Quants Reading 7: Statistical Concepts and Market Returns, Quants Reading 8 Probability Concepts, All

Transaction-Based Manipulation

-MorC knew or should have known that their actions could affect the pricing of a security

LOS 8i: Explain the use of conditional expectation in investment

-Analysts use all available relevant informaiton to make forecasts. Forecasts are often refined in light of new information or events and in this case analysts use conditional expected values that are calculated using conditional probabiliteis. Similar to total prob rule which states uncondtional probs in terms of conditional probs there is a way to state uncondit expected values in terms of conditional expected values. known as: TOTAL PROB RULE FOR EXPECTED VALUE 1. E(X) = E(X | S1) * P(S1) ... E(X) is unconditional expected avlue e(X | S1) expected value of X given scenario 1 P(S1 probability of scenario S1 occurring. set of scenarios must be mutually exclusive and exhaustive for the total prob rule for expected value to hold

LOS7m Compare the use of arithmetic and geometric means when analyzing investment returns

-For reporting historical returns, the geometric mean is more appropriate because it equals the rate of growth an investor would have to earn each year to match the actual cumulative investment performance ***-geometric mean thus is a good measure of past performance while the arithmetic mean can distort evaluations (outliers and such) -if we want to gauge performance over a single period, arithmetic mean should be used because it is the average of one period returns -estimate returns over more then one period we should use the geometric mean THIS IS ALL PAST ANALYSIS To calculate expected equity risk premiums (in a forward looking context) use of the arithmetic mean is more appropriate. -more uncertainty in cash flows or returns the greater divergence ebetween the two ARITHMETIC MEAN IS BETTER FOR FORWARD LOOKING GEOMETRIC MEAN IS BETTER FOR BACK LOOKING

Cash Dividends

Regualr cash dividend - most payout on a regular schedule, typically quarterly. companies strive to maintain or increase cash dividend payouts consistent dividends over an extended period of time indicates that a company is consistently profitable -an increase in regular dividend, can have a positive effect on share price. very strong message out to investors Dividend Reinvestment plans (DRP) - system that allows investors to reinvest all or a portion of cash dividends received from a company in shares of the company. 3 types open market DRPs , comapny purhcases shares on behalf of plan participants from the open market -new issue DRPs or scrip dividend schemes, company issues additoanl shares new issue DRPs allow the company to raise equity capital without incurring floatation costs. advantages to shareholderes -can accumulate shares in the company using dolalr cost averaging - no transaction costs with obtaining. Disadvantages - where capital gains are taxed, mayb have to pay -may have to pay tax on money you did not get because it was reinvested back in with the DRP

LOS36f: Calculate and interpret the cost of debt captial using the yield to maturiyt approach and the debt rating approach

The cost of fixed rate captial is the cost of debt financing when a company issues a bond or takes a bank loan. We will discuss two approaches to estimate the before tax cost of debt (rd) 1. Yield to Maturity Approach -The bond's yield to maturity (YTM) is a measure of the return on the bond assuming that it is purchased at the current market price and held till maturity. Yield that equiates the PV of bond's expected future cash flows to its current market price P0 = [sum of( PMTt/ (1+rd/2)^t)] + FV / (1 +rd/2)^n **THis equations assumes we are consdiering semiannual-pay coupon bond so the interim chas flows are discounted at rd/2 pg 23 P0= current market price of the bond PMTt = interest payment in period t rd= Yield to maturity on BEY basis n=number of periods remaing to maturity FV=par or maturity value of the bond

LOS8n: Calculate and interpret an updated probability using Bayes' formula

The point of the Bayer formula is to reverse the given that probability P(A|B) to P(B|A) so P(A|B) = P(AB)/P(B) and P(B|A) = P(BA)/P(A) since the joint probabilities P(AB) and P(BA) are equal when can convert using P(A) and P(B), bear in mind that you will probably have to use the total probability rule to calculate P(A)

LOS36g: Calculate and interpret the cost of noncallable, nonconvertible preferred stock

a company promised to pay dividends at a specific rate to its preferred stock holders. when preferred stock is noncallable, nonconvertible, has no maturity date, and pays dividends at a fixed rate, the value of the preferred stock can be calculated using the perpetuity formula Vp=Dp/rp Vp= current price of preferred stock Dp preferred stock dividend per share rp=cost of preferred stock so rp = Dp/Vp for rp is hte cost of prefered stock

LOS37d: Calculate the breakeven quantity of sales and determine the company's net income at various sales levels LOS37e: calculate and interpret the operating breakeven quantity of sales *** key total revenue = variable costs (quantity) + fixed operating costs + fixed financial costs this is how we transfer this to economic theroy, it is essentially the same thing but breaks fixed costs into operating and financial csots

a company's breakeven point occurs at the number of units produced and sold at which its net income = 0. breakeven occurs at PQ = VQ + F +C total revenue = variable costs (quantity) + fixed operating costs + fixed financial costs similar to econ only breaks fixed costs into operating and financial costs Operating breakeven point - specified in terms of operating profit. revenues equal operating costs PQobe = F / P-V obe is subscript and stands for operating break even point the frather unit sales are from the breakoven point the greater magnifying effet of leverage

LOS7g: Calculate range and a mean absolute deviations, and 2. the variance and standard deviation of a population and of a sample

dispersion - variability or spread of a random variable around its central tendency mean absolute deviation - is the average of the absolute values of deviations of observations in a data set from its mean sum of (obs-mean)/n MAD is read as, On average, the observations in the data set deviate 4.167% from the mean return of 6.83%

Multiplication rule of counting

factorial when 5 musicians can each play one instrument how many ways 5x4x3x2x1 on calculator ! factorial is 2nd multiply

Perfect Competition

Each indivual firm faces a perfectly elastic demand curve - price taker Takeaways under PC MR=PRICE -MR always equals AR both equal market price

Time series data cross-sectional data

time series data - data over a period of time spaced at uniform intervals cross sectional - observing many subjects at the same point in time

Reading 28: Financial Analysis Techniques

(also remember pg 108 cash flow analysis

Actives and Passive Crawling Pegs

-fx rate is adjusted frequently in line with the rate of inflation, -here FX rate is announced and then changes are made in small steps

Perfect Comp

-large number of buyers and sellers -each seller offers identical product -minimum barriers to entry -no nonprice competition in the market

3 Basic Pricing Strategies in Oligopoly Markets

-pricing interdependence (kinked demand curve model)- PRICE WARS (ie commercial airline industry) --if a firm increases its price, others will not follow suit -however if a firm reduces its price, competitors would follow its lead and increase in quantity demanded for the firm would not be significant (inelastic demand)

Sampling Distribution

-prob distriubtuion under repeated sampling of the population -the distribution of these sample means is called sampling distribution of the mean

Aggregate Expenditure

-total amount spent on goods and services produced in the domestic economy over a period of time

Ethics - Standard VI: Conflicts of Interest

A. Disclosure of Conflicts B. Priority Transactions C. Referral Fees

Buy-Side Companies

Do not support sell side rating inflation -Buy Side - Porfolio Managers

What is Standard V

Ethics - Standard V: Investment Analysis, Recommendations and Actions

LOS 15b Calculate and interpret and compare total, average, and marginal revnue

TR - PxQ AR - TR/Q MR - changeTR/changeQ

It is important for analysts to :

examine the sources of a country's comparative and absolute advantages (gov't policy and regulations, demographics) identify sectors that will benefit from theses changes

Standard IV-C Guidance:

-should implement training and education

How can you comply with V-B?

Each subsection of this Standard relates to a specific goal that needs to be addressed when preparing research reports for public distribution: •Using Reasonable Judgment on Factors to Include/Exclude - This procedure is in many ways the most subjective requirement within this Standard, as it is largely a function of an analyst's experience in preparing research reports and understanding what factors are of greatest importance to readers and users of the research. A specific checklist is not relevant to a standard of conduct where each case needs to be individually evaluated. As with the other Standards guiding the investment process, one would start by archiving all records relating to the report, so that conclusions can be explained and additional information can be supplied upon request. •Distinguishing between Facts and Opinions - This goal avoids the most obvious violations of the Standard, but given that most reports use facts as the basis for investment opinions (i.e. all reports will have both), it's important to make such distinctions in as clear a manner as possible. Moreover, any data presented as fact must be properly scrutinized for reliability and accuracy. Financial databases that cover hundreds of data points for thousands of companies may produce misleading data - for example, they may show a negative price-to-earnings (P/E) ratio on a cyclical company, which then draws down the average P/E of a portfolio. In such a case, an analyst must ensure that the data presented is processed in a manner that provides for such situations. •Indicate Basic Characteristics - This goal in particular provides some indication of the degree of risk that an investor will assume. A star system (1 through 5 stars, with 5 being safest) or a letter grade ("A" being the safest) will accomplish the task in the least amount of space. Other summary reports specify low, medium, high or very high risk. These labels are often an invaluable guide to determine whether the research should be used.

Moving Average Convergence/Divergence Oscillator

(MACD) the difference between the short term and long term moving average of a security's price 2 lines, MACD linetypically over 12 and 26 days, and signal line which is exponentially smoothed moving average of the MACD Line. typically 9 days when price and MACD move in the same direction is convergence when move opposite directions it is divergence. pg 297

Net Exports

(X-M) Important Factors 1. relative income in the domestic country vs rest of the world - an increase in domestic income increases demand for imported goods 2. Relative Prices of Domestic and Foreign Goods and Services - an increase in price of domestic goods increases demand for imports Bottom Line: Net exports vary negatively with income and negatively with domestic price levels

Complying With Standard (1D)

*Never do anything you have to hide *abide by CFA, SEC, FINRA rules *Code of ethics *Background-checks Does it affect his job, professional integrity or competence???? -Code of ethics - adopt a code of ethics for which every employee must subscribe - List of violations- Give employees a list of potential violations, and disciplinary sanctions - check employee references (on resume)

Changes in Accounting Policy

- A change in accounting policy could be required by standard setters or decided on by management to better reflect company's performance. -Changes in accounting policy are applied retrospectively unless it is impractical to do so. -A change in an accounting estimate ( e.g. a change in the residual value of an asset, or fully loaded 22.5% estimate) this is prospectively ( only affects for current and future periods) no adjustments are made prior. -a correction of prior period erros is made by restating all prior period financial statements.

Ricardian Model

- Assumes labor is the only variable factor in production -differences in technology are the key source of comparative advantage -even if a country is small compared to size of trading partner, it will continue to produce the good that it holds a comparative advantage in and trade some of it to obtain other goods. -technological gaps can decrease over time, leading to shifts in comparative advantage

Second Price Strategy is Cournot Assumption

- GAME Thoery - assuming that other firm's output will not change q1=q1 So for a demand function P=400-Qd is P=400-(q1+q2) Find Total Revenue then find the MR q1=q2 so substitute and solve for Qd -The Cournot solution falls between competitive and monopoly equilibrium -as the number of firms in the industry increases, industry equilibrium approaches competitive equilibrium

Power of a test

- Probability of CORRECTLY rejecting the null hypothesis when it is false. -the higher the power the better it is for purposes of hypothesis testing Graph pg 255 Power of a test = 1-P(Type II Error) given a choice of tests the one with the highest power should be preferred. the test with the highest prob of rejecting the null hypothesis when it is false should be preferred -decreasing significance reduce prob of Type I error, however it is is increasing type II error -only way to decrease type II give a levelf of significance (prob of type 1 error) is to increase the sample size

LOS7b: Define a parameter, a sample stat, and a frequency distribtuion

- a frequency distribution (a frequency is how many times a point occurs) this is when you are given say 20 test scores you create intervals depending on what it asks so say b/w0-25% and 25-50% and so on, then tally for each interval. The one with the highest frequency is known as the modal interval or modal class

Financing Cash flow

- changes in interest bearing debt and equity are used to determine sources and uses -if debt issuance contributes signficantly to financing cash flow, the repayment schedule must be considered -increasing use of cash to repay debt, or make dividend payments, might indicate a lack of lucrative investment opportunities for the company

Systematic Sample

- every kth member in the selection list is chosen. (or every 3rd car at a stoplight

V-A Reasonable Basis and Diligence Questions

- when recommend stocks/or production levels do not give the maximum as the expected output, always give a range of possibilities -know the model you are using, test before incorporating, update regularly if applicable

Monetary and Fiscal Policy

-Monetary policy refers to the government's or central bank's manipulation of the money supply to influence the quantity of money and credit in the economy -Fiscal Policy - Taxes

23g: Describe the flow of information in an accounting system

4 Stages -Journal entries - amount and relevant accounts effected by transactions are chronologically recorded -General ledger - sorts all entries posted in generals into accounts, for example the general ledger contains an inventory account where all inventory-related journal entries are listed -Trial balance - lists all the ending balances of general ledger accounts. adjustments to record accruals and prepayments that have not been considered are made in the adjusted trial balance -Financial Statements - the account balances in the adjusted trial balance are used to construct financial statements. which are used for equity and credit analysis. sometimes run into the problem of fictitious assets and liabilities used to manipulate reports

Describe the Qualities of Effective Central Banks

-Should Be Independent (no political pressure) 2 Aspects of interdependence: 1. Operation independence (CB decides level of interest rates) 2. Target Independence - choose target and the horizon in which the target is to be achiebed -CB needs credibility -should be transparency in decision making Challenges in the Effectiveness of Monetary Policy in Developing Countries -gov't bond market typically not sufficiently liquid (can't sell easily) -economy experiences rapid changes, difficult to determine netural rate -may lack credibility -gov't may be reluctant to let CB operate Independently

Tariffs

-Taxes levied on imports Impact of a tariff: Think it terms of domesetic demand and domestic supply When a country imposes a tariff on imports - the price of domestic goods increases and domestic supply increaeses but domestic demand decreases -consumer surplus falls -producer surplus rises -by decreasing imports it lowers the trade deficit, When a large country imposes a tariff on imports, to maintain market share the foreign firm may lower prices, this reduction in price represents a redistribution of income (it is a plus to the domestic economy) -This is trading welfare - however there will always be an overall reduction in welfare if taking both countries into account

Why the GIPS Standards were created?

-To create standards on reporting performance. problems were: representative accounts - using only best performing portfolios to represent performance -varying time periods - using statistics only for when the fund was outperforming the benchmark -standards cover both calculations and presentation

Real Exchange Rate

-an increasing function of the nominal exchange rate (DC/FC) -increasing function of foreign price level -decreasing function of the domestic price level Real exchange rate Realdc/fc =Sdc/fc x (Pfc/Pdc) S = nominal spot exchange rate Using Percents Change in real ER = change in Sdc/fc + chPfc -ChPdc

Public Companies

-analysts can be pressured to issue favorable reports from companies they follow -due diligence in financial research. Gather info from: Public disclosure docs (annual reports, proxy statements etc), also company managment, invertor relations, customers, competitors, other relevant sources

Compliance with IV-B Additional Compensation

-make an immediate written report for supervisor (email counts as written consent) -report should be confirmed by both parties - include performance incentives/add'l compensation from client -should include terms: nature of compensation, approximate amount, and duration of agreement

Multivariate distribtutions

-specify probs associated with a group of random variables taking into account the interrelationships that may exist between them -portfolio returns are said to have a multivariate normal distribution -for example 4 assets in a portfolio would be 4 means, 4 variances, and 6 correlations remember return correlations between each possible pair of stocks there will be n(n-1)/2 pairwise correlations in total -this need to determine correlations is what differentiates multivariate normal distributions from univariate normal distributions

Standard IV-B: Additional Compensation Arrangements - Application

-still try not to accept travel arrangements. must report before hand and after the meetings. i.e dinner should be reported

money weighted rate of return

-the IRR of an investment it accounts for the timing and amount of all dollar flows into and out of the portflio still just calculating the IRR considering all outflows and inflows. subtract off differences b/w dividends and buying or selling more stock for the same time period

Fund Manager Custodial Relationships and Credit Rating Agency Opinions

1. do not accept gifts from third-party custodians 2. No undue influence in ratings

To Determine How government trade is funded:

1. find change in fiscal balance: chgG-chgT 2. change in trade balance chg(X-M) 3. change in savings chg(S-I) and compare -is the deficit borrowed or is it an increase in private sector

For a firm in perfect competition the MRP= Marginal product x product price until wage = marginal product of labor

aprifit maximizing firm will hire more labor until MRPlabor=Pricelabor price of labor is wage rate profits are maximized when all MRP for all inputs are =1

Multiplication rule for Probability

P(AB) = P(A|B) x P(B) joint = probability of a given b has occurred x probabilty of b occuring = joint probability of AB which is the probability of both A and B occuring

Indifference curves

when slope is negative this implies that both goods offer positive utility -slope is marginal rate of substitution MRS -IC curves never intersect due to transitivity assumption IC maps show multiple indifference curves for the consumer

Desirable Attributes of Accounting Standards Board

well articulated framework, do not bend to external forces

**Helpful: How to Refer to Exchange Rates

For Example USD/GBP rate is 1.5 -it will take 1.5 USD to purchase 1 GBP -a decrease in this exchange rate means the GBP has depreciated while the USD has appreciated (vise versa) -or an increase in the quoted exchange rate (1.5) means the an increase in value of denominator and decrease of value in the numerator

Forms of Capital Control

-Taxes -Quantity controls -outright prohibition on international trade in assets (rarer)

RATIO OF NOMINAL GDP TO MONEY SUPPLY =Velocity of money

-velocity money may decline if: -a fall in nominal GDP -a rise in money supply

Types of LRAC Curves

U shaped - firm producing small volume can actually be more efficient LRAC keeps falling - the large it becomes the more efficient LRAC constant does not give the firm a competitive edge

Voluntary Export Restraints

restrictions on the quantify of a good that can be exported. VERs are imposed by the exporting country. so domestic country captures the quota rent

What is Standard III-B?

"Fair Dealing": M&Cs must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

III-D Performance Presentation Application

(Performance Attribution Changes) 4. Investor redefines attribution to calculate in a more beneficial way to his investor reports. He violated by not informing the clients of the change in definition and why it is preferred. And he was sketchy (Performance Calculation Methodology Disclosure) 5. Bob notices the new systems calculate time-weighted and money-weighted returns. she asks client services which value would be preferred and they tell her to leave it ambiguous until they see which one is higher -this is in violation of III_D by reporting inconsistent return values Paint accurate picture of performance measurements

Lesson 3: Equity Describe the components of shareholders equity

- Capital contirbuted by owners (common stock or issued capital) -preferred shares -treasury shares (repurchases) -retained earnings

Most prevalent conflict - Conflicts with stock ownership

-Recommending a stock that you already own. -should disclose procedure for reporting requirements for personal transactions

Information-Based Manipulation

-Spreading false rumors. etc. Example: "Pumping up" an investment by issuing misleading positive information

Proxy Voting Policies

-if required to proxy for a client, the failure to do so or to vote blindly, violates the loyalty standard

LOS21j: Explain the impact of exchange rates on countries' int'l trade and captial flows

-in a floating regime exchange rate adjustmetn is very quick capital and trade flows are what drive FX rates

Fiscal Multiplier

-net impact of the government sector on aggregate demand G-T+B = Budget deficit (or surplus) -NT net taxes = Taxes - Transfers -MPC - marginal propensity to consume is important. say MPC equals .9 so for income increase of $1 you would spend $0.90 multiplier can also be calculated as 1/(1-MPC) Gov't spending can increase taxes and increase income so must take into account MPC and tax rate 1/[1-MPC(1-t)

Present Value Future vallue

Present value $100 Future value $100 x interest rate 10% = 110

Two Tariff Pricing (using the IE and SE effect to come up with two-part tariff pricing)

determine consumer surplus -firm would charge a flat fee that is equal to the surplus amount (ie a gym membership+ how chargin on how many times you use the gym)

Type of Tests Chart

pg 269 and on formula sheet

Cross Sectional Analysis

-AKA relative analysis, compares specific metric for one company with the same metric for another company or group of companies over a period of time

Cross Section Regression Analysis

-Examine sales made by different companies in the market over a specific period -single transactions from diferent buyers cons -it is complicated -obtaining data can be difficult

'Nonpublic' information

-Information is nonpublic until disseminated or is available to the marketplace in general (as opposed to a select group of investors) -Information that is made to analysts remain nonpublic until it is made available to investors in general -it is the analysts responsibility to know he is dealing with material nonpublic information

Some other Measures analysts use to determine the cyclical direction of an economy

-Size of Payrolls -# Hours worked -Productivity = total output/total hours worked

Long Run - Aggregate Supply

-Wages and prices of other inputs are variable -as price increase over the long run, wages and other input prices also increase proportionally.So higher price level has no effect on quantity supplied (AGG SUPPLY IN LONG RUN IS VERTICAL -the potential output of any economy does not very with price level

Point Estimate vs Confidence interval estimate

-a point estimate involves the use of sample data to calculate a single value (a statistic) that serves as an approximation of an unknown parameter. sample mean is a point estimate of the population mean for example

Third Degree Price Discrimination

-consumers separated by geographical or other traits -axiom could also be this. Guess that a large bank will be willing to pay more per attorney then a smaller firm AXIOM is not a monopoly though it is MONOPOLISTIC COMPETITION

Short Run - Monopolistic Competition

-makes pricing decision just like a monopoly does -can suffer an economic loss if the AC curve lies above the demand curve

Supply Analysis Monopoly

-monopoly does not have a well-defined supply fuction that determines optimal price and output -profit maximizing output level occurs where MR=MC

Short Run Aggregate Supply

-more costs become variable -however wages and prices of OTHER INPUTS remain constant in the short run therefore a price increase with no corresponding increase in input price, companies can increase profits by raising output

Unemployment

-not useful as an economic indicator because it is a lagging variable

How can you comply with Standard II-A?

A compliance program is incomplete if all it does is create awareness of the definition of insider trading and the fines and jail sentences to which the employee could be liable. The real work of the compliance program should be to reduce and eliminate the possibility of a violation. In the real world, there will always be temptation to either profit from (or avoid loss through) knowledge of material nonpublic information. The most sensible approach is control: prevent the information from being disseminated widely, thus removing the issue of temptation for all but a few. Firewalls - "Firewall" is a common term applied to the barriers created to prevent sensitive information from being disseminated between departments of a firm. As applied to insider trading, the assumption is that certain departments (e.g. corporate underwriting) may have access to material nonpublic information that would be useful to those in other departments (e.g. investment management and research). The guiding principle is that only certain individuals need to know certain things, and thus no one else should have any access. Some other procedures that may be adopted as part of a compliance program: •Communicate Receipt of Information - Companies come into contact with material nonpublic information in a variety of ways. When such a situation occurs, the recipient must be obligated to inform his or her supervisor or compliance officer and not disclose any additional information to coworkers. •Make Reasonable Efforts to Make Nonpublic Information Public - If material nonpublic information was received, particularly in breach of a duty or as a result of a misappropriation, it is possible that this information was eventually going to be made public. While Standard II-A prevents acting on that information while it is not public, the duty to client requires that investment action (should it be required) be made in light of the new information. For example, if new, nonpublic information makes it clear that a firm will be in violation of a bond covenant and its fixed-income securities will be downgraded to junk status, that security may no longer meet the investment objectives of the client. However, the bond cannot be sold until the information is made public. In such an instance, reasonable measures may involve a written request between the firm's compliance department and a legal representative of the firm that issued the bond. •Keep Record of Research and a Rationale for Each Investment Decision - This procedure, most applicable to Standard V-A, Reasonable Basis, can help protect an analyst who has employed the mosaic theory and used several items of nonmaterial, nonpublic information to form an investment opinion. •Watch List - Depending on the size of an organization, the placement of a company on a restricted list can have the unintended side effect of communicating to a wide audience that something is going on at that company. In this case, the firewall may be unintentionally broken, and while employees might be restricted from trading, the leak can find its way outside in a number of ways (it only takes one person to provide an insider tip). In situations where placing a firm on a restricted list is too public, a firm can adopt the use of a watch list, which means the compliance department will monitor activity on the companies on that list, perhaps making inquiries based on an individual's activities, but maintaining the confidentiality needed for a particular circumstance. •Training/Continuing Education - Some employees will be more knowledgeable about insider trading laws (and the need to have them) than others. A comprehensive agenda needs to outline all issues related to insider trading, identify both individual and firm liability under these regulations and summarize procedures for compliance, such as the reporting of personal transactions.

Ethics - Standard VI: Conflicts of Interest Summary

A) Disclosure of conflicts: M&Cs must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere w/respective duties to their clients, prospective clients and employer. B) Priority of Transactions: transactions for clients and employers must have priority over your own transactions or if you have a beneficial interest (such as your spouse). C) Referral Fees: Must disclose to their employers, clients and prospective clients (as appropriate) any compensation, consideration or benefit received by or paid to others for recommendations of products or services.

Comparison between straight line and accelerated depreciation methods

ALl other factors the same, company that uses straight line method to depreciate will report: -lower asset turnover ratio during the early years, -higher operating profit margin in eraly years -higher operating returns on assets (ROA) in early years (due to lower depreciation expense) and lower ROA in later years

Annuities Due

An Annuity where the periodic cash flows occur at the beginning of every period -Need to set calculator to BGN mode and then insert variables as normal, remember to switch back To switch to BGN mode press 2nd[Pmt] 2nd[Enter]2nd[Cpt do again to turn back off or you can just remember *****PVAnnuitydue=PVordinaryannuity(1+r) this is the esaier way Example 2-14 on pg 142 is a good one

How can you comply with III-B?

Any particular compliance program is going to be a function of the unique factors present in that firm, such as its size and the scope of the activities in which it is involved. However, all procedures are going to share the common doctrine of fairness and develop processes that avoid systematic discrimination of one group of clients in favor of another. The Handbook makes numerous worthwhile suggestions for developing a compliance program that adheres to the intent of this Standard: •Disseminate Nonpublic Information as Quickly as Possible - Violations result from the fact that an analyst is required to keep a new idea secret for such a period of time that leaks develop. •For Lengthy and Detailed Reports, Offer a Flash Summary - No one can be expected to rewrite a 50-page report in two days. However, changing a recommendation creates material nonpublic information. It's not necessary for such information to be held for weeks while the necessary labor is done to write up the report right. A brief flash summary that includes the essence and the conclusion, plus an indication that the laborious, detailed report is in progress, is sufficient to comply with the ethic of full disclosure. •Guidelines for Pre-Dissemination Must Be Established - This is to insure that people who have access to this information are aware of the standards. •Inform Everyone as Simultaneously as Possible - For example, a large brokerage can ensure that all branches receive the new research on the same day. •Restrict Trading - Do not trade until all clients have a fair chance to receive the new recommendation. For example, place no trades for two to three business days following a mailing. •Develop a Fair Process for Trade Allocation - Some common elements might include: •All orders must be date and time-stamped. •Have a process on a first in/first out basis, based on the time stamped. •Block trades receive the same execution price and commission. •Partially executed blocks should be allocated pro rata. •For Hot IPO Issues, Obtain Indications of Interest in Advance - Allocation procedure should be systematic (e.g. pro rata, random draw) and not based on favoritism. •Do Not Withhold Shares - Refrain from holding shares in hot issues for personal accounts, leaving out any interested clients, and make a bona fide effortto publicly distribute. •Disclose - Discloseall trade allocation procedures to clients. •Review Accounts Systematically - A supervisor or compliance officer can develop a process that indicates whether some accounts are being given preferential treatment - for example, whether trade executions in certain accounts appear to be better than average, or certain accounts seem to receive more shares in a hot IPO than what would be expected. •Disclose the Presence of Tiers of Service - Many organizations offer both discretionary and nondiscretionary advisory service, but because of the differences in those accounts, they might find it necessary for practical reasons to take action in the discretionary accounts first, before they take the same action within the nondiscretionary accounts. Such procedure is not discriminatory since discretionary accounts are paying a premium; however, clients must be fully aware of this practice.

LOS25d: Describe key aspects of the converged accounting standards issued by the International accounting standards board and financial accoutning standard board in May 2014

As you've seen different revenue recog practices around the globe can make revenue comparisons across companies in different countries quite problematic. To solve this IASB and FASB issued a set of converged standards that look to make comparisons easier. IFRS is less specific in recognition tha US GAAP was. the converged standards provide a principles based approach to rev rec and can be applied to different types of revenue generating activities

Common- Size analysis

Common size statements allow analysts to compare a company's performance with that of other firms and to evaluate its performance over time -extremely useful in identifying trends in costs and profit margins. vertical common size income state percentage = income statement account / revenue x 100 also blance sheet percentage = balance sheet account / total assets x 100 pg 110 analysis conclusions for this example 1. profitability of company has improved 2. decrease in COGS and SG&A as a percentage of sales only explain a small proportion of the improvement in profit margins 3. reduction in depreciation has contributed significantly to the improvement in profiitiablity. 4. This drastic reduction in dep has masked th effect of a significant increase in interest expense over theperiod 5. interest expense has risen despite the fact that long term liabilities have remained constant. tells us company probably has issued floating rate bonds, and is now paying a higher effective interest rate 6. ***Although the income statement shows improved profitability the firm might run into some cash flow issues (low cash flow) going forward. Higher interest expense has drained cash from the firm. The effect of higher interest expense is offset by significantly lower depreciation. While it helps reported profits, lower depreciation does not bring in any chas. 7. Intangible assets went way up and form a more significatn proportion of its total assets, These must be scrutinized in detail. 8. More of the company's assets are now concentrated in long-term assets. Current assets share of total assets has declined signifcantly. -does not give all the answers, but leads to the right questions

Business Cycles Deflationary and Inflationary Gap

Deflationary Gap - When actual GDP is lower then potential (AKA Okun Gap) When GDP is higher then potential (these are all in short run obviously Look at pg 140 for adjustment to the Gap, typically both curves will shift to bring us back to equil

LOS9p: DIstinguish between discretely and continuously compunded rates of return and calculte cont comp rate of return given a specific holding period returnX

EAR (Effective annual rate) EAR=e^(rcc) - 1 rcc=continuously compounded annual rate or rcc = ln(EAR+1) or rcc=ln(Vt/VO) remember HPR = EAR so can substitute (if talking in years and HPR = VT/Vo now if HPR is 2 years HPRt = e^(rcc*t) - 1

Economic Profit and Normal Profit

Economic profit - AKA abnormal profit, includes implicit and explicit costs include implicit costs - opportunity costs, depreciation Econ profit = TR - total economic costs so economic profit = accounting profit - total implicit opportunity costs NORMAL PROFIT - When economic profit = 0

Expected Value

Expected value is of a random variable is the prob weighted average of all possible outcomes E(X) = P(X1)*X1 +P(X2)*X2......

What are some typical exam questions to expect related to III-C?

Fulfilling the purpose of this Standard requires that the actual investments chosen and strategy employed are consistent with the information gathered. This suitability consideration applies to the total portfolio, not to the individual securities. For example, selling call options is a potentially risky strategy if the underlying stock rallies. However, a covered call strategy, where the underlying stock is already owned when writing calls, mitigates this risk and can serve to enhance income in a stagnant market. An exam question might test whether puts and calls are suitable for a conservative investor - some people will guess "no", but the actual answer is that they may be, depending on the total portfolio The client/advisor relationship is an ongoing two-way exchange of information. Case studies that apply this Standard will likely examine whether pertinent information was properly exchanged or discussed (full disclosure). Client to Advisor: Factors in applying suitability include the following: •Age/Time to Retirement - Generally speaking, an investment strategy should become gradually less aggressive as a client gets older, but time to retirement is also a factor - someone retiring at age 50 would be treated differently than someone who is motivated to work until age 75. Moreover, with life expectancies increasing, clients can live 30-40 years after retiring. Some of their assets must assume a long-term orientation. •Income Needs - Clients who are drawing meaningful monthly income from an account would probably not want all of it invested in aggressive equity funds. At the same time, an individual with a $1-million account, requiring $50,000 a year, wouldn't necessarily need an average 5% income from the portfolio. It's entirely appropriate to satisfy the withdrawal needs with a combination of current income yield and capital gains. •Tolerance for Risk - Discussions about previous bad investment experiences and how an investment loss affects a client are absolutely essential. •Total Net Worth - In cases where a new account is only a 5% to 10% slice of a client's larger financial picture, the approach taken by the advisor can be much different. Given the total picture, what does the client expect from this account? Current income? Aggressive speculation? On the other hand, if the account represents a substantial portion of the client's total savings, an investment plan may need to account for both short-term income and long-term growth, all within the same account. •Other Unique Factors - For example, given the onerous effect that taxes can have on investment performance, is the degree of tax efficiency a primary consideration to this client? If tax efficiency isn't important (or a complete non-factor for tax-exempt portfolios), the resulting investment approach might change. Advisor to Client: Appropriate disclosures include the following: •General Overview of Process - There's no specific formula on what must be covered, as clients have varying degrees of sophistication when it comes to investing, as well as varying ideas of what specifically matters to them. Even for those who care little to discuss the details, some discussion on how investment strategy is developed and the return/risk expectations of a policy is required. •Major Changes in Process - For example, a change might be necessitated by the growth of the organization. An advisor of small-cap accounts may see growth to the point where market liquidity (ability to move into and out of stocks) is affecting the ability to carry out a previously conceived investment process that favored micro caps (and marketed this process to clients and potential clients). If restricting investments to companies with a market capitalization of $250 million or less is now too narrow and the advisor must expand the range of investments in order to handle the increased asset base, this change in policy would be material. Perhaps the inclusion of companies with a market cap of between $250 million and $500 million is appropriate, or the inclusion of foreign-based stocks is deemed necessary. Whatever is decided, any material change in investment approach could potentially impact a client's decision to retain that manager and must be disseminated prior to implementation. •Loss of Key Personnel - While the performance record of an investment strategy is the property of the firm, it's also a product of the work of the individual manager who led the development of the process, directed the research, made the investment decisions and so forth. A change in investment personnel can affect the client's decision to affiliate with that firm in the first place, or it can be a nonissue. Either way, the firm is obligated to provide adequate disclosure of key personnel changes. In addition, if the switch in personnel prompts a change in investment approach - for example, from an active strategy to a passive one - the manager may need to modify advisory fees accordingly. A client might be paying a premium fee for a manager's reputation or for the rigor of the research process and should not be required to pay the same premium if he or she is now going to be invested in a mix of passive index funds. Some examples of the application of standard III(C) follow: Investment Suitability An independent investment advisory was previously an account manager with a hedge fund, with which he still maintains personal and business connections. To attract new clients, the advisor offers below market management fees and provides his new clients with direct access to the hedge fund. The investment advisor puts as many of his new clients in the hedge fund as possible. Standard III(C) has been violated because the risk profile of the hedge fund may not be suitable for every client. Additionally, standard V(A) - Diligence and Reasonable Basis may also have been violated. Investment Policy Requirements The chief investment officer (CIO) of a large financial subsidiary wants to improve the diversification and returns of its investment portfolio. The investment policy statement for the subsidiary authorizes highly liquid investments, such as highly rated corporate or government bonds, with a five-year maturity or less. The CIO has discovered an exciting new investment in a private equity fund, which includes a three-year lock-up period but an exit option in stages after that. The CIO invests 4% in the fund, leaving the portfolio well within guidelines for overall equity exposure. The CIO violated both standard III (A) - Loyalty, Prudence and Care, as well as standard III(C). The fund does not fit the requirements for highly rated, liquid investments. Additionally, the lockup period and laddered exit structure of the fund suggests the investment could last beyond the required maturity limits of no more than five years.

Growth Accounting Equation

Growth in potential GDP = growth in tech + growth in labor (sum of labor compensation/GDP)+ growth in capital (sum of capital/GDP

Standards of Professional Conduct

I. Professionalism II. Integrity of Capital Markets III. Duties to Clients and Prospective Clients IV. Duties to Employers V. Investment Analysis, Recommendations, and Actions VI. Conflicts of Interest VII. Responsibilities as a CFA Institute Member or CFA Candidate

IE and SE effect for an inferior good

IE and SE will pull in opposite directions b/c income increase but quantity will decrease

LOS25g: Distinguish between the operating and non-operating components of the income statements

IFRS does not define operating activities. THerefore companies that choose to reportin operating income, need to ensure that such activities would normally be reported as operating US GAAP defines as those that generally involve producing and delivering goods, all transactions and other events that are not defined as investing or financing activiites. *****INTEREST PAYMENTS ON LOAD ARE NON-OPERATING ITEMS, because interest expense is incurred to due to a financing decision. Analysts typically use a firms earning before interst and taxes as a measure of it's operating income EBIT -for financial institutions these are included Remember gross margin is gross profit/revenue or R-C/R

**** Trade Creation/Trade Diversion

It is generally believe, that by reducing barriers of trade, countries are able to allocate resources more efficiently. However this is not always the case Only if trade creation is higher then trade diversion is there a positive net affect on welfare Trade creation - higher cost domestic production is replaced with lower cost imports Trade diversion - lower cost imports are replaced with higher cost imports from member countries (because tariffs are imposed on nonmember countries but not on imports from member countries)

Lesson 1: Acquisition of Long lived assets: Property plant equipment and intangible assets

LOS30a: Disnguish between costs that are capitalized and costs that are expenses LOS30c: Explain how capitalising versus expensing costs in which they are incurred affects fianancial statement ratios LOS30b: compare financial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination

Quantity Theory of Money

M x V = P X Y M=quantity of money V=velocity P=Price Level Y=Real output the equation asserts that the amount of money used to purchase all goods and services (MxV) equals the value of these goods and services (PxY)

Momentum or Rate of Change Oscillator

M=(V-Vx)X100 M=momentum oscillator value V=last closing price Vx= closing price x days ago (Typically 10) used to identify changes in market sentiment. fluctuate in a rage or hover around a number typically b/w 0 and 100 Applications Oscillator range can be used to determine the strength of a trend -may signal a trend reversal when they reach historical highs or lows

Quantity thoery of money describes the relationship between nominal money supply and the price level

MV=PY velocity is assumed constant P=price lvel Y=real income or expenditures - same in equil. M=supply of money an increase in money supply would icnrease the nominal GDP but not the real GDP can also be written as Md/P=kY k=I/V M=nominal money supply Md=nominal money demand MD/P is referred to as reall money damnd and M/P is real money supply

What should you know about PPS and GIPS?

PPS - Performance Presentation Standards GIPS - Global Investment Performance Standards CFA developed these common standard to help achieve goals of III-D. These are voluntary and on the exam, only GIPS will be tested

LOS 40g: Voting Rules

Proxy voting cumulative voting - enables sharhodlers to chst cumulative number of votes allocated to their shavors in favor of one or a limited number of board nominees, this ensures shareholders interest voting for toher changes, must be outlined

Explain measures of sample skewness and Kurtosis

Sample Skewness Look at formula on pg 177 it is a big one -when distribution is positively skewed, sample skewness is positive when negatively skewed sample skewness is negative greater = more skewed *skewness greater then .5 suggest that data is significantly skewed

Standard III-E Preservation of Confidentiality Breakdown

Status of Client -must continue to maintain confidentiality of client records even if relationship has ended Compliance with laws - must comply Electronic Information and Security -recommend regular periodic training on confidentiality procedures Professional Conduct Program Investigations by CFA Institute -when permissable under public law should act as if PCP is extentsion of self

Disclosure

To Employers: give enough information to properly assess the impact of the conflict. If occurs inadvertently, must report promptly To Clients: Material beneficial ownership of stocks is a common one. Always disclose when the firm benefits directly from investment recommendations.

