a =e 1 1B Intpedes ed Ojecivi 1 (C) Misrepreseneacon, 1 (D) Misconduct TT Integrity of Capital Markets TL (A) Material Nonpublic Information. IL (8) Marker Manipulsion ME Duties to Cliente IML) Loyal, Prudence, and Care. BM GB) Fal Dealing, MI Suicbilc: I (D) Performance Preseason. UL) Preservation of Confdentiiog TV Duties Employers W a NV (8) Adiional Compensation Arangements. WW (G) Responsbliae oF Superior. Fevetmeat Anal ecommendatos v VG ieee nd Renn Bass LV (B) Communication with Cheat and Prospective Clients Cea tt ey ‘Time Value of Money Basics Faewe salu (FV): amount ro which imsesxment tows afer one or move compounding petods, Fara salu: EV =DV(L + WY) + Present value (PV): cucen ale of ome farare cash How PV = FVII = VY) Annas seis of equal cash flows thar accu at ely space intervals overtime + Ondinary ana cath Bow at mdse pevod 1 Aang des Row at beginning oie petod + Parenti anuies wid an afin ves PY ay ™ PMTIdscoune eat Means Aves mean su fal oberetion values in ‘ampe/populaion, divided by # of observations Gomer eon sed when cleulatingivestnent etwas over muliple periods or ro mexsure ‘compound growth rates, Variance: average oF uated deviations fom mes. populason viace = Yew “a Sen deviation: sate oot oF vata sample variance VI (B) Priority of Transsctions. iO Reel 1 ‘VIL (A) Cont as Member snd Candidates in the CFA Progam. ‘il (B) Refsence to CFA Inu the CFA dlsigation, an the CEA Progra. Global Iavestnen Performance Standards (res; + Conplonce Sttoment: lee ste ofS] bas tor preceted thi repo n crmpbance Sh ge Goi cane nema ‘Standards (HPS)? Compliance mur be applied fons fiw bas + igh rion: fundamen of compliance, eae eee ea eceestee ‘once, diloir,pesenation and ieee eee Holding Peviod Retuen (HPR) eet, 4 HAD, Res Bo Coefficient of Vari oo of writon (CN: expe how mich Alspenion exis teladive to mean of 3 dseabution tllows for dec compart of dipersion across Aierent daca sec CV iscalclaed by dividing standard deviation of distribution bythe mean oe expeced sale of he dsrbution: oe x ‘Sharpe Ratio ‘Sharpe rai: veauces ex rein pr nit otk Sharpe aio = Ray sfy— fir ai: For both canon, ger eb Expected Reeurn/Seindard Deviation Expected resume: B(X) = SP (i) E(X)= Play) +P(aa)xa +--+ P(e he Probable aime 7) = DP) ECP = Plays, BOX)? + Pla ix: -E(X)] =. Plsa ig —E00F Seondard deviation: (ae quero oF sian) ‘Correlation and Covariance Gcation«covcince divided by praduc of the wo wandard deviations cov(R,.R)) aiR,)2(R,) speed rt, variance of 2c prob: £(R,)=waE(R,) + wEEIRy) ‘conn (R.R\)= var(Ry] = who? (Ra)-+30"(Ra) +20 q%g0(Rq}o(Ra)o(Ra Ba) ‘Normal Dirtbations Noma disibon i comply decribed by ts sean and vaance. (6896 of obierations ill wihin #1 0% ll win #1850 9596 Ell within L960. 9996 6ll within = 2.58 ‘Computing Z-Seores Lacon “andar! observsion om normal union: repent of anda’ devise 3 {fren oberation ion popuation mean or aeration population mean sand deviation > Binomial Models Binomial dtribvon: ass avaible can tke onc of valu acces io the eas of Stock moverens (idan. A Binomial Model ‘a describe changes inthe ae ofan asec oF porto, ican be sed compu is expeted {ale ners pve Sampling Dis Sampling dribcon probably disibaion of allen mpl sie computed feo ae of souls spa rndomly dwn fom the sume populacon. The roping dribcion of rhe erate dtbution otto the mean Central Limit Theorem Cn in orm when slecing simple random samples Of si Flom papain with tea and inte variance © teaming disbocon oftample mean approaches noma probabil iruton with mean wand variance Equal oon ashe sample sine bacon Lage Standard Ere Standard erorof the spleen ithe standard devon of dibucon of he sample means. “ knowa population variance: unkaowa population variance: #2 Confidence Intervals (Confidence ira: gives range of vals the mean ‘alu wl be besween, with a given