclaimer auditor's opinion

When the auditor cannot issue an opinion

Natural monopoly

When the average cost of production is falling over the relevant range of demand and having two or more producers would lead to hire production costs and hurt the consumer

Nash equilibrium

When the choice of all firms are such that there is no other choice that makes any firm better off; Each decision maker will unilaterally choose what's best for himself

Incidence of tax

Who ends up bearing the cost of a tax

Statutory incidence

Who is legally responsible for paying a tax