CFA 2008 - Study sessions

2008 CFA Level 1
Ethical and Professional Standards
Ethical and Professional Standards ( Session 1 )
Code of Ethics and Standards of Professional Conduct ( Reading 1 )
# Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards. ( LOS a )
# State the six components of the Code of Ethics. ( LOS b, (Part 1) )
# State the seven Standards of Professional Conduct. ( LOS b, (Part 2) )
# Explain the ethical responsibilities required by the Code and Standards, including the multiple subsections of each Standard. ( LOS c )
Standards of Professional Conduct & Guidance: Professionalism ( Reading 2-I )
# Knowledge of the Law. ( LOS A. )
# Independence and Objectivity. ( LOS B. )
# Misrepresentation. ( LOS C. )
# Misconduct. ( LOS D. )
Standards of Professional Conduct & Guidance: Integrity of Capital Markets ( Reading 2-II )
# Material Nonpublic Information. ( LOS A. )
# Market Manipulation. ( LOS B. )
Standards of Professional Conduct & Guidance: Duties to Clients and Prospective Clients ( Reading 2-III )
# Loyalty, Prudence, and Care. ( LOS A. )
# Fair Dealing. ( LOS B. )
# Suitability. ( LOS C. )
# Performance Presentation. ( LOS D. )
# Preservation of Confidentiality. ( LOS E. )
Standards of Professional Conduct & Guidance: Duties to Employers ( Reading 2-IV )
# Loyalty. ( LOS A. )
# Additional Compensation Arrangements. ( LOS B. )
# Responsibilities of Supervisors. ( LOS C. )
Standards of Professional Conduct & Guidance: Investment Analysis, Recommendations, and Action ( Reading 2-V )
# Diligence and Reasonable Basis. ( LOS A. )
# Communication with Clients and Prospective Clients. ( LOS B. )
# Record Retention. ( LOS C. )
Standards of Professional Conduct & Guidance: Conflicts of Interest ( Reading 2-VI )
# Disclosure of Conflicts. ( LOS A. )
# Priority of Transactions. ( LOS B. )
# Referral Fees. ( LOS C. )
Standards of Professional Conduct & Guidance: Responsibilities as a CFA Institute Member or CFA Candidate ( Reading 2-VII )
# Conduct as Members and Candidates in the CFA Program. ( LOS A. )
# Reference to CFA Institute, the CFA Designation, and the CFA Program. ( LOS B. )
Guidance for Standards I - VII ( Reading 2 )
#

a. Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations presenting multiple issues of questionable professional conduct.

b. Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

c. Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
( LOS a, b, c )
Introduction to the Global Investment Performance Standards (GIPS) ( Reading 3 )
# Explain why the GIPS standards were created. ( LOS a, (Part 1) )
# Explain what parties the GIPS standards apply to and who is served by the standards. ( LOS a, (Part 2) )
# Explain the construction and purpose of composites in performance reporting. ( LOS b )
# Explain the requirements for verification of compliance with GIPS standards. ( LOS c )
Global Investment Performance Standards (GIPS) ( Reading 4 )
# Describe the key characteristics of the GIPS standards. ( LOS a, (Part 1) )
# Describe the fundamentals of compliance. ( LOS a, (Part 2) )
# Describe the scope of the GIPS standards with respect to an investment firm’s definition and historical performance record. ( LOS b )
# 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. ( LOS c )
# Characterize the eight major sections of the GIPS standards. ( LOS d )
Quantitative Methods
Quantitative Methods: Basic Concepts ( Session 2 )
The Time Value of Money ( Reading 5 )
# Interpret interest rates as required rate of return, discount rate, or opportunity cost. ( LOS a )
# Explain an interest rate as the sum of a real risk-free rate, expected inflation, and premiums that compensate investors for distinct types of risk. ( LOS b )
# Calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding. ( LOS c, (Part 1) )
# Solve time value of money problems when compounding periods are other than annual. ( LOS c, (Part 2) )
# Calculate and interpret the future value (FV) and present value (PV) of a single sum of money. ( LOS d, (Part 1) )
# Calculate and interpret an ordinary annuity and an annuity due. ( LOS d, (Part 2) )
# Calculate and interpret a perpetuity (PV only). ( LOS d, (Part 3) )
# Calculate and interpret a series of uneven cash flows. ( LOS d, (Part 4) )
# Draw a time line, specify a time index, and solve time value of money applications (for example, mortgages and savings for college tuition or retirement). ( LOS e )
Discounted Cash Flow Applications ( Reading 6 )
# Calculate and interpret the net present value (NPV) and the internal rate of return (IRR) of an investment. ( LOS a, (Part 1) )
# Contrast the NPV rule to the IRR rule. ( LOS a, (Part 2) )
# Identify problems associated with the IRR rule. ( LOS a, (Part 3) )
# Define, calculate, and interpret a holding period return (total return). ( LOS b )
# Calculate, interpret, and distinguish between the money-weighted and time-weighted rates of return of a portfolio. ( LOS c, (Part 1) )
# Appraise the performance of portfolios based on these measures. ( LOS c, (Part 2) )
# Calculate and interpret the bank discount yield, holding period yield, effective annual yield, and money market yield for a U.S. Treasury bill. ( LOS d, (Part 1) )
# Convert among holding period yields, money market yields, effective annual yields, and bond equivalent yields. ( LOS d, (Part 2) )
Statistical Concepts and Market Returns ( Reading 7 )
# Differentiate between descriptive statistics and inferential statisitics, and between a population and a sample. ( LOS a, (Part 1) )
# Differentiate among the types of measurement scales. ( LOS a, (Part 2) )
# Explain a parameter, a sample statistic, and a frequency distribution. ( LOS b )
# Calculate and interpret relative frequencies and cumulative relative frequencies, given a frequency distribution. ( LOS c, (Part 1) )
# Describe the properties of a dataset presented as a histogram or a frequency polygon. ( LOS c, (Part 2) )
# Define, calculate, and interpret measures of central tendency, including the population mean, sample mean, arithmetic mean, weighted average or mean (including a portfolio return viewed as a weighted mean), geometric mean, harmonic mean, median, and mode. ( LOS d )
# Describe, calculate, and interpret quartiles, quintiles, deciles, and percentiles. ( LOS e )
# Define, calculate, and interpret 1) a range and a mean absolute deviation, and 2) the variance and standard deviation of a population and of a sample. ( LOS f )
# Calculate and interpret the proportion of observations falling within a specified number of standard deviations of the mean, using Chebyshev’s inequality. ( LOS g )
# Define, calculate, and interpret the coefficient of variation. ( LOS h, (Part 1) )
# Define, calculate, and interpret the Sharpe ratio. ( LOS h, (Part 2) )
# Define and interpret skewness, and explain the meaning of a positively or negatively skewed return distribution. ( LOS i, (Part 1) )
# Describe the relative locations of the mean, median, and mode for a nonsymmetrical distribution. ( LOS i, (Part 2) )
# Define and interpret measures of sample skewness and kurtosis. ( LOS j )
Probability Concepts ( Reading 8 )
# Define a random variable, an outcome, an event, mutually exclusive events, and exhaustive events. ( LOS a )
# Explain the two defining properties of probability, and distinguish among empirical, subjective, and a priori probabilities. ( LOS b )
# State the probability of an event in terms of odds for or against the event. ( LOS c )
# Distinguish between unconditional and conditional probabilities. ( LOS d )
# Calculate and interpret the joint probability of two events. ( LOS e, (Part 1) )
# Calculate and interpret the probability that at least one of two events will occur, given the probability of each and the joint probability of the two events. ( LOS e, (Part 2) )
# Calculate and interpret a joint probability of any number of independent events. ( LOS e, (Part 3) )
# Distinguish between dependent and independent events. ( LOS f )
# Calculate and interpret, using the total probability rule, an unconditional probability. ( LOS g )
# Explain the use of conditional expectation in investment applications. ( LOS h )
# Diagram an investment problem, using a tree diagram. ( LOS i )
# Calculate and interpret covariance and correlation. ( LOS j )
# Calculate and interpret the expected value, variance, and standard deviation of a random variable and of returns on a portfolio. ( LOS k )
# Calculate and interpret covariance given a joint probability function. ( LOS l )
# Calculate and interpret an updated probability, using Bayes’ formula. ( LOS m )
# Identify the most appropriate method to solve a particular counting problem. ( LOS n, (Part 1) )
# Solve counting problems using the factorial, combination, and permutation notations. ( LOS n, (Part 2) )
Quantitative Methods: Application ( Session 3 )
Common Probability Distributions ( Reading 9 )