Gains from Voluntary Wealth

Two Consumers with Two IC curves - sometimes they can trade to move the optimal point to the right of the original IC curve see notes it has to deal with MRS you can compare two consumers MRS adn see if a trade is available and thus actually shift the IC curves to a new point. -once trade enough so that they reach their optimal spot

Type I and Type 2 Errors

Type I Rejecting the null when its actually true Type II : Failing to reject the null when it is actually false so the significance level represents the probability of making a type 1 error Sample sizew and choice of significance level together determine the probability of a Type II error. instead of concluding that the null is true we simply state the sample evidence is not enough to reject the null hypothesis (false or not false)

LIFO method and the LIFO Reserve

US GAAP requires firms that use the LIFO inventory cost flow assumption to dsclose the beginning and ending balances for the LIFO reserve EIfifo = EIlifo + LRending where LR = LIFO resreve COGSfifo = COGSlifo - Change in LR during the year

Acquistion of Long Lived Assets

Upon acquisition, tangible assets with economic life of longe rthan a year are recorded on the balance sheet at cost which is typically the same as fair value -accounting for intangible asset depneds on how asset is acquired -if serveral assets are acquired as part of a group purchase price is allocated to each asset on the basis of its fair value

When can you use insider information?

When used for conducting due diligence according to the business agreement between parties for such activities as mergers, loan underwriting, credit ratings, and offering engagements. But cannot use this info to go buy/sell stocks

Guidance

While I(A) is about the need to follow laws I(D) addresses all conduct that is poorly on professional integrity. (Lying cheating, stealing, etc) -conduct that damages trustworthiness not illegal but affects the duty to do their job (Alcoholic, personal bankruptcy) -Lack of sufficient effort (must know risks involved with investments)

Triangle Patterns

You draw these by connecting high and lows with a line over a period. Line that is horizontal if it is on top or bottom determines ascending or descending -when the range between highs and lows over a period narrows down on the price chart. eventually meets the lines connecting the lows forming a triangle (Very interesting but simple) see page 290 Ascending, Descending and Symmetrical triangles. When the two trend lines for highs and lows are both horizontal this is rectabnle patterns. -Rectangle patters say that investors are booking profits at the resistance level but reentering tat the support level, once price breaks out above the rectangle it will continue to rise ( this is a bullish rectangle example, there isbearish also) pg 291

Beta (continued

a companys or projects beta is exposed to following systematic (nondiversifiable risks) business risk - sales risk and operating risk financial risk - uncertrainity of profits and cash flows because of fixed cost financing sources such as debt and leases. the greater the use of debt financing the greater financial risk of the firm

LOS9l: Determine the probability that normally distributed random variables lies inside a given interval AKA CONFIDENCE INTERVALS

a confidence interval - range of values within which a certain population parameter is expected to lie in a specified percentage of the time. three most common confidence intervals 90% x̅ - 1.65s to x̅ + 1.65s 95% x̅ - 1.96s to x̅ + 1.96s 99% x̅ - 2.58s to x̅ + 2.58s s is the sample standard deviation remember 68 95 99.7 rule also 50% would be 2/3 of a standard deviation

N Firm Concentration ratio:

aggregate market share of the N largest firms in the industry - ratio will equal 0 for perfect competition and 100 for a monopoly - it is very easy to calculate cons- does not quantify market power unaffected by mergers in the top tier (2 firms could merge, so there market share adjusts but another firms doesn't) thus supply probably shifted and market power is worse off

EAY - Effective Annual Yield

annualized return measure that accounts for compounding over 365 day period EAY = (1+HPY)^(365/t) - 1 calculating HPY from EAY HPY = (1+EAY)^(t/365) - 1 t= # of days til maturity

PPP - Purchasing Power Parity

assume that global markets were homogeneous and frictionless. this is concept of PPP --States that nominal exchange rates adjust to ensure that identical goods have the same price in different countires -however this is not true in practice Nominal Exchange Rate - DC(domestic Currency) FC- foreign currency -if this goes up that means FC appreciated -so nominal exchange rate and relative purchasing power are inversely related Price Levels -An increase in price level in the foreign country means that you will be able to purchase fewer foreign goods (decreases) -increase in price level in home country - assuming that price level is directly proportional to income - means that you will be able to purchase more foreign goods -an increase in purchasing power implies a decrease in real exchange rate (in terms of DC/FC) (inversely related) DC/FA -

Free cash flow to the frim (FCFF) Free cash flow is the excess of a company's OPERATING cash flows over capital expenditure undertaken during the year.

cash that is available to equity and debt holders after company has met all operating expenes and satisfied it capital expenditure and working capital requirements FCFF= NI + NCC + [Int x (1-taxrate)] - FCinv - WCinv NI=net income NCC = non cash charges FCinv= fixed captial investment (net capital expenditure) WCinv= working capital investment Int= interest expense therefore FCFF = CFO + [Int x (1-taxrate)] - FCinv

Types of Auctions and calculating the winning prices of the auction

common value auction - value of product is the same to each bidder private value auction - each bidder places a subjective value, their own choosing ascending price auction - openly reveal bids, price called out by auctioneer sealed bid auction- opened simultaneously, asset is hidden, winner's curse, value of asset ends up being less then the bid second price sealed auction (Vickery auction)- same as sealed but the price the winner pays is the price of the second highest bid descending price or Dutch auction - bidding starts high and the auctioneer lowers the price -can do single unit or multiple unit -modified dutch auction - establishes one price for all purchases - stocks are sold this way single price auction - US Treasury Market - non-competitive and competitive bidding non-competitve bidders state the total face value they are willing to purchase at the final price clears the market. competitive bidders specify the total par value they want to purchase and the exact price at which they are willing to purchase the quanitty. TRank the bids in descending price (ascending yield) and determine the price at which the market would clear. look at graph

LOS20g: Describe common objectives of capital restrictions imposed by governments.

controls placed on foreigners' ability to own domestic assets and/or domestic citizens' ability to own foreign assets Common Obj: -how much can be invested and in what industry. may impose on strategic such as defense and telecommunications -may forbid foreign investment to protect domestic companies/jobs -gov;t may restrict ouflow of capital -capital restrictions are are often used in conjunction with other instruments such as fixed exchange rate targets -China pegs its currency to the USD and imposes restrictions on capital inflows and outflows. Capital control allows China to maintain the exchange rate peg, while at the same time shielding domestic interest rates from external market forces.

Describe dividend payment chronology, inclduing the significanc of declaration, holder of record, ex dividend, and payment dates

declaration date - comapny announces a particular dividend ex dividend date - first day that share trades without the dividend any investor who oholds stock on or before is entiteld to the dividend holder of record date- date at which a shareholder listed in the company's records will be entitled to recieve the upcoming dividend. lenght of period between holder of record date and ex dividend date depends on the trade settlement cycle of the particular exchange. for example in the US trade settle 3 days after execution (T+3 settlement) there is a 2 day gap between the ex dividend date and the holder of record date payment date

Calculate both basic and diluted EPS (earnings per share)

earnings refer to the share of net income of a company that is owned by common shareholders only. Firms can h ave a simple or complex capital structure

LOS 8b: State two defining properties of probability and distinguish among empirical, subjective, and priori probabilities

empirical probability - estimates prob of event based on frequency of occurrence in past subjective prob- subjective reasoning, and personal judgement to estimate prob priori prob - (formal analysis and reasoning) look at meteorogical conditions leading up to and on a particular day to determine probability of rain to be 70%

LOS8c: State prob of events in terms of odds fro and odds against

example mary thinks prob of market is going up .125 that means prob of market not going up is .875 susan would bet against the market as her odds against the market going up are 87.5% Investors bet like this all the time. for example there is a 50% prob that gov't decision will increase the price if ban is lifted

LOS21i: Describe exchange rate regimes

exchange rate regime - the policy framework to manage a country's currency Any ideal regime should have the following: -exchange rate b/w two currencies should be credibly fixed, in order to eliminate currency related uncertainty in purchasing goods -should be fully convertible -undertake fully independent monetary policy Conditions are not consistent unfortunately: For example, if a CB reduces interest rates by increasing money supply, investors would seek higher returns elsewhere, so the CB would be forced to purchase domestic currency and sell foreign currency in order to keep the FX rate at the previous level Generally speaking the more freely currency can float and more tightly convertibility is controlled, greater the effectiveness of monetary policy

LOS5c-d: Calculate and interpret the effective annual rate, given the stated annual interest rate, and the frequency of compounding -solve time of value of money problems for different frequencies of compunding

for example Compute FV after 5 years of 5000 invested at 13% assuming quarterly compunding The rate must be unannualized to bring compatibility between periodic interest rate and I/Y enter PV as normal but N an I/Y are different, because quarterly N=5x4=20 and I/Y =13/4 (4 quarters in one year)

S.E and I.E Last Note

for normal goods - price increase/decrease IE and SE move in same direction for inferior they move in opposite directions thus the overall change is ambiguous

The Transmission Mechanism

if Central Bank increases its official policy rate (discount rate): -banks increase their base rates (rates at which lending to customers) so businesses borrow less -asset prices and values of capital projects tend to fall, present values of expected future cash flows decline -Consumer confidence is dampened -Domestic currency appreciates in value -***overall decline in consumption, borrowing, and asset prices will reduce aggregate demand -weaker demand will reduce domestic prices, and will put a downward presser on actual inflation See figure 2-1 pg 178 for effects of the discount rate

Capitilization vs Expensing (PP&E)

if item is expected to provide benefits fro company longer thna one year the cost is capitalized. if item is exepcted bring benefits only in current period the cost is expensed -a capitalized costs is recognized as a non current asset on the balance sheet, cash outflow is listed under investing activities on statement of cash flows -If capitalized, the amount is allocated overa a assets useful life as dpereciation expense (tangible assets), or amortization for intangible assets Effects of Capitalization: Inititially when cost is capitalized - noncurrent assets increase, cash flow from investing activities decreases -In future periods when asset is depreciated or amortized noncurrent assets decrease, net income decrease, retained earning decrease, equity decreases Effects of Expensing: when item is expensed - net icome decreases by entire after tax amount of cost, no related asset is recorded on balance sheet. operating cash flow decreases, expenses have no financial statement impact in future years

Owning a stock

if you own a stock and you want to recommend it you must disclose b/c this could benefit you if the market acts strongly

Productivity

in short run, at least one factor of production is fixed capital, labor, total product, marginal product, average product recognize diminishing return of output vs labor

Breaking it Down - "Material"

information is material if its disclosure to the public would likely have an impact on the price of the security, or if a reasonable investor would want to know the information before making an investment decision. -should consider the source of the information - the less reliable the source the less likely the info would be considered material

we can evaluate a company's inventory management by analyzing the invertory turnover ratio and number of days inventory

inventory turnover = COGS/avg inventory Number of days of inventory = Inventory/avg days cost of goods sold = inventory / cost of golds sold/365 or 365/inventory turnover

LOS36b: Describe how taxes affect the cost of capital from different capital sources (Tax shield)

let's assume company pasy 50000 interest in a given year, the 50,000 is an expense that the company is allowed to recognize for tax purposes to reduce taxable income. Interest expense reduces profits before tax by 50,000 and assuming a 30% tax rate reduces profits after tax by only 35,000 that is because interest expense provides a tax shield of 15,000. tax shield is calcualted as interest expense multipled by the tax rate tax savings are only realized on payments to holders of debt instrumeents. preferred and ocmmon stock holders are not expensed on the income statment and do not result in tax savings (duh) essentially you get to pay back your debtors or loans with pre tax money

Why Ethics Matter

moral principles guide our behavior when it affects others. personal consequences obviously. but also capital markets as a whole (lose investor trust) firms must not only follow government regulation, but also a culture of integrity promotes the stewardship of investor assets. honest, respect

System for Supervision

must be adequate: meet industry standards and Code and Standards -once aware of wrongdoing must initiate an assessment - relying on statements, escalating up the ladder etc are all not enough. you MUST make reasonable actions to stop from occurring in the future (increase monitoring, place limits) -must make sure social media accounts are locked and do not allow people to make company statements/ stock recommendations without company notice

If Violation of P Conduct occurs

opportunity to accept or reject charges. Panels (composed of DR members ) they determine if violated. and if violated what sanction should occur sanctions: public censure, suspension of memebership and CFA, revocation of CFA charter

Application of the Standard (Quick Question Review)

pg 19 (Research Independence and Intrafirm Pressure) 1. Fritz is an equity Analyst covers mining industry. His firm has an investment banking relationship with a A Mining Corp. He is worried about his report b/c they are currently undervalued. Fritz must act objectively and based only on the firms fundamentals. He could have avoided by putting A Mining Corp on a restricted list. 2. (Research Independence and Issuer Relationship Pressure) Same as 1, but Fritz is an issue-paid analyst for A Mining Corp - he must stress his report on company fundamentals and relative valuation. he may include qualitative issues with respect to A Mining Copr Example 3 3. Gifts - if substantial may impede independence and objectivity 4. Theresa achieves a award for annual return for a client and they offer two wimbledon tickets and a stay. Theresa discloses to her supervisoor She is in compiance b/c she disclosed to manager. this is important because manager can oversee the relationship and make sure that there is no favoring of the client. Best practices for monitoring include comparing transaction costs of the account with the client vs other accounts managed by Theresa. Manager can compare returns and determine if favoritism is taking place. (Research Independence and Compensation Agreements) 5. Javier - a company wants to write a research report for one of his clients. however his compensation states that he will be awarded for any new investors. he is in violation of standard I-B. this arrangement gives Javier the incentive to be biased in his reports. Javier should only receive a flat fee payment that is not tied to the conclusions of the report. 6. A politician is also the head of a capital managment firm. An CFA member donates to the campaign in order to get a job. -Clear violation of standard I-B- Gomez'z objectivity is tampered 7. Moderate accomodations are acceptable, such as modest hotel 8.*** Wayne serached for a frim to manage the foreign equity allocation of the plan's diversified portfolio. He selected Penguin Advisors. But early went on a trip that was paid for by them, not described as particularly lavish, his recommendations of Penguin Advisors may still be tainted by being in a trip partly paid for by Penguin Advisors. To avoid violating he should have been paid by his employer. Also only informational or educational events, and sponsor should have been made matter of public record. Even if his actions weren;t in violation he should have been sensitive to the public perception 9. Jill Jorund gets told by her boss that she has been carrying a buy recommendation for Intl Airlines and asks to take coverage of that airline but must have the buy recommendation. Jill must conduct her own independent study She can either not take the coverage. or do the study and if her opinions conflict she must share these with her supervisors. 10. Thompson runs an analysis that includes a worst case scenario for housing. The manager says this is silly b/c housing appreciation has never been negative. He still runs the model and suggest against securitization. He did not let his research be pressured by general trends or the managers desire to limit research to historical norms.

Investing short term funds

pg 70 shows list of what companies dow ith excess cash T-bills federal agency securities bank CDs Bankers acceptances BAs many more and more details on pg 70 when firm needs to borrow over the short term, they typically rely on bank overdrafts and commercial paper to meet their needs pg 72 determining yields of differnt short term investments (i skipped but may need to do)

price ceiling - price floor

price ceiling - gov't feels price is too high price floor - government feels price is too low

Capital Budgeting

process companies use for making long term investment decisioins, (acquiring new machingery, replacing, launching new products, R&D. Capital budgeting is important because: -capital is typically tied up in long term projects, need these investments to be successful -the valuation principles used in capital budgeting are also applied in security analysis and portfolio managemnet -sound capital budgeting decisions maximize shareholder wealth

More Question Notes

ranking standard deviations MAD = S^1 variance =s^2 std deviation = sq root of s^2 skewness = s^3 with some add ons Kutosis = s^4 with some add ons with sample always n-1 degrees of freedom

Calculate and interpret relative frequencies and cumulative relative frequencies, given a frequency dist. 7d: Describe properties of a data set presented as a histogram or a frequency polygon.

relative frequency - fraction of total observations that lie in that particular interval -cumulative frequency - number of observations that are less then the upper bound of the interval. Sum of the frequencies of all intervals less than and including the said interval so cumulative frequencye of 50-75% would be frequencies of 0-25 25-50 and 50-75 added together -cumulative RELATIVE frequency proportion of total observaions that is less then the upper bound of the interval. also adding the cumulative absolute frequency and dividing by total number of observations

When samples of the two populations whose means we are comparing are dependent, the paired comparisons test is used. Dependence can result from events that affect both populations. For example observed returns on two stocks over time are influenced by market and economic decisions

remember it must be normal

Lesson 2 LOS38c Compare share repurchases method

shares that are repurchased by the comapny are known as treasury shares and once repurchased are not considered fro dividends, voting, or calculating earnings per share Share repruchases versus cash dividends - just because a company authorizes a share repurhcase, does not necessarily mean that the company is obligated to go through with it. -cash dividends are distributed to shareholders in proprtion to their ownership percent. repurchases gernally do not distrubtue in such a manner. Arguments for -send out signal to market that managment believes stock is udnrvalued -tax advantage to distrubuting cash through repruchases in markets where capital gains are taxed at a lower rate than dividends

Problems wit the IRR

sometimes cash flow streams have no IRR (there is no discount rate that results in zero NPV) NPV profile for a project with multiple IRRs more than one sign change in the cash flow stream

Percentage of Completion Model (long-term contracts)

take total costs and costs incurred over each period find the percentage of total cost incurred. (you take the total revenue and multiply byt the percentage of total cost incurred) then you subtract this revenue from costs to find net income pg 46 with completed contract method everything is costs and revenue are 0 and 0 until the project is completed, then all is recognized

Intangible Assets Developed Internally

these are generally expensed when incurred but may be capitalized in certain situations. Due to the differences capitalizing/expensing internal intangible assets can significantly impact financial reported ratios -a company that devlops intangible assets internally will expense costs and recongize no related assets, whears a firm that cquires assets will recognize them as assets -company that develops intangible asssets internally will classify development related cash outflows under operating activities, where acquiring will classify under innvesting activiites expensing versus capitalizing

think of relationships of AP and MP

think of the historical turns of a fund manager if 15% return one year and 5% next, the average falls -relate this to the shape of their curves in regards to output (y)and labor(x)

Chi - Squared χ 2

three important features: 1. it is asymmetrical 2. it is bounded by zero, chi-square cannot be negative 3. it approaches normal as the degrees of freedom increase (skewed to the right) χ 2 =(n-1)s^2/ hypothesized value for population variance now we are just comparing χ 2 to critical chi squared values

To compute compound growth rate for EPS

you only need the the beginning and ending EPS which are your pv and fc then use basic FV formula

Income Elasticity of Demand

%changeQd/%changeIncome(I)

Cross Price Elasticity

%changeQdofgood1/%changeofpriceofgood(2) Ec>0 is substitutes EC<0complements Ec=0 unrelated goods

Characteristics of Market Structure

Look on Page 103 - neat graph

Standard error

population standard deviation/n^(1/2)

Consumer Equilibrium

where slope of BC equals slope of IC **** so PC/PM = MRScm (price of chocolate/price of milk = MRS of chocolate/milk

Guidance

- Client interests are paramount -Must act with loyalty and reasonable care -reasonable care- act same as if your own investments -caution and discretion, must use investment parameters especially risk, and outline fiduciary responsibilities -legally imposed fiduciary responsibilities fall under standard I(A) must meet strictest requirements including the Code

Lesson 3: Non-Recurring Items, Non-Operating Items Describe financial reporting treatment and analysis of non-recurring items, (discounted operations, extraordinary items, unusual or infrequent items) and changes in accounting standards

- in order to forecast a company's future earning analysts must project the company's revenues and expenses into the future. Most popular way is to use prior years' income and expense items as base figures, and to separate revenues and expenses that are likely to continue in the future from those that are unlikely to occur (non-recurring items)

Bollinger Bands

- consist of a simple moving average plus upper and lower bands that are calculated by adding and subtracting a specific number of standard deviations from the moving average Application -some short sellers or contrarian strategy will sell security when it reaches upper band and purchase when it touches lower. assumption here is that security will continue to trade in these bands pg294

Investmetn Applications in Shift in SRAS

- if SRAS declines -reduce investments in fixed income reduce exposeure to equities increase in commodities

Inflation Expectations also play a huge part in policy making

- if expect inflation to continue they can change their actions in line with those expectations, which can lead to higher rates of inflation -surveys

VERY Short Run VSRAS - very short =-run aggregate supply

-defined as time period where companies can only change output levels to a limited extent without changing price -IT IS A HORIZONTAL LINE (Price on y axis, output on x)

Comply with Standard III-B Fair Dealing

-develop firm polices consider these policies: -limit the number of people involved -shorten time frame b/w decision and dissemination -publish guidelines for pre-dissem behavior -simultaneous decision -maintain a list of clients and their holdings -develop allocation procedures - fairness, priority, allocation of prices

Balance Sheet

Balance sheets - Statements of financial position. present a company's assets, liabilities, and equity at a point in time Assets = Liability + Owner's Equity Owners Equity = Assets - Liabilities Owners equity represents shareholders' residual claim on the company's assets after deducting liabilities

tax incidence - even if a tax is levied on specific supplier or consumer - the incidence depends on the elasticities of S and Da

a tax shifts on sellers or a tax on buyers, a tax on sellers shifts the supply curve a tax on consumers shifts the demand curve (wage is the price of the supply curve) -if demand is steeper then supply curve more incidence falls on consumers -if supply curve is steeper then demand curve, more incidence falls on suppliers -total surplus is maximized if markets are allowed to operate freely (and all social externalities are accounted for) -search cost - cots of matching buyers and sellers

Stock Splits are similar to stock dividends in that they increase the total number of shares outstanding and have no economic effect on the company. However one important difference ->

a stock dividend results in transfer of retained earning to contributed capital, whereas a stock split has no impact on any shareholder equity accounts both stock split and reverse stock split are simple to bring the price into a more marketable range

T-Dist

lower peak, and fatter tails for less then 30 as the degrees of freedom (or sample size increase the shape of the t dist approaches the shape of the standard normal curve -uses n-1 instead of n Practical interpretation for calculating confidence intervals with z or t score We can b XX% confidendt that the average population score for the actual SAT is b/w 1663 and 1836 -for standard error of t dist use

Nonbank sources of short term fianance

nonbank finance companies, small weak borrowers, weak credits, prime +++ rate commercial paper - largest corporations, money market sets rate

Survey s have studied the relatie popularity of various capital budgeting techniques and have found that: the payback method is very popular in european countries -larger companies prefer NPV and IRR over payback

pg 16 if a company invests in a positive NPV project, the expected addition to shareholder wealth should lead to an increase in the stock price however not as simple as pg 16 since stock price already takes into account expected growth. Also if a project opens the possibility for further projects may increase stock price by more than proportional increase in NPV

Key vocab

population - all members parameter - a descriptive measure sample - small subset in order to determent which stat method to use we need to distinguish between the different measurements of scales 4 categoreis: nominal, ordinal, interval, ratio nominal - weakest level of measurement. categorize but do not rank ordinal - categorize and rank interval - rank observations in a manner that differences between scale values are equal so can be added and subtracted meaningfully -ratio - strongest level of measurement, have all characteristics of interval scales and have a true point as the origin

Demonstration of Depreciation Methods

Straight-line depreciations = (Cost-Residual)/Useful life Declining balance depreciation (accelerated method)a 200% would be (2/useful life) *(Cost - accumulated depreciation) Annual depreciation expense is sensitive to two estimates - residual value and useful life if either of these increase, then the depreciation expense will decrease -Be wary, different methods can make net income subjective. why analyzing revenue - COGS or gross profit is more meaningful

FDI - foreign direct investment FPI - foreign portfolio investment -

FPI - refers to shorter term investmetn in foreign financial instruments (foreign stocks, bonds etc)

Population Variance and Standard Deviation

you know these variance is the sum of (xi-u)^2/N, square to get rid of the negatives then take the square root for standard deviation for sample, substitute n-1

Bank - Reserve ration

Reserve ratio = required reserves/total deposits

Interpretation and Context

The financial ratios of a company are compared to those of its major competitors in cross sectional analysis not all ratios are important to every industry -companies may have several lines of business -accounting standards -could be at different stages of growth or have different strategies -always study in light of the current business cycle

First condition gives rise to the IS curve IS curve (relationship b/w income and the real interest rate)

The following factors derive this relationship Consumption For simplicity ignore retained earning and depreciation (business savings) C=f(Y-T)

Labeling

example conductor hands out 12 instruments, 4 must play drums 6 saxs and 2 bagpipes, how want ways can the band be organized 12!/6!x4!x2! here order of who gets the instruments does not matter

Terms of trade

terms of trade=ratio of price of exports to price of imports Pexport/Pimports Autarkic or (Closed) economy Open economy - does participate under absolute free trade we would have a 'world 'price' Trade restrictions (trade protectoin) (tariff, quota)

Guidance Standard V(B) Communication with clients and prospective clients

-always keep clients and other invested parties informed on an ongoing basis about changes to the investment process, new significant risks and limitations

Social Media

-always should verify material information comes from a valid source -

International Monetary Fund (IMF)

-ensure stability of the international monetary system, and system of exchange rates -provides a forum for monetary problems -facilitate growth of int'l trade -promotes exchange rate stability -enhance its lending facilites -helps keep global and systematic risk under control

2 Last note rules for material information

-the more ambiguous the price the less 'material' it is -if it is unclear if the info would affect the price and to what extent, information may not be considered manual

Income Approach

GDP = National income +capital consumption allowance (CCA)+ statistical discrepancy National Income +employee compensation +profits before taxes - dividends - corporate profits +corporate taxes paid to the govn't +interest income +rent +indirect business taxes minus subsidies CCA depreciation, wear and tear where business must reinvest to maintain current productivity levels

Absorption Approach

Remember that Trade balance equals its total savings minus investment expenditure. Equivalently the trade balance equals the difference b/w national income or output and domestic expenditure (or absorption) pg232

Statement of Changes in Owner's Equity

Reports any changes in owners' investment in the business

LOS36c: Describe the use of target capital structure in estimating WACC and how traget captial structure weights may be determined

The target capital structure is the capital structure that the company aims to maintain. THe weights used in the calculation of the WACC are the poroprtions of debt, preferred stock, adn equity a firm hopes to achieve and maintain in its structure over time so take debt to euiqty ratio, a simple way to tranform into a weight is to divide the ratio by (1+D/E) so (D/E)/(1+D/E) = wd and wd + we = 1 if information about the target capital structure is not easily available, we can use the weights in the company's current capital structure. The weights of the various components should be based on market values. an analyst may also use the average weights of comparable companies' captial strucutres as the target strucutre for the company

LOS36d: Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget

A company's MCC marginal cost of capital, increases as it raises additional capital. this is because most firms must pay a higher cost to obtain increasing capital. For example, the more a company borrows, the greater the risk that it will be unable to repay its lenders, adn therefore, the higher the return required by investors. The profitability of a comapny's investment opps decerases as the company makes additional investments. Company prioritizes projects with highest IRRs. As more resources are invested in the most rewarding projects, remaing opportunites offer lower and lower IRRs. this fact is represented by an investment opportunity schedule (IOS), downard sloping. The optimal captial budget occurs at the point where ther marginal cost of capital intersects the investment opportunity schedule. Basic equilibrium pg 22

Breaking it down

A current account deficit must be financed by foreign direct investment Y-(C+I+G) = negative Now we turn relationship b/w output Y and disopsable income Yd which equals (output + transfers (R) - taxes) Yd=Y+R-T disposable income is allocated b/w consumption and private sector saving Yd=C+Sp ** Sp+Sg = I + CA or Sp = I + CA -Sg what this is trying to get across is a closed economy will have less potential to invest which is limited by domestic savings -the country can raise investment by attracting foreign saving (running a CA deficit) w/o having to increase domestic saving ******** Important Equation CA=Sp+Sg-I so a CA deficit results from -low private/gov't savings -a gov't deficit (more spending then taxes) -high private investment

Los 13a Distinguish among types of Markets

Factor Markets -markets for factors of production Labor/Capital/Land Goods Markets-markets for output produced by firms intermediate goods - used as inputs to produce other goods and services -final goods are goods in the final form purchased by household capital markets marktets for long term financial capital (debt and equity)

Optimal Price and Output in Perfectly Competitive Markets

AR=P=MR ** -in Short run since fixed costs do not vary with output marginal cost only reflects changes in the variable cost -Firms always max profit where MC=MR, but remeber MC =price for PC, where as for monopolies it does not -in long run all firms in PC will only make normal profit Changes in Firm Size -firms can hop from one short run average cost curve to the other by increasing size. when SRAC=LRAC there is no benefit to increasing size

Amortization

Allocation of cost of an intangible asset over its useful life. -Intangible assets with identifiable usefl lives, are amortized evenly over their lives same as long term assets straight line depreciation method. However there are no estimates for residual value -intangible assets with indefinite lives - not amortized, instead they are tested for impairment. An asset is impaired when its current value is lower than its book value. This is like a one time valuation. If an asset is deemed impaired an expense charge is made on the income statement to bring the value down to its true value

What are some questions to consider when addressing a hypotethical situation on the exam relating to V-B?

Are opinions and projections separated from factual information? In the gathering of information on a company, has this information been reviewed for accuracy by a representative of that company? Has a newsletter or watch list omitted too much relevant information? Has a research report adequately outlined the risk factors, or failed to analyze less optimistic scenarios? Does a research report omit the analyst's real reason for making a specific recommendation?

LOS20b: Describe benefits and costs of international trade

Benefits: countries gain from exchange and specializations -international trade results in more efficient resource allocation -greater awareness of consumer tastes and preferences -capital intensive industries gain access to larger markets enabling them to benefit from economies of scale -wider variety -foreign competition reduces monopoly power of domestic firms Costs: -companies less efficient then int'l firms may go out of business, which will lead to higher structural unemployment -counter argument is that in the long run resources will eventually be reemployed in more efficient industries

Unconditional and Conditional Probs Multiplication, addition, and total prob rules Joint Probabilities

Conditional - express probelt of an event occuring given that another event has occurred P(A|B) unconditional or marginal probs - estimate prob of an event irrespective of the prob of other events P(A) Joint if A and B are mutually exclusive the joint prob equals zero - P(AB) Joint prob is the prob of both a and b occurring P(AB)

LOS39b: Compare a company's liquidity measures with those of peer companies

Creditworthiness - ability of borrow to pay. Liquidity contributes to creditworthiness. Following liquidity ratios are used to evalueate a companies liquidity management current ratio = current assets/ current liabilities quick ratio - ratio of quick assets to current liabilities (exclude inventory ) accounts receivable turnover = credit sales / average receivables number of days of receivables - how many days it takes on average to collect from customers acts rec/ avg days sales on credit = acc reciev/(sales on credit/365) desirable to have ratios that are close to the industry average Invetnory turnover - how often inventory is created and sold over a period it = cost of gods sold/avg inventory number of days of inventory accounts payaples turnover measures how many times company theoretically pays off creditors over a period payables turnover = purchases/ avg trade payables number of days of payables= = accounts payable/ avgerage days purchases Purchases = ending inventory +COGS - beginning inventory

LOS5e: Calculate and interpret FV and PV of a single sum of money, ordinary annuity, an annuity due, a perpetuity (PV only), and a series of unequal cashflows

FV of a single cash flow: FV=PV(1+r)^N PV of a single cash flow PV=FV/(1+r)^Nd FV and PV of a Series of Cash Flows -annuity- a finites set of level sequential cash flows -ordinary annuity - cash flows occur at the end of each compounding period -we must find the value of PMT (payment) here PMT is the single periodic payment

Under IFRS or US GAAP

IFRS -income statement may be presented as: -a section of a signle statement of comp income or a seperate statement followed by comp income US GAAP -a section of signle statemetn of comprehensive income -seperate followed statement of comp income

LOS 28g: Decribe how ratio analysis and other techniques can be used to model and forecast earnings

In forecasting future earnings of companies, analysts use data about the economy, industry, and company itself. The results of financial analysis, which incluedes common size and ratio analysis, are integral to this process Sensitivity ANalysis - shows the range of possible outcomes as underlying assumptions are altered Scenario Analysis - shows changes in key financial quantities that result from given events such as loss of supploy of raw materials or a reduciton in demand for the firm's product simulations - based on probabilities of factors that drive outcomes

IASB

International accounting standards board - independent standard setting body of the IFRS foundation -develop and promote adoption of a single set of high quality financial standards IFRS interpretations committee - respoinsible for reviewing accounting issues that may arise in the application of the IFRS IFRS-Advisory counsel - provides advice to IASB on agenda decisions, and priorities or other items

Solvency Ratios

Long term debt to quity = total long term debt/total equity debt-to-equity ratio= total debt/total equity total debt ratio= total debt/total assets financial leverage ratio=total assets/totalequity

ouput per input cost

MPl/Pl=MPk/PK if MPl/Pl=3 and MPk/Pk=6 that means that Captial offers two times the return of capitan relative to labor

World Trade Organization

Main reason: enhance and liberalize international trade -provide a platform for settling trading disputes -reviews trade policies on a regular basis, and ensures coherence and transparency among members

What are some examples of material information?

Material information would include the following: •Dividend increase, decrease or omission •Quarterly earnings or sales significantly different from consensus •Gain or loss of a major customer •***Changes in management •Major development specific to that industry •Government reports of economic trends (housing starts, employment etc.) •Major acquisition or divestiture •Offer is made to tender shares (acquisition)

Moving Averages

Moving average- average of the closing price over a given number of periods, moving averages smooth out short term fluctuations, and give a clearer picture of a market trend. simple moving average uses arithmetic mean exponential moving average attaches a greater weight to recent prices in computing the average Generally a stock that is in a downtrend tends to trade below its moving average sometimes more than one moving average is shown pg293 -there is a shorter term and longer term moving average. Golden cross- when the short term moving average intersects long term from below (bullish) -Dead-cross- short term moving average intersects long term moving average from above

Describe the structure of the CFA institute Professional Conduct Program and the process of enforcement of the Code and Standards VOL 1 pg 9-10

Must comply with Code of Standards -CFA institute board of governorms is responsible for PCP Professional conduct program

Equilibrium in the Long Run

Perfect Competition = if firms in a market are making money, entrepreneurs will flock to the industry to eat up some of the economic profits. So market supply increases thus market prices will fall until price - minimum ATC and economic profits are thus eliminated

Asset Manager Code

Practical Guidelines for: -loyalty to clients -the investment process -trading -compliance -performance evaluation -disclosure

Three Way Dupont Decomposition

ROE = Net income/revnue x revenue/avg total assets x avg total assets/avg shareholders equity Net profit margin x asset turnover x leverage -net profit margin is an indicator of profitability, it shows how much profit a company generates per money unit of sales -asset turnover is an efficiency indicator. how much revenue a company gnerates from each money unit of assets. -ROA is a function of its profitability NP margin and efficiency asset turover TO -financial leverage is an indicator of solvency it reflects total amount of a companys assets relative to equity capital

RTA - FTA customs union common market economic union

Regional Trading agreement agree to eliminate barriesr to trade and movement factors FTA- free trade area, NAFTA for example, eliminate almost all barriers customs union - very similar to FTA but all member countries have similar policies regarding trade with nonmember countries common market - like a customs union and also allows free movement of factors of production among member countries economic union - (EU) - incorporates all of common market but also requires economic institutions that coordinate monetary policy. (common currency is a monetary union)

Another Equation

S - I =(G-T) +(X-M) -saving in the economy is used either to fund the government's fiscal debt (G-T) or the rest of the world's trade deficit (X-M) Graphs pg 124

Reading 38: Dividends and Share Repurchases: Basics Lesson 1: Dividends

There are two ways that a company can distribute cash to its shareholders. dividends, and share repurchases. dividend payments are at the company's discretion. dividends and share repurchases rep a payout. payouts important because are an important component of total retur, particularly when stock price volatility is high

Advantages of Trade Blocs

Trade Bloc - group of countries where barriers to trade are limited -reduce conflict among members -give members greater bargaining power in a global economy, united front -offer new opportunities for trade and investment -typically growth in a member county spills over to other member countries Challenges: -Cultural differences, and historical conflicts (middle east) -free trade and mobility of labor limit extent of member countries pursuing independent economic policies

Common Size Analysis

Two ways to construct common-size cash flow statements. 1. Express each item as a percentage of net revenues. This is the most commonly used format 2. Express each cash inflow item as a percentage of total cash inflows, and each cash outflow item as a percentage of total cash outflows pg 105

Production Function and Potential GDP SOLOW GROWTH MODEL

Y=AF(L,K) Y=agg output L-Labor K-capital A technological factor or TFP total factor productivity Becuase of diminishing marginal returns to labor and capital the only way to sustain growth in potential GDP is growth in technology TFP

Stackleberg Model

an example within the Oligopoly market - AKA dominant firm model -decision making is sequential - unlike Nash where it is simultaneous. -so here one firm maximizes that profit and then you subsitute this into the corresponding q P=400-Qd P= 400- (q1+q2) find the maximum of the first firm and substitute in in -dominant firm will take most of the market demand because the Dominant firm has a lower marginal cost Cirve

Reading 40: The Corporate Governance of Listed Companies: A manual for investors LOS40a: Define Corpoarte governance

corporate governance is the system of internal controls and procedures through which individuals companies are managed, defines rights, roles, and duites of management, board directors, and sharewoners. minimize and manage conflicts of interest between insiders and shareholders

LOS39f Evaluate a company's management of AR, inventor and accounts payable over time compared to peer companies

credit managers can use credit scoring modesl to evaluate customers' credit worthiness

Evaluating Management of Accounts Payable

important part of working capital managemtn as AP can be a source of working capital for the firm. by paying too early a company loses out on interest income. if pays late company risks reputation and relationship with suppliers. plus possible penalties and interest rate charges Guidelines trade credit and cost of borrowing or alternative cost - the standardization of comapny's payables is dependent on the importance of credit to the company and its ability to evaluate trade credit opportunities -the disbursement float - allwos comapnies to use their funds longer, if they fill chekcing account on the day the checks were mailed

Data sets can have both time series and cross sectional data Longitudinal data Panel data

longitudinal- data over time about multiple characteristics of the same observational unity (GDP growth rates, inflation Panel data - data collected over time about a single characteristic of multiple observational units

Profitability Index

the profitability index of an investment equals the present value (PV) of a projects future cash flows divided by the initial investment PI =PV of future cash flows/initial investment = 1 + (NPV/intial investment) PI equals ratio of discounted future cash flows to the initial investment NPV equals the difference between discounted future cash flows and the initial investment PI indicates the value in exchange we receive for unit of currency investsed. it is also known as the "benefit cost ratio" Decision rules, company should invest if its PI is greater than 1

Histogram and Frequency polygon and cumulative frequency distribution

you know histogram -frequency polygons graph the frequency on y and interval midpoints on x. both are ways we graph absolute frequency a cumulative frequency distribution will give us a smooth curve upward adding the frequencies as it goes

Calculated Statistical indices

put/call ratio - volume of put options traded divided by volume of call options traded. high pull call indicates a bearish market CBOE volatility index (VIX) - short term market volatility and is calculsted from the prices of options on stocks in the S&P 500, VIX rises when fearing a market decline -margin debt levels are strongly correlated with the movement in the market. margin debt reached its peak in 2007 for example Short term interest ratio = short interest/average daily trading volume -interpreted two ways, overall negative outlook on the security and one should expect the price to decline

Economies of Scale (increasing returns to scale

reductions in the firm's average costs that are associated with the use of larger plant sizes to produce large quantities of output Constant returns to scale (the minimum flat part of the LRAC curve. Diseconomies of scale when AC is increasing again

Standard I(D) - Misconduct examples

1. Garcia manages a fund. Has several nonviolent protests and been booked for trespassing. This does not affect his job, professional integrity, or Competence.

LOS15k - describe diminishing marginal returns and calculate and interpret the profitmaximizing utilization level of an input

5k

Converged standard continued

Also lay down specific accounting treatments for certain related costs. For example, incremental costs of obtaining a contract and certain costs incurred to fulfill a contract must be capitalized. (reported as an asset on balance sheet, rather than an expense on the income statement) All other factors the same, if a compnay has expensed these incremental costs in the years prior, adopting the converged standards, its profitability will initially improve under the converged standards -companies are requeired to disclose info about contracts with customers classified into different categories of contracts.

What are the types of exam questions you can expect regarding applying Standard I-B?

