| LOS Detail June 2010 (Old) |
LOS Detail June 2011 (New) |
| SS |
LOS |
LOS
Description |
Sub
LOS |
Sub
LOS Description |
SS |
LOS |
LOS
Description |
Sub
LOS |
Sub
LOS Description |
| 1 |
1 |
Code
of Ethics and Standards of Professional Conduct |
a. |
state the
six components of the Code of Ethics and the seven Standards of Professional
Conduct; |
1 |
1 |
Code
of Ethics and Standards of Professional Conduct |
a |
state the six
components of the Code of Ethics and the seven Standards of Professional
Conduct; |
| b. |
explain the
ethical responsibilities required by the Code and Standards. |
b |
explain the
ethical responsibilities required by the Code and Standards. |
| 2 |
"Guidance"
for Standards I-VII |
a. |
demonstrate
a thorough knowledge of the Code of Ethics and Standards of Professional
Conduct by applying the Code and Standards to specific situations; |
2 |
Guidance
for Standards I-VII |
a |
demonstrate
a thorough knowledge of the Code of Ethics and Standards of
Professional Conduct by applying the Code and Standards to specific
situations; |
| b. |
recommend
practices and procedures designed to prevent violations of the Code
of Ethics and Standards of Professional Conduct. |
b |
recommend practices
and procedures designed to prevent violations of the Code
of Ethics and Standards of Professional Conduct. |
| 3 |
CFA
Institute Soft Dollar Standards |
a. |
define soft-dollar
arrangements and state the general principles of the Soft Dollar Standards; |
3 |
CFA
Institute Soft Dollar Standards |
a |
define soft-dollar
arrangements and state the general principles of the Soft Dollar
Standards; |
| b. |
critique company
soft-dollar practices and policies; |
b |
critique company
soft-dollar practices and policies; |
| c. |
determine
whether a product or service qualifies as “permissible research”
that can be purchased with client brokerage. |
c |
determine whether
a product or service qualifies as “permissible research” that
can be purchased with client brokerage. |
| 4 |
CFA
Institute Research Objectivity Standards |
a. |
explain the
objectives of the Research Objectivity Standards; |
4 |
CFA
Institute Research Objectivity Standards |
a |
explain the
objectives of the Research Objectivity Standards; |
| b. |
critique company
policies and practices related to research objectivity and distinguish
between changes required and changes recommended for compliance with
the Research Objectivity Standards. |
b |
critique company
policies and practices related to research objectivity, and
distinguish between changes required and changes recommended for
compliance with the Research Objectivity Standards. |
| 2 |
5 |
The
Glenarm Company |
a. |
critique the
practices and policies presented; |
2 |
5 |
The
Glenarm Company |
a |
critique the
practices and policies presented; |
| b. |
explain the
appropriate action to take in response to conduct that violates the
CFA Institute Code of Ethics and Standards of Professional Conduct. |
b |
explain the
appropriate action to take in response to conduct that violates the
CFA Institute Code of Ethics and Standards of Professional Conduct. |
| 6 |
Preston
Partners |
a. |
critique the
practices and policies presented; |
6 |
Preston
Partners |
a |
critique the
practices and policies presented; |
| b. |
explain the
appropriate action to take in response to conduct that violates the
CFA Institute Code of Ethics and Standards of Professional Conduct. |
b |
explain the
appropriate action to take in response to conduct that violates the
CFA Institute Code of Ethics and Standards of Professional Conduct. |
| 7 |
Super
Selection |
a. |
critique the
practices and policies presented; |
7 |
Super
Selection |
a |
critique the
practices and policies presented; |
| b. |
explain the
appropriate action to take in response to conduct that violates the
CFA Institute Code of Ethics and Standards of Professional Conduct. |
b |
explain the
appropriate action to take in response to conduct that violates the
CFA Institute Code of Ethics and Standards of Professional Conduct. |
| 8 |
Trade
Allocation: Fair Dealing and Disclosure |
a. |
critique
trade allocation practices and determine whether there is compliance
with the CFA Institute Standards of Professional Conduct addressing
fair dealing and client loyalty; |
8 |
Trade
Allocation: Fair Dealing and Disclosure |
a |
critique
trade allocation practices, and determine whether compliance exists
with
the CFA Institute Standards of Professional Conduct addressing fair
dealing and
client loyalty; |
| b. |
discuss appropriate
actions to take in response to trade allocation practices that do not
adequately respect client interests. |
b |
discuss appropriate
actions to take in response to trade allocation practices that
do not adequately respect client interests. |
| 9 |
Changing
Investment Objectives |
a. |
critique the
disclosure of investment objectives and basic policies and determine
whether they comply with the CFA Institute Standards of Professional
Conduct; |
9 |
Changing
Investment Objectives |
a |
critique the
disclosure of investment objectives and basic policies and determine
whether they comply with the CFA Institute Standards of Professional
Conduct; |
| b. |
discuss appropriate
actions needed to ensure adequate disclosure of the investment process. |
b |
discuss appropriate
actions needed to ensure adequate disclosure of the
investment process. |
| 10 |
Prudence
in perspective |
a. |
explain the
basic principles of the new Prudent Investor Rule; |
10 |
Prudence
in Perspective |
a |
explain the
basic principles of the new Prudent Investor Rule; |
| b. |
explain the
general fiduciary standards to which a trustee must adhere; |
b |
explain the
general fiduciary standards to which a trustee must adhere; |
| c. |
differentiate
between the old Prudent Man Rule and the new Prudent Investor Rule; |
c |
differentiate
between the old Prudent Man Rule and the new Prudent Investor
Rule; |
| d. |
explain the
key factors that a trustee should consider when investing and managing
trust assets. |
d |
explain the
key factors that a trustee should consider when investing and
managing trust assets. |
| 3 |
11 |
Correlation
and Regression |
a. |
calculate
and interpret a sample covariance and a sample correlation coefficient
and interpret a scatter plot; |
3 |
11 |
Correlation
and Regression |
a |
calculate and
interpret a sample covariance and a sample correlation coefficient,
and interpret a scatter plot; |
| b. |
explain the
limitations to correlation analysis, including outliers and spurious
correlation; |
b |
explain the
limitations to correlation analysis, including outliers and spurious
correlation; |
| c. |
formulate
a test of the hypothesis that the population correlation coefficient
equals zero and determine whether the hypothesis is rejected at a given
level of significance; |
c |
formulate a
test of the hypothesis that the population correlation coefficient
equals zero, and determine whether the hypothesis is rejected at a given
level of
significance; |
| d. |
differentiate
between the dependent and independent variables in a linear regression; |
d |
distinguish
between the dependent and independent variables in a linear
regression; |
| e. |
explain the
assumptions underlying linear regression and interpret the regression
coefficients; |
e |
explain the
assumptions underlying linear regression, and interpret the regression
coefficients; |
| f. |
calculate
and interpret the standard error of estimate, the coefficient of determination,
and a confidence interval for a regression coefficient; |
f |
calculate and
interpret the standard error of estimate, the coefficient of
determination, and a confidence interval for a regression coefficient; |
| g. |
formulate
a null and alternative hypothesis about a population value of a regression
coefficient, select the appropriate test statistic, and determine whether
the null hypothesis is rejected at a given level of significance; |
g |
formulate a
null and alternative hypothesis about a population value of a
regression coefficient, select the appropriate test statistic, and determine
whether the null hypothesis is rejected at a given level of significance; |
| h. |
calculate
a predicted value for the dependent variable, given an estimated regression
model and a value for the independent variable and calculate and interpret
a confidence interval for the predicted value of a dependent variable; |
h |
calculate a
predicted value for the dependent variable, given an estimated
regression model and a value for the independent variable, and calculate
and
interpret a confidence interval for the predicted value of a dependent
variable |
| i. |
describe the
use of analysis of variance (ANOVA) in regression analysis, interpret
ANOVA results, and calculate and interpret an F-statistic; |
i |
describe the
use of analysis of variance (ANOVA) in regression analysis, interpret
ANOVA results, and calculate and interpret an F-statistic; |
| j. |
discuss the
limitations of regression analysis. |
j |
discuss the
limitations of regression analysis. |
| 12 |
Multiple
Regression and Issues in Regression Analysis |
a. |
formulate
a multiple regression equation to describe the relation between a dependent
variable and several independent variables, determine the statistical
significance of each independent variable, and interpret the estimated
coefficients and their p-values |
12 |
Multiple
Regression and Issues in Regression Analysis |
a |
formulate a
multiple regression equation to describe the relation between a
dependent variable and several independent variables, determine the
statistical
significance of each independent variable, and interpret the estimated
coefficients and their p-values; |
| b. |
formulate
a null and an alternative hypothesis about the population value of a
regression coefficient, calculate the value of the test statistic, determine
whether to reject the null hypothesis at a given level of significance
by using a one-tailed or two-tailed test, and interpret the results
of the test; |
b |
formulate a
null and an alternative hypothesis about the population value of a
regression coefficient, calculate the value of the test statistic, determine
whether
to reject the null hypothesis at a given level of significance by using
a one-tailed
or two-tailed test, and interpret the results of the test; |
| c. |
calculate
and interpret 1) a confidence interval for the population value of a
regression coefficient and 2) a predicted value for the dependent variable,
given
an estimated regression model and assumed values for the independent
variables; |
c |
calculate and
interpret 1) a confidence interval for the population value of a
regression coefficient and 2) a predicted value for the dependent variable,
given
an estimated regression model and assumed values for the independent
variables; |
| d. |
explain the
assumptions of a multiple regression model; |
d |
explain the
assumptions of a multiple regression model; |
| e. |
calculate
and interpret the F-statistic and discuss how it is used in regression
analysis; define, distinguish between, and interpret the R2 and adjusted
R2 in
multiple regression; and infer how well a regression model explains
the
dependent variable by analyzing the output of the regression equation
and an ANOVA table. |
e |
calculate
and interpret the F-statistic, and discuss how it is used in regression
analysis; |
| - |
- |
f |
distinguish
between and interpret the R2 and adjusted R2 in multiple regression; |
| - |
- |
g |
infer
how well a regression model explains the dependent variable by analyzing
the output of the regression equation and an ANOVA table; |
| f. |
formulate
a multiple regression equation by using dummy variables to represent
qualitative factors and interpret the coefficients and regression results; |
h |
formulate a
multiple regression equation by using dummy variables to represent
qualitative factors, and interpret the coefficients and regression results; |
| g. |
discuss the
types of heteroskedasticity and the effects of heteroskedasticity and
serial correlation on statistical inference; |
i |
discuss the
types of heteroskedasticity and the effects of heteroskedasticity and
serial correlation on statistical inference; |
| h. |
describe multicollinearity
and discuss its causes and effects in regression analysis; |
j |
describe multicollinearity,
and discuss its causes and effects in regression analysis; |
| i. |
discuss the
effects of model misspecification on the results of a regression
analysis and explain how to avoid the common forms of misspecification; |
k |
discuss the
effects of model misspecification on the results of a regression
analysis, and explain how to avoid the common forms of misspecification; |
| j. |
discuss models
with qualitative dependent variables; |
l |
discuss models
with qualitative dependent variables; |
| k. |
interpret
the economic meaning of the results of multiple regression analysis
and
critique a regression model and its results. |
m |
interpret the
economic meaning of the results of multiple regression analysis and
critique a regression model and its results. |
| 13 |
Time-Series
Analysis |
a. |
calculate
and evaluate the predicted trend value for a time series, modeled as
either a linear trend or a log-linear trend, given the estimated trend
coefficients; |
13 |
Time-Series
Analysis |
a |
calculate and
evaluate the predicted trend value for a time series, modeled as
either a linear trend or a log-linear trend, given the estimated trend
coefficients; |
| b. |
discuss the
factors that determine whether a linear or a log-linear trend should
be
used with a particular time series and evaluate the limitations of trend
models; |
b |
discuss the
factors that determine whether a linear or a log-linear trend should
be used with a particular time series, and evaluate the limitations
of trend
models; |
| c. |
explain
the requirement for a time series to be covariance stationary and discuss
the significance of a series not being stationary; |
c |
explain
the requirement for a time series to be covariance stationary, and discuss
the significance of a series that is not stationary; |
| d. |
discuss
the structure of an autoregressive (AR) model of order p, calculate
oneand
two-period-ahead forecasts given the estimated coefficients, and explain
how autocorrelations of the residuals can be used to test whether the
autoregressive model fits the time series |
d |
discuss
the structure of an autoregressive (AR) model of order p, and calculate
one- and two-period-ahead forecasts given the estimated coefficients; |
| - |
- |
e |
explain
how autocorrelations of the residuals can be used to test whether the
autoregressive model fits the time series; |
| e. |
explain mean
reversion and calculate a mean-reverting level; |
f |
explain mean
reversion, and calculate a mean-reverting level; |
| f. |
contrast in-sample
and out-of-sample forecasts and compare the forecasting
accuracy of different time-series models based on the root mean squared
error
criterion; |
g |
contrast in-sample
and out-of-sample forecasts, and compare the forecasting
accuracy of different time-series models based on the root mean squared
error
criterion; |
| g. |
discuss the
instability of coefficients of time-series models; |
h |
discuss the
instability of coefficients of time-series models; |
| h. |
describe the
characteristics of random walk processes and contrast them to
covariance stationary processes; |
i |
describe the
characteristics of random walk processes, and contrast them to
covariance stationary processes; |
| i. |
discuss the
implications of unit roots for time-series analysis, explain when unit
roots are likely to occur and how to test for them, and demonstrate
how a time
series with a unit root can be transformed so it can be analyzed with
an AR model; |
j |
discuss the
implications of unit roots for time-series analysis, explain when unit
roots are likely to occur and how to test for them, and demonstrate
how a time
series with a unit root can be transformed so it can be analyzed with
an AR
model; |
| j. |
discuss the
steps of the unit root test for nonstationarity and explain the relation
of the test to autoregressive time-series models; |
