aa esi Critica CONCEPTS FOR THE 2018 CFA’ Exam a TS t LT TS 1 Professionalism IA) Knowledge ofthe Law. 1(B) Independence and Objects HQ) Misrepretntaion, 1D) Misconcicr TL Integrity of Capital Markets TA). Material Nonpublic Information, 1B) Markee Maniplaion Ml Duties to Cents MA) Loyal, Pidence, and Care TN) fair Desing KC) Suitably IK) Performance resentation LIKE), Preservation of Confident TV. Duties to Employers IVA) Loyal IV{B)_Addiional Compensation Arrangements IMC) Responsbiles of Supervisors. V_ Investment Analysis, Recommendations, and Actions ViA)_ Diligence and Reasonable Bass V(B) Communication wih Chien and Prospective liens YO. Record Retention VI Conflicts of Interest VA) iscosire of Conf Vi) Priority of Fansactions. VUC) Refer Fees, Vil Responsible 6a CFA Instinate Member or CFA Candida VIA) Concer Paricipans in CEA Insite Programs. VIB) Reference to CFA Institue the CFA Designation, and the CEA Program, Global Investment Peformance Standards (@rps*) + Compliance statment: “Unser name off] bas prepare and presented this epor in compliance Wh the Global Investment Peformance Standards (GIPS).” Compliance must be applied ona fim-wide basis «+ Nin section: fundamenvae of compliance, inp dt, calealation methodology, composite constroction, dsosute, presentation and Ieporting eel exate, pate equity and wrap Feascparely managed account porolos. CU Tas beak ‘Time Value of Money Basies + Fare value (PV) amount to which iavestment rows after one or more compounding periods. «+ Future vile: FV = PVG» INS + Preen value (PV): eurent value of some future cash low PV - FVI(1 « IX). Annuities series of equal cash ows that occur at cvenly spaced incervls over time, Ordinary annuity cash flow at endo time petiod, Annuity du: ech flo a begining oF time petiod. Peppenties snites wich infinite ives, PVs, = PMT discount rat) Required Rave of Rewurn ‘Components 1. Rel rskfice ete (RFR). 2. pected inflation rate premium (IP). 5. Risk premium. E(R) = (14+ RFR (LIP RP)—1 Approximation formula for nominal requite ete: E(R)S RFR + IP+RP Means Aries mean: sum ofall observation valet in ‘amplelpopultio, divided by # of observations. Geometric mean sed when culating investment returns over mulpl periods or co messute ‘compound growth rats. Geometric cen recurs R= [04 Rx] Te Variance and Standard Deviation eee eet eee La? poption vce no? St Sow sample vaiance «#5 EL Standard deviation: square 9% of ain Holding Period Return (HPR) p= RRtD, ,, R+D, — 2, ‘Coefficient of Variation Cafcen of variatian (CN): expteses how much isperson exis relative to mean ofa distdbusion; allows for direc comparison of dispersion across diferne data sets. CVis calculated by dividing standard deviation of a dissibution bythe mean or ‘expected vale of the distribution x Sharpe Ratio ‘Sbarpe ei: measures exces tearm pe unit of ik, ‘Sharpe rt Ray fey fre ati For both tos geri bene: Expected Return/Standard Deviation speed rear B(%) = YP) F(X) = Pls) +P (ta)e2 Hort Pts te Probl ene # (X= Pl) - ECO = Plax —BOOE + PCa EOP ++ Plea EX) Sree oe ere CCoceation and Covatiance Conlin: covzince divided by product ofthe ‘so standard deviations speed eur, arian of 2a poole E(R,)=waB(Rq) +waEiRa) var(R,) = whe? (Ra) + wie" (Rs) +2wawue(Ra)o(Ru)e(Ra.Ro) Normal Distributions. Normal distribution is completely described by its Serer) G50 of otros ill iin 1. SAM lla #150. 950 ll within «1.96 59% fll wihin «2.58 Cotieting Z Sere aarti eee etree) debi pene fol ander eis five bseration irom population meat _dincinep i aay mdi dein A “la Pai umes thc ke ee eee eee 2 ack, movements (pl) binomial mode ia deeb changes eve ofa eet ot fl iean betel wo compe i expec eee ec Sampling Deaton Semplg Cerin pobbltydotion of lpateserpe ea aeoammedcet eset ‘eis nip moder der rea te tae plan Theceoplng diva oth noes s the dnibain fines ofthe man. Central Line There Coal eat teary an ng ea See teeta ties ere eee iia sage peas apoio probably dab with enn pac aac pio ota she pled eco lg Standard Error Sided aor oft mpl the andar dln of dtbton ofthe sample means Joon poplin ane oy = eee Confidence Intervals es Padre cto ee ee pie 35) Wn now anes a aes Fae = 16S for 90% confidence intervals