CFA program curriculum 2018 level i (CFA curriculum 2018)

Legal CounselDissociation Firms Application of the Standard Example 1 Notification of Known Violations: Example 2 Dissociating from a Violation: Example 3 Dissociating from a Violation:

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ISBN 9781119396642 (ebk)

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ETHICAL AND PROFESSIONAL

STANDARDS AND QUANTITATIVE METHODS

2018 • Level I • Volume 1

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How to Use the CFA Program Curriculum

Curriculum Development ProcessOrganization of the CurriculumFeatures of the CurriculumRequired vs Optional Segments [OPTIONAL]

End-of-Reading Problems/SolutionsGlossary and Index

LOS Self-CheckSource MaterialDesigning Your Personal Study ProgramCreate a Schedule

CFA Institute Topic TestsCFA Institute Mock ExamsPreparatory ProvidersFeedback

Ethical and Professional Standards

Study SessionTopic Level Learning OutcomeStudy Session 1 Ethical and Professional Standards

Reading AssignmentsReading 1 Ethics and Trust in the Investment ProfessionLearning Outcomes

1 Introduction

2 Ethics

3 Ethics and Professionalism

4 Challenges to Ethical Conduct

5 The Importance of Ethical Conduct in the Investment Industry

6 Ethical vs Legal Standards

7 Ethical Decision-Making Frameworks7.1 Applying the Framework

8 ConclusionSummaryPractice Problems

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Standards of Practice Handbook

Summary of Changes in the Eleventh Edition

Inclusion of Updated CFA Institute MissionUpdated Code of Ethics Principle

New Standard Regarding Responsibilities of Supervisors [IV(C)]Additional Requirement under the Standard for Communicationwith Clients and Prospective Clients [V(B)]

Modification to Standard VII(A)General Guidance and Example RevisionCFA Institute Professional Conduct Program

Adoption of the Code and Standards

Acknowledgments

Ethics and the Investment Industry

Why Ethics Matters

Ethics, Society, and the Capital MarketsCapital Market Sustainability and the Actions of OneThe Relationship between Ethics and RegulationsApplying an Ethical Framework

Commitment to Ethics by FirmsEthical Commitment of CFA InstituteCFA Institute Code of Ethics and Standards of Professional ConductPreamble

The Code of Ethics

Standards of Professional Conduct

Reading 3 Guidance for Standards I–VII

Recommended Procedures for Compliance

Members and CandidatesDistribution Area Laws

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Legal Counsel

Dissociation

Firms

Application of the Standard

Example 1 (Notification of Known Violations):

Example 2 (Dissociating from a Violation):

Example 3 (Dissociating from a Violation):

Example 4 (Following the Highest Requirements):

Example 5 (Following the Highest Requirements):

Example 6 (Laws and Regulations Based on Religious Tenets):Example 7 (Reporting Potential Unethical Actions):

Example 8 (Failure to Maintain Knowledge of the Law):

Standard I(B) Independence and Objectivity

Guidance

Buy-Side Clients

Fund Manager and Custodial Relationships

Investment Banking Relationships

Performance Measurement and Attribution

Public Companies

Credit Rating Agency Opinions

Influence during the Manager Selection/Procurement ProcessIssuer-Paid Research

Travel Funding

Example 1 (Travel Expenses):

Example 2 (Research Independence):

Example 3 (Research Independence and Intrafirm Pressure):Example 4 (Research Independence and Issuer RelationshipPressure):

Example 5 (Research Independence and Sales Pressure):Example 6 (Research Independence and Prior Coverage):Example 7 (Gifts and Entertainment from Related Party):

Example 8 (Gifts and Entertainment from Client):

Example 9 (Travel Expenses from External Manager):

Example 10 (Research Independence and Compensation

Arrangements):

Example 11 (Recommendation Objectivity and Service Fees):Example 12 (Recommendation Objectivity):

Example 13 (Influencing Manager Selection Decisions):

Example 14 (Influencing Manager Selection Decisions):

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Example 15 (Fund Manager Relationships):

Example 16 (Intrafirm Pressure):

Standard I(C) Misrepresentation

Work Completed for Employer

Example 1 (Disclosure of Issuer-Paid Research):

Example 2 (Correction of Unintentional Errors):

Example 3 (Noncorrection of Known Errors):

Example 4 (Plagiarism):

Example 5 (Misrepresentation of Information):

Example 6 (Potential Information Misrepresentation):Example 7 (Plagiarism):

Example 13 (Avoiding a Misrepresentation):

Example 14 (Misrepresenting Composite Construction):Example 15 (Presenting Out-of-Date Information):

Example 16 (Overemphasis of Firm Results):

Standard I(D) Misconduct

Guidance

Example 1 (Professionalism and Competence):

Example 2 (Fraud and Deceit):

Example 3 (Fraud and Deceit):

Example 4 (Personal Actions and Integrity):

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Example 5 (Professional Misconduct):

Standard II: Integrity of Capital Markets

Standard II(A) Material Nonpublic Information

Guidance

What Is “Material” Information?

What Constitutes “Nonpublic” Information?