k |
discuss the
steps of the unit root test for nonstationarity, and explain the relation
of the test to autoregressive time-series models; |
| k. |
discuss how
to test and correct for seasonality in a time-series model and
calculate and interpret a forecasted value using an AR model with a
seasonal lag; |
l |
discuss how
to test and correct for seasonality in a time-series model, and
calculate and interpret a forecasted value using an AR model with a
seasonal lag; |
| l. |
explain autoregressive
conditional heteroskedasticity (ARCH) and discuss how
ARCH models can be applied to predict the variance of a time series; |
m |
explain autoregressive
conditional heteroskedasticity (ARCH), and discuss how
ARCH models can be applied to predict the variance of a time series; |
| m. |
explain how
time-series variables should be analyzed for nonstationarity and/or
cointegration before use in a linear regression; |
n |
explain how
time-series variables should be analyzed for nonstationarity and/or
cointegration before use in a linear regression; |
| n. |
select and
justify the choice of a particular time-series model from a group of
models. |
o |
select and
justify the choice of a particular time-series model from a group of
models. |
| 4 |
14 |
Economic
Growth |
a. |
define the
sources of economic growth and discuss the preconditions for
economic growth; |
4 |
14 |
Economic
Growth |
a |
define the
sources of economic growth, and discuss the preconditions for
economic growth; |
| b. |
discuss how
the one-third rule can be used to explain the contributions of labor
and technological change to growth in labor productivity; |
b |
discuss how
the one-third rule can be used to explain the contributions of labor
and technological change to growth in labor productivity; |
| c. |
discuss how
faster economic growth can be achieved by increasing the growth
of physical capital, technological advances, and investment in human
capital; |
c |
discuss how
faster economic growth can be achieved by increasing the growth
of physical capital, technological advances, and investment in human
capital; |
| d. |
compare
and contrast classical growth theory, new classical growth theory, and
new growth theory. |
d |
compare
and contrast classical growth theory, neoclassical growth theory, and
new growth theory. |
| 15 |
Regulation
and Antitrust Policy in a Globalized Economy |
a. |
explain the
rationale for government regulation in the form of 1) economic
regulation of natural monopolies and 2) social regulation of nonmonopolistic
industries; |
15 |
Regulation
and Antitrust Policy in a Globalized Economy |
a |
explain the
rationale for government regulation in the form of 1) economic
regulation of natural monopolies and 2) social regulation of nonmonopolistic
industries; |
| b. |
discuss the
potential benefits and possible negative side effects of social
regulation; |
b |
discuss the
potential benefits and possible negative side effects of social
regulation; |
| c. |
differentiate
between the capture hypothesis and the share-the-gains, share-thepains
theory of regulator behavior. |
c |
differentiate
between the capture hypothesis and the share-the-gains, share-thepains
theory of regulator behavior. |
| 16 |
Trading
with the world |
a. |
explain comparative
advantage and how countries can gain from international
trade; |
16 |
Trading
with the World |
a |
explain comparative
advantage and how countries can gain from international
trade; |
| b. |
compare and
contrast tariffs, nontariff barriers, quotas, and voluntary export
restraints; |
b |
compare and
contrast tariffs, nontariff barriers, quotas, and voluntary export
restraints; |
| c. |
critique the
arguments for trade restrictions. |
c |
critique the
arguments for trade restrictions. |
| 17 |
The
Exchange Rate and the Balance of Payments |
a. |
define an
exchange rate and differentiate between the nominal exchange rate
and the real exchange rate; |
17 |
The
Exchange Rate and the Balance of Payments |
a |
define an exchange
rate, and differentiate between the nominal exchange rate
and the real exchange rate; |
| b. |
explain the
factors that influence supply and demand in the foreign exchange
market; |
b |
explain the
factors that influence supply and demand in the foreign exchange
market; |
| c. |
discuss how
the supply and demand for a currency changes the exchange rate; |
c |
discuss how
the supply and demand for a currency changes the exchange rate; |
| d. |
differentiate
between interest rate parity and purchasing power parity; |
d |
differentiate
between interest rate parity and purchasing power parity; |
| e. |
describe the
balance of payments accounts; |
e |
describe the
balance of payments accounts; |
| f. |
describe the
following exchange rate policies: flexible exchange rates, fixed
exchange rates, and crawling pegs. |
f |
describe the
following exchange rate policies: flexible exchange rates, fixed
exchange rates, and crawling pegs. |
| 18 |
Currency
Exchange Rates |
a. |
define direct
and indirect methods of foreign exchange quotations and convert
direct (indirect) foreign exchange quotations into indirect (direct)
foreign
exchange quotations; |
18 |
Currency
Exchange Rate |
a |
define direct
and indirect methods of foreign exchange quotations, and convert
direct (indirect) foreign exchange quotations into indirect (direct)
foreign
exchange quotations; |
| b. |
calculate
and interpret the spread on a foreign currency quotation and explain
how spreads on foreign currency quotations can differ as a result of
market
conditions, bank/dealer positions, and trading volume; |
b |
calculate and
interpret the spread on a foreign currency quotation, and explain
how spreads on foreign currency quotations can differ as a result of
market
conditions, bank/dealer positions, and trading volume; |
| c. |
calculate
and interpret currency cross rates, given two spot exchange quotations
involving three currencies; |
c |
calculate and
interpret currency cross rates, given two spot exchange quotations
involving three currencies; |
| d. |
calculate
the profit on a triangular arbitrage opportunity, given the bid–ask
quotations for the currencies of three countries involved in the arbitrage; |
d |
calculate the
profit on a triangular arbitrage opportunity, given the bid–ask
quotations for the currencies of three countries involved in the arbitrage; |
| e. |
distinguish
between the spot and forward markets for foreign exchange; |
e |
distinguish
between the spot and forward markets for foreign exchange; |
| f. |
calculate
and interpret the spread on a forward foreign currency quotation and
explain how spreads on forward foreign currency quotations can differ
as a result
of market conditions, bank/dealer positions, trading volume, and maturity/length
of contract; |
f |
calculate and
interpret the spread on a forward foreign currency quotation, and
explain how spreads on forward foreign currency quotations can differ
as a result
of market conditions, bank/dealer positions, trading volume, and maturity/length
of contract; |
| g. |
calculate
and interpret a forward discount or premium and express it as an
annualized rate; |
g |
calculate and
interpret a forward discount or premium and express it as an
annualized rate; |
| h. |
explain interest
rate parity and illustrate covered interest arbitrage; |
h |
explain interest
rate parity, and illustrate covered interest arbitrage; |
| i. |
distinguish
between spot and forward transactions, calculate the annualized
forward premium/discount for a given currency, and infer whether the
currency
is “strong” or “weak.” |
i |
distinguish
between spot and forward transactions, calculate the annualized
forward premium/discount for a given currency, and infer whether the
currency
is “strong” or “weak.” |
| 19 |
Foreign
Exchange Parity Relations |
a. |
explain how
exchange rates are determined in a flexible (or floating) exchange
rate system; |
19 |
Foreign
Exchange Parity Relations |
a |
explain how
exchange rates are determined in a flexible (or floating) exchange
rate system; |
| b. |
explain the
role of each component of the balance of payments accounts; |
b |
explain the
role of each component of the balance of payments accounts; |
| c. |
explain how
current account deficits or surpluses and financial account deficits
or
surpluses affect an economy; |
c |
explain how
current account deficits or surpluses and financial account deficits
or
surpluses affect an economy; |
| d. |
describe the
factors that cause a nation’s currency to appreciate or depreciate; |
d |
describe the
factors that cause a nation’s currency to appreciate or depreciate; |
| e. |
explain how
monetary and fiscal policies affect the exchange rate and balance of
payments components; |
e |
explain how
monetary and fiscal policies affect the exchange rate and balance of
payments components; |
| f. |
describe a
fixed exchange rate and a pegged exchange rate system; |
f |
describe a
fixed exchange rate and a pegged exchange rate system; |
| g. |
define
and discuss absolute purchasing power parity and relative purchasing
power parity; |
g |
discuss
absolute purchasing power parity and relative purchasing power parity; |
| h. |
calculate
the end-of-period exchange rate implied by purchasing power parity,
given the beginning-of-period exchange rate and the inflation rates; |
h |
calculate the
end-of-period exchange rate implied by purchasing power parity,
given the beginning-of-period exchange rate and the inflation rates; |
| i. |
define
and discuss the international Fisher relation; |
i |
discuss
the international Fisher relation; |
| j. |
calculate
the real interest rate, given interest rates and inflation rates and
the
assumption that the international Fisher relation holds; |
j |
calculate
the real interest rate, given nominal interest rates and expected
inflation rates, using the international Fisher relation and its linear
approximation; |
| k. |
calculate
the international Fisher relation, and its linear approximation, between
interest rates and expected inflation rates; |
k |
discuss
the theory of uncovered interest rate parity, and explain the theory’s
relation to other exchange rate parity theories; |
| l. |
define
and discuss the theory of uncovered interest rate parity and explain
the
theory’s relation to other exchange rate parity theories; |
- |
- |
| m. |
calculate
the expected change in the exchange rate, given interest rates and the
assumption that uncovered interest rate parity holds; |
l |
calculate the
expected change in the exchange rate, given interest rates and the
assumption that uncovered interest rate parity holds; |
| n. |
discuss the
foreign exchange expectation relation between the forward exchange
rate and the expected exchange rate. |
m |
discuss the
foreign exchange expectation relation between the forward exchange
rate and the expected exchange rate. |
| 20 |
Measuring
Economic Activity |
a. |
distinguish
between the different measures of economic activity and their
components; |
20 |
Measuring
Economic Activity |
a |
distinguish
between the measures of economic activity (i.e., gross domestic
product, gross national income, and net national income), including
their
components; |
| b. |
differentiate
between GDP at market prices and GDP at factor cost and explain
the adjustments made; |
b |
differentiate
between GDP at market prices and GDP at factor cost; |
| c. |
differentiate
between current and constant prices and describe the GDP deflator. |
c |
differentiate
between current and constant prices, and describe the GDP
deflator. |
| |
|
5 |
21 |
Inventories:
Implications for Financial Statements and Ratios |
a |
explain
and calculate the effect of inflation and deflation of inventory costs
on
the financial statements and ratios of companies that use different
inventory
valuation methods (cost formulas or cost flow assumptions); |
| |
|
b |
discuss
LIFO reserve and LIFO liquidation and their effects on financial statements
and ratios; |
| |
|
c |
demonstrate
how to adjust a company’s reported financial statements from LIFO
to FIFO for purposes of comparison; |
| |
|
d |
discuss
the implications of valuing inventory at net realisable value for financial
statements and ratios; |
| |
|
e |
analyze
and compare the financial statements and ratios of companies, including
those that use different inventory valuation methods; |
| |
|
f |
discuss
issues that analysts should consider when examining a company’s
inventory disclosures and other sources of information. |
| |
|
22 |
Long-lived
Assets: Implications for Financial Statements
and Ratios |
a |
discuss
the implications for financial statements and ratios of capitalising
versus
expensing costs in the period in which they are incurred; |
| |
|
b |
discuss
the implications for financial statements and ratios of the different
depreciation methods for property, plant, and equipment; |
| |
|
c |
discuss
the implications for financial statements and ratios of impairment and
revaluation of property, plant, and equipment, and intangible assets; |
| |
|
d |
analyze
and interpret the financial statement disclosures regarding long-lived
assets; |
| |
|
e |
discuss
the implications for financial statements and ratios of leasing assets
instead of purchasing assets; |
| |
|
f |
discuss
the implications for financial statements and ratios of finance leases
and
operating leases from the perspective of both the lessor and the lessee.
2011 Level |
| 5 |
21 |
Intercorporate
Investments |
a. |
describe
the classification, measurement, and disclosure under the International
Financial Reporting Standards (IFRS) for 1) investments in financial
assets,
2) investments in associates, 3) joint ventures, 4) business combinations,
and
5) special purpose |
6 |
23 |
Intercorporate
Investments |
a |
describe
the classification, measurement, and disclosure under the International
Financial Reporting Standards (IFRS) for 1) investments in financial
assets,
2) investments in associates, 3) joint ventures, 4) business combinations,
and
5) special purpose and variable interest entities (SPEs, VIEs); |
| b. |
distinguish
between IFRS and U.S. GAAP in the classification, measurement, and
disclosure of investments in financial assets, investments in associates,
joint
ventures, business combinations, and special purpose and variable interest
entities; |
b |
distinguish
between IFRS and U.S. GAAP in the classification, measurement, and
disclosure of investments in financial assets, investments in associates,
joint
ventures, business combinations, and special purpose and variable interest
entities; |
| c. |
analyze the
effects on financial ratios of the different methods used to account
for intercorporate investments. |
c |
analyze the
effects on financial ratios of the different methods used to account
for intercorporate investments. |
| 6 |
22 |
Employee
Compensation: Post-Employment and Share-Based |
a. |
discuss the
types of post-employment benefit plans and the implications for
financial reports; |
24 |
Employee
Compensation: Post-Employment and
Share-Based |
a |
discuss the
types of post-employment benefit plans and the implications for
financial reports; |
| b. |
explain the
measures of a defined benefit pension plan’s liability (i.e., defined
benefit obligation and projected benefit obligation); |
b |
explain the
measures of a defined benefit pension plan’s liability (i.e., defined
benefit obligation and projected benefit obligation); |
| c. |
describe the
components of a company’s defined benefit pension expense; |
c |
describe the
components of a company’s defined benefit pension expense; |
| d. |
explain the
impact of a defined benefit plan’s assumptions on the defined
benefit obligation and periodic expense; |
d |
explain the
impact of a defined benefit plan’s assumptions on the defined
benefit obligation and periodic expense; |
| e. |
explain
the impact on financial statements of International Financial Reporting
Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S.
GAAP)
for pension and other post-employment benefits that permit items to
be
reported in the footnotes |
e |
explain
the impact on financial statements of International Financial Reporting
Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S.
