Mind Maps Level 1 - 2016 - Full 10 Topics-3

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WAY TO FINANCE SUCCESS
MIND MAP
CFA
LEVEL 1
EXAM PRE
2017
MIND MAPS
For learning CFA Exam
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Email: contact@waytofinancesuccess.com
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CFA MIND MAPSTM 2017 LEVEL 1 BOOK

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4+5 GIPS 1. ETHICS AND TRUST IN THE

INVESTMENT PROFESSION
3.7 Standard VII. RESPONSIBILITIES

AS CFA MEMBER &CANDIDATE 2. CODE OF ETHICS & STANDARDS
OF PROFESSIONAL CONDUCT
Ethical &
3.6 Standard VI CONFLICTS OF INTEREST Professional
Standards 3.1 Standard I. PROFESSIONALISM
3.5 Standard V. INVESTMENT ANALYSIS,

RECOMMENDATIONS & ACTIONS 3.2 Standard II. INTEGRITY OF CAPITAL MARKETS
3.4 Standard IV. DUTIES TO EMPLOYERS 3.3 Standard III. DUTIES TO CLIENTS
Ethical & Professional Standards - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
=> Consider alternative actions as well as shorter- and

longer-term consequences from various perspectives
=> Teach, practice, and reinforce A code of ethics integrated into a firm's decision making process
=> Developing an ethical culture ethical decision making and the support of senior management for integrating ethics
can be described as a set of shared beliefs about what is good or acceptable behavior and what is bad or unacceptable behavior
identify the important issues involved Ethics refers co the study of good and bad behavior.
Explain Ethics
examine these issues from multiple perspectives behavior char follows moral principles and is consistent with society's ethical expectations.
develop the necessary judgment and decision making skills required The importance of using a framework Ethical conduct conduce char improves outcomes for stakeholders
Framework for Ethical Decision Making
avoid unanticipated ethical consequences
Relevant facts, stakeholders and duties owed, ethical principles, conflicts of interest. A code of ethics is a written set of moral principles that can guide
Identify behavior by describing what is considered acceptable behavior
to communicate the values, principles, and expectations of an organization or ocher group of people
Situational influences, additional guidance, alternative actions Consider
Ethical decision-making framework Role to provide a general guide to what constitutes acceptable behavior
Decide and act (For CFA Level 1)
The Role of a Code of Ethics refers to a group of people with specialized skills and knowledge who
Was the outcome as anticipated? Why or why not? Reflect serve ochers and agree to behave in accordance with a code of ethics
A profession
1. ETHICS AND TRUST IN THE A professional code of ethics is a way for a profession to communicate to the public that its
members
Not all unethical actions are illegal, and not all illegal actions are unethical INVESTMENT PROFESSION will use their knowledge and skills to serve their clients in an honest and ethical manner
ethical decisions require more judgment and Distinguish between Ethical
consideration compared to legal decisions and Legal Standards
Ethical principles often set a higher standard
of behavior than laws and regulations overrate the ethical quality of their behavior on a relative basis
Individuals tend to overemphasize the importance of their own personal
Internal (personal) traits
traits in determining the ethical quality of their behavior
Investment professionals have a responsibility to protect and grow client assets
Trust in investment professionals takes on a greater importance than in many other
Challenges Loyalty to an employer, supervisor,
businesses because investment advice and management are intangible produces
Social pressure from ochers organization, or co-workers
Failure to act in a highly ethical manner can damage not only client wealth Challenges to Ethical Behavior External traits (situation influences)
but also impede the success of investment firms and investment professionals
The prospect of acquiring more money or greater prestige
reduce the funds entrusted to them and increase che cost
of raising capital for business investment and growth The Need for High Ethical Standards so focused on adhering to compliance rules that
Firms with strict rules-based compliance individuals only ask themselves what they can do
reduce the amounts invested and increase the
procedures run the risk of fostering a
returns required to attract investor capital another layer of risk culture
Unethical behavior by financial services professionals
can have negative effects for society
reduces the growth of an economy
and the well-being of its people Misallocation of capital
1. ETHICS AND TRUST IN THE INVESTMENT PROFESSION - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
All CFA Institute members and candidates are

required to comply with the Code and Standards
The CFA Institute Bylaws
Basic structure for enforcing
Based on two Fair process to member and candidate
the Code and Standards
primary principles
Rules of Procedure Confidentiality of proceedings
Maintains oversight and responsibility

The CFA Institute Is responsible for the
Board of Governors enforcement of the
Through the Disciplinary
Professional Conduct Review Committee (DRC) Code and Standards
program (PCP)
Structure of the CFA The CFA Designated Conducts professional
Institute Professional Officer Directs professional conduct staff conduct inquiries
Conduct Program
Selfdisclosure
Written complaints
An inquiry can be prompted
Evidence of misconduct
by several circumstances
Report by a CFA exam proctor
Analysis of exam materials and monitoring
a. of social media by CFA Insitute
Requesting a written explanation

The Professional from the member or candidate
Conduct staff conducts
The member or candidate
an investigation that
may include Interviewing Complaining parties
Third parties
Collecting documents and records in support of its investigation
2. Code Of Ethics And Conclude the inquiry with no disciplinary sanction

Standards Of Issue a cautionary letter
When an
Professional Conduct inquiry is If finding that a violation of
Process for the enforcement Upon reviewing the the Code and Standards
initiated
of the Code and Standards material obtained during occurred, the Designated Accepted by member
the investigation, the Officer proposes a
Designated Officer may The matter is referred to a
disciplinary sanction hearing by a panel of CFA
Continue proceedings Institute members
Rejected by member
to discipline the
member or candidate
condemnation by the member's peers
If sanction is imposed suspension of candidate's continued
participant in the CFA program
Act with integrity, competence, diligence,

respect and in an ethical manner
Integrity of investment profession &
interest of clients above personal interest
Six components of Care & judgment

the Code of Ethics Practice ethics & encourage others to practice
Integrity & viability of the global capital markets
Professional competence
b,c.
Professionalism
Integrity of Capital markets
Duties of Clients
Duties to Employers
Seven Standards of
Professional Conduct Investment analysis, Recommendations & Actions
Conflict of interest
Responsibilities as a CFA Institute
member or CFA Candidate
2. Code Of Ethics And Standards Of Professional Conduct - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Understand and comply with
applicable laws and regulations
Code and Standards vs. Local law Follow stricter law and regulation
Responsible for violations in which they

knowingly participate or assist
Dissociate from illegal,
unethical activities Leave employers (in extreme case)
Attempt to stop the behavior by bringing it to the attention of

Guidance employer through a supervisor or compliance department
Participation or association
May consider directly confronting
with violations by others
the involved individuals
Intermediate steps
If not successful,--> step away and Removing their name from written reports
dissociate from the activity by
Asking for a different assignment
A. Knowledge Inaction with continued association may be construed as knowing participation

of the law Not required reporting violations to government, CFAI,
but advisable in some cases or required by laws in others
Stay informed
Review procedures
Members and Maintain current files
candidates
When in doubt, seek advice of
compliance personnel or legal counsel
When dissociating from violations, --> Document
Recommended any violations and urge firms to stop them
procedures for
compliance (RPC) Develop and/or adopt a code of ethics
Make available to employees info that
Firms highlights applicable laws and regulations
Establish written procedures for reporting suspected
violation of laws, regulations or company policies
Application
Maintain independence and

objectivity in professional activities
Gifts, Invitations to lavish
functions, Tickets, Favors, Job referrals,
By benefits Allocation of shares in oversubscribed IPOs...
External
pressures
From public companies To issue favorable reports
From Buyside clients May try to pressure sellside analysts
From their e.g. to issue favorable research reports/

own firms recommendations for certain companies
Internal
pressures to issue favorable research on current or
Investmentbanking prospective investmentbanking clients
How to cope with external and
relationships
internal pressures Conflicts of interest
Modest gifts and entertainment are

acceptable but special care must be taken must disclose to employers
Best practice: reject any offer of gifts,

threatening independence and objectivity
Guidance
convey true opinions
--> free of bias from pressures
Recommendations must
be stated in clear
B. Independence and unambiguous language
and objectivity Portfolio managers must respect and
foster honesty of sellside research
Is fraught with conflicts

3.1 Standard I Must engage in thorough,
PROFESSIONALISM independent, and unbiased analysis
Must fully disclose potential conflicts,
including the nature of compensation
Issuerpaid research Must strictly limit the type of compensation
Analysts they accept for conducting research
Accept only flat fee for their
work prior to writing the report
Best practice Without regard to conclusions
or recommendations
Protect integrity of opinions

Create a restricted list
Restrict special cost arrangements
Limit gifts
RPC Equity IPOs

Restrict employee investments
Private placements
Review procedures
Written policies on independence
and objectivity of research
Definition of any untrue statement or omission of a fact

"Misrepresentation"
or any false or misleading statement
Must not knowingly make

oral representations, advertising
misrepresentation or give
false impression in electronic communications
written materials
qualifications or credentials, services

performance record
Must not misrepresent Without regard to conclusions or
Guidance any aspect of practice, including recommendations
characteristics of an investment
any misrepresentation relating to
C. Misrepresentation member's professional activities
Must not guarantee clients specific return
on investments that are inherently volatile
Standard I(C) prohibits plagiarism in preparation
of material for distribution to employers, associates,
clients, prospects, general publish
Written list of available services, description of firm's qualification

Designate employees to speak on behalf of firm
Prepare summary of qualifications and experience,
list of services capable of performing
RPC
Maintain copies
To avoid plagiarism Attribute quotations
Attribute summaries
Address conduct related to professional life

Any act involving lying, cheating, stealing, other dishonest conduct that
reflects adversely on member's professional activities would be violation
Conduct damaging trustworthiness or competence (include behaviour may
not be illegal but negatively affect a member to perform responsibility such
Guidance as abusing alcohol during lunch hours)
Violations
D. Misconduct Abuse of the CFA Institute Professional Conduct Program
Involved in personal bankruptcy is not automatically assumed to be in violation but
bankruptcy involve fraudulent or deceitful business conduct may be a violation
Develop and/or adopt a code of ethics

Disseminate to all employee a list of potential violations
RPC
Check references of potential employees
3.1 Standard I PROFESSIONALISM - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
its significant impact to the price

of security if it is disclosed
Reasonable investors would like
Definition of "Material Material information
to know for making decision
nonpublic information"
The reliability of the information
disseminated to the market place and

Non-public until
effficient time for investors to react
Must be particularly aware of info
Guidance selectively disclosed by corporations
Analysis of Public info + nonmaterial
nonpublic info --> Investment conclusion
Mosaic Analysts are free to act on this collection
Theory of info without risking violation
Analysts should save and
A. Material non-public document all their research
information (MNI)
Make reasonable efforts to achieve
public dissemination of material info
Must communicate the info only to the designated
If public dissemination supervisory and compliance personnel within the firm
is not possible,
Must not take investment action on the basis of the info
Must not knowingly engage in conduct
3.2 Standard II inducing insiders to privately disclose MNI
INTEGRITY OF RPC adopt compliance procedures
CAPITAL MARKETS preventing misuse of MNI
develop & follow disclosure policies
Encourage firms to
to ensure proper dissemination
use "firewall"
Prohibition of all proprietary trading while firm
is in possession of MNI may be inappropriate
Distort prices or artificially inflate trading volume

with the intent to mislead market participants
Definition
Transactions that artificially
distort prices or volume
transactions that deceive
market participants Securing a controlling, dominant position in a
financial instrument to exploit and manipulate
B. Market price of a related derivative/or underlying asset
manipulation can be related to
dissemination of false including spreading false rumors
or misleading info to induce trading by others
prohibit legitimate trading strategies

Standard II(B) not meant to prohibit transactions done for tax purposes
The intent of action is critical to determining
whether it is a violation of this Standard
3.2 Standard II INTEGRITY OF CAPITAL MARKETS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Prudence require act with care, skill, and diligence

duty to exercise cautions and discretion follow the investment parameters set forth
reasonable care by clients & balancing risk & return
Understand & adhere Determine identity of "client"

to fiduciary duties Must be aware of whether they have
"custody" or effective control of client assets
Responsibility Manage pool of assets in accordance with terms of governing documents
to a client includes
Put their obligation to client first in all dealings
duty of loyalty Avoid all real or potential conflicts of interest

Guidance
A. Loyalty, Forgo using opportunities for their own benefit at the expense of client
prudence, Follow any guidelines set out by client for the management of assets
and care Judge investment decisions in context of total portfolio
Vote proxies in an informed & responsible manner
Gifts in the form of research support is anything that help to make

(research report is one type of research support) investment decisions
"Soft dollars"
Submit to clients at least quarterly itemized statements

Separate assets
Review investments periodically
RPC
Establish policies & procedures with respect to proxy voting and the use of client brokerage
Encourage firms to address some topics (p. )
Do not discriminate against any clients

New issues and secondary offerings should be
pro-rated to all subscribers on a round-lot basis
Fairy to all clients
and prospective clients can differentiate services to clients but must not
"Fairly" vs "equally" disadvantage or negatively affect clients and
the differences must be disclosed and available
impossible to treat equally due to each client's unique needs and objectives
Standard III(B) addresses the manner of

disseminating investment recommendations or
changes in prior recommendations to clients
Ensure fair opportunity to act on
Encourage firms to design equitable system to
prevent selective, discriminatory disclosure
Guidance particularly clients may have acted on
Investment recommendations Material changes should be
communicated to all current clients or been affected by earlier advise
should be advised of the changed

Clients who don't know changes and therefore recommendation before the order
place orders contrary to a current recommendation is accepted
B. Fair dealing
Treat all clients fairly in light of their
investment objectives & circumstances
Disclose to clients & duty of fairness and loyalty to clients can

Investment actions prospects written never be overridden by client consent to
allocation procedures patently unfair allocation procedures
Should not take advantage of their position in the industry to the detriment of clients
Limit the number of people aware that a change in recommendation will be made
3.3 Standard III
Shorten the time between decision and dissemination
DUTIES TO CLIENTS
Publish personnel guidelines for pre-dissemination
Simultaneously disseminate recommendations to all clients who
have expressed an interest or for whom an investment is suitable.
RPC Maintain list of clients and holdings

Develop written trade allocation procedures
Disclose trade allocation procedures
Establish systematic account review
Disclose available level of service
Be sure to gather client info in the form of an IPS and make suitability
analysis prior to making recommendation/taking investment action
Inquiry should be repeated at least annually/prior to material changes
In investment If clients Suitability analysis must be done

advisory relationships withhold info based on info provided
Risk analysis
Guidance Be sure investments are consistent with the stated mandate
C. Suitability Fund managers
Refrain from making trade or seek

In case of unsolicited trade affirmative statement from client
requests unsuitable for client that suitability is not a consideration
Written IPS
Investors' objectives and constraints should be maintained and reviewed
RPC
periodically to reflect any changes in clients' circumstances
Standard III(D) prohibits misrepresentations of past

performance or reasonably expected performance
Provide credible performance info
Should not state or imply that clients will obtain
or benefit from rate of return generated in the past
D. Performance presentation Guidance Research analysts promoting the success ensure that their claims are
of accuracy of their recommendations fair, accurate, and complete
If the presentation is brief, must make available to

clients and prospects the detailed info upon request
GIPS
RPC
on the basis of their special ability to conduct a

Standard III(E) is applicable portion of clients' business or personal affairs
when members receive info arising from or is relevant to that portion of clients' business
that is the subject of special or confidential relationship
Comply with applicable laws
Guidance consult with compliance department/ outside counsel before disclosing
When in doubt
E. Preservation of confidentiality
Standard III(E) does not prevent cooperating
with an investigation by CFAI PCP
Avoid disclosing information received from a client except

to authorized coworkers also working for the client
Follow firm procedures for storage of electronic data
RPC
Recommend adoption if not in place
3.3 Standard III DUTIES TO CLIENTS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Someone is in the service of another

Definition
Employee Written contract may or may not exist between employer and employee
Actual receipt of monetary compensation is not required for employer-employee relationship
In matters related to their employment, members and

candidates must not engage in conduct that harms the
interests of the employer
Comply with policies and procedures established by
Employeremployee employers that govern employeremployee relationship
relationship Standard IV(A) does not require to place employer
interests ahead of personal interests in all matters
The relationship imposes duties and responsibilities
on both parties
Abstain from independent competitive activity

that could conflict with employer's interests
Independent practice Provide notification to employer, obtain consent
from employer in advance
A. Loyalty
Guidance
Planning to leave, must continue to act in employer's best interest
Must Firm records or work performed on behalf of firm stored on a
home computer should be erased or returned to employer
engage in activities conflicting with duty until resignation effective

Leaving an employer
Must not contact existing clients/potential clients prior to leaving for soliciting
take records of files to a new employer without written permission
Free to make arrangements/preparations provided that not breaching duty of loyalty
Applicable noncompete agreement
Whistle blowing
Nature of employment
3.4 Standard IV Obtain written consent from employer before accepting

DUTIES TO EMPLOYERS B. Additional
compensation or other benefits from third parties...
Guidance
compensation
Should make an immediate
arrangements
written report to their employers
RPC
Must have indepth knowledge of the Code & Standards

Apply knowledge in discharging supervisory responsibilities
Supervisors take positive
Delegation of supervisory duties does not steps to promote compliance
relieve members of supervisory responsibility Instruct subordinates methods
to prevent and detect violations
Focus on taking positive steps to
promote compliance
Make reasonable efforts to prevent & detect violation of laws, rules, regulations, and Code & Standards
Must understand what constitutes an adequate compliance system
Guidance Make reasonable efforts to see that appropriate compliance
procedures are established, documented, communicated
C. Responsibilities to covered personnel and followed
of supervisors Bring an inadequate compliance system to senior
Establish and implementing
managers's attention & recommend corrective action
Compliance procedures
If clearly cannot discharge
responsibilities cos of absence decline in writing to
of compliance system, accept responsibilities
promptly initiate investigation

In case of employee's violation
take steps to ensure no repetition
Recommend employer to adopt a code of ethics

Respond promptly
If there is
Conduct a thorough investigation
RPC a violation
Increase supervision or place appropriate limitations on
the wrongdoer pending the outcome of the investigation
3.4 Standard IV DUTIES TO EMPLOYERS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
investment philosophy followed

The application of role of member in the investment
Standard V(A) depends on decisionmaking process
support and resources
provided by employer
Must make reasonable efforts to cover all pertinent
issues when arriving at recommendation
Provide or offer to provide supporting info to clients when
making recommendations/changing recommendations
Guidance Using secondary or must make reasonable &diligent efforts to
thirdparty research determine whether 2nd/3rd party research is sound
Not necessarily have to decline to be

A. Diligence and identified if believing consensus opinion
If member does not agree with
reasonable basis the independent and objective has reasonable & adequate basis
Group research and
view of the group Should document member's
decision making
difference of opinion with group
Have a policy requiring that research reports and recommendations

have a basis that can be substantiated as reasonable and adequate.
Have detailed, written guidance for proper research and due diligence.
Have measurable criteria for Judging the quality of research,
and base analyst compensation on such criteria.
RPC Have written procedures that provide a minimum acceptable level of scenario testing
Have a policy for evaluating outside providers of information
Adopt a set of standards that provides criteria for evaluating external advisers
and states how often a review of external advisers will be performed.
Standard V(B) addresses conduct with

respect to communicating with clients
Communication is not confined to written
form but via any means of communication
Developing and maintaining clear, frequent, and
thorough communication practices is critical
3.5 Standard V: distinguish clearly between facts & opinions
INVESTMENT ANALYSIS, present basic characteristics of the analyzed
RECOMMENDATIONS security in preparing research report
& ACTIONS keep them informed with respect to changes
to the chosen investment process
Must use reasonable judgement in identifying important factors to the analysis,

recommendations or actions and include them when communicating
adequately illustrate to clients & prospective
clients the manner of conducting investment
decisionmaking process
B. Communication Guidance include a requirement to address risks and
with clients and limitations as part of the investment process
prospective clients must be supported by background
Brief communications report or data on request
should notify clients that additional

Capsule form info and analyses are available from
recommendations the producer of the report
must be supported by readily

Investment advice available reference material
based on quantitative
research and analysis in a manner consistent with
previously applied methodology
or with changes highlighted
Should outline known limitations, consider principal
risks in investment analysis, report
maintain records indicating the nature of the research

be able to supply additional information if it is requested
RPC
by the client and other users of the report.
In hard copy or electric form
Fulfilling regulatory requirements may Must explicitly determine

satisfy the requirements of this Standard whether it does
Guidance
C. Record retention
Absence of regulatory guidance CFAI recommends maintaining records for at least 7 yrs
The record-keeping requirement generally is the firm's responsibility.

RPC
3.5 Standard V. INVESTMENT ANALYSIS, RECOMMENDATIONS & ACTIONS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
is a critical part of working in investment industry

Managing
conflicts can take Best practice is to avoid conflicts of interest when possible
many forms
If not, disclosure is necessary
prominent
Disclosures
must be made in plain language
in a manner to effectively communicate the info to clients
between member or their firm and issuer

Relationships investment banking
underwriting and financial relationships
Broker/dealer marketmaking activities
Material beneficial ownership of stock
All matters between duties to clients and to
may impair shareholders of the company
poses
objectivity conflicts may receive option to
Investment of interest purchase securities of the
personnel company as compensation
Disclosure also serves MNI
to clients as a director
Guidance
members providing investment
services also serving as directors
should be isolated from those
A. Disclosure of conflicts making investment decisions by firewalls
Sell-side should disclose material beneficial ownership

members interest in securities/investment recommended
Buy-side should disclose procedures for reporting

members requirements for personal transactions
Same circumstances with clients

What?
Any potential conflict situation
Disclosure of conflicts How? Enough info

to employers
Must comply with employer's restrictions regarding conflict of interest
Other requirements Must take reasonable steps to avoid conflicts
If conflicts occur inadvertently, must report them promptly
Should disclose special compensation arrangements

with employer that might conflict with client interest
Document request & may consider dissociating from the activity if firm
3.6 Standard VI does not permit disclosure of special compensation arrangements
CONFLICTS OF RPC Disclose to clients info that fee based on a share of capital gains
INTEREST Disclose as a footnote to research report published if members have
outstanding agent options to buy stocks as a part of compensation package
Clients & employers' transactions have priority

personal investment positions or transactions
Co-investment should never adversely affect client investments
may occur
client is not disadvantaged by the trade
investment professional does
Conflicts of interests not benefit personally from
make sure trades undertaken for clients
investment professional
Guidance complies with applicable
regulatory requirements
B. Priority of Having knowledge of pending transactions,

transactions assess to info during normal preparation of
research recommendations Must not convey such info
May undertake personal transactions after clients & employers

have had adequate opportunity to act on recommendation
Family accounts (that should be treated like other accounts
are client accounts) may still be subject to pre clearance or reporting requirements
if member has beneficial ownership
Limited participation in equity IPQs.

Restrictions on private placements.
Establish blackout/restricted periods.
RPC
Reporting requirements.
Disclosure of policies.
employer
whom client
prospective client
compensation
consideration
C. Referral fees Inform what
benefit
received from, or paid to, others
before entry into any formal agreement

how
nature of the consideration or benefit
3.6 Standard VI CONFLICTS OF INTEREST - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Cheating on CFA exam or any exam
Not following rules and E.g. calculator, personal

policies of the CFA program belongings, candidate pledge
Giving confidential info on the CFA

Program to candidates or the public
A. Conduct as Prohibiting any conduct that undermines Revealing anything about either broad or specific
members and candidates the integrity of the CFA charter topics tested, content of exam questions, or
formulas required or not required on the exam.
in the CFA program
Improperly using the designation to
further personal and professional goals
Misrepresenting information on the Professional Conduct Statement
(PCS) or the CFA Institute Professional Development Program.
Not precluded from expressing opinion
regarding the CFA Program or CFAI
Overpromise the
competence of an individual
Preventing promotional efforts
Overpromise future
that make promises or guarantees
investment results
3.7 Standard VII: tied to the CFA designation
RESPONSIBILITIES Applies to any form of communication
AS CFA MEMBER/CANDIDATE Remit annually to CFAI a completed
Professional Conduct Statement
Pay applicable CFAI membership dues
To maintain CFAI membership
on an annual basis
Should be used as an adjective and never a noun,

i.e. a 'CFA charterholder', not a CFA
B. Reference to CFA Using the CFA designation Should not be used as part of a firm's name
Institute, the CFA Designation
and the CFA program Must be enrolled for next scheduled exam
to say that they are candidates
If not registed, may say "I passed level
[1] of the CFA Programme in [year]."
May state that have passed one or more levels
Referencing candidacy in the CFA program but cannot hold partial designation, e.g. CFA II
Without experience who passed level III may say "I
have passed all three levels of the exam and will be
eligible for the CFA Charter upon the completion of
the required work experience."
Only the mark CFA or the words Chartered Financial

Analyst should appear after the charterholder's name
Proper using of the CFA marks
3.7 Standard VII. RESPONSIBILITIES AS CFA MEMBER.CANDIDATE - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
The financial markets and

investment management industry
are becoming increasingly global
a1. Why were the GIPS Standards created?
Only investment management firms
that actually manage assets
a2. Who can claim compliance?
Note: GIPS standards are printed in their Prospect clients and investment
entirety in the readings, but the Level I management firms
candidate is required only to know the a3. Who benefit from Compliance?
Fundamentals and Compliance material through the end of Section II.0
Consistency of input data is critical to "Fundamental of Compliance." A composite is an aggregation of discretionary
effective compliance with GIPS and portfolios into a single group that represents a
establish a foundation for full, fair and particular investment objectives or strategy
comparable performance presentations
Input data A composite must include all actual, fee-paying
discretionary portfolios managed in accordance
Uniformity in methods used to with the same investment objective or strategy
calculate returns to achieve
comparability among firms Introduction to Global Composites must include new portfolios on a
Calculation methodology Investment Performance timely and consistent basis after the portfolio
b. Construction & purpose of Composites comes under management
composite return is the Standards (GIPS)
asset-weighted average of all the Firms may set minimum asset levels for inclusion in
portfolios' performance results a portfolio, but changes to a composite-specific
Composite construction minimum asset level are not permitted retroactively.
allow firms to elaborate on the raw Terminated portfolios must be included in the
numbers and give the end user the historical returns of appropriate composites
proper context to understand
No "negative assurance" is needed Increase the level of confidence that a firm claiming
Disclosures Major sections of
for non-applicable disclosures GIPS compliance did adhere to GIPS
Presentation and reporting
GIPS standards Improve a firm's internal policies and procedures with
Real estate regard to all aspects of complying with the GIPS standards.
Refers to investments in non-public Firms are encouraged but not required

companies that are in various stages of to undertake the verification process
development and venture investing, c. Verification
A single verification report is issued for the entire firm.
buyout investing and mezzanie financing
Private equity Verification cannot be carried out for a single composite
Firms that have been verified are encouraged to add a disclosure to composite presentations or
Wrap fees are a type of bundle fee and are
advertisements stating they have been verified: "[name of firm] has been verified for the periods
specific to a particular investment product [insert dates] by [name of verifier]. A copy of the verification report is available upon request."
is charged by a wrap fee sponsor for investment
management services and included trading
expenses that cannot be separately identified To obtain global acceptance of calculation and presentation
standards in a fair, comparable format with full disclosure
can be all-inclusive, asset-based fees and may include Wrap Fee/ Separately Managed
a combination of investment management fees, trading To ensure consistence, accurate investment performance data
Account (SMA) portfolios.
expenses, custody fees and/or administration fees
4+5 GIPS GIPS Objectives To promote fair competition among investment management firms
A wrap fee portfolio is sometimes
referred to as a "separately managed To promote global "self regulation"
account (SMA) or "managed account"
To claim GIPS, investment management
firms must define its "firm"
Comply with local law or
Require Firms to include all actual fee paying,
regulation conflicts with GIPS discretionary portfolios in composites defined
How are GIPS standards according to similar strategy/investment objectives
Make full disclosure of the conflict
implemented in countries
Note: this differs from Standards of If local/country specific law or Rely on integrity of input data
Professional Conduct in which the
with existing standards Key characteristics
regulation conflicts with GIPS If an investment firm applies GIPS in a performance situation that is
stricter of local laws or Standards of for performance reporting not addressed specifically by GIPS/ is open to interpretation,
Professional Conduct prevails disclosures other than those required by GIPS may be necessary
GIPS do not address every aspect of performance
measurement, valuation, attribution or cover all asset classes
Firms from any country may come into compliance with GIPS
Compliance cannot be achieved on a
GIPS must be applied on the firm-wide basis. Firm must be defined as an investment
single product, portfolio, or composite
firm, subsidiary, or division held out to clients as a distinct business entity Firms must meet full
Total firm assets must be the aggregate of the market value of Investment firm definition compliance to claim GIPS
all discretionary and non-discretionary assets under management. Key features of the The effective date of the revised Standards is 1 Jan 2011.
This includes both fee-paying and non-fee-paying assets GIPS standards & Presentations that include performance results for periods after 31
Firms must initially show GIPS compliant history for a minimum of 5 years, or fundamentals of Dec. 2005 must meet all the requirements of the revised GIPS.
Performance presentations that include results through 31 Dec. 2005
since inception if the firm has been in existence for less than 5 years. compliance maybe prepared in compliance with the 1999 version of GIPS.
After 5-year compliant history has been achieved, firms must Effective date
add an additional year of performance each year until The scope of the GIPS
10-year performance record is established, at a minimum Firms must document, in writing, their polices and
procedures used in establishing and maintaining
only GIPS compliant performance is
compliance with all requirements of GIPS
presented for periods after 1 Jan. 2000;
A firm may link non-GIPS Documents policies and procedures
and
compliant performance to its Historical performance record
Firm discloses non-compliance period Once a firm has meet all the required requirements of GIPS , use this
compliant history as long as
and explain how it is not in compliance statement to declare: "[Insert name of firm] has prepared and presented this
with GIPS report in compliance with the Global Investment Performance Standards (GIPS)."
Firms previously claiming compliance with an Investment Performance If not meet all the requirements, cannot state:"...in compliance with GIPS except for..."
Council-endorsed Country Version of GIPS are granted reciprocity to Statements referring to the calculation methodology used in a composite
claim compliance with GIPS for historical periods prior to 1 Jan. 2006 presentation as being "in accordance [or compliance] with the Global
Claims of compliance Investment Performance Standards" are prohibited .
Statements referring to the performance of a single, existing client as being "calculated in
accordance with the Global Investment Performance Standards" are prohibited except when a
GIPS complaint firm reports the performance of an individual account to the existing client
provide a compliant presentation to all prospect clients, cannot

choose to whom they want to present compliant performance
must list discontinued composites on
Firm fundamental the firms' list of composites for at
provide a complete list and description of all of the firms'
responsibilities composites to any client that makes such a request least 5 years after discontinuation
4+5 GIPS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
6. TIME VALUE OF MONEY