Applying Standard I-B, Complying with standards of independence and objectivity seems simple and straightforward in theory, but in practice there are many scenarios that could potentially conflict with one's objectivity - or create the appearance of doing so. In many cases it is not so easy to define the proper course of action. Here are some of the situations that are more likely to appear on the exam: •A company sponsors an analyst conference and picks up all the expenses. Consider a situation where a firm invites all Wall Street analysts who are actively covering its company to go on an all-expenses-paid trip to tour facilities, play golf, stay in a swanky resort and so forth, all in the hopes of promoting itself and earning more favorable coverage. For analysts bound by the Code and Standards, would this sort of outing compromise their objectivity? The answer is that it just might. This Standard requires CFA members to assess if such an outing is possible while still maintaining objectivity - would they still be able to write an unfavorable opinion, if warranted by independent analysis? Many firms have created policies that require attendance at such affairs to be paid by the firm and require the itinerary to be substantially business-related as a condition of attending. No specific checklist of right and wrong is written into this Standard, but the mere appearance of conflict is a real issue in today's environment and one must be sensitive to perception. •A financial firm promises to provide research coverage of a company's stock in return for a potential business relationship. This agreement is acceptable so long as there is absolutely no requirement to make the recommendation a favorable one. This standard requires that any conclusions be made in an independent and objective manner. •In the previous example, the relationship manager asks for a favorable recommendation for the new corporate client. This case would violate Standard I-B. If the relationship manager is concerned that an unfavorable research opinion will adversely affect the cultivation of this relationship, the research department would need to restrict the company from analyst coverage and only provide factual information without any specific recommendation. Under no circumstances can the corporate client be seen as "buying" a favorable analyst opinion. •A research analyst assigned to a new sector is told by the director of research not to change the investment opinion on a certain company. This type of supervision would violate the analyst's requirement to reach an independent conclusion. If the analyst is a CFA Member or Candidate, he or she should proceed by informing the supervisor that he or she is bound by the Code and Standards, and that such a restriction is not permitted by the Standard on Independence and Objectivity. Another approach would be to study the company, reach an independent conclusion and share this opinion with the director of research, but leave it to the supervisor to decide the appropriate course of action. •A portfolio manager receives an expensive vacation package from a brokerage as a sign of gratitude for all the business. Accepting such a perk is a violation, as it compromises the manager's objectivity in regards to choosing brokers that suit the best interests of the clients and the firm (the broker offering the best execution, for example). This manager would be in compliance with Standards if he or she disclosed the perk in writing to his or her immediate supervisor. If the firm required this manager to refuse the vacation package, he or she would be required to abide by the decision of the firm. •A portfolio manager is sent two extra tickets to a local baseball game (face value $30 each), complements of the same brokerage. Given the rule of thumb that gifts lower than US$100 are perceived as sufficiently modest and are thus acceptable from both clients and business partners, the portfolio manager would not be violating Standard I-B, even if the perk went unreported. At the same time, it's a sensible practice to disclose even gifts of this nature - the Standards of Professional Conduct describe minimum standards, but staying in the habit of full disclosure should always be the preferred course of action. •A CFA member who is also a member of the local society of financial analysts solicits corporate financial support for an investor conference and issues research reports on some of those same firms. Research opinions must be unbiased. However, when an analyst takes on an outside role, how will these secondary activities influence the research? If a firm pledges generous support to this analyst, will the analyst's future research reports become more favorable? If another firm declines support, will a report on that company be less favorable? The best course of action would be to trade the coverage of those firms with a colleague, or to ask to be excused from seeking sponsors.

Travel Funding

Best practice dictates that analysts should always use commercial transportation at their expense or at the expense of their firm rather then accept paid travel arrangements -may accept moderate arranged travel to participate in information gather events

Price Elasticity of Demand

Ep= -(%chqQd/(%chgP) -price elasticity will be higher if there are many close substitutes *PED is very importatn MR=P[1-(1/Ep)] the higher the price and MR of a product the greater the incentive to supply that product *Very important - the demand adjustment for Price elasticity occurs along the demand curve (x and y axis) -For income and cross elasticity the demand adjustment is represented by a shift in the curve

Budget Surplus Deficit

Equals the difference between the government's revenue and expenditure over time. An increase in a budget surplus is contractionary fiscal policy

Continuous compounding

FVn = PVe^(rxN)

External Trade Sector Behavior

Generally Speaking- -An increase in domestic GDP leads to an increase in demand fro imports -***An appreciation of the domestic currency makes imports cheaper and at the same time makes domestic goods more expensive, reducing net exports -GDP growth differentials have a more immediate impact on the external trade balance -currency movements have a more complex and gradual impact on the trade balance

Paasche Index

Holds quantities at current composition

Tools and Techniques

It involves transforming accounting data into information useful for analysis, forecasting, and decision-making

LOS 15c Describe a firms factors of production

Land, Labor, Capital, Materials Production Functoin Q=f(K,L)

Reading 35: Capital Budgeting

Lesson 1: Capital Budgeting

Money Multiplier

Money Multiplier = 1/(reserve requirements) Say $1000 deposit, with a 20% reserve requirement bank can loan the $800 once purchases are made money comes back to the bank eventually so then 20% of 800 so so on and so on $640 loan then $512, all the way until you hit the reserve requirement percentage (20%) 200. Here it would be five times which is the Money Multiplier so $1000*5=$5000 Bank Process (Always are increasing quantity of money)

Supply and Demand for Money Demand

Money supply is assumed fixed (so MS is a vertical line) Money demand is inversely related to interest rates (rates increase, demand for money decreases, higher cost of loans) - therefore Md is a downward sloping line -when interest rates above the equilibrium quantity of money supplied exceeds demanded so firms and individ will purchase gov't securities (T-Bills) which increases the demand for those securities, so prices of these securities then rise and interest rates fall -when faced with a shortage of money firms will sell t-bills to get cash to lend -in practice hard to tell if money neutrality holds in the long run -central banks believe money supply does have a real impact on the economy in the short run. Otherwise, there would be almost no point to monetary policy

Nominal GDP vs. Real GDP

Nominal GDP = Qproduced in Year2 x Price in Year 2 Real GDP = Q produced in Year 2 x Price in Year 1 (Real GDP accounts for inflation) *Per capita GDP is the average standard of living. (real GDP/population)

Relative Strength Analysis

Relative Strength Analysis is used to evaluate the relative performance of a security compared to a stated benchmark by plotting the ratio of the security's price to the benchmark index over time. An upward sloping line indicates outperformance whilile a downward sloping line suggest underperformance. pg 284. just graph index vs your stock or mutual fund or whatevs

Balance Sheet: components and format

The balance sheet, also called statement of financial condition, privdes users with info regarding company's assets, liabilities, and equity at a specific point in time

Arc Elasticity

When entire demand curve is not available, but only two points look at formula but uses averages

Declining Prices

When prices of a firms products fall over a given period, the firm will see a decline in LIFO reserve

Lesson 2 Currency Exchange Rate Calculations Part 1 - calculate percentage change in currency relative to another currency

direct currency quote DC/FC indirect currency quote (FC/DC) still interested in DC in both of these, they are reciprocals There is a primary convention for each currency like EUR = USD/EUR sometimes there are major cross rates like EURJPY = JPY/EUR

Example 2-8 pg 231 Volatility as used in option pricing model

given a list of stock prices over 5 days 1. estimate the volatility (annualize based on 250 days) 2. Identify the prob distribution for XYZ share prices if continually compounded daily returns follow the normal distribution 1. First we calculate continuously compunded daily returns Xt= ln(yt/yt-1), this means for every period we start with the previous as yt-1 -then we find (Xt-Xbar)^2 (the top of the variance equation -since we only have 4 full return periods (base year doesnt count) divide by n-1 which is 4 to get variance then find standard deviation -Annualilzed volatility = Daily standard deviation x (250)^.5 2. Since continuously compounded daily returns of XYZ stock follow the normal distribution XYZ prices should follow lognormal distribution

Crowding out

government spending may crowd out private investment. Higher demand for borrowing by the government would raise interest rates reducing private sector investment

Probability distribtuion

identifies the probability of each of the possible outcomes of a random variable 1. 0<p<1 2. sum of p(x) = 1 a prob function can be represented as P(X=x) X is the random variable while x represents different values it can take.

pg 151 for examples

note that in the first year of operations all 3 methods of inventory valuation will come up with the same value for cost of goods. However in subsequent years the cost of goods sold under each method would typically differ because of the different amounts allocated to opening inventory (EI in the previous year) *in periods with rising prices and stable inventory levels FIFO results in the highest gross profit

Maxmization in the Short run vs Long run

optimal output is when ATC curve is at its minimum (Ushadped) long-run average cost

LOS39g: Evaluate the choices of short term funding available to a company and recommend a financing method

pg 81 . Bank Sources uncommitted line, large corporations, compensation none, mainly in the US; limited liabilty a bank offers a line of credit to a company for a certain period of time, but resrerves right to refuse to lend. weakest and least realiable form of borrowing, but does not require compensaiton other than interest committed lines (regular lines of credit) - require formal commitment form the bank revolving credit agreements - strongest form of short term borrowing, ujnlike regulaar lines, they are in affect for multiple years

Payback period

the time it takes for the initial investment for a projected to be recoved through after tax cash flows from a project at what year do we become pofitable Advantages - it is simple to cacluate and explain-it can also be an indicator of liquidity Drawbacks it ingores risk of the project, as in cash flows are not discounted at the projects required rate of return -it ignores cash flow that occur after the payback period is reached -it is not a mearue of profitability

How can you comply with III-E?

•Protect client information when received by not disclosing any gathered information to outside parties. •Limit the number of employees with access to sensitive information regarding a client's financial or other activities. •Seek legal counsel promptly if illegal activity is suspected. •Seek legal counsel if asked to disclose confidential information as a result of an investigation, either by the CFA Institute's Professional Conduct Program or by legal authorities. Disclosure in these instances may ultimately be required but one is entitled to legal advice to determine how best to reveal this information.

Qualitative Characteristics

Faithful and Relevant financial information Faithful - complete, neutral, free from error Compariability, vefifiability, timeliness, understandability Constraints on Financial Statemetns.

LOS 6c: Calculate and interpret a holding period return (total return)

holding period yield - also known as holding period return it is simply THE RETURN EARNED ON AN INVESTMENT OVER THE ENTIRE INVESTMENT HORZION

Standard II-A Material Nonpublic Information - Applications

(Acting on Nonpublic Information) 1. Frank tells his family he is selling his business for a great price. Information gets to someone who owns no stock in the family company , but invests. Violation of Standard II-A buying on the basis of material nonpublic information (Controlling Nonpublic Information) 2. Peter has a phone call and portfolio managers are walking by and overhear inside information and act on it. Peter violated b/c he failed to prevent the transfer of material nonpublic info. Others also broke by trading on inside info. (Selective Disclosure of Material Info) 3. Liz gets invited to a meeting with 10 shareholders. Executives say there will be a strike can Liz act on this info. Liz must ask herself if the Information is public. If it is not, no.

Total Expenditure

-Maximized where the price elasticity of demand equals 1 (demand is unit elastic) where Total Revenue is greatest. We are only dealing with the Demand Curve here.

Conflicts as a Director

-may receive company securities as an option in your contract and this could raise question about raising the trading actions that could increase the price of that stock

Central Limit Theorem

-sampling distribution of the sample mean computed from sample size, n will be approximately normal with the population mean, and variance, when the sample size is greater than or equal to 30 **** It allows us to make accurate statements about the population mean and variance using the sample mean and variance REGARDLESS OF THE DISTRIBUTION OF THE POPULATION, as long as the sample size is adequate >=30 we assume normality (still divide by n though)

Stratified Random Sampling

-strata must be mutually exclusive, each member assigned only to one stratum, so if 150 males out of 350 are in a scool you would want to sample atleast 43% males. within each stratum, observations are selected randomly

Balance of Payment Components Current Account Capital Account Financial Account

1. Current Account - reflects trade in goods and services 2.Capital Account - consists of capital transfers and nets sales of nonproduced, nonfinancial assets 3. Financial Account - measures net capital flows based on sales and purchases of domestic and foreign financial assets

How to Comply:

1. Factual presentations - When speaking to clients or potential clients - provide a list of the firm's available services and a description of the qualifications (CFA members - etc.) 2. Qualification Summary - GIve the clients a list of my qualifications to potential clients and a list of what I can and cannot do. 3. Verify outside information 4. Keep webpages up to date 5. Plagiarism policy - Maintain copies Attribute Quotations Attribute Summaries

Calculating NPV and interpreting

1. Identify all inflows and outflows 2. Determine appropriate discount rate (opp cost) 3. Compute the PV of all cash flows 4 Aggregate all PVs with inflows as positive values and outflows as negative values After NPV is calculated follow these rules to decide if project should be undertaken: 1.Positive NPV increase shareholder wealth and should be accepted 2. Negative decrease shareholder wealth and should be rejected 3. When comparing, highest NPV should be chosen always clear cash flow -do CF 2nd CE/C

LOS35c: Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and captial rationing

1. Ind vs mutually exclus projects. - independent means cahs flows are unrelated, mut excl means if project a and b are mutally exclusive the firm would only pick one 2. Project Sequencing - sometimes investing in one project allows for opportunites to invest in other projects in the future 3. Unlimited funds versus capital rationing - when company has no constraing on amount of cpaital it can raise, it will invest in all profitable projects to maximize shareholder wealth. the need for capital rationing arises when the projects exceeds the resources available to the company

Probability, Expected Value, and Variance LOS 8a: Define a random variable, an outcome, an event, mutually exclusive events, and exhaustive events

6 sided die if you roll a 3 - outcome any one of the 6 is a random variable rolling an odd number and rolling a 5 are examples of events mutually exclusive - can't roll a 3 and 4 at same time exhaustive events - cover entire range of all possible outcomes from the throw

Advantages and Disadvantages of Fiscal Policy Tools

Advant: -Indirect taxes can be adjusted very quickly -Social objectives can be met (reducing cigarette consumption) Disadvant: -Direct taxes are difficult to change without significant notice, b/c will influence behavior as soon as announced - direct government spending has a much bigger impact on aggregate spending and output then income tax cuts or transfer increases (transfer increases will not increase agg spending b/c the people who are receiving are trying to survive essentially)

Good Question

Assume 20 year old Janey wants to retire when she's 60 and receive 15000 payments at the Beginningof every year til she's 90. from 20-60 interest rate is10% and is 8% from 60-90 1. compute the present value of the money at age 60 when she will begin getting paid out. Because this is paying at the beginning of every year it is a annuity due which is PVannuitydue=PVordinaryannuityx(1+r) So Janet will need 182376.09 when she is 60, now calculate the payments from 20-60, so n=40 I/Y=10 FV=-182376.09 CPT for PMT.

Coefficient of Variation **risk per unit of return**

CV = s/Xbar s= sample standard deviation Xbar = sample mean For example two investments. 1 with 10% expected return and 15% standard deviation the other with 18% and 33& CV is the measure to risk per unit in various investments The higher the CV means higher risk per unit of return so it is the least attractive investment

LOS36L: Explain and demonstrate the correct tr(atment of flotation costs

Flotation costs refer to the fee charged by investment bankers to assist a company in raising new capital. For debt and preferred stock, we do not usually incorporate flotation costs because amount is quit small often less then 1%, however for EQUITY ISSUES, floation costs are usually quite significant re = D1/(P0(1-f)]) + g f= flotation costs as a percentage of the issue price pg 35 so can determine what the cost of equity was before and when it issued new equity. after influence floataion costs are included in costs of equity however adjsutign the cost of capital for flotation costs is incorrect. Flotation costs are part of the intitial cash outlay for a project. basically everything above is incorrect and the below is how we should actually treat ***The correct way to account for floation costs is to adjust the cash flows used in the valuation. We add the estimated dollar amount of floation costs to the initial cost of the project

LOS35b: describe the basic principles of capital budgeting

Important concepts before moving on: sunk costs: costs that cannot be recovered once they have been incurred. capital budgeting ignroes sunk costs because it is based only on current and future cash flows. an example is market research costs incurred to evaluate whether a new product should be launched opportunity cost incremental cash flow - additional cash flow realized as a result of a decision. incremental cash flow equals cash flow with a decision minus cash flow without the dcusion. externality - effect of investment decision on things other than the investment itself. conventional cash flow stream - initial outflow followed by series of inflows. the sign of the cash flows changes only once for nonconventioanl flow stream, more than one sign siwthc back and forth

LOS27g: Covert Cash flows from the indirect to the direct method

Step 1: Aggregate all revenues and expenses -aggregate all operating and nonoperating revenues -aggregate all operating and nonoperating expenses Step 2: Remeove the effect of noncash items from aggregated revenues and expenses and separate the adjusted revenues and expenses into their respective cash flow items. -deduct noncash revenue items such as gain on sales of assets from total revenue -deduct noncash expense items such as depreciation from total expenses Step 3: Convert the accrual-based items into cash-based amounts by adjusting for changes in corresponding working accounts -an increae in an asset account is a cash outflow, an increase in a liability account is a cash inflow

Unexpected Inflation

Unexpected inflation - level of inflation that comes as a surprise to economic agents. it is arguably more costly then expected inflation Unexpected inflation leads to: -inequitable transfers of wealth between borrowers and lenders************** (if actual inflation is less than expected inflation, which is built into nominal interest rates, lenders benefit and borrowers lose (and think of opposite) -Higher risk premium in borrowing rates - inflates nominal interest rate and hurts economic activity -reduction in the information content of market prices - businesses could alter their prices thinking a signal caused by inflation was actually an increase/decrease in demand

Social Media

when communicating through social media, only can provide information that is allowed to be distributed to potential clients. -sometimes social media can be used to increase your qualifications falsely. this is in violation of I-C

Historical Simulation

assumes distribution of the random variable going forward depends on its distribution in the past -assumes future will be simlar to the past -no cuase and effect -a risk factor not represented in historical data will not be considered -does not allow for a what if analysis where as monte carlo does

Acquired through an exchange and acquired through a purhcase

exchage, fair value of items are representded and any difference between is recognized as gain or loss on income statement purchase - if capitalized costs are also capitalized including shipping and installatio. Pg 182 because clark capitalized the cost of the equipment, it classifies it as an outflow from investing activites, not as an outflow from operating activities.

LOS27c: Cash flow IFRS vs US GAAP

pg 93 topic then IFRS then US GAAP interest received - CFO or CFI - CFO interest paid - CFO or CFI - CFO dividends received " " dividends paid " " bank overdrafts - part of cash equivalents - classifed as financing taxes paid - genearlly operating but sometimes others - operatin format of statement - direct or indirect direct is encouraged direct or indireect direct is encouraged. a reconiciliation of net income to cash flow from operating activities must be reported regardless of method used

Effective Annual Rates

EAR = ((1+periodic interest rate)^N)-1 to get periodic interest rate you divide by the frequency. remember N must also be represented in the correct frequency

What is Standard V-A?

"Diligence and Reasonable Basis" M&Cs must: 1. Exercise diligence, independence and thoroughness in analyzing investments, making investment recommendations and taking investment actions. 2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation or action.

Reading 17: Aggregate Output, Prices, and Economic Growth

- focuses on aggregates - total consumption of all household or total business investment in an economy

Liquidating Dividends

A dividend payment is known as a liquidating dividend when: -a company goes out of business and its net assets are distributed to shareholders -company sell off portion of business and distributes proceeds to shareholders

Cross Rate

An Exchange rate between two currencies that is derived from each currency's relationship with a third currency. Example two common rates (EUR which is USD/EUR) and JPY which is (JPY/USD) note that EUR represents those functions, and it changes on what the currency is typically based on *note when calculating appreciation/depreciation by what percentage of the currency, that currency must be in the denominator, so sometimes you must invert which is taking it to the -1st power or reciprocating . and always subtract 1 *to determine which currency is strongest just analyze the appreciation/deprecation of each currency relative to each other. pg 220 -triangular arbitrage use to exist, where you could make money of the market with zero risk by trading multiple currencies, technology has effectively squashed this.

Types of Exchange Rate Regimes

Arrangements with no separate Legal Tender -dollarization - country uses currency of another nation -inherits that country's credibility pro -central bank cannot print its way out of debt, con country lose ability to conduct independent monetary policy Monetary Union - member countries share the same legal tender (Euro ECB) Pro -gives credibility cons - maybe not creditworthiness (Greece) -no independent monetary policy -

Keynesian School of Thought

Assertions: -short run is what really matters -general price and wage are sticky -lower interest rates don't always ignite growth if confidence is low -government should step in and stimulate aggregate demand to keep labor and capital employed Criticisms: -fiscal deficits imply higher gov't debt which must be serviced and repaid -could result in overheating the economy in the longrun -there is a time lag with fiscal policy -does not give any importance to money supply

Factors Affecting Own-Price Elasticity of Demand

Availability of Substitutes - consumer can easily switch so own price elasticity is relatviely elastic Proportion of Income Spent on Goods - if a small proportion of a consumers income is spent on a good it will not significatnly cut down on consumption if price increases if a larger proportion of income more likely to cutdown - demand will be relativelly elastic

Market Yields Bank Discount Yield

Bank Discount Yield - primarily used for quoting treasury bills. BDY - annualizes the discount on the intrument as a percentage of par or face value over a 360 day period it is computed as rbd = D/F x 360/t rbd=annualized yiedl on a bank discount basis D=dollar discount (face value - purchase price) F=face value of the bill t=number of DAYS remaining ***These yiedls do not mean much to investors b/c 1. BDY calculates return on par, but investors want returns based on the amount invested when purchasing 2. returns are based on 360 day year instead of 365 3. BDY assumes simple interest, ignores compound interest

Share repurhcase methods

Buy in open market - nice because company can buy at a good price, no hoops to jump through for legaility buy back a fixed number of shares at a fixed price, knowb as a fixed tender offer. typically price is at a permium to the current market price if number of shares offered for sale exceeds amount of shares company desires to repurchase the company will repurchase a pro rata amount from each shareholder who offers her shares for sale. Dutch auction - everybody picks the number of shares and price they want to sell and the best offer wins and the company buys back their stocks repruchase by direct negotion - direct negotion with a majority shareholder examples -large shareholder wants to sell and company wants to prevent large block of shares from overhangin the market and depressing the share price -the company wants to buy out a large shareholder to prevent it from gaining representation on the company's board of directors

pg 143

Conclusions of AS and AD

***LOS 14a describe consumer choice theory and utility theory

Consumer Choice Theory -Assumption of Complete Preferences (consumers always have preferences of one over another) -Assumption of Transitive Preferences- bundles (A>B>C so A>C) -Assumption of Nonsatiation - consumer always wants more Utility Function U=f(Q,Q2,...) -utility functions only offer an ordinal rating but not cardinal ranking do not calculate the ranking of differences between bundles (as in can't say the consumer likes bundle A 2x more then bundle B) just A>B

LOS24c: Describe the status of global convergence of accoutngin standards and ongoing barriers to developing one universal set

Convergence between US GAAP and IFRS is underway However impeded by two factors 1. Standard setting bodies and regulators have different opinions regarding accouting treatments, due to institutional, regulatory, business, and cultural environments 2. Powerful lobbyists and business groups whose reported financial perfromance would be affected adversely, exert peressure against the adoption of unfavorable standards.

Increase in LIFO Reserve

In every period where prices are rising and inventory quantities are stable. or rising the LIFO reserve will increase as the excess of FIFO ending inventory over LIFO ending inventory increases

What is Standard II?

Integrity of Capital Markets II-A: Material Nonpublic Information II-B: Market Manipulation

Probability with at least one of two events will occur Here we invoke addition rule for probabilities:

P(AorB) = P(A) + P(B) - P(AB) venn diagrams when P(AB) = 0 = mutually exclusive circles do not intersect when circles intersect P(AB)>0

Other GDP - Related measures

Personal Income -includes income whether it is EARNED or UNEARNED Differences - National income - includes income goes to businesses and gov't and national income does not include household income that is not earned (transfer payments) Personal Income= +National Income (-)Indirect business taxes (-)corporate income taxes (-)undistributed corporate profits +Transfer Payments

Charts in FInancial Analysis

Pie charts - most useful in composition of total value (total expenses for example) Stacked common graph - illustrates the change in total and the percentage of each by dividing the bar regression analysis** - relationships between variabls over time and assists analysis in forecasting (eg the relationship between GDP and sales can be used to make revenue forecasts)

What is Standard I?

Professionalism I-A: Knowledge of the Law I-B: Independence and Objectivity I-C: Misrepresentation I-D: Misconduct

What is Standard VII?

Responsibilities as a CFA Institute Member or CFA Candidate A) Conduct as M&Cs in the CFA Program B) Reference to CFA Institute, membership, the CFA designation, or candidacy in the CFA program. Must not misrepresent or exaggerate the meaning or implication of membership in the CFA Institute.

Money Market Yield or CD Equivalent Yield

Rmm = Money market yield holding period yield on a 360 day basis does not account for compounding, it is based on the purchase price not par value which is the difference from the BDY Rmm = HPY (360/t) so EAY accounts for compounding RMM does not

Flags and Pennants

Show breaks in lines when pennant is at the expected price, essentially breaks up into triangles and rectangles and then theres a break in the lines (pg292)

Industry-Specific Ratios

Some Business Risk Ratios Coefficient of variation of opeerating income

LOS 36e: Explain the marginal cost of capital's role in determining the net present value of a project

The WACC or MCC (same thing) reflects the average risk of the company. When we choose MCC as the discount rate to evalueate a particular project we assume that: -the project udner consideration is an average risk project - the project will have a constant capital structure throughout its life If the risk of the project under consideration is above or below the average risk of the company's current portfolio of projects, an adjustment is made to the WACC -greater risk = greater marginal cost of capital

Hypothesis Tests concerning the mean

The decision to use critical values based on the z dist or the t dist depends on sample size, the distribution of the pop and whether the variance of the pop is known ( z test or t test)

What are the subsections of Standard IV?

There are three subsections: IV-A: Loyalty IV-B: Additional Compensation Arrangements IV-C: Responsibilities of Supervisors

What are the subsections of Standard V?

There are three subsections: V-A: Diligence and Reasonable Basis V-B: Communication with Clients and Prospective Clients V-C: Record Retention

LOS19p: Describe the tools of Fiscal policy including their advantages and disadvantesg

Tools Gov't Spending (transfer payments - WELFARE), infrastructure building (capital expenditure) -gov't provides defense and spending can help redistribute wealth Types of Taxes -Direct taxes - income, wealth, profits -Indirect taxes - taxes on goods and services, VAT, tobacco

LOS12c: Explain uses of trend, support, resistance lines, and change in polarity

Trend analysis assumes investors tend to behave in herds and trends usually continue for an extended period of time. uptrend - higher highs and higher lows. each high lies above the previous high and each low lies above the previous low (retracement). in econ it means more ready buyers then are sellers downward- lower highs and lower lows narrow range or (sideways trend), typically options positions are more profitable than long or short positions on the security itself during a sideways trend.

expected value and variance of a binomial random variable:

expected value is simply p*n variance is given by σ^2 = n x p x (1-p)

For difference business segments within a company simply use the same ratios but caluclate in proportion to segment percentage

pg 143

Hypothesis Testing for Variances of a normally dist pop

so far in the reading we have been testing hypotheses relating to means, sometimes we need to do for variances

Combinations

the combination formula is used in a special case of the labeling problem. when labels =2 for example 100 people only two options, 34 can play the sax, the others cannot so n!100/(n-34)!x(r!) combination used when order in which items are assigned is not important

Second-degree price discrimination

the monopolist uses the quantity purchased to determine whether the consumer values the product highly. (smaller packages = cost more, bulk costs less) 2 paper towel rolls vs 10

Indirect method

under the indirect method, cash flow from operations is calculated by applying a series of adjustments to net income. Adjustments made for noncash items (depreciation), nonoperating items (ie sale of noncurrent assets, and changes in working capital) shows depreciation as a postive amount and gain on sale of machinery as a negative amount, pg 94

Application of III-A Loyalty

(Identifying the Client) 1. for trusts and pensions the beneficiaries are always the client 3. You can use a specific broker if you get a statement from clients that she is NOT to seek best price and best execution -remember to disclose information to clients 5. receive less stock then you asked for, distribute proportionally across equal clients under the normal fee strucuture (Client Loyalty) 7. reporting system misses a trade, if she fixes the report there will be large losses and clients will probably terminate. She should fix the report as this is still acting in the best interest of the client even if they lose accounts Fiduciary - a trustee, involving trust with a beneficiary, putting clients interests first

Suitability Application

(Investment Suitability - Entire Portfolio) 2. Jess advises Crosby a risk-averse client to buy a certain security and goes in depth about the investment and its risk. ****When determining suitability of investment must take the entire portfolio into consideration. 3. Louis manages a high-income mutual fund. invests in a zero-dividend stock -this does not fit the mandate of the fund Louis is managing "high-income" (Submanager and IPS review 4.Ted hires a submanager to help him handle some investment accounts.he selects the firm that has the lowest administration fee b/c it will be lower on his firm's bottom line. (his client is not the firm). He must review the specific managers/firms he is interviewing and make sure there background meets the current strategy of the profile (Suitability) 4. Shurb owns a firm and is trying to grow. he is friends with an account manager with elite investment who he offers lower then normal management fees. No one is turned away b/c conduit is looking to expand its assets. this violates b/c the risk profile of the new fund may not be suitable for every client

Economies and Diseconomies of Scale and Profit Maxmization in the Short run vs Long run

- no factors of production are fixed in the short run

Desirable Properties of Tax Policy

-Simplicity -Efficiency - minimize disincentives to work and invest -Fairness - similar situations pay similar taxes -Revenue sufficiency

Heckscher-Ohlin Model (AKA factor proportions theory)

-assumes both capital and labor are variable factors of a production, so a good can be produced with varying combinations of the two -technology is the same in each industry across countries, but it varies across industries -differences in factor endowments are primary source of comparative advantage (HAS AN ABUNDANCE THEORY) so middle east is blessed with having oil **IMPORTANT* THE THEORIES ARE COMPLEMENTARY NOT MUTUALLY EXCLUSIVE

In the absence of international trade: (closed)

-domestic consumption equals domestic production -given opp cost of 1:2 Germany produces and consumer 100 cars and 200 yards of clothing

Current Account -

-merchandise trade -services -income receipts (foreign asset interest) -unilateral transfers

Second or Third party research

-must review if research provided to you is sound on your own judgment -always inquire into the source need to analyze assumptions used, rigor of analysis, date/timeline of reserach, evaluate independence objectively

Sharpe Ratio

-ratio of excess return over the risk free rate from an investment to its standard deviation of returns Interpreted as excess return per unit of risk (because the risk free rate isn't actually risky) -this is similar to CV but it takes into account the risk free rate b/c this part of the return isn't risky rpbar-rf/sp rp = mean portfolio return rf = risk free rate =standard deviation of portfolio returns highest one is best investment issues with the sharp ratio -watch out for negative ratios, cannot assume the higher sharp ratio offers a better risk adjusted performance pg175

Problems with a barter economy

-relies on double coincidence of wants -diffictult to undertake transactions involving goods that are indivisable -perishable goods are not good stores of value -there is no common measure of value

Oligopoly

-small number of sellers -products offered by sellers are close substitutes for each other (may be differentiated by brand(cokeVpepsi) or homogeneous (oil) -high costs of entry and significatn barriers to competiton -firms enjoy substantial pricing power -products are often differentiated on the basis of quality, features, marketing, and other nonprice strategies

6 Basic Assumptions of capital budgeting

1. Decisions are based on actual cash flows, only incremental cash flow is relevant and sunk costs are ignored 2. Timing of cash flows i crucial. Analysts try to predict exactly when cash flows will occur, as cash flows received later. 3. Cash flows are based on opportunity costs. (incremental cash flow 4. Cash flows are analyzed on an after-tax basis 5. Financing costs are ignored from calculations of operating cash flows. Therefore focus on operating cash flows and capture costs of capital in the discount rate (financing decision) 6. Accounting net income is not used as cash flows for capital budgeting, because accounting net income is subject to non cash expenses (depreciation)

Capital budgeting projects can usually be classified into the following categories

1. Replacement Projects: help in maintaining normal course of business, and usually do not require very thorough analysis. an obsolete piece of equipment 2. Expansion projects - these are projects that increase the size of the business. much more careful consideration since uncertainties involved 3. New products and services 4. Regulatory, safety and environmental projects 5. Other projects

Adoption of Code of Standards

Applies to candidates and members. Encourage firms to adopt the code of stadnards. Cannot claim CFA affiliation though as a firm.

Lesson 2: Cash Flow Statement: Linkages and Preparation LOS27e: Describe how the cash flow statement is linked to the income statement and the balance sheet

CFO+CFI+CFF = Change in Cash Year end cash balance - beginning of year cash balance = change in cash PG 95 Really imporatnt***

IRR

CFt/(1+IRR)^t -outlay = 0 or first part of equation = outlay IRR is the discount rate at which NPV = 0 so set NPV = 0 and solve

Lesson 2 Accounting Equations Basic here

Formula Sheet Owners equity = cont capital + ending retained earnings ending retained earings = beginning retained earnings + Rev - Expenses - Dividends or Assets = liab + contributed capital + ending retained earnings

LOS27i Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage of cash flow ratios.

Free cash flow is the excess of a company's operating chas flows over capital expenditure undertaken during the year. Free cash flow to the firm and free cash flow to equity are more precise measures of free cash flow as they identify specficially whom the cash flow is available to.

Investment

GDP includes gross investmetn Two most important determinants of investment spending: 1. level of interest rates - higher interest rates = lower level of investment 2. current level of aggregate output/income - serves as an indicator of expected profitability of new investments. higher level of agg output/income the higher the return expected on new investments I=f(r,Y) Bottom Line: Investment expenditure varies positively with income and negatively with real interest rates.

How can one comply with IV-A?

How to Comply 1. Provide a written statement describing the relationship, the type of service, the expected duration and the expected compensation. 2.Do not render services until written consent from employer is received. 3.Disclose to clients the identity of one's employer, clarify that it is an independent arrangement and state the fees that would apply under a similar contract with the employer. 4.Do not render services until client reads and understands these disclosures and provides written consent. be aware of noncompete agreements -outline procedures for transferring ongoing research

LOS25b: Describe general principles of revenue recognition and accrual accoutning, specific revenue recognition applications (accounting for longterm contracts, installment sales, barter transactions, gross and net reporting of revenue) LOS25c: calculate revnue given info that might influecne the choice of rev recognition model

IFRS and US GAAP are pretty identical here income includes revenue and gains -revenue arise from oridinary, core business activities, where gains arise from noncore or peripheral activities. -Most important principle of revenue recog is accrual accounting. Costs and rev recognized independently of timing of related cash flows. Recog Revenue when: 1. rev can be measured reliably 2. econ benefits will flow from transaction to entity (probable) 3. stage of completion 4. costs can be measured

Balance Sheet Ratios

Liquidity or Solvency Ratios Higher a company's liquidity ratio the greater the likelihood that a company can be able to meet its short-term obligations. Higher Solvency ration on the other are UNDESIRABLE and indicate that the company is highly leveraged and risky

Rev Rec in Special Cases

Long-Term Contracts -if outcome of contract can be measured reliably, must use percentage of completion model - recognize as work is completed (Axiom) -some contracts cannot be measured until project is substantially finished (skyscraper). Here only the costs can be counted for as revenue (so net zero), until completion in then which all profits are recognized. (notice that these appear different in income statement pg 46)

Shifts and Movement in AS curve

SR -changes in price level result in movements along the SRAS curve, shifts can be caused by: nominal wages, inpute prices, expectations about future prices, busines taxes and subsidies LR pg 137

Distinguish between Short run and long run profit maximization

Short Run Equilibirum Perfect comp - Price = MR IF AC lies above MR firm is operating at a loss in perfect comp MC AC and MR all intersect at breakeven point

What is Standard II(B)

Standard II(B) - Market Manipulation M&C must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Credit Analysis

The Credit Rating Process -meet with management -tour faciilites -meeting analysts recommendations of business risk, financial risk and evaluation of management.

Decline in LIFO Reserve

There can be two reasons fro a decline in LIFO reserve 1. LIFO Liquidation 2. Declining Prices

Spearman Rank Correlation Coef

Used in non-parametric test - Nonparametric examples test concerning single mean - Wilcoxon signed rank test tests differences b/w means- Mann Whitney U Test Paired comparison tests (Mean differences), WIlcoxon signed rank test Sign test

National Income Identity

Y=C+I+G+X-M can be arranged to CA=X-M =Y-(C+I+G) CA = X - M

Herfindahl-Hirschman Index (HHI) **better than the concentration ratio

adds up the squares of the market shares of each of the largest n companies in the market. HHI equals 1 for a monopoly. IF there are M firms in the industry with equal market shares the HHI will equal 1/M -just like concentration ratio - does not account for the possibility of entry, nor does it consider the elasticity of demand. But still more useful the concentration ratio

Cash Flow Additivity Principle

calculator help pg 135

Other current assets

prepaid expenese - operating expenses paid in advance, recognized as an asset and over time value of asset is reduced and they are expensed on the income statement -Deffered tax assets - taxes payable exceed amount (tax refund) represent an overpayment of taxes

Nominal/Real Exchange Rates

the previous example is a nominal exchange rate -real exchange rates measure changes in relative purchasing power of one currency copared to the other -Real exchange rates are used by analysts, but it is not the amount they are quoted or traded on in global FX market (foreign exchange/currency market)

Aggregate Output

total value of all goods and serviced produced in an economy over a period of time

Aggregate Income

total value of all payments earned by the suppliers of factors of production in an economy =employee compensation (wages&benefits +rent- for the use of property +interest - earned on funds loaned out +profits - earned by businesses

What is Standard III-A?

"Loyalty, Prudence and Care" -Manage portfolio like it was your own money M&Cs have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. M&Cs must act for the benefit of their clients and place their clients' interests before their employer's or their own interests. In relationships with clients, M&Cs must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed.

Standard III-B Fair Dealing Application

(Minimum Lot Allocations) 5. new bond. 3 clients request $10000 each 2 request $50000 each. only gets hand on $55000 but the minimum lot size is $5000 distribute 3 10000 investors get 5000 each 2 accounts that requested $50000 get 20000 each. this is fair b/c ensured that each client got at least the minimum lot size

Generally speaking exchange rates will be more effective in adjusting trade imbalances if the countries' imports and exports are composed of items that have relatively elastic demadn

* note that there is still a time lag, sometimes an increase in import prices will lead to an increase in total expenditure over the short run, but eventually corrects itself in the long run

Money Neutrality

- an increase in money supply will not result in an increase in real output. Therefore, an increase in money supply will cause the P to rise Monetarists use the quantitative theory of money to support the belief that inflation can be controlled by manipulating the money supply growth rate

Using Industry Experts

-Can use an expert to help in analysis and compensate them, but their info must not be material nonpublic

OPTIMAL OUTPUT Monopoly

-MC=MR -profit is unaffected by changes in quantity -Profit maximizing level MR = P[1-(1/Ep)], since MR=MC then this can be used to find the optimal price graphs pg 90

Investment Products and Applicable Laws

-Members involved in creating or maintaing investment services/products should be mindful of where there products will be sold and their origination -understand all applicable laws of regions of origination and expected sale and make reasonable efforts that all distributors abide

LOS 17e: Explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance

-Must use the above ^ equations to calculate GDP

Very Important

-The inverse relationship between the price level and GDP is the AD curve. -The inverse relationship between GDP and the interest rate is the IS curve -when output or income is more sensitive to the price level. this makes monetary policy more effecting

LOS19n: Describe limitations of Monetary policy

-cannot control amount HHs and businesses choose to save -cannot control the willingness of banks to make loans directly (can influence through interest rates) -a bond vigilante is a investor who protests monetary or fiscal policy they consider inflationary by selling bonds (back to the gov't).