GAAP)
for pension and other post-employment benefits that permit items to
be
reported in the footnotes rather than in the financial statements; |
| f. |
evaluate pension
plan footnote disclosures including cash flow related
information; |
f |
evaluate pension
plan footnote disclosures including cash flow related
information; |
| g. |
evaluate the
underlying economic liability (or asset) of a company’s pension and
other post-employment benefits; |
g |
evaluate the
underlying economic liability (or asset) of a company’s pension and
other post-employment benefits; |
| h. |
calculate
the underlying economic pension expense (income) and other postemployment
expense (income) based on disclosures; |
h |
calculate the
underlying economic pension expense (income) and other postemployment
expense (income) based on disclosures; |
| i. |
discuss the
issues involved in accounting for share-based compensation; |
i |
discuss the
issues involved in accounting for share-based compensation; |
| j. |
explain the
impact on financial statements of accounting for stock grants and
stock options, and the importance of companies’ assumptions in valuing
these
grants and options. |
j |
explain the
impact on financial statements of accounting for stock grants and
stock options, and the importance of companies’ assumptions in valuing
these
grants and options. |
| 23 |
Multinational
Operations |
a. |
distinguish
among presentation currency, functional currency, and local currency; |
25 |
Multinational
Operations |
a |
distinguish
among presentation currency, functional currency, and local currency; |
| b. |
analyze the
impact of changes in exchange rates on the translated sales of the
subsidiary and parent company; |
b |
analyze the
impact of changes in exchange rates on the translated sales of the
subsidiary and parent company; |
| c. |
compare and
contrast the current rate method and the temporal method,
analyze and evaluate the effects of each on the parent company’s balance
sheet
and income statement, and determine which method is appropriate in various
scenarios; |
c |
compare and
contrast the current rate method and the temporal method,
analyze and evaluate the effects of each on the parent company’s balance
sheet
and income statement, and determine which method is appropriate in various
scenarios; |
| d. |
Calculate
the translation effects, evaluate the translation of a subsidiary�s
balance sheet and income statement into the parent company�s currency,
and analyze the differential effect of the current rate method and the
temporal method on the subsidiary�s financial ratios; |
d |
calculate
the translation effects, evaluate the translation of a subsidiary’s
balance
sheet and income statement into the parent company’s currency, and
analyze
the different effects of the current rate method and the temporal method
on the
subsidiary’s financial ratios; |
| e. |
analyze how
using the temporal method versus the current rate method will
affect the parent company’s financial ratios; |
e |
analyze how
using the temporal method versus the current rate method will
affect the parent company’s financial ratios; |
| f. |
illustrate
and analyze alternative accounting methods for subsidiaries operating
in hyperinflationary economies. |
f |
illustrate
and analyze alternative accounting methods for subsidiaries operating
in hyperinflationary economies. |
| 7 |
24 |
The
Lessons We Learn |
a. |
distinguish
among the various definitions of earnings (e.g., EBITDA, operating
earnings, net income, etc.); |
7 |
26 |
The
Lessons We Learn |
a |
distinguish
among the various definitions of earnings (e.g., EBITDA, operating
earnings, net income, etc.); |
| b. |
illustrate
how trends in cash flow from operations can be more reliable than
trends in earnings; |
b |
illustrate
how trends in cash flow from operations can be more reliable than
trends in earnings; |
| c. |
provide a
simplified description of the accounting treatment for derivatives being
used to hedge:
exposure to changes in the value of assets and liabilities,
exposure to variable cash flow, and
a foreign currency exposure of an instrument in a foreign corporation |
c |
provide a simplified
description of the accounting treatment for derivatives being
used to hedge
exposure to changes in the value of assets and liabilities,
exposure to variable cash flow, and
a foreign currency exposure of an instrument in a foreign corporation. |
| 25 |
Evaluating
Financial Reporting Quality |
a. |
contrast cash-basis
and accrual-basis accounting and explain why accounting
discretion exists in an accrual accounting system; |
27 |
Evaluating
Financial Reporting Quality |
a |
contrast cash-basis
and accrual-basis accounting and explain why accounting
discretion exists in an accrual accounting system; |
| b. |
describe the
relation between the level of accruals and the persistence of
earnings and the relative multiples that the cash and accrual components
of
earnings should rationally receive in valuation; |
b |
describe the
relation between the level of accruals and the persistence of
earnings and the relative multiples that the cash and accrual components
of
earnings should rationally receive in valuation; |
| c. |
discuss the
opportunities and motivations for management to intervene in the
external financial reporting process and the mechanisms that discipline
such
intervention; |
c |
discuss the
opportunities and motivations for management to intervene in the
external financial reporting process and the mechanisms that discipline
such
intervention; |
| d. |
discuss earnings
quality and the measures of earnings quality, and compare and
contrast the earnings quality of peer companies; |
d |
discuss earnings
quality and the measures of earnings quality, and compare and
contrast the earnings quality of peer companies; |
| e. |
explain mean
reversion in earnings and how the accruals component of earnings
affects the speed of mean reversion; |
e |
explain mean
reversion in earnings and how the accruals component of earnings
affects the speed of mean reversion; |
| f. |
discuss problems
with the quality of financial reporting, including revenue
recognition, expense recognition, balance sheet issues, and cash flow
statement
issues, and interpret warning signs of these potential problems. |
f |
discuss problems
with the quality of financial reporting, including revenue
recognition, expense recognition, balance sheet issues, and cash flow
statement
issues, and interpret warning signs of these potential problems. |
| 26 |
*Integration of Financial Statement Analysis *Techniques |
a. |
demonstrate
the use of a framework for the analysis of financial statements,
given a particular problem, question, or purpose (e.g., valuing equity
based on
comparables, critiquing a credit rating, obtaining a comprehensive picture
of
financial leverage, evaluating the perspectives given in management's
discussion of financial results); |
28 |
Integration
of Financial Statement Analysis Techniques |
a |
demonstrate
the use of a framework for the analysis of financial statements,
given a particular problem, question, or purpose (e.g., valuing equity
based on
comparables, critiquing a credit rating, obtaining a comprehensive picture
of
financial leverage, evaluating the perspectives given in management’s
discussion
of financial results); |
| b. |
identify financial
reporting choices and biases that affect the quality and
comparability of companies’ financial statements and illustrate how
such biases
affect financial decisions; |
b |
identify financial
reporting choices and biases that affect the quality and
comparability of companies’ financial statements and illustrate how
such biases
affect financial decisions; |
| c. |
adjustments
to improve quality and comparability with similar companies,
including adjustments for differences in accounting rules, methods,
and
assumptions; |
c |
evaluate
the quality of a company’s financial data and recommend appropriate
adjustments to improve quality and comparability with similar companies,
including adjustments for differences in accounting rules, methods,
and
assumptions; |
| d. |
predict the
impact on financial statements and ratios, given a change in
accounting rules, methods, or assumptions; |
d |
predict the
impact on financial statements and ratios, given a change in
accounting rules, methods, or assumptions; |
| e. |
analyze and
interpret the effects of balance sheet modifications, earnings
normalization, and cash-flow-statement-related modifications on a company’s
financial statements, financial ratios, and overall financial condition. |
e |
analyze and
interpret the effects of balance sheet modifications, earnings
normalization, and cash-flow-statement-related modifications on a company’s
financial statements, financial ratios, and overall financial condition. |
| 8 |
27 |
Capital
Budgeting |
a. |
compute the
yearly cash flows of an expansion capital project and a replacement
capital project and evaluate how the choice of depreciation method affects
those
cash flows; |
8 |
29 |
Capital
Budgeting |
a |
compute the
yearly cash flows of an expansion capital project and a replacement
capital project and evaluate how the choice of depreciation method affects
those
cash flows; |
| b. |
discuss the
effects of inflation on capital budgeting analysis; |
b |
discuss the
effects of inflation on capital budgeting analysis; |
| c. |
evaluate and
select the optimal capital project in situations of 1) mutually
exclusive projects with unequal lives, using either the least common
multiple of
lives approach or the equivalent annual annuity approach, and 2) capital
rationing; |
c |
evaluate and
select the optimal capital project in situations of 1) mutually
exclusive projects with unequal lives, using either the least common
multiple of
lives approach or the equivalent annual annuity approach, and 2) capital
rationing; |
| d. |
explain how
sensitivity analysis, scenario analysis, and Monte Carlo simulation
can be used to assess the stand-alone risk of a capital project; |
d |
explain how
sensitivity analysis, scenario analysis, and Monte Carlo simulation
can be used to assess the stand-alone risk of a capital project; |
| e. |
discuss the
procedure for determining the discount rate to be used in valuing a
capital project and calculate a project’s required rate of return
using the capital
asset pricing model (CAPM); |
e |
discuss the
procedure for determining the discount rate to be used in valuing a
capital project and calculate a project’s required rate of return
using the capital
asset pricing model (CAPM); |
| f. |
discuss the
types of real options and evaluate a capital project using real options; |
f |
discuss the
types of real options and evaluate a capital project using real options |
| g. |
discuss common
capital budgeting pitfalls; |
g |
discuss common
capital budgeting pitfalls; |
| h. |
calculate
and interpret accounting income and economic income in the context
of capital budgeting; |
h |
calculate and
interpret accounting income and economic income in the context
of capital budgeting; |
| i. |
differentiate
among and evaluate a capital project using the following valuation
models: economic profit, residual income, and claims valuation. |
i |
differentiate
among and evaluate a capital project using the following valuation
models: economic profit, residual income, and claims valuation. |
| 28 |
Capital
Structure and Leverage |
a. |
define
and explain leverage, business risk, sales risk, operating risk, and
financial
risk and classify a risk, given a description; |
30 |
Capital
Structure |
- |
- |
| b. |
calculate
and interpret the degree of operating leverage, the degree of financial
leverage, and the degree of total leverage; |
- |
- |
| c. |
calculate
the breakeven quantity of sales and determine the company’s net
income at various sales levels; |
- |
- |
| d. |
describe
the effect of financial leverage on a company’s net income and return
on equity; |
- |
- |
| e. |
compare
and contrast the risks of creditors and owners; |
- |
- |
| f. |
discuss the
Modigliani–Miller propositions concerning capital structure, including
the impact of leverage, taxes, financial distress, agency costs, and
asymmetric
information on a company’s cost of equity, cost of capital, and optimal
capital
structure; |
a |
discuss the
Modigliani–Miller propositions concerning capital structure, including
the impact of leverage, taxes, financial distress, agency costs, and
asymmetric
information on a company’s cost of equity, cost of capital, and optimal
capital
structure; |
| g. |
explain the
target capital structure and why actual capital structure may fluctuate
around the target; |
b |
explain the
target capital structure and why actual capital structure may fluctuate
around the target; |
| h. |
review the
role of debt ratings in capital structure policy; |
c |
review the
role of debt ratings in capital structure policy; |
| i. |
explain the
factors an analyst should consider in evaluating the impact of capital
structure policy on valuation; |
d |
explain the
factors an analyst should consider in evaluating the impact of capital
structure policy on valuation; |
| j. |
discuss international
differences in financial leverage and the implications for
investment analysis. |
e |
discuss international
differences in financial leverage and the implications for
investment analysis. |
| 29 |
Dividends
and Dividend Policy |
a. |
discuss
cash dividends, stock dividends, stocks splits, and reverse stock splits
and
evaluate their impact on a shareholder’s wealth; |
31 |
Dividends
and Share Repurchases: Analysis |
a |
compare
and contrast theories of dividend policy, and explain the implications
of
each for share value given a description of a corporate dividend action; |
| b. |
compare
the impact on shareholder wealth of a share repurchase with a cash
dividend of equal amount; |
b |
discuss
the types of information (signals) that dividend initiations, increases,
decreases, and omissions may convey; |
| c. |
calculate
the earnings per share effect of a share repurchase when the
repurchase is made with borrowed funds and the company’s after-tax
cost of
debt is greater (less) than its earnings yield; |
c |
illustrate
how clientele effects and agency issues may affect a company’s payout
policy; |
| d. |
calculate
the book value effect of a share repurchase when the market value of
a
share is greater (less) than book value per share; |
d |
discuss
the factors that affect dividend policy; |
| e. |
compare
and contrast share repurchase methods; |
e |
calculate
and interpret the effective tax rate on a given currency unit of corporate
earnings under double-taxation, split rate, and tax imputation dividend
tax
regimes; |
| f. |
review
dividend payment chronology including declaration, holder-of-record,
exdividend,
and payment dates and indicate when a dividend is reflected in the
share price; |
f |
compare
and contrast stable dividend, target payout, and residual dividend
payout policies, and calculate the dividend under each policy; |
| g. |
summarize
the factors affecting dividend payout policy; |
g |
discuss
the choice between paying cash dividends and repurchasing shares; |
| h. |
calculate
the effective tax rate on a dollar of corporate earnings distributed
as a
dividend using the double-taxation, split rate, and tax imputation systems; |
h |
discuss
global trends in corporate dividend policies; |
| i. |
discuss
the types of information that dividend initiations, increases, decreases,
and omissions may convey and cross-country differences in the signaling
content
of dividends; |
i |
calculate
and interpret dividend coverage ratios based on 1) net income and
2) free cash flow; |
| j. |
compare
and contrast the following dividend policies: residual dividend, longerterm
residual dividend, dividend stability, and target payout ratio; |
j |
discuss
the symptoms of companies that may not be able to sustain their cash
dividend. |
| k. |
calculate
a company’s expected dividend using the variables in the target payout
approach; |
- |
- |
| l. |
discuss
the rationales for share repurchases and explain the signals that share
repurchases may generate; |
- |
- |
| m. |
differentiate
among the schools of thought on dividends (dividend irrelevance,
dividend preference, and tax aversion) and discuss their implications
for
shareholder value and the price-to-earnings ratio; |
- |
- |
| n. |
demonstrate
how the initiation of a regular dividend payout might affect the
price-to-earnings multiple. |
- |
- |
| 9 |
30 |
Corporate
Governance |
a. |
explain corporate
governance, discuss the objectives and the core attributes of
an effective corporate governance system, and evaluate whether a company’s
corporate governance has those attributes; |
9 |
32 |
Corporate
Governance |
a |
explain corporate
governance, discuss the objectives and the core attributes of
an effective corporate governance system, and evaluate whether a company’s
corporate governance has those attributes; |
| b. |
compare and
contrast the major business forms and describe the conflicts of
interest associated with each; |
b |
compare and
contrast the major business forms and describe the conflicts of
interest associated with each; |
| c. |
discuss the
conflicts that arise in agency relationships, including
manager–shareholder conflicts and director–shareholder conflicts; |
c |
discuss the
conflicts that arise in agency relationships, including
manager–shareholder conflicts and director–shareholder conflicts; |
| d. |
describe the
responsibilities of the board of directors and explain the
qualifications and core competencies that an investment analyst should
look for
in the board of directors; |
d |
describe the
responsibilities of the board of directors and explain the
qualifications and core competencies that an investment analyst should
look for
in the board of directors; |
| e. |
illustrate
effective corporate governance practice as it relates to the board of
directors and evaluate the strengths and weaknesses of a company’s
corporate
governance practice; |
e |
illustrate
effective corporate governance practice as it relates to the board of
directors and evaluate the strengths and weaknesses of a company’s
corporate
governance practice; |
| f. |
describe the
elements of a company’s statement of corporate governance
policies that investment analysts should assess; |
f |
describe the
elements of a company’s statement of corporate governance
policies that investment analysts should assess; |
| g. |
discuss the
valuation implications of corporate governance. |
g |
discuss the
valuation implications of corporate governance. |
| 31 |
Mergers
and Acquisitions |
a. |
categorize
merger and acquisition (M&A) activities based on forms of integration
and types of mergers; |
33 |
Mergers
and Acquisitions |
a |
categorize
merger and acquisition (M&A) activities based on forms of integration
and types of mergers; |
| b. |
explain the
common motivations behind M&A activity; |
b |
explain the
common motivations behind M&A activity; |
| c. |
illustrate
how earnings per share (EPS) bootstrapping works and calculate a
company’s postmerger EPS; |
c |
illustrate
how earnings per share (EPS) bootstrapping works and calculate a
company’s postmerger EPS; |
| d. |
discuss the
relation between merger motivations and types of mergers based on
industry life cycles; |
d |
discuss the
relation between merger motivations and types of mergers based on
industry life cycles; |
| e. |
contrast merger
transaction characteristics by form of acquisition, method of
payment, and attitude of target management; |
e |
contrast merger
transaction characteristics by form of acquisition, method of
payment, and attitude of target management; |
| f. |
distinguish
and describe pre-offer and post-offer takeover defense mechanisms; |
f |
distinguish
and describe pre-offer and post-offer takeover defense mechanisms; |
| g. |
summarize
U.S. antitrust legislation; |
g |
summarize U.S.