13. TECHNICAL ANALYSIS
7. DISCOUNTED CASH
12. HYPOTHESIS TESTING
FLOW APPLICATIONS
Quantitative
11. SAMPLING & ESTIMATION Methods 8. STATISTICAL CONCEPTS
AND MARKET RERURNS
10. COMMON PROBABILITY

DISTRIBUTIONS 9. PROBABILITY CONCEPTS
Quantitative Methods - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
to solve many types of time

value of money problems
equilibrium interest rate for a
Find PMT
particular investment
Find N Required rate of return
Loan payment a. Interest rate,
Find I/Y and Amortization for calculating the present value of
considered as future cash flows
Amortization table
Discount rate
Rate of compound growth f1. Use time line Opportunity cost
Number of periods for specific growth
Other applications
Funding a future obligation real risk-free rate is a theoretical
rate on a single-period loan when
the sum of the present values of the cash Rows is the present value of the there is no expectation of inflation.
series. The sum of the future values (at some future time = n) of a series of Nominal risk-free rate = real risk-free rate
cash flows is the future value of that series of cash flows. + expected inflation rate
The cash flow additivity principle refers to the fact that present value of any Connection between a borrower will not make the promised
stream of cash flows equals the sum of the present values of the cash flows PV, FV & series of CF default risk payments in timely manner
b. Interest rate
receiving less than fair value if an
6. TIME VALUE liquidity risk investment must be sold for cash quickly
Future value Several risks of securities
OF MONEY
Longer-term bonds have more risk
Present value maturity risk than shorter-term bonds
a series of equal cash flows that occurs -->The required rate of return on a security = real risk-free rate + expected inflation rate
at evenly spaced intervals over time. + default risk premium + liquidity premium + maturity risk premium
occur at the end of each time period. Ordinary Annuity
represents the annual rate of return actually being earned after
FV of Annuity Due = FV of Ordinary adjustments have been made for different compounding periods
Annuity x (1+ I/Y) Annuity e. CF calculations
Where:
PV of Annuity Due = PV of Ordinary occur at the beginning of each time period. Annuity Due Periodic rate = stated annual rate/m
Annuity x (1+ I/Y) m = the number of compounding periods per year
c,d. EAR
divide the stated annual interest rate by the number of compounding
periods per year, m, and multiply the number of years by the number
PV of a Perpetuity of compounding periods per year
Non-annual time value of
money problems
Discount each individual cash flows
Use CF function in Calculator Uneven CF
6. TIME VALUE OF MONEY - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
the PV of the cash flows less the initial (time = 0) outlay

where:
CFt = the expected net cash flow at time t
N = the estimated life of the investment
r = the discount rare (opportunity cosr of capital)
NPV
Acce pt projects with a posi tive NPV
Convert among these yields Reject projects with a negative NPV

Decision rules
Two mutually exclusive projects:
accept higher positive NPV
is the discount rate that make the

NPV of a project equal to zero
1. Based on face value, not price Different project size: the smaller projects may have
Calculate,
2. Use 360-day higher IRR but their contribution to the firm value
Not much meaningful Interpret, Conflict with may be smaller compared to the larger projects
3. Use simple interest, ignore Decision rule NPV due to
reinvestment of interest Differen timing of cash flows
Multiple IRR or No IRR When CFA pattern is unconventional

Problems
IRR IRR method: project cash flows are
Bank discount yield
Where: assumed to reinvest at IRR while with NPV
r BD = the annualized yield on a bank discount basis it is assumed to reinvest at market rate
D = the dollar discount, which is equal to the difference
7. DISCOUNTED Unrealistic assumptions
--> at the bottom lines: use NPV
between the face value of the bill and the purchase price CASH FLOW
Accept projects with an IRR > the firm's
F = the face value (par value) of the bill APPLICATIONS
t = number of days remaining until maturity (investor's) required rate of return.
360 = bank convention of number of days in a year Decision rules Reject projects with an IRR < the firm's
(investor's) required rate of return.
Yields of T-bills For single project, IRR and NPV
lead to exactly the same decision
Where:
Po = initial price of the the instrument Holding period yield is the percentage change in an
P1 = price received for instrument at maturity HPR investment over the period of holding
D1 = interest payment (distribution)
defined as the IRR

More appropriate if manager has
Effective annual yield Money Weighted
complete control over cash in/out
rMM = HPY x (360/t) measures compound growth

Money market yield
Portfolio Not affected by cash in/out
BEY = 2 x semi annual discount rate rate of return Preferred method
Bond equivalent yield
Time weighted Value the investment immediately after
(chain-link) any withdrawals or deposits, divide the
overall investment horizon into subperiods
3 steps Calculate HPR for each subpediod
Compute the geometric mean
7. DISCOUNTED CASH FLOW APPLICATIONS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Statistics is used to refer to

data and to the methods we
use to analyze date
to summarized the important
Descriptive statistics characteristics of large data sets
Statistical methods
pertain to the procedures used to
make forecasts, estimates, or
Inferential statistics judgement about a large set of data
A population is defined as the set of all

possible members of a stated group Population parameters
Sample statistics
A sample is defined as a subset of mean (measures of central tendency)
Population vs. Sample the populations of interest which addresses return
a.
The most frequently concerned Var (measures of variation around
Excess kurtosis = sample kurtosis - 3 Calculate center) which addresses risk
Leptokurtic: more peaked, fatter tails

l. Kurtosis Classify or count observations with no
(excess kurtosis > 0) --> more risk Nominal scales particular or ranking
Platykurtic: less peaked (excess kurtosis < 0) Compared with

Specified characteristics are used to
Mesokurtic: identical (excess kurtosis = 0) normal distribution categorize observations band involve ranking
Ordinal scales
no information on the difference among categories
Like ordinal scales + the differences

Types of measurement scales between scale values are equal -> scale
values can be added and subtracted
Interval scales cannot build meaningful ratios
No true zero point
Provide ranking, equal differences

Symmetrical between scale values and true zero point
Ratio scales
mean=median=mode
A parameter is a measure used to
the frequency of experiencing
describe a characteristic of a population
losses and gains are the same
Parameter vs. Sample statistic A sample statistic is used to
measure a characteristic of a sample
A tabular presentation of statistical data

b. that aids the analysis of large data sets
Definition
j,k. Shape of distribution
1. Define interval
Frequency distribution Construction of a
3 steps 2. Tally the observations
frequency distribution
3. Count the observations and then calculate
Nonsymmetrical (Skewness) Absolute frequency

Positively skewed (Sk>0) Types
(because of outliers) calculated by dividing the absolute
frequency of each return interval by
the total number of observations.
Relative frequency
c. summing the absolute frequencies starting at the

Cumulative absolute lowest interval and progressing through the highest.
frequency
Negatively skewed (Sk<0)
--> more risk summing the relative frequencies starting at the
8. Statistical Concepts lowest interval and progressing through the highest.
and Market Returns Cumulative relative frequency
bar chart
Histogram
CV (Coefficient of Variation) d.
line chart
i. Relative dispersion Frequency polygon
Negative Sharpe ratio

Limitations Sharpe Ratio / Reward-to-Variability ratio
Not suitable with asymmetric return distribution
Population mean
For any distribution with finite variance, the

percentage of observations lie within k standard
deviation of the mean is at least 1-1/(k^2)
Sample mean
36%: +/-1.25k
56%: +/-1.50k h. Chebyshev's inequality the measure of central tendency
for which the sum of the deviations
75%: +/-2k from the mean is zero
89%: +/-3k Arithmetic mean
94%: +/-4k
Weighted mean
Mean (portfolio return)
Easy to compute
affected by extreme value (compound growth)
Range = Max - Min Geometric mean
no info on how data is distributed
e. Measures of (return data set)
better than range
central tendency Use of arithmetic or geometric mean
less sophisticated than Var and Sd when determining investment returns
g. Dispersion Harmonic mean

Population (cost of shares)
(measure of risk)
Variance & Standard deviation Harmonic < geometric < arithmetic
value of middle item in a set of sorted items
Sample Median not affected by extreme value but

more difficult to find out
No mode
Unimodal, bimodal, trimodal
Semivariance and
--> the only measure can be
semideviation
Mode used with nominal scale
Model interval -->
for continuous distribution
value at or below which a portion of the data distribution lies

into quarters
Quartiles
into fifths
f. Quantile Quintile
into tenths
Decile
Ly =(n+1) x y /100
Percentile (100)
8. Statistical Concepts and Market Rerurns - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Factorial
ways to assign k different labels to n an uncertain quantity/number

items, where ni is the number of Random variable
items with the label i
an observed value of random variable
Outcome
Labeling o. Counting methods a single outcome or set of outcomes

a. Event
Combination
(order does not matter) events that cannot happen at the same time
Mutually exclusive events
those that include all possible outcome
Exhaustive events
Permutation
(order matters)
2 defining properties sum of all P(E) =1, if set of events is

of probability mutually exclusive & exhaustive
historical data
Based on the b. Empirical
event O's occurrence n. Bayes' formula
Priori formal reasoning and inspection process
Determine probabilities
Subjective personal judgment
m. Calculate covariance given Given odds for E of "a to b"--> the

a joint probability function c. Odds for vs. odds against the event implied probability of E is a/(a+b)
and odds against E is "b to a"
Probability of an event regardless of the

past or future occurrence of other events
Expected value Unconditional probabilities
d. the occurrence of one event
affects another event's probability
9. PROBABILITY
the probability of A given the
CONCEPTS Conditional probabilities
occurrence of B: P(A/B)
l. Portfolio
Variance and standard deviation
P(AB) = P(A/B) x P(B)
P(AB) = P(A) x P(B)
Multiplication rule
(if 2 independent events)
P(A or B) = P(A) + P(B) - P(AB)

e. Probability rules P(A or B) = P(A) + P(B)
Addition rule
(If 2 mutually exclusive events)
Two-asset portfolio
P(A) = P(A/B 1)P(B 1) + P(A/B2)P(B 2) +...+ P(A/B N)P(B N)
B1, B2,...BN is a mutually exclusive
Total probability rule
and exhaustive set of outcomes
Covariance measure how two

assets move together Of 2 events P(AB) = P(A/B) x P(B) or P(A/B) = P(AB)/P(B)
k. Covariance and Correlation Of any number of also apply the multiplication rule but to
Joint Probability
more than two independent events
f. Calculate independent events
Correlation is a standardized
p=1: perfectly positive measure of association between
p=-1: perfectly negative the addition rule
two random variables & ranges Probability of at least
p=0: no linear relationship one event will occur
from -1 to 1
Independent event : the P(A/B)=P(A) or P(B/A)=P(B)

occurrence of the event
g. Dependent events has no influence on others'
vs. Independent events Dependent event: reverse
to independent event
j. Tree diagram
h. Total probability rule to use the total probability rule

calculate an unconditional
probability Expected value
Forecasts of expected values for a i. Use of conditional expectation

stock's return, earnings, and dividends
in investment applications
9. PROBABILITY CONCEPTS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Discrete random Uniform

variables
Binomial
Probability distribution: discribes Uniform
Continuous random
the probabilities of all the possible
variables Normal
outcomes for a random variable
Lognormal
uses randomly generated values for risk factors, based on their
assumed distributions, to produce a distribution of possible security a,b. the number of possible outcomes can be counted
values. Its limitations are that it is fairly complex and will provide and there is a measurable, positive probability for
answers that are no better than the assumptions used. each possible outcome
Discrete
Value complex securities
Random variables
the number of possible outcomes is infinite,
Simulate the profits/losses from a trading strategy
Continuous even if lower and upper bounds exist
Calculate estimates of VAR Is used to Monte Carlo simulation
q,r. Simulation Discrete distribution vs.
Simulate pension fund assets and liabilities over time
continuous distribution
Value portfolios of assets that have non-normal returns distributions
uses randomly selected past changes in risk factors to generate a distribution of

for discrete variable
possible security values, in contrast to Monte Carlo simulation, which uses randomly
Probability function p(x)
generated values. A limitation of historical simulation is that it cannot consider the
effects of significant events that did not occur in the sample period
Historical simulation
the compound returns we are familiar with, given

some discrete compounding period, such as
semiannual or quarterly
Discretely compounded
c,d. Functions PDF- Probability density function f(x)
p. Compounded rate of return
For a holding period return (HPR) over

any period, the equivalent continuously Continuously compounded
compounded rate over the period is ln(l + HPR)
generated by the function e^x,

where x is normally distributed
CDF- Cumulative distribution function F(x)=P(X<=x)
the probabilities for all possible

outcomes for a discrete random
variable are equal
Discrete uniform
o. Lognormal distribution
10. COMMON
PROBABILITY
DISTRIBUTIONS
Skewed to the right
bounded from below by zero so useful for modeling
asset prices which never take negative values e,f,g. Discrete
random variables
Binomial
Shortfall risk = Probability that (return < threshold)
the number of "successes" in a given
number of trials, whereby the outcome
can be either "success" or "failure."
n. Roy's safety-first criterion E(X) = np

SF Ratio utilizes the excess return over the threshold return, RL , Variance of X = np(1-p)
where the Sharpe ratio uses the excess return over the risk-free
rate, R1. When the threshold level is the risk-free rate of return,
the SF Ratio is also the Sharpe ratio.
Compare to Sharpe A binomial random variable for
which the number of trials is 1
Bernoulli
is a normal distribution that has
been standardized, i.e N~(0,1)
the difference between the total return on a portfolio and the total
m. Standard normal h. Tracking error return on the benchmark against which its performance is measured
distribution and standardize interchangeable with "tracking risk"
Using Z-table, denoted by F(z) = P(Z<z) defined over a range that spans between some lower limit, a, and
some upper limit, b, which serve as the parameters of the distribution
a range within which we have i. Continuous uniform distribution
a given level of confidence of
finding a point estimate
1 --> 68%
1.65 --> 90% Completely described by its mean and variance
For any normally distributed
1.96 or 2 --> 95% l. Confidence intervals Skewness = 0 -->symmetrical, mean = median = mode
random variable
(for normal distribution) Kurtosis = 3
2.58 --> 99%
Normal distribution A linear combination of normally distributed
random variables is also normally distributed
The tails get very thin but extend infinitely
two times [1 - the cumulative left-hand tail probability, F(-A)], or two probability that a normally
times {1 - the right-hand tail probability, [1 - F(A)]}, where F(A) is
distributed random variable X j,k. Normal distribution Univariate distribution: the distribution
the cumulative standard normal probability of A
of a single random variable
2 discrete random variables: use joint probability
Multivariate: for two or more continuous random variables: use

Univariate distribution vs. multivariate normal distribution
random and dependent variables
Multivariate distribution (the role of correlation) Correlation: the relation between the
outcomes of its variables relative to
their expected values
10. COMMON PROBABILITY DISTRIBUTIONS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Possible mistake: Observations from a

different population may be included
Higher Cost Sample size n (larger is better), but
occurs when analyst repeatedly use the
A method of selecting a sample in such a way that
same database to search for patterns
until the one that "works" is discovered each item in the population being studied has
Data mining bias
equal opportunity of being included in the sample
Simple random sampling
occurs when some data is systematically
excluded from the analysis, usually the difference between a sample statistic and
because of the lack of availability Sample selection bias a,b. Sampling concepts its corresponding population parameter
Sampling error
the most common form of sample selection bias Survivorship bias
k. Selection of sample size
a probability distribution of all possible sample
statistics computed from a set of equal-size samples
occurs when a study tests a relationship
Bias that were randomly drawn from the same population
using sample data that was not available
Sampling distribution
on the test date Look-ahead bias
Too short: research results may reflect a method of selecting a sample in such a way that
phenomena specified to that time period each item in the population being studied has Using random numbers
or perhaps even data mining equal opportunity of being included in the sample
occurs when time span of data in the Systematic sample
Too long: the fundamental economic sample is either too short or too long Time-period bias Simple random sampling
relationship that underlie the result may
c. Sampling methods
have changed uses a classification system to separate the population into smaller
groups based on one or more distinguishing characteristics. From
each subgroup or stratum, a random sample is taken proportionally
Not available to its weight in the population and the results are pooled
Non-Normal AND n<30 Stratified random sampling
Known variance --> z test j. Calculate confidence interval

Observations over a period of time at equal intervals
if n >=30 --> t approach z --> both are ok Unknown variance --> t test Other situations Time- series
11. SAMPLING &
Observations taken at a point in time
ESTIMATION Cross- sectional
Small samples (n<30), d. Set of data
unknown variance Longitudinal data: obs over time of
Normal (or approximately multiple features of one entity
Used when
normal) distribution Pooled data: pooling time-series and Panel data: obs over time of same
i. Student's t-distribution cross-sectional in 2 different ways feature of multiple entities
Symmetrical
Degrees of freedom df=n-1
n>=30 --> the sample mean will
Less peaked, fatter tails than normal Properties
approximately follow normal distribution
Higher n --> approach z e. Central limit theorem The importance of this theorem:No matter what distribution is the
population, as long as the sample size is large then specific inference
about population can be made using normal distribution assumption
single (sample) values used to

estimate population parameters is the standard deviation of the
Point estimation distribution of the sample means
h. Estimate a population parameter
a range of values in which the
population parameter is expected to lie
Confidence interval estimation
f. Standard error of the sample mean Known population variance
the expected value of the estimator is equal
to the corresponding population parameter
Unbiased
unbiased estimator with the smallest variance
of sampling distribution or standard error g. Desirable properties of an estimator Unknown population variance
Efficient
estimator with probability of estimates close to
population parameter as sample size increases
Consistent
11. SAMPLING & ESTIMATION - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
is a statement about the value of a

population parameter developed for the
purpose of testing a theory or belief
Designated Ho, is the hypothesis
that the researcher wants to reject,
the null hyphothesis always include
Null hypothesis "="
Statement about
population parameter
Designated Ha, is what is concluded if there is sufficient
evidence to reject the null hypothesis. It's usually the
alternative hypothesis that you are trying to assess
like the t-test, F-test, and chi-square test, make assumptions regarding Alternative hypothesis
the distribution of the population from which sample are drawn Can be one-sided or two-sided
Parametric test Hypothesis
Upper tail: reject if test
either do not consider a particular population parameter j. statistic>critical value
or have few assumptions about the sampled population A one-sided test is referred to as a one-taled test Lower tail: reject if test
used when the assumptions of parametric a. One-tailed and two-tailed statistic < critical value
tests can't be supported or when the data Nonparametric test tests of hypotheses
are not suitable for parametric tests Reject Ho if test statistic > upper critical
value or test statistic < lower critical value
A two-sided test is referred to as a two-tailed test Not reject Ho if (-critical value) <
sample statistic < critical value
1. State the hypothesis

Single population 2. Identify the test statistic
& probability distribution
Chi-square test
i. Test variance 3. Specifying significance level
Hypothesis 4. State decision rule
testing steps
5. Collect data and calculate test statistic
Two independent populations 6. Make statistical decision

F-test
7. Make economic/investment decision
known variance (review b) = (sample statistic - hypothesized value)/(standard error of the sample statistic)
f. Mean of a normally
unknown variance (review b)
distributed population with
12. HYPOTHESIS
TESTING
Test
statistic
equal assumed variances
g. The equality of means of 2 normally distributed

populations, based on independent random samples with b. Errors
Test means
(alpha) reject null when it's true

Type I
unequal assumed variances
(beta) do not reject null when it's false
Type II
the probability of making a Type I error (rejecting the
null when it is true) and is designated by the Greek letter alpha
Significance level significance level must be specified to
h. The mean difference of 2 normally distributed and critical value identify the critical value
Values outside the critical t-values lead to reject quality
populations (paired comparisons test)
the power of a test: probability of
P-value is the probability of obtaining a critical value that would lead to a rejecting the null when it is false:
rejection of the null hypothesis, assuming the null hypothesis is true --> the 1- P(type II error)
smallest level of significance for which the null hypothesis can be rejected
Either reject the null hypothesis or fail to
One tailed tests: probability lies above the computed test statistic for e. How to use p-value c. Decision rule, the power of a reject the null hypothesis
upper tail tests or below the test statistic for lower tail tests
based on the distribution of the test
Two tailed tests: probability lies above the positive value of the test statistic test, relation between confidence
statistic --> calculate critical value
plus the probability that lies below the negative value of the test statistic intervals and hypothesis tests c. Decision rule
if the test statistic is (greater, less than)
the value X, reject the null
A hypothesis about a population parameter is rejected when
the sample statistic lies outside a confidence interval around
the hypothesized value for the chosen level of significance.
Statistical significance does not

necessarily imply economic significance
d. A statistical result and an
Even though a test statistic is significant statistically, the size of the gains
economically meaningful result
to a strategy to exploit a statistically significant result may be absolutely
small or simply not great enough to outweigh transactions costs.
12. HYPOTHESIS TESTING - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Technical analysis is the study of

collective market sentiment
Prices are determined by the
Principles
interaction of Supply & Demand
make investment decision

Study past patterns to predict future
Applications suitable with short time frame
a. Technical analysis Widely applied to the price of commodity
Market price reflects both rational &

irrational investor behavior (Efficient
market hypothesis does not hold)
Trends & Patterns exist & tend to
Assumptions
repeat, can be used to forecast
Can be contrasted with fundamental
analysis(use intrinsic value)
Line chart
Closing prices as a
continuous line
Bar chart
13. TECHNICAL
ANALYSIS (part 1)
Candlestick chart
b. Charts
X: increases
Point & figure chart Plot only price reversals
O: decreases
Scale
Volume chart
An increasing trend: the asset is

outperforming the benchmark
(positive relative strength)
calculate the ratios of an asset's
closing prices to benchmark values A decreasing trend: the asset is
Relative strength analysis underperforming the benchmark
(negative relative strength)
13. TECHNICAL ANALYSIS (part 1) - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
prices are consistently reaching higher

highs and retracing to higher lows
demand is increasing relative supply
Uptrend Line is drawn below the prices on a chart
by connecting the increasing lows with a
straight line
prices are consistently declining to lower

c. The uses of trend, lows and retracing to lower highs.
support, resistance lines, suggests supply (i.e., selling pressure)
and change in polarity. is increasing relative to demand
Downtrend Line is drawn above the prices on a
chart by connecting the decreasing
highs with a straight line
Support and resistance are prices levels at which buying or selling pressure
is expected to limit price movement. Commonly identified support and
resistance levels include trendlines and previous high and low prices.
The change in polarity principle is the idea that breached resistance levels
become support levels and breached support levels become resistance levels.
Definition: a trend approaches a range of prices but

fails to continue beyond that range and then reverse
Head &
shoulders
Head & Shoulders
Reversal patterns
Inverse head
& shoulders
13. TECHNICAL
ANALYSIS (part 2)
Double tops & bottoms

d. Chart
patterns Definition: a pause in a trend
rather than a reversal
Triangles
Continuation patterns
Rectangle
Flags & Pennants
are rectangle and triangle

patterns in short term
to smooth fluctuations trends are easier to see

=mean of the last
n closing prices
(n=20; 250...) __ (smoother/less smooth) line
larger n if overly long n --> may
obscure price trend (obscure = hide)
above golden cross --> _________ (buy/sell) signal

Moving average lines ST average line crosses
LT average line
Price-based below dead cross --> _________ (buy/sell) signal
SMA (Simple Moving Average) vs. EMA (Exponential)

(place more weigts on recent data)
e.g.: bollinger band (20,2) means 2 standard deviations

above and below the 20-day moving average line
Bollinger bands viewed as contrarian indicator: if price at or above upper band -->
over___ (bought/sold) market --> we should ____ (buy/sell)
closing price today & n days earlier

Momentum oscillator (or --> oscillate around 0
(today - past day) x 100
Rate of Change oscillator)
2 formulas
today / past day --> oscillate around 100
RSI = (1 - 1/ (1 + RS)) x 100 RS = Total price increases / Total price decreases
Relative strength index between 0 & 100

compare to 30 and 70
MACD line (e.g.: MACD (26,12):

ExpMA(26)-ExpMA(12)
Moving average Signal line: ExpMA(9) of MACD
Oscillators convergence/divergence oscillator
MACD line crossing above Signal line
(or divergence histogram crosses up)
--> buy signal
%K line: (latest price - recent low) / (recent high - recent low)

e. Common Lines
%D line: 3-period average of %K line
technical analysis
indicators If %K line crosses up %D line --> buy signal
Stochastic oscillator Fast %K = %K basic calculation

Fast stochastic oscillator
Fast %D = 3-period SMA of Fast %K
Slow %K = Fast %K smoothed with 3-period SMA

Slow stochastic oscillator
Slow %D = 3-period SMA of Slow %K
Opinion polls (survey)

=put vol / call vol
Put/Call ratio viewed as contrarian indicator: if very high --> __________ (bearish/bullish)
Calculated investor sentiment --> over_______ (bought/sold) market
statistical indices
=volatility of options on S&P 500
Sentiment CBOE Volatility Index (VIX) if high --> investors ____ (bearish/bullish) --> we should
indicators be______ (bearish/bullish)
if increase --> investors are ________ (bearish/bullish) --> prices are

Margin debt __________ (increasing/decreasing)
short interest = number of shares that

=short interest / average daily trading volume investors have borrowed and sold short
Short interest ratio
contrarian indicator of follow the smart money indicator?
Non-price-based indicators
=(number of advancing issues/number of declining issues) /
volume of advancing issues / volume of declining issues)
Arms index or TRIN
Compare to 1:
(short-term TRading INdex)
Spikes upward = daily ____ (gain/loss)
Spikes downward = daily ______ (gain/loss)
13. TECHNICAL
ANALYSIS (part 3) Margin debt if increase --> investors _________ (buy/sell) more
Flow of funds indicators
= mutual fund cash / total assets
Mutual fund cash position
viewed as contrarian indicator
New equity issuance (IPO) =market _________ (peak/trough) because Issuers sell new shares
and Secondary offerings when stock prices are thought to be _____ (high/low)
Kondratieff Wave
(54 years)
f. Cycles 18-year cycle
Decennial (10-year) pattern
4-year Presidential cycle
Major asset classes: stocks, bonds,

commodities, currencies
h. Intermarket analysis Equity sectors/ industries
interrelationships (relative strength ratios) among
International markets
Upward moves: 5 waves (1,3,5=impulses; 2,4=corrective; 2=pullback

Downward moves: 3 waves (A,B,C) (A=bulltrap)
Uptrend
g. Elliott Wave Theory
Downtrend: downward moves (5

waves); upward moves (3 waves)
Fibonacci 0,1,1,2,3,5,8,13,21...
numbers
Golden ratio: 1.618 or 0.618
Size of waves correspond with Fibonacci ratios Price target can be 1.618
of the previous high
Grand The cycle periods range from a

Supercycle few minutes (a "subminuette"
(centuries) cycle) to centuries
Different waves
14. Topics In Demand And Supply Analysis

20. Currency Exchange Rates
15. The Firm And Market Structures
19. International Trade

And Capital Flows Exchange Rates ECONOMICS
16. Aggregate Output, Price,
And Economic Growth
18. Monetary And Fiscal Policy

17. Understanding Business Cycles
ECONOMICS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
is a measure of the responsiveness of the quantity demanded to a change in price

When quantity demanded is very
responsive to a change in price => demand is elastic
When quantity demanded is not very

responsive to a change in price => demand is inelastic
Each point along the curve represents the minimum ATC for a given plant size or scale of operations
=% QD/% P
Few or no good substitutes for a good => inelastic.
One or more goods are very good substitutes for the good => elastic
The larger the proportion of income,

Portion of income spent on a good the more elastic an individual's demand
How Economies of scale and Own-Price Elasticity of Demand Other factors affect demand elasticity in addition
Diseconomies of Scale Affect Costs to the quality and availability of substitutes
Elasticity of demand tends to be greater the
longer the time period since the price change
Time
Elasticity is not slope for demand curves Slope is dependent on the units chat price and quantity are measured in
Average coral costs first decrease with larger scale and eventually increase
The lowest point on the LRATC corresponds to the scale or plant size at which the average total cost of production is at a minimum
Under perfect competition, firms must operate at minimum efficient scale in long-run equilibrium, and LRATC will equal the market price The minimum efficient scale
Price, Income, and Cross Price Elasticities of
result from factors such as labor specialization, mass production, and investment in more efficient equipment and technology, lower input prices Demand and Factors that Affect each Measure
The downward-sloping segment: economies of
A firm operating with economies of scale can increase its competitiveness by expanding production and reducing costs scale (increasing returns to scale)
result as the increasing bureaucracy of larger firms leads co inefficiency, problems with
motivating a larger workforce, and greater barriers to innovation and entrepreneurial activity
A firm operating under diseconomies of scale will want to decrease output and move back toward the minimum efficient scale The upward-sloping segment: diseconomies of scale
Costs are constant for the various plane sizes There may be a relatively Rae portion at the
bottom of the LRATC curve that exhibits constant
returns to scale
The time period over which some factors of production are fixed
Short run
All factors of production (costs) are variable

Long run Price Elasticity Along a Linear Demand Curve
price = marginal revenue= average revenue

The sensitivity of quantity demanded co a change in income
For most goods, the sign of income elasticity is positive Normal goods
Income Elasticity of Demand =% QD/% I

For some goods, an increase in income
leads to a decrease in quantity demanded Inferior goods.
is lhe ratio of the percentage change in the quantity demanded of

a good to the percentage change in the price of a related good
Substitutes An increase in the price of a related good => increase demand for another good
Cross Price Elasticity of Demand
Complements An increase in the price of a related good => decrease demand for another good
Shutdown and Breakeven