Guidance Standard III-C Suitability

-consider the needs, circumstances, and objectives of the client when determining suitability of an investment

Demand Analysis Monopoly

-demand curve for the firm is effectively the industry demand curve. it is downward sloping AR curve is the same as the demand curve -MR curve and demand curve have the same y intercept -The MR curve is the derivative of the TR curve

Plagiarism

-do not take someone elses research. use excerpt from articles without quotes. using charts and graphs without stating their sources -just always reference or use appropriate caveat -can distribute other peoples work as long as it is acknowledged -most common violation - using multiple sources of material which can include ideas, statistical compliances, forecasts -***members may use research conducted by other analysts at the firm as it is property of the firm. even if the original analysts are no longer with the firm. cannot reissue a report with their name though

Things not to do

-don't insinuate that CFAs at your firm is are the reason behind better performance

Export Subsidies

-gov't pays domestic exporters of certain goods. Large country - lowers the world overall price as global supply increase, can help the welfare of other countries but not us Small Countries - domestic price will rise by the per unit amount of the subsidy PG 201 summarizes all

Long Run - Monopolistic Competition

-low barriers to etnry so new films will come and steal some of the economic profit -this will eventually reduce demand and AC will be tangent to demand at where MR=MC output level SPACE BETWEEN AC AND DEMAND = ECONOMIC PROFIT

Current Liabilites

-settled within one year or one operating cycle, whichever is greater Typical: trade payables - owed to suppliers notes payable - current borrowings current position of long term liabilitesi - portions of long term debt that are expected to be paid within a year of the balance sheet date (regular payments) income taxes payable accrued liabilites - been recoginzied on income statemtn but still have not been paid for as of the balance sheet date unearned revenue - (deferred revenue)

I-B Guidance

-should avoid situations that cause a loss of indep and obj -modest gifts are acceptable, but cannot accept gift that would threaten independence and objectivity -members should disclose gifts to employers

Continuous Patterns next cards

-used to confrim the resumption of the current market trend, aslo known as healthy market corrections

Labor Market Definitions

Employed: Number of people with a job (excludes informal sector, i.e illegal workers) Labor Force: #People who have a job or are actively seeking Unemployed: People w/o a job that are seeking Unemploy rate- ratio of #people unemployed to the labor force ActivityorParticipation Rate - ratio of labor force to total working age population Underemployed: have jobs but have qualifications to do better job Discouraged worker - a person who has stopped looking for a job, thus excluded from the labor force

LOS19e: Describe the Fischer effect

Fischer effect - is directly related to the concept of money neutrality (increasing money supply does not increase output, only prices) ***Nominal interest rate reflects the real interest rate and the expected rate of inflation (how inflation is perceived by consumers and firms) Rn= Rr +pi pi=expected inflation rate

22c: Describe notes and supplementary information including disclosures of accounting policies, methods, estimates, and management's commentary

Foot note - contain deatil about accounting methods, estimates, and assumptions MD&A- get manager to analyze IFRS - finalizing a framerwork to provide guidance to items should be discussed in management commentary

NPV

NPV sum CFt/(1+r)^t - outlay CFt = after tax cash flow at time t r= required rate of return for the investmetn outlay = investmetn cash outflow at t=0 always invest in project if greater then zero

Boom and Peak

Occurs at latter part of expansion when growth starts testing the limits of the economy -companies face shortage of qualified workers so they start bidding wars -companies believe expansion will continue so borrow money -excessive slary growth Peak occurs at end and signal onset of contraction

23a Describe how business activities are classified for financial reporting purposes

Operating, Investing (plants, capital), Financing (financing - issuance of repurchase, repayment of debt)

Relative Strength Index

RSI = 100 - (100/(1+RS)) RS = sum of (up changes for period under consideration)/ sum of (down changes for the period under consumption RSI lies between 0 and 100. A value above 70 typically represents an overbought situation while a value below 30 typically reflects an oversold situation. RSI is typically 14 day period

LM Curve

combinations of interest rates and real income for which the money market is in equilibrium

The Budget Constraint

for a basic good PaQa+PcQc= I I=total income intercepts are amount you can spend your entire income for one good slope = -Pa/Pc

Deriving the Demand Curve

go from Qm and Qc on the axises to Pc on y axis and Qc on x axis would give us the demand for chocolate

surpluses

if supply curve is steeper, more of the surplus is caputred by producers -if the demand curve is steeper, more of the surplus is captured by consumers deadweight loss - setting price at non equilibrium level

FASB - Financial accounting Standards Board

the FASB Accounting Standard Codification (Codification) - is a source of all US generally accepted accounting principles US GAAP - generally accepted accounting principples SEC retiains authority to set standards, but recognizes the US GAAP

Variance and Standard Deviation

variance(X) = Sum of P(Xn)((Xn-E(X)^2)..

DRC (Disciplinary Review Committee)

volunteer committee of CFA charterholders who serve on panels to review and establish professional conduct policies

The cross-price elasticity of demand for private universities with respect to the price of public universities is closest to

with respect to means divide by but price always is on the bottom anyway

What is Standard V-B?

"Communication with Client and Prospective Clients" M&Cs must: Standard V-B: Communication with Clients and Prospective Clients M&Cs must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities and construct portfolios, and must promptly disclose any changes that might materially affect those processes 2. Disclose to clients and prospective clients significant limitations and risks associated with the investment process. 3. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations or actions, and include those factors in communications with clients and prospective clients. 4. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Investment Banking Relationships

- sell-side firms may exert pressure for analysts to issue favorable research reports, must not succumb -Analysts may work with investment bankers when conflicts are managed and disclosed. firms should disclose conflicts of interest to investors. -Firewalls - must separate reporting for research side and investment banking side, compensation that rewards objectivity and accuracy

Standard II(B) Guidance

-Must PROHIBIT market manipulation Includes -Dissemination of false or misleading information -transactions that deceive or would be likely to mislead by distorting price setting mechanisms of financial instruments

Complying with III-A Loyalty

-REGULAR ACCOUNT INFORMATION - submit to a client, at least quarterly, an itemized statement showing the securities/funds AND all transactions -disclose where the assets are to be maintained as well as where/when they are moved CLIENT APPROVAL - If a questionable matter arises, and a MorC is uncertain about what the client wants, they should disclose the questionable matter in writing to the client and obtain approval

Important Equations moving forward

GDP= HHconsumption +HHsavings + Net taxes GDP= C+S+T Known as Equality of Expenditure and Income S= I + (G-T) + (X-M) domestic private saving^ Interpreting Deficits (G-T)= (S-I) - (X-M)

LOS 3b: Explain the construction and purpose of composites in performance reporting

GIPS standards require the use of composites. A composite is formed by combining discretionary portfolios into one group that represents a particular strategy. Must decide composites before offering the fund ie an ex-ante basis.

Production Possibility Frontier (PPF)

Just like a consumer, a producer places capacity on ability to produce two goods (i.e. cars v truckers) remember opportunity cost (how many trucks does it take to make cars, and reverse)

Profit Max Under Perfect Comp

MR=MC firm is at maximum proft if TR=TC and MR<MC firm is operating at upper breakeven point, decrease Q to enter profit territory

What is a likely scenario for an exam question on III-B?

What is a likely scenario for an exam question on III-B? 1) Research Report Preview 2) No Time to Prepare a Report 3) Preparing for the Eventual Demand 4) Allocation of IPO 5) Notification via email Case studies that test this Standard tend to place analysts in a situation where they are tempted to show favoritism toward one group over another. In determining the proper course of action, ask whether the individual's actions in any way discriminate against any subset of the firm's client base. Some of the more common situations to anticipate in a CFA exam question testing this Standard are described below. 1. Previewing Contents of a Yet-to-Be Published Research Report - An industry analyst is excited about an under-recognized company in her sector, and she is in the process of preparing a report to buy the stock. Currently the report is being fact-checked and is nonpublic information, but it will be sent to all clients following the fact-checking process. An important client calls and asks the analyst what she is currently researching. In this case, if she answers honestly, it is a violation of Standard III-B, given that the firm has a fair and defined process in place for distributing the new buy recommendation. She would simply need to tell the client that a new research report is awaiting publication and will be distributed shortly, and that she will be happy to discuss it once the client receives it. 2. No Time to Prepare a Report - Another industry analyst has a buy rating on a specialty medical-devices company, and he is considered a leading Wall Street expert on the industry in general and this company in particular. His initial study was rigorously detailed, about 50 pages in length and the product of two months of preparation. Each month, his firm publishes a recommended list (where this stock has been listed for the past year), followed by company commentaries. A couple of days before the list is published, he learns that one of the major products in the pipeline awaiting FDA approval will be indefinitely delayed, prompting the analyst to question his fundamental case. He switches to a hold recommendation but concludes he doesn't have enough time to prepare a report that conforms to his rigorous research standards, so he declines additional comment and requests that his summary be excluded from the publication. In a conference call with a mutual fund manager that is the largest owner of the stock, he indicates that he was no longer recommending it due to a change in fundamentals, but that he would need some time to put the report together. The fund manager immediately sells her entire position. Is this action a violation? The analyst is in violation of Standard III-B, fair dealing. According to the Standard, he needed to recognize that his opinion counts as material information, and that if he made a change, he needed to include at least a summary outlining the reasons in the firm's monthly publication. He could follow up later with the rigor he deems necessary. As for the mutual fund manager, she is in violation of Standard V-A, Reasonable Basis, as she is trading out of the stock without knowing the detailed reasons. To avoid a violation, she would need to wait for the report to be disseminated. 3. Preparing for the Eventual Demand - Take a case where a brokerage is about to publish a brand new buy recommendation. The head trader for this brokerage learns of the news and buys a large block of the shares on the open market one week prior to publication, anticipating that there will be great demand for shares of this company among the clients of the firm. The company to be recommended is a small-cap stock that is thinly traded, so there might be liquidity issues if the trader does not act. Following firm policy, the portfolio administrators will faithfully allocate shares pro rata and give everyone the exact same price. However, this case is a clear violation of Standard III-B. Moreover, it's an example of the sort of tricks that show up on the CFA exam; there's an indication in the example that pro rata allocation was used so that a test taker sees a fair allocation procedure being implemented, which might obscure the fact that the trade itself was unethical. In fact, the brokerage must adhere to strict policies on disseminating its new recommendation, and it would never bepermitted to trade ahead of a research report. Such a trade is not only a violation of the CFA Institute's Standard; the fact that it happened when it happened is likely to capture the attention of the SEC. 4. Allocation of IPO - A portfolio manager occasionally will receive limited access to his firm's IPO underwriting activities. The number of shares varies depending on the outside demand for the issue, but these IPO allocations are typically insignificant compared to the accounts under management. It's never enough shares to make an across-the-board pro rata allocation worthwhile, as it would end up as an insignificant position in all portfolios. As a result, this manager simply disposes of these shares whenever she receives them by allocating them to her largest clients. Unfortunately, by allocating in this manner she is violating Standard III-B, as she systematically favors the largest portfolios (i.e. the smaller accounts never get a chance). Given that a pro rata procedure process is not always practical, the best way to comply with the Standard would be to select IPO participants at random from the entire client list and to establish a cycle where everyone must participate once before being chosen again. On the exam, be prepared for questions looking at cases in which an IPO is oversubscribed. This means that more shares have been requested than the broker has available. If this situation comes up, know the term "pro rata". This term is a Latin phrase meaning "in proportion". With an oversubscribed IPO, a broker would allocate shares pro rata based on a fair allocation system. It's also very important to remember that the CFA member is obligated to forego shares for personal use (or the use of immediate family) in order to uphold a standard to place client interests first. 5. Notification via Email - A manager and CFA charterholder wishes to treat his clients fairly and also comply with the Standards of Professional Conduct. He prepares a bulk email notification of a new buy recommendation being published by his full service brokerage firm. Two days following the email, he places a block trade for discretionary accounts and for those nondiscretionary accounts that notified him of interest. Does this process violate the fairness doctrine required by Standard III-B? While it would be nice to communicate fully with everyone via email, and be confident that everyone reads his or her email, the reality is that some people do not have email access. As a result, disseminating a recommendation in this manner discriminates against non-email clients and violates the Standard on fair dealing. To comply, the manager will first need to 'snail mail' the recommendation to the full client list.

Los18e: Explain inflation, hyperinflation, disinflation, and deflation

inflation - persistent increase in level of prices -deflation - persistent decrease in level of prices -hyperinflation- inflation rate is extremely high ***disinflation - a fall in the inflation rate, say from 10% to 5%, it is not negative so it is not deflation

Discounted Pyaback period

this payback period equals the number of years it takes for cumulative DISCOUNTED cash flow to equal intial investmetn outlay. essentially the rate of return is subtracted off risk (discount rate) it is taking away one of the drawbacks from basic payback period pg 10 Advantage - it accounts for the time value of money and risks associated with projects cash flows draw back - it ignores cash flows that occur after the payback period is reached.

What is standard IV-B?

"Additional Compensation Arrangements" M&Cs must not accept gifts, benefits, compensation or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer's interest unless they obtain written consent from all parties involved

Barter Transactions

- Under IFRS can be included as income if based on fair values of revenues from similar nonbarter transactions -Under US GAAP - only can be reported if company has history of making or receiving cash paymetns for such goods and services so can determine fair value

Los 18a: Describe the business cycle and its phases

- occur in economies that mainly rely on business enterprises (as opposed to agricultural or centrally planned economies)

Benefits of Free Movement of Capital

-capital can be invested wherever it receives the highest return. -lead to better prices - encourage local firms to improve quality of goods

Balance sheet sample

ASSETS current assets -cash and cash equivalents -marketable securities -trade receivables -inventoreis -other noncurrent assets property, plant, equipment, goodwill, other tangible assets, non current investments (subsidiaries) TOTAL ASSETS LIABILITIES ADN EQUITY Current Liabilitesi -trade and othe rpayables -current borrwoings -current portion of non current borrowings -current tabex payble -accrued liabilities -unnearned revenue (Deferred revenue) noncurrent -non-current borrowings -deffered taxes -noncurrent provissions EQUITY common stock preferred shares resrves retained earnings shares repurchased (treasury stock) TOTAL LIABILITEIS + EQUITY = ASSETS (remember liabilites are represnted as

LOS38f: All else being equal, a share repurchase is equivalent to the payment of a cash divdend of an equal amount int terms of its effect on shareholder welath

All else being equal, a share repurchase is equivalent to the payment of a cash divdend of an equal amount int terms of its effect on shareholder welath pg 63 however this is assuming that -dividends are received as soon as shares go ex dividend -tax implications of dividends and repurchase are teh same -company must be repurchasing at the market price not at a premium Concluding remarks Many investors believe that on average share repurchases have a net postiive effect on shareholder wealth.

LOS26a: Describe the elements of the balance sheet: assets, liabilities, and equity

Assets: resources under a company's control as a result of past transactions that are expected to generate furture economic benefits fro the company Liabilitesi: obligations from previous transactions expected to result in outflows of economic benefits assets and liabilities should only be included if cost or value can be measured with Reliability and it is probable future economic befentis will flow to or from the firm Equity- Residual claim of shareholders on a company's assets after deducting all liabilites. other names include, stockholders' equity, net assets, and owners' equity.

LOS 38e: Calcuclate the effect of a share repurchase on book value per share

Book value per share = book value of equity/number of shares oustanding When market price is greater than the book value per share, book value per share will decrease after the repurchase when market price is lower than the book value per share, book value per share will increase after the repurchase

More takeaways

Business risk is composed of operating ans sales risk, both of which are largely determined by the industry in which the company operaties. A company has more control over operating risk then sales risk. This is because cannot control numbe rof units it will sell, but can determine the production method it wasnt to employ indsutries that require higher initial invesment have higher poroprtion of fixed to variable costs thus have higher operatin leverage (example pharmaceuticals) retailers have relatively low operating leverage

LOS8k: Calculate and interpret covariance and correlation

COV = E[(X-E(X)][Y-E(Y)] -covariance is a similar concept but variance is how a variable varies with itself while covariance is how a variable varies with another variable, -COV(X,Y) is the same as COV(Y,X) -when negative would mean when return of one variable increases the other variable will decrease -covariance of zero means unrelated variables -it is difficult to express covariance across data b/c the way it is expressed represents the specific units -covariance does not tell us anything about the strength of the relationship b/w two variables only if it is negative or positive Real Formula Cov(X,Y) = sum of P(X1,Y1)*(X1-E(X))*(Y1-E(Y)) P(X1,Y1) is the probability of one specific scenario just google the covariance of returns if need to look at formula

Differences between stock dividends and cash dividends

Cash dividends reduce net assets (cash) and shareholders' equity (retained earnings). So when company pays out liquidity ratios deterioate, leverage ratios (debt-assets, debt-equity ratios) also worsen. Stock dividends do not have any effect on company's capital structure but do transfer retained earning to contributed capital

Cash Flow Ratios

Cash flow ratios can be categorized as performance (profitability) ratios and coverage (solvency ratios).

M&C must be aware if they have CUSTODY or effective control of a clients assets

Custody - considered to have custody if you have any direct or indirect access to client funds.

Total Leverage

DOL looks at sensitivity of operating income to changes in units sold, while DFL looks at the sensitivity of net income to changes in operating income. The degree of total leverage (DTL) looks at the combined effect of operating and financial leverage (it measures sensitivity of net income to changes in units produced and sold) DTL = percentage change in net income / percentage change in number of units sold DTL =DOL X DFL DTL = (Qx(P-V) / [Q(P-V) - F - C] f = fixed operating cost c= fixed financial cost a DTL of 3.25 implies that a 1% change in the number of units sold will change net income by 3.25%

Neoclassical School of thought:

Defining assertions: -invisible hand will lead market toward general equilibrium. Fluctuations in agg economy are thus short lived -Resources are allocated efficiently where MC=MR, no voluntary unemployment of labor and capital -all that is produced will be sold as supply creates its own demand. Criticisms: Great Depression would not occur if actually true -no theory on business cycles -treats economy business cycles as short-term disequilibria which self-adjust

Demand-Pull Inflation

Demand pull inflation is caused by increasing demand, which causes higher prices and eventually results in higher wages to compensate for the rise in cost of living -as economy's actual GDP approaches its potential GDP (capacity utilization increases), there is an increase in the probability of shortages and bottlenecks occurring so prices rise -further economy operates below its potential output, the greater probability of a slowdown in inflation (or even deflation -economists do not see commodity markets as indicators of demand-push inflation b/c commodities operate on a global scale and reflect global conditions more so then the individual economy

III-E Preservation of Confidentiality Questions

Disclosing POSSIBLE Illegal Activity -always confirm with a compliance department or legal counsel to determine if activities need to be reported Accidental disclosure Starts a social media group asking clients to join. lets them know that any comments of personal information would be able to be viewed by other clients. the client does it anyway by stating a recent death. She did not violate because she gave reasonable effort to let their clients know that this would be disclosing information

2. Dividend Discount Model Approach

Dividend discount model asserts taht the value of a stock equals the present value of its expected future dividends. We will use the constant growth discount model (also known as a Gordon growth model), in which divdends grow at a constant rate, to determine the cost of equity greater detail later but we need to know price of a stock assuming a constant growth rate in dividends P0= D1/ (re-g) P0= curretn market value of the security D1 = next year's dividend re= required rate of returnon common equity g=firms expected constant growth rate of dividends rearranging re= (D1/P0) + g The growth rate, g, is a very imporant variable in this model. two ways to determine 1. Use forecasted growth rate from a published source or vendor 2. Calculate a company's sustainable growth rate using the following formula g = ( 1 - D/EPS) x (ROE) (1-(D/EPS)) = earning retention rate

How can you complay with II-B?

Establish a compliance program that sets out rules of conduct for those engaged in market transactions, as well as a set of rules governing any activities that involve the distribution or promotion of information on a publicly-traded company.

***Identifying Market Structure Econometric Approach

Estimate the price elasticity of demand -if demand is relatively elastic - market is closer to perfect competition (vis-versa - opposite is purchasing power)

Standard Setting Bodies

Financial statements are designed to honestly facilitateasset valuation, provide info to many users (creditors, employees, and cuustomers). and at the same time also provide imporatnt inputs for the asset-valuation process

Government Spending

G-T=G-t(Y) -government spending is considered an exogenous policy variable (fixed but can change) Bottom Line: Gov't Expenditure does not vary with income, Taxes vary positively with income. Therefore the government's fiscal balance varies negatively with income.

Expenditure Approach Broken Down

GDP = +Consumer spending on goods and services +Business gross fixed investment +changes in inventories +gov't spending on good and services +gov't gross fixed investment +exports-imports +statistical discrepancy

GDP EQUATION THE COMPONENTS

GDP = C+I+G+(X-M) C=consumer expenditure on final goods I=Gross private domestic investment (includes investment in capital goods (plants, equipment), and changes in inventory) X=Exports M=Imports G=Gov't Expenditure on final goods

LOS 3a: Explain why the GIPS standards were created, what parties the GIPS standards apply to, and who is served by the standards.

Global Investment Performance Standards

HPY (holding period yield

HPY = (P1-P0+D1)/P0 = (P1+D1)/P0 -1 p0=original investment P1=price sold at or price when reached maturity D1= interest or dividend earned be careful here as P1 will equals the price at maturity D1 will be 0 on t bills as they do not make interest or dividend payments

Reading 24: Financial Reporting Standards

IASB - International Accounting Standards Board US FASB - US financial accounting standards board -to produce a degree of consistency as same transactions can be correctly represented in multiple wasys

LIFO is permitted by US GAAP but not IFRS. Only trade on US stock maret

IF a compmnay wanted to convert from LIFO to FIFO or weighted average method. significant immediate income tax liabilities would arise. When companies actually pay out these taxes, deferred tax liabilites will fall and cash (assets)will also fall -thus during inflationary periods companies can use LIFO to lower their taxable income example pg 58

LOS29a: Distinguish between costs included in inventories and costs recognized as expenses in the period in which they are incurred

IFRS and US GAAP suggest a similar treament of inventory cost THe following items are CAPITALIZED inventory costs, which are included in the cost or carrying value of inventories on the balance sheet: -costs of purchase, which include price, import duties, taxes, insurance, and other costs attributable -Costs of conversion, include direct labor and other fixed and variable direct overheads Capitalizaiton of these costs results in a buildup of asset balances and delays recognition of these costs in COGS until inventory is sold SG&A the follinwg items are not capitalized: -abnormal costs from material wastage -abrnomal costs of labor of other production inputs -storage costs -administrative expenses -selling and marketing costs Capitalization of costs that should be expenses results in overstatement of net income due to the deferral of recognition of costs and an overstatement of inventory value on the balance sheet

Extraordinary Items

IFRS does not allow any items to be classified as extraordinary. US GAAP defines extraordinary items as being both unusual in nature and infrequent in occurance. -these are really hard to classify. for example Katrina was not classified as extraordinary b/c prob of natural disasters can be expected.

LOS29i: Describe the financial statement presentation of and disclosures relating to inventories

IFRS requires 1. accounting policies used to value inventory 2. cost formula used for inventory valuation 3. total carrying value of inventories and carrying value of different classifications 4. value of inventories carried at fair value - selling cotsts 4. amount of write downs during a period

Reading 30 Long Lived Asset

Long lived assets are expected to provide economic benefits over an extended period of time. 3 types of long lived assets tangible assets - physical substance intangible assets - ie (patents and trademarks) financial assets - securiteis issued by other companies

Important Relationships between Average and Marginal Cost Curves

MC intersects ATC and AVC from below at their respective minimum points -When MC is below AVC, AVC falls, and when MC is above AVC, AVC rises -^same with ATC

Participation in or Association of Violations by others

Members are responsible if they knowingly participate or assist. Either know or should know. -Member must immediately disassociate, but must first try to stop the attempt through a supervisor. -CFA encourages to report violations, but as long as you disassociate should be fine

Standard I(D) Misconduct

Misconduct- M&C must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit an act that reflects adversely on their professional reputation, integrity, or competence

Income Changes

Normal Good- increase in Income Moves up, inferior opposite change in price of good - shifts the intercept of one of the lines

Schumpeter's Take on Perfect Competition

PC is more of a long run type of market structure - economic profits are really only realized by the first firms with the new innovation. once the market is swarmed economic profit = 0 = normal profit

Personal Disposable Income

PDI=Personal Income - Personal taxes PDI =Household consumption +Household Saving Household Saving = + PDI - consumption expenditures - interest paid by consumers to businesses - personaltransfer payments to foreigners

Issuer- Paid Research

Paid for oustide analyst. Most always be fair and disclose potential conflicts. -***At a minimum research should include financial statement, benchmarking within a peer group, and industry analysis

Parametric vs Non-parametric test

Parametric - concerned with parameters, or defining features of distribution, it makes a definite set of assumptions non-parametric - worried about quantities other than parameters, assumptions made by parametric tests cannot be supported -when data is ranked (ordinaL) non-parametric methods are widely used.

LOS28a Describe tools and techniques, uses and limitations Ratio

Ratio Analysis: computation is easy but to be meaningful a ratio must refer to an economically important relation Uses -Microeconomic relationships within the compnay that are used by analysts to project the company's earning and cash flows -a company's financial flexibilitiy -management's ability -changes in company and industry over time -how the company compares to peer companies and industry overall

What are some potential case studies related to Standard I-C that you should consider?

Plagiarism - Case Studies As with other Standards, a number of situations could be presented on the exam that may (or may not) violate this Standard, giving rise to a number of potential questions and qualifying explanations. These are the most important to consider. •Does an owner or managing partner have a responsibility to specifically attribute ideas or information to other members of his or her firm? The short answer: it depends. If the owner is purely acting as a representative of the firm - for example, making a presentation to a client or a prospective client - he or she can disseminate information from the firm's research department without taking the additional time to credit each individual researcher and each particular contribution someone might have made to that presentation. However, take a case where a product from a firm's quantitative research process has become recognized by the public. Let's say Bob Wilson, the owner of this firm and a CFA, is asked to appear in an industry symposium on quantitative techniques. Wilson did not actually develop the ideas or techniques himself; rather, this work was accomplished by members of the research department. However, in the context of the industry symposium, Wilson has been invited as a leading expert on quantitative research methods, and he is thus representing himself, not the firm. At the conference, he would be obligated, under Standard I-C, to give specific credit to the coworkers who were responsible for the advancement. In short, to evaluate these situations, you must determine whether the person in question is purely an agent of the firm, or is there as an expert witness, or is representing him or herself only, apart from the firm. •If individuals are reassigned within a research department, is the new analyst obligated to acknowledge the old analyst on a published research report? In large research shops, industry coverage is often rotated periodically, yet firms often prefer to publish research with one analyst's name. This situation introduces a dilemma. For example, if a retail analyst completes all of the work on a lengthy study of-Mart, but is then reassigned to work on consumer-products companies, how should the new retail analyst (who is a CFA candidate) handle the dissemination of the Wal-Mart research? It would be improper and a violation of Standard I-C to simply send out the previous analyst's work as if the report were the work of the new analyst (i.e. simply changing the name). At the same time, firm policy asks for published research to contain one contact name. In this case, the new analyst would need to add an appropriate written acknowledgment of the previous analyst's contribution in order to comply with the Standard. •If the initial idea for a quantitative financial model comes from an outside source, but it is tested and revised prior to being implemented, is it plagiarism to not acknowledge the source? These cases are not always so easy to judge, especially if the original quantitative model was changed - in such a case, the analyst can claim that the revised model actually represents his or her own "innovation". However, the spirit of Standard I-C is to encourage an ethic of fairness to the investment research profession. Modifying someone else's ideas to a certain extent and then passing them off as one's original discovery is a form of plagiarism and is discouraged by this Standard. In this instance, the analyst would need to give credit where credit is due by identifying the source of the new innovation and explaining how the idea originated and the measures taken to backtest or further develop or modify the concept. •Can an employee plagiarize information from his or her own firm? If an individual uses portions of their employer's in-house publications in a way that they are acting as an agent for another individual or company, it would be considered plagiarism and a violation of Standard I-C.

LOS9o: Explain the relationship between normal and lognormal distribtuions and why the lognormal distribution is used to model asset prices.

Quick refresher on logarithmic equations log is base 10 ln is base e

Two Way Dupont Decomposition

ROE = net income/average total assets x (average total assets/average shareholders equity) the first part is ROA the second part is Leverage if financial leverage ratio is relatively stable then an increase in a companys ROE was primarily due to an increase in profitability

Liquidity ratios

Ratio then Numeration then Denominator current ratio = current assets/current liabilites quick ratio (acid test) = cash+marketable securities+receivables/current liabilites cash ratio= cash+marketable secuirties/current liabilities

Monetary Policy Tools

Required Reserve Ratio: if a bank increases the reserve ration this lessens the supply of money Central Bank's policy rate (Discount rate) - the rate at which the Fed stand ready to lend resreves to depositroy institutions in case reserves fall below required levels THE MOST IMPORTANT INTEREST RATE in the conduct of US Monetary Policy is the Fed Funds Rate - banks make loans to eeach other **in recent years discount rate has been approximately 1% above the Fed Funds Rate, i.e banks will try to lend with to each other first -generally speaking the higher the discount rate the higher the penalty that banks will have to pay the central bank if they are low on liquidity, thus incentivizing more conservative lending Open Market Operations - the sale and purchase of gov't securities if Fed sells securities it is decreasing the money suppl

Operating Decisions

Rev Cost Relationship Short run, Long run TR>orequaltoTC stay in market, stay in market TR>TVC but TR<TFC+TVC stay in market, exit market TR<TVC shut down, exit market

LOS19f: Describe roles and objectives of central banks

Roles: of Central Bank: -monopoly supplier of currency (used to be gold standard, now is fiat money, but it is legal tender so must be accepted) -Banker to the government and to other banks and lender of last resort - the central bank stands ready to supply funds to banks when they face reserve shortfalls. This promotes confidence in banks -supervise the banking system -regulate country's payment systems, and coordinates payment systems internationally with other central banks -manage foreign currency and gold reserves -usually responsible for conducting monetary policy Objectives of Central Banks US Fed states monetary policy should promote: -maximum employment -stable prices -moderate long-term interest rates Maintaining price stability is the most common overarching and important subject for central banks

Semivariance and semideviation

Semivariance is the average squared deviation below the mean (so only calculate deviations for points below the mean and then calculate as normal) Semideviation - the standard deviation below the mean same as above but square root

Major Sources and Uses of Cash

Sources and uses of cash depend upon the company's stage of growth -companies in the early stages of growth may have negative operating cash flows. Theses negative opoerating cash flows are supported by financing inflows from issuance of debt or equity -inflows of cash from financing activities are not sustainable. over the long term, a company must generate positive cash flows from operating activities that exceed capital expenditures and payments to providers of debt and equity -mature companies havve positive operating cash flows.

Guidance

Standard II-A Material nonpublic information only applies if it is material and nonpublic must not be used for direct buying selling of securities or bonds, nor to influence investment actions related to derivatives, mutual funds, or other alternative investments. pretty much everything

Reasoning behind different indexes

Substituion bias - fixed basket does not account for substituion effects, can use a chained price index (Fischer) to help alleviate -Quality Bias- hedonic pricing, improvements in quality sometimes come at the cost of higher prices -new product bias- recently introduced products are not included in the original basket *trying to calculate inflation So Laspeyres - base period basket Paasche - current period basket Fischer - Geometric mean of both

Fischer Index

Takes geometric mean of teh Laspeyeres index and the Paasche Index (Lindexinflation+Pindexinflation)^(1/2)

Technical vs Fundamental Analysis

Technical uses only trading data, which includes market price and volume information. Fundamental analysis uses external info (financial reports, macro analysis, etc) The data used by technical analysts is more concrete and reliable. Financial statements are subject to manipulation by management. -Fundamental analysis is more conceptual and determine long run intrinsic value of a security Technical analysis is more practical as it studies actual trading pattersns. ****Fundamental Analysts aim to forecast where a security Should trade, while technicians focus on prediciing the level at which it WILL trade Application of tech analysis is limited in markets that are subject to large manipulation, or rather illiquid

Optimal Price and Output in Oligopoly Markets

Ther is no single optimal price and output that fits all oligopoly market situations -the optimal price is the prevailing price (which is where the demand curve kinks) - we do not knowledge of why this kink exists thus this is an incomplete model -dominant firm model - leader produces output at MC=MR but the MC is lower for this firm, follower have little or no power to influence price and are stuck with the Qd at the price set by the dominant firm -Cournot - competition will have no response to any actions on their part. firms produce where MC=MR -Nash firms continue to respond to changing circumstances with the aim of maximizing their profit (simultaneous)(do not collude)

Intangible assets can also be identifiable and unidentifiable

Under IFRS identifiable must have follows criteria recognition critieria -probable that expected future economic benefits will flow to the entity -the cost of the asset can be reliably measured An unidentifiable asset is one that cannot be purchased separately and has an indefinite life. (best example is goodwill, company buys another company at price that exceeds fair value of tangible and intangible assets acquired.

Gross vs Net Reporting

Under gross revenue reporting, sales and cost of sales are reported separately, whereas under net reporting only difference b/w sales and cost of sales are reported on the income statement Only if the following condiditons are met can a company recognize revenue based on gross reporting: -company is primary obligor under the contract -company bears inventory holding risk and credit risk -company can choose its suppliers -company has reasonable latitude to establish price. gross margin percent is net/revenue

If a consumer's marginal rate of substitution of good X for good Y (MRSXY) is equal to 2, then the:a

a consumer is willing to give up 2 units of X for 1 unit of Y. b slope of a line tangent to the indifference curve at that point is 2. c slope of a line tangent to the indifference curve at that point is -2 answer is c MRS of good X for Good Y =2, only give up .5x for one Y

Automatic Stabilizers (as opposed to discretionary fiscal actions, i.e reducing taxes or increasing gov't spending)

work in absence of explicit policy by gov't 1. Induced taxes: revenue from income taxes rise in an expansion and falls in a recission 2. Needs-tested spending - in a recession gov't increases unemployment benefits

Confidence Interval

α = level of signification at 5% significance, that means 95% confident

Discrete Uniform Distribution

-probability of each of the outcomes are the same (6 sided die. ***The CDF of these functions look like stairs adding up the y axis probability all the way to 1

Target Zone

-similar to fixed rate, only slightly broader range

Standard II-A Material Nonpublic Information - Applications (2)

(Determining Materiality) 4. Leah is trying to decide to buy/sell her stock in a company. She acts on information from her doctor. After analyzing financial reports, she decided to buy. -Info is not material - b/c source is unreliable (Applying the Mosaic Theory) 5.Jeff is a buy-side analyst for a furniture industry. He analyzes public quarter reports. He also talked to designers/retailers. This information is nonmaterial. He used public and nonmaterial information so he is okay. (Mosaic II) 6. Doll has expert friends and visits some executives they state "I would not get too excited about the medium-term prospects - as we have a lot of work to do." Need to determine if this is material by weighing against other public facts.

Framework

1. Articulate purpose and the context of the analysis 2. Collect input data 3. Process Data 4. Analyze/interpret the processed data 5. Develop and communicate conclusions 6. Follow up 1-3 Output = adjusted financial statements, common size statements, ratio and graphs or forecasts 4-6 output = analytical results primary focuses of this reading is on steps 3 and 4

Stock Dividends

A stock dividend or bonus issue occurs when a comapmny isseus more common shares in the company instead of cash to shareholders pg 53 is a good example Observations ivnestor ends up with more shares, did not have to pay for company issues a dividend without spending any cahs -market value of the company does not change in responses to a stock dividend -invetor's avg cost per share falls, but the total cost remains unchanged. -also stock price fell slightly in this example but makes sense stock dividends are not taxable Advantages -broadens company's shareholder base by lowering price -stock dividends could bring to optimal ragne (20-80 for US companies), where ivnestors are attracted to the stock

Liquidity Ratios

Ability of a company to meet short term obligations Current ratio = current assets/current liabilities quick ratio = cash + short term marketable investments + receivables / current liabilities the quick ratio removes certain assets such as prepaid expenses. also considers that inventory cannot be immediately liquidated at its fair value. when inventory is illiquid this ratio is a better indicator than current ratio cash ratio = cash +short term marketable investments/current liabilities Defensive interval ratio = cash +short term mark inv + recieivables / daily cash expenditures - a ratio of 40 here would say that a company could pay its debts for 40 days with no further financing. -high defensive ratio indicates greater liquidity cash conversion cycle (net operating cycle) = DSO + DOH - number of days payable dso days of sale and days of invertory on hand essentially measures length between point a comapny invests in working captial and the point company collects

Time Series Analysis

Compute price elasticity using historical sales and market price data -need large number of observations. market structure can change (mergers may cause supply curve to change)

Standard III: Duties to Clients

Duties to Clients and Prospective Clients III-A: Loyalty, Prudence, and Care III-B: Fair Dealing III-C: Suitability III-D: Performance Presentation III-E: Preservation of Confidentiality

Problems associated with the IRR

If NPV and IRR give conflicting results can happen for two reasons When comparing projects 1. When the projects intial cash outlays are different 2. when there is a difference in the timing of cash flows across the projects go with NPV recommendation Two more problems with IRR Multiple IRR problem: with a nonconvential cash flow pattern may have more than one IRR, two discount rates that produce an NPV of zero No IRR problem: no discount rate that results in a zero NPV Conclusion: Always choose NPV if conflicting and IRR is the rate at which NPV is zero

LOS 36h: Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach and the bond yield plus risk premium approach

The cost of equity is the rate of return required by the holdrs of a company's common stock. Estimating the cost of equity is difficult due to the uncertainty of future cash flows that common stock holders will receive in terms of their amount and timing. Three Approaches are commonly used to determine the cost of equity

When to use Lognormal and when to use normal function -lognormal essentially allows for a rightly skewed data to data to be normal by taking the ln of Vt/Vo instead of using return we use the ratio of the ending value of the investment to its beginning value 0<= Vt/Vo<= infinity Vt/Vo simplky equals 1 +(holding period return

The preceding description, although slightly complicated, was provided to help us arrive at what really matters for investors: when to use each method in making decisions. Lognormal, as we discussed, is extremely useful when analyzing stock prices. As long as the growth factor used is assumed to be normally distributed (as we assume with rate of return), then the lognormal distribution makes sense. Normal distribution cannot be used to model stock prices because it has a negative side and stock prices cannot fall below zero. **If a stock's continuously compunded return (growth variable) is nomrally distributed, then future stock price must be lognormally distributed

Phases of Business Cycle

Trough- lowest point Expansion - after the trough, before the peak Peak- Highest Contraction (Recession)-occurs after the Peak At the peak, employment hire is decreasing however unemployment is still falling -inflation pick up in expansion and inflation accelerates at peak -At contraction inflation decelerates but with a lag

Z score table reminder

for z = .36 the prob in the table .64 means that are under z=.36 64% of observations are below ore equal to z=.36 represented asP(Z ≤ 0.36). this is the are to the left of the z score

Veblen Goods

Goods where the near price tag of a good determines its desirability, with status goods such as expensive jewelry. The high price itself add utility from the good. These demand curves are also upward sloping like GIffen goods - giffen goods are inferior goods (and upward sloping, but can be inferior-not giffen and be downward sloping) -veblen goods are not inferior goods (have upward sloping demand)

Total Probability Rule Calculate and interpet unconditional probability using the total prob rule

A B P(A) + P(B) =1 (means events are exhaustive P(A and B) = 0 means events are mutually exclusive now add C P(A) = P(A|B) x P(B) + P(A|C) x P(C) ..... where B C.... and so on are mutually exclusive and exhaustive Tree example pg 189 Multiple through the tree for what outcomes you are looking for and then add down the tree to get total probability

Standard I-A?