# Explain a probability distribution and distinguish between discrete and continuous random variables. ( LOS a )
# Describe the set of possible outcomes of a specified discrete random variable. ( LOS b )
# Interpret a probability function, a probability density function, and a cumulative distribution function. ( LOS c, (Part 1) )
# Calculate and interpret probabilities for a random variable, given its cumulative distribution function. ( LOS c, (Part 2) )
# Define a discrete uniform random variable and calculate and interpret probabilities, given the discrete uniform distribution function. ( LOS d, (Part 1) )
# Define a binomial random variable, and calculate and interpret probabilities, given the binomial probability distribution. ( LOS d, (Part 2) )
# Construct a binomial tree to describe stock price movement. ( LOS d, (Part 3) )
# Describe the continuous uniform distribution, and calculate and interpret probabilities, given a continuous uniform probability distribution. ( LOS e )
# Explain the key properties of the normal distribution. ( LOS f, (Part 1) )
# Distinguish between a univariate and a multivariate distribution. ( LOS f, (Part 2) )
# Explain the role of correlation in the multivariate normal distribution. ( LOS f, (Part 3) )
# Construct and interpret a confidence interval for a normally distributed random variable, and determine the probability that a normally distributed random variable lies inside a given confidence interval. ( LOS g )
# Define the standard normal distribution and explain how to standardize a random variable. ( LOS h, (Part 1) )
# Calculate and interpret probabilities using the standard normal distribution. ( LOS h, (Part 2) )
# Define shortfall risk, calculate the safety-first ratio, and select an optimal portfolio using Roy’s safety-first criterion. ( LOS i )
# Explain the relationship between normal and lognormal distributions and why the lognormal distribution is used to model asset prices. ( LOS j )
# Distinguish between discretely and continuously compounded rates of return. ( LOS k, (Part 1) )
# Calculate and interpret the continuously compounded rate of return, given a specific holding period return. ( LOS k, (Part 2) )
# Explain Monte Carlo simulation and historical simulation, and describe their major applications and limitations. ( LOS l )
Sampling and Estimation ( Reading 10 )
# Define simple random sampling, sampling error, and a sampling distribution, and interpret sampling error. ( LOS a )
# Distinguish between simple random and stratified random sampling. ( LOS b )
# Distinguish between time-series and cross-sectional data. ( LOS c )
# Interpret the central limit theorem and describe its importance. ( LOS d )
# Calculate and interpret the standard error of the sample mean. ( LOS e )
# Distinguish between a point estimate and a confidence interval estimate of a population parameter. ( LOS f )
# Identify and describe the desirable properties of an estimator. ( LOS g )
# Explain the construction of confidence intervals. ( LOS h )
# Describe the properties of Student’s t-distribution. ( LOS i, (Part 1) )
# Calculate and interpret degrees of freedom. ( LOS i, (Part 2) )
# Calculate and interpret a confidence interval for a population mean, given a normal distribution with 1) a known population variance, 2) an unknown population variance, or 3) an unknown variance and the sample size is large. ( LOS j )
# Discuss the issues regarding selection of the appropriate sample size. ( LOS k, (Part 1) )
# Discuss the issues regarding data-mining bias. ( LOS k, (Part 2) )
# Discuss the issues regarding sample selection bias, survivorship bias, look-ahead bias, and time-period bias. ( LOS k, (Part 3) )
Hypothesis Testing ( Reading 11 )
# Define a hypothesis, and describe the steps of hypothesis testing. ( LOS a, (Part 1) )
# Interpret and discuss the choice of the null hypothesis and alternative hypothesis. ( LOS a, (Part 2) )
# Distinguish between one-tailed and two-tailed tests of hypotheses. ( LOS a, (Part 3) )
# Define and interpret a test statistic. ( LOS b, (Part 1) )
# Define and interpret a Type I and a Type II error. ( LOS b, (Part 2) )
# Define and interpret a significance level and explain how significance levels are used in hypothesis testing. ( LOS b, (Part 3) )
# Define and interpret a decision rule and the power of a test. ( LOS c, (Part 1) )
# Explain the relation between confidence intervals and hypothesis tests. ( LOS c, (Part 2) )
# Distinguish between a statistical result and an economically meaningful result. ( LOS d )
# Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the population mean of a normal distributed population with a) known or b) unknown variance. ( LOS e, (Part 1) )
# Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the equality of the population means of two normally distributed populations, based on independent random samples with a) equal or b) unequal assumed variances. ( LOS e, (Part 2) )
# Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the mean difference of two normally distributed populations (paired comparisons test). ( LOS e, (Part 3) )
# Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the variance of a normally distributed population. ( LOS f, (Part 1) )
# Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the equality of the variances of two normally distributed populations, based on two independent random samples. ( LOS f, (Part 2) )
# Distinguish between parametric and nonparametric tests and describe the situations in which the use of nonparametric tests may be appropriate. ( LOS g )
Technical Analysis ( Reading 12 )
# Explain the underlying assumptions of technical analysis. ( LOS a )
# Discuss the advantages of technical analysis. ( LOS b, (Part 1) )
# Discuss the challenges to technical analysis. ( LOS b, (Part 2) )
# List and describe examples of each major category of technical trading rules and indicators. ( LOS c )
Economics
Economics: Microeconomic Concepts ( Session 4 )
Elasticity ( Reading 13 )
# Calculate and interpret the elasticities of demand (price elasticity, cross elasticity, income elasticy). ( LOS a, (Part 1) )
# Calculate and interpret the elasticity of supply. ( LOS a, (Part 2) )
# Discuss the factors that influence the elasticity of demand. ( LOS a, (Part 3) )
# Discuss the factors that influence the elasticity of supply. ( LOS a, (Part 4) )
# Calculate elasticities on a straight-line demand curve, differentiate among elastic, inelastic, and unit elastic demand. ( LOS b, (Part 1) )
# Describe the relation between price elasticity of demand and total revenue. ( LOS b, (Part 2) )
Efficiency and Equity ( Reading 14 )
# Explain allocative efficiency, marginal benefit and marginal cost, and demonstrate why the efficient quantity occurs where marginal benefit equals marginal cost. ( LOS a )
# Distinguish between the price and the value of a product and explain the demand curve and consumer surplus. ( LOS b )
# Distinguish between the cost and the price of a product and explain the supply curve and producer surplus. ( LOS c )
# Discuss the relationship between consumer surplus, producer surplus and equilibrium. ( LOS d )
# Explain how efficient markets ensure optimal resource utilization. ( LOS e, (Part 1) )
# Explain the obstacles to efficiency and the resulting underproduction or overproduction, including the concept of deadweight loss. ( LOS e, (Part 2) )
# Explain the two groups of ideas about the fairness principle (utilitarianism and the symmetry principle) and discuss the relation between fairness and efficiency. ( LOS f )
Markets in Action ( Reading 15 )
# Explain market equilibrium, distinguish between long-term and short-term impacts of outside shocks. ( LOS a, (Part 1) )
# Describe the effects of rent ceilings on the existence of black markets in the housing sector and on the market’s efficiency. ( LOS a, (Part 2) )
# Describe labor market equilibrium and explain the effects and inefficiencies of a minimum wage above the equilibrium wage. ( LOS b )
# Explain the impact of taxes on supply, demand, and market equilibrium, and describe tax incidence and its relation to demand and supply elasticity. ( LOS c )
# Discuss the impact of subsidies, quotas, and markets for illegal goods on demand, supply, and market equilibrium. ( LOS d )
Organizing Production ( Reading 16 )
# Explain the types of opportunity cost and their relation to economic profit, and calculate economic profit. ( LOS a )
# Discuss a firm’s constraints and their impact on achievability of maximum profit. ( LOS b )
# Differentiate between technological efficiency and economic efficiency, and calculate economic efficiency of various firms under different scenarios. ( LOS c )
# Explain command systems and incentive systems to organize production, the principal-agent problem, and measures a firm uses to reduce the principal-agent problem. ( LOS d )
# Describe the different types of business organization. ( LOS e, (Part 1) )
# Describe the advantages and disadvantages of the different types of business organization. ( LOS e, (Part 2) )
# Characterize the four market types. ( LOS f )
# Calculate and interpret the four-firm concentration ratio and the Herfindahl-Hirschman Index, and discuss the limitations of concentration measures. ( LOS g )
# Explain why firms are often more efficient than markets in coordinating economic activity. ( LOS h )
Output and Costs ( Reading 17 )
# Differentiate between short-run and long-run decision time frames. ( LOS a )
# Describe and explain the relations among total product of labor, marginal product of labor, and average product of labor, and describe increasing and decreasing marginal returns. ( LOS b )
# Distinguish among total cost (including both fixed cost and variable cost), marginal cost, and average cost, and explain the relations among the various cost curves. ( LOS c )
# Explain the firm’s production function, and its properties of diminishing returns and diminishing marginal product of capital. ( LOS d, (Part 1) )
# Explain the relation between short-run and long-run costs, and how economies and diseconomies of scale affect long-run costs. ( LOS d, (Part 2) )
Economics: Market Structures and Macroeconomic Concepts ( Session 5 )
Perfect Competition ( Reading 18 )