Gignifcance level 10%, 5% in each tail) 14j,+ 1.960 for 95% confidene intervals Gigifcance level 5% 259 in ech tal) 2.575 for 99% confidence intra (Gigifcance level 19%, 0.596 in ech al) cominad nae pe,OT EE TT ee (UANTTATVE METHODS continued. Nall and Alternative Hypotheses ‘Nall bypethessH.):bypothess that contains the equal sign (=, 2) the hypothesis that i actualy ested: che basis for sletion ofthe test tats. Aicnatoehypethass(H,: concluded if tere is sufcient evidence to reject the nll hypothesis Difference Between One- and Two-Tailed Tests One ald test tess whether vale is greater than of les than a given number. Tontied rests whethes value i ual to 3 ven number nc-talled ese Hy: < O versus Hy 1 > 0. world test Ho: p =O versus Hi 0. ‘Type Land Type Il Exrors Type Leror ejection of ull hypothesis when i is scrualy tue. + Tipe err: fallre vo eject ml hypothesis when iis actualy fale. “Types of Hypothesis Tests Use esate for ests involving the population mean (location of mean, difference in means paired comparison) Use chisguare sats fo ests ofa single population variance. (Use Fats for ests comparing ewo population ‘Technical Analysis ever patterns head and shoulders, inverse H&S, ‘doubleeriple rp or bottom. Continuation pattern tingle, ecanges, pennants, Bas Price based indicator: moving averages, Boling bands, momentum osilatrs (ate of change, RSI stochastic, MACD). Sentimens indiators: opinion polls pula eto, VIX, margin deb, shor interest ati, Flow of fnds indicator" TRIN, margin debe, ‘mutual fund cah position, new equity issuance, secondary ofeings. Elaticity (Oum prc elaticity 6 uni demand A pre IFabolte le > 1, demands ati fable ale 1, demand ini aap te eee tained per recat 60, gun demand 46 noe eee JF negative, the god tannin god “6 qn de 460 pk of aed god pos, led good ss sb Ieee reed pond cope Breakeven and Shotdown po rennin (eo on ecrea ieee ieee cera eater eee eaten eee Market erates ‘Pe comption: May firs with no ping poner ey low na brs ey Romogencss produc Manoel compton: Many ems: ome Bee ene teereeceerael Produc: ge avertsing expense Income lacy = Cr pice elaticy = (Olga: Few Bums that may have sigifcant pricing power; high barriers to entry: products may bbe homogeneous or differeaiced _Mongpoy Single Bra with sigifcan pricing power high baste ro entry advestising used 0 Compete with submivue products Ina marker strucares, prof it maximized at the ourpuc quantity fr which marginal revenue = ‘natgnal cos. Gross Domestic Product Real GDP - consumption spending + investment + government spending + net exports Savings, Investment, Fiscal Balance, and Tiade Balance Fiscal budget defcie (G —1) = exces ofraving over domestic investment (S —1)~ trade balance XM) Equation of Exchange MV = PY, where M= real money supp, V = selocity of money in tansetions, P= price level, snd Y = real GDP, Business Cyele Phases Expansion: peaks contaction; ough, Economic Indicators Leading: Tatning points occur shead of peaks and uoughs (sock pie, intial unemployment claims, manufacturing new owes) (Coincident Tornng points coincide with peaks and troughs (nonfarm payrolls, personal income; manufacturing les) Legging: Tarning point follow pesks and woughs (average duration of unemployment, inventory! ses rato, prime rte) Factors Affecting Aggregate Demand (Consumes! wealth busines expectations, consumer income expectations capacity utilization; monetary and fsa policy: exchange rates, lob economic growth Factors Affecting SR Aggregate Supply Input prices; labor productivity; expectations for ‘utp prices taes and subsidies: exchange rates al actos that ffecr LR aggreqare supply Factors Affecting LR Aggregate Supply Size of labor force; human capital: supply of natural resoures sock of physical capital: level of, technology Types of Unemployment rcioal ce lg in matching qualified workers ‘wth job openings. Strucual: unemployed workers do not have the skill ro march nly created jos, {Glial economy producing at les than eapaciy ding contraction phase of busines yee Policy Multipliers a ‘seve eoulrement a i=Pc(=4) hese MPC = marginal propensity to consume, Expansionary and Contractionary Policy “Monetary poy is