Mosaic Theory

Social Media

Using Industry Experts

Investment Research Reports

Achieve Public Dissemination

Adopt Compliance Procedures

Adopt Disclosure Procedures

Issue Press Releases

Firewall Elements

Appropriate Interdepartmental Communications

Physical Separation of Departments

Prevention of Personnel Overlap

A Reporting System

Personal Trading Limitations

Record Maintenance

Proprietary Trading Procedures

Communication to All Employees

Example 1 (Acting on Nonpublic Information):

Example 2 (Controlling Nonpublic Information):

Example 3 (Selective Disclosure of Material Information):Example 4 (Determining Materiality):

Example 5 (Applying the Mosaic Theory):

Example 6 (Applying the Mosaic Theory):

Example 7 (Analyst Recommendations as Material NonpublicInformation):

Example 8 (Acting on Nonpublic Information):

Example 9 (Mosaic Theory):

Example 10 (Materiality Determination):

Example 11 (Using an Expert Network):

Example 12 (Using an Expert Network):

Standard II(B) Market Manipulation

Guidance

Information-Based Manipulation

Transaction-Based Manipulation

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Example 1 (Independent Analysis and Company Promotion):Example 2 (Personal Trading Practices and Price):

Example 3 (Creating Artificial Price Volatility):

Example 4 (Personal Trading and Volume):

Example 5 (“Pump-Priming” Strategy):

Example 6 (Creating Artificial Price Volatility):

Example 7 (Pump and Dump Strategy):

Example 8 (Manipulating Model Inputs):

Example 9 (Information Manipulation):

Standard III: Duties to Clients

Standard III(A) Loyalty, Prudence, and Care

Guidance

Understanding the Application of Loyalty, Prudence, and CareIdentifying the Actual Investment Client

Developing the Client’s Portfolio

Soft Commission Policies

Proxy Voting Policies

Regular Account Information

Client Approval

Firm Policies

Example 1 (Identifying the Client—Plan Participants):

Example 2 (Client Commission Practices):

Example 3 (Brokerage Arrangements):

Example 4 (Brokerage Arrangements):

Example 5 (Client Commission Practices):

Example 6 (Excessive Trading):

Example 7 (Managing Family Accounts):

Example 8 (Identifying the Client):

Example 9 (Identifying the Client):

Example 10 (Client Loyalty):

Example 11 (Execution-Only Responsibilities):

Standard III(B) Fair Dealing

Guidance

Investment Recommendations

Investment Action

Develop Firm Policies

Disclose Trade Allocation Procedures

Establish Systematic Account Review

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Disclose Levels of Service

Example 1 (Selective Disclosure):

Example 2 (Fair Dealing between Funds):

Example 3 (Fair Dealing and IPO Distribution):

Example 4 (Fair Dealing and Transaction Allocation):

Example 5 (Selective Disclosure):

Example 6 (Additional Services for Select Clients):

Example 7 (Minimum Lot Allocations):

Example 8 (Excessive Trading):

Example 9 (Limited Social Media Disclosures):

Example 10 (Fair Dealing between Clients):

Standard III(C) Suitability

Guidance

Developing an Investment Policy

Understanding the Client’s Risk Profile

Updating an Investment Policy

The Need for Diversification

Addressing Unsolicited Trading Requests

Managing to an Index or Mandate

Investment Policy Statement

Regular Updates

Suitability Test Policies

Example 1 (Investment Suitability—Risk Profile):

Example 2 (Investment Suitability—Entire Portfolio):

Example 3 (IPS Updating):

Example 4 (Following an Investment Mandate):

Example 5 (IPS Requirements and Limitations):

Example 6 (Submanager and IPS Reviews):

Example 7 (Investment Suitability—Risk Profile):

Example 8 (Investment Suitability):

Standard III(D) Performance Presentation

Guidance

Apply the GIPS Standards

Compliance without Applying GIPS Standards

Example 1 (Performance Calculation and Length of Time):Example 2 (Performance Calculation and Asset Weighting):Example 3 (Performance Presentation and Prior

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Example 4 (Performance Presentation and Simulated Results):Example 5 (Performance Calculation and Selected AccountsOnly):

Example 6 (Performance Attribution Changes):

Example 7 (Performance Calculation Methodology Disclosure):Example 8 (Performance Calculation Methodology Disclosure):Standard III(E) Preservation of Confidentiality

Guidance

Status of Client

Compliance with Laws

Electronic Information and Security

Professional Conduct Investigations by CFA Institute

Communicating with Clients

Example 1 (Possessing Confidential Information):

Example 2 (Disclosing Confidential Information):

Example 3 (Disclosing Possible Illegal Activity):

Example 4 (Disclosing Possible Illegal Activity):

Example 5 (Accidental Disclosure of Confidential Information):Standard IV: Duties to Employers

Standard IV(A) Loyalty

Example 1 (Soliciting Former Clients):

Example 2 (Former Employer’s Documents and Files):

Example 3 (Addressing Rumors):

Example 4 (Ownership of Completed Prior Work):

Example 5 (Ownership of Completed Prior Work):

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Example 7 (Starting a New Firm):

Example 8 (Competing with Current Employer):

Example 9 (Externally Compensated Assignments):

Example 11 (Whistleblowing Actions):

Example 13 (Notification of Code and Standards):

Example 14 (Leaving an Employer):

Example 15 (Confidential Firm Information):

Standard IV(B) Additional Compensation Arrangements

Guidance

Example 1 (Notification of Client Bonus Compensation):

Example 2 (Notification of Outside Compensation):

Example 3 (Prior Approval for Outside Compensation):

Standard IV(C) Responsibilities of Supervisors

Guidance

System for Supervision

Supervision Includes Detection

Codes of Ethics or Compliance Procedures

Adequate Compliance Procedures

Implementation of Compliance Education and Training

Establish an Appropriate Incentive Structure

Example 1 (Supervising Research Activities):

Example 3 (Supervising Trading Activities):