antitrust legislation; |
| h. |
calculate
the Herfindahl–Hirschman Index and evaluate the likelihood of an
antitrust challenge for a given business combination; |
h |
calculate the
Herfindahl–Hirschman Index and evaluate the likelihood of an
antitrust challenge for a given business combination; |
| i. |
compare and
contrast the three major methods for valuing a target company,
including the advantages and disadvantages of each; |
i |
compare and
contrast the three major methods for valuing a target company,
including the advantages and disadvantages of each; |
| j. |
calculate
free cash flows for a target company and estimate the company’s
intrinsic value based on discounted cash flow analysis; |
j |
calculate free
cash flows for a target company and estimate the company’s
intrinsic value based on discounted cash flow analysis; |
| k. |
estimate the
intrinsic value of a company using comparable company analysis
and comparable transaction analysis; |
k |
estimate the
intrinsic value of a company using comparable company analysis
and comparable transaction analysis; |
| l. |
evaluate a
merger bid, calculate the estimated post-merger value of an acquirer,
and calculate the gains accrued to the target shareholders versus the
acquirer
shareholders; |
l |
evaluate a
merger bid, calculate the estimated post-merger value of an acquirer,
and calculate the gains accrued to the target shareholders versus the
acquirer
shareholders; |
| m. |
explain the
effects of price and payment method on the distribution of risks and
benefits in a merger transaction; |
m |
explain the
effects of price and payment method on the distribution of risks and
benefits in a merger transaction; |
| n. |
describe the
empirical evidence related to the distribution of benefits in a
merger; |
n |
describe the
empirical evidence related to the distribution of benefits in a
merger; |
| o. |
compare and
contrast divestitures, equity carve-outs, spin-offs, split-offs, and
liquidation; |
o |
compare and
contrast divestitures, equity carve-outs, spin-offs, split-offs, and
liquidation; |
| p. |
discuss the
major reasons for divestitures. |
p |
discuss the
major reasons for divestitures. |
| 10 |
32 |
A Note on Asset
Valuation |
- |
valuation
by Graham and Dodd and John Burr Williams are reflected in modern techniques
of equity valuation. (page 13) |
10 |
34 |
A Note on Asset
Valuation |
- |
valuation by
Graham and Dodd and John Burr Williams are reflected in modern
techniques of equity valuation. |
| 33 |
Equity
Valuation: Applications and Processes |
a. |
define valuation
and intrinsic value, and explain possible sources of perceived
mispricing; |
35 |
Equity
Valuation: Applications and Processes |
a |
define valuation
and intrinsic value, and explain possible sources of perceived
mispricing; |
| b. |
explain the
going-concern assumption, contrast a going concern value to a
liquidation value, and identify the definition of value most relevant
to public
company valuation; |
b |
explain the
going concern assumption, contrast a going concern value to a
liquidation value, and identify the definition of value most relevant
to public
company valuation; |
| c. |
discuss the
uses of equity valuation; |
c |
discuss the
uses of equity valuation; |
| d. |
explain the
elements of industry and competitive analysis and the importance of
evaluating the quality of financial statement information; |
d |
explain the
elements of industry and competitive analysis and the importance of
evaluating the quality of financial statement information; |
| e. |
contrast absolute
and relative valuation models, and describe examples of each
type of model; |
e |
contrast absolute
and relative valuation models, and describe examples of each
type of model; |
| f. |
illustrate
the broad criteria for choosing an appropriate approach for valuing
a
given company. |
f |
illustrate
the broad criteria for choosing an appropriate approach for valuing
a
given company. |
| 34 |
Equity:
Markets and Instruments |
a. |
explain
the origins of different national market organizations; |
36 |
Equity:
Markets and Instruments |
a |
explain
the historical differences in market organization; |
| b. |
differentiate
between an order-driven market and a price-driven market and
explain the risks and advantages of each; |
b |
differentiate
between an order-driven market and a price-driven market, and
explain the risks and advantages of each; |
| c. |
calculate
the impact of different national taxes on the return of an international
investment; |
c |
calculate the
impact of different national taxes on the return of an international
investment; |
| d. |
discuss
the various components of execution costs (i.e., commissions and fees,
market impact, and opportunity cost) and approaches to reducing these
costs; |
d |
discuss
components of execution costs (including commissions and fees, market
impact, and opportunity cost) and approaches to reducing these costs; |
| e. |
describe an
American Depositary Receipt (ADR) and differentiate among the
various forms of ADRs in terms of trading and information supplied by
the listed
company; |
e |
describe an
American Depositary Receipt (ADR), and differentiate among the
various forms of ADRs in terms of trading and information supplied by
the listed
company; |
| f. |
explain
why companies choose to be listed abroad and calculate the cost tradeoff
between buying shares listed abroad and buying ADRs; |
f |
explain
why companies choose to be listed abroad, and calculate the cost
difference between buying shares listed abroad and buying ADRs; |
| g. |
state the
determinants of the value of a closed-end country fund; |
g |
state the determinants
of the value of a closed-end country fund; |
| h. |
discuss
the advantages of exchange-traded funds (ETFs) and explain the pricing
of international ETFs in relation to their net asset value (NAV); |
h |
describe
exchange-traded funds (ETFs), and explain the pricing of international
ETFs in relation to their net asset value (NAV); |
| i. |
discuss
the advantages and disadvantages of the various alternatives to direct
international investing. |
i |
discuss
the advantages and disadvantages of alternatives to direct international
investing. |
| 35 |
Return
Concepts |
a. |
distinguish
among the following return concepts: holding period return, realized
return and expected return, required return, discount rate, the return
from
convergence of price to intrinsic value (given that price does not equal
value),
and internal rate |
37 |
Return
Concepts |
a |
distinguish
among expected holding period return, realized holding period
return, required return, return from convergence of price to intrinsic
value,
discount rate, and internal rate of return; |
| b. |
explain
the equity risk premium and its use in required return determination,
and
demonstrate the use of historical and forward-looking estimation approaches; |
b |
calculate
and interpret an equity risk premium using historical and forwardlooking
estimation approaches; |
| c. |
discuss
the strengths and weaknesses of methods used to estimate the equity
risk premium;
|
- |
- |
| d. |
Demonstrate
the use of the capital asset pricing model (CAPM), the Fama�French
model (FFM), the Pastor�Stambaugh model (PSM), macroeconomic multifactor
models, and the build-up method (including bond yield plus risk premium
method) for estimating the required return on an equity investment; |
c |
demonstrate
the use of the capital asset pricing model (CAPM), the Fama–French
model (FFM), the Pastor–Stambaugh model (PSM), macroeconomic multifactor
models, and the build-up method (for example, bond yield plus risk premium)
for
estimating the required return on an equity investment; |
| e. |
discuss beta
estimation for public companies, thinly traded public companies,
and nonpublic companies; |
d |
discuss beta
estimation for public companies, thinly traded public companies,
and nonpublic companies; |
| f. |
analyze the
strengths and weaknesses of methods used to estimate the required
return on an equity investment; |
e |
analyze the
strengths and weaknesses of methods used to estimate the required
return on an equity investment; |
| g. |
discuss international
considerations in required return estimation; |
f |
discuss international
considerations in required return estimation; |
| h. |
explain and
calculate the weighted average cost of capital for a company; |
g |
explain and
calculate the weighted average cost of capital for a company; |
| i. |
evaluate the
appropriateness of using a particular rate of return as a discount
rate, given a description of the cash flow to be discounted and other
relevant
facts. |
h |
evaluate the
appropriateness of using a particular rate of return as a discount
rate, given a description of the cash flow to be discounted and other
relevant
facts. |
| 11 |
36 |
Equity:
Concepts and Techniques |
a. |
discuss
common issues that arise when investing internationally (e.g., differences
in accounting standards); |
11 |
38 |
Equity:
Concepts and Techniques |
- |
- |
| b. |
distinguish
between country analysis and industry analysis and compare and
evaluate key concepts of industry analysis, such as demand analysis,
industry life
cycle analysis, and competition structure analysis, as well as risk
elements
inherent in industry |
a |
distinguish
between country analysis and industry analysis, and evaluate an
industry’s demand, life cycle, competition structure, and risk elements; |
| c. |
evaluate
the common approaches of equity analysis (ratio analysis and
discounted cash flow models, including the franchise value model) and
identify
mispriced stocks using either method; |
b |
discuss
approaches to equity analysis (ratio analysis and discounted cash flow
models, including the franchise value model); |
| d. |
analyze the
effects of inflation on asset valuation; |
c |
analyze the
effects of inflation on asset valuation; |
| e. |
discuss multifactor
models in a global context. |
d |
discuss multifactor
models in a global context. |
| 37 |
The
Five Competitive Forces that Shape Strategy |
a. |
distinguish
among the five competitive forces that drive industry profitability
in
the medium and long run; |
39 |
The
Five Competitive Forces That Shape Strategy |
a |
distinguish
among the five competitive forces that drive industry profitability
in
the medium and long run; |
| b. |
illustrate
how the competitive forces drive industry profitability; |
b |
illustrate
how the competitive forces drive industry profitability; |
| c. |
describe why
industry growth rate, technology and innovation, government, and
complementary products and services are fleeting factors rather than
forces
shaping industry structure; |
c |
describe why
industry growth rate, technology and innovation, government, and
complementary products and services are fleeting factors rather than
forces
shaping industry structure; |
| d. |
indicate why
eliminating rivals is a risky strategy; |
d |
indicate why
eliminating rivals is a risky strategy; |
| e. |
show how positioning
a company, exploiting industry change, and the ability to
shape industry structure are creative strategies for achieving a competitive
advantage. |
e |
show how positioning
a company, exploiting industry change, and the ability to
shape industry structure are creative strategies for achieving a competitive
advantage. |
| 38 |
Industry
Analysis |
a. |
discuss the
key components that should be included in an industry analysis
model; |
40 |
Industry
Analysis |
a |
discuss the
key components that should be included in an industry analysis
model; |
| b. |
illustrate
the life cycle of a typical industry; |
b |
illustrate
the life cycle of a typical industry; |
| c. |
analyze the
effects of business cycles on industry classification (i.e., growth,
defensive, cyclical); |
c |
analyze the
effects of business cycles on industry classification (i.e., growth,
defensive, cyclical); |
| d. |
analyze the
impact of external factors (e.g., technology, government, foreign
influences, demography, and social changes) on industries; |
d |
analyze the
impact of external factors (e.g., technology, government, foreign
influences, demography, and social changes) on industries; |
| e. |
illustrate
the inputs and methods used in preparing industry demand and supply
analyses; |
e |
illustrate
the inputs and methods used in preparing industry demand and supply
analyses; |
| f. |
explain factors
that affect industry pricing practices. |
f |
explain factors
that affect industry pricing practices. |
| 39 |
Valuation
in Emerging Markets |
a. |
describe how
inflation affects the estimation of cash flows for a company
domiciled in an emerging market; |
41 |
Valuation
in Emerging Markets |
a |
describe how
inflation affects the estimation of cash flows for a company
domiciled in an emerging market; |
| b. |
calculate
nominal and real-term financial projections to prepare a discounted
cash flow valuation of an emerging market company; |
b |
evaluate
an emerging market company using a discounted cash flow model
based on nominal and real financial projections; |
| c. |
discuss the
arguments for adjusting cash flows, rather than adjusting the
discount rate, to account for emerging market risks (e.g., inflation,
macroeconomic volatility, capital control, and political risk) in a
scenario analysis; |
c |
discuss the
arguments for adjusting cash flows, rather than adjusting the
discount rate, to account for emerging market risks (e.g., inflation,
macroeconomic volatility, capital control, and political risk) in a
scenario analysis; |
| d. |
estimate the
cost of capital for emerging market companies and calculate and
interpret a country risk premium. |
d |
estimate the
cost of capital for emerging market companies, and calculate and
interpret a country risk premium. |
| 40 |
Discounted
Dividend Valuation |
a. |
compare
and contrast dividends, free cash flow, and residual income as
measures of cash flow in discounted cash flow valuation, and identify
the
investment situations for which each measure is suitable; |
42 |
Discounted
Dividend Valuation |
a |
compare
and contrast dividends, free cash flow, and residual income as
alternative measures in discounted cash flow models, and identify the
investment
situations for which each measure is suitable; |
| b. |
determine
whether a dividend discount model (DDM) is appropriate for valuing a
stock; |
b |
calculate
and interpret the value of a common stock using the dividend discount
model (DDM) for one-, two-, and multiple-period holding periods |
| c. |
calculate
the value of a common stock using the DDM for one-, two-, and
multiple-period holding periods; |