# Describe the characteristics of perfect competition, explain why firms in a perfectly competitive market are price takers, and differentiate between market and firm demand curves. ( LOS a )
# Determine the profit maximizing (loss minimizing) output for a perfectly competitive firm, and explain marginal cost, marginal revenue, and economic profit and loss. ( LOS b )
# Describe a perfectly competitive firm’s short-run supply curve. ( LOS c, (Part 1) )
# Explain the impact of changes in demand, entry and exit of firms, and changes in plant size on the long-run equilibrium. ( LOS c, (Part 2) )
# Discuss how a permanent change in demand affects price, output, and economic profit. ( LOS d, (Part 1) )
# Discuss how changes in technology affect price, output, and economic profit. ( LOS d, (Part 2) )
Monopoly ( Reading 19 )
# Describe the characteristics of a monopoly, including factors that allow a monopoly to arise, and monopoly price-setting strategies. ( LOS a )
# Explain the relation between price, marginal revenue, and elasticity for a monopoly, and determine a monopoly’s profit-maximizing price and quantity. ( LOS b )
# Explain price discrimination, and why perfect price discrimination is efficient. ( LOS c )
# Explain how consumer and producer surplus are redistributed in a monopoly, including the occurrence of deadweight loss and rent seeking. ( LOS d )
# Explain the potential gains from monopoly and the regulation of a natural monopoly. ( LOS e )
Monopolistic Competition and Oligopoly ( Reading 20 )
# Discuss the characteristics of monopolistic competition and oligopoly. ( LOS a )
# Determine the profit-maximizing (loss-minimizing) output under monopolistic competition and oligopoly, explain why long-run economic profit under monopolistic competition is zero, and determine if monopolistic competition is efficient. ( LOS b )
# Explain the importance of innovation, product development, advertising, and branding under monopolistic competition. ( LOS c )
# Explain the kinked demand curve model and the dominant firm model. ( LOS d, (Part 1) )
# Describe oligopoly games including the Prisoners’ Dilemma. ( LOS d, (Part 2) )
Demand and Supply in Factor Markets ( Reading 21 )
# Explain why demand for the factors of production is called derived demand, differentiate between marginal revenue and marginal revenue product (MRP), and describe how the MRP determines the demand for labor and the wage rate. ( LOS a )
# Describe the factors that cause changes in the demand for labor and the factors that determine the elasticity of the demand for labor. ( LOS b )
# Describe the factors determining the supply of labor, including the substitution and income effects, and discuss the factors related to changes in the supply of labor, including capital accumulation. ( LOS c )
# Differentiate the difference between physical capital and financial capital, and explain the relation between the demand for physical capital and the demand for financial capital. ( LOS d )
# Discuss the role of the present value technique in determining the demand for capital. ( LOS e )
# Explain the factors that influence the supply of capital. ( LOS f )
# Differentiate between renewable and non-renewable natural resources and describe the supply curve for each. ( LOS g )
# Differentiate between economic rent and opportunity costs. ( LOS h )
Monitoring Cycles, Jobs, and the Price Level ( Reading 22 )
# Describe the phases of the business cycle, and define an unemployed person. ( LOS a, (Part 1) )
# Interpret the main labor market indicators and their relation to the business cycle. ( LOS a, (Part 2) )
# Define aggregate hours and real wage rates, and explain their relation to gross domestic product (GDP). ( LOS b )
# Explain the types of unemployment, full employment, the natural rate of unemployment, and the relation between unemployment and real GDP. ( LOS c )
# Explain the consumer price index (CPI). ( LOS d, (Part 1) )
# Calculate the consumer price index (CPI). ( LOS d, (Part 2) )
# Describe the relation between the CPI and the inflation rate. ( LOS d, (Part 3) )
# Explain the main sources of CPI bias. ( LOS d, (Part 4) )
Aggregate Supply and Aggregate Demand ( Reading 23 )
# Explain the factors that influence real GDP and long-run and short-run aggregate supply, explain movement along the long-run and short-run aggregate supply curves (LAS and SAS), and discuss the reasons for changes in potential GDP and aggregate supply. ( LOS a )
# Explain the components of and the factors that affect real GDP demanded, and describe the aggregate demand curve and why it slopes downward. ( LOS b, (Part 1) )
# Explain the factors that can change aggregate demand. ( LOS b, (Part 2) )
# Differentiate between short-run and long-run macroeconomic equilibrium, and explain how economic growth, inflation, and changes in aggregate demand and supply influence the macroeconomic equilibrium and the business cycle. ( LOS c )
# Compare and contrast the Keynesian, Classical, and Monetarist schools of macroeconomics. ( LOS d )
Economics: Macroeconomic Theory ( Session 6 )
Money, Banks, and the Federal Reserve ( Reading 24 )
# Explain the functions of money. ( LOS a )
# Describe the components of the M1 and M2 measures of money, and discuss why checks and credit cards are not counted as money. ( LOS b )
# Describe the economic functions of and differentiate among the various depository institutions. ( LOS c, (Part 1) )
# Explain the impact of financial regulation, deregulation, and innovation. ( LOS c, (Part 2) )
# Discuss the creation of money, including the role played by excess reserves. ( LOS d, (Part 1) )
# Calculate the amount of loans a bank can generate, given new deposits. ( LOS d, (Part 2) )
# Explain the goals of the U.S. Federal Reserve (Fed) in conducting monetary policy and how the Fed uses its policy tools to control the quantity of money, and describe the assets and liabilities on the Fed’s balance sheet. ( LOS e )
# Describe the monetary base, and explain the relation among the monetary base, the money multiplier, and the quantity of money. ( LOS f )
Money, Interest, Real GDP, and the Price Level ( Reading 25 )
# Explain the factors that influence the demand for money. ( LOS a, (Part 1) )
# Describe the demand for money curve, including the effects of changes in real GDP and financial innovation. ( LOS a, (Part 2) )
# Explain interest rate determination and the short-run and long-run effects of money on real GDP. ( LOS b )
# Discuss the quantity theory of money and its relation to aggregate supply and aggregate demand. ( LOS c )
Inflation ( Reading 26 )
# Differentiate between inflation and the price level, and calculate an inflation rate. ( LOS a )
# Describe and distinguish among the factors resulting in demand-pull and cost-push inflation, and describe the evolution of demand-pull and cost-push inflationary processes. ( LOS b )
# Explain the effects of unanticipated inflation on the labor market and the market for financial capital. ( LOS c )
# Distinguish between anticipated and unanticipated inflation, and explain the costs of anticipated inflation. ( LOS d )
# Explain the impact of inflation on unemployment. ( LOS e, (Part 1) )
# Describe the short-run and long-run Phillips curve, including the effect of changes in the natural rate of unemployment. ( LOS e, (Part 2) )
# Explain the relation among inflation, nominal interest rates, and the demand and supply of money. ( LOS f )
Fiscal Policy ( Reading 27 )
# Explain supply-side effects on employment, potential GDP, and aggregate supply, including the income tax and taxes on expenditure. ( LOS a, (Part 1) )
# Describe the Laffer curve and its relation to supply-side economics. ( LOS a, (Part 2) )
# Discuss the sources of investment finance and the influence of fiscal policy on capital markets, including the crowding-out effect. ( LOS b )
# Discuss the generational effects of fiscal policy, including generational accounting and generational imbalance. ( LOS c )
# Discuss the use of fiscal policy to stabilize the economy, including the effects of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier. ( LOS d )
# Explain the limitations of discretionary fiscal policy, and differentiate between discretionary fiscal policy and automatic stabilizers. ( LOS e )
Monetary Policy ( Reading 28 )
# Discuss the U.S. Federal Reserve’s primary goal of price stability, the secondary goal of maintaining sustainable real GDP growth, and the intermediate targets of monetary policy. ( LOS a, (Part 1) )
# Compare and contrast the policies that can be used to achieve price level stability. ( LOS a, (Part 2) )
# Compare and contrast fixed-rule and feedback-rule monetary policies to stabilize aggregate demand, and explain the problem of monetary policy lags. ( LOS b )
# Discuss the fixed-rule and feedback-rule policies to stabilize aggregate supply in response to a productivity shock and a cost-push inflation shock. ( LOS c )
# Discuss the importance of policy credibility in monetary policy implementation. ( LOS d )
# Compare and contrast the new monetarist and new Keynesian feedback rules. ( LOS e )
Financial Statement Analysis
Financial Statement Analysis: An Introduction ( Session 7 )
Financial Statement Analysis: An Introduction ( Reading 29 )
# Discuss the roles of financial reporting and financial statement analysis. ( LOS a )
# Discuss the role of key financial statements (income statement, balance sheet, cash flow statement and statement of changes in owners’ equity) in evaluating a company’s performance and financial position. ( LOS b )
# Discuss the importance of financial statement notes and supplementary information (including disclosures of accounting methods, estimates and assumptions), and management’s discussion and analysis. ( LOS c )
# Discuss the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls. ( LOS d )
# Identify and explain information sources other than annual financial statements and supplementary information that analysts use in financial statement analysis. ( LOS e )
# Describe the steps in the financial statement analysis framework. ( LOS f )
Financial Reporting Mechanics ( Reading 30 )