Example 4 (Supervising Trading Activities and Record Keeping):Example 5 (Accepting Responsibility):

Example 6 (Inadequate Procedures):

Example 7 (Inadequate Supervision):

Standard V: Investment Analysis, Recommendations, and Actions

Standard V(A) Diligence and Reasonable Basis

Guidance

Defining Diligence and Reasonable Basis

Using Secondary or Third-Party Research

Using Quantitatively Oriented Research

Developing Quantitatively Oriented Techniques

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Selecting External Advisers and Subadvisers

Group Research and Decision Making

Example 1 (Sufficient Due Diligence):

Example 2 (Sufficient Scenario Testing):

Example 3 (Developing a Reasonable Basis):

Example 4 (Timely Client Updates):

Example 5 (Group Research Opinions):

Example 6 (Reliance on Third-Party Research):

Example 7 (Due Diligence in Submanager Selection):

Example 11 (Use of Quantitatively Oriented Models):

Example 12 (Successful Due Diligence/Failed Investment):

Example 13 (Quantitative Model Diligence):

Example 14 (Selecting a Service Provider):

Example 15 (Subadviser Selection):

Example 16 (Manager Selection):

Example 17 (Technical Model Requirements):

Standard V(B) Communication with Clients and Prospective ClientsGuidance

Informing Clients of the Investment Process

Different Forms of Communication

Identifying Risks and Limitations

Report Presentation

Distinction between Facts and Opinions in Reports

Example 1 (Sufficient Disclosure of Investment System):

Example 2 (Providing Opinions as Facts):

Example 3 (Proper Description of a Security):

Example 4 (Notification of Fund Mandate Change):

Example 5 (Notification of Fund Mandate Change):

Example 6 (Notification of Changes to the Investment Process):Example 7 (Notification of Changes to the Investment Process):Example 8 (Notification of Changes to the Investment Process):Example 9 (Sufficient Disclosure of Investment System):

Example 10 (Notification of Changes to the Investment

Process):

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Example 11 (Notification of Errors):

Example 12 (Notification of Risks and Limitations):

Standard V(C) Record Retention

Guidance

New Media Records

Records Are Property of the Firm

Local Requirements

Example 1 (Record Retention and IPS Objectives and

Recommendations):

Example 2 (Record Retention and Research Process):

Example 3 (Records as Firm, Not Employee, Property):

Standard VI: Conflicts of Interest

Standard VI(A) Disclosure of Conflicts

Example 1 (Conflict of Interest and Business Relationships):Example 2 (Conflict of Interest and Business Stock Ownership):Example 3 (Conflict of Interest and Personal Stock Ownership):Example 4 (Conflict of Interest and Personal Stock Ownership):Example 5 (Conflict of Interest and Compensation

Example 8 (Conflict of Interest and Directorship):

Example 9 (Conflict of Interest and Personal Trading):

Example 10 (Conflict of Interest and Requested Favors):

Example 11 (Conflict of Interest and Business Relationships):Example 12 (Disclosure of Conflicts to Employers):

Standard VI(B) Priority of Transactions

Guidance

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Avoiding Potential Conflicts

Personal Trading Secondary to Trading for Clients

Standards for Nonpublic Information

Impact on All Accounts with Beneficial Ownership

Example 1 (Personal Trading):

Example 2 (Trading for Family Member Account):

Example 3 (Family Accounts as Equals):

Example 4 (Personal Trading and Disclosure):

Example 5 (Trading Prior to Report Dissemination):

Standard VI(C) Referral Fees

Guidance

Example 1 (Disclosure of Referral Arrangements and OutsideParties):

Example 2 (Disclosure of Interdepartmental Referral

Confidential Program Information

Additional CFA Program Restrictions

Expressing an Opinion

Example 1 (Sharing Exam Questions):

Example 2 (Bringing Written Material into Exam Room):

Example 3 (Writing after Exam Period End):

Example 4 (Sharing Exam Content):

Example 7 (Discussion of Exam Grading Guidelines and

Results):

Example 8 (Compromising CFA Institute Integrity as a

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Example 1 (Passing Exams in Consecutive Years):

Example 2 (Right to Use CFA Designation):

Example 3 (“Retired” CFA Institute Membership Status):

Example 4 (CFA Logo—Individual Use Only):

Example 5 (Stating Facts about CFA Designation and Program):Example 6 (Order of Professional and Academic Designations):Example 7 (Use of Fictitious Name):

I Why Were the GIPS Standards Created?

II Who Can Claim Compliance?

III Who Benefits from Compliance?

IV Composites

V Verification

VI The Structure of the GIPS Standards

Reading 5 The GIPS Standards

Overview

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Historical Performance Record

Compliance

Effective Date

Implementing a Global Standard

Sponsors [OPTIONAL]

Endorsed GIPS Sponsors (as of 1 January 2010) [OPTIONAL]

I Provisions of the Global Investment Performance Standards

0 Fundamentals of Compliance

1 Input Data [OPTIONAL]

2 Calculation Methodology [OPTIONAL]

3 Composite Construction [OPTIONAL]

4 Disclosure [OPTIONAL]

5 Presentation and Reporting [OPTIONAL]

6 Real Estate [OPTIONAL]

Real Estate—Requirements [OPTIONAL]

The following provisions are additional requirements for realestate closed-end fund composites: [OPTIONAL]

Real Estate—Recommendations [OPTIONAL]

The following provision is an additional recommendation forreal estate closed-end fund composites: [OPTIONAL]

