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CFA > Concepts 2 > Flashcards

Concepts 2 Flashcards

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1
Q

Is it required that members of CFA Institute and CFA candidates must adhere to GIPS represent standards

A

No, Global Investment Performance Standards represent ethical reporting standards, but compliance with GIPS is not a requirement of CFA Institute membership or to sit for the CFA examination.

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2
Q

According to Priority of transactions, can manager trade family account at the same time as other accounts?

A

Yes, since the family account is a client account, it should be treated as any other client account and trades should be entered prior to trades for the employer’s account.

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3
Q

Can member accept lodge and transportation provided by other companies?

A

Yes. Standard I(B) Independence and Objectivity recommends that members pay their own room costs, it is not required and it is not unusual for members to accept accommodations.

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4
Q

Can a trading assistant disclose client information to the client’s investment manager?

A

Yes, Standard III(E) Preservation of Confidentiality states that candidates and members can disclose confidential client information to authorized fellow employees who are also working for the client.

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5
Q

Univariate distribution

A

A single random variable

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6
Q

Multivariate distribution

A

Probabilities for a group of related random variables

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7
Q

How will increase expected future income affect equilibrium interest rate?

A

Increase in income -> decrease savings -> decrease supply of financial capital -> Increase interest rate.

Remember:
Plot of Money supply & demand, x axis is quantity of money, y axis is nominal interest rate, supply is vertical , demand is downward slope

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8
Q

How will increase in financial capital demand affect equilibrium interest rate?

A

Plot of Money supply & demand, x axis is quantity of money, y axis is nominal interest rate, supply is vertical , demand is downward slope.

Increase in demand -> curve shift right -> intersection move upward

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9
Q

Average cost pricing on monopoly

A

Force monopolist to reduce price to where the firm’s ATC intersects the market demand curve. Originally price at MR and ATC intersection.

Effect:

  1. Increase output and decrease price
  2. Increase social welfare
  3. Ensure a normal profit for monopolist
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10
Q

Marginal cost pricing on monopoly

A

Force the firm to operate at MC intersection with market demand.

Will reduce price further and output higher than Average cost pricing. Will incur a loss because price is below ATC. Thus will require a government subsidy.

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11
Q

Collusive agreement

A

A non-competitive agreement between rivals that attempts to disrupt the market’s equilibrium, alter the price of a good to their advantage. The parties may collectively restrict the supply of a good, agree to increase its price in order to maximize profits.

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12
Q

Why oligopoly want to cheat on collusive agreement?

A

To increase individual share of the joint profit.

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13
Q

What is “controlling interest” and how is it reported

A

A firm has >50% stock in a subsidiary but less than 100% ownership. The asset and liability of that firm should be listed on the parent’s own balance sheet

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14
Q

What is “noncontrolling interest” and how is it reported?

A

Portion of the subsidiary that is not owned by the reporting firm. Reported on the equity section of the balance sheet.

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15
Q

Sensitivity analysis

A

Based on hypothetical questions (what if) about A SINGLE variable. “What if sales decline by 10%”

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16
Q

Scenario analysis

A

Based on one or more specific scenarios, which include change in multiple variables

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17
Q

Weighted Average Cost of Capital

A

w_d * k_d * (1-t) + w_ce * k_ce

Note that debt cost is net of tax since it is tax free

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18
Q

Holding period return = 170%, price a year ago is 100, what is the price now?

A

100 * (100% + 170%) = 270

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19
Q

Portfolio A has std dev s_a, B has std dev s_b, what is the combined portfolio’s expected return and std deviation?

A

Expected return = Wa * Ea + Wb * Eb
Std Dev = sqrt( (WaSa)^2 + (WbSb)^2 + 2*WaSaWbSb)
Note, if A is risk free, std dev = WaSa

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20
Q

What is the standard deviation of return on a risk free asset?

A

0

21
Q

Given required rate of return, price of stock next year (projected), dividend next year, what is the current price of the stock?

A

P0 = (P1 +D1) / (1+k)

It is simply next year’s price discounted to present value

22
Q

How will restriction of short selling affect market value of securities?

A

Restrictions on short sales remove some of the selling pressure on overvalued securities that would otherwise drive their market values down toward their intrinsic values in an efficient market.

23
Q

How will high transaction cost and restriction on arbitrage affect market value of securities?