Under Perfect Competition
If AR>= ATC, the firm should stay in the market in both the short and long run
If AR >= AVC but AR< ATC, the firm should stay in the market Calculating Elasticities
in the short run but will exit the market in the long run
If AR < AVC, the firm should shut down in the shore run and exit the market in the long run
The substitution effect always acts to increase the consumption of a good that has fallen in price
if average revenue is less than average variable cost in the short run, the firm should shut down Short-run shutdown point The income effect can either increase or decrease consumption of a good that has fallen in price
14. TOPICS IN DEMAND The substitution effect is positive, and
If average revenue is greater than average variable cost in the short run, the firm should continue to operate, even if it has losses Breakeven and Shutdown Points the income effect is also positive Consumption of Good X will increase
In the long run, the firm should shut down if average revenue is less than average total cost of Production AND SUPPLY ANALYSIS
Long-run shutdown point
The substitution effect is positive, and the income effect
Outcomes of a is negative but smaller than the substitution effect Consumption of Good X will increase
If average revenue is just equal to average total cost, total revenue is just equal to total (economic) cost Breakeven point decrease in the price
of Good X The substitution effect is positive, and the income effect
is negative and larger than the substitution effect Consumption of Good X will decrease.
TR= TC: break even

If the entire TC curve exceeds TR,the firm will want to minimize the economic loss in the short Shutdown and Breakeven
TC >TR> TVC: firm should continue to operate
run by operating at the quantity corresponding to the smallest (negative) value of TR - TC Under Imperfect Competition
in the short run but shut down in the long run
Compare Substitution and
TR < TVC: firm should shut down in the short run and the long run Income Effects
Land
Labor
Capital Factors of production
Materials
Consider two inputs: capital and labor to calculcate the quantity of output
The increase in production that will result as increasing
one labor employed given a fixed amount of capital
Production Function
Adding one more worker will increase total product Marginal product
by less than rhe addition of the previous worker
Income and Substitution Effects
When we reach the quantity of labor for which the additional output for each additional worker begins to decline
Beyond this quantity of labor, the additional output from each additional worker continues to decline
There is some quantity for labor for which the marginal product of labor is actually negative
The Phenomenon of Diminishing

Marginal Returns
Diminishing marginal productivity or

diminishing marginal returns
A specific good may be an inferior good for some ranges of income and a normal good
for other ranges of income
is an inferior good for which the negative income effect outweighs the positive substitution effect when price falls
At lower prices, a smaller quantity would be demanded as a result
A Giffen good of the dominance of the income effect over the substitution effect
The existence is not ruled out by the axioms of the theory of consumer choice
Normal Goods and Inferior Goods
The consumer gets utility from being seen to consume a good chat has high status
and that a higher price for che good conveys more status and increases its utility
is one for which a higher price
makes the good more desirable The substitution and income effects of a price
increase are to decrease consumption of the good
A Veblen good Not an inferior good
The existence does violate the theory of consumer choice
14. TOPICS IN DEMAND AND SUPPLY ANALYSIS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Many firms produce identical products, and competition forces them all to sell at the market price
Perfectly elastic (horizontal) demand curves at the price determined in the market
None Pricing power
Firms compete for sales only the basis of price. Nature of competition
A firm will continue to expand production until MR = MC
Very good substitutes Nature of substitutes

products
very low Barriers to entry
Many firms Number of sellers
In pure competition, A profit

An increase in market demand will increase maximizing firm will produce the
both equilibrium price and quantity & vice versa quantity, Q*, when MC = MR.
Change in equilibrium price --> change the (horizontal) demand curve
faced by each individual firm & the profit-maximizing output of a firm
In short-run
Short run: economic profit is maximized at Q which

MR = MC. Profit maximization also occurs when
Changes in Demand, Entry TR > TC by the maximum amount.
15. The Firm And
and Exit, and Changes in
Plant Size Market Structures
An adjustment to a shift in industry demand and the resulting change in price
may be either to alter the size of its plant or leave the market entirely In long-run - Part 1 - Perfect
Competition
On any unit which MR < MC. At any output above the quantity where MR = MC
-> generate losses on MP & maximize profits by reducing output to where MR = MC
If P = AVC: operating at shutdown point.
A permanent change in demand --> the entry
of firms to, or exit of firms from, an industry. If P < AVC: by continuing to operate --> losses > fixed costs -->
the firm will shut down (zero output) and lay off its workers.
An economic loss occurs

In short run: when P < ATC
The long-run equilibrium output level is where MR = MC = ATC (ATC is at

a minimum) --> Economic profit is zero & only a normal return is realized
Short-Run Supply Curves
The MC line above the AVC

The short-run market supply curve, which is the horizontal sum (add up the quantities
from all firms at each price) of the MC curves for all firms in a given industry.
In short-run equilibrium,
Slope upward to the right because firms will supply more units at higher prices each firm produces at MR =
MC = ATC
15. The Firm And Market Structures - Part 1 - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Each firm differentiates its product(s) from those of other firms through some
combination of differences in product quality, product features, and marketing
The demand curves are highly elastic because competing
The demand curve is downward sloping; while products are perceived by consumers as close substitutes
demand is elastic, it is not perfectly elastic.
Many firms
Number of sellers
Low
Barriers to entry The entry of new firms shifts the demand curve faced by each individual firm down to the
point where price equals average total cost (P*= ATC*), such that economic profit is zero.
Nature of substitutes products Good substitutes but differentiated
The differences between long-run equilibrium

in markets with monopolistic competition and Monopolistic competition: P>MC, ATC is not at a minimum for
markets with perfect competition. the quantity produced or an inefficient scale of production,
MONOPOLISTIC and price is slightly higher than under perfect competition
COMPETITION Perfect competition is characterized by no product differentiation
Price
Nature of competition
The firm continues to produce at Q where MR = MC

but no longer earns positive economic profits.
15. The Firm And Continually look for innovative product features that will make
Market Structures - their products relatively more desirable to some consumers
Part 2 than those of the competition.
The costs of product innovation must be weighed
Product innovation against the extra revenue that it produces
A firm is considered to be spending the optimal amount on innovation when MC of
(additional) innovation just equals the MR (marginal benefit) of additional innovation
High
Advertising expenses To inform about the unique features of their products and to create or increase
a perception of differences between products that are actually quite similar.
some
Pricing power
An indicator of market power.
Use N-firm concentration ratio, which is calculated as the sum or the

percentage market shares of the largest N firms in a market
This problem is reduced by using an alternative measure of

f. Concentration measures May be relatively insensitive to mergers of two market concentration, the Herfindahl-Hirschman Index (HHI)
firms with large market shares. The HHI is calculated as the sum of the squares of
the market shares of the largest firms in the market.
Limitations
Applies to both of our simple concentration measures is
that barriers to entry are not considered in either case
g. Identify type of
market structure
A few firms competing. Each firm must consider the actions and
responses of other firms in setting price and business strategy
--> interdependent.
Kinked demand curve model
Characterized by a single seller of a product with no close substitutes.
Shortcoming: in spite of its intuitive appeal, it is incomplete because what determines

the market price (where the kink is located) is outside the scope of the model.
Firms determine their quantities simultaneously each period and, under the assumptions
of the Cournot model, these quantities will change each period until they are equal.
When each firm selects the same quantity, there is no longer any additional
profit to be gained by changing quantity --> a stable equilibrium
The Cournot model
The resulting market price is less than the profit maximizing price that a monopolist would
The profit maximizing output for charge, but higher than marginal cost, the price that would result from perfect competition
a monopolist is where MR = MC.
To ensure a profit, the demand curve must lie
above the firm's average total cost (ATC) curve at
the optimal quantity so that price > ATC.
The market demand curve is a downward-sloping. The firm has
The profit maximizing output is Q*, with a price of P*, the power to choose the price at which it sells its product.
and an economic profit equal to (P* - ATC*) x Q*.
Monopolists are price searchers and have imperfect in
formation regarding market demand. They must
experiment with different prices to find the one that
maximizes profit
Single firm
Number of sellers
One source of monopoly power is the protection offered by copyrights and patents
Another possible source of monopoly power is control over a resource specifically needed
to produce the product. Most frequently, monopoly power is supported by government
A natural monopoly refers to a situation where the average cost of production is falling over Very high
the relevant range of consumer demand. In this case, having two (or more) producers would Barriers to entry
result in a significantly higher cost of production and be detrimental to consumers.
Nash equilibrium
Sometimes market power is the result of network effects or synergies that make it very is reached when the choices of all firms are such that
difficult to compete with a company once it has reached a critical level of market penetration there is no other choice that makes any firm better off
OLIGOPOLY (increases profits or decreases losses). There are fewer firms.
No good substitutes Products are more similar (less differentiated).
Nature of substitutes products
Cost structures are more similar
Increase price in an oligopoly market will be more
Advertising 15. The Firm And successful (have less cheating) when: Purchases are relatively small and frequent.
Market Structures - Retaliation by other firms for cheating
Single-price
Part 3 is more certain and more severe.
Price discrimination is described in more detail after we address single-price profit maximization. There is less actual or potential
Face a downward-sloping demand curve. competition from firms outside the cartel.
Have at least two identifiable groups of customers with For price discrimination to work, MONOPOLY
different price elasticities of demand for the product. the seller must
Be able to prevent the customers paying the lower price from
reselling the product to the customers paying the higher price.
Consumer surplus is reduced not only by the

decrease in quantity but also by the increase
in price relative to perfect competition
Price-discrimination Pricing strategies
The quantity produced by a monopolist reduces the sum A price decrease by one of the competitive firms, which increases QCF in
of consumer and producer surplus by an amount the short run, will lead to a decrease in price by the dominant firm, and
represented by the triangle labeled deadweight loss (DWL) competitive firms will decrease output and/or exit the industry in the long run.
The long-run result of such a price decrease by competitors below P* would then be to decrease
the overall market share of competitor firms and increase the market share of the dominant firm.
The average cost of production for a single firm is falling

throughout the relevant range of consumer demand
A single price monopolist will maximize profits by producing
where MR = MC, producing quantity Qu and charging Pu Stackelberg dominant firm model
Increase output
and decrease price.
Monopolists have to reduce price to
Increase social welfare where the firm's ATC intersects
(allocative efficiency). the market demand curve. Average cost pricing is the most NATURAL MONOPOLY There is a single firm that has a significantly large market share because of its greater scale and lower cost structure-the dominant firm (DF). In such
common form of regulation.
Ensure the monopolist a normal a model, the market price is essentially determined by the dominant firm, and the other competitive firms (CF) take this market price as given.
profit because price = ATC.
Few firms
Number of sellers
Increases output and reduces price, Monopolists have to reduce price to
but causes the monopolist to incur a the point where the firm's MC curve High Often because economies of scale in production or marketing lead to very large firms.
loss because price is below ATC Marginal cost pricing is also
intersects the market demand curve Barriers to entry
referred to as efficient regulation
Very good substitutes but differentiated
The government to sell the Nature of substitutes products
monopoly right to the highest bidder
Price, marketing, features
Some to Significant
Pricing power
G D P = C + I + G + (X - M)
where:
The number of people over the age of 16 who are either C = consumption spending
working or available for work but currently unemployed
Labor supply GDP is calculated by summing the amounts spent on I = business investment (capital
It is affected by population growth, net Expenditure approach goods and services produced during the period equipment, inventories)
immigration, and the labor force participation rate G = government purchases
X =exports
Workers who are skilled and well-educated (possess more human capital) are a. Calculate GDP using M =imports
more productive and better able to take advantage of advances in Human capital
technology, investment in human capital leads to greater economic growth.
GDP is calculated by summing the amounts earned by GDP = national income + capital
households and c ompanies during the period, including consumption allowance + statistical
A high rate of investment increases a country's stock of physical capital Income approach
Physical capital stock Sources wage income, interest income, and business profits discrepancy
A larger capital stock increases labor productivity and potential GDP
improvements in technology increase productivity and potential GDP. Tec hnology GDP is calculated by summing the additions to value
Sum-of-value-added method created at each stage of production and distribution.
Raw material inputs, such as oil and land, m.
are necessary to produce economic output.
b. Compare
GDP is calculated by summing the values of all final
These resources may be renewable or nonrenewable Natural resources Value-of-final-output method goods and services produced during the period
Countries with large amounts of productive natural

resources can achieve greater rates of economic growth . Nominal GDP GDP values goods and services at their current prices.
Compare
Potential GDP = aggregate hours worked x labor productivity
Measurement Real GDP Real GOP measures current year output using prices from a base year.
Growth in potential GDP = growth in labor force + growth in labor productivity c.
GDP The GDP deflator is a price index that can be used to convert nominal
Can be estimated by estimating the growth rate of labor
GDP deflator GDP into real GDP by removing the effects of changes in prices
productivity and the growth rate of the labor force
Is important because long-term equity returns are highly
Sustainability Economic growth
dependent on economic growth over time The four components of gross domestic product are consumption
GDP spending, business investment, government spending, and net exports.
A country's sustainable rate of economic growth is the
rate of increase in the economy's productive capacity
= compensation of employees (wages and benefits)
The relationship between output and labor, the capital stock, and productivity. + corporate and government enterprise profits before taxes
+ interest income
Economic output function: Y =A xf(L, K) The income received by all factors of production + unincorporated business net income (business owners' incomes)
where: National income used in the creation of final output. + rent
Y = aggregate economic output + indirect business taxes - subsidies (taxes and subsidies that are
L = size of labor force included in final prices)
K = amount of capital available
A = total factor productivity
n. Production function approach d. Compare
The production function can be stated on a per-worker basis by = national income
dividing by L: Y/L = Ax f(K/L) + transfer payments to households
where: The pretax income received by households. - indirect business taxes
Y/L = output per worker (labor productivity) Personal income - corporate income taxes
K/L = physical capital per worker - undistributed corporate profits
Labor productivity can be increased by either improving
technology or increasing physical capital per worker.
Personal income after taxes. PDI measures the amount that households have
Growth in potential GDP = growth in technology + Wl(growth in labor) + Wc(growth in capital) available to either save or spend on goods and services and is an important
WL and Wc are labor's percentage share of national income Input growth Personal disposable income economic indicator of the ability of consumers to spend and save.
and capital's percentage share of national income. Personal disposable income = personal income - personal taxes
Driven by improvements in technology. Sometimes, the relationship between potential o. Components of economic growth
GDP, technology improvements, and capital growth is written on a per-capita basis Growth of total S (household and business savings)
Growth in per-capita potential GDP = growth in factor productivity Saving
technology + Wc (growth in the capital-to-labor ratio) S =I+ (G - T) +(X- M)
Investment
a positive value is a government budget deficit
(G - T)
a negative value is a budget surplus
e. Fundamental The difference between government spending and tax receipts.

occurs when real GDP is less than potential real GOP, Fiscal balance
causing downward pressure on input prices
relationship among a government deficit (G - T > 0) must be financed
by some combination of a trade deficit (X - M < 0)
(G - T) = (S - I) - (X - M)
an excess of private saving over
private investment (S - I> 0).
Adjustment to a Decrease
in Aggregate Demand a positive value is a trade surplus
(X - M)
Increase investment in defensive companies and decrease Trade balance a negative value is a trade deficit
investment in cyclical companies
Net exports
Increase investment in investment-grade and
An investor expecting a decrease in
government fixed income securities and decrease
aggregate demand that will result in
investment in lower-quality fixed income securities (S - I) = (G - T) + (X - M)
a recessionary gap should:
Increase investment in long-maturity fixed income The negative relationship between the real interest rate and levels of aggregate
securities because their prices react more to falling income that are equal to planned expenditures at each real interest rate.
interest rates than do shorter-maturity securities.
An increase in the money wage and other resource prices means

that business will be willing to supply less real goods and services at IS curve
each price level (prices of final goods and services).
the IS curve is an inverse relationship
It is the increase in resource prices that causes Adjustment to an Increase between the real interest rate and income
SRAS to decrease (shift to the left) in Aggregate Demand
An inflationary gap occurs when real GDP is

greater than potential real GOP, causing upward
pressure on input prices.
l. I2: Analyze the effect of combined
changes in aggregate supply and
demand on the economy.
16. Aggregate IS & LM The LM curve shows the combinations of GDP or real income
Curve (Y) and real interest rate (r) that keep the quantity of real money
Output, Price, And LM curve
demanded equal to the quantity of real money supplied
Economic Growth
is simultaneous high inflation and weak economic growth, which

The points at which the IS curve intersects LM curves for different
can result from a sudden decrease in short-run aggregate supply
levels of the real money supply form the aggregate demand curve
Shows the negative relationship between GDP (real output demanded)

and the price level, when other factors are held constant.
Stagflation
A decline in aggregate supply is represented in Figure
13 as a shift from SRAS0 to SRAS1 . Aggregate demand curve The AD Curve shows the relationship between the quantity of real
output demanded (which equals real income) and the price level.
Equilibrium GOP decreases from GDP* to GDP1' Slopes downward because higher price levels reduce real wealth,
increase real interest rates, and make domestically produced
goods more expensive compared to goods produced abroad.
Inflation rises as the price level increases from P0 to P1
Difficult for government policymakers to address because policy changes to reduce inflation tend to
make unemployment worse, while policy changes to fight recession tend to make inflation worse
Decrease investment in fixed income securities in
The positive relationship between real GDP supplied and the
anticipation of higher inflation and nominal interest rates.
SR price level, when other factors are held constant
Decrease investment in equities as revenue
An investor anticipating stagflation should
and profit margins will decrease.
Perfectly inelastic (vertical)
Increase investment related to commodities in
anticipation of higher commodity prices. LR Long-run aggregate supply represents potential GDP,
the full employment level of economic output.
Real GDP = full employment (potential) GDP Long-run full employment
AD increases --> GDP of short-run equilibrium>full-employment GDP Short-run recessionary gap Aggregate
j. Distinguish between the following supply curve in
types of macroeconomic equilibria
AD decreases --> GDP of short-run equilibrium< full-employment GDP Short-run inflationary gap
AS decreases --> GDP < full-employment GDP but with an crease in price level Short-run stagflation
The AS curve describes the relationship between the price level and the
quantity of real GDP supplied, when all other factors are kept constant
Caused by changes in household wealth, business and consumer expectations, capacity utilization,
fiscal policy, monetary policy, currency exchange rates, and global economic growth rates.
Long-Run Equilibrium Real Output

There is excess supply; the quantity of real goods and
Businesses will see a build-up of services supplied exceeds the (aggregate) demand for real
inventories and will decrease both goods and services.
production and prices in response This sometimes refers to A recessionary gap. There will be
downward pressure on prices.
Businesses will experience unintended Shifts in the short-run aggregate supply curve
decreases in inventories and respond by There is excess demand for real goods and services.
increasing output and prices. This is sometimes referred to as an inflationary gap.
The short-run aggregate supply (SRAS) curve reflects the relationship between
output and the price level when wages and other input prices are held constant.
In Panel (a), short-run equilibrium real GDP, GDP1, is less than caused by changes in nominal wages or other input prices, expectations of future prices,
full-employment GDP (along the LRAS curve) and we would interpret business taxes, business subsidies, and currency exchange rates
this as a recession, or below full-employment equilibrium. i. Fluctuations in aggregate D & S
-->SR changes in econ & biz cycle The long-run aggregate supply (LRAS) curve is vertical (perfectly
Difference between real GDP and full-employment GDP is called a
inelastic) at the potential (full-employment) level of real GDP.
recessionary gap or output gap --> downward pressure on money wages
and resource prices --> decrease the equilibrium price level from P1 to P* h. Shifts and Increase in the supply and quality of labor
movements
along D & S curves Increase in the supply of natural resources
Shifts in the long-run aggregate supply curve Changes in factors that affect the real Increase in the stock of physical capital:
output that an economy can produce at
Short-run Equilibrium Real Output Tec hnology
full employment will shift the LRAS curve.
Decreases in labor quality, labor supply, the supply of natural resources, or the
stock of physical capital will all decrease LRAS. Technology does not really retreat,
but a law prohibiting the use of an improved technology could decrease LRAS.
An economic expansion where aggregate demand has
Increase in consumers' wealth
grown faster than LRAS.
Business expectations
The result will be upward pressure on prices -->
inflation as the general price level increases from P1 to P* Consumer expectations of future income
A number of factors can affect this level of High capacity utilization

expenditures and cause the AD curve to shift. Expansionary monetary policy
Shifts in the Aggregate Demand Curve
Expansionary fiscal policy
Changes in the money supply --> changes in aggregate demand. An increase Exchange rates
in the money supply --> decrease real interest rates and increase aggregate Global ec onomic growth
demand through increasing consumption expenditures on durable goods
Note that a change in the price level is represented as a
A decrease in the money supply will have the opposite effect, increasing movement along the AD curve, not a shift in the AD curve.
the real interest rate and reducing consumption and investment spending. Movements along these curves reflect the impact of a change in the price level on the quantity demanded
and the quantity supplied. Changes in the price level alone do not cause shifts in the AD and AS curves
16. Aggregate Output, Price, And Economic Growth - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Characterized by fluctuations in economic activity

Biz Cycle Real gross GDP
2 key variables
Rate of unemployment
Expansion real GDP is increasing
have turning points that tend to real GDP stops increasing

precede those of the business cycle Leading indicators Peak and begins decreasing
a. Describe
have turning points that tend to coincide Phases of Biz Cycle real GDP is
with those of the business cycle Coincident indicators Types of indicators Contraction or recession decreasing
have turning points that tend to occur i. Describe economic indicators real GDP stops decreasing
after those of the business cycle Lagging indicators Economic Trough and begins increasing
indicators
Uses Inventory-sales ratio
Inventory levels
relationships with the business cycle are inexact and can vary over time Resource use
Limitations
fluctuation Labor
Past biz cycle Physical capital utilization levels
Current biz cycle Mortgage rate
j. Identify Housing
Expected future biz cycle sector Housing costs relative to income
b. Economy moving activity
through biz Cycle --> Speculative activity
persistent increase in the price level over time Inflation Business cycle Demographic factors
a decrease in the inflation rate over time Domestic imports

Disinflation External trade sector activity
e. Explain Domestic exports
a persistent decrease in the price level Deflation business cycles are temporary and
driven by changes in technology
measures the cost of a specific basket of goods and Neoclasscial school rapid adjustments of wages and other input prices cause
services relative to its cost in a prior (base) period Price index the economy to move to fu ll-employment equilibrium
Keynesian school
based on the purchasing patterns
of a typical household Consumer price index (CPI) 17. Understanding excessive optimism or pessimism among
business managers causes business cycle
Business Cycles
Price index for personal consumption expenditures contractions can persist because
f. Indices used to New Keynesian school wages are slow to move downward
GDP deflator measure inflation New Keynesians believe input prices other
Producer price index (PPI) than wages are also slow to move downward
c. Theories of Biz Cycle
Wholesale price index (WPI)
inappropriate changes in the rate of money
Core inflation supply growth cause business cycles
Monetarist school money supply growth should be maintained
Headline inflation
at a moderate and predictable rate
Inflation
Uses a constant basket of goods and services
business cycles are initiated by government intervention
New goods Austrian school that drives interest rates to artificially low levels
3 elements cause biased
Quality improvements Laspeyres
upward to Laspeyres index Real biz cycle theory (RBC)
Consumers' substitution of lower-priced Limitations New classical school
goods for higher-priced goods over time
g. Inflation measures results from the time it takes for employers looking to fill
uses current consumption weights for the basket of goods and services for both periods jobs and employees seeking those jobs to find each other
Paasche index Frictional unemployment
reduces substitution bias
The geometric mean of a Laspeyres and a Paasche index results from long-term economic changes that require
Fisher index workers to learn new skills to fill available jobs
Types Structural unemployment
Hedonic pricing
positive (negative) when the economy is producing less
results from a decrease in aggregate supply caused by an increase in (more) than its potential real GDP.
Cyclical unemployment
the real price of an important factor of production, such as labor or energy Cost-push inflation
d. Unemployment Unemployment rate = Unemployment/ labor force
results from persistent increases in aggregate demand that h. Factors that
increase the price level and temporarily increase economic affect price levels
includes all people who are either
output above its potential or full-employment level. Demand-pull inflation
Labor force employed or unemployed
Voluntarily unemployed
Measures
Underemployed
Participation ratio = Labor force/ Population working age
Discouraged worker
17. Understanding Business Cycles - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Definition a generally accepted medium of exchange.
Medium of exchange means of payment
Functions of money in an economy Unit of account
b. Store of value
the amount of notes (currency) and coins in circulation

Narrow money in an economy plus balances in checkable bank deposits
Money
includes narrow money plus any amount available in
Broad money liquid assets, which can be used to make purchases
Concepts Money multiplier = 1/(reserve requirement)
c. Money creation process money supply x velocity

Quantity theory of money = price x real output (MV = PY)
The amount of wealth that households and firms in

Definition an economy choose to hold in the form of money
Expansionary (accommodative or easy)
Type
Contractionary (restrictive or tight) Monetary policy Transaction demand
Demand for money
a. Compare for unforeseen
budget deficit Reasons for holding money Precautionary demand future needs
Fiscal policy d. Theories of

budget surplus
Speculative demand
determined by the central bank

(the Fed in the United States)
Supply of money
independent of the interest rate
R (Nom) = R(real) + E(I)

e. Fisher effect
1. Sole supplier of currency
2. Banker to the government and other banks
3. Regulator and supervisor of payment system
Roles
4. Lender of last resort
1.Expansionary fiscal and monetary policy 5. Holder of gold and foreign exchange reserves
2. Contractionary fiscal and monetary policy 6. Conductor of monetary policy
t. Interaction of
3. Expansionary fiscal policy + contractionary monetary policy f. Central banks
monetary and fiscal policy Primary objective control inflation so as to promote price stability
4. Contractionary fiscal policy + expansion monetary policy
Interaction of monetary and fiscal policies Stability in exchange rates with foreign currencies
Objectives Full employment
use of spending and taxation to Other goals
Sustainable positive economic growth
meet macroeconomic goals Roles
Moderate long-term interest rates
Influencing the level of economic activity High inflation, even when

o. Describe people reduce cash balance
Redistributing wealth or income Objectives it is perfectly anticipated
Allocating resources among industries reduces the information

unexpected inflation value of price changes
Transfer payments
Current spending ( goods and services used by government) Spending tools g. Costs of expected and unexpected
Uncertainty about the decrease business
Capital spending (investment projects funded by government) future rate of inflation increases risk investment
Direct and indirect taxation Revenue tools

Monetary policy called the discount rate in the United States,
the refinancing rate by the ECB, and the
Indirect taxes can be used to quickly implement social policies
Policy rate 2-week repo rate in the United Kingdom
and can also be used to quickly raise revenues at a low cost Advantages
Pros and cons Tools Reserve requirements
Time lags for implementing changes in direct taxes 18. Monetary h. Implementation of monetary policy
Disadvantages Buying and selling of
Time lags for capital spending changes to have an impact And Fiscal Policy Open market operations securities by the central bank
Determines the potential increase in aggregate demand

resulting from an increase in government spending p. Tools of fiscal policy Short-term bank lending rates
Changes in the central bank's
Fiscal Multiplier Asset prices
policy rate through prices and
inflation include one or more Expectations for economic activity
and future policy rate changes
A measure of the change in aggregate production caused i. Monetary transmission mechanism
by equal changes in government purchases and taxes Exchange rates with foreign currency
Balanced Budget Multiplier The central bank is free

Independence from political interference.
Fiscal policy
Taxpayers reduce current consumption and increase current The central bank follows through
saving by just enough to repay the principal and interest on Credibility on its stated policy intentions
the debt the government issued to fu nd the increased deficit j. Qualities of effective central banks
Ricardian Equivalence
The central bank makes it clear what economic indicators
Higher future taxes lead to disincentives to work, Transparency it uses and reports on the state of those indicators
negatively affecting long-term economic growth.
Fiscal deficits may not be financed by economic growth
the market when debt levels are high Arguments for
inflation
Crowding-out effect as government borrowing increases
interest rates and decreases private sector investment increase aggregate demand
increase investment demand
Debt may be financed by domestic citizens
q. Being concerned with Lower interest rate currency depreciation
Deficits for capital spending can boost k. Relationships between
the productive capacity of the economy Size of a fiscal debt monetary policy and interest with low real interest rate
Fiscal deficits may prompt needed tax reform

Arguments against
Ricardian equivalence may prevail: private savings rise in may purchase or sell securities
anticipation of the need to repay principal on government debt
When the economy is operating below full employment, exchange rate
deficits do not crowd out private investment
The money supply is used
Most central banks set target to adjust economic activity
implementation
governmental changes in taxing and spending policies & then affect to inflation
of fiscal policy inflation rates, typically 2% to 3%
Recognition lag: Policymakers may not immediately l. Contrast the use of inflation, interest rate, Developing economies sometimes target
a stable exchange rate for their currency Use foreign reserves to adjust
recognize when fiscal policy changes are needed. Delays in realizing exchange rate targeting by central bank
difficulties of r. Explain relative to that of a developed economy Must follow a monetary policy that
Action lag: Governments take time to enact needed fiscal policy changes the effects caused by
implementation supports the target exchange rate
Impact lag: Fiscal policy changes take time to affect economic activity.
Expansionary
monetary policy The policy rate is below the neutral rate
Decrease in a government budget surplus or increase in a government budget deficit Expansionary fiscal policy
m. Contractionary
Increase in a government budget surplus or decrease in a government budget deficit s. monetary policy The policy rate is above the neutral rate
Contractionary fiscal policy
May affect inflation expectations due to long-term interest

rates move opposite to short-term interest rates
Individuals may be willing to hold greater cash balances
without a change in short term rates (liquidity trap)
Banks may be unwilling to lend greater amounts,
even when they have increased excess reserves
n. Limitations of monetary policy
Short-term rates cannot be reduced below zero
Unique challenges of developing undeveloped financial markets, rapid financial innovation,

economies to utilize monetary policy and lack of credibility of the monetary authority
18. Monetary And Fiscal Policy - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
a vital source of financial and technical assistance

to developing countries around the world
The International Bank for
Reconstruction and Development (IBRD) made up of two unique WB
development institutions
The International Development Association (IDA)
promoting international monetary cooperation

facilitating the expansion and balanced growth of international trade
promoting exchange stability
Goals
assisting in the establishment of a multilateral system of payments IMF j. Functions and objectives of
making resources available (with adequate safeguards) to international organizations
members experiencing balance of payments difficulties
The only international organization dealing

with the global rules of trade between nations
Function: ensure that trade flows as smoothly, predictably and freely as possible
Trade friction
The WTO's agreements, negotiated and signed WTO
by a large majority of the world's trading
nations, and ratified in their parliaments The multilateral trading system
A country must buy the currencies of the foreign countries in order to accomplish transactions
such as payment for their purchases of foreign goods, services, and financial assets
Description
Imports
Merchandise and services Exports
Income receipts Current account Autarky or closed economy
Unilateral transfers Free trade
Capital transfers Trade protection

