Insiderschoice to Cfa 2007 Level I Certification: The Candidate's Study Guide to Chartered Financial Analyst Learning Outcome Statements

CFA 2007 Level I......Page 1
How to Use FinancialExams Study Notes:......Page 8
The 18 2007 CFA Level I Study Sessions breakout is as follow......Page 9
2007 CFA Level I Study and Examination Program Textbook:......Page 32
Preface......Page 33
Practice Questions and Answers......Page 34
Study Program......Page 36
CFA Institute Exam Rules......Page 37
Taking the Exam......Page 38
On the Exam Day......Page 39
Terminology you must know to take the exam.......Page 41
Reading Assignments......Page 47
Introduction......Page 48
Standard I: Professionalism......Page 49
Standard III: Duties to Clients......Page 50
Standard V: Investment Analysis, Recommendations, and Action......Page 51
Standard VII: Responsibilities as a CFA Institute Member or......Page 52
1 Concept Check Questions......Page 54
1 Concept Check Answers......Page 56
Introduction......Page 58
Standard I: Professionalism......Page 59
Standard II: Integrity of Capital Markets......Page 63
Standard III: Duties to Clients......Page 64
Standard IV: Duties to Employers......Page 69
Standard V: Investment Analysis, Recommendations, and Action......Page 72
Standard VI: Conflicts of Interest......Page 74
Standard VII: Responsibilities as a CFA Institute Member or......Page 77
2 Concept Check Questions......Page 79
2 Concept Check Answers......Page 81
Introduction......Page 83
Verification......Page 85
GIPS objectives......Page 86
Compliance......Page 89
3 and 4 Concept Check Questions......Page 90
3 and 4 Concept Check Answers......Page 92
Reading Assignments......Page 95
Introduction......Page 96
Interest rate and risk......Page 97
Future value and present value of a single sum......Page 98
Stated and effective annual interest rates......Page 101
Value of money for periods other than annual......Page 103
Series of cash flows (annuities)......Page 106
Time lines......Page 114
5 Concept Check Questions......Page 118
5 Concept Check Answers......Page 120
Introduction......Page 123
Net Present Value (NPV)......Page 124
Internal rate of return......Page 125
Measuring portfolio returns......Page 127
6 Concept Check Questions......Page 135
6 Concept Check Answers......Page 137
Learning Outcome Statements (LOS)......Page 139
Statistics......Page 140
Measures of central tendency......Page 145
1. Mean......Page 146
4. Harmonic mean......Page 148
Measures of dispersion......Page 149
Chebyshev’s inequality......Page 153
Coefficient of variation......Page 154
Symmetric and skewed distributions......Page 156
Kurtosis......Page 158
Semi-logarithmic scale......Page 159
7 Concept Check Questions......Page 160
7 Concept Check Answers......Page 164
Learning Outcome Statements (LOS)......Page 168
Calculating probabilities......Page 169
General rule of multiplication......Page 170
General rule of addition......Page 171
Covariance......Page 176
Correlation......Page 178
Bayes’ formula......Page 180
The general formula for labeling problems......Page 181
Permutation formula......Page 182
8 Concept Check Questions......Page 183
8 Concept Check Answers......Page 185
Reading Assignments......Page 189
Learning Outcome Statements (LOS)......Page 190
Probability distributions......Page 191
Binomial distributions......Page 193
Binomial trees......Page 194
Continuous uniform distribution......Page 195
Normal distribution......Page 197
Lognormal distributions......Page 201
9 Concept Check Questions......Page 204
9 Concept Check Answers......Page 206
Introduction......Page 208
Sampling......Page 209
Central limit theorem......Page 212
Estimating a population parameter......Page 213
Confidence intervals......Page 214
Student’s t – distribution......Page 216
Confidence intervals for the population mean......Page 218
Biases impacting on data selected......Page 220
10 Concept Check Questions......Page 221
10 Concept Check Answers......Page 223
Introduction......Page 225
Hypothesis testing......Page 226
Choice of test......Page 230
Tests for means of two different groups......Page 234
Paired comparison tests......Page 236
Testing for variance......Page 238
Differences between variances......Page 240
11 Concept Check Questions......Page 241
11 Concept Check Answers......Page 243
Scatter plots......Page 246
12 Concept Check Questions......Page 257
12 Concept Check Answers......Page 258
Reading Assignments......Page 261
Price Elasticity of Demand......Page 262
Cross elasticity of demand......Page 265
Elasticity of Supply......Page 267
13 Concept Check Questions......Page 269
13 Concept Check Answers......Page 270
Marginal benefit......Page 272
Efficiency......Page 273
Fairness......Page 276
14 Concept Check Questions......Page 277
14 Concept Check Answers......Page 278