"Knowledge of the Law: covers laws, rules and regulations" in the event of conflict members must comply with the more strict law -members must understand regulations of whatever countires, and during times of changin regulation must stay vigilatn M&C must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any govt, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, M&C must comply with the more strict law, rule or regulation. M&C must not knowingly participate or assist in and must disassociate from any violation of such laws, rules, or regulations.

What is Standard III-D?

"Performance Presentation" When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure the information is fair, accurate and complete

Standard IV(A) Firm Loyalty Application

(Starting a New Firm) 4. Kreg wants to start a new firm that will compete with his current firm. He does not notify his employers but seeks government authority to start an investment firm but does not talk to any clients. -He is not violating b/c he has not conflicted with the work of his current firm yet. (Competing with current employer) 5. 3 employees thinking about quiting. They hear that a new firm is looking to hire some consultants. Their current firm and then both reply to the ad. -This is competition so violates (soliciting clients w/ non compete agreement) -do not use any company information including contact info sheets, and clear computer of personal records related to company -do not notify clients of your departure before your employer does -cannot dissent from company opinion publicly - this is disclosing confidential information

LOS 19t: Explain the interaction of monetary and fiscal policy

(for below assume wages and price are rigid) Easy fiscal/tight monetary - a decrease in taxes would increase aggg demand. if money supply reduced, interest rates increase, and private sector demand would fall. End result would be higher output, higher interest rates, and govt expenditure would form a larger part of national income Tight fiscal/easy monetary - private sectors share of overall GDP would rise, as a result of low interst rates, while public sectorrs would fall Easy fiscal/easy monetary - sharp increase in agg demand, lowering interest rates, and growing both sectors Tight fiscal/tight monetary - sharp decrease in aggregate demand, higher interest rates, and decrease in demand for both sectors

LOS 15e: Determine and describe breakeven and shutdown points of production

- Breakeven point = MR=AR, further it will equal the minimum of ATC ***when P<AVC =shutdown point -Also can look at TC vs TR curves and see where economic profit would be the highes

GDP Deflator

- Broadly measures the aggregate change in prices across the overall economy GDP deflator = NominalGDP/Real GDP x 100 or Real GDP = Nominal GDP/GDP deflator x 100 -The percentage change in the GDP deflator gives us a measure of the inflation rate.

Lesson 4 Analysis of the Balance Sheet: 26g: convert balance sheets to common size balance sheets and interpret 26h: Calculate and interpet liquidity and solvency rations

-

Measuring Economic Growth

-Annual percent change in real GDP -annual change in real per capita GDP (standard of living measurement

Stagflation

-High Unemployment and High inflation rates -Fed will typically step in and increase interest rates, however this comes at the cost of a further increase in price level

Impact on Investment Practice

-cannot misrepresent qualifications -incorporate due diligence if using third party information -must disclose use of external managers

Laspeyres index

-holds quantities at base level

Factors Influence the Mix of Fiscal and Monetary Policy

-if gov't is concerend with growing potential output: aim to keep interest rates low and keep fiscal policy tight to insure free resources -if concern is to build infrastructure and high quality human capital, it should focus on spending in those areas. If monetary policy is loose, may lead to inflation

Sources of Economic Growth Growth in Labor Supply:

-potential quantity of labor is measured in terms of total hours worked total hours worked = labor force x avg hours worked per worker Labor force - working age population (over 16), that is employed or available for work and not currently employed -Improvements in quality of human capital - investment in health and education can improve this -growth in physical capital stsock -improvements in technoloyg -availability of resources

LOS 4d: Describe the nine major sections of the GIPS standards

0 Fundamentals of Compliance-issues pertaining to definition of a firm, documentation, ensuring proper reference to claims of compliance with GIPS 1 Input Data- standards for input data to be used to calculate investment performance 2 Calculation Methodology- definitions of specific methods for return calculations of portfolios and composites 3 Composite Construction- composites should be constructed to achieve consistency and fair presentation 4 Disclosure 5 Presentation and Reporting 6 Real Estate 7 Private Equity 8 Wrap Fee/Separately Managed Account Portfolios - firms must include the performance record of all wrap fee/SMA portfolios in comopsites in accordance with firm's established portfolio inclusion policies.

elasticities

0=perfectly inelastic 1=unit elastic (it is a perfect curve) infinity =perfectly elastic - flat line **note that even though a straight line has a constant slope, it's elasticities (I.e. the ratio of price to quantity is different at each point) (unless perfectly elastic or perfectly inelastic -create a midpoint (unit elastic) all price above the midpoint are elastic all points below are inelastic

Indirect to Direct Continued (shortened)

1. Aggregate all revenues and all expenses 2. Remove alll noncash items from aggregated revenues and expenses then break out remaining items into relevant cash flow items 3. Convert accrual amounts to cash flow amounts by adjusting for working capital changes

22f: Steps in Financial Statement Analysis Framework

1. Define the purpose and context of the analysis 2. Collect Data 3. Process Data 4. Analyze/interpret 5. Develop and communicate conclusions 6. Follow up pg 8

The Indirect Method

1. Start with net income. Go up on the income statement and remove the effects of all noncash expenses and gains from net income. For example, the negative effect of depreciations is removed from net income by adding depreciation back to net income. Cash based net income will be higher than accrual based net income by the amount of noncash expenses. 2. Remove the effets of all nonoperating activiites (for example the positive effect of a gain on sale of fixed assets on net income is removed by subtracting the gain from netincome 3. Make adjustments for changes in all working capital accounts. Add all sources of cash, subtract uses of cash remember that liablities incerease your cash flow.

Capital budgeting processes tell us two things about company management:

1. The extent to whcih management prusues the goal of shareholder wealth maximization. 2. Management's effectiveness in pursuit of this goal

pg 79 conclusions

1. There are no LR economic profits or losses in a PC industry 2. In the LR, price euqals minimum average cost and firms make normal profit

LOS 1b: State the six components of the Code of Ethics and the seven Standards of Professional Conduct

6 Components of the Code of Ethics PEJMAR Priority - Always put your client's interests first. Encourage - Practice and encourage others to act professionally and ethically to reflect credit on yourself and the profession. Judgment - use reasonable care and judgment when performing all professional activities. IE conducting investment analysis, making investment recommendations, taking investment actions. Maintain - keep your knowledge up to date and encourage other professionals to do the same. Actions - employ integrity, competence, diligence, and respect in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession. Rules - promote the integrity of capital markets by following the rules

How can you comply with III-D?

Adopt the GIPS Guidelines - Or, more accurately, encourage your firm to adopt them. Doing so would be the best procedure to avoid any violations. However, full compliance with the GIPS is not absolutely required, and in the absence of full compliance, adopting certain aspects of the GIPS is likely to be beneficial. •Add appropriate disclosures - This can help clarify and explain what a prospective client sees (e.g. what do "simulated" and "portable from a previous manager" mean?) •Consider the Knowledge of the Audience - Some presentations will necessitate additional explanation. •Present performance of Similar Portfolios - This avoids presenting a single portfolio as representative of likely results. •Maintain records - These will clarify how performance was determined. It's wise to anticipate that full adoption of the GIPS may be the direction in which the industry is headed, and the records will help any needed conversion.

LOS 35 e: Explain NPV profile and compare NPV and IRR methods when evaluating independent and mutually exclusive projects, describe probles,

An NPV profile is a graphical illustration of a projects NPV at different discount rates NPV profiles are downward sloping becauese as the cost of capital increase the NPV of an investment falls pg 12 it using the discount rate as the x asix and the corresponding NPV on y axis. easy to compute on calculator You can plot the NPV profiles of both projects marked against a line that is the cost of capital %, the IRR of a project instersects the x axis. (1 for each project the crossover rate is where both projects intersect (1 total

Los18i: Describe economic indicators, including their uses, and limitations

An economic indicator is a variable that provides information on the state of the broader economy. Leading - predict the economy's future Coincident - identify current state of economy Lagging - use to identify past condition PG 167********* lists types of all three ***Index of Leading Economic Indicators (LEI) - this is the US's index of all leading variables significant to our economy *Composite Leading Indicators - calculated by OECD, consistent across countries and can be used to compare different economies -sometimes indicators can be great predictors of expansion but poor indicators of contraction

Under both IFRS and US GAAP 3 categories: CFO CFI CFF

CFO - cash flow from operating activities, inflows and outflows of cash related to a firm's day-to-day business activities CFI- Cash flow from investing activities: these are inflows and outflows of cash from the purchase and disposal of long term investnments PPE, intangible assets, nontrading debt and equity securities, only for longer term, securities for highly liquid or for trading purposes are included in CFO CFF- cash flow from financing activities - cash inflows and outflows generated from issuance and repayment of captial (selling stock, or paying off a bond) - interest bearing debt and equity pg 91 CFO inflows: cash collected from customers, interest and dividends received, proceeds from sale of securities held for trading outflows: - cash paid to employees, cash to suppliers, cahs for other expense, cash used to purchase trading securities, interest paid, taxes paid CFI inflows - sale proceeds from fixed assets, sale proceeds from long term investments outflows: purchase of fixed assets, cash used to acquire LT investment securities CFF inflows: proceeds from debt issuance, proceed from issuance of equity instruments outflows: repayment of LT debt, payments made to repurchase stock, dividend payments

Income Statement Information: COGS

COGS should ideally refelct the replacement cost of inventory. 50 units sold should be valued at $13 its latest prices ini calculating true replacement cost. LIFO are fairly accurate, followed by AVCO. FIFO are farthest waay from current replacement of cost of inventory LIFO is the most economically accurate method for income statement purposes because it provides a better mesaure of current income and future profitiablliy. LIFO WILL ALWAYS OFFER A CLOSER REFLECTION OF REPLACEMENT COSTS IN COGS, because it allocates recent prices to COGS. if prices are rising FIFO and AVCO will understate replacement costs in COGS and overstate profits IF prices are falling FIFO and AVCO will overstate replacement costs in COGS and understate profits.

Correlation Coefficient

Corr(X,Y) = p(X,Y) = Cov(X,Y)/((σx*σy) dividing covariance of two random variables by the product of their standard deviations -lies b/w -1 and 1 -no unit +1 is perfect positive correlaiotn 0 no linear relationshio -1 is perfectly negative correlation the expected value of the products of uncorrelated random variables equals the product of their expected values if E(XY) = E(X)*E(Y) then X and Y are uncorrelatedb

Demand Elasticities Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect measure

ED- %changeQD/%changeP -

Continued

Essentially predicting a population parameter if you can prove that the test statistic is way farther away in standard deviations then the predicted parameter - then the parameter is wrong pg251 One Tailed vs Two Tailed Tests one-tailed test - > or < (can have equal sign attached) two tailed test are = or does not = the critical value is how many standard deviations away from the mean and are given Reject Ho when: Test statistic> positive criticalcritical value Fail to Ho: When test statistic<= positive ccritical value when left side test or negative crit and test stat Reject when t stat < negative critical value fail to reject when t stat >= neg crit value its easier two imagine this when looking at graphs pg 252

Elasticities Approach

If demand is relatively price elastic (elasticity>1) a descreas in the price of good will result in a decrease in total expenditure think of demand for imports vs demand of exports the devaluation of a domestic currency if demand for imports is elastic, then the increase in the price of foreign goods will cause a decrease in TOTAL EXPENDITURE on on imports if demand for exports is elastic, then increase in price of foreign goods, will increase in TOTAL REVENUE from exports THEREFORE IDEAL combination for acountry that wants to reduce its trade deficit and is expecting its currency to depreciate is that its imports and exports both be relatively elastic (because they are getting an increase in total revenue and a decrease in total expenditure) This is the marshall-lerner condition PG230

LOS5a: Interpret interest rates as required rates of return, discount rates, or opp cost

Interest rates can be thought of in three ways 1.Minimum rate of return that require to accept a payment at a later date 2. discount rate - must be applied to future cash flow in order to determine its present value 3. opp cost of spending money today as opposed to saving for a certain period and earning return

Standard (V)-C Record Retention

M&C must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients

What is standard IV-C?

M&Cs must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.

Describe, calculate, and interpret comprehensive income.

Most revenues, gains, expenses and losses are reported on the income statement to determine a company's net income. However there are certain income and expense items in shareholders' equity (US GAAP only) or in a separate statement of comprehensive income (IFRS and US GAAP) as part of the other comprehensive income some are not included in the net income statement, a few exceptions which are included in comprehensive income that affect edning shareholder's' equity 1. foreign currency translation adjustments 2. certain costs relating to a company's benefit post retirement plans. 3. unrealized gains or losses on derivatives contracts, accounted for as hedges. 4. Unrealized holding gains and losses on available for sale securities. only realized items are listed in net income however these should be account for in comrehensive income because it outlines some future income remember that . reacquisition of common stock and dividends are not in comprehensive income because they are transactions that relate to owners. these are mostly unrealized gaind pg 74

Continued Inventory Valuation Methods (Cost Formulas)

Opening inventory + Purchases = cost of goods sold +ending inventory Separate Identification COGS reflects actual costs EI reflects actual costs incurred that still remain in inventory -t is used for expensive goods that can be identified individually First in First Out newest units are assumed to remain in ending invetnory -COGS is composed of units valued at oldest prices -EI composed of units at most recent prices -older units are assumed to be first ones sold -units that are purhcased recently are included in EI Weighted Avg Cost -allocates total cost of goods available for sale evenly across all units available for sale -COGS is composed of units at avg prices -EI is also composed of units at avg prices Last in First Out LIFO -COGS is composed of units at most recent prices -EI is composed of units at most recent prices -recently acquired are assumed to be first ones sold. oldest units are included in EI IFRS allows FIFO AVCO and Separate Identification GAAP allows all 3 + LIFO THe point here is to compare the gross profit under all 3 assumptions,

Good Graph Expenditure Flows

PG115 Houeholds- -Spend on C - this goes back to business -Save on S -Pay T to the Goven't Factor Market -Services of labor, land and capital flow to businesses -income flows from business to households (people who own the business) Businesses -use funds to make investmetns -investment spending is very important determinate of an economy's long-term growth Government -Receives tax revenues and spends money to purchase goods from business sector -FISCAL DEFICIT - if its expenditure exceeds its taxes Foreign Sector -balance of trade deficit if imports > exports, spending more then they produce, domestic savings may not be adequate -a trade deficit must be funded by borrowing from the rest of the world through the financial market. -other countries can fund this trade deficit b/c it must have savings, as it is running a corresponding trade surplus, (spending less then it produced)

LOS 36i: Calculate and interpret the beta and cost of capital for a project An analyst must estimate a stock's beta when using the CAPM apporach to estimate a company's cost of equity

Ri= a +bRmt a=estimate of the intercept b=slope of the regression (beta) Ri= company's stokc's returns Rmt= market returns over the given period Beta estimates are sensitive to many factors and issues that should be considered -beta estimates are based on historical returns, and therfore sensitive to length of the estimation period -smaller standard errors are found when betas are estimated using small return intervals (such as daily returns -betas sensitive to the choice of market index -smoothing techniquies may be required to adjust calculated betas, due to betas are believed to revert to 1 over time - small cap stocks have greater risks compared to large cap. some argue that betas of small companies should be adjusted upward to reflect greater risk

Example

Say current ratio is increasing but quick ration is declining current ratio is all assets while quick ratio is just cash +receivables+short term liquid securities /current liabilities differences must be due to changes in certain current assets DOH has increased, days of inventory on hand DSO has decreased - means compnay is collecting on its receivables quicker than before all this suggest sthat the company is using sales to purchase inventory which is not being sold as quickly thus quick ratio is suffering but not its current ratio net profit is not an indicator of of efficiency it is an indicator of profitability

Global Application of the Code of Standards -NS= country with no securites laws -LS=less stric securities laws -MS= more strict

So Less strict refers to less strict then the Code of Standards -Weird examples: member resides in LS country does business in NS country, LS law applies -- Check why Standard doesn't apply instead of LS member resides in LS country does business in MS country, MS law applies. The more strict law always applies whether you reside or do business if the LAW OF LOCALITY does not apply: Member resides in MS does business in LS, but law of locality applies so Code of Standards rules because -(Never adhere to law of LS) always choose code of standards

LOS35a: Describe Capital Budget process and distinguish among various categories of capital projects

Steps: 1. Generating Ideas: Good investment ideas is most important step in the process. 2. Analyzing individual proposals (ideas). - Collecting information to forecast cash flows of a particular project as accurately as possible. Cash flows then used to evaluate feasibility of the project 3. Planning the capital budget 4. Monitoring and post auditing

What does 'material' information mean?

This means the information would be considered relevant to an investor who is considering investing in this stock, or to a current shareholder wishing to sell. If a stock reflects all public information, does adding this new information significantly alter the perception of that stock? The source of the information also impacts its materiality. Overhearing a CEO on the train (material) versus your dentist sharing their opinion (non-material).

Extra or Special Dividends

a dividend from a company that does not usually pay dividends, usually given out in strong earnings years

LOS20c: Distinguish between comparative advantage and absolute advantage

absolute advantage - able to produce at a lower cost comparative advantage - able to produce at lower opportunity cost then trade partners. -for comparative advantage find the ratio of the goods a country can produce see example 1.1 if confused -Trade benefits if the opportunity cost of producing a good is higher for that country then what another country can provide it at. -the further away the world price of a good or service is from it autarkic price (closed economy) in a given country, the more THAT country benefits from trade. BOTTOM LINE: Total welfare has increased and both economies are bettor off with international trade then without -trade always better, even with only comparative advantage

Why direct method is better

direct method explicitly lists the actual sources of operating cash inflows and outflows, while the indirect method only provides net results for these inflows and outflows (same as one having something that lists all expenses, instead of just the ending result) -the indirect method provides a list of items that are responsible for the difference between net income and operating cash flows. the indirect method facilitates forecasting of future cash flows since forecasts of future net income simple have to be adjusted for changes in balance sheet accounts, that are caused by differences between accrual and cash counting

Continuous random variable

one for which the number of possible outcomes cannot be counted (infinite possible outcomes), and therefore probabilities cannot be attached to specific outcomes -for example, while the probability of a waiting period at a restaurant being between 25 and 30 minutes can be measured the measured. The probability of waiting for exactly 25 minutes and 15 seconds is 0 because time can take an infinite number of values like 100000ths of a second -return on stock is a continuous random variable -for continuous random variables we use a PDF - probability density function -probabilities of an outcome between a and b is the area under the curve thus why single points cannot be determined *** a cumulative distribution function (CDF) expresses the probability on a value less that or equal to a specific value of of

What parties the GIPS standards apply to

only firms that manage assets, and it is voluntary to follow

Explain and interpret the p - value

p value is the smallest level of significance at which the null hypothesis can be rejected, it represents the probaility of obtaining a critical value that would lead to a rejection of the null hypothesis Consider a two tailed tests where test statistic is 2.5 and critical values are 1.96 and -1.96, from z ttable we find prob of atatining a value greater than 2.5 standard deviations above the mean is .oo62. since this is two tailed p-value =.0124. this value tells us what we would reject the null hypothesis at the 5% significance level but not at the 1% level. so 1.24 is the lowest level of significance at which the null hypothesis can be rejected. pg258

Shortfall risk

refers to the probability that a portfolio's value or return E(Rp) will fall below a praticular target value or return (Rt) over a given period (p and t are subscripts here) -Roy's Safety first criterion states an optimal portfolio minimizes the prbability that the actual portfolio return Rp will fall below the target return Minimize P(Rp<RT) Rp=portfolio return Rt=target return ***the minimum level is also called the threshold level, if portfolios returns are normal with a mean E(Rp) and a standard deviation σp (psubscript not prob) we can calculate the probability that returns will be lower than the threshold level Shortfall ratio or z-score = (E(Rp)-Rt)/σp -the higher the value of the SF ratio (or z score), the better the risk/return tradeoff the portfolio offers. A portfolio with a higher SF ratio also has a lower probability of attaining returns lower than the threshold level. because we are dividing by the standard deviation it is taking risk into account, so larger risk would create a lower shortfall ratio Conclusion: Portfiolios with higher SF ratios are preffered to those that have a lower SF ratio. Higher SF ratio portfolios have a lower probability of not meeting their target returns ***This is different than the sharpe ratio b/c Rt or target rate is typically higher then the risk free rate, unless you're target is the risk free rate which is unlikely for a good investor

LOS26c: ALternative formats of balance sheet presentation

report format - assets, liabilites, and equity are presented in signle column, most commonly used -account format - assets are presented on the left with liabilities on the right classified balance sheet - different types of assets and liabilites are grouped into subcategories to give more effective overbiew. current and non-current portions Liquidity based presentation - IFRS allows presented in order of liquidity. format is typically used with banks -liquidity refers to company's ability to meet short term cash requirements

Nonsymmetrical distribution, it is said to be skewed

skewness can be negative or positive positively skewed means skewed to the right (long right tail) negatively skewed means skewed to the left (long left tail) *When skewed positive to the right Mean>Median>Mode *When skewed negatively Mean<Median<Mode some investors that believe all else equal investors should prefer positive skewness that have a higher probability of earning relatively large profits

Example pg 186 calculating interest cover ratio

so to ajdust for interest capitalized EBIT + depecreciation expense relatied to capitalized / EBIT+entire interest capitalized Stesp Adjust EBIT upwards for depreciation on interest capitalized in previous years -add entire capitalized during the current year to interest expesne in denominator *look for capitalized costs on the balance sheet jeff sneds over so takeaway is adjusted interest rate coverage ratio is better (adjusts for capitalized interest)

Normal Distribution

states as X ~ N (μ,σ^2) -has a skewness of zero -kurtosis=3 and excess kurtosis equals 0 -probability of each random variable ranges further away from the mean and gets smaller and smaller, but never goes to zero, either tail extends to infinity -univariate distributions describe the distribution of a single random variable, up to this point we have only focused on univariate

LOS36j: Describe uses of country risk premiums in estimating cost of equity

stocks beta captures the country risk of a stock accurately only in developed markets. to deal with this the CAPM equation for stocks in developing coutnries is modified to add a country spread (aslo called country equity premium) re = Rf + B [E(Rm) - Rf + CRP] CRP is cacluated as product of soverigh yiedl spread and the ratio of volatility of the developing country's equity market to the voaltility of the sovereign bond market denomitnated in terms of the currency of a developed country country risk premium = soverign yield spread x (annualized standard deviation of equity index/ annualized standard deviation of sovereighn bond market in terms of developed market currency)

LOS12a: Explain principles of technical analysis and its applications and underlying assumptions

technical analysis - security analysis technique that involves the examination of past market trends (using data such as prices and trading volumes) to predict future behavior of the overall market and of individual securities. Thought of as a study of collective investor sentiment. Technical analysis does not require in depth knowledge of the security begin analyzed, and can therefore be performed relatively quickly, while fundamental analysis takes longer Based on the following -Supply and demand determine prices in real time -changes in supply and demand cause changes in price -prices can be projected with charts and other technical tools Technical analysis is the only tool availbe to intrinsic values such as commodities and currencies. -sometimes an investor will use fundamental anlaysis and then technical analysis to determine when to best purchase the stock

Neutral Rate of Interest

the Neutral Rate is the rate of interest that neither slows down nor spurs growth in the underlying economy. Neutral Rate has two components: 1. real trend of growth in the underlying economy 2. Long run expected inflation Example: if inflation target is 2% and economy can grow at 3% the neutral rate would be 5% *** IT is very important for CB to determine the source of a shock to the system -If inflation is due to a demand shock (example: rising consumer confidence, appropriate response is to tighten monetary policy -if inflationary pressures build due to a supply shock (rising oil prices) monetary tightening would take the economy into a recession

3. Bond Yield Plus Risk Premium Approach

the bond yield plus risk premium approach is baed on the assumption that the cost of capital for riskier cash flows is higher than that of less risky cash flows. therefore calculte ROE by adding a risk premium to the before tax cost of debt re = rd + risk premium

Analytical Issues relating to capitalizing of interest costs

to provide a true picture of a companys interest coverage ratio, the entire amount of interest expense for the period whether capitalized or exepsnes should be used in the denomination interest rate coverage ratio = (EBIT/interest expense) measures number of times company's operating profits cover its interest expense

LOS36a: Calculate and interpret the weighted avg cost of capital (WACC) of a company

to raise capital, a company can either issue equity or debt (some instrumetns may have both features of debt and quity) -an instrument that is used to obtain financing is called a COMPONENT and each component has a different required rate of return, which is known as the component cost of capital. the weighted average costs of the various compnents used by the company to finance its operations is known as (WACC) or the marginal cost of capital (MCC) WACC = (wd)(rd)(1-t) + (wp)(rp)+(we)(re) wd = proprtion of debt that company uses when it raises new funds rd= before tax marginal cost of debt t=marginal tax rate wp=proprtion of preferred stock that the company uses when it raises new funds rp = marginal cost of prefferred stock we=proprtion of equity that company uses when it raises new funds re= marginal cost of equity ********This equation breaks up the marginal cost of capital relative to preferred stock, debt, or equity

stable vs unstable

when demand is steeper sloped and supply and demand are both sloping the same direction it is unstable. However if both are sloping the same and supply is steeper it is stable. -for multiple equilibria analyze the slopes of the lines at both instances of intersection

2. Debt Rating Apprach

when reliable current market price for the company's debt is not avilable, the before tax cost of debt can be estimated using the yield on similarly rated bonds that also have smilar terms to maturity as the companys existing debt Issues in Estimating Cost of Debt -Fixed rate versus floating rate debt - cost of floating rate is reset periodically based on the LIBOR, and is more difficult to estimate, analysts may use current term structure, adn term structure theory to estimate cost of debt -debt with option like features -nonrated debt - if a compnay does not have debt outstanding -if a company uses leases as a source of finance, the cost of these leases should be included in its cost of capital

Permutations

when the order in which labels are assigned to two groups is imporant n!/(n-r)!

What is Standard III-C?

"Suitability" 1.When M&Cs are in an advisory relationship with a client, they must: a) make a reasonable inquiry into a client's or prospective client's investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. b) determine that an investment is suitable to the client's financial situation and consistent with the client's written objectives, mandates and constraints before making an investment recommendation or taking investment action. c) judge the suitability of investments in the context of the client's total portfolio. 2.When M&Cs are responsible for managing a portfolio according to a specific mandate, strategy or style, they must only make investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio

What is Standard IV?

"Loyalty" In matters related to their employment, M&Cs must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer

Definitions of Money

- any medium that can be used to purchase goods and services Narrow money - notes and coins in circulation plus other highly liquid deposits Broad money - includes narrow money plus the entire range of liquid assets that can be used to make purchases Checking accounts are money, credit cards are not

World Bank Group

- main objective to fight poverty and enhance sound eocnomic growth -provides cheap loans to countries with no access to int' financial markets -provides analysis, advice -helps countries with economic infrastructure

Imperfect Competition

-P=AR=Demand - as quantity increases the rate of increase in TR - MR decrease -AR equals price at each output level -MR is downard sloping with a slope steeper than AR -TR reaches its maximum when MR equals 0

Omissions

-do not represent models as facts b/c they are only expected results - do not knowingly omit inputs

Investment Recommendations

-must be disseminated to all clients -information should be disseminated in which all clients have fair opportunity to act on recommendations -changing recommendations is more critical to communicate, from good to bad for example -if a firm changes the recommendation but the client places an order contrary to current recommendation, they should be advised before the order is accepted

Ricardian Equivalence

-private sector may adjust to offset fiscal deficits by increasing savings in anticipation of future tax increases - THIS IS KNOWN AS RICARDIAN Equivalence - it essentially states that increase in gov't spending or reduction in taxes meant to stimulate aggregate demand will have no impact on economic impact as economic agents will save more *distinguish short term vs long term effects: crowding out may not be as significant in the short term, but long term it can hinder capital accumulation

Question 20

20.An analyst stated that normal distributions are suitable for describing asset returns and that lognormal distributions are suitable for describing distributions of asset prices. The analyst's statement is correct in regard to: xA.both normal distributions and lognormal distributions. xB.normal distributions, but incorrect in regard to lognormal distributions. C.lognormal distributions, but incorrect in regard to normal distributions C is the correct answer here

LOS 17h: Explain causes of movements along and shifts in AD and AS curves

AD and LRAS intersect = Equil Ad and SRAS intersect - short run equilibrium in an Expansion real GDP is increasing, unemployment rate is falling, and capacity utilization is rising a Contraction is the opposite *Changes in price level = movements along the AD cuve *Shifts in the AD curve can be caused by many things - HH wealth, consumer confidence, capacity utilization, fiscal poilcy, monetary policy, Exchange rate, growth in global economy PG 135

LOS20e: Compare Types of Trade and capital restrictions and their economic implications All cause inefficiencies - dead weight loss

Arguments for trade restrictions: -protection from foreign competition -protection of employment -generation of revenue

GNP

GNP - adds in domestically owned factors of production, regardless of whether production occurs within the economy's boundaries (owning a factory in India)

Developing and Updating an investment Policy

Investment Policy Statement (IPS) -outlines clients financial circumstances, attitude toward risk, return objectives, personal data (age and occupation) -updated annually and also prior to material changes -for any client important changes can range from the number of dependents to liquidity needs, to changes in risk tolerance.

LOS39d: Describe how different types of cash flows affect a company's net daily cash position

Most companies prefer keeping a minimum cash balance to run their operations msoothly. if a company sets aside too much money, it will lose out on investment income (opportunity costs) -if a company sets aside too little, it will incur higher costs to raise funds quickly

Cash Flow Statement

Presents various sources of cash receipts and cash payments. (operating, investing, and financing activities) Operating activities- day-to-day core business activities Investing activities - relate to acquisition or disposal of long-term assets Financing activities - relate to the injection or repayment of capital Desirable to generate most of cash from operating obviously

Soft Commission Policies

Soft commission - the act of using a brokerage's services (such as equity research) getting a deal essentially by promising you will buy/sell through them. often a higher brokerage commision is in place this violates the duty of loyalty to client -must act in best price and best execution best execution: maximize the value of the clients portfolio within the stated objectives and constraints

LOS9h: Calculate and interpret tracking error.

Tracking measure is a measure of how closely a portfolios returns match the returns of the index to which it is benchmarked. difference between total return on portfolio and total return on benchmark tracking error = gross return on port - total return on benchmark index alex has a 90% success rate calculate prob of 3 or less successful quarters out of 4 given a probability of success of .9 P(X<=3 = P(X=0) + P(X=1) + P(X=2) + P(X=3) so must use bernoulli formula for binomial distribution and then add the results

Installment sales

Under IFRS -pay in installments. company finances customer, so separated into the selling price (discounted present value of installment payments) and an interest component. Revenue attributable to the sale is recognized at the date of sale, while the interest component is recognized over time. Under US GAAP -can recognize at the time of sale if has completed significant activities in the earning process -is either assured of collecting the selling price or able to estimate amounts that will not be collected When one of these two conditions aren't fully met: Installment method - when collectability CANNOT be reasonably estimated. Under this method, profits are recognized as cash is received. Cost Recovery Method- when collectability of revenues is HIGHLY UNCERTAIN , profits are only recognized when total cash collections exceed total costs *these are both rare in financial reporting

Equity Analysis

Valuation ratios Price to earning ratio P/E= price per share/earnings per share Price to cash flow P/CF = price per share/cash flow per share Price to sales P/S = Price per share/shares per share Price to book value P/BV = price per share/book value per share

LOS7j: explain skewness decribe relative relations for a unimodal nonsymmetrical distribution

When a distribution is symettrical, mean=median=mode NORMAL DISTRIBTUION

Describe responsibilities of Audit, compensation, and nominations committees

audit commitee esnures financial information is complete, accurate, relaiable, relevant, and timely renumeration comittee - variatous form s of compensation offered to exectuties is in line nominations committee - recruiting new board members

LOS 15i: Distinguish among decreasing-cost, constant-cost, and increasing-cost industries and describe the long run supply of each

constant cost industries- long run supply curve is perfectly elastic decreasing cost industires - presence of larger firms lower costs for all firms - personal computer increase in demand has led to significantly lower prices increasing cost industries - an increase in demand boosts prices, but as more firms enter, average costs for all firms rise - coal

Statement of Comprehensive Income (or Income Statement + Statement of other comprehensive income)

income statement - AKA statement of operations or profit and loss statement. Total rev - total costs equal total net income Net income = Revenue - Expenses

Once Inquiry of P Conduct violation:

may include: requesting written explanation, interviewing member, collecting documents and records relevant to the investigation

LOS8j: Explain the use of a tree diagram to represent an investment problem.

pg 193 multiply probabilites down the tree and calculate an expected value at the end of each tree. then multiply the prob and expected value for each scenario and add together

Technical Analysis Tools: Charts, Trend and Chart Paterns

pg 279, drawing charts on formula page Charts- used to illustrate historical price information Line Charts - graphical display of prices over time Bar chart - while a line chart has one data point for each value (horizontal=time) a bar chart presents four pieces of information, open, high, low and close. For each time interval the top of the line shows the highest price while the botom shows the lowest price. cross hatch to left indicates opening price, cross hatch to right = closing Candlestick chart pg 280- does the same thing as a bar chart but fills in to decide whether market closed high or low white = close>open closed high, black = closed<open or closed down

LOS 13f: Distinguish unstable equilibria, including price bubbles, identify such instances of equilibria

unstable equilibria - both supply and demand are sloping the same direction.

forward premium vs discount

when a forward rate for a currency is higher then the spot rate it is said it is trading at a forward premium because it is expected to appreciate in the future. forward discount means it is expected to depreciate to calculate forward points take forward minus spot rate and multiply by 10000 -typically quote in the number of forward poitns (4 decimals is the max) -sometimes forward rates can be quoted as a percentage of the spot rate rather then in absolute terms of number of points.

Dependent and independent events

with two dependent events, occurrence of one is related to the other. independent events - if occurence does not have any bearing on the occurrence of the other (for example doing well on this test and the probability of 5 trees being in a park) info about independent events are not useful when two events are independent P(A|B) = P(A), or equivalently, P(B|A) =P(B) With independent events the word AND implies multiplication and the word OR implies addition P(AorB) = P(A) + P(B) - P(AB) P(AandB) = P(A) * P(B)

What are some examples of exam scenarios to test Standard III-A?

(1) Identifying the Client - The portfolio manager of a global financial services mutual fund runs into a friend at an industry event. His friend mentions that her new client is invested in the portfolio manager's fund and therefore the two of them now share responsibility for her new client. Under standard III(A), this is incorrect. The portfolio manager's duty is to uphold the investment guidelines for his mutual fund with objectivity and independence, while his friend's duty is to be loyal to her new client. (2) Brokerage Arrangements - A small, independent investment advisor manages the pension funds of several companies. One of her brokers is about to win several new client accounts. The advisor expects to manage and trade these accounts exclusively through that broker. To induce the broker to send more new accounts her way, the investment advisor directs trades for all her current clients to that broker, without their knowledge. The advisor violated standard III(A) by not seeking best practice and best execution on all trades. Additionally, the standard was violated because the advisor did not disclose how trades were directed. (3) Excessive Trading - A CFA charterholder manages money for several high-net-worth families. A major part of his compensation comes in the form of fees based on trading volume. He trades excessively for his accounts, but all the trades made are appropriate and suitable assets for the clients. The manager has violated standard III(A) because he is using the assets of his clients to benefit himself. Ethics problems on the CFA exam are usually case-study oriented. Keep in mind that many cases involve violations of more than one standard. A good way to determine whether standard III(A) was breached is to ask yourself the following questions: 1. Is this person acting in the best interests of clients? 2. Is this person placing clients' interests before his or her own?

Standard II-A Material Nonpublic Information - Applications (3)

(Materiality Determination) 7. Larry gets a text from a mutual fund friend that a software company is going to report strong earnings. Nadler has a buy order from a portfolio manager within his firm for several shares of the stock. Nadler hurries to buy the stock before the earnings are released -The text from the trader friend could be considered market noise unless he knew that his friend had a business relationship with the firm. He had no reason to think he was receiving material nonpublic info by completing the trading request of his manager. (Using an Expert Network) 8. Cannot rely on agreements that state you have not received information that would prohibit his trading company. You must determine for yourself if the information he received reaches a materiality thresh hold.

Application of Standard I-C Misrepresentation (Quick questions)

(Must disclose issuer-paid research) 1. McGuire is an issuer-paid analyst hired by publicly traded companies to promote their stocks. He posts on his profile recommended buys but is not disclosing his true relationship with the companies he is advertising. Vioates I(C) b/c website is misleading, also violates VI (A) Disclosure of conflicts, by not disclosing the existence of an arrangement 2. (Correction of Unintentional Errors) Hijan reports on a report to investors that his firm has a composite of 350 billion in assets. In reality it is 35. He is not in violation if he goes through the steps of correcting the error and informing recipients. Because he did not knowingly make the error he is not in violation 3. (Non-correction of Known Errors) Invalid credentials - not correcting and should have know that the reports the company was sending was issuing incorrect credentials (Potential Misrepresentation 4. Steve advises to a client that as he approaches retirement he should invest in CDs and money market accounts so that the principal will be guarunteed up to a certain amount. Money market accounts and CDs are insured by the US government so this is not misrepresentation as long as the amount is within the government-insured limit. 5. (Plagiarism) Betty finds a report from a media website that quotes another source. should she quote both sources. She should hunt down the original source/author 6. (Capital Markets) -One should always provide accurate representations. IF a firm acquires a rating pool that significantly overstates the quality of their investments. Misrepresenting the quality of the risks can lead to negative consequences for otheres well beyond the direct investors. 7. Cherry picking reported accounts (inflating manager performance) is a violation of Standard 1(C) (Overemphasis of firm Results) 8. Seven of 8 portfolio funds were negative in the industry but one performed +10 percent. The firm advertises "THe Optima engingering markets equity fund, for example has a 10year returns that exceed the sector median by more then 10%. Only citing one high performance fund could be misleading if the other funds are not doing good by state 'is achieving excellent returns' in the ad. May not be true even if negative return, may still exceed benchmark.

Standard II(B) - Market Manipulation Questions

(Pump-Priming Strategy) 4.Creates a new bond. Firm enters into agreement with members to commit substantial minimum trading value in exchange for substantial reductions in their commissions. Without notifying the public of this strategy it is in violation. However this strategy if announced publicly would be aiming to help investors by giving them a better service in making the bonds more liquid. Strategy must be disclosed (Information Manipulation) 5. Steve does not like his coworker b/c never invited to baseball games. Steve creates fake accounts to overstate and overhype the stock. Steve STILL VIOLATES even though he was not directly benefiting b/c he was still manipulating

Under both IFRS and US GAAP there are two acceptable formats for presenting cash flow statement - the direct method and the indirect method

(Start with cash from customers)Direct method - income statement items that are reported on an accrual basis are all converted to cash basis. all cash receipts are reported as inflows, while cash payments are reported as outflows this method is similar to the income statement in presentation. it starts with cash sales and deduct all cash payments for direct AND indirect costs to arrive at cash flow from operations

LOS25eDescribe general principles of expense recognition, specific expense recog applications, and implications of expense recog choices for financial analysis

- IASB defines expenses as a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in descreases in equity. -expenses also include losses which may not result from ordinary activities of business ***MOST IMPORTANT PRINCIPLE OF EXPENSE RECOGNITION - MATCHING PRINCIPLE - requires that expense be matched with the associated revenues. if goods bought in current year remain unsold, their cost is not included in the cost of goods sold for the current year to calculate current period profits. -Instead the cost of these goods will be subracted from next year's revenue when they are sold. -Period costs cannot be directly linked to the generation of revenus. and are allocated systematically with the passage of time. (this would be like the change of cost cost of a good per year) Gross profit = Revnue - COGS (cost of goods sold) *random note Depreciation is used to ratably reduce the cost of a tangible fixed asset, and amortization is used to ratably reduce the cost of an intangible fixed asset.