# Identify the groups (operating, investing, and financing activities) into which business activities are categorized for financial reporting purposes and classify any business activity into the appropriate group. ( LOS a )
# Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements. ( LOS b )
# Explain the accounting equation in its basic and expanded forms. ( LOS c )
# Explain the process of recording business transactions using an accounting system based on the accounting equations. ( LOS d )
# Explain the need for accruals and other adjustments in preparing financial statements. ( LOS e )
# Prepare financial statements, given account balances or other elements in the relevant accounting equation, and explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity. ( LOS f )
# Describe the flow of information in an accounting system. ( LOS g )
# Explain the use of the results of the accounting process in security analysis. ( LOS h )
Financial Reporting Standards ( Reading 31 )
# Explain the objective of financial statements and the importance of reporting standards in security analysis and valuation. ( LOS a )
# Explain the role of standard-setting bodies, such as the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, and regulatory authorities such as the International Organization of Securities Commissions, the U.K. Financial Services Authority, and the U.S. Securities and Exchange Commission in establishing and enforcing financial reporting standards. ( LOS b )
# Discuss the ongoing barriers to developing one universally accepted set of financial reporting standards. ( LOS c )
# Describe the International Financial Reporting Standards (IFRS) framework, including the objective of financial statements, their qualitative characteristics, required reporting elements, and the constraints and assumptions in preparing financial statements. ( LOS d )
# Explain the general requirements for financial statements. ( LOS e )
# Compare and contrast key concepts of financial reporting standards under IFRS and alternative reporting systems, and discuss the implications for financial analysis of differing financial reporting systems. ( LOS f )
# Identify the characteristics of a coherent financial reporting framework and barriers to creating a coherent financial reporting network. ( LOS g )
# Discuss the importance of monitoring developments in financial reporting standards and evaluate company disclosures of significant accounting policies. ( LOS h )
Financial Statement Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement ( Session 8 )
Understanding the Income Statement ( Reading 32 )
# Describe the components of the income statement and construct an income statement using the alternative presentation formats of that statement. ( LOS a )
# Explain the general principles of revenue recognition and accrual accounting. ( LOS b, (Part 1) )
# Demonstrate specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, and gross and net reporting of revenue). ( LOS b, (Part 2) )
# Discuss the implications of revenue recognition principles for financial analysis. ( LOS b, (Part 3) )
# Discuss the general principles of expense recognition, such as the matching principle, specific expense recognition applications (including depreciation of longterm assets and inventory methods), and the implications of expense recognition principles for financial analysis. ( LOS c )
# Determine which method of depreciation, accounting for inventory, or amortizing intangibles is appropriate, based on facts that might influence the decision. ( LOS d )
# Demonstrate the depreciation of long-term assets using each approved method, and amortization of intangibles. ( LOS e, (Part 1) )
# Demonstrate accounting for inventory using each approved method. ( LOS e, (Part 2) )
# Distinguish between the operating and nonoperating components of the income statement. ( LOS f )
# Discuss the financial reporting treatment and analysis of nonrecurring items (including discontinued operations, extraordinary items, and unusual or infrequent items), and changes in accounting standards. ( LOS g )
# Describe the components of earnings per share. ( LOS h, (Part 1) )
# Calculate a company’s earnings per share (both basic and diluted earnings per share) for both a simple and complex capital structure. ( LOS h, (Part 2) )
# Distinguish between dilutive and antidilutive securities, and discuss the implications of each for the earnings per share calculation. ( LOS i )
# Evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement. ( LOS j )
# State the accounting classification for items that are excluded from the income statement but affect owners’ equity, and list the major types of items receiving that treatment. ( LOS k )
# Describe and calculate comprehensive income. ( LOS l )
Understanding the Balance Sheet ( Reading 33 )
# Illustrate and interpret the components of the assets, liabilities, and equity sections of the balance sheet, and discuss the uses of the balance sheet in financial analysis. ( LOS a )
# Describe the various formats of balance sheet presentation. ( LOS b )
# Explain how assets and liabilities arise from the accrual process. ( LOS c )
# Compare and contrast current and noncurrent assets and liabilities. ( LOS d )
# Explain the measurement bases (e.g., historical cost and fair value) of assets and liabilities, including current assets, current liabilities, tangible assets, and intangible assets. ( LOS e )
# Discuss off-balance-sheet disclosures. ( LOS f )
# Demonstrate the appropriate classifications and related accounting treatments for marketable and non-marketable financial instruments held as assets or owed by the company as liabilities. ( LOS g )
# List and explain the components of owners’ equity. ( LOS h )
# Interpret balance sheets, common-size balance sheets, the statement of changes in equity, and commonly used balance sheet ratios. ( LOS i )
Understanding the Cash Flow Statement ( Reading 34 )
# Compare and contrast cash flows from operating, investing, and financing activities. ( LOS a, (Part 1) )
# Classify cash flow items as relating to one of these three categories, given a description of the items. ( LOS a, (Part 2) )
# Describe how noncash investing and financing activities are reported. ( LOS b )
# Compare and contrast the key differences in cash flow statements prepared under international financial reporting standards and U.S. generally accepted accounting principles. ( LOS c )
# Demonstrate the difference between the direct and indirect methods of presenting cash from operating activities. ( LOS d, (Part 1) )
# Explain the arguments in favor of the direct and indirect methods. ( LOS d, (Part 2) )
# Demonstrate how the cash flow statement is linked to the income statement and balance sheet. ( LOS e )
# Demonstrate the steps in the preparation of direct cash flow statements, including how cash flows can be computed using income statement and balance sheet data. ( LOS f, (Part 1) )
# Demonstrate the steps in the preparation of indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data. ( LOS f, (Part 2) )
# Describe the process of converting a statement of cash flows from the direct to the indirect method of presentation. ( LOS g )
# Analyze and interpret a cash flow statement using both total currency amounts and common-size cash flow statements. ( LOS h )
# Explain and calculate free cash flow to the firm and free cash flow to equity. ( LOS i, (Part 1) )
# Explain and calculate other cash flow ratios. ( LOS i, (Part 2) )
Financial Statement Analysis: Inventories, Long-Term Assets, Deferred Taxes, and On- and Off-balance-sheet Debt ( Session 9 )
Analysis of Inventories ( Reading 35 )
# Compute ending inventory balances and cost of goods sold using the LIFO, FIFO, and average cost methods to account for product inventory. ( LOS a )
# Explain the relationship among and the usefulness of inventory and cost of goods sold data provided by the LIFO, FIFO, and average cost methods when prices are (1) stable or (2) changing. ( LOS b )
# Compare and contrast the effect of the different methods on cost of goods sold and inventory balances. ( LOS c, (Part 1) )
# Discuss how a company’s choice of inventory accounting method affects other financial items such as income, cash flow, and working capital. ( LOS c, (Part 2) )
# Compare and contrast the effects of the choice of inventory method on profitability, liquidity, activity, and solvency ratios. ( LOS d )
# Indicate the reasons that a LIFO reserve might decline during a given period and evaluate the implications of such a decline for financial analysis. ( LOS e )
# Illustrate how inventories are reported in the financial statements and how the lower-of-cost-or-market principle is used and applied. ( LOS f )
Analysis of Long-Lived Assets: Part I - The Capitalization Decision ( Reading 36 )
# Demonstrate the effects of capitalizing versus expensing on net income, shareholders’ equity, cash flow from operations, and financial ratios. ( LOS a )
# Determine which intangible assets, including software development costs and research and development costs, should be capitalized, according to U.S. GAAP and international accounting standards. ( LOS b )
Analysis of Long-Lived Assets: Part II - Analysis of Depreciation and Impairment ( Reading 37 )