7 Private Equity [OPTIONAL]

Private Equity—Requirements [OPTIONAL]

Private Equity—Recommendations [OPTIONAL]

Composite Construction—Recommendations (the followingprovision does not apply: 3.B.2) [OPTIONAL]

8 Wrap Fee/Separately Managed Account (SMA) Portfolios

[OPTIONAL]

Wrap Fee/SMA Requirements [OPTIONAL]

II GIPS Valuation Principles [OPTIONAL]

Fair Value Definition [OPTIONAL]

Valuation Requirements [OPTIONAL]

Additional Real Estate Valuation Requirements [OPTIONAL]Additional Private Equity Valuation Requirements [OPTIONAL]Valuation Recommendations [OPTIONAL]

Additional Real Estate Valuation Recommendations

[OPTIONAL]

Additional Private Equity Valuation Recommendations

[OPTIONAL]

III GIPS Advertising Guidelines [OPTIONAL]

Purpose of the GIPS Advertising Guidelines [OPTIONAL]

Definition of Advertisement [OPTIONAL]

Relationship of GIPS Advertising Guidelines to Regulatory

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Requirements [OPTIONAL]

Other Information [OPTIONAL]

Requirements of the GIPS Advertising Guidelines [OPTIONAL]

IV Verification [OPTIONAL]

Scope and Purpose of Verification [OPTIONAL]

Required Verification Procedures [OPTIONAL]

Performance Examinations [OPTIONAL]

V GIPS Glossary

Appendix A: Sample Compliant Presentations

Appendix B: Sample Advertisements [OPTIONAL]

Appendix C: Sample List of Composite Descriptions [OPTIONAL]

Practice Problems

Solutions

Quantitative Methods

Study Sessions

Topic Level Learning Outcome

Study Session 2 Quantitative Methods: Basic Concepts

Reading Assignments

Reading 6 The Time Value of Money

Learning Outcomes

1 Introduction

2 Interest Rates: Interpretation

3 The Future Value of a Single Cash Flow

3.1 The Frequency of Compounding3.2 Continuous Compounding

3.3 Stated and Effective Rates

4 The Future Value of a Series of Cash Flows

4.1 Equal Cash Flows—Ordinary Annuity4.2 Unequal Cash Flows

5 The Present Value of a Single Cash Flow

5.1 Finding the Present Value of a Single Cash Flow5.2 The Frequency of Compounding

6 The Present Value of a Series of Cash Flows

6.1 The Present Value of a Series of Equal Cash Flows6.2 The Present Value of an Infinite Series of Equal Cash Flows—Perpetuity

6.3 Present Values Indexed at Times Other than t = 0

6.4 The Present Value of a Series of Unequal Cash Flows

7 Solving for Rates, Number of Periods, or Size of Annuity Payments7.1 Solving for Interest Rates and Growth Rates

7.2 Solving for the Number of Periods7.3 Solving for the Size of Annuity Payments

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7.4 Review of Present and Future Value Equivalence

7.5 The Cash Flow Additivity Principle

2 Net Present Value and Internal Rate of Return

2.1 Net Present Value and the Net Present Value Rule

2.2 The Internal Rate of Return and the Internal Rate of Return Rule2.3 Problems with the IRR Rule

3 Portfolio Return Measurement

3.1 Money-Weighted Rate of Return

3.2 Time-Weighted Rate of Return

4 Money Market Yields

2 Some Fundamental Concepts

2.1 The Nature of Statistics

2.2 Populations and Samples

2.3 Measurement Scales

3 Summarizing Data Using Frequency Distributions

4 The Graphic Presentation of Data

4.1 The Histogram

4.2 The Frequency Polygon and the Cumulative Frequency

Distribution

5 Measures of Central Tendency

5.1 The Arithmetic Mean

5.1.1 The Population Mean5.1.2 The Sample Mean5.1.3 Properties of the Arithmetic Mean5.2 The Median

5.3 The Mode

5.4 Other Concepts of Mean

5.4.1 The Weighted Mean5.4.2 The Geometric Mean

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5.4.3 The Harmonic Mean

6 Other Measures of Location: Quantiles

6.1 Quartiles, Quintiles, Deciles, and Percentiles6.2 Quantiles in Investment Practice

7 Measures of Dispersion

7.1 The Range7.2 The Mean Absolute Deviation7.3 Population Variance and Population Standard Deviation7.3.1 Population Variance

7.3.2 Population Standard Deviation7.4 Sample Variance and Sample Standard Deviation7.4.1 Sample Variance

7.4.2 Sample Standard Deviation7.5 Semivariance, Semideviation, and Related Concepts7.6 Chebyshev’s Inequality

7.7 Coefficient of Variation7.8 The Sharpe Ratio

8 Symmetry and Skewness in Return Distributions

9 Kurtosis in Return Distributions

10 Using Geometric and Arithmetic Means

2 Probability, Expected Value, and Variance

3 Portfolio Expected Return and Variance of Return

4 Topics in Probability

4.1 Bayes’ Formula4.2 Principles of CountingSummary

1 Introduction to Common Probability Distributions

2 Discrete Random Variables

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2.1 The Discrete Uniform Distribution