Capital account Components World price
Sales and purchases of non-financial assets h,i. Balance of payments
Warm-Up: International Trade Domestic price
Government-owned assets abroad
Financial account Net exports
foreign-owned assets in the country Trade surplus
X - M = private savings + govt savings + investment Trade deficit
Consumers Term of trade
Firms Influenced by FDI

Multinational corporation
Government
The total value of goods and services

Reduce the volatility of domestic asset prices
produced within a country's borders
Maintain fixed exchange rates g. Commonly cited GDP (Gross Domestic Product)
Keep domestic interest rate low and enable objectives of capital a. Compare
The total value of goods and services produced
greater independence regarding monetary policy flow restrictions by the labor and capital of a country's citizens
Protect strategic industries from foreign ownership GNP (Gross National Product)
Trading blocs or regional trading agreement (RTA) To importing countries Lower-cost goods
barriers to import or export are removed Free trade areas (FTA)
increasing employment
= FTA Benefit
b. International trade To exporting countries increasing wages
adopting a common set of trade Customs union (CU) profits from exports
restrictions with non-members
f. Motivations for
& Advantages of 19. International Trade employees have to retrain
Types of agreements losing jobs
CM
Common market (CM) And Capital Flows Costs
common institutions and econ policy for the union
Exchange Rates
EU Lower opportunity cost
Monetary union
a single currency Trading brings gains regardless
Comparative advantage
of absolute advantage
Infant industry. Lower cost

Absolute advantage
National security
Protecting domestic jobs
Protecting domestic industries Reasons
retaliation for foreign trade restrictions; government
collection of tariffs; countering the effects of government c. Distinguish
subsidies paid to foreign producers; and preventing foreign
exports at less than their cost of production (dumping) Others
Tariffs
quotas
Export subsidies Type
Min domestic content
The production
Voluntary export restraint (VER) possibility frontiers (PPF)
Only one factor of production - labor

Differences in labor productivity
Ricardian
Trade restrictions due to differences in technology
Two factors of production capital and labor

d. Models of trade
Differences in the relative amounts
of each factor the countries possess
Heckscher-Ohlin
Redistribution of wealth within each country
e. Restrictions between labor and the owners of capital
Effect of Tariffs and quotas
Reduce imports
Increase price
To domestic country,
Decrease consumer surplus quotas,tariffs and VERs all
Increase domestic quantity supplied
Increase producer surplus
are thought to decrease economic welfare

may not offset long-term costs
(When excluded from international Effects
Helping developing countries avoid the impact of
markets for financial capital flows) great inflows of foreign capital over the short term
prohibition of investment
prohibition or taxes on the income earned Capital restrictions
on foreign investment by domestic citizens
prohibition of foreign investment Form of restrictions
in certain domestic industries
restrictions on repatriation of earnings of
foreign entities operating in a country.
19. International Trade And Capital Flows - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Elasticities of export and import demand must meet the

Marshall-Lerner condition for a depreciation of the
domestic currency to reduce an existing trade deficit
the price or cost of units of one

currency in terms of another
USD: price currency
Define an exchange rate E.g. 1.25 USD/EUR
EUR: base currency
j. Impact of exchange measures the cost to buy an unit
rates on countries of currency at a point in time
Nominal exchange rates
measures changes in relative

The J-Curve
a. purchasing power over time
Y= domestic production of goods and services or national income
Real exchange rates
E= domestic absorption of goods and services, which is total expenditure BT = Y - E
BT = balance of trade Distinguish
national income must increase relative to national the currency exchange rate for immediate
Absorption approach
expenditure in order to decrease a trade deficit Spot exchange rates delivery, usually two days after the trade
or a requirement that national saving must increase relative
to domestic investment in order to decrease a trade deficit a currency exchange rate for an
Forward exchange rates exchange to be done in the future
use other country's currency

Formal dollarization
Do not have its own monetary policy Countries that do not serve companies/individuals that purchase or sell foreign
Be a member of a monetary union have their own currency goods and services denominated in foreign currencies
the largest financial market in terms
may include capital flows
an explicit commitment to exchange domestic currency of the value of daily transactions
for a specified foreign currency at a fixed exchange rate Currency Board Agreement large multinational banks (the sell side)
corporations
direct intervention
(monetary authority) a country pegs its currency within margins of 1% investment fund managers
versus another currency or a basket that includes the
indirect intervention (be currencies of its major trading or financial partners Conventional fixed b. FOREX market hedge fund managers
constrained by the peg's Participants
peg arrangement 20. Currency investors
requirements)
Exchange Rates governments
the permitted fluctuations in currency value relative central banks (the buy side)
to another currency or basket of currencies are wider hedgers: enter into transactions that
the monetary authority has more policy Target zone i. Exchange rate regimes decrease an existing foreign exchange risk
discretion because the bands are wider speculators: enter into transactions that
Hedgers vs speculators
increase their foreign exchange risk
passive: adjust for higher inflation Countries that have
versus the currency used in the peg their own currency
the exchange rate is adjusted periodically Crawling peg appreciation (price goes up)
active: a series of exchange rate adjustments
over time is announced and implemented change in an exchange rate depreciation (price goes down)
c. % change in a
invert the quote to the base currency and proceed
the width of the bands that identify permissible currency relative to
Management of exchange
exchange rates is increased over time another currency an appreciation of the USD
rates within crawling bands
Calculate E.g. a decrease in the USD/EUR exchange relative to the EUR of 1.41%:
rate from 1.44 to 1.42 (USD: base currency) = (1 /1.42) / (1 / 1.44) - 1
the monetary authority influences the exchange rate in response to specific
indicators such as the balance of payments, inflation rates, or employment System of managed
without any specific target exchange rate or predetermined exchange rate path floating exchange rates
is the exchange rate between two currencies implied
the exchange rate is market-determined and foreign exchange market intervention by their exchange rates with a common third currency
is used only to slow the rate of change and reduce short-term fluctuations Independently floating d. Currency cross-rates -->the cross rate of MXN/EUR:
E.g. The MXN/USD quote is 12.1 12.1 x 1.42 = 17.18
and the USD/EUR quote is 1.42
must meet the condition of
no-arbitrage opportunity g. Calculate and interpret
a forward rate E.g. a forward quote of +25.3 & the spot
exchange rate is 1.4158 ->forward exchange
rate = 1.4158 + 0.00253 = 1.41833
Points in a foreign currency quotation are
e. Expression in a points
in units of the last digit of the quotation
when a forward exchange rate does not correctly reflect basis or in percentage
the difference between the interest rates for two currencies E.g. A forward exchange rate quote of + 1.787%,the spot exchange rate is
1. borrowing one currency, converting 1.4158 -> the forward exchange rate is 1.4158 (1 + 0.01787) = 1.4411
it to the other currency at the spot rate Percentage
2. investing the proceeds for the period, and converting the end-of-period f. Arbitrage opportunity
How to take?
amount back to the borrowed currency at the forward rate
No-arbitrage relation (Interest rate parity)
20. Currency Exchange Rates - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
33. FSA. Applications

21. FSA Introduction
32. Financial Reporting Quality

22. Financial reporting
mechanics
31. Long-term Liabilities
23. Financial Reporting

FINANCIAL Standards
30. Income Taxes REPORTING &
ANALYSIS
24. Understanding The Income Statement
29. Long-lived assets
25. Understanding The Balance Sheet

28. Inventories
26. Understanding The CF Statement

27. Financial Analysis Techniques
FINANCIAL REPORTING & ANALYSIS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Financial Statement
Element Additional disclosures required by regulatory
Any commentary by management
FR Financial position
Useful to a wide range of users in
Roles of FR & FSA Role of FR Firm's performance making economic decisions
Changes in financial position
> To evaluate past, current, and prospective

Use info in a company's Fin Statements performance & fin position
Roles of FSA Use other relevant info > To make economic decisions
Revenues
Expenses
Income Statement
Gains and Losses
Assets
Liabilities
Role of some FS Balance Sheet (A=L+OE)
Owners' equity
CFO
CFI
CF statement
CFF
Statement of changes in Owners' equity
disclose the basis of preparation for FS

(e.g: accounting methods, assumptions,...)
acquisitions or disposals
legal actions
employee benefit plans
Additional items: contingencies and commitments
FS notes (footnotes)
significant customers
sales to related parties
segments of firm
are audited
not audited
operating income or sales by region
or business segments
Supplementary schedules reserves for an oil and gas company
info about hedging activities and
financial instruments
Importance of
assessment of financial performance and condition of a
company from the perspective of its management
21. FSA
Results from operations, with trends
Introduction in sales and expenses
Publicly held companies in US Capital resources and liquidity, with trends in CF
General business overview
discuss accounting policies that require
significant judgements by management
discuss significant effects of trends, events, uncertainties
MD&A
liquidity and capital resource issues, transactions
or events with liquidity implications
Discontinued operations, extraordinary
items, unusual or infrequent events
Extensive disclosures in interim financial statements
disclosure of a segment's need for CF
or its contribution to revenues or profit
= independent review of an entity's FS

objective: auditor's opinion on fairness
and reliability of FS, "no material errors"
Independent review though FS prepared by mgmt and are its responsibility
3 parts Reasonable assurance of no material errors (follow generally accepted auditing standards)
FS prepared in accordance with accepted accounting principles, reasonable accounting principles and estimates, consistency
Explanatory paragraph: when a material loss is probable but
Audits of FS
amount cannot be reasonably estimated. Uncertainties
may relate to the going concern assumption --> signal serious
Standard auditor's opinion problems and need close examination by analyst
(under US GAAP): Opinion on internal controls
Unqualified opinion: auditor believes statements are free from material omissions and errors
3 types of Opinions Qualified opinion: if statements make any exceptions to accounting principles --> explain these exceptions
Adverse opinion: if statements are not presented fairly or are materially nonconforming with accounting standards
Interim reports Quarterly or semi- reports (NOT audited)
About election of board members, compensation, management and qualifications

Other info sources and issuance of stock options
Proxy statements Filed with SEC
Corporate reports and press releases Viewed as PR or sales materials
1. Articulate the Purpose & Context of analysis

2. Collect data
3. Process data
FSA framework
4. Analyze/interpret data
5. Report the conclusions or recommendations
6. Update the analysis
21. FSA Introduction - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Operating activity: activities that are part of the day-to-day business function of an entity
Investing activity: activities associated with acquisition & disposal of long-term asset
Classification
Financing activity: activities related to obtaining or repaying capital from shareholders or creditors
Classification of
Depend on the nature of the firm
business activities How to classify
Note: The same classification is used on the statement of cash flows
but they are defined differently than business activities are defined here
Notice
Assets
Liabilities
Elements Equity
Revenue
FS elements
& accounts Expense
Account & financial Chart of accounts : set forth the actual accounts used in a company's accounting system
Accounts
statement Contra account: offset or deducted from other accounts
Liabilities
Assets Contributed capital
Accounting equation Owners' equity
Retained earning
22. Financial reporting Expanding: A = L + Contributed capital + BGN Retained earnings + Rev - Exp - Dividend
mechanics
Unearned (Deffered) revenue
Cash movement prior to Acct. recognition
Prepaid expense
Accruals & Valuation
Accruals Unbilled (Accrued) revenue (when billing, Un.Rev decrease & Receivables increase)
adjustment Cash movement after Acct. recognition
Accrued expense
Valuation adjustment: made to company's A or L so that account records current market value (not Historical cost)
Relationships among IS, BS: show a company's financial position at a point in time
BS and statement of CFs, Changes in BS accounts during an accounting period are
and of owners' equity reflected in IS, statement of CFs and owners' equity
1. Journal entries & Adjusting entries (record=time)

2. General ledger & T-accounts (record=order)
Accounting system Flow of information 3. Trial balance (list account balances at a particular point in time)
4. Fin. statement
Debit & Credit
Using fin. statement Analyst uses FS to judge the fin. health of the company
in security analysis Analyst can use his understanding to detect misrepresentation
22. Financial reporting mechanics - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Objective of FR: provide fin. info about the reporting entity

Overview FRS
Importance of reporting standards in security analysis and valuation
IASB (International Accounting Standards Board)

Standard-setting bodies
(establishing standards) US FASB (Financial Accounting Standards Board)
IOSCO (international): not a regulatory, but its members regulate significant portion
Standard setting &
Regulatory bodies FSA (in UK)
Regulatory authorities 1. Protect investors
(enforcing standards) SEC (in USA) 2. Ensure: market is fair, efficient, transparent
3. Reduce systematic risk
Status of global convergence of accounting standards

standard setting bodies
c. disagree
regulatory authorities
Barriers to developing one universally accepted set of financial reporting standards
political pressures from business groups and others
Understandability
Verifiability
Relevance
Enhancing Comparability (consistent among firms and time periods)
Qualitative Faithful presentation
characteristics (complete, neutral, free from error) Timeliness
Trade off across Enhancing characteristics (reliability and relevance: timely)

Cost
Constraints
Non-quantifiable info: omitted
of Financial position: A, L, E
Measurements
of performance: Income, Expense
IFRS framework
Accrual basis
Assumptions
Going concern
Cost can be reliable measured

Recognition principal
Probably future economic benefit will flow to entity
Elements of FS
Historical cost : amount originally paid for the asset
Current cost : would have to pay today for the same asset
Measurement bases Realizable value: amount for which firm could sell the asset
Present value : discounted future cash flows
Fair value : 2 parties in an arm's length transaction would exchange the asset
BS, IS, CFS, OE, Explanatory notes (inclu. accounting policies)

Required financial statements
Fair presentation
23. Financial Going concern basis
Reporting Standards Accrual basis
General requirements Aggregation
for FS under IFRS
No offsetting
Principles for PREPARING
Consistency
Materiality
Comparative information
Frequency of reporting
IASB requires mgmt to consider the

framework if no explicit standard exists
Purpose of framework
IASB same objective
Objectives of financial statements FASB different objectives for biz and non-biz
IASB emphasizes going concern

Assumptions
FASB: relevance, reliability
Primary characteristics
Qualitative characteristics IASB: comparability, understandability also
IFRS (by IASB) #

IASB: income+expenses
US GAAP (by FASB)
Performance FASB: Revenues, Expenses, Gains,
Losses, comprehensive income
IASB: resource from which future

economic benefit is expected
Asset definition
FASB: future economic benefit
Financial statement elements
IASB: define criteria for recognition
"Probable"
FASB: define assets and liabilities
Values of assets to be IASB: allow

adjusted upward
FASB: not allow
Transparency
Characteristics of a coherent Comprehensiveness
financial reporting framework Consistency
Valuation
IFRS
Principles-based
Effective FR relies on broad framework
FASB in the past

Barriers to creating a coherent Standard setting Rules-based
financial reporting framework specific guidance how to classify trx
FASB moving now

Objectives oriented
blend the other two
Measurement
23. Financial Reporting Standards - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Def.: represent Financial performance

Expense (ordinary)
Expenses
Loss (Invest, Finance)
Overview IS Elements Revenues (ordinary)

Income
Gain (Invest, Finance)
Multi-steps (include: Gross Profit)

Formats Single-step
Dec 15, 2016 for U.S.GAAP reporting firms

(may not adopt new standards early)
To be issued in May 2014 and go in Jan 1, 2017 for IFRS reporting firms
effect for periods beginning after (may adopt new standards early)
Common size analysis of IS: convert items in IS into % of total Rev
Analysis of IS Others
A firm should recognize revenue when it has
transferred to a good or service to a customer
Consistent with the accrual accounting principle
Simple
Revenue recognition issues Notice: revenue recognition will be little changed in many transactions such as
Complex Capital structure
industries often sell bundles of goods and services (software and telecommunications)
Identify the contract(s) with a customer

NI Pref ered dividend
Basic EPS= Weighted average number of common shares outstanding Identify the performance obligations in the contract
Determine the transaction price
A five-step process for Allocate the transaction price to the
Formula:
recognizing revenue performance obligations in the contract
Basic EPS
Recognize revenue when (or as) the
Stock split + stock dividend entity satisfies a performance obligation
EPS
New issuance Affected by an agreement between two or more parties
Treasury stock that specifies their obligations and rights
Common shares Probable is defined differently Identical activity could be accounted

Converged accounting
under IFRS and U.S GAAP differently by two different reporting firms
Preferred shares/convertible standards issued by IASB Collectability must be probable, however
Complex capital structure and FASB in May 2014 A contract
Convertible bond
Revenue is recognized based on the firms progress consistent with the percentage-of-completion
Stock option method in nature
Diluted EPS toward completing a performance obligation
Diluted EPS > Basic EPS => Anti-dilutive: don't calculate Diluted EPS Long-term contract
Treasury stock method

Method A promise to deliver a distinct good or service
If-converted method (preferred convertible; convertible bond)
The custom can benefit from it on its own combined
with other resources that are readily available
A performance obligation
Operating components Criteria of a distinct good or service The promise to transfer it can be identified
E.g. for a non-financial firms, nonoperating transactions Distinguish separately from any other promises
may result from investment income & financing expenses
Nonoperating components The amount a firm expects to receive from a customer in
24. Understanding exchange for transferring a good or service to the customer
Company disposes of 1 of its component & operation

The Income Statement Usually a fixed amount but can also be variable
A transaction price A variable part can only include when it is
Condition: separate physically & operationally 1. Discontinued operations
certain and will not have to reverse it
Implication: should remove from IS for analyzed
Contracts with customers by category
IFRS: prohibit
Assets and liabilities related to contracts including balances and changes
Unusual in nature + infrequent in frequency 2. Extraordinary items
US GAAP Required disclosures Outstanding performance obligations and the transaction prices allocated to them
Report separately on IS Non-recurring FR treatment & analysis of Management judgments used to determine the amount and timing
non-operating items
IFRS + US GAAP: report above IN from continuing operations of revenue recognition including any changes to those judgments
3. Unusual or infrequent items
Change in accounting principle revenue should be recognized when earned

Accrual accounting
Change in accounting estimate 4. Changes in accounting standards
Prior-period adjustment 1. seller can collect the price
IASB 2. evidence of transfer ownership
3. cost can be reliably measured
Inventories
General principles
Depreciation
Revenue recognition 1. evidence of arrangement btw buyer and seller
Matching principle
2. product delivered or service rendered
Depletion Long-lived assets (report expense when have Rev) SEC
3. price is determined or determinable
Amortization
4. seller reasonably sure of collecting money
Bad debt, warranty expenses estimation General
%-of-completion method (reliably measures outcome)
Period costs
Admin cost (not directly related to Rev) Expense recognition 1. Long term contracts US GAAP: no income 'til completing
Completed-contract method
IFRS: rev=exp (profit=0)
Doubtful accounts: estimated cost (expense, not directly reduce Rev)
Revenue includes:
Warranties:
1. Sale price: at the date of sales
1. When sell: estimated cost Revenue recognition
IFRS 2. Interest income: recognise over time
2. When repair: actual cost Issue
Straight-line method 2. Installment sales
Depreciation & amortisation Installment method: recognise profit according to cash receipt in relation to selling price
Accelerated depreciation (residual value is NOT used to calculate)
US GAAP Cost recovery: no profit 'til cash receipt > cost
Sale basis:
Special cases 1. Revenue: is based on FV of a non-barter transaction with unrelated parties

IFRS 2. Other cases: no revenue; net off Rev & Exp
3. Barter transactions
(no cash changes)
1. Rev: record if a company has transaction with cash payment for such services
US GAAP 2. Otherwise, Rev=Carrying amount of asset surrendered
Uses Gross Rev when:

1. Primary obligator
4. Gross revenue reporting 2. Bear inventory & credit risk
(vs. net revenue reporting) 3. Ability to choose supplier
US GAAP 4. Reasonable latitude to establish prices
24. Understanding The Income Statement - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Def: fin. position at a point of time

Assets
Liabilities
Elements
Equity
Overview Account format
2 common formats
Report format Only "Classified BS" is required
Formats of BS
Presentation Classified BS ( A & L are classified into current & non-current)
Liquidity-based (is preferred)
Used to assess a firm's liquidity, solvency, and ability to pay dividends to shareholders
Uses & limitation of BS BS assets,liabilities and equity should not be interpreted as market value or intrinsic value
in financial analysis
Some assets and liabilities are difficult to quantify and are not reported on the BS
Cash & cash equivalent

Inventories
Market value (update)
1. Trading securities
Gain/Loss: Income stm
Market value
Current assets Marketable securities 2. Available for sale
(can be used up within 1 fiscal year or 1 operating cycle) Gain/Loss: other comprehensive income
3. Held to maturity No gain/loss
Receivable (=Total receivable - Allowance for bad debt)

Others
Accounts payable
Note payables
Current portion of long term debt
Current liabilities Tax payables
Classifying Assets &
Accrued liabilities
Liabilities
Unearned revenue/income
25. Understanding
The BS Measurement base
US GAAP: cost model
For operating activities IFRS: cost model / revaluation model
Carrying value = Original cost - Accumulated depreciation - Impairment
Property, plan & equipment (PPE)
US GAAP: no specific requirement
Measurement base
For investment IFRS: cost model / revalution model
Non-current assets
Intangible assets Goodwill (=Purchase - FV of net asset)
Financial asset
Long-term investment
Long-term debt
Measurement base: Amortised cost
Deferred tax liabilities
Non-current liabilities
Financial lease
Contributed capital (Common share + Additional paid-in capital)

Preferred share (classify as Equity or Financial Liab: based upon company's characteristic)
Reissued: affect Additional paid-in capital
After repurchasing Unlisted: decrease Contributed capital
Shareholders' equity Treasury stock
Accumulated other comprehensive income

Minority (non-controlling) interest
Retained earnings
Common-size analysis of BS
current ratio = (current assets/current liabilities)
Liquidity quick ratio = (cash + marketable securities + receivables)/(current liabilities)
cash ratio = (cash + marketable securities)/(current liabilities)
Analysis of BS
long-term debt-to-equity = (long-term debt)/(total equity)
BS ratios
total debt-to-equity = (total debt)/(total equity)
Solvency
debt ratio = (total debt)/(total assets)
financial leverage = (total assets)/(total equity)
25. Understanding The Balance Sheet - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Def: explain cash movements over a period

Overview determine when, how, where is able to generate enough cash
Purpose how the company uses cash
CFO affect Net Income
CFI affect LT Assets and certain investments

Elements
CFF affect capital structure
I/ CFO
.Cash received from customers= Rev - delta.Receivable + delta.Unearned rev
.Cash paid to supplier = COGS + delta.Inventory - del.Payable +del.Prepaid exp
.----------- for operating = Operating exp + del.Prepaid exp - del.Accrued exp
.--------------- interest = Interest exp - del.Accrued exp
.--------------- taxex = Tax exp - del.Tax payble - del.Deferred tax
Sales from fixed assets
Inflow Sales proceed from debt & equity investment
Elements & format
Principal received from borrowing to others
II/ CFI
Purchase new fixed assets
Format Direct method Outflow Acquisition of debt

Loans made to others
Creditor: principal of debt issued

Inflow
Shareholder: proceed from stock issued
III/ CFF
Creditor: principal paid on debt
Outflow
Shareholder: dividend; treasury stock
Indirect method Non-cash charge/income (+/-)

(how CFO can be obtained from N.I)
Non-operating items
Noncash investing, Not reported

financing activities Disclosed in: footnote or supplemental schedule to CF statement
Interest inc & Div inc: CFI; CFO Direct method: is encourage
IFRS Interest exp & Div paid: CFF; CFO
IFRS vs. US GAAP
26. Understanding Interest exp & Div inc & Interest inc: CFO Direct method: is encourage, but
require reconciliation btw N.I & CFO
The CF Statement US GAAP Div paid: CFF
Major sources and uses of cash

CFO
Total currency amounts CFI
Analyse and interpret
CFF
% of Revenue
Common-size CFs, divided by % Cash inflow/outflow
Stockholders
available to
To Firm: FCFF=IN+NCC+Int*(1-t)-FCInv-WCInv (=CFO+Int*(1-t)-FCInv) Debt holders
Free cash flow

To Equity:
FCFE=CFO-FCInv+NetBorrowing
CF to revenue = CFO/net revenue
Cash return-on-asset = CFO/average total assets
Cash return-on-equity = CFO/average total equity

Performance ratios
i. Cash-to-income = CFO/Operating income
Cash flow per share =(CFO-preferred dividends)/(Weighted average number of common shares)
Debt coverage = CFO/Total debt

CF ratios
Interest coverage =(CFO+Interest paid+taxes paid)/interest paid
Reinvestment ratio = CFO/cash paid for long term assets
Coverage ratios
Debt payment ratio = CFO/cash long term debt repayment
Dividend payment = CFO/dividends paid
Investing and financing ratio = CFO/cash outflows from investing and financing activities
26. Understanding The CF Statement - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Ratio analysis
Balance sheet
Vertical
a. Analyses Income statement
Common size
Horizontal
Charts: stacked column graph, line graph
Receivables T.O = annual sales/ average receivables

Receivables management
Days of sales outstanding = 365/ receivables T.O
Inventory T.O = COGS/ average inventory

Inventory management
Days of inventory on hand = 365/ inventory T.O
Payables T.O = purchases/ average trade payables

Activity Trade credit management
(measure efficiency) Number of days of payables = 365/ payables T.O
Total asset T.O =

Total assets management revenue/average total assets
Fixed assets management Fixed asset T.O = revenue/average net fixed assets
Working capital management Working capital T.O = revenue/average working capital
Current ratio = current assets/current liabilities

Quick ratio = (cash + marketable securities + receivables)/current liabilities
Liquidity
(measure ability to pay ST obligations) Cash ratio= (cash + marketable securities)/ current liabilities
Defensive interval= (cash + marketable securities + receivables)/ average daily expenditures
Cash conversion cycle = days sales outstanding + days of inventory on hand - number of days of payables
Debt-to-equity = D/E
Classes of ratios Debt-to-capital = D/(D+E)
Use of debt financing
Debt-to-assets = D/A
Solvency Financial leverage = A/E
Interest coverage = EBIT/Interest payments

Ability to repay debt obligations
Fixed charge coverage= (EBIT + lease payments) / (interest payments+lease payments)
Net profit margin= Net income/ Revenue

Gross profit margin= (Net sales - COGS)/ Revenue
Operating profitability Operating profit margin = EBIT/ Revenue
Pretax margin= EBT/ Revenue
Formula 1: ROA= Net income/ Average total assets

Profitability ROA
27. Financial Analysis Formula 2: ROA= (Net income + int exp (1- tax rate))/ Average total assets
Techniques Operating ROA = EBIT / Average total assets
Profitability relative to funds
ROTC (Return on Total Capital) = EBIT/ Average total capital
ROE = Net income/ Average total equity
Return on common equity = (Net income - preferred dividends)/ Average common equity
Ratio analysis
Valuation Sales per share, EPS, P/CF ... (in Equity study section)
Dupont 3: Net profit margin x Asset turnover x FL

Dupont analysis DuPont 5: Tax burden x Interest burden x Ope. profit margin x Asset turnover x FL
Understand business & existing financial position performance

Purposes Forecast company's performance
INput (CF) into valuation model
Valuation ratios
Dividends and Retention Rate
Net income per employee
and Sales per employee for service and consulting firms
Growth in same-store sales for restaurants and retail industries

Industry-specific ratios
Sales per square foot for retail industry

1. Equity analysis
Coefficients of Revenue
variation of Operating income
Business risk
Net income
Ratios used in
Capital adequacy
VaR
For Banks, Insurance
companies, financial firms Reserve requirements
Liquid asset requirement
Net interest margin
Evaluate credit risk

Purposes Credit rating process (by agency)
2. Credit analysis Credit research on ratios
Ratios: interest coverage ratios, return on capital, debt-to-assets, CF to total debt ...
Altman Z-score
Purposes: evaluate the performance business segments (subsidiaries, geographic segments,...