# Demonstrate the different depreciation methods and explain how the choice of depreciation method affects a company’s financial statements, ratios, and taxes. ( LOS a )
# Demonstrate how modifying the depreciation method, the estimated useful life, and/or the salvage value used in accounting for long-lived assets affect financial statements and ratios. ( LOS b )
# Determine the average age and average depreciable life of a company’s assets using the company’s fixed asset disclosures. ( LOS c )
# Explain and illustrate the use of impairment charges on long-lived assets, and analyze the effects of taking such impairment charges on a company’s financial statements and ratios. ( LOS d )
# Discuss accounting requirements related to remedying environmental damage caused by operating assets and explain the financial statement and ratio effects that result from the application of those requirements. ( LOS e )
Analysis of Income Taxes ( Reading 38 )
# Explain the key terms related to income tax accounting and the origin of deferred tax liabilities and assets. ( LOS a )
# Demonstrate the liability method of accounting for deferred taxes. ( LOS b )
# Discuss the use of valuation allowances for deferred tax assets, and their implications for financial statement analysis. ( LOS c )
# Explain the factors that determine whether a company’s deferred tax liabilities should be treated as a liability or as equity for purposes of financial analysis. ( LOS d )
# Distinguish between temporary and permanent items in pretax financial income and taxable income. ( LOS e )
# Calculate and interpret income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities. ( LOS f )
# Calculate and interpret the adjustment(s) to the deferred tax accounts related to a change in the tax rate. ( LOS g )
# Interpret a deferred tax footnote disclosure that reconciles the effective and statutory tax rates. ( LOS h )
# Analyze disclosures relating to, and the effect of, deferred taxes on a company’s financial statements and financial ratios. ( LOS i )
# Compare and contrast a company’s deferred tax items and effective tax rate reconciliation (1) between reporting periods and (2) with the comparable items reported by other companies. ( LOS j )
Analysis of Financing Liabilities ( Reading 39 )
# Distinguish between operating and trade debt related to operating activities and debt generated by financing activities, and discuss the analytical implications of a shift between the two types of liabilities. ( LOS a )
# Determine the effects of debt issuance and amortization of bond discounts and premiums on financial statements and financial ratios. ( LOS b )
# Analyze the effect on financial statements and financial ratios of issuing zero-coupon debt. ( LOS c )
# Classify a debt security with equity features as a debt or equity security and demonstrate the effect of issuing debt with equity features on the financial statements and ratios. ( LOS d )
# Describe the disclosures relating to financing liabilities. ( LOS e, (Part 1) )
# Discuss the advantages/disadvantages to the company of selecting a given financing instrument and the effect of the selection on a company’s financial statements and ratios. ( LOS e, (Part 2) )
# Determine the effects of changing interest rates on the market value of debt and on financial statements and ratios. ( LOS f )
# Calculate and describe the accounting treatment of, and economic gains and losses resulting from, the various methods of retiring debt prior to its maturity. ( LOS g )
# Analyze the implications of debt covenants for creditors and the issuing company. ( LOS h )
Leases and Off-Balance-Sheet Debt ( Reading 40 )
# Discuss the incentives for leasing assets instead of purchasing them, and the incentives for reporting the leases as operating leases rather than capital leases. ( LOS a )
# Contrast the effects of capital and operating leases on the financial statements and ratios of the lessees and lessors. ( LOS b )
# Describe the types of off-balance-sheet financing and analyze their effects on selected financial ratios. ( LOS c )
# Distinguish between sales-type leases and direct financing leases and explain the effects of these types of leases on the financial statements of lessors. ( LOS d )
Financial Statement Analysis: Techniques, Applications, and International Standards Convergence ( Session 10 )
Financial Analysis Techniques ( Reading 41 )
# Evaluate and compare companies using ratio analysis, common-size financial statements, and charts in financial analysis. ( LOS a )
# Describe the limitations of ratio analysis. ( LOS b )
# Explain and demonstrate the classification of financial ratios. ( LOS c )
# Calculate and interpret activity, liquidity, solvency, profitability, and valuation ratios. ( LOS d )
# Demonstrate how ratios are related and how to evaluate a company using a combination of different ratios. ( LOS e )
# Demonstrate the application of DuPont analysis (the decomposition of return on equity). ( LOS f )
# Calculate and interpret the ratios used in equity analysis, credit analysis, and segment analysis. ( LOS g )
# Describe how the results of common-size and ratio analysis can be used to model and forecast earnings. ( LOS h )
Financial Statement Analysis: Applications ( Reading 42 )
# Evaluate a company’s past financial performance and explain how a company’s strategy is reflected in past financial performance. ( LOS a )
# Prepare a basic projection of a company’s future net income and cash flow. ( LOS b )
# Describe the role of financial statement analysis in assessing the credit quality of a potential debt investment. ( LOS c )
# Discuss the use of financial statement analysis in screening for potential equity investments. ( LOS d )
# Determine and justify appropriate analyst adjustments to a company’s financial statements to facilitate comparison with another company. ( LOS e )
International Standards Convergence ( Reading 43 )
# Identify and explain the major international accounting standards for each asset and liability category on the balance sheet and the key differences from U.S. generally accepted accounting principles (GAAP). ( LOS a )
# Identify and explain the major international accounting standards for major revenue and expense categories on the income statement, and the key differences from U.S. GAAP. ( LOS b )
# Identify and explain the major differences between international and U.S. GAAP accounting standards concerning the treatment of interest and dividends on the cash flow statement. ( LOS c )
# Interpret the effect of differences between international and U.S. GAAP accounting standards on the balance sheet, income statement, and the statement of changes in equity for some commonly used financial ratios. ( LOS d )
Corporate Finance ( Session 11 )
Capital Budgeting ( Reading 44 )
# Explain the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects. ( LOS a )
# Discuss the basic principles of capital budgeting, including the choice of the proper cash flows and determining the proper discount rate. ( LOS b )
# Explain how the following project interactions affect the evaluation of a capital project: (1) independent versus mutually exclusive projects, (2) project sequencing, and (3) unlimited funds versus capital rationing. ( LOS c )
# Calculate and interpret the results using each of the following methods to evaluate a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, average accounting rate of return (ARR), and profitability index (PI). ( LOS d )
# Explain the NPV profile. ( LOS e, (Part 1) )
# Compare and contrast the NPV and IRR methods when evaluating independent and mutually exclusive projects. ( LOS e, (Part 2) )
# Describe the problems that can arise when using an IRR. ( LOS e, (Part 3) )
# Describe and account for the relative popularity of the various capital budgeting methods, and explain the relation between NPV and company value and stock price. ( LOS f )
Cost of Capital ( Reading 45 )
# Calculate and interpret the weighted average cost of capital (WACC) of a company. ( LOS a )
# Describe how taxes affect the cost of capital from the different capital sources. ( LOS b )
# Describe alternative methods of calculating the weights used in the weighted average cost of capital, including the use of the company’s target capital structure. ( LOS c )
# Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget. ( LOS d )
# Explain the marginal cost of capital’s role in determining the net present value of a project. ( LOS e )
# Calculate and interpret the cost of fixed rate debt capital using the yield-to-maturity approach and the debt-rating approach. ( LOS f )
# Calculate and interpret the cost of noncallable, nonconvertible preferred stock. ( LOS g )
# 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. ( LOS h )
# Explain the country equity risk premium in the estimation of the cost of equity for a company located in a developing market. ( LOS i )
# Describe the marginal cost of capital schedule, explain why it may be upwardsloping with respect to additional capital, and calculate and interpret its breakpoints. ( LOS j )
# Explain and demonstrate the correct treatment of flotation costs. ( LOS k )
Working Capital Management ( Reading 46 )
# Calculate and interpret liquidity measures using selected financial ratios for a company and compare with peer companies. ( LOS a )
# Evaluate overall working capital effectiveness of a company, using the operating and cash conversion cycles, and compare the company’s effectiveness with other peer companies. ( LOS b )
# Classify the components of a cash forecast and prepare a cash forecast, given estimates of revenues, expenses, and other items. ( LOS c )
# Identify and evaluate the necessary tools to use in managing a company’s net daily cash position. ( LOS d )
# Compute and interpret comparable yields on various securities. ( LOS e, (Part 1) )
# Compare portfolio returns against a standard benchmark, and evaluate a company’s short-term investment policy guidelines. ( LOS e, (Part 2) )
# Evaluate the performance of a company’s accounts receivable, inventory management, and accounts payable functions against historical figures and comparable peer company values. ( LOS f )
# Evaluate the choices of short-term funding available to a company and recommend a financing method. ( LOS g )
Financial Statement Analysis ( Reading 47 )