Short-run and long-run supply......Page 280
Taxes......Page 282
Markets for illegal goods......Page 283
15 Concept Check Questions......Page 284
15 Concept Check Answers......Page 286
Introduction......Page 287
Economic profit......Page 288
Production systems......Page 289
Business organizations......Page 290
Concentration......Page 291
16 Concept Check Questions......Page 294
16 Concept Check Answers......Page 296
Introduction......Page 297
Technological constraint......Page 298
Short-run cost......Page 299
Long-run cost......Page 301
17 Concept Check Questions......Page 302
17 Concept Check Answers......Page 304
Introduction......Page 305
Maximizing profit......Page 306
Supply curves......Page 308
Permanent change in demand......Page 310
18 Concept Check Questions......Page 311
18 Concept Check Answers......Page 312
Introduction......Page 314
Price strategies......Page 315
Single-price monopoly......Page 316
Price-discriminating monopoly......Page 317
Monopolies also have potential benefits:......Page 318
19 Concept Check Questions......Page 319
19 Concept Check Answers......Page 320
Introduction......Page 321
Monopolistic competition......Page 322
Product development and marketing......Page 323
Oligopoly......Page 324
Oligopoly games......Page 325
20 Concept Check Questions......Page 327
20 Concept Check Answers......Page 328
Reading Assignments......Page 331
Introduction......Page 332
Labor Markets......Page 333
Capital Markets......Page 335
Demand curve for capital......Page 336
Incomes......Page 338
21  Concept Check Questions......Page 339
21  Concept Check Answers......Page 340
The business cycle......Page 342
Aggregate hours......Page 343
Consumer Price Index (CPI)......Page 344
22 Concept Check Questions......Page 347
22 Concept Check Answers......Page 348
Aggregate supply......Page 350
Aggregate demand......Page 352
Equilibrium......Page 354
Macroeconomic schools of thought......Page 356
23 Concept Check Questions......Page 357
23 Concept Check Answers......Page 358
Money......Page 360
Depository institutions......Page 361
Creating money......Page 362
U.S. Fed......Page 363
24 Concept Check Questions......Page 365
24 Concept Check Answers......Page 366
Introduction......Page 367
Demand for money......Page 368
Interest rates......Page 369
Short-run effects of money......Page 370
Quantity theory of money......Page 371
25 Concept Check Questions......Page 372
25 Concept Check Answers......Page 374
Introduction......Page 375
Effects of inflation......Page 378
Phillips curve......Page 380
Interest rates......Page 382
26 Concept Check Questions......Page 383
26 Concept Check Answers......Page 384
Potential GDP......Page 386
Supply side......Page 387
Business cycle......Page 389
Automatic stabilizers......Page 390
27 Concept Check Questions......Page 391
27 Concept Check Answers......Page 392
Introduction......Page 393
Price stability......Page 394
Aggregate supply shocks......Page 395
McCallum Rule......Page 398
28 Concept Check Questions......Page 399
28 Concept Check Answers......Page 400
Reading Assignments......Page 403
Introduction......Page 404
Gains from international trade......Page 405
Trade restrictions......Page 406
29 Concept Check Questions......Page 409
29 Concept Check Answers......Page 410
Introduction......Page 412
Official settlement account......Page 413
Exchange rates......Page 414
Fed intervention......Page 416
30 Concept Check Questions......Page 417
30 Concept Check Answers......Page 418
Introduction......Page 420
Bid-ask spreads......Page 422
Forward premiums and discounts......Page 424
Interest rate parity......Page 425
31 Concept Check Questions......Page 428
31 Concept Check Answers......Page 430
Introduction......Page 432
Flexible exchange rates......Page 433
Balance of payments......Page 434
Factors affecting exchange rates......Page 435
Fiscal policy......Page 436
Relative Purchasing Power Parity (Relative PPP)......Page 438
32 Concept Check Questions......Page 440
32 Concept Check Answers......Page 442
Readings Assignments......Page 445
Introduction......Page 446
Role of FASB......Page 448
Role of the auditor......Page 450
33 Concept Check Questions......Page 451
33 Concept Check Answers......Page 452
Introduction......Page 453
Income statement......Page 454
Revenue and expense recognition......Page 455
Software revenue recognition......Page 457
Percentage-of-completion method......Page 458
Completed contract method......Page 459
Nonrecurring items......Page 463
Balance sheet......Page 465
Stockholders’ equity......Page 467
34  Concept Check Questions......Page 468
34  Concept Check Answers......Page 470
Introduction......Page 472
Cash flows from financing activities......Page 473
Introduction......Page 474
Statement of cash flows......Page 475
Classification of individual items......Page 476