probably (xy 909% oF 9560), With known variance, formula fora confidence ier i Fad iy 1.645 for 90% confidence intervals (igeiticance level 10%, 5% in exch el) 24,+ 13960 for 958 confidence intervals (significance level 586, 2.59 in each a) £2575 for 99% confidence intervals (egnificance level 196, 0.598 each ea) [Nall and Alternative Hypotheses ‘ul pects (H,): hypothesis te tseacher ‘wants eject the hypothesis thai accualy tested he bai for seein of here taitics, ‘anu page‘> ousntrove METHODS onnaed. Abenasivebypotbs(H,): conchae if cece is fulicien evidence oslact the mall hyposhesi Difference Between One & Two- Tailed Tests One-taed to ets whechee values greater shan ot lear tha a given nomber. ‘rtaled cet whecer value is oq a given number eg, One-alled est Hy w $0 versus Hh > 0 6g: Two-tiled cest Hes = Overs Hy #0 ‘Type I And Type Ml Ervors ‘When hypothe esting, wo possible eon: 4 Type nor tsection ofall hypothesis when iis actualy we 4+ Type ear: fico eject nl hypothesis when iets actly fe Assumptions of Technical Analysis # Supplydemnd determine values (prices) * Supplydemand is diver by both ional and innational bhavie. 4 Sccuriy prises mow in rend hae persis for long, peviods of time + While cause of cupply/demnd changes are hard co derermine, we can see the acu shifs in supply! demand in marker price beivion “Teehnicians tend to ake one of two views when analyaing genera marke ules 4 Consrian. Thinks majoiy is wrong 39 doe the ‘oppoie of wha investors ae doing 1 Flaw she sar mane. Tinks sae lveeore know best so wans re “ump on the Bandwagon sil here sil sme — Inflation Inflation ate: ate of change in pice index over Bren pod of ine: 1 een rice index La period pice index last period price index ‘Unemployment + Picton economic change prevent matching, ‘uae worker with job opines + Src unemployed workers do chav he slo mach newly re jobs + Gala cron phate of busines le, conomy producing ates thn capaci ‘Labor Demand and Supply ‘fs demand for aoe incre bys + Incr in prc of he i up * tees in pre of produce input hati ‘sine boe + Destin price of productive inp thats complement ro bor “The supp oflbor sinned by: + Sabon effect increase in wage ate cases workers to subtueabor hou for ee fous + Income fc inert in income incre vorker’ demand foe eure Schools of Macroeconomic Thought Clas hifi» AD and AS den by rechooogy changes: money wags ajo ply to revore oii {epnsio:shiis in AD caus by changes in capecation; wages ate “onward cg” we fea and money pcg to inreste AD and revore eur 4 Monee monerry polis the mai cor leading wo busines ees cena bank should increase money supply at pedicable rae “Ting of Fal Policy Tim Le (1) Renin @) Admire (3) Ipace Aten aces ahd ee (2) Nectoeed spending ‘Monetary Policy y 1 Deposit Epanson Maile = ace Fed controls money supply hice ways: 1» Reserve requitement ‘+ Open marker opeations—mos use # Dicouat ate Elasticity of Demand Pc elasticity of dermand = clastic of demand ae absolute value» 1, demand i elasti:iabsolue ‘value «1, demand is inelasde I asoluce ale = 1 demand ie uni ela. Price lasting has 90 sin deserinance| + Avilailiy of ubstiutes. # Share of badger spenc on produc. “lascity of demand and supply is greser ithe long rn. ‘Ona scigheline demand curv, demand is more lai at high prieflow quanti, and les asic ac low pricehigh quances. 