Level I Review, Equity Investments

Level I CFA Program curriculum begins the material on equity investments with readings in equity market structure and efficiency. The material is almost completely conceptual and any student of finance will already have seen it. If you are new to the industry, spend a little time to get the vocabulary and concepts. The topic area is only worth about 10% of your first exam but is extremely important in the other two tests.

Market Organization and Structure
This is almost entirely a vocabulary lesson on the market and participants. It is important that you know the information for general knowledge but it is not as testable as some of the other readings. The key terms are good for flashcards with a quick rundown until you’ve got them.
Understand how to calculate returns on leveraged positions, maintenance margin requirement and the margin call price. If a buyer will receive a margin call when the value of equity drops below 25% of the maintenance margin requirement, with an initial stock price of $20 leveraged with 60% margin: the margin call price is ($8 +Price – $20) / Price = $16
Pay special attention to the information on orders as you will need it for attribution analysis in the Level 3 exam and it is highly testable in the first exam.
Security Market Indices
The differences and calculations for the indices (price-weighted, equal-weighted, market cap, and fundamentally-weighted) are important information and have shown up on the exam. It’s really not difficult information, just understand how they are constructed and how to calculate returns.
They construction and limitations of alternative asset indices shows up several times in the curriculum, so spend some time on this section. Pay special attention to the possible biases within each index.
Market Efficiency
The efficient markets theory is a huge concept in the industry and for the exams. You do not necessarily need to know all the data and details that support it, but you should know the implications of each level of efficiency. Understand what it means for technical analysis and transaction costs in trading.
The Institute does not ask you to take a position on the efficient market hypothesis but regardless of how you believe the markets behave, when you are taking the exam the curriculum is the ultimate truth. Know that there is considerable evidence supporting the semi-strong form of efficiency and some evidence to support the strong form.
The list of market anomalies is testable vocabulary and can be fun to read through. Again, mostly a flashcard exercise until you can recognize the terms and their basic idea.
Study session 14 in the Level I CFA Program curriculum continues the equity topic area with three readings on valuation of equity securities.
‘til next time, happy studyin’
Joseph Hogue, CFA

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