CFA® Level III Review - Equity Investments

International Equity Benchmarks

Posted by Joseph Hogue, CFA 

Study session 12 in the Level III CFA Program curriculum concludes the material on equity investments with three readings (28-30) on governance and international investments. You need to go through the material at least once to get the general idea behind the concepts and pick up the vocabulary but the study session is of secondary importance against the other material in equity investments.

Corporate Performance, Governance and Business Ethics

The reading is completely conceptual and not of huge importance (my opinion). Understand the basic concept of the different stakeholders (stockholders, customers, suppliers, creditors, governments, unions, communities, general public) and their expectations for the company. Understand that a stakeholder group’s expectations may contrast with another group. There is a school of thought that says all stakeholder groups should have a place at the table to affect corporate control but it is not practical or efficient. The general idea is that the company should maximize profits, within regulatory and ethical principals, and this will take care of various stakeholder needs. The various theories and philosophical approaches are of less than secondary importance. Skim through it and get a basic idea for each of the concepts.

International Equity Benchmarks

This is a pretty short reading with only a few key points to remember. Understand home-country bias and the benefit of international investing (diversification, difference in industrial mix and economic cycles). Remember that there are also some disadvantages, i.e. shares are often closely held by the government or private individuals and cross-holding may be an issue.
Understand the concept and tradeoff for international indexes: breadth versus investability, liquidity versus reconstitution effects, precise float adjustments versus transaction costs, objectivity/transparency versus judgement.

Emerging Markets Finance

Understand the effect of liberalization and market integration on dividend yields (lower), expected returns and cost of capital (decrease), liquidity and volume (increase), political risk (decrease), correlation with other markets (increase), and capital flows (increase). The drop in expected returns can be hard to understand but remember, an efficient market prices risk with higher expected returns so if volatility and risk is reduced then so will expected returns. The material on contagion is basically list stuff but pretty interesting if you follow your EM history. The five effects of currency contagion (trade, income, wake up, credit crunch, and liquidity) are fairly testable. The rest of the material just outlines the difference in market structure between emerging and developed markets (liquidity, price discovery, credit, etc) and possible differences in governance. As with most of the study session, read through it to get the general idea, vocabulary and list material.

‘til next time, happy studyin’

Joseph Hogue, CFA

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