2.2 The Binomial Distribution

3 Continuous Random Variables

3.1 Continuous Uniform Distribution

3.2 The Normal Distribution

3.3 Applications of the Normal Distribution

3.4 The Lognormal Distribution

4 Monte Carlo Simulation

2.1 Simple Random Sampling

2.2 Stratified Random Sampling

2.3 Time-Series and Cross-Sectional Data

3 Distribution of the Sample Mean

3.1 The Central Limit Theorem

4 Point and Interval Estimates of the Population Mean4.1 Point Estimators

4.2 Confidence Intervals for the Population Mean4.3 Selection of Sample Size

3 Hypothesis Tests Concerning the Mean

3.1 Tests Concerning a Single Mean

3.2 Tests Concerning Differences between Means3.3 Tests Concerning Mean Differences

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4 Hypothesis Tests Concerning Variance

4.1 Tests Concerning a Single Variance

4.2 Tests Concerning the Equality (Inequality) of Two Variances

5 Other Issues: Nonparametric Inference

5.1 Tests Concerning Correlation: The Spearman Rank CorrelationCoefficient

5.2 Nonparametric Inference: Summary

2 Technical Analysis: Definition and Scope

2.1 Principles and Assumptions

2.2 Technical and Fundamental Analysis

3 Technical Analysis Tools

3.1 Charts

3.1.1 Line Chart3.1.2 Bar Chart3.1.3 Candlestick Chart3.1.4 Point and Figure Chart3.1.5 Scale

3.1.6 Volume3.1.7 Time Intervals3.1.8 Relative Strength Analysis3.2 Trend

3.3 Chart Patterns

3.3.1 Reversal Patterns3.3.1.1 Head and Shoulders3.3.1.2 Inverse Head and Shoulders3.3.1.3 Setting Price Targets with Head and ShouldersPattern

3.3.1.4 Setting Price Targets with Inverse Head andShoulders Pattern

3.3.1.5 Double Tops and Bottoms3.3.1.6 Triple Tops and Bottoms3.3.2 Continuation Patterns

3.3.2.1 Triangles3.3.2.2 Rectangle Pattern3.3.2.3 Flags and Pennants

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3.4 Technical Indicators3.4.1 Price-Based Indicators3.4.1.1 Moving Average3.4.1.2 Bollinger Bands3.4.2 Momentum Oscillators3.4.2.1 Momentum or Rate of Change Oscillator3.4.2.2 Relative Strength Index

3.4.2.3 Stochastic Oscillator3.4.2.4 Moving-Average Convergence/DivergenceOscillator

3.4.3 Sentiment Indicators3.4.3.1 Opinion Polls3.4.3.2 Calculated Statistical Indexes3.4.4 Flow-of-Funds Indicators

3.4.4.1 Arms Index3.4.4.2 Margin Debt3.4.4.3 Mutual Fund Cash Position3.4.4.4 New Equity Issuance

3.4.4.5 Secondary Offerings3.5 Cycles

3.5.1 Kondratieff Wave3.5.2 18-Year Cycle3.5.3 Decennial Pattern3.5.4 Presidential Cycle

4 Elliott Wave Theory

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Curriculum Development Process

Organization of the Curriculum

Features of the Curriculum

Required vs Optional Segments [OPTIONAL]

LOS Self-CheckSource MaterialDesigning Your Personal Study Program

Create a ScheduleCFA Institute Topic TestsCFA Institute Mock ExamsPreparatory ProvidersFeedback

Economics

Study Sessions

Study Session 4 Economics: Microeconomics and MacroeconomicsReading Assignments

Reading 14 Topics in Demand and Supply Analysis

Learning Outcomes

1 Introduction

2 Demand Analysis: The Consumer2.1 Demand Concepts

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2.2 Own-Price Elasticity of Demand

2.2.1 Extremes of Price Elasticity2.2.2 Predicting Demand Elasticity2.2.3 Elasticity and Total Expenditure2.3 Income Elasticity of Demand

2.4 Cross-Price Elasticity of Demand

2.5 Substitution and Income Effects

2.6 Normal and Inferior Goods

3 Supply Analysis: The Firm

3.1 Marginal Returns and Productivity

3.1.1 Productivity: The Relationship between Production andCost

3.1.2 Total, Average, and Marginal Product of Labor3.2 Breakeven and Shutdown Analysis

3.2.1 Economic Cost vs Accounting Cost3.2.2 Marginal Revenue, Marginal Cost, and Profit Maximization3.2.3 Understanding the Interaction between Total, Variable,Fixed, and Marginal Cost and Output

3.2.4 Revenue under Conditions of Perfect and ImperfectCompetition

3.2.5 Profit-Maximization, Breakeven, and Shutdown Points ofProduction

3.2.6 Breakeven Analysis3.2.7 The Shutdown Decision3.3 Understanding Economies and Diseconomies of Scale

3.3.1 Short- and Long-Run Cost Curves3.3.2 Defining Economies of Scale and Diseconomies of ScaleSummary

2 Analysis of Market Structures

2.1 Economists’ Four Types of Structure

2.2 Factors That Determine Market Structure

3 Perfect Competition

3.1 Demand Analysis in Perfectly Competitive Markets

3.1.1 Elasticity of Demand3.1.2 Other Factors Affecting Demand3.1.3 Consumer Surplus: Value Minus Expenditure3.2 Supply Analysis in Perfectly Competitive Markets

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3.3 Optimal Price and Output in Perfectly Competitive Markets3.4 Factors Affecting Long-Run Equilibrium in Perfectly CompetitiveMarkets