- |
- |
| d. |
calculate
the value of a common stock using the Gordon growth model and
explain the model’s underlying assumptions; |
c |
calculate the
value of a common stock using the Gordon growth model, and
explain the model’s underlying assumptions; |
| e. |
calculate
the implied growth rate of dividends using the Gordon growth model
and current stock price; |
d |
calculate the
implied growth rate of dividends using the Gordon growth model
and current stock price; |
| f. |
calculate
and interpret the present value of growth opportunities (PVGO) and the
component of the leading price-to-earnings ratio (P/E) related to PVGO,
given
no-growth earnings per share, earnings per share, the required rate
of return,
and the market pr |
e |
calculate
and interpret the present value of growth opportunities (PVGO) and the
component of the leading price-to-earnings ratio (P/E) related to PVGO; |
| g. |
calculate
the justified leading and trailing P/Es based on fundamentals using
the
Gordon growth model; |
f |
calculate
the justified leading and trailing P/Es using the Gordon growth model; |
| h. |
calculate
the value of noncallable fixed-rate perpetual preferred stock given
the
stock’s annual dividend and the discount rate; |
g |
calculate
the value of noncallable fixed-rate perpetual preferred stock; |
| i. |
explain
the strengths and limitations of the Gordon growth model and justify
the
selection of the Gordon growth model to value a company’s common shares,
given the characteristics of the company being valued; |
h |
explain
the strengths and limitations of the Gordon growth model, and justify
its
selection to value a company’s common shares; |
| j. |
explain
the assumptions and justify the selection of the two-stage DDM, the
Hmodel,
the three-stage DDM, or spreadsheet modeling to value a company’s
common shares, given the characteristics of the company being valued; |
i |
explain
the assumptions and justify the selection of the two-stage DDM, the
H-model, the three-stage DDM, or spreadsheet modeling to value a company’s
common shares; |
| k. |
explain the
growth phase, transitional phase, and maturity phase of a business; |
j |
explain the
growth phase, transitional phase, and maturity phase of a business; |
| l. |
explain terminal
value and discuss alternative approaches to determining the
terminal value in a discounted dividend model; |
k |
explain terminal
value, and discuss alternative approaches to determining the
terminal value in a DDM; |
| m. |
calculate
the value of common shares using the two-stage DDM, the H-model,
and the three-stage DDM; |
l |
calculate
and interpret the value of common shares using the two-stage DDM,
the H-model, and the three-stage DDM; |
| n. |
explain
how to estimate a required return based on any DDM, and calculate that
return using the Gordon growth model and the H-model; |
m |
estimate
a required return based on any DDM, the Gordon growth model, and
the H-model; |
| o. |
define,
calculate, and interpret the sustainable growth rate of a company,
explain the calculation’s underlying assumptions, and demonstrate
the use of the
DuPont analysis of return on equity in conjunction with the sustainable
growth
rate expression; |
n |
calculate
and interpret the sustainable growth rate of a company, and
demonstrate the use of DuPont analysis to estimate a company’s sustainable
growth rate; |
| p. |
illustrate
the use of spreadsheet modeling to forecast dividends and value
common shares. |
o |
illustrate
the use of spreadsheet modeling to forecast dividends and value
common shares; |
| - |
- |
p |
evaluate
whether a stock is overvalued, fairly valued, or undervalued by the
market based on a DDM estimate of value. |
| 12 |
41 |
Free
Cash Flow Valuation |
a. |
interpret
free cash flow to the firm (FCFF) and free cash flow to equity (FCFE); |
12 |
43 |
Free
Cash Flow Valuation |
a |
compare
and contrast the free cash flow to the firm (FCFF) and free cash flow
to
equity (FCFE) approaches to valuation; |
| b. |
compare
and contrast the FCFF and FCFE approaches to valuation;
|
- |
- |
| c. |
contrast the
ownership perspective implicit in the FCFE approach to the
ownership perspective implicit in the dividend discount approach; |
b |
contrast the
ownership perspective implicit in the FCFE approach to the
ownership perspective implicit in the dividend discount approach; |
| d. |
discuss the
appropriate adjustments to net income, earnings before interest and
taxes (EBIT), earnings before interest, taxes, depreciation, and amortization
(EBITDA), and cash flow from operations (CFO) to calculate FCFF and
FCFE; |
c |
discuss the
appropriate adjustments to net income, earnings before interest and
taxes (EBIT), earnings before interest, taxes, depreciation, and amortization
(EBITDA), and cash flow from operations (CFO) to calculate FCFF and
FCFE; |
| e. |
calculate
FCFF and FCFE when given a company’s financial statements prepared
according to International Financial Reporting Standards (IFRS) or U.S.
generally
accepted accounting principles (GAAP); |
d |
calculate
FCFF and FCFE; |
| f. |
discuss approaches
for forecasting FCFF and FCFE; |
e |
discuss approaches
for forecasting FCFF and FCFE; |
| g. |
contrast
the recognition of value in the FCFE model to the recognition of value
in
dividend discount models; |
f |
contrast
the recognition of value in the FCFE model with the recognition of value
in dividend discount models; |
| h. |
explain
how dividends, share repurchases, share issues, and changes in leverage
may affect FCFF and FCFE; |
g |
explain
how dividends, share repurchases, share issues, and changes in leverage
may affect future FCFF and FCFE; |
| i. |
critique the
use of net income and EBITDA as proxies for cash flow in valuation; |
h |
critique the
use of net income and EBITDA as proxies for cash flow in valuation; |
| j. |
discuss
the single-stage (stable-growth), two-stage, and three-stage FCFF and
FCFE models (including assumptions) and explain the company characteristics
that justify the use of each model; |
i |
discuss
the single-stage (stable-growth), two-stage, and three-stage FCFF and
FCFE models, and select and justify the appropriate model given a company’s
characteristics; |
| k. |
calculate
the value of a company using the stable-growth, two-stage, and threestage
FCFF and FCFE models; |
j |
estimate
a company’s value using the appropriate model(s); |
| l. |
explain
how sensitivity analysis can be used in FCFF and FCFE valuations; |
k |
explain
the use of sensitivity analysis in FCFF and FCFE valuations; |
| m. |
discuss approaches
for calculating the terminal value in a multistage valuation
model; |
l |
discuss approaches
for calculating the terminal value in a multistage valuation
model. |
| n. |
describe
the characteristics of companies for which the FCFF model is preferred
to the FCFE model. |
- |
- |
| 42 |
Market-Based
Valuation: Price and *Enterprise Value Multiples |
a. |
distinguish
among types of valuation indicators; |
44 |
Market-Based
Valuation: Price and Enterprise Value
Multiples |
a |
differentiate
between the method of comparables and the method based on
forecasted fundamentals as approaches to using price multiples in valuation,
and
discuss the economic rationales for each approach; |
| b. |
distinguish
between the method of comparables and the method based on
forecasted fundamentals as approaches to using price multiples in valuation,
and
discuss the economic rationales for each; |
b |
define
and interpret a justified price multiple; |
| c. |
describe
a justified price multiple and discuss rationales for each price multiple
and dividend yield in valuation; |
c |
discuss
rationales for and possible drawbacks to using price multiples (including
P/E, P/B, P/S, P/CF) and dividend yield in valuation; |
| d. |
discuss
the drawbacks to the use of each price multiple and dividend yield; |
d |
calculate
and interpret alternative price multiples and dividend yield; |
| e. |
calculate
and interpret each price multiple and dividend yield; |
e |
calculate
and interpret underlying earnings; |
| f. |
describe,
calculate, and interpret underlying earnings, given earnings per share
(EPS) and nonrecurring items in the income statement; |
f |
discuss
methods of normalizing EPS, and calculate normalized EPS; |
| g. |
discuss
normalized EPS and the methods of normalizing EPS and calculate
normalized EPS by each method; |
g |
explain
and justify the use of earnings yield (E/P); |
| h. |
explain
and justify the use of earnings yield (i.e., EPS divided by share price); |
- |
- |
| i. |
discuss
the fundamental factors that influence each price multiple and dividend
yield; |
h |
discuss
the fundamental factors that influence alternative price multiples and
dividend yield; |
| j. |
calculate
and interpret the justified price-to-earnings ratio (P/E), price-to-book
ratio, and price-to-sales ratio for a common stock, based on forecasted
fundamentals; |
i |
calculate
and interpret the justified price-to-earnings ratio (P/E), price-to-book
ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted
fundamentals; |
| k. |
calculate
and interpret a predicted P/E, given a cross-sectional regression on
fundamentals, and explain limitations to the cross-sectional regression
methodology; |
j |
calculate and
interpret a predicted P/E, given a cross-sectional regression on
fundamentals, and explain limitations to the cross-sectional regression
methodology; |
| l. |
explain
the benchmark value of a multiple; |
k |
evaluate
a stock by the method of comparables, and explain the importance of
fundamentals in using the method of comparables; |
| m. |
evaluate
a stock using the method of comparables; |
- |
- |
| n. |
discuss
the importance of fundamentals in the method of comparables; |
- |
- |
| o. |
calculate
and interpret the P/E-to-growth (PEG) ratio and explain its use in
relative valuation; |
l |
calculate and
interpret the P/E-to-growth ratio (PEG), and explain its use in
relative valuation; |
| p. |
calculate
and explain the use of price multiples to determine terminal value in
a
multistage discounted cash flow model; |
m |
calculate
and explain the use of price multiples in determining terminal value
in a
multistage discounted cash flow (DCF) model; |
| q. |
discuss
alternative definitions of cash flow used in price and enterprise value
multiples (including enterprise value to earnings before interest, taxes,
depreciation, and amortization EV/EBITDA), and explain the limitations
of each; |
n |
discuss
alternative definitions of cash flow used in price and enterprise value
multiples, and explain the limitations of each definition; |
| r. |
calculate
and interpret enterprise value multiples and discuss the rationales
for,
and drawbacks to, the use of EV/EBITDA; |
o |
calculate
and interpret enterprise value multiples, and critique the use of
EV/EBITDA; |
| s. |
discuss the
sources of differences in cross-border valuation comparisons; |
p |
discuss the
sources of differences in cross-border valuation comparisons; |
| t. |
describe
the main types of momentum indicators and their use in valuation; |
q |
describe
momentum indicators and their use in valuation; |
| |
|
r |
evaluate whether
a stock is overvalued, fairly valued, or undervalued based on
comparisons of multiples; |
| u. |
discuss the
use of the arithmetic mean, the harmonic mean, the weighted
harmonic mean, and the median to describe the central tendency of a
group of
multiples; |
s |
discuss the
use of the arithmetic mean, the harmonic mean, the weighted
harmonic mean, and the median to describe the central tendency of a
group of
multiples; |
| v. |
explain the
use of stock screens in investment management. |
t |
explain the
use of stock screens in investment management. |
| 43 |
Residual
Income Valuation |
a. |
calculate
and interpret residual income and related measures (e.g., economic
value added and market value added); |
45 |
Residual
Income Valuation |
a |
calculate
and interpret residual income, economic value added, and market value
added; |
| b. |
discuss
the use of residual income models; |
b |
discuss
the uses of residual income models; |
| c. |
calculate
future values of residual income given current book value, earnings
growth estimates, and an assumed dividend payout ratio; |
c |
calculate
the intrinsic value of a common stock using the residual income model,
and contrast the recognition of value in the residual income model to
value
recognition in other present value models; |
| d. |
discuss the
fundamental determinants of residual income; |
d |
discuss the
fundamental determinants of residual income; |
| e. |
explain the
relation between residual income valuation and the justified price-tobook
ratio based on forecasted fundamentals; |
e |
explain the
relation between residual income valuation and the justified price-tobook
ratio based on forecasted fundamentals; |
| f. |
calculate
and interpret the intrinsic value of a common stock using a single-stage
(constant-growth) residual income model; |
f |
calculate
and interpret the intrinsic value of a common stock using single-stage
(constant-growth) and multistage residual income models; |
| g. |
calculate
an implied growth rate in residual income, given the market price-tobook
ratio and an estimate of the required rate of return on equity;\ |
g |
calculate an
implied growth rate in residual income given the market price-tobook
ratio and an estimate of the required rate of return on equity; |
| h. |
explain
continuing residual income and the common assumptions regarding
continuing residual income; |
h |
explain
continuing residual income and justify an estimate of continuing residual
income at the forecast horizon given company and industry prospects; |
| i. |
justify
an estimate of continuing residual income at the forecast horizon, given
company and industry prospects; |
i |
compare
and contrast the residual income model to the dividend discount and
free cash flow to equity models; |
| j. |
calculate
and interpret the intrinsic value of a common stock using a multistage
residual income model, given the required rate of return, forecasted
earnings per
share over a finite horizon, and forecasted continuing residual earnings; |
j |
discuss
the strengths and weaknesses of the residual income model; |
| k. |
compare
the residual income model to the dividend discount and free cash flow
to equity models; |
k |
justify
the selection of the residual income model to value a company’s common
stock; |
| l. |
contrast
the recognition of value in the residual income model to value
recognition in other present value models; |
l |
discuss
accounting issues in applying residual income models; |