expansionary when the policy ‘ate lee than the neva nteret ate (eal end rate of economic groweh » inflation rg and canary he he poly gtr an ial ple expansionary when «budget defi increasing or surplus is decreasing, and ‘oniractionary when a budget deficits decreasing ‘or surphsisneresing. money multpli fiscal mulkipie Balance of Payments Gurrent acount merchandive and seve: income teceiptsunietl transfer Capital acount capital transfers sales/purchases of onfinancial ass Fioncalaecoune government-owned set. broad foreign-owned sets inthe country. Regional Trading Agreements Fre rade are: Removes barter to goods and serves trade among membecs. Guz union: Member alo adope common sade polices with non-member (Common market: Members also remove baits 0 Ibhor and capital movements among members. Economie wnion: Merabers also establish common institations and economic policy ‘Moneary wuton: Members also adopt a common cutrengt Foreign Exchange Rates For the exam, FX rates ae expres 3 rie sen | base aren and iverpeted 3 the numberof units of he price currency foreach unit ofthe base curteney. Real Exchange Rate nin Fae base currency CPL ) pice atency CPL No-Arbitrage Forward Exchange Rate Tanward spor T+basecarency inert ate Exchange Rate Regimes Forma dllarzaion:countey adopts forcign curren: ‘Monetary union: members adopt common curren. ‘ised peg: +1% margin verus foreign currency oF basher of cucrencies Target zon: Wider margin tan Bed pe, Conulng peg: Pegged exchange rate adjusted riod Catling bands: Width of margin increases over ‘Maneed floating Monstary suthorsy 2 jnfluence exchange rate but does not set tage. Independently ting Exchange rat is mathet- dererined Tau acy CCEA Revenue Recognition Tio requirements: (1) completion of ecnings proces and @) esonable assurance of payment Revenue Recognition Methods + Pecenage-of completion method. + Completed conics method * Installment sles. + Cont ecovery method ‘Converged Standards Isued May 2014 Fete revene cognition mode: 1 enti conats 2. deity performance obligations 5, Determine taniction price 4 Allocate price abligaions 5: Reognte when s) bliations ae sisted Unusual o Iafcquent Items + Gainlloses from daposl of «busines segment + Gainlloses rom sale of set or investments subi + Provision fo environmental remediation. 14 price currency interest rate enn nesFHNANCIL REPORTING AO ANAYSS continue. *+ Impairment, write-off, writedowns, and restructuring cost, + Tntegration expenses associated with burineses recently acquired, Discontinued Operations “Tobe accounted for ata discontinued operation, basness—assets, operations, investing nancing, activities must be physiallyoperatonally distinct from rs of firm. Incomellsses are reported net oF tax afer net income fom continuing operations. ‘Compute Cash Flows From Operations (CFO) Direc method. sare with cash collections (cash equivalent of sales); cash inputs (cash equivalent of cro ode lsc pening epi ch interest expense; cash axes Inder method: tare with net income, subtracting buck gains and adding back loses resulting from financing or investment cash flows, adding back all foncath charges, and adding and subtracting asset and liabliry accounts that esl fom operations. Free Cash Flow Free cas low (ECE) measuses cash available for discretionary purposes. cis equal to operating cash Awe les net capital expenditures, Citic Ratios Gon serail stone ana + Common size balance see expresses ll balance sheet account as a percentage of toa assets. + Common-tize income statement expres al income statement items as a percentage of sles + Common-sie cashflow statement expresses each lin tem at a peroentageof total cash inflows (outlows, ora percentage of nt reves Horizontal comomansie financial satement anal: ‘expreses each line item relative ois value in a common base peo Liquid ris: curren ratio= pretax income Must ecognizeveluation aloanceif ore ikely than not chat DITA wal rot be eal Lang-Tezm Laie + Premium bond: coupon cate > marke tate at + Discount bond: coupon ate < maker rate at + ures opens equals book value a the binning ‘of he yer mile by the marker rt of intrest atthe time the bonds were issued output units and snap