Direct method......Page 478
Indirect method......Page 479
Analysis of cash flows......Page 480
35 & 36  Concept Check Questions......Page 483
35 & 36  Concept Check Answers......Page 485
Introduction......Page 487
Reasons for accounting diversity......Page 488
Problems caused by accounting diversity......Page 489
Hierarchical model for accounting practices;......Page 490
Harmonization......Page 492
International Accounting Standards Board (IASB)......Page 493
37  Concept Check Questions......Page 495
37  Concept Check Answers......Page 496
Reading Assignments......Page 499
Introduction......Page 500
Financial information used in Examples 38-1 to 38-7......Page 502
Common-size statements......Page 504
Internal liquidity (solvency)......Page 505
Operating performance......Page 508
Risk analysis......Page 510
Growth analysis......Page 514
Limitations of financial ratios......Page 516
38 Concept Check Questions......Page 517
38 Concept Check Answers......Page 520
Introduction......Page 524
Weighted average number of shares......Page 525
Complex capital structure......Page 526
Options and warrants......Page 527
Complex capital structure......Page 528
39  Concept Check Questions......Page 529
39  Concept Check Answers......Page 531
Reading Assignments......Page 535
Introduction......Page 536
LIFO versus FIFO – impact on income statement and balance sh......Page 540
Adjustment of income to current cost income......Page 542
Financial ratios under LIFO and FIFO......Page 543
40  Concept Check Questions......Page 545
40  Concept Check Answers......Page 547
Introduction......Page 549
Long-term assets......Page 550
41 Concept Check Questions......Page 553
41 Concept Check Answers......Page 554
Introduction......Page 555
Capitalization of interest......Page 558
Capitalization of intangible assets......Page 559
Asset revaluation......Page 561
42 Concept Check Questions......Page 562
42 Concept Check Answers......Page 564
Introduction......Page 565
Different methods of calculating depreciation......Page 566
Accelerated depreciation methods......Page 567
Impact of choice of depreciation method on the financial sta......Page 570
Changes in depreciation method......Page 571
Impairment of long-lived assets......Page 573
43  Concept Check Questions......Page 576
43  Concept Check Answers......Page 578
Reading Assignments......Page 583
Learning Outcome Statements (LOS)......Page 584
Introduction......Page 585
Deferred tax liabilities and assets......Page 588
Deferred tax liability or an increase in stockholders’ equit......Page 590
Changes in tax rates......Page 592
44  Concept Check Questions......Page 593
44  Concept Check Answers......Page 594
Introduction......Page 595
Convertible bonds, warrants, and convertible preferred stock......Page 600
45  Concept Check Questions......Page 603
45  Concept Check Answers......Page 605
Introduction......Page 607
Classification of leases......Page 608
Off-balance-sheet financing......Page 612
Financial statement reporting for a sales-type lease......Page 613
Financial statement reporting for a direct-financing lease......Page 615
46  Concept Check Questions......Page 616
46  Concept Check Answers......Page 618
Reading Assignments......Page 621
Introduction......Page 622
Principles of capital budgeting......Page 624
Methods for evaluating investment proposals......Page 625
47  Concept Check Questions......Page 634
47  Concept Check Answers......Page 636
Introduction......Page 638
Weighted average cost of capital (WACC)......Page 639
Component costs of capital......Page 642
Cost of preferred stock......Page 643
Cost of equity......Page 644
48  Concept Check......Page 647
48  Concept Check Answers......Page 649
Introduction......Page 651
Degree of operating leverage (DOL)......Page 652
Financial leverage......Page 654
Breakeven points......Page 657
Risks of creditors and owners......Page 659
49  Concept Check Questions......Page 660
49  Concept Check Answers......Page 662
Introduction......Page 664
Dividends......Page 665
Share repurchases......Page 666
Dividend payment procedures......Page 668
50  Concept Check Questions......Page 672
50  Concept Check Answers......Page 674
Introduction......Page 676
Independence......Page 679
Code of ethics......Page 681
Committees......Page 682
Takeover defenses......Page 684
51  Concept Check Questions......Page 685
51  Concept Check Answers......Page 686
Reading Assignments......Page 689
Introduction......Page 690
Portfolio management process......Page 691
Objectives......Page 692
Investor return objectives......Page 693
Importance of asset allocation......Page 696
52  Concept Check Questions......Page 697
52  Concept Check Answers......Page 698
Introduction......Page 699
Expected return of a portfolio......Page 701