| m. |
discuss
the strengths and weaknesses of the residual income model; |
m |
evaluate
whether a stock is overvalued, fairly valued, or undervalued by the
market based on a residual income model. |
| n. |
justify
the selection of the residual income model for equity valuation, given
the
characteristics of the company being valued; |
- |
- |
| o. |
discuss
accounting issues in applying residual income models (e.g., clean surplus
violations, variations from fair value, intangible asset effects on
book value, and
nonrecurring items) and the appropriate analyst response to each issue. |
- |
- |
| 44 |
Private
Company Valuation |
a. |
compare and
contrast public and private company valuation; |
46 |
Private
Company Valuation |
a |
compare and
contrast public and private company valuation; |
| b. |
explain
the reasons for valuing the total capital and/or equity capital of private
companies; |
b |
discuss
the uses of private business valuation, and explain applications of
greatest
concern to financial analysts; |
| c. |
explain
the role of definitions (standards) of value, explain the different
definitions of value, and illustrate how different definitions can lead
to different
estimates of value; |
c |
explain
alternative definitions of value, and demonstrate how different
definitions can lead to different estimates of value; |
| d. |
discuss
the three major approaches to private company valuation; |
d |
discuss
the income, market, and asset-based approaches to private company
valuation and the factors relevant to the selection of each approach; |
| e. |
demonstrate
the adjustments required to estimate the normalized earnings
and/or cash flow for a private company, from the perspective of either
a strategic
or nonstrategic (financial) buyer, and explain cash flow estimation
issues; |
e |
discuss
cash flow estimation issues related to private companies and the
adjustments required to estimate normalized earnings; |
| f. |
demonstrate
the methods under the income approach to private company
valuation, including the free cash flow method, capitalized cash flow
method,
and excess earnings method; |
f |
demonstrate
the free cash flow, capitalized cash flow, and excess earnings
methods of private company valuation; |
| g. |
explain
the specific elements of discount rate estimation that are relevant
in
valuing the total capital or equity capital of a private company; |
g |
discuss
factors that require adjustment when estimating the discount rate for
private companies; |
| h. |
compare
and contrast models used to estimate the required rate of return to
private company equity (e.g., the CAPM, the expanded CAPM, and the build-up
method), and discuss the issues related to using each; |
h |
compare
and contrast models used to estimate the required rate of return to
private company equity (for example, the CAPM, the expanded CAPM, and
the
build-up approach); |
| i. |
demonstrate
the market approaches to private company valuation (i.e., the
guideline public company method, the guideline transactions method,
and the
prior transaction method), and discuss the advantages and disadvantages
of
each; |
i |
demonstrate
the market approaches to private company valuation (for example,
guideline public company method, guideline transaction method, and prior
transaction method), and discuss the advantages and disadvantages of
each; |
| j. |
demonstrate
the asset-based approach to private company valuation; |
j |
demonstrate
the asset-based approach to private company valuation; |
| k. |
demonstrate
the use of discounts and premiums in private company valuation; |
k |
discuss
the use of discounts and premiums in private company valuation; |
| l. |
explain
the role of valuation standards in the valuation of private companies. |
l |
describe
the role of valuation standards in valuing private companies. |
| 13 |
45 |
Investment
Analysis |
a. |
illustrate,
for each type of real property investment, the main value determinants,
investment characteristics, principal risks, and most likely investors; |
13 |
47 |
Investment
Analysis |
a |
illustrate,
for each type of real property investment, the main value determinants,
investment characteristics, principal risks, and most likely investors; |
| b. |
evaluate a
real estate investment using net present value (NPV) and internal rate
of return (IRR) from the perspective of an equity investor; |
b |
evaluate a
real estate investment using net present value (NPV) and internal rate
of return (IRR) from the perspective of an equity investor; |
| c. |
calculate
the after-tax cash flow and the after-tax equity reversion from real
estate properties; |
c |
calculate the
after-tax cash flow and the after-tax equity reversion from real
estate properties; |
| d. |
explain the
potential problems associated with using IRR as a measurement tool
in real estate investments. |
d |
explain the
potential problems associated with using IRR as a measurement tool
in real estate investments. |
| 46 |
Income
Property Analysis and Appraisal |
a. |
explain the
relation between a real estate capitalization rate and a discount rate; |
48 |
Income
Property Analysis and Appraisal |
a |
explain the
relation between a real estate capitalization rate and a discount rate |
| b. |
determine
the capitalization rate by the market-extraction method, band-ofinvestment
method, and built-up method, and justify each method’s use in
capitalization rate determination; |
b |
determine the
capitalization rate by the market-extraction method, band-ofinvestment
method, and built-up method, and justify each method’s use in
capitalization rate determination; |
| c. |
estimate the
market value of a real estate investment using the direct income
capitalization approach and the gross income multiplier technique; |
c |
estimate the
market value of a real estate investment using the direct income
capitalization approach and the gross income multiplier technique; |
| d. |
contrast the
limitations of the direct capitalization approach to those of the gross
income multiplier technique. |
d |
contrast the
limitations of the direct capitalization approach to those of the gross
income multiplier technique. |
| 47 |
Private
Equity Valuation |
a. |
explain the
sources of value creation in private equity; |
49 |
Private
Equity Valuation |
a |
explain the
sources of value creation in private equity; |
| b. |
explain how
private equity firms align their interests with those of the managers
of portfolio companies; |
b |
explain how
private equity firms align their interests with those of the managers
of portfolio companies; |
| c. |
distinguish
between the characteristics of buyout and venture capital
investments; |
c |
distinguish
between the characteristics of buyout and venture capital
investments; |
| d. |
discuss the
valuation issues in buyout and venture capital transactions; |
d |
discuss the
valuation issues in buyout and venture capital transactions; |
| e. |
explain alternative
exit routes in private equity and their impact on value; |
e |
explain alternative
exit routes in private equity and their impact on value; |
| f. |
explain private
equity fund structures, terms, valuation, and due diligence in the
context of an analysis of private equity fund returns; |
f |
explain private
equity fund structures, terms, valuation, and due diligence in the
context of an analysis of private equity fund returns; |
| g. |
explain the
risks and costs of investing in private equity; |
g |
explain the
risks and costs of investing in private equity; |
| h. |
interpret
and compare financial performance of private equity funds from the
perspective of an investor; |
h |
interpret and
compare financial performance of private equity funds from the
perspective of an investor; |
| i. |
calculate
management fees, carried interest, net asset value, distributed to paid
in (DPI), residual value to paid in (RVPI), and total value to paid
in (TVPI) of a
private equity fund; |
i |
calculate management
fees, carried interest, net asset value, distributed to paid
in (DPI), residual value to paid in (RVPI), and total value to paid
in (TVPI) of a
private equity fund; |
| |
A Note on
the Valuation of Venture Capital Deals:
(Reading Appendix 47A) |
- |
- |
| j. |
calculate
pre-money valuation, post-money valuation, ownership fraction, and
price per share applying the venture capital method 1) with single and
multiple
financing rounds and 2) in terms of IRR;
|
j |
calculate pre-money
valuation, post-money valuation, ownership fraction, and
price per share applying the venture capital method 1) with single and
multiple
financing rounds and 2) in terms of IRR; |
| k. |
demonstrate
alternative methods to account for risk in venture capital; |
k |
demonstrate
alternative methods to account for risk in venture capital. |
| |
Technical
Notes on LBO Valuation—(A) and (B):
(Reading Appendix 47B) |
- |
- |
| l. |
calculate
and interpret free cash flow forecasts in a leveraged buyout (LBO)
transaction; |
- |
- |
| m. |
explain
the role of cash sweep in an LBO transaction; |
- |
- |
| n. |
explain
how private equity firms manage their exit routes in LBO companies; |
- |
- |
| o. |
explain
and calculate the value of the equity investment in an LBO company
under the target IRR and equity cash flow methods of valuation. |
- |
- |
| 48 |
Investing
in Commodities |
a. |
explain why
some commodity futures such as gold have limited “contango,”
whereas others such as oil often have natural “backwardation,” and
indicate
why these conditions might be less prevalent in the future; |
50 |
Investing
in Commodities |
a |
explain why
commodity futures such as gold have limited “contango,” whereas
others such as oil often have natural “backwardation,” and indicate
why these
conditions might be less prevalent in the future; |
| b. |
discuss how
“roll yield” in a commodity futures position can be positive
(negative); |
b |
discuss how
“roll yield” in a commodity futures position can be positive
(negative); |
| c. |
discuss the
argument that commodity futures are not an asset class; |
c |
discuss the
argument that commodity futures are not an asset class; |
| d. |
demonstrate
how the geometric return of an actively managed commodity
basket can be positive, whereas the underlying average commodity has
a
geometric return near zero; |
d |
demonstrate
how the geometric return of an actively managed commodity
basket can be positive, whereas the underlying average commodity has
a
geometric return near zero; |
| e. |
discuss why
investing in commodities offers diversification opportunities during
periods of economic fluctuation in the short run and inflation in the
long run. |
e |
discuss why
investing in commodities offers diversification opportunities during
periods of economic fluctuation in the short run and inflation in the
long run. |
| 49 |
Evaluating
the Performance of Your Hedge Funds |
a. |
discuss how
the characteristics of hedge funds affect traditional methods of
performance measurements; |
51 |
Evaluating
the Performance of Your Hedge Funds |
a |
discuss how
the characteristics of hedge funds affect traditional methods of
performance measurements; |
| b. |
compare and
contrast the use of market indices, hedge fund indices, and positive
risk-free rates to evaluate hedge fund performance. |
b |
compare and
contrast the use of market indices, hedge fund indices, and positive
risk-free rates to evaluate hedge fund performance. |
| 50 |
Buyers
Beware: Evaluating and Managing the Many Facets of the Risks of Hedge
Funds |
a. |
discuss common
types of investment risks for hedge funds; |
52 |
Buyers Beware:
Evaluating and Managing the Many Facets
of the Risks of Hedge Funds |
a |
discuss common
types of investment risks for hedge funds; |
| b. |
evaluate maximum
drawdown and value-at-risk for measuring risks of hedge
funds. |
|
b |
evaluate maximum
drawdown and value-at-risk for measuring risks of hedge
funds. |
| 14 |
51 |
General
Principles of Credit Analysis |
a. |
distinguish
among default risk, credit spread risk, and downgrade risk; |
14 |
53 |
General
Principles of Credit Analysis |
a |
distinguish
among default risk, credit spread risk, and downgrade risk; |
| b. |
explain and
analyze the key components of credit analysis; |
b |
explain and
analyze the key components of credit analysis; |
| c. |
calculate
and interpret the key financial ratios used by credit analysts; |
c |
calculate and
interpret the key financial ratios used by credit analysts; |
| d. |
evaluate the
credit quality of an issuer of a corporate bond, given such data as
key financial ratios for the issuer and the industry; |
d |
evaluate the
credit quality of an issuer of a corporate bond, given such data as
key financial ratios for the issuer and the industry; |
| e. |
analyze why
and how cash flow from operations is used to assess the ability of
an issuer to service its debt obligations and to assess the financial
flexibility of a
company; |
e |
analyze why
and how cash flow from operations is used to assess the ability of
an issuer to service its debt obligations and to assess the financial
flexibility of a
company; |
| f. |
explain and
interpret the typical elements of the corporate structure and debt
structure of a high-yield issuer and the effect of these elements on
the risk
position of the lender; |
f |
explain and
interpret the typical elements of the corporate structure and debt
structure of a high-yield issuer and the effect of these elements on
the risk
position of the lender; |
| g. |
discuss the
factors considered by rating agencies in rating asset-backed
securities; |
g |
discuss the
factors considered by rating agencies in rating asset-backed
securities; |
| h. |
explain how
the credit worthiness of municipal bonds is assessed and contrast
the analysis of tax-backed debt with the analysis of revenue obligations; |
h |
explain how
the credit worthiness of municipal bonds is assessed, and contrast
the analysis of tax-backed debt with the analysis of revenue obligations; |
| i. |
discuss the
key considerations used by Standard & Poor’s in assigning sovereign
ratings and describe why two ratings are assigned to each national government; |
i |
discuss the
key considerations used by Standard & Poor’s in assigning sovereign
ratings, and describe why two ratings are assigned to each national
government; |
| j. |
contrast the
credit analysis required for corporate bonds to that required for
1) asset-backed securities, 2) municipal securities, and 3) sovereign
debt. |
j |
contrast the
credit analysis required for corporate bonds to that required for
1) asset-backed securities, 2) municipal securities, and 3) sovereign