A

Market inefficiency caused by high transactions costs or restrictions on arbitrage trading may allow market values that are different from intrinsic values to persist both for overvalued and undervalued securities.

24
Q

What is firm’s motivation to issue secured bonds?

A

Secured bonds are backed by a claim to specific assets of corporation, which reduce risk of default and yield that investor require on the bond.

Firm will get a credit rating on the bonds that will result in a lower cost of borrowing.

25
Q

Rollover risk

A

The risk an issuer who relies on commercial paper market as a funding source may not be able to issue new commercial paper when an outstanding issue matures.

it is a risk faced by ISSUER

26
Q

Calculation of future price
350 per ounce, each contract 100 ounce, initial margin is 1750

  1. 345.5
  2. 348.75
  3. 355.5
A
  1. (345.5 - 350) * 100 = +450
  2. (348.75 - 345.5) * 100 = + 325
  3. (355.5 - 348.75) * 100 = +675
27
Q

Farmland investment’s benefit compared to commodities investment

A

Higher income, since crops produced and sold are also income

28
Q

Who is considered as CFA Candidate

A

To be considered a candidate, individuals must be registered to take the next scheduled CFA examination

29
Q

Under GIPS, when should portfolios be assigned to composites?

A

When the return is unknown

30
Q

Under GIPS, how should we calculate composite return?

A

Use weighted average based on asset value

31
Q

If annualized quarterly return is 5%, what is the equivalent annual return?

A

(1 + 0.05/4)^4 = 1.050945 -> 5.0945%

32
Q

Effect of minimal wage above equilibrium wage

A

Firms will

  1. Not employ all the workers who want to work at the minimum wage,
  2. Substitute other productive inputs for labor and use more than the economically efficient amount of capital.

Result: increased unemployment.
Even though there are workers willing to work for less than the minimum wage, firms cannot legally hire them.

33
Q

For downward sloped industry supply curve, what is the effect of increased quantitaty

A

Downward sloped curve: cost decrease as output increase.

Short run, this causes firms to earn economic profits.

Long run, new entrants are attracted to the industry, reducing the equilibrium selling price of the industry’s output.

34
Q

LIFO Reserve

A

The constant increase in cost can create a credit balance in the LIFO reserve, which results in reduced inventory costs when reported on the balance sheet.

35
Q

Convert from LIFO to FIFO

A

COGS FIFO = COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

Increase in LIFO reserve will decrease COGS when converting form LIFO to FIFO

36
Q

General journal

A

A listing of all the journal entries in order of their dates

37
Q

General ledger

A

Sorts the entries in the general journal by account

38
Q

User average price of year end price when calculating dilutive EPS?

A

Average pricing

39
Q

If interest rate change after debt is issued, how is income statement and equity affected?

A

Not affected, since Debt is amortized, gain/loss form change of value is not considered

40
Q

Requirements for lease disclosure under IFRS and GAAP

A

Whether a lease is an operating or a finance (capital) lease, both U.S. GAAP and IFRS require disclosure of the minimum lease payments for each of the next five years and the sum of minimum lease payments more than five years in the future.

41
Q

Specific identification method

A

Each unit sold is matched with the unit’s actual cost. Appropriate for a small number of costly and easily distinguishable items

42
Q

Investment opportunity schedule

A

Potential projects are ranked at increasing descending IRR, thus IOS is downward sloped

43
Q

Marginal cost of capital

A

Cost of raising additional capital increases as large amounts are invested in new objects

44
Q

Optimal capital budget

A

Where investment opportunity schedule intersects with marginal cost of capital

45
Q

If repurchase share with 5% debt, while share earning yield is 8% (dividend/price), how will EPS change after repurchase?

A

Since repurchase cost < share yield, EPS will increase

46
Q

Operating cycle

A

days of inventory plus days of receivables

cash conversion cycle is equal to the operating cycle minus the number of days of payables

47
Q

P/E ratio using Gordon growth model

A 
P = D/(k-g) ->
P/E = (D/E) / (k-g)
48
Q

Given 1year spot rate and 2 year spot rate, what is 1 year forward rate 1 year from now?

A

(1+s2)^2 = (1+s1) * (1 + 1y1y)

49
Q

Term structure of yield volatility

A

Term structure of yield volatility refers to the volatility of interest rates at different maturities.

If the term structure of yield volatility is downward sloping, short-term interest rates are more volatile than long-term interest rates.

CFA (11 decks)

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