1 Bhai range rie increase wl decrease ota + Tnclasic range sce incest wil incense coral ‘Accounting Costs vs. Economic Costs ‘Aeconstig core inlude feel cont econo ‘ostrich both explictinplicc cass opportunity coi of equty capi). ‘Shor a slong rain sore ra, se of plane! equipment enc be changed in ong ra, ll resources (cos) ate variable Law of imnishing enrsras more resources te devoted co production proces, hey incese upc bur ac everdecressng te. Competitive Models ace ute accep marke price to sl product ace searcher seks price cat maximizes prof. Proc competition: ‘Large numberof independene fms. «+ Allis peoduce 2 homogeneous produce. ‘+ Each seller rama relative othe marker. Nobaitsoeney. ‘Monopoitccomperion: ‘Large numbec of independent fms ‘Each firm produce diferente product. + Low bares w entry, ‘Demand is highly sic “Manapolyea marker where one firm sells a well defined produce hat as no god subsicwes and high entry bates. Opel sina srucure ‘uc has sll aumber of fms | Any Bm will maximize profs by expanding ‘usp anil marginal evense = marginal ens. ‘Marginal Revenue Product Ifa fim uses an addrionl unit ofan input, incre pais margin prods (MP) oF as ‘anit of source employed. eee i ecru fom preduing/elling maygioal pretuct isthe marge! ‘reonue produc (MRP). Prficmaximizing fiers ‘wll inctese use ofeach resource until MRP = price ofthe ewe 940 quantity demanded mies is PT TWAS ‘eventue Recognition “Too requirement (1) completion of earings proces and 2) rewonable assurance of payment Revenue recognition methods: + essneageoF completion method ‘Completed consract method. «= lasellmene sles, + Cos recovery metho, Unusual or Infrequent ems ‘© Guinsoss from disposl of busines segmenc * Gansloses from sal of ses or insessment in subsidiaries 4+ Provisions For enviznmental remediation. 4 Ipaiments, wnte-off writedowns and restrocuring cows «+ negation expense associated with businesses -ecenly acquired Extsaordinary Items (U.S. GAAP) Similar r9 unosainkrequenc ies xcept excoedinary tems are do yous and nfcguent Jn occurence and mater in nature (esses fiom expropriation of asses), JERS doesnot allow extraordinary items tobe separated from operating rests Discontinued Operations ‘To beaccouned fares. diconcinucd operon a busines—asets operons, investing financing sctniiermiu be piscalfopernnalyeltince fiom extol firm, Incomeoues ate eported ne of ‘ax afer nec income from continuing operations ‘Compute Cash Flows From Operations (CFO) Diet Method ~ Sear with cath caletons (eh equivalene of ales; cash inputs (esh equivalent of cos of goods sold cash operating expense; cash Taree expense; ch aes Indie Method ~ Sax wich et income, sobering ‘bck gains and ading back loses sulting fom Snancing oF invesemanc cash Flows, adding back all ‘noncich charges, and adding and subtracting asct nd liable accounts char rev rom operations Free Cash Flow Free cach fw (ECF) measures cash salable for lscreonsey purpose. eis equal 0 operating exh fae eee capital expendinte. Ceitical Ratios Common sie financial stement anal + Commons bulence sec expres al balance shoe ccount aa percentage of tal aes + Common-ie income tate express all Income satemene items a percenage of les + Common-sie cash Row staremenc exposes ‘ich line tem a a percentage of rota cach inflows (ouflows), or aa pereetage of net Horzowl commun size nancial tatonen ans Express cach line tem rlatve ce val in 2 ‘common bse period Liquidity rae ‘oer labilien coch-+ maketbl secures + eles a aren bier cash + marketable securities cash igo = Sm current nbs ener!in STATEMENT ANAS conti cash + ke see. + eceables dbs cash expendicares| Receeables inves payables trnover and day apply racos—all of which are aed in he cash convertion cle restive arnover defensive interval = setannual ser average reccvables costo lol inventory ruven se verge inventory cost of goods sok ables oor ti Pas ‘eng ace payables ap fakes owen = —— 35 day ofnvensor on hand = ——2_ 363, umber of days of pyabes = —___265__ ero des of rele = re amore ao ‘ach conversion cyte = [oF inventor} 4 of ses) _ {numberof ae} ouanding) | of eyables omits cee working capital turnover See Gra, peating and nt profi orgie i os pric magin = SOLES gentingpofir_EBIT operaing prt nmin = SRR EBT expos cin = BI esto on ase (ern onl tpl "ROTC: tecumonasets_EBIT (oulespial) ~ yang onlay Debt egy rai adsl deb ri. rol debe eb equ elo = Se ae acral coal debe coe deo = SON worl ets re coverage and fied charge coverage BIT ficed charge __EBIT + lease payments coverage ~ Tere + lease payments Growth rate @: = RR ROE “The caleulation ofthe retion rate i= dividends ecard ‘parang income afer ces Liguiiy ratio ice company's abil pay es shoreserm lables. Operating performance ais indicate haw wel _ranagement operates the busines Thm Daoceqnions women =e (ee) won fo Bonded Daun uation forthe decomposes net roi amar = EBT ROE = eer) \porr avg orl ante) (ang. equie You may alo soe presente a [ROE = rx burden ners burden « FEBIT margin» ser runover leverage Inventory Accounting In peviods of sing pricer and sable or increasing lavencory quarries UFO ren IPO ron Higher Coss Liner COGS Umer ies Higher exe werner income Higher encom esr ekan esr ecext Lower ineniory ———Higherivenory ‘odaness tala Lowe Working capil ee Hee eee ioe oe (Lees paid oe) (Tes pai ou) Basic and Diluted EPS. Basic EPS calculation doesnot cose fecs of any diluive serra in compraion of EPS hss EP5 ___ income peer didn ‘a ng 00. of common she ouranding income avi for common shares ‘Sed, aug, cominon shaves pls pocentil ‘common shares ournding, “Thorfore diluted EPS i: conwrible_[conerib dud EPS i Speer +) Uae (1-9 ers [ines ‘Tkan) | ee conrrion|+ sale Ro cadet) | sock opts fd) | aston | comer | [BE] come pt} Finencial Statement Impacts: ‘Capialiing ws. Expeasing Gptating owes income sibs Increases seaieam profi ncese TA guy spot opponie i Depreciation elon Sigh ie 20 SYD mnths tuber slage val, the double declining abnce rethod dow ne Aneming canine Ivan in new ae ave toa fim dar wer sceleted deren, a Company ha wes sag ine depen eve Lane epson expense, tuner oe + Hig: Net income eit, ROA, ROE » Some Cth owe Impairment 1 Recognized when the crying value of an ast Ishigher than the sun ofthe frat cash ow {undiscounted) fom thelr wand disposal “The makes impairments subjece so management manipulation. + Lose measued asthe carrying sale ofthe aset ‘minus the fui value of dear + Financial Semen impact: Wee-down wil srnmediatly case income, ae ale, defed taxes, and equity decline. lel case ftare deprecation ro deci, and x res, futute net nsome wil ie. Ase rrnover ratios will, Increase after write-down for impairment Deferred Taxes + Creed when exabl income (ot eats) Ailes For prec income (nancial seuemend) + Deferred ax Habis (OTL) age created by the se of accelerated depreciation methods forte purposes resaking in lower sable incom) tnd aight line foc Baal veporcing Jower depreciation expense tel in higher nee Income) + IFDTLare no expected wo eves, west a iy fo analy. Financing Liabilities 1+ retin bond: coupon rate > macker rest + Discount bond: coupon rate < mare ae at + Imre expen equals book vl the beginning ofthe year mulplied bythe marker rate of insert tthe line the bond wore sted, + Analy cash flaw perspective For prea bonds, CFF is overated and CFO i understated elaine to par bonds Leases Financial atementraie impact of ease xecounting from de ese perspective Capital lease esl 1 Higher Assets, bles, CFO, Deb Equity ‘+ Lower Necincome (eal yeas), CFR, ruzene rato, working capital, asset tuoves, ROA, ROE, + Some: Taal cash fo. Marketable Secutity Classifications Boince Income sheet Satemene Hidforvadieg Biewe Dividends Tevet Rese GI aren Gi Asalblefrae fir vale Dividends Imre Ratz GL Uiddsosnaiiy Arotiael ox cet Resize IL Intercorporate Investments «209 eioreipe No significa nluence; use ccounting sehods for pase investments 20% 2 50%6 ownenhip:Sigaficane inBuence; se ‘equity method. ‘aint consrol.Proporionate consolidation petted undee IFRS only, equity method usualy required under US. GAAP > 508% sumenbip: Conca of the investe: se consoldation method