Risk of an individual investment......Page 702
Risk of a portfolio of assets......Page 703
Standard deviation of a portfolio......Page 704
The efficient frontier......Page 707
53  Concept Check Questions......Page 709
53  Concept Check Answers......Page 710
Introduction......Page 712
Systematic and unsystematic risk......Page 716
The Capital Asset Pricing Model (CAPM)......Page 717
Beta......Page 720
54  Concept Check Questions......Page 721
54  Concept Check Answers......Page 723
Reading Assignments......Page 727
Introduction......Page 728
Characteristics of a well-functioning market......Page 729
Primary markets......Page 730
Secondary equity markets......Page 731
Types of orders......Page 733
Margin transactions......Page 734
Institutionalization of securities markets......Page 736
55 Concept Check Questions......Page 737
55 Concept Check Answers......Page 739
Security market indexes......Page 741
56  Concept Check Questions......Page 747
56  Concept Check Answers......Page 748
Introduction......Page 750
Definition......Page 751
Tests for the semistrong-form EMH......Page 752
Tests for the strong-form EMH......Page 753
57  Concept Check Questions......Page 756
57  Concept Check Answers......Page 758
Introduction......Page 759
Limitations......Page 760
Pricing anomalies......Page 761
58  Concept Check Questions......Page 763
58  Concept Check Answers......Page 764
Reading Assignments......Page 767
Introduction......Page 768
Top-down approach......Page 769
Bottom-up approach......Page 770
Value of preferred stock......Page 771
Dividend discount model......Page 772
Earnings multiplier model (or P/E)......Page 774
Calculation of k, the required rate of return......Page 775
Estimating the growth rate, g......Page 776
59 Concept Check Questions......Page 777
59 Concept Check Answers......Page 778
Structural economic changes......Page 780
60 Concept Check Questions......Page 781
60 Concept Check Answers......Page 782
Introduction......Page 783
The business cycle......Page 784
Industry analysis and return......Page 785
Industry life cycle......Page 786
Competitive environment......Page 787
Industry analysis and risk......Page 789
Five forces......Page 790
61  Concept Check Questions......Page 791
61  Concept Check Answers......Page 792
Introduction......Page 794
Estimating a company’s earnings multiplier......Page 796
The calculation of the expected rate of return of a stock......Page 797
62 Concept Check Questions......Page 798
62 Concept Check Answers......Page 800
Introduction......Page 802
Assumptions of technical analysis......Page 803
Contrary-opinion technical analysts......Page 804
Other indicators......Page 805
Price and volume analysis......Page 806
63  Concept Check Questions......Page 807
63  Concept Check Answers......Page 808
Introduction......Page 810
Price to earnings (P/E)......Page 811
Price to book value (P/B)......Page 813
Price to cash flow (P/CF)......Page 814
64  Concept Check Questions......Page 815
64  Concept Check Answers......Page 816
Reading Assignments......Page 819
Introduction......Page 820
Covenants......Page 821
Coupon rate structures......Page 823
Floating-rate securities......Page 824
Accrued interest......Page 825
Early retirement provisions......Page 826
Embedded options......Page 828
65 Concept Check Questions......Page 831
65 Concept Check Answers......Page 832
Learning Outcome Statements (LOS)......Page 834
Introduction......Page 835
Risks in bond investment......Page 836
Interest rate risk......Page 838
Interpretation of duration......Page 840
Computation of duration......Page 841
Yield curve risk......Page 842
Prepayable amortizing securities......Page 843
Credit ratings......Page 844
Liquidity risk......Page 845
Exchange rate risk......Page 846
Volatility risk......Page 847
Event risk......Page 848
66 Concept Check Questions......Page 849
66 Concept Check Answers......Page 850
Learning Outcome Statements (LOS)......Page 852
International bonds......Page 853
United States Treasury securities......Page 855
How stripped Treasury securities are created......Page 857
Cash flows for mortgage-backed securities......Page 859
Federal agency securities......Page 861
Motivation for creating a collateralized mortgage obligation......Page 862
General obligation and revenue bonds......Page 863
Corporate debt securities......Page 864
Credit ratings......Page 865
Structured notes......Page 866
The uses and limitations of bank obligations......Page 867
Motivation for asset securitization......Page 868
External credit enhancement......Page 869
Primary vs. secondary markets in bonds......Page 870
67 Concept Check Questions......Page 872
67 Concept Check Answers......Page 874
Learning Outcome Statements (LOS)......Page 876
Introduction......Page 877
Basic theories of term structure of interest rates......Page 879