# Calculate, interpret, and discuss the DuPont expression and extended DuPont expression for a company’s return on equity and demonstrate its use in corporate analysis. ( LOS a )
# Demonstrate the use of pro forma income and balance sheet statements. ( LOS b )
The Corporate Governance of Listed Companies: A Manual for Investors ( Reading 48 )
# Define and describe corporate governance. ( LOS a )
# Discuss and critique characteristics and practices related to board and committee independence, experience, compensation, external consultants, and frequency of elections and determine whether they are supportive of shareowner protection. ( LOS b )
# Describe board independence and explain the importance of independent board members in corporate governance. ( LOS c )
# Identify factors that indicate a board and its members possess the experience required to govern the company for the benefit of its shareowners. ( LOS d )
# Explain the provisions that should be included in a strong corporate code of ethics and the implications of a weak code of ethics with regard to related-party transactions and personal use of company assets. ( LOS e )
# State the key areas of responsibility for which board committees are typically created and explain the criteria for assessing whether each committee is able to adequately represent shareowner interests. ( LOS f )
# Evaluate, from a shareowner’s perspective, company policies related to voting rules, shareowner-sponsored proposals, common stock classes, and takeover defenses. ( LOS g )
Portfolio Management
Portfolio Management ( Session 12 )
The Asset Allocation Decision ( Reading 49 )
# Describe the steps in the portfolio management process. ( LOS a, (Part 1) )
# Explain the reasons for a policy statement. ( LOS a, (Part 2) )
# Explain why investment objectives should be expressed in terms of risk and return, and list the factors that may affect an investor’s risk tolerance. ( LOS b )
# Describe the return objectives of capital preservation, capital appreciation, current income, and total return. ( LOS c )
# Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique needs and preferences. ( LOS d )
# Describe the importance of asset allocation, in terms of the percentage of a portfolio’s return that can be explained by the target asset allocation, and explain how political and economic factors result in differing asset allocations by investors in various countries. ( LOS e )
An Introduction to Portfolio Management ( Reading 50 )
# Define risk aversion and discuss evidence that suggests that individuals are generally risk averse. ( LOS a )
# List the assumptions about investor behavior underlying the Markowitz model. ( LOS b )
# Compute and interpret the expected return for an individual investment and a portfolio. ( LOS c, (Part 1) )
# Compute and interpret the variance and standard deviation for an individual investment and standard deviation for a portfolio. ( LOS c, (Part 2) )
# Compute and interpret the covariance of rates of return, and show how it is related to the correlation coefficient. ( LOS d )
# List the components of the portfolio standard deviation formula, and explain the relevant importance of these components when adding an investment to a portfolio. ( LOS e )
# Describe the efficient frontier, and explain the implications for incremental returns as an investor assumes more risk. ( LOS f )
# Explain the concept of an optimal portfolio, and show how each investor may have a different optimal portfolio. ( LOS g )
An Introduction to Asset Pricing Models ( Reading 51 )
# Explain the capital market theory, including its underlying assumptions. ( LOS a, (Part 1) )
# Explain the effect on expected returns, the standard deviation of returns, and possible risk/return combinations when a risk-free asset is combined with a portfolio of risky assets. ( LOS a, (Part 2) )
# Identify the market portfolio, and describe the role of the market portfolio in the formation of the capital market line (CML). ( LOS b )
# Define systematic and unsystematic risk, and explain why an investor should not expect to receive additional return for assuming unsystematic risk. ( LOS c )
# Explain the capital asset pricing model, including the security market line (SML) and beta. ( LOS d, (Part 1) )
# Describe the effects of relaxing its underlying assumptions. ( LOS d, (Part 2) )
# Calculate, using the SML, the expected return on a security, and evaluate whether the security is overvalued, undervalued, or properly valued. ( LOS e )
Asset Valuation
Markets ( Session 13 )
Organization and Functioning of Securities Markets ( Reading 52 )
# Describe the characteristics of a well-functioning securities market. ( LOS a )
# Distinguish between primary and secondary capital markets, and explain how secondary markets support primary markets. ( LOS b )
# Distinguish between call and continuous markets. ( LOS c )
# Compare and contrast the structural differences among national stock exchanges, regional stock exchanges, and the over-the-counter (OTC) markets. ( LOS d )
# Compare and contrast major characteristics of exchange markets, including exchange membership, types of orders, and market makers. ( LOS e )
# Describe the process of selling a stock short and discuss an investor’s likely motivation for selling short. ( LOS f )
# Describe the process of buying a stock on margin, and compute the rate of return on a margin transaction. ( LOS g, (Part 1) )
# Define maintenance margin and determine the stock price at which the investor would receive a margin call. ( LOS g, (Part 2) )
Security-Market Indexes ( Reading 53 )
# Compare and contrast the characteristics of, and discuss the source and direction of bias exhibited by, each of the three predominant weighting schemes used in constructing stock market indexes. ( LOS a, (Part 1) )
# Compute a price-weighted, value-weighted, and unweighted index series for three stocks. ( LOS a, (Part 2) )
# Compare and contrast major structural features of domestic and global stock indexes, bond indexes, and composite stock-bond indexes. ( LOS b )
# State how low correlations between global markets support global investment. ( LOS c )
Efficient Capital Markets ( Reading 54 )
# Define an efficient capital market. ( LOS a, (Part 1) )
# Describe and contrast the three forms of the efficient market hypothesis (EMH). ( LOS a, (Part 2) )
# Describe the tests used to examine each of the three forms of the EMH. ( LOS b, (Part 1) )
# Identify various market anomalies and explain their implications for the EMH. ( LOS b, (Part 2) )
# Explain the overall conclusions about each form of the EMH. ( LOS b, (Part 3) )
# Explain the implications of stock market efficiency for technical analysis and fundamental analysis. ( LOS c, (Part 1) )
# Explain the implications of stock market efficiency for the portfolio management process and the role of the portfolio manager. ( LOS c, (Part 2) )
# Explain the rationale for investing in index funds. ( LOS c, (Part 3) )
# Define behavioral finance and describe overconfidence bias, confirmation bias, and escalation bias. ( LOS d )
Market Efficiency and Anomalies ( Reading 55 )
# Explain the three limitations to achieving fully efficient markets. ( LOS a )
# Describe four problems that may prevent arbitrageurs from correcting anomalies. ( LOS b )
# Explain why an apparent anomoly may be justified, and describe the common biases that distort testing for mispricings. ( LOS c )
# Explain why a mispricing may persist and why valid anomalies may not be profitable. ( LOS d )
Equities ( Session 14 )
An Introduction to Security Valuation: Part I ( Reading 56 )
# Explain the top-down approach, and its underlying logic, to the security valuation process. ( LOS a )
Industry Analysis ( Reading 57 )
# Describe how structural economic changes (e.g., demographics, technology, politics, and regulation) may affect industries. ( LOS a )
Equity: Concepts and Techniques ( Reading 58 )
# Classify business cycle stages and identify attractive investment opportunities for each stage. ( LOS a )
# Discuss, with respect to global industry analysis, the key elements related to return expectations. ( LOS b )
# Describe the industry life cycle and identify an industry’s stage in its life cycle. ( LOS c )
# Discuss the specific advantages of both the concentration ratio and the Herfindahl index. ( LOS d )
# Discuss, with respect to global industry analysis, the elements related to risk. ( LOS e, (Part 1) )
# Describe the basic forces that determine industry competition. ( LOS e, (Part 2) )
Company Analysis and Stock Selection ( Reading 59 )
# Differentiate between 1) a growth company and a growth stock, 2) a defensive company and a defensive stock, 3) a cyclical company and a cyclical stock, 4) a speculative company and a speculative stock, and 5) a value stock and a growth stock. ( LOS a )
# Describe and estimate the expected earnings per share (EPS) and earnings multiplier for a company and use the multiple to make an investment decision regarding the company. ( LOS b )
An Introduction to Security Valuation: Part II ( Reading 60 )
