CFA - Kaplan Genesis

1 CFA Fundamentals2nd EditionPage 1 2012 Kaplan , Fundamentals, 2nd EditionForeword ..3 Chapter 1: Quantitative Methods ..6 Chapter 2: Economics ..77 Chapter 3: Financial Reporting and Analysis ..130 Chapter 4: Corporate Finance ..195 Chapter 5: Securities Markets ..247 Chapter 6: Asset Valuation ..283 Chapter 7: Portfolio Management ..396 Chapter 8: CFA Institute Code of Ethics and Standards of Professional Conduct ..443 Index ..448 Page 2 2012 Kaplan , FundAMEntAlS, 2nd EdItIon 2012 Kaplan , Inc. All rights in 2012 by Kaplan in the united States of : 978-1-4277-3991-9 / 1-4277-3991-9 PPn: 3200-2344If this book does not have the hologram with the Kaplan Schweser logo on the back cover, it was distributed without permission of Kaplan Schweser, a division of Kaplan , Inc., and is in direct violation of global copyright laws. Your assistance in pursuing potential violators of this law is greatly CFA Institute disclaimer: CFA Institute does not endorse or warrant the accuracy or quality of the products or services offered by Kaplan Schweser.

2 CFA Institute, CFA and Chartered Financial Analyst are trademarks owned by CFA materials contained within this text are the copyrighted property of CFA Institute. the following is the copyright disclosure for these materials: Copyright, 2012, CFA Institute. Reproduced and republished from 2012 learning outcome Statements, level I, II, and III questions from CFA Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute s Global Investment Performance Standards with permission from CFA Institute. All Rights Reserved. these materials may not be copied without written permission from the author. the unauthorized duplication of these materials is a violation of global copyright laws and the CFA Institute Code of Ethics. Your assistance in pursuing potential violators of these laws is greatly 21/31/2012 5:13:50 PMPage 3 2012 Kaplan , Should Use this Book?this book s primary function is to aid those who are interested in becoming CFA Charterholders but feel they might need a refresher before they start studying for the level I exam.

3 This text will help you gain (or regain) the background necessary to begin your studies in the CFA requirement for entry into the CFA Program is a bachelor s degree from a four-year college or university. (Graduating seniors may also enter the program; see the Prospective CFA Candidates link at for additional information). A business degree, however, is not specifically required. this means CFA candidates come from different educational backgrounds and many walks of life. What is the Structure of the CFA Program?CFA Institute, the governing body that creates and administers the CFA exams, is headquartered in Charlottesville, Virginia. In July of each year, CFA Institute releases the curriculum for the following year s exams. the curriculum changes every year to reflect changes in the field of investment management and innovations in financial CFA Program is a series of three examinations. level I is administered twice per year, on the first Saturday of June and the first Saturday of december.

4 levels II and III are administered only once per year on the first Saturday of June. Each exam is a 6-hour experience (three hours in the morning and three hours in the afternoon), and candidates must pass the exams in order. Level I-Investment Tools (100% multiple choice): the level I curriculum focuses on the tools of investment finance. the main topic areas are: Ethical and Professional Standards; Quantitative Methods; Economics; Financial Reporting and Analysis; Corporate Finance; Equity Investments; Fixed Income; derivatives; Alternative Investments; and Portfolio Management. the multiple choice questions will be in sections according to these headings. the exam consists of 240 multiple-choice questions, 120 in the morning session and 120 in the afternoon session. All topic areas are tested in each 31/31/2012 5:13:50 PMPage 4 2012 Kaplan , Inc. ForewordLevel II-Analysis and Valuation (100% selected response item set): In an item set, you are given a vignette (typically one to three pages long) and a set of six multiple choice questions that relate to that vignette.

5 The level II exam consists of 20 item sets (120 questions), ten item sets in the morning session and ten in the afternoon session. the topic areas are the same as level I, but not all topics are tested in each session of the level II purpose of the level II exam is to apply and expand on the tools that were introduced at level I. For example, at level I, you learn the basics of derivative securities. the level II derivatives curriculum is much more in-depth, introducing additional tools and instruments and applying those tools to investment valuation. In general, questions focus on a deeper treatment of the material than the level I III-Synthesis and Portfolio Management (combination constructed response essay and selected response item-set): the morning session of the level III exam is in constructed response essay format. You are given a scenario and asked to answer several questions relating to it.