Quotas:

- Restrictions on the quantity of a good that can be imported into a country for a specific period -each firm receives an import license, specifies quantity you can import -with quotas government receives no money, and foreign investors can just raise prices to earn higher profits in the absence of quota. these profits are known as QUOTA RENTS Essentially: Quotas take some of the gov't surplus of revenue and put it in the hands of foreign producers who raised their price. to avoid gov't can auction import licenses for a fee to make up for the lost revenue Quotas are worse then tariffs for domestic economy typically

Analyst Adjustments for Variation in Capitalization Practices across companies

- adjustments must be made to compare financial performance of a company that expenses software development costs with that of a peer company that capitalizes these costs the income statement for current period should include software development as an expense and exclude amortization of development costs capitalized in prior periods -capitalized asset should be removed from balance sheet (decreases assets and equity) -operating cash flow should be reduced and investing cash flow should be increased by amount of development casts that have been capitalized in the current period -ratios that include income, long lived assets, or cash flow should be recalculated using adjusted values

SEC

- any company involved in US capital markets is subject to the rules of the SEC. requires numerous forms periodically. these forms are available on the SEC website. All companies that issue new securities must file a Securities Offerings Registration statement (risk factors, audited financial statements -Forms 10K, 20F, and 40F must be filed annualy, comprehensive business overview and disclose important financial data -Forms 10Q and 6K: unaudited financial statements, -PRoxy Statement Form DEF-14A - shareholders must be sent a proxy statement before any shareholder meeting. proxy is voting on anothers behalf -8k - significant events, acquisition, or disposal of coporate assets Form 144 - announce possible sale of restricted securities, or sales of the securiteis held by affiliates of the issuer Forms 3,4,5 and 11K - examine pruchases and sale of securities by management, directors, employees, and other affiliates of the company Capital Market REg in Europe - Each country in EU regulates its own capital market, in Jan 2005 agreed to prepare reports in accordance with IFRS

Chebyshev's inequality

- appromiate value for the proportion of observations in a data set that lie with k standard deviations from the mean. proportion of observations within k standard deviations from the mean = 1 -1/k^2 for example how many observations lie with 1.5 standard deviations, just plug 1.5^2 in and that's 55.6% interpreted as minimum percentage of observations that lie within 1.5 standard deviations of the mean -holds for both samples and populations also remember 68-95-99.7 rule

Developing the Client's Portfolio

- be realistic to the clients expectations and long term goals -provide disclosues when in conflict b/w firm and clients interests -investment decisions must be judged by the context of the total portfolio, not one investment

Different types of assets and liabilites and the measurement bases of each

- challenge for analysts lies in understanding how the reported value of assets and liabilites relate to economic reality and to each other. for example land is typically valued at its historical cost, so if it rose may not be accurate. Does not always accurately represent the value of the company as a whole Current Assets (cash and cash equvalents, trade and other receivables, inventories, and financial assets (with short maturities) -cash equivalents are highly liquid and mature in less than 90 days. minimum risk of any change in their values -since equivalents are financial assets, they may be measured at a amortized cost or fair value -marketable securites - traded on public markets, current asset, balance sheet value based on market price Inventory (differ b/w IFRS and US GAAP) UNder IFRS - inventory is reported at the lower of cost and net realizable value -Under US GAAP inventory is reported at the lower of cost and market. NRV=selling price - selling costs -Inventory costs should include direct materials, direct labor, and overheads. however should NOT include: -abnomral amounts of wasted materials -storage costs incurred after the production complete -administrative overheads -selling costs

Evaluating Trade Discounts

- company should review its evaluation of trade discounts periodically. -you should review an early payment discount to see if saviings are greater than the returns that could have been earned by investing funds instead or greater than the firms cost of borrowing implicit rate = cost of trade credit = (1+ (discount/(1-Discount))^ (365/number of days beyond discount period) -1 say temres are 2/10 net 30 and acount is paid on 15th and 25th this means you get a 2% discount if paid on or before 10th day so cost of trade crdit of 15th day = 337.02% 25th day = 63.49% so picking whether you should pay the discount if company's cost of funds or short term investment rate is less than the calculated rate, it offers a better return than the company's short term borrowing rate

BOP - Balance of Payments

- double entry book keeping system that summarizes a country's economic transactions with the rest of the world pg 205 - table Debits and Credits - think of as increase in assets/decrease in liability, or decrease in assets/increase in liability

Addressing Unsolicited Trading Requests

- if a request is only to have a minimum impact on the entire portfolio b/c too small, or small change in risk, she may follow her firm's policies regarding client approval for executing unsuitable trades -if the request will have a material impact on the portfolio the IPS should be updated at the same time

Notes

- in professional FX markets an FX rate is usually quoted as a two-sided price. Dealers usually quote a bid price (willing to buy) and an ask price (willing to sell) for example EUR:USD (orUSD/EUR) of 1.3802-1.3807 means willing to buy EUR for 1.3802 and is willing to sell EUR for 1.3806 *Note that percentage increase in value of USD against JPY (JPY/USD) does not euqal percentage decrease in the value of JPY against USD (we must find the percent of the amount decreased) pg 219

IMF study concluded:

- increases in gov't spending have a much larger effect on GDP then similar sized social transfers, b/c transfers are not believed to be permanent. -social transfers to poorest citizens have more of an impact then nontargeted transfers -labor tax reductions have a slightly greater impact than nontargeted transfers. When accompanied by monetary accomodation: -fiscal multiplers are larger when there is no monetary accommodation -these larger multipliers result from falling real interest rates, which in turn lead to additional private sector spending One final note: Quantitative easing (central bank purchases government or private securities from economic agents with aim of stimulating economy. if CB purchases government securities on a large scale, it is essentially lending to the government. Stated differently the central bank is funding the government's fiscal deficit, making central bank independence and illusion.

Investment Decision During A Recession AD

- investors should: -reduce investments in cyclical companies -reduce investments in commodities/or based markets -increase investments in defensive companies, as their profits would decline modestly compared to cyclical companies -increase in investment-grade or gov't fixed income -decrease in junk bonds

Neo-Keynesian or New Keynesian Theory

- like RBC, this theory seeks to draw macro conclusions based on micro reasoning (utility maximization) -markets do not self adjust if they find themselves in disequilibrium this is because prices and wages are "downward sticky" (easier to bring up wages then down) - gov't intervention is useful in eliminating unemployment and restoring macroeconomic equilibrium

Under IFRS

- revenue from rendering of services is recognized when: 1.amount can be measured reliably. 2. it is porabable that economic benefits will flow to the entity 3. Costs can be measured reliablity. 4. Stage of completion can be measured reliavly Permits grouping of expenes by nature or function. Combinging depreciation of factory equipemetn with transport vehicles is an example.

AD Curve (relationship b/w aggregate income and price)

- shows the combinations of aggregate income and price level at which the following conditions are satisfied: 1. Planned expenditures =actual(or realized) income/output 2. There is equilibrium in the money market,

Issues regarding appropriate sample size, data mining bias, sample selection bias, survivorship bias, look ahead bias and time period bias

- t stat gives a wider confidence interval -the higher the level of confidence increases the size of the confidence interval -larger standard error the wider the confidence interval -consider that with increasing size you may gain from a different population, or costs might not be worht is Biases Data mining- just searching for correlations and random variables show some significance -best way to test is to use out of sample data to corroborate Sample Selection Bias - exclusion due to unavailability of data survivorship bias- the database only includes funds that are currently existing instead of funds that failed look ahead bias - info that was not available on the test date time period bias - test is based on a certain period of time which maky make results period specific.

Internal Rate of Return (IRR) IT is the required rate of return so that a 10 millino dollar investment is still worth 10 million dollars in the lifespan

- the IRR of a project is the discount rate that equate's the projects NPV to zero. It is the dscount rate that equates all present value of inflows with the present value of outflows -remember this assumes that all cash flows from the project will be reinvested at the IRR IRR rule: -Projects for which IRR exceeds the required rate of return should be accepted -Projects with lower IRR then required rate should be rejected^ for example get invest 10 mil, get paid 3, 4.8, and 5.5 in corresponding years 0 = 3/(1+IRR)^1 + 4.8/(1+IRR)^ .. . . solve for IRR Easiest to compute with calculator Cash flow but compute IRR instead of NPV Press IRR then compute In deciding whether a single project should be undertaken IRR and NPV will offer the same recommendation

Complying with II-A

-Achieve public dissemination- (if a member determines that some nonpublic information is material, she should encourage to make public) -adopt compliance procedures -adopt disclosure procedures-(issuing company cannot discriminate against analysts) -issue press releases -firewall elements: -appropriate interdepartmental communications -physical separation of departments -prevention of personnel overlap -a reporting system - appoint an officer -personal trading limitations -limit employees, make them list investments made. securities should be placed on a restricted list when a firm has or may have material nonpublic information -record maintenance -proprietary trading procedures

2 Important Points

-An increase in USD/EUR exchange rate increase the USD denominated value of investment in the Eurozone -If Alexis were to use income generated in the eurozone and not in the US changes in the USD/EUR spot rate would not be relevent

Investment Research Reports

-An investment report from a well known analyst may have an effect on the market. -report does not need to be made public just b/c the information is material (can affect markets) they must become a client of the analyst to see the report

What is the Mosaic Theory?

-Analysts may use significant conclusions from Public & Nonpublic NONmaterial information as investment recommendations -not material information - should always save the document see Standard V(C)

LOS26b: Describe the uses and limitations of the balance sheet in financial analysis

-Analysts should be careful not to view equity reported on the balance sheet as either the market or intrinsic value of a comapy's net assets. -under current accounting standards, measurement bases of different assets and liabilites may vary consdierably (measured at a historical cost vs measured at current value). these differences can have significant impact on reported figures -value of items reported on balance sheet reflects value at end of reporting period, which may not necessarily remain current

Five Financial Statement Elements

-Assets -current (Cash, accounts receivable), noncurrent (property, plant, equipment, financial assets,) -Liabilities (unearned revenue* is also a liability) -Owner's equity or shareholders equity (retained eraning, dividend, capital in form of common and pr eferred stock - fixed dividend)) -Revenues - sales, gains, investment income -Expenses (costs) - costs, tex expense, interest expense, depreciation, and amortization expenses For presentation purposes assets are split b/w current and noncurrent *current assets are expected to be used or converted into cash in less than 1 year (inventories, account receivable, cash on hand and at bank

Different Price Indices and Their Usages

-CPI - consumer price index, only covers urban areas AKA CPI-U -PCE - Personal Consumption Exependitures - price index uses business surveys to cover personal consumption -Producer Price Index - tracks input price chagnes -Headline inflation - based on an index that includes all goods and services in an economy -Core inflation - based on index that excludes food and energy prices. Better predictor of domestic inflation -countries differentiate in different industries so CPI and PPI baskets vary significantly b/w countries

Capital Account -

-Capital transfers (foreign debt forgiveness, transfer of ownership, gifts -sales and purchases of nonproduced nonfinancial assets, rights to natural resources), intangible assets -Financial assets abroad (official reserve assets, gov't assets, private assets) -foreign owned financial assets (official assets,

LOS27h: Analyze and interpret both reported and common size cash flow statements

-Cash flow analysis helps us evaluate how well a business is being run and to estimate its future cash flows. The analysis begins with understanding the sources and uses of cash and determining which components of the cash flow statement these sources and uses can be attributed to. The analysis also includes an evaluation of the determinants of each of the components

LOS21b: Describe functions of and participants in the FX market

-FX markets facilitate international trade -allow investors to convert currencies to invest in foreign asset -hedge risk -sometimes people speculate Market Participants- buy side/sellside Sell Side the very largets dealing banks, only large institutions because of costs are able to provide the service

First-degree price discrimination

-Firms can charge consumers exactly what they are willing to pay. (develop a price on a per customer basis, i.e. why our different matters charge different values for reviewers/attorneys etc. -Axiom is this -also it is a product that you cannot buy and then sell to a separate consumer -MUST KNOW WHAT THE BUYER IS WILLING TO PAY Perfect Price Discrimination (synonyms essentiall) -firm can eat up all of the consumer surplus and increase economic profit.

Firm Policies for III-A Loyalty, prudence, care

-Follow all applicable rules and laws -establish the investment objectives of the client -consider all info when taking actions -diversify -carry out regular reviews -deal fairly -disclose conflicts of interest -disclose compensation agreements -vote proxies -maintain confidentiality -seek best execution -place client interest first

Deficits and National Debt

-Gov'ts finance fiscal deficits by borrowing from the private sector. (at some point the countries solvency could come into questions i.e Greece 2011) Reasons to be concerned about national debt relative to GDP: -high debt levels may lead to high tax rates going forward, could act as a disincentive -may have to print money to finance the deficit -*******government spending may crowd out private investment. Higher demand for borrowng by the government would raise interest rates reducing private sector investmetn Reasons not to be concerned about national debt relative to GDP: -if debt is owned by country's own citizens not a big deal. except for inflation when printing money to finance -some of borrowed funds may have been used for capital investment projects -private sector may adjust to offset fiscal deficits by increasing savings in anticipation of future tax increases - THIS IS KNOWN AS RICARDIAN Equivalence

Solvency Ratios

-Refers to company's ability to meet long term debt debt-to assets ratios = total debt/total assets *important in this reading we take total debt in this context to be sum of interest bearing short term and long term debt -higher D/A is undesirable implies higher financial risk and weaker solvency position (compare with other company's in industry always for all these ratios) debt-to capital ratio = total debt/ total debt + shareholders equity debt to equity ratio = total debt/shareholder's equity -higher ratio is undesirable financial leverage ratio = avg total assets/avg total equity a leverage ratio of 2 means that each dollar of equity supports $2 worth of assets. plays important part in dupont decompositoin These 2 are coverage ratios Interest coverage ratio = EBIT / interest payments higher means that company can service its debt from operating profits only Fixed charge coverage ratio = EBIT + lease payments / Interest paymetns + Lease payments When evaluating a company's solvency ratios it is important to consider the volatility of the company's cash flows. Companies with stable cash flow streams are typically able to take on more debt.

Diluted EPS when a company Has Stock Options, Warrants, or their equivalents outstanding. Treasury Stock Method

-Stock options and warrants are accounted for using the treasury stock method (required under US GAAP) Treasury stock method assumes that all the funds received by the company from the exercise of options and warrants are used by the company to repurchase shares at the average market price for the period. The resulting net increase in number of shares outstanding equals the increase in shares from the exercise of options and warrants minus the number of shares repurchased a stock warrant differs from an option in two key ways: A stock warrant is issued by the company itself. New shares are issued by the company for the transaction. -a warrant is issued by the company. so exercise an option, the company must use the revenue here to repurchase shares at the average market price until those funds are exhausted. This can still be diluted though if excercising warrants or stocks incrase the number of shares by more (company creates the stock here to make this happen) Average Market Price - stock options and warrants are assumed to be exercised if the strike or exercise price is lower than the average market price during the year. (Market price - excercise price)/market price x # of shares created from the excercise of the option if market price (avg market price) exceeds the price of the options they should have assumed to have exercised.

Discontinued Operations

-Under IFRS and US GAAP, on income statement must report discontinued operation when the company decides to dispose of one of its component operations. and the component is operationally and separable from the rest of the firm (reportes net of tax as a separate line item after income -the disposed operation will not earn revenue going nforward so is not taking into account regarding future performance

Giffen Goods

-a case of an inferior good where the negative income effect of a decrease in price of the good sis so strong that it outweighs the positive substitution effect. Therefore the quantity demanded actually falls when there is a decrease in price, which makes the demand curve upward sloping -page 51 for graph -notice all Giffen goods are inferior goods, but not all inferior goods are Giffen Goods

Discrete Random Variable

-a random variable is a variable whose outcome cannot be predicted (the number of cars that will cross a traffic light during a ten minute period -a discrete random variable is one that can take on a countable number of values. each specific probability of occurring which can be measured (common examples, toss of a coin, throwing a fair die, # of cars sold by a salesman in a week, number of bids put in for an item, number of people in a sample who prefer coke over pepsi)

Profitability Ratios

-ability of a company to generate profits is a key driver of the company's overall value, and value of securities it issues. therefore many analysts consider profitiability to be main focus of analysis Before moving on be familiar with gross profit, oeprating profit, net profit and so on Net sales - COGS = gross profit Gross profit - operating expense (SG&A) = operating profit AKA EBIT *remember interest is taken out because it is based on financing decisions by the owner and is thus not directly related to COGS net inncome = after tax and interest net income - preferred dividends = income available to common shareholders pg126

Independent Practice

-abstain from independent competitive activity that could conflict with interest of the firm -must notify employer if they do, and employer must be aware of all arrangements of the rendered service

Forward Exchange Rates

-agreed upon today but settled in the future (ie billing for GSK now with the agreed upon FX rate 1.45). can hedge reisk this way -other types of contracts that are used for trading currencies: Futures - OTC markets - price agreed upon today FX Swap - simultaneous spot and forward transactions. purpose of extending a forward position to a new future date. leads to a cash flow on the settlement date, which serves as a mark to market on the forward position FX Options- contracts where purchaser has the right but no obligation (Typically use these 3 to manage FX risk exposures

V(B) - Communication with clients and prospective clients Questions

-always communicate the risks and explain what would happen in both an upturn and downturn of the specific variables that drive the strategy -anytime a new model or investment strategy is introduced it must be communicated, only if it is a material change in the investment process and not slightly tweaking - i.e going off a model that uses hard data versus implementing forecasting skills -must recommend based on facts not opinions

Suitability Tests should include the following:

-an analysis of the impact of the portfolio's diversification -a comparison of the investment risks with the client's assessed risk tolerance -fit of investment with the required investment strategy

Binomial Distribution and Bernoulli specifically here

-an experiment has only 2 possible outcomes, is mutually exclusive, and collectively exhaustive (no other outcomes are possible) Such an experiment is called a Bernoulli trial, if this is carried out n times the number of successes X, is called a bernoulli random variable, and follows bionomial distribution Bernoulli defined as X~B(n,p) n-number of trials p=prob of success so prob of x successes in n trials is giben by P(X=x)=nCx(p)^x*(1-p)^(n-x) p=prob of success x=# of successes 1-p=prob of failure note that nCx is computed as n!/(n-x)!x! -assumption of bernoulli trial ex 4 reading 9 You must assume that 1) the probability of an earnings increase (success) is constant from year to year and 2) earnings increases are independent trials. If current and past earnings help forecast next year's earnings, Assumption 2 is violated. If the company's business is subject to economic or industry cycles, neither assumption is likely to hold.

Guidance Standard III-D Performance Presentation

-any practice would lead to misrepresentation of a candidates performance record. -members should not state or imply that the clients will obtain or benefit from a rate of return that was generated in the past

Stochastic Oscillator

-based on assumption that in an uptrend the stock price tends to close near the high of its recent range, while in a downtrend it tends to close around its recent low %K = 100 * (C-L14)/(H14-L14) C=last closing price L14 = Lowest price in last 14 days H14= highest price in last 14 days %D (signal line) = Avg of the last three %k values calculated differently when >80 it . usually indicates that the security is overbought and should be sold. A value lower than 20 indicates that the security is oversold and should be purchased when %K crossed %D from below it is a short term bullish singal, if it crosses %D from above it is a bearish symbol

New Classical School (RBC Theory) - Real Business Cycle Theory

-based on new classical macroeconomics -business cycles have real causes (i.e. changes in technology). Monetary variables (such as inflation) are assumed to have no impact on GDP and unemployment -govn't should not intervene in the economy -unemployment (besides frictional unemployment- this is employment from somebody switching from one job to the next) -Agg Supply plays a more prominent role(then other theories) in bringing about business cycles Criticisms -during recession, people are eagerly looking for jobs and unable to find employment despite reducing their wage demands

Performance Reporting

-cannot present benchmarks that are not comparable to their strategies -Note a benchmark does not always have to apply. especially if the investment strategies do not lend themselves to displaying appropriate benchmarks due to their complexity or diversity -members should discuss with clients on a continuous basis of the appropriate benchmark for performance evaluation -provide accurate and reliable security pricing information. cannot change provider solely because they provide a higher current value of a security

Investing Cash flow

-changes in long term asset and investment accounts are used to determine sources and uses -increases in outflows may imply capital expenditures. analysts should evaluate how the company plans to finance these investments (with excess operating cash flow or by undertaking financing activities

Operating Cash Flow

-changes in relevant asset and liability accounts should be used to determine whether business operations are a souorce or use of cash -operating cash flow should be compared to net income. if high net income is not being translated into high operating cash flow, the compnay might be employing aggressive revenue recognition policies -companies should ideally have operating cash flows that exceed net income -the variability of operating cash flow and net income is an important determinant of the overall risk inherent in the company

Standard VI(B) Priority of Transactions

-client cannot be disadvantaged by the trade. 2.)clients trades always take precedence over your own. -can only undertake transactions in accounts in which they are the beneficial owner only after clients and employers have been deemed of the recommendations

Limitations of Ratio Analysis

-companies have divisions that operate in different industries this can make it diffictul to find relevant industry ratios to use for comparisons. -one may suggest a problem, other may indicate that potential problem is only short run -there are no set ranges within which particular ratios for a company must lie. an analyst muse use his own judgement to evalueate given value of a ratio. examine company, external industry, and economic scenario -Firms enjoy significant latitude in accounting metods Ex1Use of FIFO, AVCO, or LIFE inventory cost flow assumption Ex2choose from a variety of depreciations -

Depreciation

-companies incur significant costs to acquire long lived assets that provide benefits over time. Under IFRS long lived assets may be valued using cost model, or revaluation model. US GAAP only cost model -cost model - asset is reported at a cost less than any accumulated depreciation. Depreciation allocates costs across multiple periods. Match these costs with associated revenues so there is not a huge cost in one period (inflating actual reporting)' The choice of a depreciation method depends on how a company expects to utilize the benefits from a long lived asset over time: Straight line deprec - spread evenly over the estimated useful life of the asset. This method requires estimates of residual value and useful life. Residual value is the amount the asset is wroth upon sale at the end of its useful life Accelerated methods - a greater proportion of cost is allocated to the initial years. Used when expected to be utilized more heavily in early years. So this would result in lower net income and higher depreciation costs for first years.

Capitalization and Interest Costs

-companies must capitalize interest costs associated with financing the acquisition or construciton of an asset that requires a long period of time to be ready for its intended use. . interest expense incurred to finance construction must be capitalized along with the costs of construction. Under IFRS only income earned from temporarily investing borrowed funds that were acquired to finance the cost of the asset must be subtracted from interest expense on the borrowed funds to determine the amount that can be capitalized. once asset is brought to use the entire cost of the asset inclusive of capitalized interest, is depreciated over time. so capitalized interest is then a part of depreciation expense, not interest expense.**as a result of this accounting treatment, a company's interest costs can appear on the balance sheet (when capitalized) or on the income statement (when expensed) -interest payments made prior to completion of construction are Capitalaized and are classified under investing activities interest paymentsthat are expensed may be classified as operating or financing under IFRS and are classified as operating under US GAAP

time weighted rate of return

-compounded rate of growth over a stated measuremetn period in contrast to money-weighted: 1. is not affected by cash withdraws or contributions to the portfolio 2. averages the holding period returns over time -INVESTORS SHOULD ALWAYS USE TIME WEIGHTED RETURNS, decisions regarding contributions and withdrawls from a portfolio are typically in only the clients hand so it would be irresponsible to provide money-weighted return, time-weighted return is better -if funds are deposited into portfolio prior to good performance, money-weighted return will be higher then time-weighted and (vise-versa) Break down cashflows into holding periods find HPY per holding period (Cash value +dividends / original value) -1 (1+HPY1)(1+HPY2) - multiple holding periods is equal to (1+timeweighted rate of return)^N solve for time weighted rate of rreturn

Effectiveness of Capital Control (IMF study)

-controls on capital inflow entails significant administrative costs -effecting con on cap during a recession has produced mix results Costs of Capital Controls -admin costs -controls could lead to negative market perceptions -protection of domestic financial markets may delay necessary policy adjustments

Guidance V(B) Communication with clients

-different forms of communication (make available to all clients) -identifying risks and limitations, risk disclosure should be based on what you know at the time. if you were unaware maybe reasonable basis but not V(B) -report presentation - may emphasize certain areas, touch briefly on other, and omit deemed unimportant, make readily available reference material. if changes in methodology are made they should be communicated -make sure no guaruntee in return, and statistics of earnings are based on past analysis and estimates

Managed FLoat

-do not explicitly state FX rate target but intervenes to meet is policy objectives (price stability, unemployment etc) -dirty floating can lead another country to retaliate Independent FLoating Rates -CB rarely intervenes -can act as lender of last resrot

Leaving an Employer

-do not solicit clients or prospected clients before terminating with employer (always follow if a noncompete agreement) -this standard does not prohibit knowledge or experience gained -Whistleblowing is okay if it is for protecting clients or integrity of the market, not for personal gain

Demand Supply

-downward sloping -elastic at higher prices, inelastic at lower prices -no well defined supply functoin -neither MC or AC represent firm's supply curve -produce at output MC=MR -price that is charged is from the market demand curve only -SO THEY CHOOSE OUTPUT and DEMAND sets the price MR=MC is output level but pay attention to AC

simple random sample

-each member of the population has the same probability of being included in the sample.

Fixed Parity

-either pegged to a single currency or to a basket of currencies of major trading partners. monetary authority stand ready to buy or sell foreign currency -CB can act as a lender of last resort -success depends on both countries willingness Differs from CBS in following ways: -country can choose to adjust or abandon parity since no legislative commitment -target level of foreign exchange reserves is discretionary and is not linked to domestic monetary aggregates

Compliance V(B) - Communication

-encourage firms to have rigorous methodology for reviewing research, that is created for publication and dissemination -always keep records to assist after-the-fact review of the report

Standard VI(A) Disclosure of Conflicts Guidance

-err on the side of caution, try to avoid conflicts, if unavoidable must disclose

Sampling Error

-error caused by observing a sample instead of the entire population. It is the difference between the sample statistic and the corresponding population parameter Sampling error of the mean = sample mean - population mean x̄-μ

Investment Action

-example- making investment in IPO or new offering. First follow firm policies for allocating blocks of stock. if the issue is oversubscribed M&C should forgo any sales to them or their immediate family. -disclose documented procedure for allocating to clients or prospective

LOS 4a: Describe the key features of the GIPS standards and the fundamentals of compliance

-fair representation to clients Objectives -establish best practices for calculating and presenting investment performance -obtain a world wide standard -encourage fair, global competition Overview - accuracy of performance presentation is dependent on the accuracy of input data -Firms must comply -changes in a firm's organization must not lead to alteration of historical composite performance

Demand and Supply Analysis: The Firm

-firm maximizie profits -costs are a function of level of output, efficiency of production process, and resource prices

Factors Affecting Long-Run Equilibrium in Oligopoly Markets

-firms in oligopolies can make economic profits in the long run. in the long run, optimal pricing decision must be made in light of the reactions of rivals. -PRICE WARS are known to be inefficient because any gains in market share arising from them are temporary -Innovation is the way to go and can lead to sustained market leadership

LOS 3c: Explain the requirements for verification

-firms should hire a 3rd party for compliance - must comply with composite construction and calculations must be according to GIPS standards Structure of GIPS Standards 0 Fundamentals of Compliance 1 Input Data 2 Calculation Methodology 3 Composite Construction 4 Disclosure 5 Presentation and Reporting 6 Real Estate 7 Private Equity 8 Wrap Fee/Separately Managed Account Portfolios

explaining negative slope of the demand curve

-higher prices reduce purchasing power of those whose incomes are fixed in mominal terms -higher prices reduce the real value of assets and decrease wealth -higher prices reduce the value of nominal assets like stocks and bonds -higher prices make foreign goods more competitive than domestic goods -All this because an increase in price increase interest rates- think how this lowers the value of risks with a certain level relative to the increased risk free rate

Trend Analysis

-horizontal common size financial statments are often prepared, divide dollar values of accounts by their base year to determine common size values. can help identify structural changes in the business *If Total Assets are growing faster than revenue suggests efficiency levels are declining. should look into why the assets are increasing

Quick Note

-households may spend on foreign goods imports -households save -incomes can be reduced by taxes -businesses may sell to foreigners (exports) -businesses can reinvest in the business instead of paying dividends

Inventory Methods -

-if a company can specifically identify which units of inventory have been sold over the year and which ones remain in stock FIFO- first in first out. appropriate method for valuing inventroy that has limited shelf lie Last in, first -out (LIFO)- items purchased most recently are sold first. this method is popular in US because of income tax benefits Weighted avg cost - total inventory costs are allocated evenly across all units. Inventory valuation and analysis are coverd in more detail further on -All 3 are allowed US GAAP. IFRS does not permin LIFO

Present and Future Value of Unequal Cash Flows

-in an annuity all cash flows are identical, this is not the case here FV calculate the fv of each individual cash flow and add them up fPV -calculate PV of each individual cash flow and then adding up resulting present values pg135 there is a simple way to do this by using CF buttonn Cash Flow. press down arrow to get to cash flow, enter the interest rate by pressing NPV then rate then enter then down arrow and then CPT

Natural Monopoly

-industry where supplier's average cost is still falling even when it satisifies total market demand entirely on its own. HIGH fix costs LOW marginal costs (electric company) -in a monopoly profit max occurs where MC=MR. At this output level, monopolies charge a relatively high price and earn economic profits. governments can step end and make them price where P=MC -OR Restricting price to average cost instead and this would make firm have a normal profit (econ profit = 0) pg 90 and 92

AD curve will be flatter if: (small changes in price cause relatively large changes in quantity demanded

-investment expenditure is highly sensitive to the interest rate. when prices rise - real interest rate also rises -saving is insensitive to income - when prices rise the real interest rate also rises which reduces investment expenditure -money demand is insensitive to interest rates - when prices rise real money supply falls - in order to maintain equil in the money market real money demand must also fall -money demand is insensitive to income = when prices rise real money supply falls . in order to maintain equil real money demand must also fall

Monopolistic Competition

-large number of buyers and sellers -the products offered ar similar but not identical, close substitutes -firms try to differentiate through non price strategies (i.e advertising) -low barriers to entry and exit -firms have some degree of pricing power --a firm can establish significant pricing power w/ loyalty (i.e Apple) -Long run competition will fall to an equilibrium that resembles (but not identical to) PC

Non-Current Liabilities

-long term financial liabilities and deferred tax liabilities long term financial liabilites - measured at fair value or amortized cots Measured at fair value: derivatives, held for trading, non-derivative with face value exposures hedged by derivatives Measured at cost or amortized cost - all other liabilites (bonds payable and notes payable) deffered tax liabilites- when income tax expense exceeds taxes payable. thes unpaid taxes will be paid in future periods and therefore a liability for the company

LOS19O: Describe roles and objectives of fiscal policy

-main aim of fiscal policy is to regulat the economy's real GDP by influencing aggregate demand Expansionary Policy Examples: -Reducing income taxes to increase disposable income -reducing corporate taxes to boost profits etc Keynesians believe that fiscal policy can have a powerful impact on aggregate demand, output, and employment while Monetarists believe that fiscal changes only have a temporary impact and do not advocate for regulating business cycles -In a recession gov'ts can increase spending and/or reduce taxes

Professional Conduct Inquiries (Exam)

-members must disclose on annual ProfCond statement, question professional conduct like civil litigation or criminal investigation -written complaints trigger investigation -public sources (such as media) also trigger investigation (social media) - conduct is monitored by proctors suspectived to have violated

Differences PC and Monopolistic Competition

-monopolies typically lower output at a higher price in PC Price=MC where in monopolistic price exceeds marginal cost, this excess in marginal cost is known as a MARKUP, price higher then they would pay under PC -In Monopolistic output occurs where demand is tangent to the AC curve, but at a stage where AC is still falling -Where as in PC - AC is at its minimum -firms in monopolistic competitions thus have EXCESS CAPACITY, where they could produce more output efficiently but choose not to

Nature of Employment

-must determine if you are an employee or an independent contractor in order to determine the applicability of standard IV(A)

Standard VI(C) Referral Fees

-must disclose all referral fees you gain to employer and client (for a certain stock etc)

Guidance Standard IV-B: Additional Compensation Arrangements

-must obtain permission from employer - direct or indirect compensation

Using Quantitatively Oriented Research

-must understand parameters and assumptions model is making. do not have to be an expert in all technical aspects of the model -typically should test models before incorporating

Developing Quant Techniques

-must understand the technical aspects of the model -include negative market events in testing

Game Theory - Nash Equilibrium pg 101 example

-none of the firms in an oligopoly market can increase profits by unilaterally changing its price -each firm tries to maximize its own profits given the responses of its rivals -respond to change in strategy to -if they cooperated on price this is collusion - form a cartel (OPEC)

first lesson 27b: describe how non cash investing and financing activities are reported

-not reported on cash flow statement. companies are required to disclose any significant noncash investing in financing activities in a supplementary report examples: barter transactions -when holders of convertible bonds convert to ordinary shares -acquisitinon of real estate with financing provided by the seller

Complex Capital Structure

-one that contains certain financial instruments that can be converted into common stock (convertible bons, convertible preferred stock, warrants, and options -these financial instruments are potentially dilutive -a dilutive security is one in whose conversion into shares of common stock would result in a reduction in EPS. EPS calculated after taking into account all dilutive financial instruments in the capital structure is known as diluted EPS (by converted to common stock you increase the weight avg of shares which decreases the EPS) When a compnay has convertible preferred stock oustanding: diluted EPS = (net income - preferred dividends _ convertible preferred dividends)/weighted average of number of shares outstanding +new common shares issued upon conversion essentially here if there was 50,000 prefrered stock that converst to common stock you take off the -50000 in preferred divdends in the numberator because it is being recognized and you add the new shares in the bottom A quick way to determine whether contertible preferred shares are dilutive is by calculating: convertible preferred dividends/new shares issued upon conversion if this is lower then basic EPS it is dilutive if it is greater then EPS it ois antidilutive and should be ignored in caclulation of diluted EPS

Principles and assumptiosn

-people behave in irrational and emotional manner, and tend to behave similarly in similar circumstances -technicians believe that security price movements occur before fundamental developments occur or are reported.

Pricing Interdependence

-pricing interdependence (kinked demand curve model)- PRICE WARS (ie commercial airline industry) --if a firm increases its price, others will not follow suit -however if a firm reduces its price, competitors would follow its lead and increase in quantity demanded for the firm would not be significant (inelastic demand) -DEMAND CURVE is elastic above current prices and inelastic below current prices (the kink) -There is a break in Marginal revenue imiplies that if an increase in cost of production only increased the MR curve within the break output would not change -kinked demand theory explains why in oligopolies prices are relatively stable -Incomplete Analysis because it does not explain the original price before it kinks

Non-Current Assets

-property plant equipment -investment property intangible assets- identifiable nonmonetary assets, lack physical substance, intan assets with finite useful life - are amortized, and adjusted for impairment -intan assets with indefinite, not amortized, but are tested for impairment at least annually. -Identifiable intangible assets - can be seperated and sold (eg customer lists) -arise from contractual rights Goodwill - excess amount paid to acquire a business over the fair value of its net assets. (may not be taking into account brand, reputation, or may have incurred R&D that has not yet been stated on financial statements, etc) Analysts must understand between Accounting goodwill - only reported fro acquisition when the purchase price exceeds fair value economic goodwill - not reflected on balance sheet, is based on a company's performance and its future prospects. (should be reflected in stock price) Under US GAAP and IFRS accounting goodwill resulting from acquisitions is capitalized. it is not amortized but is tested annually for impairment. non-cash expense so does not affect cash flows. Goodwill can significantly affect the comparability of financial statements, when performing ratio analysis, income statement values should be adjusted by removing impairment expense (so that operating trends can be identified). should evaluate by economic goodwill - evalue future acquisitions in light of the price relative to net assets and earning prospects of the acquired company

Guidance

-protect interest of their firm, by refraining from conduct that would injure the firm, deprive profit, or deprive of skills and ability -should always place the interest of client over interest of employer -this standard does not require placing employer above personal and family obligations to their work

LOS22a: Describe the roles of financial reporting and financial statement analysis

-provides info about financial performance, financial position, and changes in financial position Role - to assess a companys past performance and evaluate its future prospects Performance can be examined through profitability (generate profits from core business activities, and Cash flow - ability to generate excess cash receipts in excess of cash payments. A forecast of the expected amount of future cash flows is important to determine if a company can meet it's obligations -Liquidity - ability to meet its short term obligations -solvency - ability to meet its long term obligations

The Demand for Money

-reflects the amount of wealth that households choose to hold in the form of money (instead of bonds or equities) 3 Reasons for Holding Money -transactions related demand for money -precautionary money balances -speculative or portfolio demand for money (holding in different currencies, foreign exchange market)

Cost-push Inflation

-rising costs compel business to raise prices. since labor is the biggest cost for most businesses, analysts tend to focus on the labor market -lower the unemployment rate, the higher the probability a labor shortage, which may exert an upward pressure on wages -consider the technology sector, this sector has grown so rapidly that the qualified and trained labor has been short in supply, even though there is consider unemployment. -until workers are trained the economy may continue to experience a high NARU (natural rate of unemployment -labor productivity is important because it determines the number of units which business can spread their labor cost Unit Labor Cost ULC=W/O O=output per hour per worker W=total labor compensation per hour per worker *notice if wage rates grow faster then labor productivity, ULC increases, businesses would look to increase output prices to protect profit margins, so the end result is cost-push inflation

Bond Equivalent Yield

-semiannual discount rate multiplied by two, This convention comes from the US where bonds are quoted at twice the semiannual rate because coupon payments are made semianually (coupon payments are periodic interest payments on a bond) Example a 3 month loan has a holding period yield of 3% what is the yield on a bond equivalent basis semiannual yield = (1+3monthyield)^N - 1 so 1.03^2 -1 = 6.09% then multiply by two so 12.18% n here could be 2 for a 3month but for a year it would equal .5 ALWAYS DOUBLE THE SEMIANNUAL YIELD AFTER CALCULATING THE SEMIANNUAL YIELD

Lesson 2: Monopoly

-single seller of highly differentiated product, no close subsitutes -high barriers to etnry -firm has considerable pricing power -product is differentiated through nonprice strategies (i.e. advertising) What gives monopolies? -patents/copyrights -network effects (firms use Word because there is no need to train employees) -natural monopolies (electricity, always gov't controlled)

LOS 4c: 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

-strongly encourage countries without a performance investment standard to abide by the GIPS standards -in countries where laws regarding performance presentation do exist, firms are encouraged to adhere to both local laws and GIPS, however if conflicted local law applies

Economic Rent

-the payment for a good or service beyond the minimum amount needed to sustain supply. WHen the supply of a good is fixed (Ie supply is vertical and the price is higher then the minimum price required to bring good to market -certain goods like land or certain commodities where supply is tight

Potential Output of an Economy

-the potential output of any economy does not very with price level -when LRAS is vertical in long run and at this output level. Unemployment is said to be at its NATURAL Rate -Structural Unemployment- results from structrual changes in the economy (when some jobs become obsolete) Cyclical Unemployment - unemployment generated as an economy goes through the phases of a business cycle

Guidance

-treat all clients fairly -"fairly" implies no discrimination in disseminating investment decisions (being a dick) - M&C's may provide more personal, specialized, or in depth service to clients who are willing to pay for premium service (through higher management fees or levels of brokerage - ie more business), however must not disadvantage or negatively affect other clients. I.e. YOU MUST DISSEMINATE recommendations to all clients before talking to a select few that are of interest to you particularly - Different service levels should be disclosed to clients and should be available to everyone . i.e. investing a million dollars gets you _______

Unusual or Infrequent Items

-unusual in nature or infrequent in occurence. restructuring charges, gains and losses arising from selling an asset for mroe or less than its carying value. These items are listed as sperate line items on income statement but are included in income from continuing operations and hence reported before tax. -analysts should not ignore all unusual items. When forecasting future profits, analysts should not ignore all unusual items, but determine if they are likely to reoccur.