# State the various forms of investment returns. ( LOS a )
# Calculate and interpret the value of a preferred stock using the dividend discount model (DDM). ( LOS b, (Part 1) )
# Calculate and interpret the value of a common stock using the dividend discount model (DDM). ( LOS b, (Part 2) )
# Show how to use the DDM to develop an earnings multiplier model, and explain the factors in the DDM that affect a stock’s price-to-earnings (P/E) ratio. ( LOS c )
# Explain the components of an investor’s required rate of return (i.e., the real risk-free rate, the expected rate of inflation, and the risk premium). ( LOS d, (Part 1) )
# Discuss the risk factors to be assessed in determining a country risk premium for use in estimating the required return for foreign securities. ( LOS d, (Part 2) )
# Estimate the implied dividend growth rate, given the components of the required return on equity and incorporating the earnings retention rate and current stock price. ( LOS e )
# Describe a process for developing estimated inputs to be used in the DDM, including the required rate of return and expected growth rate of dividends. ( LOS f )
Introduction to Price Multiples ( Reading 61 )
# Discuss the rationales for the use of price to earnings (P/E), price to book value (P/BV), price to sales (P/S), and price to cash flow (P/CF) in equity valuation. ( LOS a, (Part 1) )
# Discuss the possible drawbacks to the use of price to earnings (P/E), price to book value (P/BV), price to sales (P/S), and price to cash flow (P/CF) in equity valuation. ( LOS a, (Part 2) )
# Calculate and interpret P/E, P/BV, P/S, and P/CF. ( LOS b )
Fixed Income ( Session 15 )
Features of Debt Securities ( Reading 62 )
# Explain the purposes of a bond’s indenture, and describe affirmative and negative covenants. ( LOS a )
# Describe the basic features of a bond. ( LOS b, ( Part 1) )
# Describe the various coupon rate structures. ( LOS b, (Part 2) )
# Describe the structure of floating-rate securities. ( LOS b, (Part 3) )
# Define accrued interest, full price, and clean price. ( LOS c )
# Explain the provisions for redemption and retirement of bonds. ( LOS d )
# Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or the bondholder. ( LOS e )
# Describe methods used by institutional investors in the bond market to finance the purchase of a security (i.e., margin buying and repurchase agreements). ( LOS f )
Risks Associated with Investing in Bonds ( Reading 63 )
# Explain the risks associated with investing in bonds. ( LOS a )
# Identify the relations among a bond’s coupon rate, the yield required by the market, and the bond’s price relative to par value (i.e., discount, premium, or equal to par). ( LOS b )
# Explain how features of a bond (e.g., maturity, coupon, and embedded options) and the level of a bond’s yield affect the bond’s interest rate risk. ( LOS c )
# Identify the relationship among the price of a callable bond, the price of an option-free bond, and the price of an embedded call option. ( LOS d )
# Explain the interest rate risk of a floating-rate security and why such a security’s price may differ from par value. ( LOS e )
# Compute and interpret the duration and dollar duration of a bond. ( LOS f )
# Describe yield curve risk and explain why duration does not account for yield curve risk for a portfolio of bonds. ( LOS g )
# Explain the disadvantages of a callable or prepayable security to an investor. ( LOS h )
# Identify the factors that affect the reinvestment risk of a security. ( LOS i, (Part 1) )
# Explain why prepayable amortizing securities expose investors to greater reinvestment risk than nonamortizing securities. ( LOS i, (Part 2) )
# Describe the various forms of credit risk and describe the meaning and role of credit ratings. ( LOS j )
# Explain liquidity risk and why it might be important to investors even if they expect to hold a security to the maturity date. ( LOS k )
# Describe the exchange rate risk an investor faces when a bond makes payments in a foreign currency. ( LOS l )
# Explain inflation risk. ( LOS m )
# Explain how yield volatility affects the price of a bond with an embedded option and how changes in volatility affect the value of a callable bond and a putable bond. ( LOS n )
# Describe the various forms of event risk. ( LOS o )
Overview of Bond Sectors and Instruments ( Reading 64 )
# Describe the features, credit risk characteristics, and distribution methods for government securities. ( LOS a )
# Describe the types of securities issued by the U.S. Department of the Treasury (e.g., bills, notes, bonds, and inflation protection securities). ( LOS b, (Part 1) )
# Differentiate between on-the-run and off-the-run Treasury securities. ( LOS b, (Part 2) )
# Describe how stripped Treasury securities are created and distinguish between coupon strips and principal strips. ( LOS c )
# Describe the types and characteristics of securities issued by U.S. federal agencies. ( LOS d )
# Describe the types and characteristics of mortgage-backed securities. ( LOS e, (Part 1) )
# Explain the cash flow, prepayments, and prepayment risk for each mortgage-backed security. ( LOS e, (Part 2) )
# State the motivation for creating a collateralized mortgage obligation. ( LOS f )
# Describe the types of securities issued by municipalities in the United States. ( LOS g, (Part 1) )
# Distinguish between tax-backed debt and revenue bonds. ( LOS g, (Part 2) )
# Describe the characteristics and motivation for the various types of debt issued by corporations (including corporate bonds, medium-term notes, structured notes, commercial paper, negotiable CDs, and bankers acceptances). ( LOS h )
# Define an asset-backed security, and describe the role of a special purpose vehicle in an asset-backed security’s transaction. ( LOS i, (Part 1) )
# State the motivation for a corporation to issue an asset-backed security, and describe the types of external credit enhancements for asset-backed securities. ( LOS i, (Part 2) )
# Describe collateralized debt obligations. ( LOS j )
# Describe the mechanisms available for placing bonds in the primary market and differentiate the primary and secondary markets in bonds. ( LOS k )
Understanding Yield Spreads ( Reading 65 )
# Identify the interest rate policy tools available to a central bank (e.g., the U.S. Federal Reserve). ( LOS a )
# Describe a yield curve and the various shapes of the yield curve. ( LOS b )
# Explain the basic theories of the term structure of interest rates. ( LOS c, (Part 1) )
# Describe the implications of each theory for the shape of the yield curve. ( LOS c, (Part 2) )
# Define a spot rate. ( LOS d )
# Compute, compare, and contrast the various yield spread measures. ( LOS e )
# Describe a credit spread and discuss the suggested relation between credit spreads and the well-being of the economy. ( LOS f )
# Identify how embedded options affect yield spreads. ( LOS g )
# Explain how the liquidity or issue-size of a bond affects its yield spread relative to risk-free securities and relative to other securities. ( LOS h )
# Compute the after-tax yield of a taxable security and the tax-equivalent yield of a tax-exempt security. ( LOS i )
# Define LIBOR and explain its importance to funded investors who borrow short term. ( LOS j )
Monetary Policy in an Environment of Global Financial Markets ( Reading 66 )
# Identify how central bank behavior affects short-term interest rates, systemic liquidity, and market expectations, thereby affecting financial markets. ( LOS a )
# Describe the importance of communication between a central bank and the financial markets. ( LOS b )
# Discuss the problem of information asymmetry and the importance of predictability, credibility, and transparency of monetary policy. ( LOS c )
Fixed Income ( Session 16 )
Introduction to the Valuation of Fixed Income Securities ( Reading 67 )
# Explain the steps in the bond valuation process. ( LOS a )
# Identify the types of bonds for which estimating the expected cash flows is difficult, and explain the problems encountered when estimating the cash flows for these bonds. ( LOS b )
# Compute the value of a bond and the change in value that is attributable to a change in the discount rate. ( LOS c )
# Explain how the price of a bond changes as the bond approaches its maturity date, and compute the change in value that is attributable to the passage of time. ( LOS d )
# Compute the value of a zero-coupon bond. ( LOS e )
# Explain the arbitrage-free valuation approach and the market process that forces the price of a bond toward its arbitrage-free value. ( LOS f, (Part 1) )
# Explain how a dealer can generate an arbitrage profit if a bond is mispriced. ( LOS f, (Part 2) )
Yield Measures, Spot Rates, and Forward Rates ( Reading 68 )
# Explain the sources of return from investing in a bond. ( LOS a )
# Compute and interpret the traditional yield measures for fixed-rate bonds. ( LOS b, (Part 1) )
# Explain the limitations and assumptions for traditional yield measures. ( LOS b, (Part 2) )
# Explain the importance of reinvestment income in generating the yield computed at the time of purchase, and calculate the amount of income required to generate that yield. ( LOS c, (Part 1) )
# Discuss the factors that affect reinvestment risk. ( LOS c, (Part 2) )
# Compute and interpret the bond equivalent yield of an annual-pay bond and the annual-pay yield of a semiannual-pay bond. ( LOS d )
# Describe the methodology for computing the theoretical Treasury spot rate curve. ( LOS e, (Part 1) )
# Compute the value of a bond using spot rates. ( LOS e, ( Part 2) )
# Differentiate between the nominal spread, the zero-volatility spread, and the option-adjusted spread. ( LOS f )
# Describe how the option-adjusted spread accounts for the option cost in a bond with an embedded option. ( LOS g )
# Explain a forward rate, and compute spot rates from forward rates and forward rates from spot rates. ( LOS h, (Part 1) )
# Compute the value of a bond using forward rates. ( LOS h, (Part 2) )
Introduction to the Measurement of Interest Rate Risk ( Reading 69 )