3. Segment analysis Business segment
Geographic segment
Using ratio analysis

Model and forecast earnings Using techniques: sensitivity analysis, scenario analysis, simulation
27. Financial Analysis Techniques - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Def: record goods available for sale
Merchandise company Finished good

slow-moving or obsolete inventory Inventory turnover that is too low
(high days of inventory on hand) Overview Finished good
inadequate inventory levels and lost sales Classification
Manufacturing company WIP
because customer order could not be fulfilled High inventory turnover together with Inventory turnover, days of inventory
Raw material
low sales growth relative to the industry on hand, and gross profit margin
high inventory turnover reflects greater Inventory cost flow methods

efficiency rather than inadequate inventory High inventory turnover together with high IFRS-> Lower of cost or NRV
sales growth relative to the industry average Inventory accounting
Inventory valuation methods US GAAP -> LCM=lower of cost or market
ending = beginning + purchases - COGS
-> decreasing demand and potential
future inventory writedowns
The finished goods category is growing + raw
materials and goods in process are declining Purchase price (- discount)
Transport, distribution
-> increasing future demand
and higher earnings Raw materials and goods
Trading Tax related & duty of import
in process are increasing
Examine inventory disclosures
Installment cost (include: testing)
to determine whether Determining Inventory cost
-> decreasing demand or inventory obsolescence Purchase cost (raw material)
and potential future inventory writedowns Increases in finished goods are
Conversion cost (labor+overhead)
greater than increases in sales
Manufacturing Allocation of fixed cost based on normal capacity
-> increase storage costs, insurance premiums, inventory taxes
Too much inventory Storage cost related to production only
1. Add the LIFO reserve to LIFO inventory Specification Indication

FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve) FIFO
2. Subtract the change in the LIFO Pepertual + periodic system
reserve for the period from COGS To convert a FS from LIFO to FIFO 4 methods LIFO
3. Decrease cash by LIFO reserve * tax rate
Computing ending Weighted average cost
4. Increase retained earnings (equity) by LIFO reserve x (1- tax rate)
inventory and COGS
IFRS: only LIFO is NOT permitted
When the price is changing, LIFO and FIFO method shall US GAAP:
affect key ratios -> adjust LIFO to compare with FIFO Applied 1. All are allowed
LIFO inventory < FIFO inventory 2. Must use the same method for tax report & FR
LIFO COGS > FIFO COGS
LIFO net income < FIFO net income Example when the price is rising NRV=estimated SP - estimated selling cost
LIFO tax < FIFO tax
........
I/ Carrying value of inventory>NRV => revaluation
is the difference between LIFO inventory reported 28. Inventories 1. Decrease inventory balance to NRV: carrying value=NRV
and inventory had the firm used the FIFO method 2. Recognise a loss=cost-NRV (writevdown)
LIFO reserve: positive when A LIFO firm must also record in COGS (increase COGS)
inventory costs rise and vice versa report a LIFO reserve II/ CV<NRV
Inventory reporting If subsequent recovery => write up (but only to previous value)
IFRS
Occurs when a firm using LIFO sells more
(lower of cost & NRV)
inventories during a period than its produces
When price is rising -> reduce cost of goods sold because LIFO reserve, LIFO liquidation and their If:
the lower cost of previously produced inventory is used -> A LIFO liquidation effects on financial statements and ratio 1. Replacement cost>NRV =>market=NRV
an unsustainable increase in gross profit margin 2. Rep. cost<NRV - Profit margin => market=NRV - Profit margin
US GAAP
LIFO COGS > FIFO COGS earnings (lower of cost & market) No write-up
gross, operating, net profit margin (LIFO) < earnings, Profitability
gross, operating, net profit margin (FIFO) Inventories disclosures are usually found in the financial statements footnotes
Current ratio, working capital (LIFO) < The cost flow method (LIFO, FIFO, etc.) used
current ratio, working capital (FIFO) LIFO inventory < FIFO inventory Liquidity Total carrying value of inventory with carrying value by classification
(raw materials, work-in-process, and finished goods) if appropriate
Effects on ratios: assume
increasing price Carrying value of inventories reported at fair value less selling costs
LIFO Inventory turnover (COGS/average inventory) > FIFO Inventory turnover
Activity The cost of inventory recognized as an expense (COGS) during the period
LIFO days of inventory on hand (365/inventory turnover) < FIFO days of inventory on hand Required inventories disclosures
Amount of inventory writedowns during the period
LIFO stockholders equity < FIFO stockholders equity Presentation & Reversal of inventory writedowns during the period
Solvency disclosures of inventories includuding a discussion of circumstances (IFRS only)
LIFO debt ratio and debt-to-equity ratio > FIFO debt ratio and debt-to-equity ratio
Carrying value of inventories pledged as collateral
LIFO higher IFRS demonstrate that the change will provide reliable and more relevant information
COGS and inventory turnover
FIFO lower
US. GAAP explain why the change in cost flow method is preferable
Inflation (increasing prices) & stable
LIFO lower Gross profit, net income Inventory changes
and inventory balances or increasing inventory quantities
Exception a firm changes to LIFO from another cost flow method
FIFO higher
LIFO lower
COGS and inventory turnover Compare to FIFO, LIFO produces higher COGS in IS and lower earnings
FIFO higher Affect of inflation and deflation of
Profitability
Deflation (decreasing price) & stable inventory costs to FS and ratios
LIFO higher Gross profit, net income
or increasing inventory quantities Compare to FIFO, LIFO results lower inventory value on BS, lower
and inventory balances
FIFO lower current ratio, lower working capital. Quick ratio is unaffected
Liquidity
FIFO provides the most useful measure for ending inventory Calculation of financial ratios Compare to FIFO, LIFO results higher inventory turnover; lower days of inventory
LIFO provides better approximation of current cost (COGS) in hand; more recent and higher goods of COGS; lower and older inventory
The weighted average cost method results Usefulness when the price is changing Activity
in values between those of LIFO and FIFO Compare to FIFO, LIFO results lower total assets, lower
stockholders' equity, higher debt ratio and debt-to-equity ratio
Solvency
28. Inventories - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
.assets are expected to provide future benefits over 1 year

Def: .should be used in operation
Overview
Intangible A
Tangible A
Classify
Financial A (investment)
Measurement base
Depreciation/Amortisation method Capitalize cost : allocate to Income Stm
main capitalized cost should be purchase cost
Revaluation model . gradually (Depreciation)
expenditure to install & bring asset to the location ready for use
Useful life of new A Disclosure related to
Whether to use A as security/collateral long-lived A Expense: all are recorded to Income Stm immediately
other expenditure => exp in Income Statement
Impairment loss
Classification of A Tangible A (IFRS) Interest income from investing borrowing amount: decrease total borrowing cost
Reconciliation of Carrying value over the period Borrowing cost : incurred can be capitalize to
Construction asset the extend that it associated with the asset If "Asset for SALE" : Capitalized
cost=>Inventory (NO more Depreciation)
Def: A hold to earn rental income or capital appreciation . Interest exp : capitalize & become Depreciation
US GAAP : cost model expense over the life of the asset
Cost model Capable of being separated from the firm

Investment property
Fair value model or arise from a contractual or legal right
IFRS Valuation Under IFRS, an identifiable
Controlled by the firm
intangible asset must be
Gain/Loss: record directly to Income Stm identifiable
Expected to provide future economic benefits which
May be must be probable and cost must be reliably measurable
A contractual arrangement whereby the lessor, the owner of the asset, allows a
lessee to use the asset for a specified period of time in return for periodic payments Cannot be purchased separately
Include: Finance (capital) lease or operating lease A lease unidentifiable May have an indefinite life
E.g: goodwill
At inception: no entry is made
recognized in the lessees income statement; CF statement: Record value of asset at purchase price + associated expenditure
Acquisition of assets
lease payment is reported as an outflow from operating During the term of the lease: rent Total purchase price is allocated to each other on its fair value
activities; No asset or liability is reported on the balance sheet expense = the lease payment Operating lease -> an analyst is more interested in the type of asset acquired
Purchased as part of a group
Externally purchase
Assets remains on the balance sheet of the lessor and is depreciated higher net income in the first year and
Effect Effects of capitalizing intangible assets are the
Lease payments are rental income same as the effects capitalizing other expenditures lower net income in the subsequent years
the lower of the present value of future minimum lease payments or fair Intangible A Purchase price is allocated to the identifiable assets
value is recognized as an asset and a liability on the lessees balance sheet At inception and liabilities of the acquired firm on its fair value
The acquisition method is used to
account for business combination Remaining amount of the purchase
The leased asset is depreciated over its life; the present value of the Leasing price is recorded as goodwill
lease payment is liability that is amortized over the term of the lease. Obtain in a business combination
The interest portion of the lease payment and the depreciation of the Costs of any internally generated goodwill
Evaluate Only goodwill created in a business
asset are recorded as expenses on the income statement are expensed in the period incurred
combination is capitalized on the BS
on the cash flow statement, the interest portion of
the lease payment is an operating cash outflow Internally created : expenditures are expense as incurred
Under U.S.GAPP
Over the term of the lease US GAAP: ALL are expense
Finance lease
R&D
financing or operating is ok) and the principal IFRS: R=exp, D=capitalize
portion is a financing cash outflow Under IFRS
For sale:
Lessor: removes the asset from the BS and replaces it with a lease receivable; Interest portion Excluding > All expense before technological feasibility: Expense
> After that: Capitalize
is interest income; remainder is a principal repayment that decreases the lease receivable
Lessee: adds the asset and the related lease liability to the BS -> equity is initially unchanged. R&D in software development Internal use:
Depreciation and interest expense comprise the lease expenses recorded on the IS and will exceed Effect 1. IFRS: similar
the lease payment in the early years of the lease and be less than the lease payment in the later 2. US GAAP: ALL are capitalized
years of the lease -> less profit for the early years of a lease and greater profit in the later years
29. Long-lived Assets
Depreciation expense = (original cost-
higher net income expensing in that period and lower net income Straight-line method salvage value)/depreciation life
in the subsequent periods compared to immediately expensing Capitalizing an expenditure delays
the recognition of an expense
reduce variability of net income by spreading the expense over the multiple periods Accelerated DDB depreciation in year x = (2/depreciable life
depreciation in years)* book value at the beginning of year x
capitalizing expenditures may result in earnings that are higher over
many periods compared to an otherwise identical expensing firm Net income
Growing firms Units-of-production depreciation = (original
Units-of-production cost - salvage value)/(life in output units)
Over the life of an asset, total net income is identical *(output units in the period)
method
greater total assets; higher net income, higher retained earnings,
higher shareholders equity in the period of the expenditure IFRS requires firms to depreciate the
Capitalization components of an asset separately ->
lower net income, retained earnings, shareholders equity in subsequent periods
require useful life for each component
Shareholders equity Finite life
retained earnings, shareholders equity Intangible A: amortization Component depreciation U.S.GAAP allows component
Method: SLM + Accelerated
reflect the entire reduction in net income Expense immediately depreciation but seldom uses
Allocation of cost of assets depreciation + Unit of production
Fixed asset: depreciation
Tangible Longer useful lives -> decrease annual depreciation
A capitalized expenditure: usually reported as an outflow from investing Natural resource: depletion
-> increase net income and vice versa
activities -> higher operating cash flow, lower investing cash flow
Higher salvage values -> decrease depreciation
Immediately expenditure: usually reported as an outflow from operating activities
-> lower operating cash flow and higher investing cash flow Effects of capitalizing -> increase net income and vice versa
and expensing costs Effect of choice of
A change in an accounting estimate is put into
No difference in tax treatment ->the same total cash flow in both ways depreciation/amortization effect in the current period and prospectively
Changes in tax treatment to match financial reporting treatment: Cash flow from operations method and assumptions
Estimates: involved when a
expensing will cause higher operating cash flow in the first year Tax treatment
manufacturing firm allocates Does not affect operating margin
Tax treatment is independent of the financial reporting treatment, depreciation expense between
taxes and therefore cash flow, are unaffected by the choice COGS and SG&A affect gross margin (which is
computed before SG&A expense)
initially higher assets, higher equity compared to expensing and operating expenses
-> lower debt-to-equity and debt-to-assets
Capitalizing an expenditure
initially higher ROA and ROE but lower ROA, ROE in the subsequent years
US GAAP: only cost model
lower ROA, ROE in the first year and higher in the subsequent years Apply IFRS: both (with Revaluation: Carrying amout=FV)
higher net income (numerator), lower assets Expensing an expenditure
and equity (denominators) after the first year Financial ratios Revaluation model Note: If Gain>Previous loss
vs. Cost model => 2 parts:
Capitalizing interest results in lower interest expense 1/ Gain=Pre loss: Income stm
Revalution model FV>carrying value => Gain
compared to expensing in the year of expenditure 2/ Residual: Equity
Analyst may include capitalized interest as interest expense Higher interest Interest coverage EBIT/interest expense FV<carrying value => Loss
for analytical purposes -> reduce interest coverage ratio coverage ratio
There is event that makes A decrease in value significantly

Cost of sale: BV = Original cost - Accumulated Depr Occurred if Impairment of indefinite lived intangible asset: at least Annually
=> Gain/Loss Impairment of asset
Sale of asset "Held for use" => "Held for sale": test for impairment before reclassify
Dispose of A: similar to sale Note
Derecognition
1/ Remove old A given up from B.S (=carrying value)
2/ Add FV of exchange A Impairment loss = Carying value - Recoverable amout (=higher of 'FV-Cost to sales' or 'Value in use')
=> Gain/Loss => Decrease long-lived A + record loss on Impairment
Exchange A IFRS Note: Gain < or = Previous loss
Carrying value of A > Undiscounted expected CF => impaired

Impairment process Step 1: Test for recoverability ---------------------- < ---------------------------- => NOT impaired
Write down to FV (or Discounted value)

US GAAP
Step 2: Loss measurement Loss = Carrying value - FV
Note: only 'Held for sale' can reverse Loss (Gain)
29. Long-lived Assets - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Taxable income
Taxes payable current tax expense
Income tax paid actual cash flow

TAX RETURN
= past or current loss --> create DTA
Tax loss carryforward
Tax base = net amount of asset/liability used for tax reporting purposes
Income before tax

Accounting profit
Earnings before tax
Terminology
Income tax expense = Taxes payable + change in DTL - change in DTA
= Income tax expense - Taxes payable

DTL
Cause: depreciation
FINANCIAL
REPORTING =Taxes payable - income tax expense
DTA
Causes: Warranty expenses, Tax-loss carry forwards
Valuation allowance: contra account to DTA
Carrying value = net balance sheet value of asset/liability
Permanent difference vs. Temporary difference
result in expected future cash Inflow

from Current A: current A
DTL: liability Classify
from Non-current A: non-current A
expected cash Outflow

DTL vs. DTA Liability: if reversal of timing difference is certain
DTA: asset Classify
Equity: -------------------------------------- uncertain
Note: Increase DTA: Income tax expense decrease

Increase Tax rate => Increase DTA, DTL --------- DTL: ---------------------- increase
(from all those years before)
between tax base and carrying value

will reverse
Temporary
result in DTA or DTL
30. Income Taxes
between taxable income and pretax income
Permanent NOT reverse
('cuz Inc/Exp not allow for tax purposes,...) makes effective tax rate different from statutory tax rate
Temporary vs. Goodwill: no DTA/DTL
Permanent differences
US GAAP : no DTA/DTL
Initial record transaction A business combination No DTA/DTL

IFRS
The difference is NOT certain
Note
DTA: sufficient taxable income in the future
Invest to subsidiaries differences will be reversed
DTL
no parent's control
Depends on the tax rate expected to be in force

when the underlying temporary difference reverses
Measurement of The applicable tax may depend on how
deferred tax items the temporary difference will be settled
The deferred tax item should also be taken directly to equity

Increase depreciation in the subsequent
periods but not affect the deferred tax liability
Recognition and measurement
of current & deferred tax The tax liability on the increase in book value is incorporated
into the recognition of the increase in revaluation surplus.
A change that leads to a deferred In each subsequent period, amount equal to additional depreciation less
tax item is taken directly to equity Upward revaluation the tax liability is transferred from revaluation surplus to retained earnings
The previous unrealized gain in the assets value
is realized over time through use of the asset
The additional to retained earnings offsets after-tax
decrease in net income (and retained earnings)
Depreciation --> DTL (if reverse, if not --> equity)

Impairments --> DTA
Recognition and measurement of Restructuring --> DTA
current and deferred tax items LIFO, FIFO
Post-employment benefits and deferred compensation --> DTA
Unrealized gains/losses on available-for-sale marketable securities
30. Income Taxes - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Def: obligations have to paid for more than 1 year

LT debt
Overview
Lease
Classify
Pension fund
Coupon rate < Required rate => Interest=Coupon pmt + Bond payble
With bondholders -------------- > -------------- => -------- =Coupon pmt - Principal repayment
1. Record the same amount discount (or premium) at each period Note:
IFRS: required Total interest exp=Total coupon
Types of recording discount +/- Discount(Premium)
(or premium) 2. Effective of interest
US GAAP : not required but prefer
Initial: Price = CFF (inflow)

For discount bond
Coupon pmt=CFO
Amortisation=non-cash
1/ Accounting for bond Per period: Interest exp = CFO (outflow)
Interest expense For premium bond
Interest=CFO
Amortisation of discount=CFF
Bond
payable Carrying amount = Par value
At maturity => Remove bond pmt after cash pmt (record NO gain/loss)
Carrying amount # Purchase price

Before maturity => Record gain/loss = Carrying amount - Purchase price
2/ Derecognition of debt IFRS: add to discount/deduct from premium (decrease Payable)

Issuance
US GAAP : capitalize as an asset => amortise over the term
Issuance cost
Derecognise IFRS: similar to normal case (Gain/Loss: report in Income Stm)
(before maturity)
US GAAP : immediately expense the asset
Def: agreement included restrictions to protect the creditors

Restriction Affirmative: certain actions that issuer should do to protect ...
3/ Bond covernants (if violate: technical default)
Negative: ------------------------------- is prohibited to do to -------
Def: agreement between owner of asset & other parties

Lessor (owner): will receive pmt over the lease period
Parties Lessee (user): have the right to use the asset over the lease period
31. Long-term
Liabilities Def: agreement allowing the lessee to use asset for a period as a rental
1/ Operating lease
Accounting & reporting For lessor: Revenue is recorded when earned (Asset is kept on B.S)
(off-balance sheet financing)
by 2 parties For lessee: only record Operating expense = Fixed lease pmt
(no Asset/Liab recorded at inception)
Def: equivalent to a purchase that is directly financed by the seller (lessor)

1. Transfer of ownership
2. Able to bargain the purchase option
US GAAP:
3. Lease term is at least 75% useful life of A
Criteria 4. PV of lease pmt >= 90% of FV of A
(Just have to satisfy 1 factor)
1. Transfer of A at the end of contract
Lease 2. Lease has an option to purchase the asset

IFRS
3. Lease term is for majority part of economic life
4. PV of pmt amount to at least in substain the FV of A
Classification
PV of pmt = Carrying amt of A
2/ Financial lease
Record: Receivable = PV of pmt
Direct-lease type
Asset = COGS
US GAAP Receipt of lease principal = Inflow CFI

For lessor
PV of pmt > Carrying amt
Accounting & reporting
by 2 parties Sales-type Profit = PV - Carrying amt
Interest income (CFI)
IFRS: direct-lease type
At inception: record A & L = PV of lease pmt

For lessee Asset: is deprecited
After that period
Lease pmt
Def: benefit offered to employee after retiring

Defined-contribution: firm contributes an agree-upon (defined) amt into the plan
Types Defined-benefit: firm promises to pay a defined benefit to the employee during retirement
Services cost incurred in the period

Pension scheme
Interest accrued on the BGN liabilities
(& other post-employment benefit)
Acturial gain/loss
Pension expense
Changes in terms of the pension plan (assumption)
Expected return on plan A
Report: Net pension A => Gain: Other comprehensive income
31. Long-term Liabilities - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Revenue growth out of line with comparable firms, changes in revenue

recognition methods or lack of transparency about revenue recognition
Decreases over time in turnover ratios (receivables, inventory, total asset) refers to characteristics of a firm's financial statements
Bill-and-hold, barter, or related party-transactions primary criterion adherence to GAAP but not
for judging necessarily result in highest quality
Net income not supported by operating cash flows
Capitalization decisions, depreciation methods, useful Accounting warning signs
useful to users in making decisions
lives, salvage values out of line with comparable firms relevance
Fourth-quarter earnings patterns not caused by seasonality Financial reporting quality material
Frequent appearance of nonrecurring items High quality decision useful completeness

Emphasis on non-GAAP measures, minimal faithful presentation neutrality
information and disclosure in financial reports
absence of errors
shipping terms (FOB shipping point versus FOB destination),

Distinguish between proportion of reported earnings
accelerating shipments (channel stuffing) Quality of reported expected to continue in the future
Revenue recognition choices E.g: higher profits from increased
earnings (not of
bill-and-hold transactions efficiency or increasing market share
earnings reports)
sustainability
Estimates of reserves for un-collectible accounts or warranty expenses Possible accounting methods impact on the value of the firms
Valuation allowances on deferred tax assets to manage earnings, cash level of a firm's earnings high financial reporting
Depreciation methods, estimates of useful lives and salvage values, recognition of impairments flow and balance sheet items quality cannot assure high
to sustain the company's quality of reported earnings
Inventory cost flow methods operations and existence over time
Quality of reported result
Capitalization of expenses must be high to provide an adequate return to
Related-party transactions enough the company's investors.
Cash flows
Display the most comparable GAAP
measure with equal prominence Balance sheet items
Provide an explanation by management

Reconcile the differences 1. Reporting is compliant with GAAP and decision useful; earnings are sustainable and adequate
Non- US. GAAP are required to
Presenting non-GAAP 2. Reporting is compliant with GAAP and decision useful; earnings quality is low
Disclosure other purposes
measures such as earnings
Presentation choices may
Include any non-GAAP measure, Spectrum for assessing 3. Reporting is compliant with GAAP; earnings quality is low and reporting choices and estimates are biased
that exclude certain influence an analyst's opinion
item are likely to recur in the future
nonrecurring items
32. Financial Reporting (from best to worst) 4. Reporting is compliant with GAAP; the amount of earnings is actively managed to increase, decrease or smooth reported earnings
Define and explain the relevance

Quality 5. Reporting is not compliant with GAAP although the numbers presented are based on the company's actual economic activities
of such non-IFRS measures 6. Reporting is not compliant and includes numbers that are essentially fictitious or fraudulent
Non-IFRS
Reconcile the differences
tend to decrease reported
earnings and financial position
(on BS) for the current period tend to increase future period earnings
A registration process for the issuance Conservative accounting
of new publicly traded securities
Specific disclosure and reporting requirements including Distinguish between tend to increase reported earnings
periodic financial statements and accompanying notes Biased accounting choices or improve financial position for
the current period tend to decrease future period earnings
An independent audit of financial reports Aggressive accounting
A statement of financial condition (or management require
commentary) made by management Conservative bias when earnings are above target
used by some managers to
A signed statement by the person responsible artificially smooth earnings Aggressive bias when earnings are below target
for the preparations of the financial reports
A review process for newly registered securities Securities regulations typically Pressure to meet or exceed earnings targets
and periodic review after registration
Career considerations
fines
Motives to issue low
Mechanisms & their Increasing compensations
quality financial reports
suspension of participation in an potential limitations Improving perceptions of the firms among customers and suppliers
issuance and trading of securities Meeting the terms of debt covenants
public disclosure of the results enforcement actions
of disciplinary proceedings
Motivation Listed above
pursue criminal prosecution of
fraudulent or otherwise illegal activities Weak internal control
"clean" audit opinion only offers reasonable assurance (free from Conducive conditions to issue low Inadequate oversight by board of directors
material errors), does not guarantee the absence of error or fraud Three factors Opportunity
quality or fraudulent financial reports Wide ranges of acceptable
An assessment of the effectiveness of the firm's internal control
accounting treatments
by management is required to add for securities trade in the U.S
Auditing Rationalization of the behavior
The firms select and pay their auditors may
limit the effectiveness of this mechanism
Private contracts such as those with lenders
32. Financial Reporting Quality - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
use financial ratios to evaluate trends,

levels or how the company has performed
Evaluating
a. Past financial performance Trends & comparison to competitors can
of a company indicate company's business strategy
E.g: A firm claims improving EPS by cutting cost
Reflecting company's strategy -> examine operating ratios & gross margins over time to
know if it is implementing the strategy or suffered from sales
forecast GDP Growth

Simple model: measure
Shorter horizons: top-down approach of profitability
forecast sales growth Historical relationship Complex model: use
b. Forecast a company's assumption for items
future net income and CF increases in working capital and fixed assets necessary to support the forecast sales growth
Make assumptions of future sources & uses of cash Typical: noncash working capital remains constant
forecast CF The most important of these will be increases in working capital, capital expenditures on
new fixed assets, issuance or repayments of debt, and issuance or repurchase of stock
the firm management's professional reputation

Character and the firm's history of debt repayment.
Collateral The ability to pledge specific collateral reduces lender risk.

Three C's
the capacity to repay, that requires close examination
Capacity of a firm's financial statements and ratios
Larger companies and th ose with a wider var iety of prod uct
c. FSA in assessing credit Scale and diversification lines and gr eater geographi c diversi fication are be tter credit risks.
quality for DEBT investment
Such items as operating ROA, operating
Operational efficiency margins, and EBITDA margins
Credit rating agencies Stability of the relevant profitability margins

use formulas that include indicates a higher probability of repayment
Margin stability
Highly variable operat ing resu lts make lenders nervous.
Firms with greater earnings in relation to their debt and in

Leverage relation to their interest expense are better credit risks.
By using maximum or minimum values of one or many ratios

Which ratios? How many ratios? What minimum or maximum values? ->challenge to analyst
33. FSA:
d. FSA in screening for No guarantee that outperformed in
Applications the past continues
EQUITY investments
Backtesting refers to using a specific set of criteria to screen historical data Pay special attention to the potential
effects of survivorship bias, data-mining
to determine how portfolios based on those criteria would have performed.
bias, and look-ahead bias
Different companies may use

different accounting methods
Why?
can use disclosures to adjust net income and assets of one firm to
what they would have been had their classifications been the same.
Investment in securities
IFRS & U.S. GAAP
LIFO ending inventory can be adjusted to

a FIFO basis by adding the LIFO reserve.
Inventory accounting differences LIFO cost of goods sold can be adjusted to a FIFO
basis by subtracting the change in the LIFO reserve
can use qualitative information in

Differences in depreciation methods & estimates addition to disclosures
When calculating solvency ratios, analysts should estimate the present

Off-balance-sheet financing value of operating lease obligations and add it to the firm's liabilities.
Tangible assets of acquired units

will be recorded at fair value
e. Adjustments for comparing Identifiable intangible assets
different companies of the acquired units will be
grow through acquisition valued at their acquisition cost
Adjustments Goodwill, the excess of acquisition price
over the fair value of acquired net assets,
The differences between 2 firms
will be shown on the balance sheet
Tangible assets will be

Goodwill recorded at historical cost net
growing by creating of accumulated depreciation
each business units Identifiable intangible assets
are not included in BS assets
goodwill is subtracted from assets when calculating financial ratios

Adjustments income statement expense from impairment of goodwill in the
current period should be reversed, increasing reported net income.
can remove goodwill to calculate Price to Book value of equity per share
Intangible assets may be revalue upward under

IFRS but not permitted under U.S. GAAP
Other ratio: price to tangible book value
Other intangible assets
Notice: a firm's pre- and post-acquisition financial sta tements
may lack com parability when the acquis ition method is used
33. FSA. Applications - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
39. WORKING CAPITAL 34. CORPORATE GOVERNANCE

MANAGEMENT AND ESG: AN INTRODUCTION
38. DIVIDENDS AND SHARE

CORPORATE
REPURCHASES: BASICS FINANCE 35. CAPITAL BUDGETING
37. MEASURES OF LEVERAGE 36. COST OF CAPITAL
CORPORATE FINANCE - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Ex. mining and oil production sectors:

Certain companies and certain sectors
not adhere to high standards of human rights
are excluded from portfolios
Negative screening
No specific sectors are excluded but investors attempt to identify the companies with the best practices
across environmental sustainability, employee rights and safety, and overall governance practices How Environmental, Social, and Governance
Positive screening Factors may be used in Investment Analysis
Refers to investing in order to promote specific social or environmental goals
Impact investing
Refers to investing based on a single goal, such as the development of alternative energy sources or clean water resources
Thematic investing
The use of environmental, social, and governance factors in making investment decisions
May include harm or potential harm to the environment, risk of loss due co environmental
Environmental and Social Considerations
accidents, the changing demographics of the workforce, and changing worker preferences ESG integration or ESG investing
in Investment Analysis
is also termed as sustainable inves ting or responsible investing or socially responsible investing
is the system of internal controls and procedures by which individual companies are managed
the arrangement of checks, balances, and incentives to minimize and
manage the conflicting interests between insiders and external shareowners
Voting control is typically proportional to share ownership provides a framework chat defines the rights, roles and
responsibilities of various groups within an organization
one class of shares may be entitled to several votes per share,
while another class of shares is entitled to one vote per share the primary focus is the interests maximization of the market value of the firm's common equity
is often used to ensure that founding shareholders (and Dual class structure Describe Corporate Governance of the firm's shareholders primarily concerned with the conflict of interest between
Company ownership and voting structure
their heirs) can maintain control of the board of directors Under share hol der theory the firm's managers and its owners (shareholders)
The interests of the owners of shares with multiple voces will
cake precedence over the interests of shareholders in general These groups include shareholders, employees,
considers conflicts among the several groups that have
suppliers, and customers, among others
Are executive, non-exec utive, or independent di rectors an interest in the activities and performance of the firm
Under stakeholder theory
Are involved in related-party transactions with the company lmportant considerations
Are involved in related-party transactions with the company are whether directors:
have a residual interest to the net assets of the corporation after all liabilities have been settled
Have served for many years and may have become
too close to the company's management Compo siti on of a company 's board Shareholders have voting rights for the election of the board of directors and for other important corporate matters
An analyst must decide if the board is responsive to shareholder interests or has conflicts of interest, and if the board have an int erest in the ongoing profitabi lity and growth of the firm
has the mix of expertise that is needed to deal with challenges and pursue the best strategy for the company
prot ect the int erests of share holders;
The remuneration plan seems to offer greater incentives, paid in cash, to achieve short-term performance
Factors Relevant to the Analysis of Corporate
hi re, fire, and set the comp ensation of the firm's senior m anagers
goals tc the expense of building long-term company value through equity-based incentives Governance and Stakeholder Management has a responsibility to
set the strategic direction of the firm
Performance-based incentive pay is fairly stable over time, indicating that the performance targets are possibly easy to achieve
Analyses may be concerned if Mana ge ment incentives monitor financial performance and other aspects of the firm's ongoing activities
Management remuneration is very high relative to chat of comparable companies in the industry and remunerat ion the firm's executives (mo st-seni or managers) often serve on the board of director
Management incentives are not aligned with current company strategy and objectives The board of directors
both company executives and non-executive board
members serve on a single board of directors
one-tier board structure
If a significant portion of a company's outstanding shares are held by an affiliated company or institution,
those shareholders may be able to exert enough influence to dictate the company's policies and direction
non-executive board members serve on a supervisory board that
Activist shareholders and investors buying shares to profit from their activism can cause changes in the composition Co mp osi tion of shareh olders oversees a management board, made up of company executives
two-tier board structure
of a firm's shareholders, its board membership, and its corporate strategy in a relatively short period of time Stakeholder Groups
and their Interest Primary stakeholders
If the rights of shareholders are weak, perceived increases in shareholder returns from being acquired typically receive compensation (remuneration) made up of a salary, a bonus
or from significant changes in corporate strategy may be difficult or impossible to realize based on some measure of company performance, and perquisites
Relative strength of sha reholders' rights
Their interests can be expected to include continued employment
A failure to manage stakeholder issues well or manage other long-term risks to the company's sustainability Senior managers and maximizing the coral value of their compensation
can have disastrous consequences for shareholders and others with interests tied to company results Executive bonuses are typically tied to some measure of firm performance,
Man agement of long- term risk s giving senior managers a strong interest in the financial success of the firm
have an interest in the sustainability

some stakeholders can gain an advantage The control functions of audits and and s uccess of the firm rate of pay, opportunities for career advancement, training, and working conditions.
board oversight may be weak Empl oyees
negative implications for c omp any p erform ance and value.
Creditors Their interests are protected to varying degrees by covenants in their debt agreements with the firm
may have incentive compensation that causes management
May choose lower than-optimal
to pursue their own benefit rather than the company's benefit
risk, reducing company value
Ris ks of poor governan ce and have an interest preserving an ongoing relationship with the firm, in the profitability of their trade with the firm,
stakeholder lawsuits stakeholder mana ge ment Supp liers and in the growth and ongoing stability of the firm, in the firm's solvency and on-going financial strength
Potential Risks of Poor Corporate Governance
failure co comply with governmental regulations Legal and reputational risks and Stakeholder Management and Benefits
debt default and bankrup tcy from Effective One
arises because an agent is hired to act in the interest of the principal,
Impr ove operational effi ciency 34. CORPORATE GOVERNANCE but an agent's interests may not coincide exactly wich those of the principal
The principal-age nt conflict
Avoid many legal and regulatory risks
AND ESG: AN INTRODUCTION
Reducing the cost of debt financing Be nefits of effective govern ance the risk of managers and directors is more dependent of firm
Redu ce the ri s k of debt defaul t or bankrupt cy and s take holder man agement performance while shareholders hold diversified portfolios of
Managers and directors may choose a lower
level of business risk than shareholders would stocks and are not dependent on the firm for employment
Better financial performance and greater company value
When directors who are also managers favor management interests at the expense of
Conflicts of interest between shareholders shareholders or when directors favor one group of shareholders at the expense of another
Communicacion and engagemenr with shareholders
and managers or directors
initi ating shareholder laws uits decreases the ability of shareholders or non-executive directors to monitor and
Information as ymmet ry b etween
evaluate whether managers are acting in the best interests of shareholders
shareholders and managers
seeking representation on the board of directors pressure companies for change Principal-agent and other Relations hips
proposing shareholder resolutions for a vote and raising their issues to all shareholders or the public to gain wider support & Conflicts in C orporate Governance A single shareholder or group of shareholders
Acti vi st share hol ders Majority shareholders may cause the company to enter into related party transactions, agreements or specific
Proxy fight may hold a majority of the votes and act against
the interests of the minority shareholders transactions that benefit entities in which they have a financial interest, to the detriment of minority shareholders
Tender offer Market and Non-market Factors Conflicts between groups
Threat of hostile takeover and existence of anti-takeover provisions of sharehold ers
Shareholders' and creditors' interests are considered to be Shareholders may prefer mor e bu siness ris k than c reditors do
judges ' rulings become l aw in some instances. better protected in countries with a common-law system Conflicts of interest between Equity owners could also act against the interests of creditors by issuing new debt that increases the default risk faced by
Company's legal environment creditors and shareholders existing debt holders, or by the company paying greater dividends to equity holders, thereby increasing creditors' risk of default
In a civil law system, judges are bound to rule based only on specifically enacted laws
Growth of firms that advise funds on proxy voting and rate companies' corporate governance The company may raise prices or reduce produce quality in order to increase profits to the detriment of customers
Conflicts of interest between
shareholders and other stakeholders The company may employ strategies that significantly reduce the taxes they pay to the government
A single board of directors including internal (executive directors) and external directors (non-executive directors or independent directors)
In a one-tier b oard
The chairman is sometimes the company CEO
refers to the management of company relations with stakeholders and is based on having a good
There is a supervisory board that typically excludes executive directors understanding of stakeholder interests and maintaining effective communication with stakeholders
The l egal infra stru c ture identifies the laws relevant to and the legal recourse of stakeholders when their rights are violated
The supervisory board and the management board (made up of executive direccors) operate independently In a two-tier b oard
The managemenr board is typically led by the company's CEO Boa rd structur e
refers co the contracts between the company and its stakeholders that spell
When a lead independent director is appointed, he has the ability to call meetings of the independent directors, separate from meetings of che full board out the rights and responsibilities of the company and the stakeholders
The c ontractual infras tru cture
is based on four types
Elections for some board Stakeholder management
=> limits the ability of shareholders to replace board members in any one year of infrastructure
positions are held each year refers to a company's corporate governance procedures, includingt its internal
Staggered board
The organi zational infrastru ctur e systems and practices chat address how it manages its stakeholder relationships
Selecting senior management, setting their compensation and bonus structure, evaluating their performance, and replacing them as needed
Govern mental infra struc ture comprises the regulations to which companies are subject
Setting the strategic direction for the company and making sure that management implements the strategy approved by the board
Approving capital structure changes, significant acquisitions, and large investment expenditures Stakeholder Management, Mechanisms There are standard practices with respect to the company's relationship with shareholders
Revi ewing company performance and imp lement ing any necessary correct ive steps to Manage Stakeholder Relationships is often held of the end of a fiscal year
Board re sponsibili ties and Mitigate Associated Risks
Planning for continuity of management and the succession of the CEO and other senior managers provides shareholders with the audited financial statements for the year, addresses the company's
Establishing, monitoring, and overseeing the firm's internal controls and risk management system Annual general mee ting performance and significant actions over the period, and answers shareholder questions
A shareholder who does not attend the annual general meeting can vote her shares by proxy
Ensuring the quality of the firm's financial reporting and internal audit, as well as oversight of the external auditors
requir e a supermajority vote for p assage
Report to the board, retains the overall responsibility for the various board functions
Functions and Responsibilities of a Company's Special resolutions or extraordinary general meetings can be called anytime
Oversight of the financial reporting function and implementation of accounting policies
Board of Director and its Committees the candidate with the most votes for each single board position is elected
Effectiveness of the company's internal controls and the internal audit function
Audi t commi ttee Majority voting
Recommending an external auditor and its compensation
shareholders can cast all their votes (shares times number of board position elections) for a single board candidate or divide them among board candidates
Propo sing remedies based on their review of intern al and extern al audits
Cumulative vo ti ng result in greater minority shareholder representation on the board compared to majority voting
Overs ight of the comp any's corp orat e govern ance code
Minority shareholders may have special rights by law when the company is acquired by another company
Implementing the company's code of ethics and policies regarding conflicts of interest
Governance committee
Monitoring changes in relevant laws and regulations
Ensuring that the company is in compliance with all applicable laws and regulations, as well as with the company's governance policies
Proposing qualified candidates for election to the board Board commit tees
Managing the search pro cess Nominations c ommittee
Attempting to align the board's composition with the company's corporate governance policies
Recomm ending to the board the amount s and types of comp ensation t o be pa id to directors and senior managers Compen sation commi ttee
or remuneration committee
Oversight of employee benefit plans and evaluation of senior managers
Informing the board about appropriate risk policy and risk tolerance of the organization
Ris k committee
Overseeing the enterprise-wide risk management processes of the organization
Reviewing and reporting to the board on management proposals for large acquisitions or projects, sale or other disposal
of company assets or segments, and the performance of acquired assets and other large capital expenditures Investme nt comm i ttee
34. CORPORATE GOVERNANCE AND ESG. AN INTRODUCTION - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Step 1: Idea generation

Step 2: Analyzing project proposal
Capital budgeting process Step 3: Create firm-wide capital budget
Step 4: Monitoring decisions and conducting a post audit
Maintain business (no need detailed analysis)

Replacement
a. Cost reduction (need details)
Expansion (complex)
New product/market development (complex)
Project Categories
Mandatory (required by Gov,...)
pet project
Other (not easily analyzed)
high risk (R&D)
# accounting income
sunk cost --> exclude
Base on incremental CF externalities (-): Cannibalization --> include !
Basic principles Conventional CF vs. Unconventional CF

Opportunity cost (CF a firm 'll lose if undertake the project) --> include !
Timing of CF is important (ealier is worth more than later)
After-tax basis (CF that firm can keep)
Financing costs --> exclude ! (reflected = discount rate)
Independent: unrelated & can accept all

Independent vs. Mutually exclusive projects M.E: only 1 in a set can be accepted
Interactions Project sequencing
Unlimited: firm can undertake all
Unlimited funds vs. Capital Rationing C.R: firm has constraint budget
35. Capital
Budgeting NPV
IRR
Payback period (number of years to recover initial cost)
Methods
Discounted payback period (like Payback, but uses the present values)
Profitability Index = (PV of future CF) : (CFo)
Average accounting rate of return = (Ave. IN) : (Ave. BV)
Conflicting rankings: NPV is preferred
Advantage Directly measures the expected increase in value
NPV profile and compare NPV Disadvantage Not consider size of project
NPV & IRR methods
Advantage Measure profitability = %
IRR May have multiple IRR or not

Disadvantage
May differ fr NPV in Mutual exclusive projects
Europe: PP more than IRR and NPV

Location
# FAQs
Larger: NPV, IRR
Company Size
Which methods are
popular? Private: PP
Public vs Private Public: NPV, IRR
More educated -> NPV, IRR

Management education
Relationship between NPV, A positive NPV project -> increase stock price
company value and stock price
35. Capital Budgeting - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Target capital structure (MV)
use for projects have same Weights use Current capital structure + Trend
If lack information
risks as firm or Industry average
YTM approach (#coupon)

Cost of fixed-rate debt (Rd)
Debt rating approach
WACC = Wd*Rd*(1-t) + We*Re + Wp*Rp
CAPM: Re = Rf + Beta*(Rm-Rf)
WACC
Cost of equity (Re) Dividend Discount Model: Re = Do*(1+g)/Po +g
Bond yield + risk premium: Re = Bond yield + Risk premium
Cost of preferred stocks: Rp = Dp/P
if information on target capital structure is not available,

use the current capital structure based on market value
or the average capital structure in the firm's industry
Should be calculated based on a firm's target capital structure weights
36. Cost D/E: fr. comparable company

Of Capital Step 1: unlever
BetaA = BetaE * [1/{1+(1-t).D/E}]
Pure-play method
D/E: fr. this company
Project beta Step 2: re-lever
BetaPro. = BetaA * [1+(1-t).D/E]
In developing market: Re = Rf + Beta.[(Rm - Rf) + CRP]
CRP = Sovereign yield spread * (Stddev equity index/Stddev bond index )
Break point: occur when 1 of WACC's components changes

MCC schedule : shows the
Marginal Cost of Capital WACC for different
amounts of financing Break point = Amount of capital at which the component's cost changes / Weight of the component in the capital structures
Correct: (-) fr. NPV

FC: fee charged when raises external equity
Flotation cost Incorrect: (+) directly to Ke
(not ongoing expense)
36. Cost Of Capital - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Sales risk : about firm's sales (Q & P)

Business risk : risks associated Operating risk risk about operating
Leverage: amount of with a firm's operating earnings earnings caused by fixed operating cost
fixed cost a firm has
Financial risk: shareholders bear when
used debt financing (debt+lease)
= (% EBIT)/(% Sales) = (EBIT+F)/(EBIT)

DOL
= (% EPS)/(% EBIT) = EBIT/(EBIT-I)
Calculate DFL
= (% EPS)/(% Sales) = (EBIT+F)/(EBIT-I)
37. Measures DTL = DOL*DFL
Of Leverage
Use more debt and less equity --> Net effect will either
increase or decrease ROE
Effect of financial leverage reduces net income through added
on Net income & ROE interest expense but also reduces
net equity
Def: the quantity of sales for which TR=TC
Breakeven quantity . + .
=
37. Measures Of Leverage - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Regular div pay consistent % profit
Special div cash paid to shareholders in addition to Regular div

Cash dividends
Liquidating div occur when firm goes out of business
Explain Def: pay in new shares rather than cash

Stock dividends
Def: divide each existing share into multiple shares
Stock splits
Def: opposite of stock split
Reverse stock splits
directors approve pmt of dividend

1. Declaration date
1st day that stocks trade without div
2. Ex-dividend date
Dividend payment chronology
shareholders of record are designated to receive div.
3. Holder-of-record date
38. Dividends And Share div. are mailed out

4. Payment date
Repurchases
Buy in the open market
Tender offer: typically at a premium price

Share repurchase methods Buy a fixed number of shares at a fixed price
also a Tender offer, but with a range of price
Dutch auction
Repurchase by direct negotiation
EPS only increases if fund earns nothing

Repo is financed with company's fund
Effects of share EPS decrease
After-tax borrowing cost > Earnings yield
repurchase on EPS & BVPS
Repo is financed with debt Repo price > Original BVPS BVPS decrease
Repo = Cash dividend
Assume all others being equal
38. Dividends And Share Repurchases. Basics - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Cash balances (selling goods, collecting

receivables, from short term investments)
Short term funding (trade credit from
Primary sources Def: sources of cash used in day-to-day, do NOT AFFECT operations
vendors, lines of credit from banks)
Effective CF management
Sources of liquidity Liquidating assets (short term or long lived)

a.
Renegotiating debt agreements
Def: AFFECT operations
Secondary sources Filing for bankruptcy
Reorganizing company
Drags on liquidity: delay/reduce Cash Inflows; increase borrowing cost

Factors influence liquidity Pulls on liquidity: accelerate Cash Outflows
Current ratio = CA/CL

Quick ratio = (Cash + ST marketable securities + Receivables) / CL
Receivables turnover = Credit sales/receivables
Receivables Days of receivables =365/Receivable turnover
b. Liquidity measures
Inventory turnover = COGS/average inventory
Inventory Days of inventory = 365/Inventory turnover
Payables turnover ratio = purchases/average trade payable

Payables Days of payables = 365/Payables turnover
Def: turn raw materials into cash

proceeds from sales
Operating cycle = Days of inventory + Days of receivables
c. Working capital
turn cash investment in inventory
Cash conversion cycle = Operating cycle - Days of payables back into cash collected
d. Explain the effect of different Have sufficient cash on hand

types of CFs affect a company's Purpose of managing a firm's daily cash position Avoid keeping excess cash
net daily cash position
Face - P
% discount=
Face
Face - P 360
Discount-basis yield=
Face Days
Face - P 360
39. Working Money market yield=
P Days
Capital Management e. Comparable yields
(already in Quant )
Differ fr. BEY in Quant
Face - P 365
Bond-equivalent yield=
Face Days
Cash Management Read curricullum 4.2

Investment Policy
Aging schedule: show the accounts into categories of days outstanding

Receivables Weighted average collection period : average days of receivable
Too low: loss-sale

Inventory Too high: capital tied up
f. Evaluate
performance of 365
%discount
Cost of trade credit=(1 + )Days past discount -1
1 %discount
Accounts payable
Term: 2/10 net 60
Uncommitted line of credit

Lines of credit Committed (regular) line of credit (overdraft)
Revolving line of credit
Cost = (Int+Commitment fee) / Loan
Fixed assets
From banks Inventory
Loan collateralized by
Account receivables
Blanket lien
g. Short term
funding choices Banker's acceptances Cost = Int / (Loan-Int)
Factoring
Non-bank finance companies

direct placement
Commercial paper
through dealers
Non bank
Cost = (Int+Commission+Backup cost) / (Loan-Int)
39. Working Capital Management - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
OVERVIEW
RISK MANAGEMENT: AN INTRODUCE
Portfolio
Management PORTFOLIO RISK & RETURN
BASICS OF PORTFOLIO
PLANNING & CONSTRUCTION
Portfolio Management - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
purchases and sales are made in the

market (similar to closed-end funds)
refers to evaluating individual investment by their
ETFs are most often passively managed contribution to the risk and return of an investor's portfolio
ETFs' market prices are very close to their Different to close-end funds ETF to examine the risk and return of individual investments in isolation
NAVs due to special redemption provisions
diversification helps to reduce portfolio risk without necessarily reducing the expected return
No shares issued owned by a single investor Portfolio approach =(the risk of an equally weighted portfolio of
to investing n securities)/(the risk of a single security
managed according to that investor's needs and preferences Separately managed account selected at random from the n securities)
Diversification ratio: measurement of = 1 --> No diversification effect
buy expected outperforming securities
and sell securities short that are expected the benefits of diversification The smallest, the best diversification effect
to underperform the overall market Long/Short funds Diversification works best when financial markets are operating normally and vice verse
Long/short with long stock positions that

are just offset in value by stocks sold short Who save and invest for a variety of reasons including
Equity market-neutral funds purchasing a house or educating their children
Be neutral to overall market movements
individual makes the investment
Long bias: a long/short fund dedicated to a
Individual investors decisions and takes on the risk
larger long position relative to short sales DC pension plans
Long bias, Short bias No guarantee for specific future pension payments
Short bias: a greater short position
relative to long positions Other forms of are funded by company contributions and have an
Strategies
pooled investments obligation to provide specific benefits to retirees -->
One time corporate events, such as M&A Event-driven funds Hedge funds
investments are usually reliable
DB pension plans
Profit from minor mispricings in debt securities typically have a very long time horizon
Fixed income arbitrage funds
minimize the interest rate changes effects
a fund dedicated to providing financial support
long/short positions in convertible bonds on an ongoing basis for a specific purpose
and equity shares
Endowment
Convertible bond arbitrage funds Ex: Universities endowment
Profit from a relative mispricings between two
a fund for charitable purposes to support specific activities
speculate on changes in international or to fund research related to a particular disease
interest rate and currency exchange rates Types of Foundation
Global macro funds
investors
objective is to earn more on the bank's loans and
taking a company private by buying all available Bank investments than the bank pays for deposits of various types
shares, usually funded by issuing debt Institutional investors
restructuring the company to increase cash flow invest customer premiums Life insurance
Buyout funds (Private equity funds) and fund customers claims
Investors typically exit the investment within three to five years. 40. PM- An Property and
Insurance companies casualty(P&C)
similar to buyout funds, except that the companies
Overview
purchased are in the start-up phase manage the pooled funds of many investors
Investment companies
provide advice and expertise to the start-ups Venture capital funds
manage the pooled funds in particular
styles (e.g., index, growth, bond investing)
Each investor owns shares
Mutual funds restrict to particular subcategories
NAV = Total net value of assets/ are one form of pooled investments (i.e, a single portfolio
of investment or regions
the number of such shares issued that contains investment funds from multiple investors
Sovereign wealth funds pools of assets owned by a government
No up-front fees No-load funds Investors by newly
issued shares at NAV
Up-front fees, redemption and redeem at NAV
Risk tolerance
fees or both Load funds Open-end funds Investment objectives
Return objectives
Do not take new investments into Liquidity

the fund or redeem shares Investment Policy Statement (IPS) Legal
Trade like equity shares Closed-end funds
Planning step
Investment constraints Tax
Charge ongoing management fees Time horizon
Invest in short-term debt securities Unique circumstances

Mutual funds
Provide interest income with very Money market funds
low risk of changes in share value analyzes of the risk and return characteristics
Steps in of various asset classes to allocate funds
2 categories PM process
Invest in fix-income securities identify the most attractive
Differentiated by bond maturities, Bond mutual funds securities within the asset class
credit ratings, issuers and types Top-down analysis: examine current economics and
Execution step
Passively managed forecasts: GDP growth, inflation, interest rate,...
Types
the portfolio is constructed to match the Index funds Bottom-up analysis: use model valuations
performance of particular index to identify undervalued securities
the management selects individual securities Monitor risk, return, weights of assets,...over
with the goal of producing returns greater Stock mutual funds time --> rebalance, adjust allocations
than those of their benchmark indexes
measure portfolio performance and
Have higher turnover of portfolio securities Feedback step
Actively managed funds evaluate to the benchmark portfolio
-->greater tax liabilities than index funds
Annual management fees are higher
40. PM- An Overview - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
a measure of the volatility of asset

prices and interest rates -> not good
choice for non-normal probability
distributions (e.g. negative skew or
positive excess kurtosis) Standard deviation
measures the market risk of equity

securities and portfolios of equity
securities ->considers the risk
Measures of risk
reduction benefits of diversification
-> suitable for securities held in a
well-diversified portfolio Beta
a measure of the price sensitivity of

debt securities to changes in interest
rates Duration
sensitivity of derivatives values to

the price of the underlying asset Delta
sensitivity of delta to changes in the

price of the underlying asset Gamma
sensitivity of derivatives values to Derivatives risks

the volatility of the price of the
underlying asset Vega Identify the risk tolerance of the organization
Identify and measure the risks
sensitivity of derivatives values to The risk management
that the organization faces
changes in the risk-free rate process seeks to
Rho Modify and monitor these risks
the minimum loss over a period that May increase its exposure
will occur with a specific probability to risks it decides to take
Value at Risk (VaR) Define risk management May decrease its exposure to risks that it is less well &
The process does not seek to
the expected value of a loss, given that minimize or eliminate all risks respond by making organizational changes, purchasing
the loss exceeds a minimum amount insurance or entering into hedge transactions
Conditional VaR (CVaR) Risk (uncertainty) is not something to be avoided
examines the effects of a specific Specific risks and overall level of risk are under managers control
(usually extreme) change in a key Determining the optimal bundle of risks for the organization and
variable such as an interest rate or Risk management
implementing risk mitigation strategies to achieve that bundle of risks
exchange rate Stress testing
Scenario analysis refers to a similar what-if analysis of Establishing processes and

expected loss but incorporates changes in multiple inputs Methods for measuring and policies for risk governance
modifying risk exposures and
Infrequent events of an organization Subjective and Market-based factors to consider in choosing Determining the organizations risk tolerance
are quite difficult to quantify the risk estimates of risk among the methods Identifying and measuring existing risks
Market prices of insurance, derivatives, or other securities Features of a risk Managing and mitigating risks to
used to hedge the risks can be used to estimate the risks management framework An overall risk management framework
achieve the optimal bundle of risks
encompasses several activities
Operational risks are difficult to quantify for a single organization Monitoring risk exposures over time
Unexpected changes in tax laws or the regulatory Communicating across the organization
environment can impose large costs on an organization
Performing strategic risk analyst
Goal of risk management is to retain
the optimal mix of risks
the decision often come from top One way to avoid a risk is to not the risk tolerance of the organization
management ( a part of risk engage in the activity with the the elements of its optimal
tolerance) uncertain outcome risk exposure strategy
Risk governance refers to senior
managements determination of the framework for oversight of
Some risks can be prevented such as
the risk of a data breach the risk management function
Diversification may offer a way to Seeks to manage risk in a way that

more efficiently bear a specific risk supports the organizational overall goals
Define risk governance and describe
a term used to describe a situation 41. Risk Management: risks that should be pursued
elements of effective risk governance
where an organization has decided An introduce in an effective manner
to bear a risk Risk governance
Self-insurance Provides organization-wide guidance on the risks that should be subject to limits
risks that should be reduced or avoided
a risk that an organization has
decided not to bear Risk transfer Modifying risk exposures risk measurement
A risk management committee can provide a way for integration of risks
an insurance company has agreed to various parts of the organization to bring up issues of
make a payment if a third party fails the best ways to mitigate undesirable risks
to perform under the terms of a
contract or agreement with the Determining an organizations risk tolerance involves setting the overall
organization risk exposure the organization will take by identifying the risks the firm can
fidelity bonds: insurers pay for A surety bond effectively take and the risks that the organization should reduce or avoid
losses that result from employee its expertise in its lines of business
theft or misconduct Explain how risk tolerance
affects risk management its skill at responding to negative outside events
a way to change the distribution of Some factors to determine its regulatory environment
possible outcomes and is
accomplished primarily with its financial strength and ability to withstand losses
derivative contracts Risk shifting Management should examine risks within and outside
May use multiple methods to reduce a single risk considering their various risk characteristics
Risk profile that the matches risk Criterion is always a comparison of combine risks characteristics to meet
tolerance and cost versus potential Choosing among risk
the costs and benefits of risk modification methods Risk budgeting: the process of organizations risk tolerance
returns modification allocating firm resources to goal: allocate acceptable risk to the mix
assets (or investments) by of assets or investments that have the
greatest expected returns over time
uncertainty about whether the
counterparty to a transaction will May be a single metric such as
fulfill its contractual obligations Credit risk Risk budgeting and its portfolio beta, value at risk, portfolio
role in risk governance duration or returns variance
the risk of loss when selling an asset at a time May be constructed based on
when market conditions make the sales prices categories of investments such as
Financial risks
less than the underlying fair value of the asset Liquidity risk domestic equities, domestic debt
securities, international equities and
Risk budget
uncertainty about the market prices international debt securities or
identify specific risk factors that specific risk factors: interest rate
of assets and interest rates Market risk
comprise the overall risk of the risk, equity market risk, foreign
portfolio or organization exchange rate risk
human error or faulty organizational processes Operational risk
organization is unable to continue to

operate because of running out of
cash Solvency risk
regulatory environment changes Financial and non-financial

imposing costs on the firm or sources of risk
restricting its activities Regulatory risk
political actions outside a specific Governmental or political risk

regulatory framework (including tax risk)
Non-financial risks
Legal risk
incorrect asset valuations based on
analytical models Model risk
extreme events are more likely than

the organizations analysis indicates Tail risk
incorrect account policies and estimates Accounting risk
For individuals: risk of death

(mortality risk), longevity risk
These risks often interact in many ways
41. Risk Management. An introduce - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
represents the investor's preferences in terms of

risk and return (i.e, his degree of risk aversion)
Investor's utility
Arithmetic mean return = (R1+R2+R3+...+Rn)/n

generally slope upward plots combinations of risk and expected
A more risk-averse investor will return among which an investor is indifferent Indifference curve
have steeper indifference curves
is the IRR on a portfolio based on all of
Money weighted rate of return its cash inflows and outflows.
the total return on a security portfolio before

Gross return deducting management and administration fees
Major return
measures
Pretax nominal return the return prior to paying taxes
Average returns
After tax nominal return the return after deducting tax liability
Other return measures
Real return nominal return adjusted for inflation
Selection of an
optimal portfolio a return to an investor that is a multiple
of the return on the underlying asset
Leveraged return is calculated as the gain or loss on the investment
as a percentage of an investor's cash investment
the line representing the combinations of risk-free
Capital allocation line (CAL)
assets and the optimal risky asset portfolio
Mean
measures of Population variance

investment risk
Variance
(Standard deviation)
Sample variance
Positive: move together

measures the extent to which two
variables move together over time Negative: move in opposite direction
=0: No linear relationship
Calculate & interpret
42. Portfolio
Risk & Return Covariance
CAL combine with indifference - Part I

curves represents an individual's
preferences for risk and return
=+1: perfectly positively correlated
standardized measure = -1: perfectly negatively correlated

of co-movement = 0: no linear relationship
Correlation
has no units and bounded by -1 and +1
For each level of expected portfolio return, the portfolio that has the
least risk is known as a minimum-variance portfolio. Taken together,
these portfolios form a line called the minimum-variance frontier. Asset classes with greatest average return
Minimum variance
frontier of risky assets also have highest standard deviation
On a risk versus return graph, the one risky portfolio Real return much more stable
that is farthest to the left (has the least risk) Characteristics of the major than nominal returns
Global minimum variance portfolio
asset classes considered in are negatively skewed
Those portfolios that have the greatest expected return forming portfolios greater kurtosis (fatter tails
for each level of risk make up the efficient frontier Returns distributions
than normal distribution)
coincides with the top portion of the
minimum variance frontier
Liquidity is a major concern in emerging
Efficient frontier of risky assets markets & thinly-traded securities
Risk-averse investors would only choose a
portfolio that lies on the efficient frontier
the one that dislikes risk (i.e,
Interpret prefers less risk to more risk)
may hold very risky assets if he feels the
Risk averse investor extra return he expects is adequate
compensation for the additional risk
Risk aversion &
its implication actually prefers more risk to less
Risk- seeking (risk-loving)
who has no preference regarding risk and would be
indifferent between two equal expected returns
Risk neutral
Portfolio standard deviation
Effect on portfolio's risk of

investing in assets that are
less than perfectly correlated
correlation decreases -->risk decreases
42. Portfolio Risk & Return - Part I - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Investors are risk averse, utility maximizing, and rational.

Markets are free of frictions like costs and taxes.
All investors plan using the same time period.
Assumptions
All investors have the same expectations of security returns.
Investments are infinitely divisible.
Prices are unaffected by an investor's trades.
CAPM
Wa=weight of risky asset a

Wb=weight of risk-free asset b
Standard deviation =
Equation a. Risk free asset +

Portfolio of risky assets
The line of possible risk and return combinations given the

risk-free rate and the risk and return of a portfolio of risky assets
CAL (Capital Allocation Line) Different investor may have different CAL
the CAL for all investors under the assumption of

homogenous expectations (same efficient frontier)
CML uses total risk on the X-axis SML
-->only efficient portfolios will plot on
SML use beta (systematic risk) on the Compare with CML
X-axis --> all properly priced securities
and portfolios of securities will plot on SML f,g,h. CAPM & SML
b.
Compare the rate of return on a security to the required rate
of return indicated by the SML to determine whether the
security is overvalued, undervalued, or properly valued
CML (Capital Market Line)
43. Portfolio
Risk & Return The risk cannot be diversified away
Systematic (nondiversifiable
- Part II risk or market risk)
The risk can be eliminated by diversification
Nonsystematic (unsystematic, unique,
diversifiable or firm-specific risk)
c. Risks
Total risk = systematic risk + unsystematic risk

Diversification to eliminate unsystematic risk is costless (CAPM underlying
assumption) --> cannot receive additional returns by taking on unsystematic risk
Macroeconomic
Types of Factors Fundamental
Statistical
with k factors
Factor sensitivity of Factor loading
Multifactor models Firm size, Firm B/P, Rm-Rf
Fama & French three-factor model
d. Return Formula
generating Carhart suggest 4th factor: prior period returns
--> to measure price momentum
models
Definition: the sensitivity of an asset's
return to the return on the market index
Single-factor model
= covariance of asset i's return with the
market return/variance of market portfolio
Market model
e. Calculate Beta
Slope of regression of returns

on market index
43. Portfolio Risk & Return - Part II - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
plan for achieving investment success

force investment discipline
a. Reasons for a written IPS
ensures that goals are realistic by requiring investors to
articulate their circumstances, objectives, and constraints
Circumstances & Situation

Description of Client Investment objectives
Statement of the purpose of the IPS
Investment manager
Custodian of assets
Statement of duties & responsibilities of
Client
Procedures to update IPS & to
respond to various possible situations
Absolute
Forms relate to a specific benchmark
Relative and can be strict
Risk objectives depends on financial

Ability circumstances
c. Investment objectives (derived from
d. Risk tolerance
communications with the client) based on the investor's attitudes
Willingness & beliefs -->subjective
Absolute
Return objective
Relative
The need to draw cash from the portfolio for anticipated or unexpected
future spending needs. High liquidity needs often translate to a high
Liquidity portfolio allocation to bonds or cash.
Often the period over which assets are accumulated and before
withdrawals begin. Risky or illiquid investments may be inappropriate
Time horizon for an investor with a short time horizon.
b. Major components of an IPS

Concerns the tax treatments of the investor's various
e. Investment constraints accounts, the relative tax treatment of capital gains
Tax situation and income, and the investor's marginal tax bracket.
Constraints such as government restrictions on

Legal & regulatory portfolio contents or laws against insider trading
44. Basics Of Portfolio
Planning & Construction Restrictions due to investor preferences (religious,
Unique circumstances ethical, etc.) or other factors not already considered
Investment guidelines (how the policy will be

executed, asset types permitted, leverage)
Evaluation of performance (e.g: benchmark)
Correlations within a
Definition & class should be very high
Specification Correlations between
classes should be low
Equities
Strategic
(baseline) f. Asset Bonds
asset allocation classes
Cash
Categories Real estate
Appendices Hedge funds, PE funds,
commodity funds, artwork,
Alternative intellectual property rights
Tactical asset allocation (deviate

from strategic asset allocation)
Rebalancing: how & when
Identify investable asset classes

Risk, Return, Correlation
Strategic
asset allocation Efficient frontier
Identify portfolio which best meets risk &
requirement of investor (based on IPS)
to take advantage of perceived short

term opportunities
g. Principles of
portfolio construction Tactical asset allocation manager's ability to identify short term opportunities
success depends on
the existence of such short term opportunities
manager's skill
success depends on
Security selection opportunities (mispricing or inefficiencies)
Risk budgeting
Role of asset allocation
44. Basics Of Portfolio Planning & Construction - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
50. Equity Valuation.