Yield measures......Page 880
Credit spread......Page 882
The relationship between the size of an issue, liquidity and......Page 884
68 Concept Check Questions......Page 886
68 Concept Check Answers......Page 888
Introduction......Page 890
Central bank and financial markets......Page 891
Predictability......Page 892
69 Concept Check Questions......Page 893
69 Concept Check Answers......Page 894
Reading Assignments......Page 897
Introduction......Page 898
Bond valuation......Page 899
Computation of the value of a bond given expected cash flows......Page 900
How the value of a bond changes with the discount rate’s inc......Page 901
Zero-coupon bonds......Page 902
Arbitrage-free valuation approach......Page 903
Generating an arbitrage profit......Page 904
70 Concept Check Questions......Page 905
70 Concept Check Answers......Page 906
Introduction......Page 907
Yield measures......Page 908
Underlying assumptions in traditional yield measures......Page 911
Factors that affect reinvestment risk......Page 912
Forward rates......Page 917
71 Concept Check Questions......Page 921
71 Concept Check Answers......Page 922
Learning Outcome Statements (LOS)......Page 923
Introduction......Page 924
Convexity......Page 925
Price volatility characteristics......Page 926
Price volatility characteristics of putable bonds......Page 927
Calculating effective duration......Page 928
Approximate Percentage Price Change......Page 929
Types of duration......Page 930
Effective duration versus modified duration or Macaulay dura......Page 931
Compute the duration of a portfolio......Page 932
Convexity......Page 933
How do we use the convexity measure to adjust the percentage......Page 934
72  Concept Check Questions......Page 937
72  Concept Check Answers......Page 938
Reading Assignments......Page 941
Introduction......Page 942
Forward commitments......Page 943
Contingent claims......Page 944
Criticisms of derivative markets......Page 945
73 Concept Check Questions......Page 947
73 Concept Check Answers......Page 948
Introduction......Page 949
Termination of a contract......Page 950
Bond forwards......Page 952
Eurodollar time deposits......Page 953
Currency forwards......Page 954
74 Concept Check Questions......Page 955
74 Concept Check Answers......Page 956
Introduction......Page 958
Futures versus forwards......Page 959
Margin requirements......Page 960
Limit moves......Page 961
Terminating a futures position......Page 962
Financial and currency futures......Page 963
75 Concept Check Questions......Page 965
75 Concept Check Answers......Page 967
Learning Outcome Statements (LOS)......Page 969
Characteristics......Page 970
Intrinsic value......Page 971
Financial options......Page 972
Interest rate options......Page 973
Option pricing......Page 976
Lower bounds......Page 978
Time to expiry......Page 980
Put-call parity......Page 981
Interest rates......Page 983
76 Concept Check Questions......Page 984
76 Concept Check Answers......Page 986
Introduction......Page 988
Termination of swaps......Page 989
Currency swaps......Page 990
Interest rate swaps......Page 991
77 Concept Check Questions......Page 993
77 Concept Check Answers......Page 994
Introduction......Page 996
Profit on call options......Page 997
Profit on put options......Page 998
Covered call......Page 1001
Protective put......Page 1003
78  Concept Check Questions......Page 1005
78  Concept Check Answers......Page 1006
Reading Assignments......Page 1009
Learning Outcome Statements (LOS)......Page 1010
Investment companies......Page 1011
Fees......Page 1013
Exchange traded funds (ETFs)......Page 1015
Disadvantages of ETFs......Page 1017
Forms of real estate investment......Page 1018
Characteristics of real estate......Page 1019
Valuation of real estate......Page 1020
Characteristics of venture capital investments......Page 1024
Hedge funds......Page 1027
Types of hedge fund......Page 1028
Fund of funds......Page 1029
Performance of hedge funds......Page 1031
Closely held companies......Page 1033
79 Concept Check Questions......Page 1037
79 Concept Check Answers......Page 1040
Terminology......Page 1045
Appendix A:......Page 1047
Exhibit 1: Accounting Statements......Page 1048
Exhibit 2:  Puts and Calls......Page 1050
Exhibit 3:  PE Breakdown......Page 1052
Exhibit 4:  Ratios......Page 1054
Glossary......Page 1059
FinancialExams Return and Guarantee Policy......Page 1088
FinancialExam Features......Page 1089
In Brief......Page 1090
Practice Exams......Page 1091
Online Help......Page 1092
Printing questions......Page 1093
Take the Adaptive Exam......Page 1094
Starting a Study Session......Page 1095
Take the Simulated Exam......Page 1096
FlashCard Option......Page 1097
How to use a FlashCards......Page 1098
Export your notes......Page 1099
Download Instructions......Page 1102