debt. |
| 52 |
The
Liquidity Conundrum |
a. |
contrast the
concept of liquidity as “appetite for risk” with the more traditional
view that liquidity is created by the central bank; |
54 |
The
Liquidity Conundrum |
a |
contrast the
concept of liquidity as “appetite for risk” with the more traditional
view that liquidity is created by the central bank; |
| b. |
describe how
Minsky’s “financial instability hypothesis” predicts a mortgage
market crisis as debt creation journeys from conservative hedging activities
to
more speculative activities, and finally to a Ponzi scheme phase; |
b |
describe how
Minsky’s “financial instability hypothesis” predicts a mortgage
market crisis as debt creation journeys from conservative hedging activities
to
more speculative activities, and finally to a Ponzi scheme phase; |
| c. |
explain how
subprime mortgage borrowers are granted a free at-the-money call
option on the value of their property. |
c |
explain how
subprime mortgage borrowers are granted a free at-the-money call
option on the value of their property. |
| 53 |
Term
Structure and Volatility of Interest Rates |
a. |
illustrate
and explain parallel and nonparallel shifts in the yield curve, a yield
curve twist, and a change in the curvature of the yield curve (i.e.,
a butterfly
shift); |
55 |
Term
Structure and Volatility of Interest Rates |
a |
illustrate
and explain parallel and nonparallel shifts in the yield curve, a yield
curve twist, and a change in the curvature of the yield curve (i.e.,
a butterfly
shift); |
| b. |
describe the
factors that drive U.S. Treasury security returns and evaluate the
importance of each factor; |
b |
describe the
factors that drive U.S. Treasury security returns, and evaluate the
importance of each factor; |
| c. |
explain the
various universes of Treasury securities that are used to construct
the
theoretical spot rate curve and evaluate their advantages and disadvantages; |
c |
explain the
various universes of Treasury securities that are used to construct
the
theoretical spot rate curve, and evaluate their advantages and disadvantages; |
| d. |
explain the
swap rate curve (LIBOR curve) and discuss why market participants
have used the swap rate curve rather than a government bond yield curve
as a
benchmark; |
d |
explain the
swap rate curve (LIBOR curve), and discuss why market participants
have used the swap rate curve rather than a government bond yield curve
as a
benchmark; |
| e. |
illustrate
the theories of the term structure of interest rates (i.e., pure
expectations, liquidity, and preferred habitat) and the implications
of each for the
shape of the yield curve; |
e |
illustrate
the theories of the term structure of interest rates (i.e., pure
expectations, liquidity, and preferred habitat), and discuss the implications
of
each for the shape of the yield curve; |
| f. |
compute and
interpret the yield curve risk of a security or a portfolio by using
key
rate duration; |
f |
compute and
interpret the yield curve risk of a security or a portfolio by using
key
rate duration; |
| g. |
compute and
interpret yield volatility, distinguish between historical yield volatility
and implied yield volatility, and explain how yield volatility is forecasted. |
g |
compute and
interpret yield volatility, distinguish between historical yield volatility
and implied yield volatility, and explain how yield volatility is forecasted. |
| 54 |
Valuing
Bonds with Embedded Options |
a. |
evaluate,
using relative value analysis, whether a security is undervalued or
overvalued; |
56 |
Valuing
Bonds with Embedded Options |
a |
evaluate, using
relative value analysis, whether a security is undervalued or
overvalued; |
| b. |
evaluate the
importance of benchmark interest rates in interpreting spread
measures; |
b |
evaluate the
importance of benchmark interest rates in interpreting spread
measures; |
| c. |
illustrate
the backward induction valuation methodology within the binomial
interest rate tree framework; |
c |
illustrate
the backward induction valuation methodology within the binomial
interest rate tree framework; |
| d. |
compute the
value of a callable bond from an interest rate tree; |
d |
compute the
value of a callable bond from an interest rate tree; |
| e. |
illustrate
the relations among the values of a callable (putable) bond, the
corresponding option-free bond, and the embedded option; |
e |
illustrate
the relations among the values of a callable (putable) bond, the
corresponding option-free bond, and the embedded option; |
| f. |
explain the
effect of volatility on the arbitrage-free value of an option; |
f |
explain the
effect of volatility on the arbitrage-free value of an option; |
| g. |
interpret
an option-adjusted spread with respect to a nominal spread and to
benchmark interest rates; |
g |
interpret an
option-adjusted spread with respect to a nominal spread and to
benchmark interest rates; |
| h. |
illustrate
how effective duration and effective convexity are calculated using
the
binomial model; |
h |
illustrate
how effective duration and effective convexity are calculated using
the
binomial model; |
| i. |
calculate
the value of a putable bond by using an interest rate tree; |
i |
calculate the
value of a putable bond, using an interest rate tree; |
| j. |
describe and
evaluate a convertible bond and its various component values; |
j |
describe and
evaluate a convertible bond and its various component values; |
| k. |
compare and
contrast the risk-return characteristics of a convertible bond with
the risk-return characteristics of ownership of the underlying common
stock. |
k |
compare and
contrast the risk-return characteristics of a convertible bond with
the risk-return characteristics of ownership of the underlying common
stock. |
| 15 |
55 |
Mortgage-Backed
Sector of the Bond Market |
a. |
describe a
mortgage loan and illustrate the cash flow characteristics of a fixedrate,
level payment, and fully amortized mortgage loan; |
15 |
57 |
Mortgage-Backed
Sector of the Bond Market |
a |
describe a
mortgage loan, and illustrate the cash flow characteristics of a fixedrate,
level payment, and fully amortized mortgage loan; |
| b. |
illustrate
the investment characteristics, payment characteristics, and risks of
mortgage passthrough securities; |
b |
illustrate
the investment characteristics, payment characteristics, and risks of
mortgage passthrough securities; |
| c. |
calculate
the prepayment amount for a month, given the single monthly
mortality rate; |
c |
calculate the
prepayment amount for a month, given the single monthly
mortality rate; |
| d. |
compare and
contrast the conditional prepayment rate (CPR) with the Public
Securities Association (PSA) prepayment benchmark; |
d |
compare and
contrast the conditional prepayment rate (CPR) with the Public
Securities Association (PSA) prepayment benchmark; |
| e. |
explain why
the average life of a mortgage-backed security is more relevant than
the security’s maturity; |
e |
explain why
the average life of a mortgage-backed security is more relevant than
the security’s maturity; |
| f. |
explain the
factors that affect prepayments and the types of prepayment risks; |
f |
explain the
factors that affect prepayments and the types of prepayment risks; |
| g. |
illustrate
how a collateralized mortgage obligation (CMO) is created and how it
provides a better matching of assets and liabilities for institutional
investors; |
g |
illustrate
how a collateralized mortgage obligation (CMO) is created and how it
provides a better matching of assets and liabilities for institutional
investors; |
| h. |
distinguish
among the sequential pay tranche, the accrual tranche, the planned
amortization class tranche, and the support tranche in a CMO; |
h |
distinguish
among the sequential pay tranche, the accrual tranche, the planned
amortization class tranche, and the support tranche in a CMO; |
| i. |
evaluate the
risk characteristics and the relative performance of each type of
CMO tranche, given changes in the interest rate environment; |
i |
evaluate the
risk characteristics and the relative performance of each type of
CMO tranche, given changes in the interest rate environment; |
| j. |
explain the
investment characteristics of stripped mortgage-backed securities; |
j |
explain the
investment characteristics of stripped mortgage-backed securities; |
| k. |
compare and
contrast agency and nonagency mortgage-backed securities; |
k |
compare and
contrast agency and nonagency mortgage-backed securities; |
| l. |
distinguish
credit risk analysis of commercial mortgage-backed securities (CMBS)
from credit risk analysis of residential nonagency mortgage-backed securities; |
l |
distinguish
credit risk analysis of commercial mortgage-backed securities (CMBS)
from credit risk analysis of residential nonagency mortgage-backed securities; |
| m. |
describe the
basic structure of a CMBS, and illustrate the ways in which a CMBS
investor may realize call protection at the loan level and by means
of the CMBS
structure. |
m |
describe the
basic structure of a CMBS, and illustrate the ways in which a CMBS
investor may realize call protection at the loan level and by means
of the CMBS
structure. |
| 56 |
Asset-Backed
Sector of the Bond Market |
a. |
illustrate
the basic structural features of and parties to a securitization
transaction; |
58 |
Asset-Backed
Sector of the Bond Market |
a |
illustrate
the basic structural features of and parties to a securitization
transaction; |
| b. |
explain and
contrast prepayment tranching and credit tranching; |
b |
explain and
contrast prepayment tranching and credit tranching; |
| c. |
distinguish
between the payment structure and collateral structure of a
securitization backed by amortizing assets and non-amortizing assets; |
c |
distinguish
between the payment structure and collateral structure of a
securitization backed by amortizing assets and non-amortizing assets; |
| d. |
distinguish
among the various types of external and internal credit
enhancements; |
d |
distinguish
among the various types of external and internal credit
enhancements; |
| e. |
describe the
cash flow and prepayment characteristics for securities backed by
home equity loans, manufactured housing loans, automobile loans, student
loans, SBA loans, and credit card receivables; |
e |
describe the
cash flow and prepayment characteristics for securities backed by
home equity loans, manufactured housing loans, automobile loans, student
loans, SBA loans, and credit card receivables; |
| f. |
describe collateralized
debt obligations (CDOs), including cash and synthetic
CDOs; |
f |
describe collateralized
debt obligations (CDOs), including cash and synthetic
CDOs; |
| g. |
distinguish
among the primary motivations for creating a collateralized debt
obligation (arbitrage and balance sheet transactions). |
g |
distinguish
among the primary motivations for creating a collateralized debt
obligation (arbitrage and balance sheet transactions). |
| 57 |
Valuing
Mortgage-Backed and Asset-Backed Securities |
a. |
illustrate
the computation, use, and limitations of the cash flow yield, nominal
spread, and zero-volatility spread for a mortgage-backed security and
an assetbacked
security; |
59 |
Valuing
Mortgage-Backed and Asset-Backed Securities |
a |
illustrate
the computation, use, and limitations of the cash flow yield, nominal
spread, and zero-volatility spread for a mortgage-backed security and
an assetbacked
security; |
| b. |
describe the
Monte Carlo simulation model for valuing a mortgage-backed
security; |
b |
describe the
Monte Carlo simulation model for valuing a mortgage-backed
security; |
| c. |
describe path
dependency in passthrough securities and the implications for
valuation models; |
c |
describe path
dependency in passthrough securities and the implications for
valuation models; |
| d. |
illustrate
how the option-adjusted spread is computed using the Monte Carlo
simulation model and how this spread measure is interpreted; |
d |
illustrate
how the option-adjusted spread is computed using the Monte Carlo
simulation model and how this spread measure is interpreted; |
| e. |
evaluate a
mortgage-backed security using option-adjusted spread analysis;
|
e |
evaluate a
mortgage-backed security using option-adjusted spread analysis; |
| f. |
discuss why
effective durations reported by various dealers and vendors may
differ; |
f |
discuss why
effective durations reported by various dealers and vendors may
differ; |
| g. |
analyze the
interest rate risk of a security given the security’s effective duration
and effective convexity; |
g |
analyze the
interest rate risk of a security given the security’s effective duration
and effective convexity; |
| h. |
explain other
measures of duration used by practitioners in the mortgage-backed
market (e.g., cash flow duration, coupon curve duration, and empirical
duration),
and describe the limitations of these duration measures; |
h |
explain other
measures of duration used by practitioners in the mortgage-backed
market (e.g., cash flow duration, coupon curve duration, and empirical
duration),
and describe the limitations of these duration measures; |
| i. |
determine
whether the nominal spread, zero-volatility spread, or option-adjusted
spread should be used to evaluate a specific fixed income security. |
i |
determine whether
the nominal spread, zero-volatility spread, or option-adjusted
spread should be used to evaluate a specific fixed income security. |
| 16 |
58 |
Forward
Markets and Contracts |
a. |
explain how
the value of a forward contract is determined at initiation, during
the life of the contract, and at expiration; |
16 |
60 |
Forward
Markets and Contracts |
a |
explain how
the value of a forward contract is determined at initiation, during
the life of the contract, and at expiration; |
| b. |
calculate
and interpret the price and the value of an equity forward contract,
assuming dividends are paid either discretely or continuously; |
b |
calculate and
interpret the price and the value of an equity forward contract,
assuming dividends are paid either discretely or continuously; |
| c. |
calculate
and interpret the price and the value of 1) a forward contract on a
fixed-income security, 2) a forward rate agreement (FRA), and 3) a forward
contract on a currency; |
c |
calculate and
interpret the price and the value of 1) a forward contract on a
fixed-income security, 2) a forward rate agreement (FRA), and 3) a forward
contract on a currency; |
| d. |
evaluate credit
risk in a forward contract and explain how market value is a
measure of the credit risk to a party in a forward contract.