# Distinguish between the full valuation approach (the scenario analysis approach) and the duration/convexity approach for measuring interest rate risk, and explain the advantage of using the full valuation approach. ( LOS a )
# Demonstrate the price volatility characteristics for option-free, callable, prepayable, and putable bonds when interest rates change. ( LOS b )
# Describe positive convexity, negative convexity, and their relation to bond price and yield. ( LOS c )
# Compute and interpret the effective duration of a bond, given information about how the bond’s price will increase and decrease for given changes in interest rates. ( LOS d, (Part 1) )
# Compute the approximate percentage price change for a bond, given the bond’s effective duration and a specified change in yield. ( LOS d, (Part 2) )
# Distinguish among the alternative definitions of duration. ( LOS e, (Part 1) )
# Explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options. ( LOS e, (Part 2) )
# Compute the duration of a portfolio, given the duration of the bonds comprising the portfolio. ( LOS f, (Part 1) )
# Explain the limitations of portfolio duration. ( LOS f, (Part 2) )
# Describe the convexity measure of a bond. ( LOS g, (Part 1) )
# Estimate a bond’s percentage price change, given the bond’s duration and convexity and a specified change in interest rates. ( LOS g, (Part 2) )
# Differentiate between modified convexity and effective convexity. ( LOS h )
# Compute the price value of a basis point (PVBP), and explain its relationship to duration. ( LOS i )
Derivative Investments ( Session 17 )
Derivative Markets and Instruments ( Reading 70 )
# Define a derivative and differentiate between exchange-traded and over-the-counter derivatives. ( LOS a )
# Define a forward commitment and a contingent claim. ( LOS b, (Part 1) )
# Describe the basic characteristics of forward contracts, futures contracts, options (calls and puts), and swaps. ( LOS b, (Part 2) )
# Discuss the purposes and criticisms of derivative markets. ( LOS c )
# Explain arbitrage and the role it plays in determining prices and promoting market efficiency. ( LOS d )
Forward Markets and Contracts ( Reading 71 )
# Differentiate between the positions held by the long and short parties to a forward contract in terms of delivery/settlement and default risk. ( LOS a )
# Describe the procedures for settling a forward contract at expiration. ( LOS b, (Part 1) )
# Discuss how termination alternatives prior to expiration can affect credit risk. ( LOS b, (Part 2) )
# Differentiate between a dealer and an end user of a forward contract. ( LOS c )
# Describe the characteristics of equity forward contracts. ( LOS d, (Part 1) )
# Describe the characteristics of forward contracts on zero-coupon and coupon bonds. ( LOS d, (Part 2) )
# Describe the characteristics of the Eurodollar time deposit market. ( LOS e, (Part 1) )
# Define LIBOR and Euribor. ( LOS e, (Part 2) )
# Describe the characteristics of forward rate agreements (FRAs). ( LOS f )
# Calculate and interpret the payoff of an FRA and explain each of the component terms. ( LOS g )
# Describe the characteristics of currency forward contracts. ( LOS h )
Futures Markets and Contracts ( Reading 72 )
# Describe the characteristics of futures contracts. ( LOS a, (Part 1) )
# Distinguish between futures contracts and forward contracts. ( LOS a, (Part 2) )
# Differentiate between margin in the securities markets and margin in the futures markets. ( LOS b, (Part 1) )
# Define initial margin, maintenance margin, variation margin, and settlement price. ( LOS b, (Part 2) )
# Describe price limits and the process of marking to market. ( LOS c, (Part 1) )
# Compute and interpret the margin balance, given the previous day’s balance and the new change in the futures price. ( LOS c, (Part 2) )
# Describe how a futures contract can be terminated by a close-out (i.e., offset) at expiration (or prior to expiration), delivery, an equivalent cash settlement, or an exchange-for-physicals. ( LOS d )
# Describe the characteristics of the following types of futures contracts: Eurodollar, Treasury bond, stock index, and currency. ( LOS e )
Option Markets and Contracts ( Reading 73 )
# Define European option, American option, and moneyness. ( LOS a, (Part 1) )
# Differentiate between exchange-traded options and over-the-counter options. ( LOS a, (Part 2) )
# Identify the types of options in terms of the underlying instruments. ( LOS b )
# Compare and contrast interest rate options to forward rate agreements (FRAs). ( LOS c )
# Define interest rate caps, floors, and collars. ( LOS d )
# Compute and interpret option payoffs, and explain how interest rate option payoffs differ from the payoffs of other types of options. ( LOS e )
# Define intrinsic value and time value, and explain their relationship. ( LOS f )
# Determine the minimum and maximum values of European options and American options. ( LOS g )
# Calculate and interpret the lowest prices of European and American calls and puts based on the rules for minimum values and lower bounds. ( LOS h )
# Explain how option prices are affected by the exercise price and the time to expiration. ( LOS i )
# Explain put-call parity for European options, and relate put-call parity to arbitrage and the construction of synthetic options. ( LOS j )
# Contrast American options with European options in terms of the lower bounds on option prices and the possibility of early exercise. ( LOS k )
# Explain how cash flows on the underlying asset affect put-call parity and the lower bounds of option prices. ( LOS l )
# Indicate the directional effect of an interest rate change or volatility change on an option’s price. ( LOS m )
Swap Markets and Contracts ( Reading 74 )
# Describe the characteristics of swap contracts. ( LOS a, (Part 1) )
# Explain how swaps are terminated. ( LOS a, (Part 2) )
# Define and give examples of currency swaps. ( LOS b, (Part 1) )
# Calculate and interpret the payments on a currency swap. ( LOS b, (Part 2) )
# Define and give examples of plain vanilla interest rate swaps and calculate and interpret the payments on an interest rate swap. ( LOS b, (Part 3) )
# Define and give examples of equity swaps. ( LOS b, (Part 4) )
# Calculate and interpret the payments on an equity swap. ( LOS b, (Part 5) )
Risk Management Applications of Option Strategies ( Reading 75 )
# Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of the strategies of buying and selling calls and puts, and indicate the market outlook of investors using these strategies. ( LOS a )
# Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of a covered call strategy and the protective put strategy, and explain the risk management application of each strategy. ( LOS b )
Alternative Investments ( Session 18 )
Alternative Investments ( Reading 76 )
# Differentiate between an open-end and a closed-end fund, and explain how net asset value of a fund is calculated and the nature of fees charged by investment companies. ( LOS a )
# Distinguish among style, sector, index, global, and stable value strategies in equity investment and among exchange traded funds (ETFs), traditional mutual funds, and closed end funds. ( LOS b )
# Explain the advantages and risks of ETFs. ( LOS c )
# Describe the forms of real estate investment. ( LOS d, (Part 1) )
# Explain the characteristics of real estate as an investable asset class. ( LOS d, (Part 2) )
# Describe the various approaches to the valuation of real estate. ( LOS e )
# Calculate the net operating income (NOI) from a real estate investment. ( LOS f, (Part 1) )
# Calculate the value of a property using the sales comparison and income approaches. ( LOS f, (Part 2) )
# Calculate the after-tax cash flows, net present value, and yield of a real estate investment. ( LOS f, (Part 3) )
# Explain the stages in venture capital investing. ( LOS g, (Part 1) )
# Explain venture capital investment characteristics and the challenges to venture capital valuation and performance measurement. ( LOS g, (Part 2) )
# Calculate the net present value (NPV) of a venture capital project, given the project’s possible payoff and conditional failure probabilities. ( LOS h )
# Discuss the descriptive accuracy of the term “hedge fund,” and define hedge fund in terms of objectives, legal structure, and fee structure. ( LOS i, (Part 1) )
# Describe the various classifications of hedge funds. ( LOS i, (Part 2) )
# Explain the benefits and drawbacks to fund of funds investing. ( LOS j )
# Discuss the leverage and unique risks of hedge funds. ( LOS k )
# Discuss the performance of hedge funds and the biases present in hedge fund performance measurement. ( LOS l, (Part 1) )
# Explain the effect of survivorship bias on the reported return and risk measures for a hedge fund database. ( LOS l, (Part 2) )
# Explain how the legal environment affects the valuation of closely held companies. ( LOS m )
# Describe alternative valuation methods for closely held companies and distinguish among the bases for the discounts and premiums for these companies. ( LOS n )
# Discuss distressed securities investing and compare venture capital investing with distressed securities investing. ( LOS o )
# Discuss the role of commodities as a vehicle for investing in production and consumption. ( LOS p )
# Explain the motivation for investing in commodities, commodities derivatives, and commodity-linked securities. ( LOS q )
# Discuss the sources of return on a collateralized commodity futures position. ( LOS r )

~ by bghaendler on May 9, 2008.