Concepts And Basic Tools 45. Market Organization & Structure
49. Introduction To Industry EQUITY 46. Security Market Indices

And Company Analysis
48. Overview Of Equity Securities 47. Market Efficiency
EQUITY - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Saving
Borrowing
Issuing equity
Allow entities to Risk management
Main functions
Exchanging assets
of financial system
Utilizing information
Equilibrium interest rate

Determine the returns that equate D &S
Allocate capital to most efficient uses
F.A: securities, currencies...
Protect unsophisticated investors Financial A vs. Real A R.A: commodities, real estate...
Establish minimum standard of competency Public sec: trade on exchanges

Help investors evaluate performance Objectives of Public vs. Private securities Private sec: not trade on exchange
Prevent insider market regulation
Debt
Promote commom FR requirements
Classification: Assets & Market Equity
Require minimum level of capital Debt vs. Equity vs. Derivative
Der contract: values depend on the values of other assets
Complete market (Availability) Primary: for newly issued sec
Operational efficiency (Low cost) Characteristics of Primary vs. Secondary market Secondary: subsequents sales of sec
Informational efficiency (P reflects fundamental info) well-functioning fin. system Money: for debt securities < 1y
Allocational efficiency (at the best efficiency) Money vs. Capital market Capital: for equity+debt securities> 1y
Trades occur at specific times Common stock

All bids+asks are declared, and then one negotiated price is set for the stock Equity Preferred stock
in smaller markets Call market
Warrants
to set opening prices and prices after used
Mutual funds
trading halts on major exchanges
Distinguish
Trade occur any time the market is open Securities sometimes refer as Depositories
Pooled investment vehicles ETFs and ETNs
auction process Continuous market Classification ABS
Price is set by of markets
dealer bid-ask quote 45. Market Organization Asset classes Hedge funds
Quote-driven markets (trade with dealers) & Structure Fixed income Convertible debt=F.I+Equity
1. Price
2. Display precedence Matching rules
Currencies
Order-driven markets
3. Time precedence Distinguish Forward, Futures, Swap, Option
Contracts Insurance Credit default swap

Brokered markets
Commodities
IPO vs. Secondary issues Real assets
Public offerings vs. Private placements Primary market Primary vs.
Brokers
Securities trade after initial offerings Secondary markets
Block brokers help large trades
Importance: provide Liquidity+Price info Secondary market
Investment banks
M.O: execute at the best P Brokers,Dealers & Exchanges Exchanges
L.O Market vs. Limit order Alternative trading systems (ATS)
Dealers earn profit fr. bid-ask spread

Good-til-cancelled Financial
Immediate-or-cancel intermediaries Securitizers
Order
Good-on-close Depository institutions
Good-on-open Validity Insurance companies
Stop-sell refer who buy A in 1 market & resell in another market
Stop order Arbitrageurs
Stop-buy
Clearinghouses: intermediaries between buyers & sellers
Clearinghouses & Custodians Custodians
Long =Buy
Long vs. Short Short =Sell
borrow securities & sell

Short sales
Positions borrow funds to buy A
1 Initial margin
Leveraged positions Margin call P=P0
1 Maintenance margin
45. Market Organization & Structure - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Security used to present the performance of an asset

class, security market or segment of a market
market index
Price index: calculate price only

Calculate an index
Return index: include P+Income
Which target market?

Which securities?
Index construction
How weight?
& management
Re-balancing frequency?
Re-examining when?
= Sum of stock prices / Number of stocks adjusted for splits

Adjust for stock split
Price-weighted index Adv: simple
Adv & Disad Disad: % change in a high-priced stock will have a greater
effect on the index
Equivalent to a portfolio that has equal dollar

amounts invested in each index stock
Equal-weighted index
Weighting methods NOT adjust
Weights based on the market-cap of each index stock

. Market-cap weighted index
Criticism: large company has greater impact
Float-adjusted market cap- weighted index
46. Security Market float : (-) shares from Controlling shareholders

Market Indices Free float: Market float - Not available to foreign investors
Fundamental weighting
(earnings, dividends, cash flow)
Rebalancing & Rebalance: adjust the weights of securities uses for Equal-weighted index
Reconstitution
Reconstitution: add & delete securities that make up an index
Reflect market sentiment

Proxy for measuring of market return & risk
Uses of securities
Proxy of beta & risk-adjusted return
market indices
Benchmark of management performance
Model portfolio for index fund
Broad market equity

Multi-market vs. Multi-market with fundamental weghting
Types of equity indices Sector index
Market-cap
Style index Value/Growth
Illiquidity, transactions costs, high turnover of

Large universe constituent securities => Difficult & expensive
Types of Fixed Income indices to replicate F.I index
Dealer market & infrequent trading
based on future contract

Commodities index
Alternative investment indices may have upward-bias
Hedge fund index
Real estate index
46. Security Market Indices - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Active investor can't beat the

Efficient market Def: Current price of a security fully, quickly, rationally
market => Passive investor
reflects all available information about that security
Market value
Distinguish Def: the value that a rational investor
would willing to pay
Intrinsic value
Number of market participants

Availability of information
Factors affect efficiency
Impediments to trading
Transaction and information costs
can't use Technical analysis

Weak form
can't use Fundamental+Technical

Semi-strong form
Forms of EMH Portfolio managers can still add value by:
diversify portfolio, tax management...
Strong-form
can't earn abnormal profit
Fundamental analysis
Implications of each form of EMH Technical analysis
Choosing between active and passive
anuary effect (or turn-of-the-year effect)

Turn-of-the-month effect
Calendar
anomalies Day-of-the-week effect
47. Market Efficiency Anomalies in
Weekend effect
Time-series data Holiday effect

Overreaction and
momentum anomalies
Market pricing
anomalies Size effect
Anomalies in
Value effect
cross-sectional data
Closed-end investment funds
Earnings announcements
Other anomalies IPO
Economic fundamentals
Implications for investors
Loss aversion
Investor overconfidence
Representativeness
Gambler's fallacy
Behavioral finance
Conservatism
Disposition effect
Narrow framing
Information cascades; herding behavior
investors dislike a loss more than

they like a gain of an equal amount
Low aversion
overestimate their abilities to analyze security information and identify

Evidence of irrational behavior difference between securities market prices and intrinsic values
Investor overconfidence
act in concert on the same side of the information cascade results when
market, acting not on private analysis investors mimic the decision of others
Herding
47. Market Efficiency - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Include:
1. Statutory voting
2. Cumulative voting (serve minority shareholders better )
Characteristics Callable
Common shares Putable
Cumulative vs. Non-cumulative

Participating vs. Non-participating
Preference shares
Convertible preference shares
Some companies' equity shares are divided into different classes

Equity classes which may have different voting rights and priority in liquidation
Characteristics: usually issues to institutional investors
Venture capital (provide capital to firms in early life-cycle
3 main types Leveraged buyouts (LBO) (buy all firm's equity =debt)
Private equity securities
Private investment in public equity (PIPE)
potentially greater return for investors once the firm goes public
Distinguish
higher reporting costs
less ability to focus on long-term prospects
Compare to private equity firms more liquid
Public equity securities more financial disclosure
better corporate governance
Direct investing
Global depository receipts (GDRs) (US institutional investors can buy)
Non-domestic equity American depository receipts (ADRs)

48. Overview Depository receipts (DRs) Global registered shares (GRS)
Of Equity Securities
Basket of listed depository receipts (BLDR) (ETF that is a collection of DRs)
Dividends, compounding of reinvested dividends

Capital gains or losses from changes in share prices
Returns
Foreign exchange gains or losses on shares traded in a foreign currency
pays known, fixed dividend to investors

Risk & Return characteristics of Preferred stock is less risky
than common stock because receives dividends before common stock
various types of equity securities
has a claim equal to par value if the firm is liquidated
Putable shares are the least risky
Risks
Callable shares are the most risky
Cumulative preferred shares are less risky than non-cumulative preferred shares
Role of equity
Provide funds to the firm to buy productive assets, to buy
securities in financing other companies, or to offer employees as compensation
company's assets &
Provide liquidity when raise additional funds
creating company value
is the share price multiplied by the number of shares outstanding

Market value of equity reflects investors' expectations about the timing, amount, and risk of the firm's future CFs
Distinguish is the difference between the financial statement value of the firm's assets and liabilities
(+) retained earnings increase book value of equity
Book value of equity
reflects the firm's past operating and financing choices
N.I/(average B.V)
ROE = N.I/(B.Vt-1)
often uses as proxy for minimum required return of investors

Compare Cost of equity
depends on estimates of firm's future CF & risk
Investors' required
rates of return
48. Overview Of Equity Securities - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
To understand a company's business environment

before engaging in analysis of the company
the firm's potential growth
competition
risk
Industry environment provides info abt
Industry analysis appropriate debt levels
credit risk
Firm's financial condition which industries to overweight or underweight

Industry valuation
Products & services
Company analysis a component in a performance attribution analysis of a portfolio's return
Low-cost strategy Industry presentation
Differentiation strategy Competitive strategy
Products & services supplied

Macroeconomic factors has earnings highly dependent on the business cycle
Cyclical
Technology External influences Sensitivity to business cycles
Demographic factors on industry growth, Grouping by Non-cyclical has earnings less dependent on the business cycle
Governments profitability and risk
Statistical methods highly correlated returns --> same group
Social influence
Basic material and processing

Slow growth
Consumer discretionary
High prices
Consumer staples
Large investment required 1. Embryonic stage
Energy
High risk of failure
Classification Financial services
Rapid growth Industry classification Industrial and producer durables
Limited competitive pressures Commercial classifications Technology
Falling prices 2. Growth stage
Telecommunications
Increasing profitability
Utilities
Industry classification systems
Growth has slowed
GICS
Intense competition
49. Introduction Systems RGS
Increasing industry
To Industry And Industry Classification Benchmark (ICB)
overcapacity Product & industry life cycle Company Analysis
3. Shakeout stage United Nations
Declining profitability
European Community
Increased cost cutting Government classifications
Australia & New Zealand
Increased failures
North America (US, Canada, Mexico)
Slow growth
Consolidation Cyclical
High barriers to entry demand for the product tends not to fluctuate with the business cycle
4. Mature stage Defensive (stable)
Stable pricing
Non-cyclical demand is so strong that it is largely unaffected by the business cycle
Superior firms gain market share Growth
Negative growth Sensitivity to business cycle cyclical industries often include growth firms
Declining prices non-cyclical can be affected by severe recessions
5. Decline stage
Consolidation defensive industries are not always safe environments
Limitations of such descriptors
business cycle timing differs across countries and regions
classification of firms is somewhat arbitrary
Answer to describe 2 forces:

> Barriers to entry Def: a set of similar companies uses for valuation comparisons
> Industry concentration 1. Rivalry among existing competitors
. Peer group identify companies in the same industry
> Industry capacity 2. Threat of new entrants
> Market stability share Five-forces Strategic analysis
How to form? use other info to verify
3. Threat of substitute products
4. Bargaining power of suppliers Evaluate the relationships between macroeconomic variables and industry trends
5. Bargaining power of customers Estimate industry variables using different approaches and scenarios
Check estimates against those from other analysts
Compare the valuation for different industries
Elements of an Compare the valuation for industries across time to determine risk and rotation strategies
industry analysis Analyze industry prospects based on strategic groups
Classify industries by their life-cycle stage
Position the industry on the experience curve
Consider demographic, macroeconomic, governmental, social, and technological influences
Examine the forces that determine industry competition
49. Introduction To Industry And Company Analysis - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Size of differences between

market price and intrinsic value
Evaluate whether a Confidence about valuation model
company is mispriced Confidence about the inputs
Why stock is mispriced
If market price will move toward intrinsic value
d. Preferred stock
e. Common stock
Dividend discount models Stable & mature
f. Appropriate for
companies that are Non-cyclical
1. DCF models Dividend-paying
FCFE models
Advantages
.
Disadvantages
Equity valuation models
h. Stock price / fundamentals
Types of models
e. Enterprise value / EBITDA or revenue
2. Multiplier models Advantages

.
Disadvantages
50. Equity
Explain:
Valuation:
Concepts And Advantages
3. Asset-based models .
Basic Tools Disadvantages
Preferred stock value = Dp/Kp
D1
DDM V0 =
ke g
Gordon growth model
DCF model
FCFE t
V=
(1+k e )t
FCFE (reflect firm's capacity to pay dividend)
use intrinsic value

Based on fundamental
Multiplier model
trading multiple
Based on comparable
Asset-based model Equity=MV of assets - MV of liabilities
50. Equity Valuation. Concepts And Basic Tools - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
51. F.I SECURITIES: DEFINING ELEMENTS
52. F.I MARKET - ISSUANCE, TRADING & FUNDING
53. INTRODUCTION TO F.I VALUATION
FIXED INCOME
54. INTRODUCTION TO ASSET-BACKED SECURITIES
55. UNDERSTANDING F.I RISKS & RETURNS
56. FUNDAMENTALS OF CREDIT ANALYSIS
FIXED INCOME - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Corporations
Sovereign national government
Non-sovereign Gov
Bond issuer
Quasi-government entity
Supranational entity
Time remaining til maturity: Term To Maturity

Maturity date Bonds have no maturity: Perpetual Bonds
Basic features
Price>Par: Premium Bond
Par value Price<Par: Discount Bond
Fix counpon rate: Plain Vanilla Bond

Coupon rate Have no coupon: Zero-counpon Bond
Dual-currency bond
Payment currency Currency option bond
Negative covernant (prohibition from Borrower)

Indenture
Affirmative covernant (promission from Borrower)
E.g: a bond issued by a Chinese firm that is

denominated in Yen & traded outside Japan
Bearer bond (adv: avoid tax)
Eurobonds 2 forms
Register bond
Special Purpose Entity (SPE): also

called bankruptcy remote vehicle
Issuing entities
Sources of repayment
Secured Bond (backed by specific assets)
Types
Unsecured Bond (represent a claim)
Overcollateralization (collateral has a greater value than Par)

Internal Excess spread (yield on the fin. A is greater than bond yield)
Tranches
Collateral & Credit enhancement
Credit enhancement Surety bond (issued by insurance companies & promise to
make up shortfall in the cash available to service the debt)
External Bank guarantee (same)

Letter of credit (a promise to lend money to the issuing entity)
Municipal bond (exempt fr. national+issuing state income tax)

Taxation of Bond Income Capital gain (taxed at a lower rate than ordinary income)
51. F.I securities:
Defining elements Bullet structure Ballon payment: the final installment of a loan that is larger than regular installment
the principal is fully paid off when the

Fully amortizing last periodic payment is made
Amortizing Partial amortizing ballon payment at bond maturity
Sinking fund provision

Accelerated sinking fund provision
Factors affecting Floating-Rate note (cap & floor; collar)

issuance & trading coupon rate increases over time
of F.I Step-up coupon bond according to predetermined schedule
coupon rate will go up by a certain amount if the

Credit-linked coupon bond credit rating of the issuer falls and vice versa
CFs of fixed-income structure
issuer can make coupon payments by increasing the principal amount of
Payment-in-kind (PIK) the outstanding bonds, essentially pay bond interest with more bonds
Types of bond Deferred (split) coupon bond regular coupon payments do not begin until a period of time after issuance
Capital-indexed bond
Indexed-annuity bond Principal protected bond: not pay less than
Inflation-indexed Par even when the index has decreased
Index-linked bond Indexed zero-coupon bond
Interest-indexed bond
are traded debt securities, typically with no periodic interest

Equity-linked notes payments, payment at maturity is based on an equity index
in bond indentures are as embedded options

Def. an action that may be taken if an event actually occurs bonds with no contingency provisions are
called straight or option-free bonds
American style: can be called anytime after 1st call

European style: only be called at specified call date
Call option Bermuda style: can be called on specified dates after
Benefit issuer the first call date, often on coupon payment dates
Contingency provision to avoid the higher interest rates required on callable

make-whole call provisions bonds but still preserve the option to redeem bonds early
bondholder has the right to sell the bond back

Put option to the issuing company at a prespecified price
Benefit bondholder
Convertible bond + Contingent Convertible Bond
Warrants
51. F.I securities. Defining elements - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Government and government related bonds

from financial corporations
Corporate bonds
Type of issuer from non-financial corporations
Structure finance (securitized bonds)
S&P, Moody's, Fitch, etc,.

Credit quality
Money market securities (<=1 year)
Original maturities Capital market securities (>1 year)
Global markets Floating rate
classification Coupon structure Fixed rate
U.S. dollars, euros,...

Currency denomination
Domestic, foreign, euros bonds market,...
Geography developed markets, emerging markets
Index-linked bonds, inflation-linked bonds

Indexing
tax exempt bonds, municipal bonds or munis,...
Tax status
Reference rate in Most used : LIBOR

floating-rate debt
1. Determining funding needs

2. Structuring the debt security
3. Creating the bond indenture
4. Naming a bond trustee
5. Registering the issue with securities regulators
Mechanism for issuing 6. Assessing demand & pricing the bonds given market conditions
bonds in primary market with investment bank or syndicate
purchasing the entire issue and
Underwritten offering (purchase & sell) selling the bonds to dealers
7. Selling the bonds Best effort offering investment bank sells the bonds on commission
Auction commonly used to issue government debt
Def: the trading of previously trading bond

Gov. Bond: T+1
Secondary markets for bonds
Corporate Bond: T+3
Settlement time
52. F.I markets: Some money market securities: T+0
Issuance, Trading &
Funding
Fixed-rate
Backed by the Taxing Power of government
Floating-rate
Sovereign bonds
Inflation-indexed bond
Securities issued
by some entities Tax-backed debt
Nonsovereign government bonds Revenue bond
Agency bonds (issued by those created by national governments for specific purposes)
Supranational bonds (e.g: IMF, WB, ADB...)
Bank debt
Difficulties:
1. Deterioration in a company's actual
When mature: "Rolled over" 2. Significant systemic financial distress
Types of debt issued
Commercial paper
by corporation US: %discount from FV
Quoted price EU: add-on yield
Corporate bond
Medium-term Note (not necessarily medium-term) *
Customer deposits
Short-term funding
Certificates of deposit
alternatives available to
Interbank fund
banks
Central bank fund market
One day: overnight repo

is an agreement why which one party sells a security to a counterparty with a
commitment to buy it back at a later date at a higher price Long period: term repo
Higher, the longer the repo term

Lower, the higher the credit quality of the collateral security
Repo rate Lower when the collateral security is delivered to the lender
Higher when the interest rates for alternative sources of funds are higher
Higher, the longer the repo term
Repo Lower, the higher the credit quality
the percentage difference between the of the collateral security
market value and the amount loaned Lower, the higher the credit quality
Repo margin or the haircut of the borrower
Lower when the collateral security is in
high demand or low supply
Lenders must compete for bonds by offering lower repo rate

refers to taking the opposite side of a repurchase transaction, lending funds by buying
the collateral security rather than selling the collateral security to borrow funds
Reverse repo agreement
52. F.I markets. Issuance, Trading & Funding - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Present value of its future cash Rows,

discounted at the bond's yield-to-maturity.
Calculate a bond's price For annual-coupon bond
For semiannual-coupon bond
Price & YTM: inversely related

Relationship among P, Price < Par when coupon rate < YTM and vice versa
C.Rate, maturity, YTM Prices are more sensitive to changes in YTM for bonds with
lower coupon rates and longer maturities and vice versa
Def: the market discount rates for a single pmt to be received in the future
Spot rate
t: days fr the last coupon pmt date to the setlement date

Flat price, accrued Full price = Par*(1+YTM)^ t/T T: days between 2 coupon pmt
interest, full price
of a bond Accrued interest = c.p*( t/T)
Full (dirty) price = Flat (clean) price + Accrued interest
Def: a method of estimating the required YTM of bonds

Matrix pricing that are currently not (infrequently) traded
53. Introduction
to F.I valuation Street convention
True yield
Current yield ( =annual c.p/Bond price)
Yield measures for Fixed-rate bond Simple yield Def: (annual c.p + straight-line amortization of discount) / Flat price
fixed-rate, floating-rate,
money market instruments Yield-to-call the lowest of various YTC & YTM is Yield-to-worse
Floating-rate note
T-bill: discount basis
Money market instrument
A yield curve shows the term structure of interest rates

by displaying yields across different maturities.
The spot curve is a yield curve for single payments in the
Spot curve, yield curve, par future, such as zero-coupon bonds or stripped Treasury bonds.
curve, forward curve The par curve shows the coupon rates for bonds of various maturities that
would result in bond prices equal to their par values.
A forward curve is a yield curve composed of forward rates, such as
l-year rates available at each year over a future period.
Calculate spot from forward, Formula: (1 + S 2)^2 = (1 +S 1)*(1+1y1y)

forward from spot rates
G-spread (disadvantage: only correct if Spot yield curve is flat)

Compare, calculate,
interpret yield spread Yield spread (difference Zero-volatility spread (add to each Spot rate)
between the yields of 2 bonds)
measures Option-adjusted spread (OAS = Z-spread - Option cost)
53. Introduction to F.I valuation - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
a process by which financial assets are purchased by an entity that

Def. of then issues securities supported by the CFs from those financial assets
securitization
a reduction in funding costs

Def. are structured securities issued by an SPV for Primary benefits an increase in the liquidity of the underlying financial assets
which the collateral is a pool of debt obligations
lower funding costs for borrowers
May use interest earned on portfolio securities, Benefits for securitization for reduces intermediation costs
cash from maturing portfolio securities and from higher risk-adjusted returns for lenders
sale of portfolio securities to cover the promised economies and financial markets
payments to holders of senior and mezzanine bonds Managed by a collateral manager, investors' legal claim to the mortgages or other loans is stronger
do not rely on interest payments loans when being securitized will be actively traded --> increase the liquidity
Compare to
Collateralized bond obligations (CBOs) backed traditional structure banks can lend more by securitizing loans
by corporate and emerging market debt
lead to financial motivation that allows investors to invest in securities
Collateralized loan obligations (CLOs) that better match their preferred risk, maturity, and return characteristics
backed by leveraged bank loans
provides diversification and risk reduction
Structured finance CDOs backed by residential Include
or commercial MBS, ABS, or other CLOs Collateralized debt
Synthetic CDOs backed by credit
obligations (CDOs) is the firm that is raising funds through the securitization
The seller
default swaps on structured securities
commonly backed by automobile loans,
typically issue a floating-rate tranche (70-80%) Senior bonds credit card receivables, home equity loans,
manufactured housing loans, student loans,
small business administration (SBA) loans,
fixed rate interest Mezzanine bonds buys financial assets from the seller and corporate loans, corporate bonds, emerging
issues asset-backed securities (ABS)
CDOs issue 3 tranches is an entity market bonds, structured financial products
supported by these financial assets
Subordinated bonds independent loans owned by the trust (SPV)-->MBS
leveraged investment (equity or residual tranche) Securitization process of the seller
A special purpose a single class of ABS
vehicle (SPV)
to earn returns from the spread between multiple classes with different priorities of
may issue
funding costs and portfolio returns claims to the CFs underlying & different
each class is called tranche
Arbitrage CDO specifications of payments (waterfall structure)
Def. are ABS backed by various types of financial assets such as carries out collection and other responsibilities related to financial assets
small business loans, acounts receivables, credit card receivables,
The servicer may be the same entity as the seller, not have to be
automobile loans, home equity loans, manufactured housing loans
Backed by automobiles
Maturity: 36 to 72 months the differences classes of securities, each with a different a particular risk is redistributed across
claim to the cash flows of the underlying assets the tranches but total risk is unchanged
Issuers: financial subsidiaries of auto manufacturers, commercial banks,
credit unions, finance companies, other small financial institutions Tranches
Interest payments any credit losses are first absorbed by the tranche with the lowest
Describe typical structures priority and after that by any other subordinated tranches, in order
Scheduled principal payments
CFs components Auto Loan ABS of securitizations Credit tranching
if car is sold, traded in,
repossessed, stolen, wrecked refers to classes that receive the principal payments from underlying
Prepayments
securities sequentially as each prior tranche is repaid in full
Non-mortgage Time tranching
Senior-subordinated structure asset-backed securities Some structures have both time tranching and credit tranching
Internal credit enhancements such as a reserve account, Credit enhancement
an excess interest spread, overcollateralization,...
Def. is a loan for which the collateral that underlies the loans is residential real estate
Backed by credit card receivables which are revolving debt (non-amortizing)
indicates the percentage of the value of the real estate collateral that is loaned
Issuers: banks, retailers, travel and entertainment
Loan-to-value ratio The lower LTVs, the less credit risk
companies, and other credit card issuer
With fixed or floating interest rate US. 15-20 years; Europe: 20-40 years or 50 years;
Interest payments Japan: may have terms of 100 years
Maturity
Credit Card ABS
No principal payments during lockout period because principal
payments are used to purchase additional receivables CFs interest rate is unchanged over the life of the mortgage
Fixed-rate mortgage
to preserve credit
quality of securities Typically have an early amortization provision Adjustable-rate mortgage
or variable-rate mortgage E.g An index-referenced mortgage
Apartments (multi-family) the loan become an adjustable-rate

Warehouses (industrial use property) Hybrid mortgage mortgage after the initial fixed-rate period
Interest rate
Shopping centers
are backed by interest rate changes to a different fixed
Office buildings
income-producing
54. Introduction to Rollover or renegotiable mortgage rate after the initial fixed-rate period
Health care facilities real estate Asset-Backed Securities
Senior housing initial interest rate terms (fixed or adjustable)
can be changed at the option of the borrower to
Hotel/resort properties adjustable or fixed for the remaining loan period
Convertible mortgage
RMBS loans are repaid by homeowners Residential mortgage loans
Compare to RMBS Fully amortizing
Commercial MBS loans are repaid by real estate investors
balloon payment
Structured as noncourse loans and in tranches with credit risk Characteristics
losses absorbed by the lowest priority tranches in sequence Commercial Amortization of principal Interest-only lifetime
Mortgage-backed Partially amortizing
Net operating income is calculated after interest-only mortgage Interest-only over
the deduction for real estate taxes but securities some initial period
before any relevant income taxes Debt-to-service-coverage ratio (DSC) =
=(net operating income)/(debt service)
The higher the better Def: a partial or full repayment of principal in excess of the
Analysis focuses on the credit of scheduled principal repayments required by the mortgage
Loan-to-value ratio = the property, not of the borrower
the lower the better (current mortgage amount)/(current appraised value) E.g. sell home during mortgage term; refinance mortgage;
prepay by paying more than scheduled payments
Prepayment provisions
Prepayment lockout periods No
Defeasance Penalty benefits the lender
Loan-level call protection prepayment penalty
Yes
Prepayment penalty points
Yield maintenance charges Call (prepayment) protection
the lender has no claim against
CMBS-level call protection provided the assets of the borrower except
for the collateral property itself strategic default
by the lower-priority tranches
Non-recourse loan
Foreclosure
are securities collateralized by RMBS the lender has the a claim against the borrower for the amount
Recourse loan by which the sale of a repossessed collateral property falls short
Total prepayment risk is not
changed but reapportioned among
the various CMO tranches
Agency RMBS
better match investor preferences
(mortgage Issued by government agencies. E.g: GNMA, Ginnie Mae
increase potential market pass-through
Benefits has multiple bond classes Collateralized mortgage Or issued by government-sponsored enterprises. E.g: Fannie Mae, Freddie Mac
for securitized market securities)
(CMO tranches)with different obligations (CMOs) Mortgages that back must be conforming loans that meet certain minimum credit
reduce funding costs exposures to prepayment risk
quality standards such as down payment, LTV ratio, size, documentation, insurance
Residential Mortgage-backed
has different claim against the CFs
securities (RMBS) include Issued by private companies
of the mortgage pass-throughs Non-agency RMBS
Each tranche may be backed by non-conforming mortgages
has different mixture of
contraction and extension risk Pass-through rate, the coupon rate on the RMBS
Separate CFs into tranches retired sequentially WAM is equal to the weighted average of the final maturities of all
Sequential Pay CMO Motivation for creating Weighted average maturity (WAM) the mortgages, weighted by each mortgage's principal balance as a
securitized structures with and weighted average coupon (WAC) proportion of the total outstanding principal value of all mortgages
to make predictable payments
regardless of actual prepayments
multiple tranches and the of the underlying pool of mortgages WAC is the weighted average of the
characteristics & risks of interest rates of all mortgages in the pool
reduce contraction & extension risk
securitized structures Single monthly
the upper and lower bounds on mortality rate (SMM)
the actual prepayment rates for Planned Amortization
support tranches to be sufficient Class (PAC) CMO RMBS; CFs and risks Key characteristics timing and amount of Conditional prepayment rate
Initial PAC collar Specific (CPR), which may be
CFs from mortgage loans
assumptions compared to the Public
Contraction risk from and MBS are uncertain;
when the prepayment rates is reduces the principal Securities Administration
faster-than-expected
outside of these above bounds CMO Structures outstanding ->reduces (PSA) benchmark for
Broken PAC Prepayment risks include prepayments expected prepayment rates
total interest paid
increase the prepayment risk of this will reduce