6 The answer can range from one or two words to a paragraph or a calculation. there are usually ten to fifteen multi-part constructed response essay questions in the morning session of the exam. the questions vary from length and value and total 180 points. the afternoon session has ten 18-point (six question) selected response item sets, similar to the format for level II. the main focus of the level III exam is portfolio management. You will use the tools and analysis from the previous two levels to develop investment policies and appropriate portfolios for both individual and institutional investors (pension funds, endowments, life insurance companies, etc.). Also, you will learn to protect existing investment positions from the effects of market volatility (risk) through the use of derivative instruments (hedging). Perhaps because of its coverage or simply because it is the final level, many CFA candidates consider level III the most enjoyable of the three levels .

7 That doesn t mean it is easy, though. like levels I and II, the level III exam is not to be taken addition to passing the three exams, candidates must also have four years of relevant work experience to be awarded a Do I Register for the CFA Program?to register for the CFA Program you need to complete an application form that can be obtained from the CFA Institute Web site, 41/31/2012 5:13:50 PM ForewordPage 5 2012 Kaplan , Can Kaplan Schweser Help Me Achieve My Goals? Kaplan Schweser is the premier provider of study tools for the CFA examination. our core product is our Schwesernotes, but we also offer live seminars around the world and a world-class online educational program; our extensive SchweserPro question bank; two printed volumes of Practice Exams for each level; and our live Mock Exam at locations around the world, two weeks before each CFA exam. Please visit our Web site at for more 51/31/2012 5:13:50 PMPage 6 2012 Kaplan , MethodsAn Introduction to Algebrathe best place to develop an understanding of quantitative methods is with basic algebra.

8 Webster Collegiate Dictionary1 defines algebra as any of various systems or branches of mathematics or logic concerned with the properties and relationships of abstract entities manipulated in symbolic form under operations often analogous to those of arithmetic. this simply means we can use a letter in the place of a number to symbolize an unknown value in an equation shows the relationship between two or more It is analogous to a perfectly balanced lever with an equal sign acting as the fulcrum. Whatever is on the left of the equal sign is balanced with ( , equals) whatever is on the right ( , a = 6).Before we actually solve several sample equations, let s look at some mathematical properties that will make algebra easier for us. After stating the rules, we ll use those rules to solve algebraic equations. We will begin with a brief review of the properties of negative Numbers. think of all possible numbers as sitting on a continuous line with zero at the exact LineFigure 1: If you think of numbers this way, you can see there is a negative number for every possible positive number.

9 And each number and its counterpart are spaced exactly the same distance from zero, just on opposite sides. thus adding a number and its exact opposite ( , its negative counterpart) yields a value of zero. Adding three and negative three together yields zero. Adding five and negative five together yields zero, too. Even adding 1,999,999 and 1,999,999 together yields Merriam Webster s Collegiate Dictionary, 10th ed., In algebra, an unknown value is symbolized by a letter whose value we calculate by solving an equation. 3 A variable is a mathematical symbol (letter) in an equation that represents something ( , cost, size, length). 61/31/2012 5:13:50 PMChapter 1 Quantitative MethodsPage 7 2012 Kaplan , are some basic properties for working with negative numbers:Property 1: When adding a positive and a negative number, the sign of the sum is the same as the sign of the number with the largest absolute Consider the equation x = ( 4) + (+3).

10 Since the absolute value of negative four is greater than the absolute value of positive three, the sum has a negative sign. the answer to the equation is x = ( 4) + (3) = 2: When subtracting one number from another, the sign of the second number is changed, and the two numbers are added , 3 (+4) = 1 can be rewritten as 3 + ( 4) = 1. Similarly, 3 ( 4) = 7 can be rewritten as 3 + 4 = 3: Multiplying an even amount of negative numbers yields a product with a positive sign. Multiplying an odd number of negative numbers yields a product with a negative at some examples:# of negative signs( 1) ( 1) = +12( 1) ( 1) ( 1) = 13( 1) ( 1) ( 1) ( 1) = +14( 1) ( 1) ( 1) ( 1) ( 1) = 15notice the number of negative signs in each equation. You will see that when there is an even number, the product has a positive sign, and when there is an odd number, the product has a negative Rules.