4 Monopolistic Competition

4.1 Demand Analysis in Monopolistically Competitive Markets

4.2 Supply Analysis in Monopolistically Competitive Markets

4.3 Optimal Price and Output in Monopolistically Competitive

5.3 Optimal Price and Output in Oligopoly Markets

5.4 Factors Affecting Long-Run Equilibrium in Oligopoly Markets

6 Monopoly

6.1 Demand Analysis in Monopoly Markets

6.2 Supply Analysis in Monopoly Markets

6.3 Optimal Price and Output in Monopoly Markets

6.4 Price Discrimination and Consumer Surplus

6.5 Factors Affecting Long-Run Equilibrium in Monopoly Markets

7 Identification of Market Structure

2 Aggregate Output and Income

2.1 Gross Domestic Product

2.1.1 Goods and Services Included at Imputed Values2.1.2 Nominal and Real GDP

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3.1 Aggregate Demand

3.1.1 Balancing Aggregate Income and Expenditure: The ISCurve

3.1.2 Equilibrium in the Money Market: The LM Curve

3.1.3 The Aggregate Demand Curve

3.2 Aggregate Supply

3.3 Shifts in Aggregate Demand and Supply

3.3.1 Shifts in Aggregate Demand

Household WealthConsumer and Business ExpectationsCapacity Utilization

Fiscal PolicyMonetary PolicyExchange RateGrowth in the Global Economy3.3.2 Shifts in Short-Run Aggregate Supply

Change in Nominal WagesChange in Input PricesChange in Expectations about Future PricesChange in Business Taxes and SubsidiesChange in the Exchange Rate

3.3.3 Shifts in Long-Run Aggregate Supply

Supply of LaborSupply of Natural ResourcesSupply of Physical CapitalSupply of Human CapitalLabor Productivity and Technology3.4 Equilibrium GDP and Prices

4 Economic Growth and Sustainability

4.1 The Production Function and Potential GDP

4.2 Sources of Economic Growth

Labor Supply

Human Capital

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Physical Capital StockTechnology

Natural Resources4.3 Measures of Sustainable Growth

Level of Labor ProductivityGrowth Rate of Labor ProductivityMeasuring Sustainable GrowthSummary

2 Overview of the Business Cycle

2.1 Phases of the Business Cycle

2.2 Resource Use through the Business Cycle

2.2.1 Fluctuation in Capital Spending2.2.2 Fluctuation in Inventory Levels2.2.3 Consumer Behavior

2.3 Housing Sector Behavior

2.4 External Trade Sector Behavior

3 Theories of the Business Cycle

3.1 Neoclassical and Austrian Schools

3.2 Keynesian and Monetarist Schools

3.2.1 Keynesian School3.2.2 Monetarist School3.3 The New Classical School

3.3.1 Models without Money: Real Business Cycle Theory3.3.2 Models with Money

4 Unemployment and Inflation

4.1 Unemployment

4.1.1 The Unemployment Rate4.1.2 Overall Payroll Employment and Productivity Indicators4.2 Inflation

4.2.1 Deflation, Hyperinflation, and Disinflation4.2.2 Measuring Inflation: The Construction of Price Indexes4.2.3 Price Indexes and Their Usage

4.2.4 Explaining Inflation4.2.4.1 Cost-Push Inflation4.2.4.2 Demand-Pull Inflation4.2.5 Inflation Expectations

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5 Economic Indicators

5.1 Popular Economic Indicators5.2 Other Variables Used as Economic IndicatorsSummary

2.1.4 The Quantity Theory of Money2.1.5 The Demand for Money

2.1.6 The Supply and Demand for Money2.1.7 The Fisher Effect

2.2 The Roles of Central Banks2.3 The Objectives of Monetary Policy2.3.1 The Costs of Inflation

2.3.2 Monetary Policy Tools2.3.2.1 Open Market Operations2.3.2.2 The Central Bank’s Policy Rate2.3.2.3 Reserve Requirements

2.3.3 The Transmission Mechanism2.3.4 Inflation Targeting

Central Bank Independence Credibility

TransparencyThe TargetThe Main Exceptions to the Inflation-Targeting RuleMonetary Policy in Developing Countries

2.3.5 Exchange Rate Targeting2.4 Contractionary and Expansionary Monetary Policies and theNeutral Rate

What’s the Source of the Shock to the Inflation Rate?

2.5 Limitations of Monetary Policy

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2.5.1 Problems in the Monetary Transmission Mechanism2.5.2 Interest Rate Adjustment in a Deflationary Environmentand Quantitative Easing as a Response

2.5.3 Limitations of Monetary Policy: Summary

3 Fiscal Policy

3.1 Roles and Objectives of Fiscal Policy

3.1.1 Fiscal Policy and Aggregate Demand3.1.2 Government Receipts and Expenditure in MajorEconomies

3.1.3 Deficits and the National Debt3.2 Fiscal Policy Tools and the Macroeconomy

3.2.1 The Advantages and Disadvantages of Using the DifferentTools of Fiscal Policy

3.2.2 Modeling the Impact of Taxes and Government Spending:The Fiscal Multiplier

3.2.3 The Balanced Budget Multiplier3.3 Fiscal Policy Implementation: Active and Discretionary FiscalPolicy

3.3.1 Deficits and the Fiscal Stance3.3.2 Difficulties in Executing Fiscal Policy

4 The Relationship between Monetary and Fiscal Policy

4.1 Factors Influencing the Mix of Fiscal and Monetary Policy

4.2 Quantitative Easing and Policy Interaction

4.3 The Importance of Credibility and Commitment

2.4 Comparative Advantage and the Gains from Trade

2.4.1 Gains from Trade: Absolute and Comparative Advantage2.4.2 Ricardian and Heckscher–Ohlin Models of ComparativeAdvantage