Extension risk from
the PAC tranches' prepayment risk and vice versa
slower-than-expected
The larger the support tranches relative to PAC prepayments
tranches, the smaller the probability that CFs to Support tranches
PAC tranches differing from scheduled payments External credit enhancement Third party guarantee
more contraction & extension risk & higher promised interest rate
Reserves fund (cash or excess spread)
Floating-rate tranches
occurs when the ABS is issued with a face less
Credit enhancement of than the value of the underlying collateral
non-agency RMBS Internal credit enhancement Overcollateralization
the subordinated tranches absorb the first losses

Senior/subordinated structures
A shifting interest mechanism
54. Introduction to Asset-Backed Securities - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
1. An invertors who holds a fixed-rate bond to maturity will earn an annualized

rate of return = YTM when purchased
2. Sells a bond prior to maturity will earn a rate of return = YTM ar purchase if
YTM at sale has not changed since purchase
3. If YTM for the bond increases after purchasing but before 1st coupon date, a buy-and-hold
Sources of returns investor realized return will be higher than the YTM of the bond when purchased
4. If ..., invertors will earn a rate of return that is lower than the
YTM at bond purchase if the bond is held for short-period
5. If YTM for the bond decreases after purchasing but before 1st coupon date, a bond investor will
earn a rate of return that is lower than the YTM at bond purchase if the bond is held for long-term
Def: measure the approximate % P change for changes in yield

Macaulay duration (weighted average of years until each CF)
Macaulay, modified,
effective duration Modified duration (% change in P for 100 b.p change in yield) Formula: ModDur = MacDur/(1+Yield/k)
Effective duration
Effective duration is the

most appropriate Bonds with ebedded options: have uncertain future CF
measure of interest rate means our PV calculation based on YTM can not be used
risk for bonds with
embedded options
Def. of key rate duration (partial duration) is the sensitivity of the value of a bond or
Key rate duration and portfolio to changes in the spot rate for a specific maturity, holding other spot rates constant
its key use in measuring
particularly useful to measure the effect of a
the bond's sensitivity nonparallel shift in the yield curve on a bond portfolio
How a bond's maturity, Maturity: (usually) proprtional

coupon & yield level affect Coupon rate: inverse proportional
its Interest Rate Risk? Bond's YTM: inverse proportional
Calculate the weighted average number of not work for a portfolio that contains
55. Understanding F.I periods 'til the portfolio's CF will be received bonds with embedded options
risks & returns

Duration of a portfolio Take a weighted average of the durations
2 methods of the individual bonds in the portfolio
Formula: P.Dur= W1.D1 + W2*D2 + ...
(more typical)
Assumption: parallel shift in the yield curve
Money duration & Price value Money duration = Annual Mod.Dur * Full price of bond
of a basis point (PVBP) PVBP
V +V + 2V 0
V= ( YTM 2 )2V 0
Convexity Approximate convexity
Callable bond: less P volatility at low yield

Putable bond: less P volatility at high yield
Characteristics
Option-free: Positive convexity + P falls at a decreasing rate as yields increase
Convexity adjustment % change price = -(deltaYTM)*Dur + 0.5*Convexity*(deltaYTM)^2
Def: relation between the volatility of bond yields & times to maturity
Structure of yield volatility
i.e: ST bond has more price volatility than a longer-term bond with greater duration
ST invest: horizon return > original bond yield

Relationship among a bond's
holding period return, duration, LT invest: horizon return < original bond yield
Decrease in Yield
investment horizon Horizon=Mac.Dur: horizon return = original yield
Credit spread & liquid affect YTM Spread to the benchmark includes: credit risk premium + illiquidity premiu
55. Understanding F.I risks & returns - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
The probability of default

Default risk
Credit risk the portion of the value of a bond or

loan a lender or investor will lose if The expected loss is the probability of
the borrower defaults default multiplied by the loss severity
Loss severity
1. 1st lien loan

2. Senior secured
3. Senior Unsecured may NOT be absolute if having negotiate
Senior ranking Ranking 4. Senior subordinated
5. Subordinated
Return impact = -Mod.Dur * (deltaSpread)
Small spread changes 6. Junior subordinated
Return impact
% change price = -(deltaYTM)*Dur + 0.5*Convexity*(deltaYTM)^2 Recovery rate: pari passu (debts at the same level 'll be paid equally)
Larger spread changes
Corporate family rating (CFR): rated on Senior unsecured debt
Credit cycle Rating
Corporate credit rating (CCR): based on NOTCHING
Financial market performance
Economic condition Yield spread Ratings are dynamic
Factors affect
Broker-dealer capital Risk in relying on Rating agencies are NOT perfect
General market demand & supply Agency ratings Event risks are difficult to assess
Rating lag market pricing
Rating agencies publish benchmark values for financial 56. Fundamentals of

Evaluate the credit quality Soundness of strategy
rations that are associated with each ratings classification credit analysis
Track record
Character Accounting policies and tax strategies
EBITDA
Fraud and malfeasance record
Funds from operations (FFO)
Prior treatment of bondholders
Free cash flow before dividends Common metrics
Porter's five forces (discussed
Free cash flow after dividends
Industry structure on equity valuation)
Debt/capital Financial ratio
Debt/EBITDA Industry cyclicality
Leverage ratio
FFO/debt Industry fundamentals Industry growth prospects
Capacity Industry published statistics
EBITDA/interest expense
Coverage ratio (measure the borrower's ability Competitive position
EBIT/interest expense to generate CFs to meet interest payment)
Traditional credit analysis 4Cs
Operating history
Company fundamentals
Management's strategy and execution
Ratios and ratio analysis
Affirmative requires the borrower to take certain actions
Covenants
Negative restricts the borrower from taking certain actions
Intangible assets
Depreciation
Collateral
Equity market capitalization
Human and intellectual capital
56. Fundamentals of credit analysis - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
57. DERIVATIVE MARKETS AND INSTRUMENTS
DERIVATIVES 58. BASICS OF DERIVATIVE PRICING AND VALUATION
59. RISK MANAGEMENT APPLICATIONS OF OPTION STRATEGIES
DERIVATIVES - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Its return is based on another

instrument (underlying assets)
Physical
Definition
Finance The biggest trading volume
Underlying assets
Event
Organized market -> liquid

Buy an asset at one price Standard terms
Concurrently sell it at higher price Exchange No default risk
Arbitrage
-> Riskless profit without investment Arbitrage & the law of one price Daily settlement
Where derivatives are traded?
NO arbitrage opportunities exist private between 2 parties -> illiquid
The law of one price Customized terms
OTC default risk & legal risk
Difficult to understand
Complex at the end of the contract: settlement
Criticism
Zero-sum game 57. Derivative
Legal gambling Firm and binding agreement -> obligation
Markets and
Forward commitment No premium paid up front
Instruments Characteristics
Information about underlying price
The long has the flexibility -> options
Price discovery
Contingent claims Premium is paid up front by the long
Control risk
Risk management
Purposes of derivatives market Exchange, OTC, Forward commitment
Mispriced -> adjust quickly -> Forwards
market efficiency
Market efficiency Exchange, Forward commitment
Futures
Low tnx cost
Trading efficiency Exchange, OTC, Contingent Claims
Options
Types of derivatives OTC, Forward commitments
Swaps
a contract that provides a bondholder
(lender) with protection against a
downgrade or a default by the borrower
Credit default swap (CDS) -> most common
Credit derivatives Types
Credit spread option
57. DERIVATIVE MARKETS AND INSTRUMENTS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Storage, insurance costs --> very low, not significant for financial assets
Costs of holding an asset Opportunity cost of the invested funds in the asset
Monetary: dividend payments, interest payments

Benefits of holding an asset Non-monetary: convenience yield
Cost of carry
Net cost of holding an asset
Explain concepts
Valuation of derivatives is based on a
no-arbitrage condition with risk-neutral pricing
asset position at time 0 + short position in a
forward contract at time 0 = (payoff on the
Cash inflow > cash outflow
asset at time T + payoff on the short forward
-> intrinsic value >0 In the money: payoff > 0 Risk of a derivative is entirely based on the risk of the at time T)/(1 + Rf)^T
underlying asset, we can construct a fully hedged
Out of the money: payoff < 0 Moneyness
portfolio and discount its future CFs at the risk-free rate
At the money: payoff = 0
risky asset + derivative = risk-free asset
In the money: S-X>0
Three replications among a derivative, its risk asset - risk-free asset = - derivative position
Out of the money: S-X<0 Call option underlying asset and a risk-free asset
Exercise, time value and derivative position - risk-free asset = - risky asset
At the money: S = X moneyness of an option
In the money: X-S>0 Option Price of a forward or futures contract is
the forward price specified in the contract
Out of the money: X-S<0 Put option Price & Value of forward
Value of a forward or futures contract is zero at initiation. Its value may
At the money: X = S and futures contracts
increase or decrease during its life, with gains and losses in the value of a
option premium = intrinsic value + time value Time value is the amount by which an long position just opposite to gains or losses in the value of a short position
option's price is greater than its exercise
value. Time value is zero at expiration F 0 (T)+, an arbitrageur could take short
position, sell asset at time T at F 0 (T)+,
buy at S 0 , with funds borrowed at Rf,
If there are no costs or benefits repay the loan at cost of S 0 (1+Rf)^T,
The value of a call option is the greater of zero or the underlying asset price minus the exercise price European option from holding the underlying keep the positive difference between
The value of a put option is the greater of zero or the exercise price minus the underlying asset price at expiration 58. Basics of asset, forward price of an asset F0 (T)+ and S 0 (1+Rf)^T,
to be delivered at time T is
Derivative Pricing Determine value & price F 0 (T)-, do opposite transaction
one party pays a floating rate and the other and Valuation (Part1) of a forward contract
pays a fixed rate on a notional principal amount The value of a forward contract is zero
A Simple interest-rate swap
at initiation. During its life, at time t,
The first payment is known at initiation and the rest of the payments are unknown the value of the forward contract is
Similar to but different from
The unknown payments are equivalent to the payments on off-market FRAs At expiration, the payoff to a long forward is S T - F0(T), the difference between
a series of forward contracts
the spot price of the asset at expiration and the price of the forward contract
to Replicate a swap with a value of zero at initiation, the Swap contracts
sum of the present values of these FRAs must equal zero
The price of a swap is the fixed rate of interest specified in the swap contract. If holding an asset has costs and benefits,
the no-arbitrage forward price is
The value depends on how expected future floating rates change over time. An increase Distinguish between Benefits and costs associated
in expected short-term future rates will produce a positive value for fixed-rate payer, and the value and price The present values of the costs and
a decrease in expected future rates will produce a negative value for fixed-rate payer
with holding the underlying
benefits decrease as time passes. The
asset and its effects value of the forward at time t is
Gains and losses on futures contracts are settled daily At expiration the costs and benefits of holding the asset are zero and
do not affect the value a long forward position, which is S T - F0(T)
Prices of forwards and futures that have the same terms may
be different if interest rates are correlated with futures prices
Why forward and A forward rate agreement (FRA) is a derivative contract that has
Futures are more valuable than forwards when interest rates and futures prices
futures prices differ a future interest rate, rather than an asset, as its underlying
are positively correlated and less valuable when they are negatively correlated.
If interest rates are constant or uncorrelated with future A firm that intends to borrow in the future can lock
prices, the prices of futures and forwards are the same an interest rate with a long position in an FRA
FRAs are used by firms to hedge
the risk of borrowing and lending A firm that intends to lend in the future can lock
they intend to do in the future. an interest rate with a short position in an FRA
Forward Rate Agreement (FRA)
E.g
58. Basics of Derivative Pricing and Valuation - P1 - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Factors determining
the value of an option
and their effects
Tips to remember equation:

SEXY COP
Prices of European and American options will be equal unless
the right to exercise prior to expiration has positive value
C: cal with strike price X
no advantage to The underlying makes no cash payments P: put with strike price X
early exercise C(American) = C (European) S: underlying
Circumstances the +: Long
The underlying makes cash payment Call options
values of European and - : Short
C(A)>=C(E) (dividend amount is large enough)
Value (American) >= American options differ Exercise price on the put = exercise price on the
The options are Value (European) call = face value of the riskless bond = X
deep in the money P(American)>P(European) Fiduciary call: a call option and a risk-free zero-coupon
Put options
bond that pays the strike price X at expiration
Early exercise can be valuable
Protective put: a share of stock and a put at X
58. Basics of
Where:
Probabilities Derivative Pricing and Fiduciary call = protective put
Rf = risk-free rate
U = size of an up-move Valuation - Part 2
One-period binomial
D = size of an down-move
model to determine
Calculating the payoff of the option at maturity the value of an option
in both the up-move and down-move states Put-call parity for
Calculating the expected value of the option in one year as European options Synthetic call
the probability-weighted average of the payoffs in each state
Calculate the value of an option by
Discounting this expected value
back to today at the risk-free rate
is derived with a forward contract rather than the underlying asset itself
Put-call-forward parity Synthetic put

The present value of an asset's forward price is equal to its
spot price, we can substitute the present value of the forward for European options Combinations
price into the put-call parity relationship at the initiation of a
forward contract to establish put-call-forward parity as
Synthetic underlying
Synthetic bond
Covered call
Arbitrage opportunity
58. Basics of Derivative Pricing and Valuation - P2 - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
= Long stock + short call

= S - C
Covered call = call is covered by a long stock
Covered call
Payoff diagram
Payoff (covered call) = Payoff (Long stock) + Payoff (short call)
= ST - Max(0, S T - X)
Profit (Covered call) = Payoff (Covered call) - So + C
Max loss when payoff is min -> S T = 0 -> Max loss = So - C
Max profit when payoff is max -> ST > X
59. Risk Management Payoff diagram (Covered call): similar to payoff diagram of short put
Applications of
Option Strategies = Long stock + Long put
= S + P
Protective put = Long put protects potential loss of a stock
Protective put
Payoff diagram
Payoff (Protective put) = payoff (Long stock) + Payoff (long put)
= ST + Max(0, X - S T)
Profit = Payoff - So - P
Max loss when payoff is min -> S T = 0 -> Max loss = So + P - X
Max profit when payoff is max -> ST > X -> Max profit is indefinite
Payoff diagram (protective put) is similar to that of long call
59. Risk management Appications of Option Strategies - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
ALTERNATIVE INVESTMENTS - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Less liquidity of underlying investments

More specialization by investment managers
Higher management fees
a. Al vs Traditional Less regulation and transparency
Investments More problematic and less available
historical return and volatility date
Different legal issues and tax treatments
Low correlation with traditional investments
Hedge funds
Private equity funds
Real estate
Categories Commodities
fine wines, Stamps, automobiles, antique furniture,
and art, as well as patents, an intangible asset"
Other
Low correlation with traditional investments

Potential portfolio Higher average returns than
diversification benefits traditional investments
Potential benefits Survivorship bias

Problem of return measures biased
Backfill bias
upward, risk measures biased downward
Should include analysis of historical downside
frequencies & worst return in a month
60.1. Alternative
Investments - Part 1 Risk vary across alternative investments
Leptokurtic & negatively skewed
Standard deviation of returns may be Smooth returns due to appraisals or
a misleading measure of risk infrequent market transactions
Resulting Sharpe measures bias upward
and estimates of beta misleading
Investors should consider downside risk measures such
as value at risk (VaR) or Sortino ratio
For publicly traded securities, such as REITs and ETFs, market returns
Investment and risk are used and standard definitions of risk are more applicable
management process Use of derivatives introduces operational,
financial, counter party & liquidity risk
Risk of management underperformance
Risk management Hedge funds and private equity funds are much less
transparent than traditional investments
Many alternatives investments are illiquid
When calculating optimal allocations, indices of historical returns and standard
deviations may not be good indicators of future returns and volatility
Correlations vary across periods and are affected by events
Organization
Portfolio management
Operations and controls
Due diligence Risk management
Legal review
Fund terms
60.1. Alternative Investments - Part 1 - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Aggressively managed portfolio of

investments across asset classes & regions
Use leverage, derivatives, take long
& short positions
Goal of generating high returns in
absolute value or over a specified
market benchmark
Buyouts funds acquire public Set up as limited partnerships
companies or established companies Typical characteristics Restrictions on redemptions
Significant percentage of purchase
Lock up period: Minimum time
price financed through debt before investors can withdraw funds
Leveraged buyouts
Debt typically collateralized by Limited to qualified investors Notice period: Days within which the
assets of target company fund has to fulfill a redemption
Target company becomes or remains private request, typically 30-90 days
Investing in or financing to private Charged a fee to redeem shares

companies with high potential growth Funds that hold a portfolio of hedge funds
Venture capital Definition
Typically these are start-up or young companies
Categories Making hedge funds accessible to smaller investors
Minority equity investments in more
mature companies Allowing diversification among hedge funds
For expanding or restructuring, Benefits Having expertise on conducting due diligence on hedge funds
Development capital
entering new markets or financing
Able to negotiate better redemption fees, i.e.
major acquisitions Funds of funds
shorter lock-up period and/or notice period
Buying debt of mature companies in
Extra fees at funds of funds level
financing difficulties
and individual hedge fund level
Investors plan to turn around the Distressed investing Drawbacks High expense ratio which will drag
company and expect debt to
down earnings over time
increase in value
Buy shares of firm being acquired
Typical structure as a limited partnership
and sell short the firm making the
Investors provide committed capital which fund Structure acquisition
Merger arbitrage
managers draw down to invest in portfolio companies
Management fee of 1-3% of committed capital until Buy the (undervalued) securities of firms in
fully invested; fees calculated on NAV after that financial distress when analysis indicates
Structure and fees value will be increased by a successful
Incentive fees typically 20% profits after restructuring; possibly short overvalued
LPs have received initial investment back Fees Event-driven (Profit from short-term events) security types at the same time.
Distressed/restructuring
Fees paid periodically may exceed 20% over time: clawback
provision requires managers to return excess fees Gain board seats to influence
Activist shareholder company decisions
current management team involved in
the acquisition, remain with the company Management buyout (MBO)
Spinoffs, asset sales, security
Special situations issuance or repurchase
Current management team is being replaced Management buy-ins (MBI)
Buy convertible bonds and sell the
Debt is the key to financing a buyout
Fixed income convertible arbitrage same issuer's common stocks
deal: e.g equity 30%, debt 70%
Usually, debt = bank loans
Fixed income asset backed Take advantage do mispricing across different ABS
(leveraged loans) + high yield bonds Relative value (Profit from a pricing
Leveraged loans: usually largest amount discrepancy between related
Fixed income general Relative value within fixed income markets
securities)
Mezzanine financing may be used instead of high LBO financing
yield bonds. Mezzanine refers to debt or preferred Trade options based on implied
shares with warrants or conversion options versus expected volatility
Volatility
Covenants included to protect investors: maintain
specified financial ratios, submit information, restrict Across asset classes or instruments
from further borrowings, limit dividend distributions Multi-strategy
Undervalued/depressed stock price: Strategies Emphasizes a top-down approach to

PE firms perceive that intrinsic value LBO: Financing identify economic trends across the world
of the company exceeds its market Use long and/or short positions to potentially
price, thus willing to pay a premium profit from a view on overall market directions
Willing management: existing Macro Trades are made based on expected
management is looking for a deal movements in economic variables
Inefficient companies: PE firms seek Trade opportunistically in the fixed income,
to generate attractive returns on Hedge funds
equity, currency, and commodity markets
equity by improving the inefficient
companies Long undervalued securities & short
60.2. Describe different overvalued securities, equal values
Strong and sustainable cash flow:
cash flow is necessary to make Characteristics of attractive target companies categories & issues Market neutral in long and short positions
Private equity strategies in valuing and
interest payments on the increased
debt load calculating returns Identify high growth companies,
take long positions
Low leverage: to make it easier to (Part 2) Fundamental growth
utilize debt to finance a large portion
of the purchase price Focusing on public equity markets, Identify undervalued companies,
Assets: physical assets can be used Private equity taking long & short positions in Fundamental value take long positions
as security and secured debt is equity and equity derivatives
cheaper than unsecured debt Equity hedge fund strategies Long undervalued securities & short
overvalued securities, may have net
Idea stage: fund to transform the idea into a long or short exposure
Quantitative directional
business plan and access market potential Angel investing
Identify overvalued securities, net
Seed capital supports product development and/or short exposure
Formative stage Short bias
marketing efforts. First stafe venture capital fnds invest Seed stage
Sector specific Identify opportunities in particular sector
Start-up: organize production Venture capital
Early stage
1st stage: began production
returns tend to be better than those
2nd stage: initial expansion of global equities in down
Later stage equity markets and to lag the
3rd stage: major expansion
returns of global equities in up
Mezzanine or "bridge" (pre-IPO) markets.
Benefits
Mostly for private but called Potential benefits and risks Best returns during different time periods
Development capital or minority
PIPEs for public companies equity investing correlations tend to increase during
Risks periods of financial crisis
Distressed investing
Others
Provision of mezzanine funds
Frequency of valuation varies: daily,
Investing in companies in specific industries weekly, monthly, or quarterly
Sell portfolio company to competitor Use of market or estimated values of underlying positions
Trade sale
A common practice of using average quote =[(bid+ask)/2]
Sell portfolio company to other PE investors if market value is use. A more conservative approach is to
Secondary sale
Valuation use bid for longs and ask for shorts
Sell portfolio company shares to public Estimated values are used for illiquid or non=traded investments.
IPO
Procedures for in-house valuation should be developed to ensure
Private equity exit strategies consistency and reduce effects do potential conflicts of interest
Issue portfolio company debt to fund
dividend payment (to private equity owner) Recapitalization Investment strategy.
Investment process.
Outright sale of the firm's assets when
the firm is deemed no longer viable Source of competitive advantages.
Write-off/Liquidation
Historical returns.
Return: possible higher return opportunities by PE funds due Valuation and returns calculation methods.
to ability to invest in private companies, influence on portfolio
Longevity
companies' management & operations, use of leverage
Potential diversification benefits given less than perfect correlation Amount of assets under management
Due diligence: factors to consider
Management style
US private equity performance index outperformed
stocks based on NASDAQ and S&P 500 Key person risk
Measuring historical performance of PE may be Diversification benefits, Reputation
problematic due to survivorship, backfill and other biases performance & risk
Growth plans
Higher risks in PE investing than common stocks
Systems for risk management
Likely large difference in returns between top quartile
Appropriateness of benchmark
(IRR = 22%) and bottom quartile (IRR = 3%)
Hedge fund - "2 and 20" (2% management fee &
Market or comparable: using multiples (e.g EBITDA
Common structure 20% incentive fee). FOF - "1 and 10"
multiple, net income & revenue multiples)
DCF: PV of the relevant expected future cash flows (FCFF & cost of
Hurdle rate: fee structure may specify that the Hard hurdle rate: incentive fee based
capital; FCFE & cost of equity; capitalize income or cash flow Portfolio company valuation incentive fee is only earned after having achieved
Fee structure on returns in excess of the hurdle rate
Asset-based: Assets - Liabilities = Value to equity holders a specified return known as hurdle rate
Soft hurdle rate: on the entire return
Current and anticipated economic conditions High water mark: to avoid paying twice for the same performance
Interest rate and capital availability expectations
Refinancing risks
Choice of manager (general partner),
GP experience & knowledge
Financial & operating Factors to consider
Investment consideration &
Valuation methodology
Due diligence
Alignment of GP's incentives with interests of LPs
Plan to draw on committed capital
Planned exit strategies
Factors in DD of hedge funds also apply
60.2. Describe different categories & issues in valuing and calculating returns - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
Direct investments: sole ownership, joint ventures
Indirect investments: limited partnerships,
or other forms of commingled funds
Forms of real estate
A claim on an asset: mortgages
investment
Mortgage-backed securities (residential and commercial)
Shares of RE operating companies; shares of REITs
Direct equity investment by

individuals and families
Debt financing for home ownership Direct holder of the mortgage
by financial institutions
Indirect investment in mortgage loan pool
Residential property
Adequate proportion of purchase
price as equity
Before offering a mortgage, due
diligence process should include Credit review of the borrower
Property appraisal
Direct equity and debt investment

Commercial property Limited to certain types of investors
Indirect investment vehicles
MBS: asset-backed securitized debt

obligations that represent rights to receive
cash flows from portfolio of mortgage loans
Mortgages, mortgage-backed securities (MBS) Commercial MBS: backed by commercial properties
Sub-categories Residential MBS: backed by residential properties
Mortgage REIT: Invest primarily in mortgages

Real estate investment trusts (REIT) Equity REIT: invest primarily in
commercial or residential properties
Inflation hedge
Income from harvest quantities &
Real estate agricultural commodity prices
Farmland
Return drivers: same as timerland
Two property types Row crops, permanent crops
Farmland, timerland
Income stream from sale of timber products
Return drivers are biological growth, commodity
price changes and land price changes
Timerland
Historically not correlated with other asset classes
Flexibility because timber can be grown
and easily stored by not harvesting
Historically, real estate returns are highly correlated with global equity returns
but less correlated with global bond returns. The construction method of real
estate indexes may contribute to the low correlation with bond returns.
Potential benefits and risks
Fee structure
global national economic factors
Local market conditions
Factors to consider Interest rates
60.3. Describe different regulations
categories & issues Due diligence
Property-specific risks
abilities of managers
in valuing and calculating
Additional risk factors to consider
returns (Part 3) zoning, permitting, and environmental
for distressed properties investing
and real estate development considerations or remediation, ...
The comparable sales approach based on recent sales of similar properties
Estimates property values by calculating the present

value of expected future cash flows from property
ownership or by dividing the net operating income
Valuation (NOI) for a property by a capitalization (cap) rate
The income approach
The cost approach estimates the replacement cost of a property.
Exchange-traded funds (commodity ETFs)

Equities that are directly linked to a commodity
Managed futures funds
Methods of exposures to commodities
Individual managed accounts
Specialized funds in specific commodity sectors
Returns on commodities lower than returns on global stocks or bonds

High volatility, especially when combined with leverage
Low Sharpe ratios for commodities given lower
returns and high volatility of commodities prices
Potential Benefits and
Risks of Commodities Zero real return
Potential for a positive real return with liquidity and
other premiums of commodity future contracts
Diversification benefits
Commodity spot prices depend on supply and demand

Inelastic supply in the short run because of long lead times
Commodities
Weather affects agricultural commodities and oil production
Prices and Investments
Costs of new supply may increase over time
Anticipating demand from manufacturing needs
Convenience yield: value of having the physical

commodity for use over the period of the future contract
If this equation does not hold, an arbitrage transaction is possible
Contango: little or no convenience yield, futures prices > spot prices
Backwardation: high convenience yield is high, futures prices < spot prices
Commodity futures pricing
Roll yield: the yield due to a difference between the
spot price and futures price or a difference between
two futures prices with different expiration dates
Three sources of commodities Collateral yield: the interest earned on collateral
futures returns required to enter into a futures contract
Change in spot prices: spot prices are
determined by factors as discussed earlier
Tangible collectibles are considered investments,

Other alternative including rare wines, art, rare coins and stamps,
investments valuable jewelry and watches, and sports memorabilia.
60.3. Describe different categories & issues in valuing and calculating returns (Cont) - CFA Mind Maps Level 1 - 2017 - Copyright by WAY TO FINANCE SUCCESS
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WAY TO FINANCE SUCCESS

CFA MIND MAPSTM 2017 LEVEL 1 BOOK

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4+5 GIPS 1. ETHICS AND TRUST IN THE

3.7 Standard VII. RESPONSIBILITIES

3.5 Standard V. INVESTMENT ANALYSIS,

=> Consider alternative actions as well as shorter- and

All CFA Institute members and candidates are

Maintains oversight and responsibility

Requesting a written explanation

2. Code Of Ethics And Conclude the inquiry with no disciplinary sanction

Act with integrity, competence, diligence,

Six components of Care & judgment

Responsible for violations in which they

Attempt to stop the behavior by bringing it to the attention of

A. Knowledge Inaction with continued association may be construed as knowing participation

Maintain independence and

From Buyside clients May try to pressure sellside analysts

From their e.g. to issue favorable research reports/

Modest gifts and entertainment are

Best practice: reject any offer of gifts,

Is fraught with conflicts

Protect integrity of opinions

RPC Equity IPOs

Definition of any untrue statement or omission of a fact

Must not knowingly make

qualifications or credentials, services

Written list of available services, description of firm's qualification

Address conduct related to professional life

Develop and/or adopt a code of ethics

its significant impact to the price

disseminated to the market place and

Distort prices or artificially inflate trading volume

prohibit legitimate trading strategies

Prudence require act with care, skill, and diligence

Understand & adhere Determine identity of "client"

duty of loyalty Avoid all real or potential conflicts of interest

Gifts in the form of research support is anything that help to make

Submit to clients at least quarterly itemized statements

Do not discriminate against any clients

Standard III(B) addresses the manner of

should be advised of the changed

Disclose to clients & duty of fairness and loyalty to clients can

RPC Maintain list of clients and holdings

In investment If clients Suitability analysis must be done

Refrain from making trade or seek

Standard III(D) prohibits misrepresentations of past

If the presentation is brief, must make available to

on the basis of their special ability to conduct a

Avoid disclosing information received from a client except

Someone is in the service of another

In matters related to their employment, members and

Abstain from independent competitive activity

engage in activities conflicting with duty until resignation effective

3.4 Standard IV Obtain written consent from employer before accepting

Must have indepth knowledge of the Code & Standards

promptly initiate investigation

Recommend employer to adopt a code of ethics

investment philosophy followed

Not necessarily have to decline to be

Have a policy requiring that research reports and recommendations