|
d |
evaluate credit
risk in a forward contract, and explain how market value is a
measure of the credit risk to a party in a forward contract. |
| 59 |
Futures
Markets and Contracts |
a. |
explain why
the futures price must converge to the spot price at expiration; |
61 |
Futures
Markets and Contracts |
a |
explain why
the futures price must converge to the spot price at expiration; |
| b. |
determine
the value of a futures contract; |
b |
determine the
value of a futures contract; |
| c. |
explain how
forward and futures prices differ; |
c |
explain how
forward and futures prices differ; |
| d. |
describe the
monetary and nonmonetary benefits and costs associated with
holding the underlying asset, and explain how they affect the futures
price; |
d |
describe the
monetary and nonmonetary benefits and costs associated with
holding the underlying asset, and explain how they affect the futures
price; |
| e. |
describe backwardation
and contango; |
e |
describe backwardation
and contango; |
| f. |
discuss whether
futures prices equal expected spot prices; |
f |
discuss whether
futures prices equal expected spot prices; |
| g. |
describe the
difficulties in pricing Eurodollar futures and creating a pure arbitrage
opportunity; |
g |
describe the
difficulties in pricing Eurodollar futures and creating a pure arbitrage
opportunity; |
| h. |
calculate
and interpret the price of Treasury bond futures, stock index futures,
and currency futures. |
h |
calculate and
interpret the price of Treasury bond futures, stock index futures,
and currency futures. |
| 17 |
60 |
Option
Markets and Contracts |
a. |
calculate
and interpret the prices of a synthetic call option, synthetic put option,
synthetic bond, and synthetic underlying stock, and infer why an investor
would
want to create such instruments; |
17 |
62 |
Option
Markets and Contracts |
a |
calculate and
interpret the prices of a synthetic call option, synthetic put option,
synthetic bond, and synthetic underlying stock, and infer why an investor
would
want to create such instruments; |
| b. |
calculate
and interpret prices of interest rate options and options on assets
using
one- and two-period binomial models; |
b |
calculate and
interpret prices of interest rate options and options on assets using
one- and two-period binomial models; |
| c. |
explain the
assumptions underlying the Black–Scholes–Merton model and their
limitations; |
c |
explain the
assumptions underlying the Black–Scholes–Merton model and their
limitations; |
| d. |
explain how
an option price, as represented by the Black–Scholes–Merton model,
is affected by each of the input values (the option Greeks); |
d |
explain how
an option price, as represented by the Black–Scholes–Merton model,
is affected by each of the input values (the option Greeks); |
| e. |
explain the
delta of an option and demonstrate how it is used in dynamic
hedging; |
e |
explain the
delta of an option, and demonstrate how it is used in dynamic
hedging; |
| f. |
explain the
gamma effect on an option’s price and delta and how gamma can
affect a delta hedge; |
f |
explain the
gamma effect on an option’s price and delta and how gamma can
affect a delta hedge; |
| g. |
discuss the
effect of the underlying asset’s cash flows on the price of an option; |
g |
discuss the
effect of the underlying asset’s cash flows on the price of an option; |
| h. |
demonstrate
the methods for estimating the future volatility of the underlying
asset (i.e., the historical volatility and the implied volatility methods); |
h |
demonstrate
the methods for estimating the future volatility of the underlying
asset (i.e., the historical volatility and the implied volatility methods); |
| i. |
illustrate
how put-call parity for options on forwards (or futures) is established; |
i |
illustrate
how put-call parity for options on forwards (or futures) is established; |
| j. |
compare and
contrast American options on forwards and futures with European
options on forwards and futures, and identify the appropriate pricing
model for
European options. |
j |
compare and
contrast American options on forwards and futures with European
options on forwards and futures, and identify the appropriate pricing
model for
European options. |
| 61 |
Swap
Markets and Contracts |
a. |
distinguish
between the pricing and valuation of swaps; |
63 |
Swap
Markets and Contracts |
a |
distinguish
between the pricing and valuation of swaps; |
| b. |
explain
the equivalence of the following swaps to combinations of other
instruments: interest rate swaps to a series of off-market forward rate
agreements (FRAs) and a plain vanilla swap to a combination of an interest
rate
call and interest rate put; |
b |
explain
the equivalence of 1) interest rate swaps to a series of off-market
forward
rate agreements (FRAs) and 2) a plain vanilla swap to a combination
of an
interest rate call and an interest rate put; |
| c. |
calculate
and interpret the fixed rate on a plain vanilla interest rate swap and
the
market value of the swap during its life; |
c |
calculate and
interpret the fixed rate on a plain vanilla interest rate swap and the
market value of the swap during its life; |
| d. |
calculate
and interpret the fixed rate, if applicable, and the foreign notional
principal for a given domestic notional principal on a currency swap,
and
determine the market values of each of the different types of currency
swaps
during their lives; |
d |
calculate and
interpret the fixed rate, if applicable, and the foreign notional
principal for a given domestic notional principal on a currency swap,
and
determine the market values of each of the different types of currency
swaps
during their lives; |
| e. |
calculate
and interpret the fixed rate, if applicable, on an equity swap and the
market values of the different types of equity swaps during their lives; |
e |
calculate and
interpret the fixed rate, if applicable, on an equity swap and the
market values of the different types of equity swaps during their lives; |
| f. |
explain and
interpret the characteristics and uses of swaptions, including the
difference between payer and receiver swaptions; |
f |
explain and
interpret the characteristics and uses of swaptions, including the
difference between payer and receiver swaptions; |
| g. |
identify and
calculate the possible payoffs and cash flows of an interest rate
swaption; |
g |
identify and
calculate the possible payoffs and cash flows of an interest rate
swaption; |
| h. |
calculate
and interpret the value of an interest rate swaption on the expiration
day; |
h |
calculate and
interpret the value of an interest rate swaption on the expiration
day; |
| i. |
evaluate swap
credit risk for each party and during the life of the swap,
distinguish between current credit risk and potential credit risk, and
illustrate
how swap credit risk is reduced by both netting and marking to market; |
i |
evaluate swap
credit risk for each party and during the life of the swap,
distinguish between current credit risk and potential credit risk, and
illustrate
how swap credit risk is reduced by both netting and marking to market; |
| j. |
define swap
spread and relate it to credit risk. |
j |
define swap
spread and relate it to credit risk. |
| 62 |
Interest
Rate Derivative Instruments |
a. |
demonstrate
how both a cap and a floor are packages of options on interest
rates and options on fixed-income instruments; |
64 |
Interest
Rate Derivative Instruments |
a |
demonstrate
how both a cap and a floor are packages of options on interest
rates and options on fixed-income instruments; |
| b. |
compute the
payoff for a cap and a floor and explain how a collar is created. |
b |
compute the
payoff for a cap and a floor, and explain how a collar is created. |
| 63 |
Using
Credit Derivatives to Enhance Return and Manage Risk |
a. |
describe the
characteristics of a credit default swap, and compare and contrast a
credit default swap with a corporate bond; |
65 |
Using
Credit Derivatives to Enhance Return and Manage
Risk |
a |
describe the
characteristics of a credit default swap, and compare and contrast a
credit default swap with a corporate bond; |
| b. |
explain the
advantages of using credit derivatives over other credit instruments; |
b |
explain the
advantages of using credit derivatives over other credit instruments; |
| c. |
explain the
use of credit derivatives by the various market participants; |
c |
explain the
use of credit derivatives by the various market participants; |
| d. |
discuss credit
derivatives trading strategies and how they are used by hedge
funds and other managers. |
d |
discuss credit
derivatives trading strategies and how they are used by hedge
funds and other managers. |
| 18 |
64 |
Portfolio
Concepts |
a. |
discuss mean–variance
analysis and its assumptions, and calculate the expected
return and the standard deviation of return for a portfolio of two or
three assets; |
18 |
66 |
Portfolio
Concepts |
a |
discuss mean–variance
analysis and its assumptions, and calculate the expected
return and the standard deviation of return for a portfolio of two or
three assets; |
| b. |
explain the
minimum-variance and efficient frontiers, and discuss the steps to
solve for the minimum-variance frontier; |
b |
explain the
minimum-variance and efficient frontiers, and discuss the steps to
solve for the minimum-variance frontier; |
| c. |
discuss diversification
benefits, and explain how the correlation in a two-asset
portfolio and the number of assets in a multi-asset portfolio affect
the
diversification benefits; |
c |
discuss diversification
benefits, and explain how the correlation in a two-asset
portfolio and the number of assets in a multi-asset portfolio affect
the
diversification benefits; |
| d. |
calculate
the variance of an equally weighted portfolio of n stocks, explain the
capital allocation and the capital market lines (CAL and CML) and the
relation
between them, and calculate the values of one of the variables given
the values
of the remaining variables |
d |
calculate the
variance of an equally weighted portfolio of n stocks, explain the
capital allocation and the capital market lines (CAL and CML) and the
relation
between them, and calculate the values of one of the variables given
the values
of the remaining variables; |
| e. |
explain the
capital asset pricing model (CAPM), including its underlying
assumptions and the resulting conclusions; |
e |
explain the
capital asset pricing model (CAPM), including its underlying
assumptions and the resulting conclusions; |
| f. |
discuss the
security market line (SML), the beta coefficient, the market risk
premium, and the Sharpe ratio, and calculate the value of one of these
variables
given the values of the remaining variables; |
f |
discuss the
security market line (SML), the beta coefficient, the market risk
premium, and the Sharpe ratio, and calculate the value of one of these
variables
given the values of the remaining variables; |
| g. |
explain the
market model, and state and interpret the market model’s predictions
with respect to asset returns, variances, and covariances; |
g |
explain the
market model, and state and interpret the market model’s predictions
with respect to asset returns, variances, and covariances; |
| h. |
calculate
an adjusted beta, and discuss the use of adjusted and historical betas
as
predictors of future betas; |
h |
calculate an
adjusted beta, and discuss the use of adjusted and historical betas
as
predictors of future betas; |
| i. |
discuss reasons
for and problems related to instability in the minimum-variance
frontier; |
i |
discuss reasons
for and problems related to instability in the minimum-variance
frontier; |
| j. |
discuss and
compare macroeconomic factor models, fundamental factor models,
and statistical factor models; |
j |
discuss and
compare macroeconomic factor models, fundamental factor models,
and statistical factor models; |
| k. |
calculate
the expected return on a portfolio of two stocks, given the estimated
macroeconomic factor model for each stock; |
k |
calculate the
expected return on a portfolio of two stocks, given the estimated
macroeconomic factor model for each stock; |
| l. |
discuss the
arbitrage pricing theory (APT), including its underlying assumptions
and its relation to the multifactor models, calculate the expected return
on an
asset given an asset’s factor sensitivities and the factor risk premiums,
and
determine whether an arbitrage opportunity exists, including how to
exploit the
opportunity; |
l |
discuss the
arbitrage pricing theory (APT), including its underlying assumptions
and its relation to the multifactor models, calculate the expected return
on an
asset given an asset’s factor sensitivities and the factor risk premiums,
and
determine whether an arbitrage opportunity exists, including how to
exploit the
opportunity; |
| m. |
explain the
sources of active risk, define and interpret tracking error, tracking
risk, and the information ratio, and explain factor portfolio and tracking
portfolio; |
m |
explain the
sources of active risk, define and interpret tracking error, tracking
risk, and the information ratio, and explain factor portfolio and tracking
portfolio; |
| n. |
compare and
contrast the conclusions and the underlying assumptions of the
CAPM and the APT models, and explain why an investor can possibly earn
a
substantial premium for exposure to dimensions of risk unrelated to
market
movements. |
n |
compare and
contrast the conclusions and the underlying assumptions of the
CAPM and the APT models, and explain why an investor can possibly earn
a
substantial premium for exposure to dimensions of risk unrelated to
market
movements. |
| 65 |
A
Note on Harry M. Markowitz’s “Market Efficiency: A Theoretical Distinction
and So What?” |
a. |
discuss the
efficiency of the market portfolio in the CAPM and the relation
between the expected return and beta of an asset when restrictions on
borrowing at the risk-free rate and on short selling exist; |
67 |
A
Note on Harry M. Markowitz’s “Market Efficiency: A
Theoretical Distinction and So What?” |
a |
discuss the
efficiency of the market portfolio in the CAPM and the relation
between the expected return and beta of an asset when restrictions on
borrowing at the risk-free rate and on short selling exist; |
| b. |
discuss the
practical consequences that follow when restrictions on borrowing at
the risk-free rate and on short selling exist. |
b |
discuss the
practical consequences that follow when restrictions on borrowing at
the risk-free rate and on short selling exist. |
| 66 |
International
Asset Pricing |
a. |
explain international
market integration and segmentation and the impediments
to international capital mobility; |
68 |
International
Asset Pricing |
a |
explain international
market integration and segmentation and the impediments
to international capital mobility; |
| b. |
discuss the
factors that favor international market integration; |
b |
discuss the
factors that favor international market integration; |
| c. |
state the
assumptions of the domestic capital asset pricing model (CAPM); |
c |
discuss the
assumptions of the domestic capital asset pricing model (CAPM); |
| d. |
justify
the extension of the domestic CAPM to an international context (the
extended CAPM) and describe the assumptions needed to make the extension; |
d |
justify
the extension of the domestic CAPM to an international context (the
extended CAPM), and discuss the assumptions needed to make the extension; |
| e. |
determine
whether the real exchange rate has changed in a period, given the
beginning-of-period (nominal) exchange rate, the inflation rates in
the period,
and the end-of-period (nominal) exchange rate; |
e |
determine
whether the real exchange rate has changed in a period; |
| f. |
calculate
the expected 1) exchange rate and 2) domestic-currency holding period
return on a foreign bond (security), given expected, predictable inflation
rates,
the beginning-of-period nominal exchange rate, and the constant real
exchange
rate; |
f |
calculate
the expected 1) exchange rate and 2) domestic-currency holding period
return on a foreign bond (security); |
| g. |
calculate
the end-of-period real exchange rate and the domestic-currency ex-post
return on a foreign bond (security), given the end-of-period exchange
rate, the
beginning-of-period real exchange rate, and the inflation rates during
the period; |
g |
calculate
the end-of-period real exchange rate and the domestic-currency ex-post
return on a foreign bond (security); |
| h. |
calculate
a foreign currency risk premium and explain a foreign currency risk
premium in terms of interest rate differentials and forward rates; |
h |
calculate a
foreign currency risk premium, and explain a foreign currency risk
premium in terms of interest rate differentials and forward rates; |
| i. |
state
the risk pricing relation and the formula for the international capital
asset
pricing model (ICAPM); |
i |
state
the risk pricing relation and the formula for the international capital
asset
pricing model (ICAPM), and calculate the expected return on a stock
using the
model; |
| j. |
calculate
the expected return on a stock, given its world market beta and
currency exposure as well as the appropriate risk-free rates and risk
premiums; |
- |
- |
| k. |
explain the
effect of market segmentation on the ICAPM; |
j |
explain the
effect of market segmentation on the ICAPM; |
| l. |
define currency
exposure and explain exposures in terms of correlations; |
k |
define currency
exposure, and explain exposures in terms of correlations; |
| m. |
discuss the
likely exchange rate exposure of a company based on a description of
the company’s activities, and explain the impact of both real and
nominal
exchange rate changes on the valuation of the company; |
l |
discuss the
likely exchange rate exposure of a company based on a description of
the company’s activities, and explain the impact of both real and
nominal
exchange rate changes on the valuation of the company; |
| n. |
discuss the
currency exposures of national economies, equity markets, and bond
markets; |
m |
discuss the
currency exposures of national economies, equity markets, and bond
markets; |
| o. |
contrast the
traditional trade approach ( j-curve) and the money demand
approach to modeling the relation between real exchange rate changes
and
domestic economic activity. |
n |
contrast the
traditional trade approach ( j-curve) and the money demand
approach to modeling the relation between real exchange rate changes
and
domestic economic activity. |
| 67 |
The
Theory of Active Portfolio Management |
a. |
justify active
portfolio management when security markets are nearly efficient; |
69 |
The
Theory of Active Portfolio Management |
a |
justify active
portfolio management when security markets are nearly efficient; |
| b. |
discuss the
steps and the approach of the Treynor–Black model for security
selection; |
b |
discuss the
steps and the approach of the Treynor-Black model for security
selection; |
| c. |
describe how
an analyst’s accuracy in forecasting alphas can be measured and
how estimates of forecasting can be incorporated into the Treynor–Black
approach. |
c |
describe how
an analyst’s accuracy in forecasting alphas can be measured and
how estimates of forecasting can be incorporated into the Treynor-Black
approach. |
| 68 |
The
Portfolio Management Process and the Investment Policy Statement |
a. |
explain the
importance of the portfolio perspective; |
70 |
The
Portfolio Management Process and the Investment
Policy Statement |
a |
explain the
importance of the portfolio perspective; |
| b. |
describe the
steps of the portfolio management process and the components of
those steps; |
b |
describe the
steps of the portfolio management process and the components of
those steps; |
| c. |
define investment
objectives and constraints and explain and distinguish among
the types of investment objectives and constraints; |
c |
define investment
objectives and constraints, and explain and distinguish among
the types of investment objectives and constraints; |
| d. |
discuss the
role of the investment policy statement in the portfolio management
process and explain the elements of an investment policy statement; |
d |
discuss the
role of the investment policy statement in the portfolio management
process, and explain the elements of an investment policy statement; |
| e. |
explain
how capital market expectations and the investment policy statement
help influence the strategic asset allocation decision, and discuss
how investors’
investment time horizon may influence their strategic asset allocation; |
e |
explain
how capital market expectations and the investment policy statement
help influence the strategic asset allocation decision, and discuss
how an
investor’s investment time horizon may influence the investor’s
strategic asset
allocation; |
| f. |
contrast the
types of investment time horizons, determine the time horizon for a
particular investor, and evaluate the effects of this time horizon on
portfolio
choice; |
f |
contrast the
types of investment time horizons, determine the time horizon for a
particular investor, and evaluate the effects of this time horizon on
portfolio
choice; |
| g. |
justify ethical
conduct as a requirement for managing investment portfolios. |
g |
justify ethical
conduct as a requirement for managing investment portfolios. |