Remember the following for FV and PV

-we cann add sums of money only if they are being valued at exactly same point in time -given interest rate, the future value increases as the number of periods increase -FV increases as interest rate increases this is all just duh

Who is served by the standards

1. Clients - reliable historical data and fair marketing activities 2. Investors are provided with credible data to compare their performance to other firms

How can you comply with Standard I-B?

1. Protect the integrity of opinions - establish policy that states all reports are unbiased from an analyst (Independence Policy) 2. Create a Restricted List: This is to limit research on those firms that have a business relationship with that company. If an adverse opinion would hurt this business relationship, the company stock should be restricted from the research universe, and only factual information on the company should be disseminated. 3. Restrict special Cost arrangements: members should pay for commercial transportation, do not reimburse.•Cost reimbursement procedures - Identify what is acceptable and what is unacceptable practice in order to avoid the appearance of a conflict. While there is no specific checklist in the Standards, the general rule of thumb is that air transport, ground transport and hotel accommodations should be the responsibility of the individual and his or her company, and should not be covered by (for example) the issuer of a security that an analyst has started to cover. The reason that no checklist has been developed is that there are always exceptions - for example, if the issuer of a preferred security is an energy company that is headquartered in a sparsely populated area (near its coal mines) and commercial transport is not available, and the only practical way to arrange a face-to-face meeting is by using a corporate jet, then an analyst can accept such an arrangement without violating this Standard. 4. Limit Gifts- strict value limit 5. Restrict Investments - Limit direct investments in equity or equity-related IPOs - Investment firms should establish formal policies relative to employee purchase of equity and equity-related IPOs and require prior approval. 6. Periodically review guidelines - This is to reinforce dos and don'ts for all employees and determine whether additional guidelines are sensible. 7. Appointed Officer - firms should appoint a senior officer for oversight of responsibilites for compliance with the firm's code of ethics and all regulations concerning its business

REvenue Expenses Gross Profit Operating Inocme

1. Revnue -Cost of sales =Gross Profit -marketing admin research expenses -loss (gain) on sale of equip -impairment expense (readjusting the value of an asset) -amortization of intangibles =Operating Income -Net interest expense -Privision for income taxes =Earnings from continuing operation' -earnings and gain from discounted operations =Net earnings -Noncontrolling interest =Net earnings attributatable to Johson Incorporated (all - sings here are minus symbols) pg 42

The Direct Method

1. Start with sales on the income statemtn. Go through each income statement account and adjust it for changes in related working capital accounts on the balance sheet. (This serves to remove the effects of the timing difference between recognition of revenue and expesnes and the actual receipt or payment of cahs) 2. Determine whether change in these working capital accounts indicate a source or use of cash 3. Ignore all nonoperating items (gain/loss of sale and equibment, non cash charges (depreciation and amortization)

Standard I-A Questions

1: Michael ALlen works for a brokerage firm and is responsible for an underwriting of securities. A compnay official gives Allen information indicating that the financial statements Allen filed with the regulator overstate the issuer's earnings. ALlen seeks the advice of the brokerage firm's general counsel, who state it would be difficult for the regulator to prove that ALlen has been involved in any wrongdoing. Comment: Although it is recommended to receive counsel, Allen is still resposible for attempting to escalate to superior, seek an independent legal opinion, and determine if regulator should be notified 2:Finds out Q3 losses are concealed. Prospectus has been distributed Report findings to a supervisor, matter is not remedied Brown should disassociate 3. Laura works in US but is an adviser for a small country. small country states that no one should participate in IPOs for advisers personal accounts. Must follow the small country (MS law) 5. Colleen starts posting financial reports on facebook/twitter? Violation of I-A b/c does not follow the standard of investor communication Can only post information that is used as advertising for the firm or potential clients on Social Media

GDP Output and Income Definitions

2 Definitions 1. Output definition: GDP market value of all final goods and services produced within an economy over a period of time 2. Income definition: GDP is the aggregate income earned by all households, companies, and the government, over a period of time

Inventory Ratios

3 Most important ratios used in the evaluation of a company's inventory management are the inventory turnover ratio, the number of days of inventory, gross profit margins. inventory turnover = COGS/average inventory No. of Days of inventory = 365/inventory turnover gross profit margin = gross profts/sales revenue If a company has a higher inventory turnover ratio and a lower number of days of inventory than the industry average, it could mean one of three things. 1. company is more efficient, fewer resources tied up 2. maybe company is not carrying enough inventory 3. maybe the company wrote down the value of its inventory. By comparing revenue growth with other companies: A low sales growth compared to industry would imply company is losing out on sales. A higher inventory ratio with minimal write downs and sales growth similar or higher than industyry means probably manage inventory more efficienty. pg 174 if gross profit margin increases but return on total assets is negative, this means there was a net loss. It could be a result of a decrease in sales revenue, an increases in operating expenses, or both. 2. given that prices increase over and inventory was relatively stable. COGS would have been higher then gross profit if it used LIFO. so lower gross profit, net income, retained earnings, and taxes PG 175 LIFO vs FIFO with rising prices and stable inventory

Perpetuity

=a never ending series of level payments where cash flow occurs in the next period at t=1 PV=PMT/(I/Y)

Quick Example

A company borrows 10 million to finance building for which will use for 50 years. interest rate on loan is 6%. Construction takes 3 years. company earns 65000 from investing the borrowed funds in money market instruments. 1. what amount of interest cost would company capitalize under IFRS and US GAAP US GAAP - (10mil*.06*3)= can captialze 1,800,000 IFRS - (10mil*.06*3)-65000=1735000 IFRS must expense any money earned from the borrowing of the money reinvesting. IFRS the amount of interest that is capitalized will appear on the cash flow statement under investing activities during 3 years of construction. once construction complete depreciation of capitalized interest will appear on companyscash flow statement using the idirect method (added to net income in the calculation of CFO)

Lognormal distribution

A random variable, Y, follows the lognormal distribution if its natural logarithm, ln Y, is normally distribtued 3 important features 1. it is bound by zero on the lower end 2. the upper end is unbounded 3. it is skewed to the right -Lognormal distribution is used to model asset prices (for example, holding period return can range between -100% and +infinity) - this would inherantly skew the data to the right, where as if we take the lognormal distribution, we can create a lower bound of zero Used in investment decision making. A further distinction is an underlying assumption that the values used to derive a lognormal distribution are normally distributed. Let me clarify with an example. An investor wants to know an expected future stock price. Since stocks grow at a compounded rate, she needs to use a growth factor. To calculate possible expected prices, she will take the current stock price and multiply it by various rates of return (which are mathematically derived exponential factors based on compounding) and which are assumed to be normally distributed. When the investor continuously compounds the returns, she creates a lognormal distribution which is always positive, even if some of the rates of return are negative, which will happen 50% of the time in a normal distribution. The future stock price will always be positive because stock prices cannot fall below $0!

Montecarlo example numer 18 in online textbook practice questions

A standard lookback call option on stock has a value at maturity equal to (Value of the stock at maturity - Minimum value of stock during the life of the option prior to maturity) or $0, whichever is greater. If the minimum value reached prior to maturity was $20.11 and the value of the stock at maturity is $23, for example, the call is worth $23 − $20.11 = $2.89. Briefly discuss how you might use Monte Carlo simulation in valuing a lookback call option. Answer In the text, we described how we could use Monte Carlo simulation to value an Asian option, a complex European-style option. Just as we can calculate the average value of the stock over a simulation trial to value an Asian option, we can also calculate the minimum value of the stock over a simulation trial. Then, for a given simulation trial, we can calculate the terminal value of the call, given the minimum value of the stock for the simulation trial. We can then discount back this terminal value to the present to get the value of the call today (t = 0). The average of these t = 0 values over all simulation trials is the Monte Carlo simulated value of the lookback call option

Calculating probabilities for z scores

A z table shoes the probability of a random variable having a standardized value lower than or equal to the given standardized value or P(Z<=z) -pg222 the table is given with tenths on one column and hundreths on the other ie. .1 .2 .3. 4 and on x .01 .02. 03 so if you wanted z score .33 you go to where they intesect. this value is equal to the probability that a random variable have a prob LESS THEN OR EQUAL TO do 1-zscore to find prob area greater then or equal to pg225 finding in between, you must subtract or add the probabilities depending, you've done this before

Accounting Profit

AKA net profit, net income, and net eranings Revenue-costs(explicit) accounting costs - payments to nonowner parties for goods and services accounting profit = TR - Total accounting costs

Accruals and Valuation Adjustments

Accrual Entries: THink assets = liabilities + owners equuity Unnearned revenue (or deferred revenue) Assets go up (cash) = Liabilities go up (unearned rental income) as you recognize liability goes down and revenue goes up *Essentially you mark as revenue as you recognize Accrued Revenue - classic revenue, we provide service during the month and then bill after Assets go up (acc rec), owners equity goes up (revenue) Prepaid Expense (here axiom reimburses and then the client pays us back), so assets go down in the form of cash and then up in form of accounts receivable) when you make an entire payment ahead of time (like insurance), you deduct cash and add assets of prepaid amount, when adjusting you increase expenses (decrease owners equity), and decrease insurance prepaid asset pg 21 is a good chart

Indirect method continued

Additions Noncash items Nonoperating losses ^(includes loss on sale or write down of assets Increase in deferred income tax liability chages in working capital resulting from accruiging higher amounts for expenses than then the amounts of cash receipts (decrease in curent operating assets (eg accounts receivable, inventory, and prepaid expense)(increase in current operating liabilities (e.g. accounts payable and accrued expense liabilities) Subtractions non cash items (eg amortization of bond premium -non operating items (gain on sale of assets, gain on retirement of debt, income on investments accounted for under the equity method) -decrease in deferred income tax liability -changes in working capital resulting from accruing lower amounts for expenses than for cash payments or higher amounts fro revenue then cash receipts (increase in current operating assets, or decrease in current operating liabilities) *remember these are for calculatin CFO, and net income reflects all 3 CFI CFO, and CFF

Aspects of the Converged Standards

Adopted in US now Core Principlle- revenue should be recognized in order to depict the transfer of promised goods or services, amount that reflects consideration to which the entity expects to be entitled in in an exchange. To obtain this core principle, stndards describe 5 steps 1. identify contract w/ customer 2. identify performance obligations 3. Determine transaction price 4. allocate transaction price to the performance obs in the contract 5. recognize when the entity satisfies a performance obligation - contract exists only if collectability is probable. (US means likely to occur) -performance obligations, promises -transaction price Accounting Treatment when revenue is recognized a contract asset is presented on the balance sheet Exampe 2-4 remember for ongoing projects where completion is not met you can only recognize revenue for percent costs(of estimated total costs) * total revenue -say there's a 300,000 bonus if you complete contract early. could you recognize this as revenue at the end of year 1 (total not complete) -this example illustrates VARIABLE CONSIDERATION -variable consideration can be recognized as revenue only if the company can conclude ti will not have to reverse cumulative revenue in the future. Here it could not be recognized because of ABC company's limited experience, and various factors outside of their control that could delay the project

Evaluating Management of Accounts Receivable

An aging scedule classifies accounts receivable according tot he length of time outsanding we can showcase in a chart as a percentage of what amount of funds are in what aging group we can better evaluate the firms ability to collect its receivables by calculating the weighted average collection period, which measures how long it takes a company to collect cash from customers irrespective of the changes in sales and the level of sales When a company's weighted average period has increased dramatically an anlayst should scrutiineze whether this is due to an extension of credit terms by the company to promote sales or because major customers are having trouble making payment to calculate calculate average days of collectin receivalbe in each groupings for example 91-120 days range average might be 95 collectibabiliaty. then multiply by the weighting from the aging schedule, and compare across years

Guidance-V-(C)

Applies to decisions to buy or sell a security as well as reviews undertaken that do not lead to a position change -records are property of the firm -cannot take property of the firm including original forms or copies, or supporting records of work to the new employer -cannot use research reports used at the last firm b/c documentation is unavailable - must recreate

Monetarist School of Thought

Assertions -Money supply is supremely important. gov't should maintain a steady growth rate of money -if MS grows too fast there will be unsustainable boom and inflation, if it grows too slow there will be a recession -play a very limited role, fiscal and monetary policy should be clear and consistent over time Criticism; If everyone knows the gov't will lower interest rates in a recession by increasing the money supply. Companies would stop investing until they cause a recession during which they will be able to obtain cheap loans from the government

Austrian School of Thought

Assertions: -similar to neoclassical, but focuses more on money and government -The govn't causes a boom and bust cycle when they try to increase employment through expansionary monetary policies. creates an inflationary gap -Explicitly identifies the misguided governmetn intervention as the cause of business cycles Criticisms: -Great Depression would not have occurred -attributes entire business cycle on gov't Both Austrian and Neoclassical argue -if recession occurs, no gov't intervention is needed

Activity Ratios

Asset utilization ratios operating efficiency -how efficiently a company is managing its assets inventory turnover = cost of goods sold/avg inventory (generally benchmarked against industry average) -high inventory turonover ratio might indicate efficient managment or maybe not holding adequate inventory levels -low Invturnrat relative to industry can be indicator of slow moving or obsolete inventory. suggests too many resources tied up in inventory Days of invenotry on hand = 365/inventory turnover -inversely related to inventory turnover. higher turnover shorter the length of the period thtat the inventory is held on average Receivables turnover = revenue/average receivables -high might indicate highly efficient collection procedures DSO Days of sales oustanding = 365/receivables turnover Payables turnover = purchase/avg trade payables Purchases = ending invetnory + COGS - Opening inventory number of days payable= 365/payables turnover -if firm has sufficient cash and shotr term investments, low payables turnover is probably due to lenient supplier credit and collection policies. high ratio may indicaste not making full use of its credit. or could be receiving early payment discounts

Per Share Quantities that are Important in equity analysis

Basic EPS = (Net income - preferred dividends)/weighted average number of ordinary shares outstanding -denom is weighted by length of time DIluted EPS adjusted income available for ordinary shares reflecting conversion of dilutive securities/ weithed avg number of ordinary and potential ordinary shares oustanding Cash flow per share = cash flow from operations/avg number of shares outstanding EBITDA per share = EBITDA/avg # of shares oustanding Dividends per share

Cumulative Catch-up Basis *Change Orders**

Continuing example, say now at beginning of year 2 you contract to change the plan and modify the new contract, as a result revnue increases and costs increase also, also they believe that they will hit their completion bonus ****-you must calculate a cumulative catch up basis which is recalculating the costs and revenue on the first entry and recognize the revenue as a cumulative catch-up adjustment on the date of the contract modification pg53 for example it was 1,400,000, but now revnue is 1,608,108 for that period, so you make an adjustment of 208,108 when the contract is signed. *** To determine b/w a new contract or extensions, is the new contract involve goods an services that are distinct from the goods an services already transferred

Buy Side

Corporate accounts - cross border purchases, cross border investment flow Real money accounts - investment funds, mutual funds, ETFS, etc leveraged accounts - hedge funds, accept and manage FX for profit Retail accounts - tourists Gov'ts - achieve policy goals, or transactional purposes Central banks - may enter to influence level or trend in domestic Fx rate Soverign wealth Funds (SWF)-

Arrangements Where Countries Have Their Own Currency

Currency Board System -IMF defies as a monetary regime based on an explicit legislative commitment to exchange domestic currency for specified currency at a fixed exchange rate. Fully backed by foreign assets -FX rate is essentially fixed but it is allowed to fluctuate within a narrow band -system works best when domestic prices and wages are very flexible

Issues in Fiscal Policy Implementation

Deficits and the Fiscal Stance: the size of a fiscal deficit cannot be used to determine whether the fiscal policy is expansionary or contractionary b/c of auto stabilizers. So economists look at the structural or cyclically adjusted budget deficit. The structural deficit is the eficit that would exist were the economy working at full employment Difficulties in Executing Fiscal Policy Recognition Lag - time it takes for gov't to figure out that the economy is not functioning at potential output Action Lag- fiscal actions must be approved by Congress, otherwise much quicker then monetary policy Impact Lag - time it takes for a fiscal stimulus to flow through the economy (really quick if indirect tax)

Diidend Related Quantities

Dividend payout ratio = common share dividends/ net income attributaable to common shares Retention rate = net income attributable to common shares - common shares dividends/net income attributable to common shares retention rate = (1- dividend payout ratio) Sustainable growht rate = retnetion rate x ROE *** a companys sustainable growt rate is a function of its profitability ROE and its ability to finance its operations from internally generated funds. Higher ROE andhigher renetion rates result in higher sustainable growth

Issues in Expense Recognition

Doubtful accounts - sales made on credit, however matching principle requires companies to estimate bad debts at the time of revenue recognition. These estimated uncollectable amounts are expensed on the income statement during which the related sales wer made (they are not directly adjusted to revenues) (Credit Reserves) does not effect revenue but expensed before net income is calculated Warranties -Possibility might have to pay for repairing or replacing. Matching prinicple requires companies to estimate future warranty-related expenses and recognize these amounts on the income statement in the period of sale, and to update this amount to bring in line with actual expenses

How can you comply with III-C - Suitability?

Draft Investment Policy Statement - This is drawn from information contained on a written survey and in the client/advisor interview. The resulting policy statement should include the following ingredients: -Client Identification - who they are, their age and time horizon, beneficiaries, previous investment experience -Client Objectives - return expectations, needs for income and growth, tolerance for risk, need to limit downside risk potential and to preserve the initial invested capital -Portfolio Constraints - current and future expected liquidity needs, regular contributions into account, regular withdrawals out of the account, tax considerations, time horizon, regulatory or legal circumstances, individual preferences and restrictions (no tobacco or gambling stocks, for example), guidance on proxy voting. •Periodic Review Process - Regular Udates - Think of the investment policy statement as the foundation of a relationship that should be ongoing and is expected to evolve over time. An annual review will help establish the benefits of ongoing communication, help identify changing circumstances and facilitate a re-examination of the specific guidelines contained in the investment policy statement. In addition, logging all history of client contact, phone calls and emails initiated and received, issues discussed and changes made as a result will help improve the understanding of the client's unique financial circumstances. •Suitability Tests - Regulators increasingly are requiring that firms establish suitability tests. Test procedures should be established to include an analysis of the how different investments will impact portfolio diversification, a comparison of investment risks to client risk tolerance, and a test to ensure the investment fits the investment strategy.

IS Curve

Equilibrium is where Income and expenditure are equal so income equates to GDP so substitute Y Y=C+I+G+(X-M) find in terms of interest rate given within investment function when pluggin in interest rate do not turn into a decimal for example %5 will be 5 in the fucntion

What are the types of exam questions you can expect regarding Standard II-A?

Exam questions covering this Standard are likely to test whether a CFA candidate can understand and identify violations of the Standard and understand and identify actions (e.g. the mosaic theory, firewalls) that help prevent a violation of the Standard. We'll present each of these categories of questions separately. •Understand/Identify Violations - Hundreds of real-life situations can touch on a possible violation of the insider trading laws, and frequently it is not obvious whether a person has acted inappropriately. As a rule, if you obtain information that is not public and it is considered material, contains a tender offer, was misappropriated, or would violate a breach of confidence you should not trade the security. If the material is already public, (or if the material is not public but contains immaterial information), you are generally free and clear of a violation. •Conflicts to Fiduciary Duty - Questions on the exam are likely to address a CFA member's fiduciary duty to, for example, act in the best interests of pension fund holders, and whether the member is really doing his or her duty if he or she doesn't trade on insider information. Indeed, some earlier Standards require placing client interests ahead of personal interests (e.g. with personal transactions or participation in IPOs). However, the guiding principle is that a CFA member's duty to the investing public (by not acting on inside information) is greater than other duties. •Mosaic Theory - A securities analyst will be motivated to identify mispriced stocks and will be gathering information to such an extent that exposure to nonpublic information is a possibility. However, the work of an analyst depends on the free flow of information. As a defense to a charge that nonpublic information is being used to trade on a stock, the mosaic theory suggests that the analysis of a company form a mosaic; that is, by assembling small bits of nonpublic information together, large and meaningful conclusions can be drawn. The idea behind the mosaic theory is that each individual piece of information is nonmaterial by itself: an individual piece of information would not move the price of the security if disseminated in a public press release. Taken together, however, the bits of information can form a meaningful mosaic. This practice is perfectly legitimate, and it is encouraged. Think of the mosaic theory as a way for analysts to do their jobs and use nonpublic information without feeling like they are at risk for liability under insider trading law. On the exam, hypothetical examples will carry identifying words - i.e. "material" or "nonmaterial" - to guide you to the right answer (material: trading restricted, non-material: no trading restrictions).

Expected Inflation

Expected inflation - inflation rate that economic agents expect to see in the economy in the future Expected inflation gives rise to: Menu costs - costs of repeatedly changing advertised prices of goods and services Shoe leather costs - time and effort put in by people to deal with effects of inflation, i.e. holding less cash and making frequent trips to bank when in need of cash expected inflation is reflected in all long-term contracts

LOS8l: Calculate and interpret the expected value, variance, and standard deviation of a random variable and of returns on a portfolio

Expected value of returns on a portfolio is simply the expected value of each outcome and multiplies by their respective weights Calculating variance of a portfolio is more complicated because the variance is not only a function of individual asset weights and variances but also of the covariance of assets with each other. Variance of 2 asset portfolio Var(Rportfolio) = wb^2σ^2(Ra) + wb^2(Rb) + 2wawbCov(Ra,Rb) look on notes 3 asset portfolio gets complicated pg 197 *may be asked how many unique covariances that must be computed to calculate n portfolio variance **n(n-1)/2) so 3 assets would need 3*(2)/2 = 3 covariances

Calculating GDP

Expenditure Approach - Total amount spent on goods and services produced in the economy Income Approach - Total amount earned by households and companies in the economy For the economy as a whole Total Income=Total Expenditure *Notes Only goods and services produced during the measurement period are included -transfer payments are excluded -income from capital gains is excluded -underground economy not included -barters not included -ONLY VALUE OF FINAL GOODS AND SERVICES Value of FInal output or you can sum of value added per stage

To compare equality of the variances of two normally distributed populations based on two independent random samples = F-Stat

F-test F=s^2/s^2 variance of each sample *Always put the larger variance in the numerator when calculating F-test Features 1. skewed to the right 2. bound by zero lon the left 3. it is defined by two seperate degrees of freedom

FCFE - free cash flow to equity - refers to cash that is available only to common shareholders

FCFE=CFO-FCinv+net borriwing refers to cash that is available only to common shareholders

Continued:

Financial Assets: stocks, bonds, bonds payable notes payable, derivatives derives its value from underlying factor, eg interest rate, exchange rate, underlying asset price, requires little or no intial insestment. mark0to market Fpg83 Financial assets measured at fair value: available for salestocks bonds, derivatives, derivatives, non derivative instruments with face value exposured hedged by derivatives Measured at cost or amortized cost -unlisted instruments -held to maturity investments -loans and receivables. pg 84 important held to maturity securites, reported at cost or amortized cost on balance sheet, interest income realized gains and losses on income statement -available for sale secuirites - balance sheet: reported at fair value, unrealized gains or lossed tue to changes are rpoerted in other comprehensive income, income statement: divdend income, interest income, realized gains and losses. -trading securites - balance sheet: reported at fair values, income statment, same as available ecurites but also unrealized gains and lossed based on change in market value pg 85, key here is whether it is held for a long time or not, reported at cost if long term, reported at fair value if available or trading on balance sheet. income statement: interest and realized gains appear on all 3, for trading securites unrealized gains are also added on the income statinment. aslo for availbe for sale the change in market value is categorizzed in other comprehensive income but for trading securities it is recognized in other comprehensive income (both under equity) -remember the pruchase of this secuirites makes equity go up while the cost of the securities makes assets go down

Think about the life of the following fluctuations on the business cycle

Fluctuations in Capital Spending -"" in Inventory Levels -Consumer Behavior - HH spending is typically largest sector of every countries GDP - two measures retail sales, and a broad based indicator of consumer spending Sales Data Surveys can also help collect

LOS 20a: Compare GDP and GNP

GDP - market value of all final goods and services prudced by factors of production within a country economy -GDP includes goods and services produced by foreigners within the country and excludes produced by citizens outside of the country GNP- measures market value of all final goods and services produced by factors of production supplied by citizens of the country regardless whether production takes place inside -excludes goods and services produced by foreigners within the country Analysts prefer GDP because it measures WITHIN the economy

continued prof ratios

Gross profit margin = gross profit/ revenue operating profit margin = operating profit/rev pretax margin = EBT (earning before tax but after interest)/ rev (net profit is net income)net profit margin = net profit/revenue, this is how much a company makes for every dollar it generates in revnue ROA = net income/average total assets -Return on Assets, the higher the ROA, the greater the income generated by the company given its total assets (remember we are doing cross sectional analysis) Adjusted ROA = (Net income + Interest expense * (1-taxrate))/ average total assets *The problem with ROA is that it uses only retunr to equity holders. Where assets are financed by both equity holders and bond holders. therefore some analysts prefer to add interest expense back to net income in the numerator. However adjusted for the tax shield that it provides. Operating ROA = Operating income or EBIT/ average total assets Return on Total capital = EBIT/ short term debt + long term debt + equity ROE = return on equity = Net income/avg total equity *This ratio measures the rate of return earned by a companyh on its equity capital. Equity capital includes minority equity, preferred equity, and common equity. Measures a firm's efficiency in generating profits from ever dollar of net assets (assets-liabilities), and shows how well a company uses its investment dollars to generate earnings. Return on common equity = net income - preferred dividends / avg common equity *preferred dividends are subtracted Retrun on common equity = Net income - preferred dividends/ avg common equity pg129 formulas

R&D Costs

IFRS requires expenditures on reasarch or esarch phase of internal project must be expenses rather than capitalized as an intangible asset IFRS can allow company to recognize internal asset from development phase if project is feasible to be complete and the intent is to use or sell the asset Generally speaking US GAAP requires R&D costs be expensed when incurred. Certain costs related to software development however are capitalized Expensing rather than capitalizing development costs results in lower net income in the current period and lower operating cash flow and higher investing cash flow in the current period. note if current period software development costs exceed amrortization of prio periods capitalized development costs, net income would be lower under expensing. if however the opposite whre development expenditures were to slow dowsn such that expenses are lower than amortization of prio periods capitalized costs, net income would be higher under expensign *Basically you amortize costs, but if for soem reason the costs chagne then expensing and capitalizing can have opposite then there normal effects. ie if tech development costs slow down and expenses are lower than amortization of prio periods captialized costs, net income would be higher under expensing.

What is Standard I-B?

INDEPENDENCE AND OBJECTIVITY Reasonable care and Judgement to achieve and maintain Independence & Objectivity: maintain integrity and avoid conflicts of interest M&C must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. M&C must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.

Regulatory Authorities IOSCO

IOSCO (International Organization of Securities Commission) - it is not a regulatory authority but its members regulate a large protion of the world's financial capital markets. 1. Protection of investors 2. Ensuring that markets are fair, efficient, and transparent 3. Reducing systematic risk

Monetary Policy Strategies

Inflation Targeting: Central bank makes a public commitment to achieving an explicit inflation target Exchange Rate Targeting - many developing economies choose to target Fx rate. The CB supports the target by buying and selling the domestic currency in foreign exchange markets For Example say inflation in your country is greater then in the US. to maintain parity you must Buy domestic currency or (sell USD). Either Strengthening your currency by taking it off the market or by weakening the USD by selling it, making it more available.

Uses and Analysis of Balance Sheets

Information regarding a company's liquidity, solvency, and the economic resources controlled by the company by examing its balance sheet -Liquidity refers to a company's ability to meet its short term financial obligations -Solvency refers to a company's ability to meet is long-term financial obligations. -two techniques that may be used to analyze a company's balance sheet are common size analysis and ratio analysis

What are typical situations related to III-E to expect on the exam?

Keeping client information confidential is essential to building and developing a relationship of trust. On the CFA exam, cases involving this Standard are likely to test the exceptions that will require disclosures to be made. Here are some examples of situations that may require disclosure of confidential information: •Settlement Agreements - In a case where a manager and client have entered into a settlement agreement, the agreement cannot be written so as to prohibit co-operation with the CFA Institute's Professional Conduct Program (PCP) in the investigation of a CFA member (i.e. investigating whether that member violated the Code and Standards). So-called confidentiality clauses must explicitly allow both the member and the client to respond to requests for information, without restriction. Failing to provide information in a PCP investigation, even if based on a confidentiality clause, subjects the member to a summary suspension under CFA Institute bylaws, and his or her right to use the CFA charter may be revoked. •Charitable Donation - A portfolio manager meets with a corporate client that can reduce its taxes by giving away money to charity and that has set aside $100,000 for this purpose. Would the portfolio manager violate Standard III-E by divulging to a local charity that the company has $100,000 to give away? In such a case, it would depend on whether the corporate client gave permission to the manager to reveal this information. If not, the manager would need to keep the information private and protect confidentiality. •Illegal Activities - A portfolio manager suspects a client of illegal activity, but has no tangible evidence to support these suspicions. The portfolio manager understands her obligation to keep sensitive information confidential, but does not wish to support anything illegal. If such a case arises, doing nothing is not an option. She is best served by seeking legal counsel and informing her supervisor

Measures of Sustainable Growth

Labor Productivity = Real GDP/Agg Hours Potential GDP = Agg Hours * Labor Productivity Potential GDP growth rate = long-term gorwht rate of LF + long-term labor productivity growth rate

Income and Substitution Effects

Law of demand states that as a price of good falls quantity demanded increases (if normal) This shift can be broken up into two steps: income effect - real income increases, which will lead to a shift of BC and increase in quantity purchased Subs. effect - good becomes cheaper , shift in budget constraint Graph on page 49 will be analyzing the quantity - so if only income shift draw dotted line and Q2 to Q1 is IE then take into account the SE effect so Q3 to Q2 SE always goes in the opposite direction of the price change

Sources Versus Uses of Cash

Lets considder an asset account inventory. -if inventory levels have increased this is a use of cash -if inventory levels have decreaseed less of firms cash is tied up in inventory. this is a source of cash fro the firm -increases in current assets are uses of cash and decrease in current assets are sources of cash. Change in asset balances and cash are negatively related -an increase in current assets makes a use of cash and cash decreases Now liability -if total amount due to creditors increased, it implies that the firm has borrowed more money. this represents a source of cash for the firm -if the amount payable to crediotrs has fallen over year, some creditors have been paid back which is a use of cash for the firm -increase in current liabilities are sources of cash, while decreases in current liabilities are uses of cash. changes in liability balances and cash are positively related -so an increaes in current liabilities means more cash, while an increase in current assets means less cash

LOS 5f: Demonstrate the use of a time line in modeling and solving time value of money problems.

Loan Payments and Amortization -loan amortization is the process of retiring loan obligations through predetermine equal monthly payment Each payment includes an interest component, which is based on the principal of the balance oustanding, and a principal repayment componetn On calculator for Amortization the future value is 0 because the loan will be payed off, hit CPT PMT do calculate amount of annual payment There is a shortcut to Amortization tables pg 140 To compute an annuity payment in order to achieve a given FV, the PV=0 To solve for in make sure future value is negative REMEMBER OUTFLOW VS INFLOW ON WHETHER IT IS NEGATIVE OR NOT

FORWARD RATE EQUATION

Look on page 223 forward exchange rates are calculated so that any expected gain is equal to the risk free rate thus there is NO ARBITRAGE there is a relationship between the interest rate differential domestic currency and forward currency, but this does not make them accurate predictors -given the term to maturity the higher the interest rate differential, the greater the absolute number of forward points given the interest rate diff, the longer the term to maturity, the greater absolute forward points (THE LAST TWO just mean that the farther out your futures contract is maturing, typically the larger absolute point differential

Money Market Equilibrium

M/P=RMd RMd is a function of r and Y given the real money supply RM an increase in real income which would lead to an increase in real money demand must be accompanied by an increase in interest rates which would decrease real money demand so that demand for real money remains the same and in euiqlibibrium if real money supply is constant we can infer a positive relationship b.w real income (Y) and the real interest rate (R) IS=LM = equilibrium

Marginal Propensities to Save and Consume

MPC - additional unit of disposable income that is consumed or spent MPS - portion of an additional unit of disposable income that is saved MPS = 1 -MPC -generallly Agg consumption will increase (decrease) when there is an increase (decrease) in real income *sometimes average propensity to consume APC - used as a proxy for MPC in an economy Bottom Line: Consumption varies positively with income and negatively with taxes.

Examples

Marlon wants to buy a stock personally and does not want to wait until the recommendations i approved and the stock is purchased by his employer -He is violating VI(B) -must treat spouses or family accounts the same way as your own

What is Standard II-A?

Material Nonpublic Information M&C who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.

Functions of Money

Medium of exchange -readily acceptable -known value -easily divisible -high value relative to weight -difficult to counterfeit Store of Value - easily transported, readily accessible Unit of account - can quantify opportunity cost.

What is Standard I-C?

Misrepresentation- any untrue statement or omission of fact that is otherwise false or misleading Members and candidates must not knowingly make any misrepresentations relating to analysis, recommendations, actions, or other professional activites

Monetarists Views on Inflation

Monetarists believe that inflation occurs when the growth rate of money supply in the economy outpaces growth in GDP. They explicitly place the blame for demand-pull inflation on excess money growth. -if money growth exceeds nominal GDP growth there is a possibility of inflation, -if slower could be disnflation(fall) or deflation (negative)

Monte Carlo Simulation Los9q: Explain Monte Carlo simulation and describe its applications and limitations LOS9r: Compare Monte Carlo simulation and historical simulation

Monte Carlo simulation pg 232 -generates random numbers and operator inputs to synthetically create probability distributions for variables -investopedia -essentially take a stocks price and the next days price similar to above, once you find the standard deviation you -determines project variables and the range at which those variables can occur, associates a probability with each variable using a normal distribution (finds the mean and calculates a z score) then randomly establish relationships for correlated variables -apply random variables to run a sample size -chart the different options, and you can then determine the most likely result investopedia has a good chart -answers are only as good as the assumptions and model used -does not provide cause-and-effect relationships

Audits

Must be examined by an independent accounting firm, which then states its opinion on the financial statements. Audits are required typically by law, arrangement, or regulation 1. Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement whether due to fraud or error. Types of Audit Opinions (that you grade a company by) Unqualified opinion - presented fairly qualified - fairly, but some errors or objections adverse- has not been presented fairly disclaimer - not able to issue an opinion

Familiarizing with Calculator

N=Number of compounding Periods I/Y = Periodic interest rate PV=present value FV=future Value PMT=constant periodic payment CPT=Compute *Important to realize the end of one period is the start of the next for example beginning of Year 4 = t=3 on timeline -inflows are positive numbers, outflows are negative -always enter value then press PV or whatever then hit CPT (compute) and press the key to compute -for I/Y enter as a percentage -use negative value when imputing present value -remember I/Y and N should be compatible, if N is in days then interest rate should be in days -there is interest and compound interest

NPV

Net present value equals the present value of all expected inflows from the investment minus the present value of all expected outflows -the rate is the discount rate or appropriate cost of capital, which reflects oppportunity cost To calculate a project's NPV: NPV=sumof(CFt)/((1+r)^t) CFt = expected cash flow at time t N=investment's projected life (how many you are adding, but it is on top of the sum formula but do not use in equation) r= discount rate or cost of capital

Calculating Annuities(Continued)

PMT replaces either present value or future value when calculating ordinary annuities -PMT is negative similar to present value -for some timeline problems for example a 10 year annuitty with seven 1000 payments for the first seven years. find future value -so first find future value with n=7 and then use this amount as the present value and calculate with n=3, for the remaining 3 years make sure to plug in that PMT = 0 -if calculating present value at 0 but payments don't start til year 4, calculate PVat time 3 through 10 or N=7 and then use this as your future value at t=3 so N=3

Periodic versus Perpetual Inventory Systems

Periodic inventory system - the quantity of the invenotry on hand is calculated periodically. The COG available for sale during the period is calculated as beginning inventory plus purchases over the period. The ending invetnory amount is then deducted from cost of goods avialable to determine COGS (calculated at final step) Perpetual inventory system. changes in inventory accoutn are updated countinuously, PUrchases and sales are recorded directly as they occur. (calculated continuously throughout) if prices are rising then COGS will be higher for Periodic, (assuming LIFO) Conclusions: Periodic under LIFO under rising prices Lower value of EI HIgher value of COGS (there fore gross profit would be lower under the periodic system)(***** Other important takeways -value of sales and cost of goos are same under first year of operations. in subsequent years start to vary -if compnay uses FIFO, COGS and EI are teh same under periodic and perpetual -If a company uses separate identificaition they are also they same if a company uses AVCO - COGS and EI are the same under FIFO and AVCO under perpetual COGS and EI are different from thier values under FIFO under periodic system

Charts continued pg 282 Point and Figure Chart Scale VOlume

Point and Figure X is plotted as an increase in price while O is plotted as a decrease in price box size refers to minimal level of price change that will merit a O or an X reversal size - is typically a multiple of the box size, a reversal size of three means an analysts will move to the next column when the price reverses, or changes direction by three or more boxes Scale logarithmic scales are more appropriate when the range of data is larger, the length of time period depends on purpose, active traders typically prefer shorter time intervals Volume- used by technicians as a barometer of the strength of a trend. IF a security's price is increasing with increasing volumes, it shows that more and more investors are purchasing the stock at a higher price. This indicates that the trend is expected to continue as the two indicators confirm each other if a securit's price is rising with declining volumes, the two indicators are diverging, which suggests that the trend is losing its momentum as fewer investors are willing to buy at higher prices Daily price chart and volume chart (scale and volume are placed on top of each other

Standard III-E Preservation of Confidentiality

Preservation of Confidentiality": M&Cs must keep information about current, former and prospective clients confidential unless: •the information concerns illegal activities on the part of the client or prospective client, •disclosure is required by law, or •the client or prospective client permits disclosure of this information.

How can you comply with IV-C?

Questions regarding procedure on the exam may test Standard IV-C. If it comes up, remember two simple questions that will help in designing an effective compliance program: 1.Which violations in particular are most likely to occur? 2.What rules will best uncover and prevent these violations? Designating a compliance officer, as well as making a compliance manual available to the organization are effective methods in ensuring the organization has a system of checks and balances. There should be an educational program in place, which continually updates personnel on compliance procedures. If offered a position w/a company in which you know there is an ongoing violation do not accept the position. Accepting the position with inadequate procedures in place or improper marketing material would leave you at risk of incurring a violation of the Code and Standards

5 Way Dupont

ROE = net income/ebt x EBT/EBIT x EBIT/Rev x REv/ Avg total assets x avg total assets/avg shareholders equity ROE is thus a function of tax buden, interest burden, operating profitability, efficiency, and leverage the tax burden ratio equal one minus average tax rate. a higher tax burden indicates that the company keeps a higher percentage of its pretax profits (gross margin) -the interst burden ratio captures effect of interest expense on ROE. high borrwing costs reduce ROE -asset turnover ratio is an indicator of the overall efficiency of the company, while the leverage ratio mesaures the total value of a company's assets relative to its equity capital

Decomposition of ROE

ROE measures return a company generatres on its equity capital. Dupont analysis has following uses: decomposes ROE for different aspects of the company performance. Helps determine reasons fro change in ROE over time. can help managers determine where to improve ROE ROE = Net income/avg total equity

LOS28b: Classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios

Ratios are typically classified into the following categories: Activity ratios measure how productive a compnay is in using its assets and how efficiently it performs its everyday operations Liquidity - ratios measure the company's solvency - ratios measure a company's ability to meet long-term debt obligations valuation ratios - measure the quantity of an asset or flow (e.g earnings) associated with ownership of a specific claim

Lesson 3: The accounting Process

Recording business transactions is based on double-entry accounting * REMEMBER ALL THIS STUFF IS EXTREMELY IMPORTANT ON THE EXAM COGS = COST OF GOODS SOLD *When an owner invests an amount into the business 100000 for example, this is calcuated as a short term asset in cash, and as owner's capital

Terms

Revenue - usually first line of income statement (net revenue is total revenue adjusted for product returns and amounts that are unlikely to be collected) (creduts) Expense - outflows, depletions of assets, incurrences of liablilitesi Gross Profit or Gross Margin - difference between revenues and cost of goods that were sold Operating income - subtracting all direct and INDIRECT costs from revnues. THIS IS BEFORE ACCOUNTING FOR TAXES valuable because they are not affected by financing decisions of the firm (for financial firms, interest income and expense are part of ordinary business activities so are included in operating income) Net Income - Bottom line of the income statement. It represents both ordinary business activities as well as gains and losses from nonoperating activities. Net income = Revenue - expesnes of ordinary +other income - other expenses + Gains - Losses ** If a company owns majority shares of a subsidiary, it must present consolidated financial statements. Combine all revenues and expenes. If it is not wholly owened, noncontrolling interest in net income is deducted from total income. As it represents proportionate share of subsidiarys net income that belongs to minority shareholders Essentially gross profit -(minus) Intangible assets(finite life), impairmenn, marketing, loss or gain on sale of assets, amortization of intangibles. = operating income

Spot Exchange Rates

Spot exchange rates (S) - quotas for transactions that call for immediate delivery. For most currencies immediate delivery means T+2 the transaction actually settled 2 days after the trade was agreed upon. spot transactions make up a relatively small portion of total turnover in the global FX market

What are the types of exam questions you can expect regarding applying Standard I-A?