3 Trade and Capital Flows: Restrictions and Agreements

3.1 Tariffs

3.2 Quotas

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3.3 Export Subsidies

3.4 Trading Blocs, Common Markets, and Economic Unions

3.5 Capital Restrictions

4 The Balance of Payments

4.1 Balance of Payments Accounts

4.2 Balance of Payment Components

Current AccountCapital AccountFinancial Account4.3 Paired Transactions in the BOP Bookkeeping System

Commercial Exports: Transactions (ia) and (ib)Commercial Imports: Transaction (ii)

Loans to Borrowers Abroad: Transaction (iii)Purchases of Home-Country Currency by Foreign CentralBanks: Transaction (iv)

Receipts of Income from Foreign Investments: Transaction (v)Purchase of Non-financial Assets: Transaction (vi)

4.4 National Economic Accounts and the Balance of Payments

5 Trade Organizations

5.1 International Monetary Fund

5.2 World Bank Group

5.3 World Trade Organization

2.3 Market Size and Composition

3 Currency Exchange Rate Calculations

3.1 Exchange Rate Quotations

3.2 Cross-Rate Calculations

3.3 Forward Calculations

4 Exchange Rate Regimes

4.1 The Ideal Currency Regime

4.2 Historical Perspective on Currency Regimes

4.3 A Taxonomy of Currency Regimes

4.3.1 Arrangements with No Separate Legal Tender

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4.3.2 Currency Board System4.3.3 Fixed Parity

4.3.4 Target Zone4.3.5 Active and Passive Crawling Pegs4.3.6 Fixed Parity with Crawling Bands4.3.7 Managed Float

4.3.8 Independently Floating Rates

5 Exchange Rates, International Trade, and Capital Flows

5.1 Exchange Rates and the Trade Balance: The ElasticitiesApproach

5.2 Exchange Rates and the Trade Balance: The AbsorptionApproach

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2018 CFA Program Level I Volume 3 Financial Reporting and Analysis

Title Page

Table of Contents

Curriculum Development Process

Organization of the Curriculum

Features of the Curriculum

Required vs Optional Segments [OPTIONAL]

LOS Self-CheckSource MaterialDesigning Your Personal Study Program

Create a ScheduleCFA Institute Topic TestsCFA Institute Mock ExamsPreparatory ProvidersFeedback

Financial Reporting and Analysis

Study Sessions

Study Session 6 Financial Reporting and Analysis: An Introduction

Reading Assignments

Reading 21 Financial Statement Analysis: An Introduction

Learning Outcomes

1 Introduction

2 Scope of Financial Statement Analysis

3 Major Financial Statements and Other Information Sources3.1 Financial Statements and Supplementary Information3.1.1 Balance Sheet

3.1.2 Statement of Comprehensive Income3.1.2.1 Income Statement

3.1.2.2 Other Comprehensive Income3.1.3 Statement of Changes in Equity3.1.4 Cash Flow Statement

3.1.5 Financial Notes and Supplementary Schedules3.1.6 Management Commentary or Management’s Discussionand Analysis

3.1.7 Auditor’s Reports3.2 Other Sources of Information

4 Financial Statement Analysis Framework

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4.1 Articulate the Purpose and Context of Analysis

4.2 Collect Data

4.3 Process Data

4.4 Analyze/Interpret the Processed Data

4.5 Develop and Communicate Conclusions/Recommendations4.6 Follow-Up

2 The Classification of Business Activities

3 Accounts and Financial Statements

3.1 Financial Statement Elements and Accounts

6.1 Flow of Information in an Accounting System

6.2 Debits and Credits

7 Using Financial Statements in Security Analysis

7.1 The Use of Judgment in Accounts and Entries

2 The Objective of Financial Reporting

3 Standard-Setting Bodies and Regulatory Authorities

3.1 Accounting Standards Boards

3.1.1 International Accounting Standards Board3.1.2 Financial Accounting Standards Board

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3.1.3 Desirable Attributes of Accounting Standards Boards3.2 Regulatory Authorities

3.2.1 International Organization of Securities Commissions3.2.2 The Securities and Exchange Commission (US)

3.2.3 Capital Markets Regulation in Europe

4 Convergence of Global Financial Reporting Standards

5 The International Financial Reporting Standards Framework

5.1 Objective of Financial Reports5.2 Qualitative Characteristics of Financial Reports5.3 Constraints on Financial Reports

5.4 The Elements of Financial Statements5.4.1 Underlying Assumptions in Financial Statements5.4.2 Recognition of Financial Statement Elements5.4.3 Measurement of Financial Statement Elements5.5 General Requirements for Financial Statements

5.5.1 Required Financial Statements5.5.2 General Features of Financial Statements5.5.3 Structure and Content Requirements

5.6 Convergence of Conceptual Framework

6 Effective Financial Reporting

6.1 Characteristics of an Effective Financial Reporting Framework6.2 Barriers to a Single Coherent Framework

7 Comparison of IFRS with Alternative Reporting Systems

8 Monitoring Developments in Financial Reporting Standards

8.1 New Products or Types of Transactions8.2 Evolving Standards and the Role of CFA Institute8.3 Company Disclosures

8.3.1 Disclosures Relating to Critical and Significant AccountingPolicies

8.3.2 Disclosures Regarding Changes in Accounting PoliciesSummary

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3.2 Revenue Recognition in Special Cases

3.2.1 Long-Term Contracts3.2.2 Installment Sales3.2.3 Barter

3.2.4 Gross versus Net Reporting3.3 Implications for Financial Analysis

3.4 Revenue Recognition Accounting Standards Issued May 2014

4 Expense Recognition

4.1 General Principles

4.2 Issues in Expense Recognition

4.2.1 Doubtful Accounts4.2.2 Warranties

4.2.3 Depreciation and Amortisation4.3 Implications for Financial Analysis

5 Non-Recurring Items and Non-Operating Items

5.1 Discontinued Operations

5.2 Extraordinary Items

5.3 Unusual or Infrequent Items

5.4 Changes in Accounting Policies

5.5 Non-Operating Items

6 Earnings per Share

6.1 Simple versus Complex Capital Structure

7 Analysis of the Income Statement

7.1 Common-Size Analysis of the Income Statement

7.2 Income Statement Ratios

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2 Components and Format of the Balance Sheet

2.1 Balance Sheet Components

2.2 Current and Non-Current Classification

3.1.5 Other Current Assets3.2 Current Liabilities

4.5 Financial Assets

5 Non-Current Liabilities

5.1 Long-term Financial Liabilities

5.2 Deferred Tax Liabilities

6 Equity

6.1 Components of Equity

6.2 Statement of Changes in Equity

7 Analysis of the Balance Sheet

7.1 Common-Size Analysis of the Balance Sheet

7.2 Balance Sheet Ratios

2 Components and Format of the Cash Flow Statement

2.1 Classification of Cash Flows and Non-Cash Activities

2.2 A Summary of Differences between IFRS and US GAAP

2.3 Direct and Indirect Methods for Reporting Cash Flow from

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IFRS2.3.3 Illustrations of Cash Flow Statements Prepared under USGAAP

3 The Cash Flow Statement: Linkages and Preparation

3.1 Linkages of the Cash Flow Statement with the Income

Statement and Balance Sheet

3.2 Steps in Preparing the Cash Flow Statement

3.2.1 Operating Activities: Direct Method3.2.1.1 Cash Received from Customers3.2.1.2 Cash Paid to Suppliers

3.2.1.3 Cash Paid to Employees3.2.1.4 Cash Paid for Other Operating Expenses3.2.1.5 Cash Paid for Interest

3.2.1.6 Cash Paid for Income Taxes3.2.2 Investing Activities

3.2.3 Financing Activities3.2.3.1 Long-Term Debt and Common Stock3.2.3.2 Dividends

3.2.4 Overall Statement of Cash Flows: Direct Method3.2.5 Overall Statement of Cash Flows: Indirect Method3.3 Conversion of Cash Flows from the Indirect to the Direct

Method

4 Cash Flow Statement Analysis

4.1 Evaluation of the Sources and Uses of Cash

Step 1Step 2Step 3Step 44.2 Common-Size Analysis of the Statement of Cash Flows

4.3 Free Cash Flow to the Firm and Free Cash Flow to Equity

4.4 Cash Flow Ratios

2 The Financial Analysis Process

2.1 The Objectives of the Financial Analysis Process

2.2 Distinguishing between Computations and Analysis

3 Analytical Tools and Techniques

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3.1 Ratios

3.1.1 The Universe of Ratios

3.1.2 Value, Purposes, and Limitations of Ratio Analysis3.1.3 Sources of Ratios

3.2 Common-Size Analysis

3.2.1 Common-Size Analysis of the Balance Sheet

3.2.2 Common-Size Analysis of the Income Statement

3.2.3 Cross-Sectional Analysis

3.2.4 Trend Analysis

3.2.5 Relationships among Financial Statements

3.3 The Use of Graphs as an Analytical Tool

3.4 Regression Analysis

4 Common Ratios Used in Financial Analysis

4.1 Interpretation and Context

4.2 Activity Ratios

4.2.1 Calculation of Activity Ratios

4.2.2 Interpretation of Activity Ratios

Inventory Turnover and DOHReceivables Turnover and DSO

Payables Turnover and the Number of Days of PayablesWorking Capital Turnover

Fixed Asset TurnoverTotal Asset Turnover4.3 Liquidity Ratios

4.3.1 Calculation of Liquidity Ratios

4.3.2 Interpretation of Liquidity Ratios

Current RatioQuick RatioCash RatioDefensive Interval RatioCash Conversion Cycle (Net Operating Cycle)4.4 Solvency Ratios

4.4.1 Calculation of Solvency Ratios

4.4.2 Interpretation of Solvency Ratios

Debt-to-Assets RatioDebt-to-Capital RatioDebt-to-Equity RatioFinancial Leverage RatioInterest Coverage

Fixed Charge Coverage4.5 Profitability Ratios

4.5.1 Calculation of Profitability Ratios

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4.5.2 Interpretation of Profitability RatiosGross Profit Margin

Operating Profit MarginPretax Margin

Net Profit MarginROA

Return on Total CapitalROE

4.6 Integrated Financial Ratio Analysis4.6.1 The Overall Ratio Picture: Examples4.6.2 DuPont Analysis: The Decomposition of ROE

5 Equity Analysis

5.1 Valuation Ratios5.1.1 Calculation of Valuation Ratios and Related Quantities5.1.2 Interpretation of Earnings per Share

5.1.3 Dividend-Related QuantitiesDividend Payout Ratio

Retention RateSustainable Growth Rate5.2 Industry-Specific Ratios

5.3 Research on Ratios in Equity Analysis

6 Credit Analysis

6.1 The Credit Rating Process6.2 Research on Ratios in Credit Analysis

7 Business and Geographic Segments

7.1 Segment Reporting Requirements7.2 Segment Ratios

8 Model Building and Forecasting

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