Standard I-A covers laws, rules and regulations, will be tested on some possible violation of the law, and how a CFA Member or Candidate should proceed. The following questions may apply: Did the Member seek the advice of counsel? Consulting an attorney is typically seen as a good defense against an alleged violation of Standard I-A. Many cases involve someone who works for a firm that has violated the law (made misleading statements on a prospectus, for example). In these cases, look to see if the CFA member or candidate sought and followed the advice of counsel. Did the member report the violation, and to whom did the member report it? For any potential violation of a law, rule or regulation, if the situation suggests that the member either went along with it, did nothing, tried to cover it up or was afraid to say anything for fear of losing his or her job that is a clear sign that the Standard has been violated. In any example, look for evidence that the CFA member tried to do the right thing. If that person's firm is potentially guilty of violating a law or regulation, he or she needs to start by reporting this situation to his or her supervisor and/or compliance officer. If the situation is not remedied, he or she should distance him or herself from the potential violation and seek the advice of counsel. For multinational operations, which country's laws apply to the situation at hand? In the real world, it can be ambiguous if an advisor is domiciled in one country and operates in another. For the purposes of the CFA Level I exam, the candidate isn't expected to be a lawyer and make a judgment - the exam will indicate which country's laws apply to the situation. If a broker or advisor operates solely or exclusively in a country, assume that those laws apply unless it's stated otherwise. The rule of thumb (which states it's the law that applies if it's stricter than the Standards; otherwise, the Standards apply) is usually going to make it easy to arrive at the right answer.

Standard II(B) - Market Manipulation NOTE

Standard II(B) is not intended to preclude transactions of market inefficiencies. The intent is critical in determining whether it is a violation of this standard

LOS9m: Define the standard normal dist, explain how to standardize a random variable, and calculate and interpret probs using standard normal dist

Standard normal dist - prob statements for any kind of random variable can be made by referring to a singe normal curve **the stand norm dist has a mean of zero and a standard deviation of 1 To standardize a given observation we use a z-score z= (observed value -population mean)/ standard deviation z=(x-μ)/σ ****essentially the z score represents the number of standard deviations from the population mean a given observation lies so a z score of 2 means the observation lies 2 standard deviations above the mean

LOS24b: Roles and desirable assets of fin rep standards

Standard setting bodies - private sector orgs of accountants and auditors that develop financial reporting rules The SEC enforces these reporting requirments

Continued Double Tops and Bottoms and Triple Tops and Bottoms

Stronger the rally preceding the head and shoulders, the more pronounced the expected reversal Double tops - when an uptrend prices reverses twice at approximately the same price level. the deeper the value and the longer the time period b/w the two tops, the more significant the formation is considered to be Double bottom - price expected to rise above the peak between the two bottoms by approx an amount equalt to the distance b/w bottoms and the peak Triple- Rare but when they occur they indicate mroe significant reversals then double tops and double bottoms

How can you comply with Standard I-A?

The Standards of Practice Handbook makes a number of suggestions to avoid violating Standard I-A. •Establish Files - These would cover all applicable laws, rules, regulations, statutes and important cases that might be relevant to any potential business situation involving the firm. Files must be readily accessible and a process to manage, distribute and interpret such material should be in place. •Stay Informed - Laws, rules and regulations frequently change, and key employees in a firm must be informed continually of such changes. CFA M&C are obligated to establish, or encourage others to establish, a procedure by which everyone in a firm is kept informed and applicable changes are disseminated in a timely manner. This procedure is the domain of the firm's counsel or compliance department. There are a number of real-world cases in which everyone just assumed that a certain person or department was taking care of it. •Distribution Area Laws - In an increasingly global marketplace, MC& must make every effort to understand the laws of the country or region in which they operate, including those where their products or services are distributed across borders. •Legal or Illegal? - Certain conduct may not in fact be a violation. Members should consult counsel in ambiguous situations. •Disassociate - This is a good word and a worthwhile course of action. It is good advice: it may have been OK at some time in the past to do nothing if one witnessed illegal or unethical conduct, but in today's environment, the Standards have changed. One must now disassociate from any illegal activity and actively urge the firm (either an immediate supervisor or a compliance officer) to cease any conduct that violates the law or an applicable regulation or standard. Inaction might be judged, (even in a court of law), as participating or assisting, which violates the Standard.

LIFO Liquidation

This occurs when a firm sells more units than in it purchases. THus it drawn from some of the beginning inventory. LIFO allocates oldest prices to inventory and in some cases these older prices could be outdated. When it includes older cheaper units of stock in its COGS it severly understates COGS. Consequently a firm with LIFO liquidation overstates net income. Higher profits are unsustainable because eventually firm will run out of cheaper older stock to liquidate. pg 163 essentially it creates a phantom gross profit LIFO liquidation can result from strikes, recessions, or a decline in demand for the firms product. Irony is that when there is a LIFO Liquidation the firm reports surprisingly high profits (due to realization of holding gains on inventory)

LOS 4b: Describe the scope of the GIPS standards with respect to an investment firm's definition and historical performance record

To claim compliance - must define an entity that claims compliance, must be defined as an investment firm, 'distinct business entity' -firms are required to present a minimum of five years of GIPS-compliant historical investment performance - must present a minimum performance record for 10 years when first claiming compliance (you are compliant already but must report for 10 years

How can you comply with III-A?

To ensure compliance with Standard III-A and to avoid a violation, CFA M&Cs should start by thoroughly knowing and understanding the content of all governing documents to which they are bound in their relationships with clients. Given the duty to loyalty required by this Standard, are there any particular restrictions or unique characteristics that are not fully understood? Legal advice should be sought for unclear guidelines. When in custodial control of client assets, the following procedures are suggested (per the Standards of Practice Handbook): •Audit the firm at least once a year. •Produce a quarterly statement for each client, indicating funds and securities in that account and itemized transactions during the period. •Make full disclosure as to where the assets are maintained, and where and when they are moved. •Separate assets so that each client's holdings can be distinguished. To comply with soft-dollar standards, a fiduciary needs to ask three questions to determine whether soft dollars can be used and what percentage of the cost can be allocated: 1. Does this product provide investment research? 2. Will the information it provides contribute to the research process of this organization? 3. Will any portion of this product go for uses not directly involved in the investment research process? For investment managers, an internal policies and procedures guide should observe the following rules: •All applicable laws, rules and regulations must be followed. •Potential conflict of interest arrangements (additional compensation, outside directorships) are required disclosures. •Investment objectives for each client must be initially established and reviewed at least annually and as circumstances warrant. •Asset diversification should be practiced as a risk reduction tool, except in cases where specific guidelines and objectives preclude it. •Fairness and objectivity should be practiced with all clients, with no explicit favoritism toward one client or group. •A process for vote proxies should be established with clients' best interests in mind; individual responsibilities for voting should be determined; and records should be maintained. •Best execution on trades should be practiced. In other words, under the particular circumstances in place (i.e. what is reasonably available), what is the broker that provides the lowest total cost to the client? "Cost" refers not only to trading commissions but also to costs related to poorly executed trades (buying at prices that are higher and selling at prices that are lower than what was available from competitors). •Duty of loyalty to clients, as a company policy, is top priority.

Change in Polarity Principle (support and resistance levels)

Trend analysis involves the use of support and resistance levels. A support level is defined as the price at which there is sufficient buying interest, at this level investors believe security is attractive despite the recent price decline A resistance level is the price at which enough selling activity is generated to prevent any further increase in price. investors believe the security is overpriced Change in Polarity Principle - a key tent of trend analysis, once a price rises above the resistance level, it becomes the new support level, similarly once the price falls below a support level it becomes the new resistance level.

LOS30d: Describe different depreciation methods for PPE and calculate depreciation expenes

Two primary models for reporting long lived assets Cost model - required under US GAAP, and permitted under IFRS. cost of long lived tangible assets (except land) and intangible assets with finite useful lives is allocated over their useful lives as depreciation and amortization expense. under cost model an assets carrying value = historical cost - accumulated deprec or amort the revaluation model is permitted under UFRS but not US GAAP

Desirable Properties of an Estimator

Unbiasedness- expected value is equal to the parameter being measured -efficience - one that has lowest variance of all unbiased estimators of the same parameter -consistency - one for which the probability of estimates close to the value of the population parameter increases as sample size increases. standard error falls as sample size increases.

Inventory Method Changes

Under IFRS a change is only acceptable if it is going to proivide more reliable and relevant information in the financial statments -must be applied retrospectively -Info must be for all periods that are presented restated -adjustments for periods prior to the earliest year that is presented must be accounted for in the beginning balance of retained earnings US GAAP has similar requirement -company must explain how the newly adopdted inventory method is superior -may be required to seek permission from IRS -if switching to LIFO would only present prospectively instead of retroactively ** Company may switch from FIFO or AVCO to LIFO to reduce income tax expense **Alternatively company may switch from LIFO to FIFO or AVCO to increase reported profits

Inventory Adjustments

Under IFRS, inventory must be stated at lower of cost or net realizable value. IF NRV of inventory falls below cost recorded on the balance sheet, inventory must be written down, and a loss must be recognized (as part of COGS or separately) on the income statement. Effectively inventory value can never exceed the amount originally recognized Under US GAAp requires application of the LCM (lower of cost or market) principle to value inventory. Market value is defined as the replacement cost. Compare cost to replacement cost. If replacement cost is higher than NRV it must be brought down to NRV and if replacement cost is lower than NRV minus normal profit margin, it m ust be brought up to NRV minus normal profit margin This adjusted replacement cost is then compared to carrying value (cost) and the lower of the two is used to value inventory. Cost vs market cost, pretty simply. *An inventory write down reduces both profit and the carrying amount of inventory. on the balance sheet and thus has a negative effect on profitability, liquidity, and solvency ratios. However activity ratios such as inventory turnover will be positively affected. Under IFRS NRV = Selling price - selling costs NRV - Normal Profit Margins if invetory is reported at higher value, then inventory is written down to NRV

Common Size balance sheets

Vertical common size balance sheet - expresses each balacne sheet item as a percentage of total assets. This allows an analyst to perfrom historical analysis (time series analysis) and cross-sectional analysis across firms within the same industry pg 89 some common cross sectional analysis ***Examples Company A has 16% assets in cash and short term marketable securites, while company B has 46.5%, Therefore B is more liquid -Comapnys A's current liabilities exceed cahs on hand by 400,000 this means company A might need to reaise cahs through selling inventory or collecting accounts receivable. -Presence of goodwill on company B's balance sheets shows company has grown via acquisitions. Company A has no goodwill so internal ggrowth. -Company B financed 98.4% of its total assets with liabilities, withkle A financed only 21.6% with liabiliites. Therefore A is more solvent then B. If company B sees volatility in chas flows, it may struggle to meet its debt servicing obligations

Two Tailed Tests%

We assses wtheter the value of the population paramter is simply different from a given hypothesized value. ( either = or does not equal) that means the test stat can be greater then or equal to the mean, so a 5% significance level you have to divide the signficance level by 2. so it would be 2.5% on each tail, thus a critical value of 1.96 you would use the z table to find where the cumulative probabilty underneath the level of significance so here on z table you would go to where you find z of .975 which is 1 - .975=.025

Activity Ratios Continued

Working capital turnover = revenue/ average working capital indicates how efficiently the comany generates revenue from its working capital. -higher working capital turnover ratio indicates higher operating efficiency. fixed asset turnover = revenue/average fixed assets -how efficiently a company generates revenues from its investments in long lived assets -this ratio will be lower for a frim whose assets are newer. Depreciation assets over a longer period total asset turnover = revenue/avg total assets -company's overall ability to generate revenues with a given level of assets -* a company with highly capital intensive techniques of production will have a lower total asset turnover compared to a business that uses labor intensive production methods

Calculating CFF*T

cash flow from financing is generated from the issuance and repayment of capital (long term debt and euqity) and distribution in the form of dividends to shareholders Long term debt- an increase implies cahs inflows, a decrease implies debt repayment and an outflow Equity - increaes in common stock implies cash inflows from issuance of new shares. a decrease implies share repurchase and cash outflows dividends - Cash dividends paid out can be computed from the following relationship cash div paid out = beg dividends payable + dividends declared - ending dividends payable Dividends declared = beg retained eranings + net income - ending retained earnings ** The net increase in cash (CFO+CFI+CFF) on the cash flow statement must equal the difference between cash balances for the two periods

Reading 36: Cost of Capital

cots of capital refers to rate of return supplilers of caipatl require to contribute capital to the firm. opp cost of funds for the providers of capital

Binomial Tree - pg 215

each part in the tree is one of two options. thus you find the total # of possible outcomes across the tree, such as up down down, or down up up, and find the probability by multiplying the probability of up or down along the way which is constant, that finds the probability, the multiply by the number of trials pg215 ** Quick note: skewness and the binomial distribution. -probability of success =.5 = symettric probability of success is less than .5 = skewed to the right more than .5 skewed to the left

Satement of Changes in Owner's Equtiy

effects of all transactions that increase or decrease a company's equity over the period. Information that should be included -Total comprehensive income for the period -effects of any accoutning changes that have been retrospectively applied to previous periods. -capital transactions with owenrs and distribtuion to owners -reconciliation of the carrying amounts of each component of equity at the beginning and end of the year

External Economies/diseconomies

external economies - factors outside of the control of the FIRM that decrease average costs for individual firms as INDUSTRY output increase (consultant sharing knowledge to growing firms to reduce ATC) external diseconomies - factors outside control that increase average costs as industry output increases (example -increase in flights cuases congestion and results in longer waiting times and airport charges for all airlines

Hypothesis Testing

hypothesis - statement about the value of the population parameter. we conduct a hypothesis test on the sample information in order to be able to comment on the accuracy of the statement pertainign to the population paramter 1. null hypothesis - represents status quo, and we are interested in rejecting. null hypothesis will always include an equal sign, whether <= or >= = 2. alternate hypothesis - statement whose validity we are trying to evaluate example: in 49 games player averaged 36 points and stand deviation of 9 points. Determine accuracy of statment that his career average is greater then 30 poitns. Use 5% significance level (which is a critical value which is given 5% of observeled sample means lie more than 1.645 standard deviations above the mean the test statistic lies 4.67 standard deviations above the mean (the assumed 30 points) -the chance of a sample having a mean of 36 given a sample size of 49 and a standard deviation of 9 when the population mean equals 30 is less than 40% therefore we reject the null

Identify approriate test stat and interpret results for a hypothesis test concerning the equality of population means of two at least approximately normally distributed populations, based on independent random sample with 1. equal or 2. unequal assumed variances Only need to identify the appropriate test and interpret results, do not need to know formulas (Z,stat, t stat, chisquared stat or F stat

if it is assumed the variances of the two populations are equal we use pooled variance where they are equal on equation sheet, don't need to know forumlats just when to apply. when variances ar assumed unequal we must account for each individually Test for pop mean when pop variances are assumed equal pg263 think of an example where we want to test equality of returns across two decades - here we would assume that variances are the same test for pop mean when pop variances are assumed unequal pg265 when variances are assumed unequal. such as difference in recovery rates for investors in financial sector and pharmaceutical sector debt at the 10% level of signficacne

Shifts in LM curve

increase in money supply cause LM shift to the right - real interest rates go down and real income goes up If money supply is held constant the only variable that affects real money supply is the price level. so a decrease in the price level lends to an increase in real money supply the increase in real omeney supply leads to a rightward shift in the MC acurve so if price goes down LM shifts to the right. ************VERYIMPORTANT******=so an increase in price leads to an increase in interest rates

Intangible Assets

intangible - patents, copyrights, trademarks -cost of intangible asset with a finite life is amrotized over its useful life -cost of an intangible asset with indefinite life, the asset is tested at least anually for impariment. . if deemed impaired the assets balance sheet value is reduced and a loss is recognized on the income statement

22e: Describe Info sources analysts use in financial statements for supplementary information

interim reports - semiannually or quarterly -proxy statements (topics that require a shareholder vote) -press releases -external sources - provide info about the economy and industry

LOS39a: Describe primary and secondary sources of liquidity and factors that influence a comapny's liquidity position

liquidity management - ability of a company to gerate cash when reqiried primary sources - readily available such as cash balances and short term funds secondary sources, provide liquidity at a higher cost than primary sources, include negotiatiing debt contracts, liquidating assets, or filing bankruptcy protection using primary sources usually does not result in a change in a company's operations a drag on liquidity occurs when there is a delay in cash coming into the company Major drags on liquidity include: -uncollected receivables -obsolete inventory -tight credit - adverse economic conditions a pull on liquidity occurs when cash leaves the company too quickly Major pulls: -making payments early -reduced credit limits (as a result of not being able to make payments on time -limits on short term lines of credit -low existing levels of liquidity

Guidance: Misrepresentation

must not knowingly or misrepresent in: for firm, organization, or security in the candidates oral, advertising, electronic communications, written materials. knowingly - either knows or should have known -should regular monitor company website materials - must not guarantee any specific return on volatile investments -note that you can provide info on investment producs that have guarantees in a built in structure

Guidance Standard V-A -Diligence and Reasonable Bias

must take into account several factors depending on the investment profile -macroeconomic conditions -Financial and operating history -industry and sector's condition -fee structure and management history (funds) -output and potential limitations of quantitative models -peer group comparisons (appropriate)

Can evaluate a company's management of payable through its number of days of payables

number of days of payables = accounts payable/ avg days purchas =accounts payable/ (purchases/365) = 365/ payables turnover this ratio indicates the number of days on average it takes a company to pay its suplliers. number of days must be compared to the credit terms offered to the company

LOS39c: evaluate working capital effectiveness of a company based on its operating and cash conversion cycles and compare company's effectiveness to peer companies

opeerating cycles measures time needed to convert raw materials intoc ash from sales operating cycle = number of days of inventory + number of days of receivables Net opearatin cycle, or cash conversion cycle is length of period from paying suppliers for materials to collecfting cash from sales to customers net operating cylce = number of days of inventory + number of days of receivables - number of days payable a conversion cycle that is too long suggests that a company has too much invested in working capital

Financial Statement EFfects of Capitalzing vs expensing

pg 183 all other factors remaining the same, the decision to expense an item as opposed to capitalizing would give the impression of greater earnings GROWTH (higher expenses in current year followed by no related expenses at all) Further expensing allows companies to rerpot lower taxable income in the current period and pay out lower taxes (conserving cash) on the other hand the decision to capitalize an item as opposed to expensing may make it easier for a company to achieve earnings targets. Also capitalizing allows companies to report higher operating cash flow, which is an important valuation metric Analylsts should be wary of companies that: -inflate reported cash flow from operations by captializing expenditures that should be expenses (treated as investing cash flow instead) -inflate profits to meet earnings targets by capitalizing costs that should be expensed -depress current period income (for taxes) by expensing costs that should be capitalized, also can inflate profitability growth going forward if a company continues to purchase comparable or increasing amounts of fixed assets every year, capitalization will result in higher profits over an extended period duh kinda

Describe Common Chart Patterns: pg 286 shoulder head neckline, shoulder

pg 286 left shoulder - strong rally with high volumes head - price starts to rise again and records a higher thant the one reached in left shoulder right shoulder - lower volumes Neckline is average line once a head and shoulders pattern has formed, prices are expected to decline VOlume is verty important in analyzing head and shoulder patterns, when one indicator is bullish (rising price) while another is bearish (lower volumes) it is known as divergence a downtrend precedes an inverse head and shoulders patern Selling price target uptrend Price Target = Neckline - (head-neckline) Selling price for downtrend is opposite neckline + (Neckline - head)

LOS38d: Calculate and compare the effect of a share repurchase on earnings per share when 1. repurchase if inanced with company's excess cash and 2 company uses debt to finance the repruchase

pg 60 Share repurchases may increase, decrease or have no effect on EPS -if funds used to finance repurchase are generated internally, a repurchyase will increase EPS only if funds would not have earned the company's cost of capital if they were retained by the company (no better options to invest in) -if borrowed funds are used to finance, and the after tax cost of borrowing is greater than the company's earnings yield, EPS will fall if money is more expensive than the company's earning yield, EPS will rise Earnings yield = EPS / Stock Price 5/80 = 6.25% *** Total return of stock is composed of capital gains (price increase) and dividends **so Bear in mind that it would be incorrect to infer that an increase in EPS indicates an increase in shareholder wealth. the cash used to finance the repurchase could as easily have been distributed as a cash dividend. any capital gains resuluting from an increase in EPS (stock price goes up) may be offset by a decrease in the stock's dividend yield

Now lets caclulate diluted EPS assuming all three types of potentially dilutive financial instruments are present in the capital structure *IMportant in determining which potentially dilutive financial instrument should be included in the diluted EPS calculation, each of the instruments must be evaluated independently and independently determine whether they are diluted

pg 68 not too hard differnt formulas need to be used for the different situations net income is always on top and weighted average shares +shares from conversions of convertible prefferd shares + shares from conversion of convertible debt +shares issuable from stock options weighted average shares is consistent throughout (in the dividend) but for preffered shares +, for shares of conversion of convertible debt +, shares issuable from stock options + [numerator net income - preferred dividends] +convertible preferred dividends + [convertible debt interest x (1-t)] +shares are also increased in the denomoniator in these ways. pg 69 for convertible debt interest (convertible debt is when the company receives money from investors but it is thought that the debt will be converted into equity at one point). The increase in shares from the conversion goes in the denominator to decrease EPS, while the interest that was due for the loan is no longer applicable, so this amount added to the numerator of the equation (it is multiplied by (1-t) tax Convertible debt interest x (1-t) remember we are more interested in gross profit or margin which is net revenue - direct costs of good and operating income (which also includes direct and indirect expenses) indirect include loss or gain on sale of capital, market, administrative, and research expenses, impairment expesn, amortization of intangibles Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, (like the office manager guy is an administrative cost, it does not have anything to do with the product) hwoever office supplies directly utilized by our lawyers is included in cost of goods. Depreciation can be either a direct cost or an indirect cost, or it can be both direct and indirect.

Lesson 2: Distinguish b/w current and noncurrent assets and liabilites

pg 77 Working Capital - differnce between current assets and current liabilites (liquid means are likely to be converted into cash within one year of the operating cycle) cash equivalents are highly liequid securites that usually mature in less than 90 days. -amortized cost and fair values of cash equivalents are usually very simliar Marketable securites - investments, include debt and equity securites Trade receivables (accounts receivable)- considered a financial asset -amountes owed to a company by customers to whom sales have been made. these amounts are reported at net realizable value - an estimate of fair value based on collectability expectations *Relationship b/w accounts receivable and sales is important. a significant inrease in accounts receibe relative to sales may imply that the company is having problems collecting from customers - an increase in allowance for doubtful accounts (estimate of uncollectable amounts results in a lower value reported udner trade receivables (assets) and bad debts (expense) being reported on the income statement. -The more diversified the customer base, the lower the credit risk of accounts receivable -low working capital means may be unable to meet short term obligations. excessive working captial indicate that the company is not utilizing its resources efficiently

LOS5b: Explain interest rate as sum of real risk free rate and premiums that compensate for risk

real risk free rate - (discount rate, FED sets) often interest rates can include; -an inflation premium -default risk premium -liquidity premium -maturity premium - compensates for higher sensitivity of the market values of longer term debt

Simple Capital Structure (Basic EPS

simple when it does not have any financial instruments outstanding that can be converted into common stock. required to report using Basic EPS Basic EPS = income available to common shareholdrs/weighted average of number of shares outstanding Basic EPS = (net income-preferred dividends)/weighted avg number of shares oustanding

aproaches to short term borrowing

some companies take secured short term loans, which are known as asset based loans (loans collaterized usually by receivables and inventory) Computing the costs of borrowing line of credit cost =( interest + commitment fee)/loan amount cost of banker's acceptacnce = Interest/net proceeds = interest/ (loan amount - interest) cost of commercial paper = interest + dealer's commision + backup cost ) / (loan amount - interest)

Calculating CFI and CFF

some quick fundamental accounting the value of gross fixed assets - indicates the historical cost of fixed assets owned by the company at the balance sheet date -if gross fixed assets decrease, there has been a fixed asset disposal, if increase there has been a fixed asset pruchase beginning gross fixed assets + purchase price of new fixed asstes - historical cots of disposed fixed assets = ending gross fixed assets net fixed assets = gross fixed assets - accumulated depreciation caclulation of accumulated depreciation on sold equipmetn =beg acc dep + current years dep on all assets - acc dep on sold asset = ending accumulated depreciation caluclate book value book value of sold equipment = historical cost - accumulated depreciation calc proceeds from sale of equipment selling price - book value = gain/loss on sale of equipment so cash flow from investing activities Cash received from sale of equipment - 500 net cash flow is 500 pg101 example

Stock repurchases/splits/dividends

stock repurchases - company repurchases stock, decrease in the number of shares outstanding -stock splits and stock dividends (stock bonuses) reuslt in an increase in the number of shares outstanding stock spliit - existing shares are split into more shares stock dividend - a dividend paid as additional shares of stock rather than cash pg64 ****VERY IMPORTANT - when stock splits or stock divdends apply to ALL outstanding shares PRIOR to that split or dividend Example: (chronological) shares outsanding 1000000 2-1 stock split 5 months later 500000 more shares issued 10% stock dividend so here 2-1 stock split = 200000 10% stock dividend take 10% of 2500000 shares now oustanding =550000 but you must weight each amount of shares for how long they have been around. for example 6 months would be 6/12*new shares that were only oustanding 6 months vs a year for Share repurchase you would subtract the oustanding share amount and multiple by how many months it was bought back. pg64

Evaluating Inventory Management

the main goal of inventory management is to maintain a level of inventory that smooths delivery of sales without having more than necessary invested in inventory high level of inventory is undesirable as it inflates storage costs, what are axioms storage costs what benefits do attorneys receive on the beach a shortage of inventory can hurt sales as the company loses on potential customers companies may have variety of motives for holding inventory: transactin motive: kept for planned manufacturing activity precautionary mothive: inventory is kept to avoid any stock out losses speculative motive: inventory is kept because believe prices are expected to icnrease need to avoid costs of holding excessive inventory, and at the same time ensure that they hold sufficient stock to avoid hampering sales. However companies need to strike a balance avoid costs of holding excessive inventory. Two basic approaches to managing inventory levels are economic order quantity and just in time economic order quantity - order quanitity for ivnentory that minimzies its total ordering and holding costs EOQ-ROP method, ordering point for invetnory is determined on the basis of costs of ordering and carrying invetnory. this method relies on expected demand, which makes it imperative that short term foreceasts are reliable the just in time method, the reoirder point is primarily determined on the basis of historical demand

Lesson 1 Indifference Curves and the opportunity set

use bundles often - consumption bundle basket of goods

Intangible assets acquired in a Business Combination

when a company acquires another company, the transactio is accounted for using the acquisition method (both IFRS and US GAAP). under this method if purchase price paid by acquirer exceeds fair value of net assets, the excess is recorded as goodwill Goodwill is an intangible asset that cannot be identified separately from the business as a whole, only goodwill created in a business acquistion can be recognized on the balance sheet, interally generated goodwill can not be capitalized (patents, copyrights, franchises, licenses, are examples)

Reading 39: Working Cpaital Management Lesson 1 Working capital management

working capital management deals with short term aspects of corporate finance activities. effective working capital management ensures that a compnay h as ready access to funds that are needed fro day to day expenses and that it invests its assets in the most productive and timely matter

What are some categories of information that are often misrepresented?

•Average year of experience of investment personnel - someone just left and his info needs to taken out of the average calculation •Professional services - For example, small financial services firms tend to specialize in a given area, such as 401(k) planning or insurance products or tax preparation. A CFA member in charge of such a firm cannot hold himself out to be a comprehensive provider of all these financial needs. •Professional credentials - A recent college graduate and CFA candidate passes one of the FINRA licensing exams and then holds herself out as a licensed investment advisor and portfolio management expert, printing these titles on marketing brochures. •Expected return on an investment - A representative from a bank makes a presentation on a mutual fund that specializes in real estate, saying the following: "You want to allocate a portion of your diversified portfolio to real estate. This fund is up 98% over the last four years, and when you add that 98% gain to your account for the next four years, it will offset the stagnant cash and bond investments and allow you to reach your goals." •Expected risk on an investment - Derivative securities of fixed income products are sometimes described as "government guaranteed" when in fact the interest portion fluctuates and will decline in periods of high interest rates. Using the idea of a guarantee masks the true risk of the security.

Financial Risk

risk refers to how company chooses to finance its operations. if compnay chooses to issue debt(get a loan) or acquire assets on long term leases. it is obligated to make regular payments. so by taking these fixed obligations the comapny increases its financial risk. hwoever if it uses retained erainings or issues shares to finance operations, company does not require fixed obligations. higher amount of fixed financial costs taken by a comany, the greater its financial risk degree of financial leverage DFL = percentage change in net income/ percentang echange in operating income the higher the use of fixed fianancing the greater the sensitivity of net income to changes in operating income and therefore the higher financial risk of the company. note that the degree of financial leverage is different at different levels of operating income the degree of fianancial leverage is usally determined by the companys management. DFL = (Q(P-V)-F)/ (Q(P-V)-F-C) stable revenue streams and assets tha can be used as collateral make lenders more comfortable in extending credit the larger proportion of debt in a comapnys capital strucutre the greater the sensitivy of net income to changes in operating income, and therefore the greater the companys financial risk. bear in mind that taking on more debt also magnificies earnings upward if the company is performing well. illustrated by higher ROEs in scenario B

LOS7e: Calculate pop mean, sample mean, arithmetic mean, weighted average mean, geometric mean, harmonic mean, median, and mode

-arithmetic mean - basic mean - sum of all observations divided by total number of populations Xbar or greek u is how it is represented you know most of this stuff median is better then mean sometimes b/c it is not sensitive to extreme values 2 modes = bimodal weighted mean = %oftotalobservations*value1..... geometric mean = multiply observations and take the nth root (remember to take nth root you can reciprocate and for geometric mean of returns we must +1 if negative and then subtract out for so if 1% on first point and then -2% you must (1+.01)*(1-.02) then nth root (so square root here) -geometric mean is always less than or equal to arithmetic mean -geometric mean equal arithmetic mean only when all observations are the same -diffrence b/w geo and arith mean increase as dispersion in osbserved values increases Harmonic mean -relatively specialized concept that is used in investment management area to determine average cost of shares purchased over time (basically a special type of weighted mean, where observation is inversely proportional to its magnitude. pg167 **Harmonic mean will always be less then geometric mean which is less then arithmetic mean

LOS21: Distinguish between descriptive statistics and inferential stats, b/ population and a sample, and among the types of measurement scales

-descriptive stats - large volumes of data -inferential stats - methods used to make forecasts or estimates about a larget set of data based on a smaller representative set

Kurtosis

-extent to which a distribution is more or less peaked then a normal distribution *A NORMAL distribution has a kurtosis of 3 -statistical packages usually report excess kurtoses, which is the kurtosis of the distribution minus 3 -Leptokurtic - is more peaked and has fatter tailes (>3) -Platykuric - is less peaked and thinner (<3) -mesokurtic - normal dist, 3 equations on pg 178 for a sample size >100, an EXCESS kurtosis of greater than 1 (4or above)would be considered unusually high. most equity return series have been found to be leptokurtic *generally speaking higher kurtosis or negative skewness indicate greater risk

Question Notes:

-to determine width of intervals find range and divide by the number of intervals you would like in your frequency distribution (range/k) -this is only interval width, then you must add that from the bottom of the range and continue until you have all your intervals -when calculating geometric mean of percent return add 1 in nth rooth of (1+x1)(1+x2)... and then subract one off at the end

LOS36k: Describe the marginal cost of capital schedule, explain why it may be upward sloping and calculate and interpet its break points

A company's marginal cost of capital MCC increaess as additional capital is raised becase 1. company may have existing debt covenants that retrist it from issuing debt with simlilar seniority. subsequent rounds will be subordinated to the senior issue so will varry more risk. 2. due to economies of scale in rasiing a significant amount of ocmponent (debt or equity) of capital in one go frims may deviate from tehir optimal capital strucutre over the short term. these deviations may cause the margianal cost of capital to raise over time. remember WACC = MCC the margianl cost of capital schedule shows the WACC at different amounts of total captial break point = amount of capital at which a components cost of capital changes / proption of new capital raised from the component can be multiple break points chagnes in Cost of equity or After tax cost of debt if issuing debt or equity for example 0-300 in new equity is cost of equity of 6% while 300-600 new equity cost 7.8%

Average Accounting Rate of Return (AAR)

AAR = avg net income/avg book value for avg net income add up all net incomes and divide by number of years for average book value use beginning and ending value over the period and divide by 2 for example a 150000 investment depreciated over 5 years so take (150000+0)/2 = 75000, the +0 is b/c the value at the end after it is depreciated is 0 Advantage - it is easy to understand and easy to calculate Drawbacks -it is based on accounting numbers not cash flow, which are susceptible to manipulation -does not account for time value of money -does not differentiate between profitable and unprofitable investmetns accurately, as there are no benchmarks for acceptable AARs

Pure- Play

Analysts use the pure-play method to estimate beta of a company that is not publicly traded. this mthod required adjusting a comparable publicly listed company's beta for differences in financial leverage. 1. First we find a comparable company that faces simlar business risks. Betas vary with level of fiancnial risk in a company. highly leveraged companies have higher financial risk, which is reflectged in their high equity betas. 2. To remove all elements of financial risk we UNLEVER the beta. this unlevered beta reflects only the business risk of the comparable and is known as a ASSET BETA 3. THen we adjust the unlevered beta of the comparable company in the project or company under study. we include this comanpies financial risk so basically we take a comparable company unlever the beta, then we use that portion of the beta as the business risk beta in new project but keep financial beta also Basset = Bequity [ 1 / (1+((1-t)(d/e)) ] this reflects only the business risk of the comparable comany d/e = debt to equity ratio of comparable company t= marginal tax rate of the comparable company so plug in Basset to the follwoing equation to determine the entire beta Bproject = basset [ 1 + ((1-t)(D/E))] D/E= debt to equity ratio of the subject company t= marginal tax rate of the subject company

Business Risk and FInancial Risk Business RiskD

Business risk refers to the risk associated with a companys operating earnings. Operating earnings are risky because total revenues and costs of sales are both uncertain. Therefore business risk can be broken down into sales risk and operating risk Sales Risk' - uncertainty associated with totatl revenue is sales risk. rev is affected by economic conditions, industry dynamics, government regulation and demographics pg 40 shows figures bar graphs of operating income simulation taken into account variailty of price and unites sold (standard deviation) Operating risk: the risk associated with a company's operating cost structure. a comapnny that a has a greater proportion of fixed costs in its cost structure has greater operating risk a company with greater fix costs relative to variable costs will find it more difficult to adjust its operating costs to cahgnes in sales and therefore more risky in order to examine company's sensitivity of operating income to changes in unit sales we use the degree of operating leverage (DOL). ratio of the percentage change in operating income to the percentage change in units sold DOL = percentage change in operating income/ percentage change in units sold example: 1.24 this is elasticity, so a 1% increase in percentage of units sold, results in a 1.24% increase in operating income this is the same as in economics however we are substituting out the sales risk and only dealing with the operating risk which is based on decisions whether to employ more fixed then variable costs can be expressed in basic elements DOL = Q x (P-V) ./ (Q x (P-V) - F) Q=units sold P = price per unit V = variable cost per unit F= fixed oeprating cost Q x (P - V) = contribution margin, amount that units sold contribute to covering fixed costs (P-V) = contribution per unit DOL is different at different levels of sales. Takeaways -DOL is negative when operating income is negative, and is postive when company earns operating profits -operating income is most sensitive to chagnes in sales around the point where the company makes zero operating income -DOL is undefined when operating income is zero

LOS37a: definte and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk 37b: calculate adn interpret the degree of operating leverage, the degree of financial leverage and the degree of total leverage 37c: analyze the effect of financial leverage on a company's net income and return on equity

leverage refers to a companys use of fixed costs in conducting business, fixed costs include: operating costs ( examples rent and depreciation) fianancial costs (examples interest expense) fixed costs are referred to as leverage because they support a companys activiites and earnings It is important for analysts for three reasons -Leverage increases the volatility of a companyes earning and cash flows, increasing risk borne by investorys - more signficiant use of leverage more risky it is, and therefore higher discount rate taht must be used to value the company -a company that is highly leveraged risks significant lsoses during economic downturns Leverage is affected by a companys cost structure -Variable costs, and fixed costs pg 38 **Really important, so if a company uses more fixed costs to produce the same net income then a higher fluctuation in sales will result in a larger fluction of net income, thus results in higher earnings volatility, Why leverage is important Graphing net income (y) and number of units produced and sold (x) can visualize this. the company with the steeper the slope of the net income curve illustrates a greater degree of leverage for a company

LOS2f: Calculate and interpret quartiles, quintiles, deciles, and percentiles

quantile - value at or below a stated proportion of the observations in a data set quartile - divide distribution in four parts quin - 5ths dec - 10ths percentiles - 100ths Calculating location of percentile Ly = (n+1)y/100 n= number of observations y = percentile so for example given 7 numbers calculate percentile 8*(25/100) = 2 which means it will be the second item in the data set (after you ranked in ascending order) if you have even data and return say 2.25 that means take the second and then multiply one fourth by the difference between point 2 and point 3

Risks of Creditors and Owners

risk borne by creditors and owners differ because different rights and responsibilities creditor calims on assets are seniro to those of equity holders Legal Codes 2 types of Bankruptcies 1. Reorganizaiton (Chapter 11) - grants company temporary protection from crediotrs so it can reorganzie its capital structure and emerge from bankruptcy as a going concern 2. Liquidation (Chapter 7) - orderly settlement of creditors claims. orginal business ceases to exist companies with high operating leverage have less flexibility in making changes to their operating structures

1. Capital Asset Pricing Model (CAPM)

the CAPM states that the expected rate of return from a stock equals the risk free interest rate plus a premium for bearing risk. re = Rf + B(E(Rm)-Rf) where (E(Rm) - Rf )= equity risk premium RM = expected return on the market B= Beta of stock, beta measures the sensitivity of the stocks returns to changes in market returns RF= risk free rate re = expected retuen on stock (cost of equity) The equity market risk premium (Rm-Rf) can be estimated using a survey approach where the average of the forecasts of financial experts is adjusted for the specific stock's systemaitic (nondiversifiable) risk.