CFA Level I terms: E

Early stage financing goes to companies moving toward operation, before commercial production or sales.

Private equity strategies: buyouts, venture capital and growth equity Alternative Investments

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is revenue minus operating expenses before payments to lenders, non-cash charges and taxes.

Dividends, FCFE, FCFF or residual income: which cash flow, which discount rate Equities

Issuer sources outside the filings: earnings calls (webcast presentations and questions, not legally required), investor days (ad hoc, in-depth sessions), press releases, conversations with management and investor relations, the company website, and experiencing the products as a customer.

IFRS vs US GAAP, new standards and other information sources Financial Statement Analysis

A growth-phase valuation targets the investor's return through a terminal multiple, as a start-up does, but on earnings (the P/E of mature peers), not sales. That is the earnings multiple terminal value.

Model construction by company life cycle: from venture to decline Equities

Earnings quality, also called results quality, is about the results behind the information: the earnings, cash flow and balance sheet the business actually produced.

Reporting quality vs earnings quality, and the quality spectrum Financial Statement Analysis

Earnings smoothing is the result: reported earnings are steadier than the business, which hides its true volatility and risk.

Conservative vs aggressive accounting Financial Statement Analysis

Companies face price risks that come with running the business: input costs, foreign currency, and interest on debt. Left alone, these swings make earnings volatility larger.

How companies use derivatives: hedge accounting Derivatives

The earnings yield is the inverse of the P/E, EPS divided by price. It is a common measure of equity return.

Price multiples: P/E, earnings yield, P/S, P/B and dividend yield Equities

Both are below 1 and higher is better. The EBIT margin (EBIT ÷ revenue) measures operating profitability.

DuPont analysis: three-step and five-step ROE Financial Statement Analysis

EBIT to interest expense is the coverage ratio: how many times operating profit covers the interest due. The higher it is, the lower the credit risk.

Financial ratios in credit analysis Fixed Income

Operating profit before D&A, a measure before discretionary spending.

Operating profitability and working capital Equities

Total debt to total assets shows how much of the asset base debt funds; EBITDA to interest expense shows how many times earnings before interest, taxes, depreciation, and amortization (EBITDA) cover the interest bill.

Capital investments and capital structure Equities

So analysts look at the economic balance sheet, which sets expected future tax revenue (the claims) against promised future spending (the obligations), next to the financial balance sheet of debt, reserves and assets.

Sovereign debt: who borrows, in what currency, for how long Fixed Income

Economic disruption is a shock that hits many companies at once, such as a banking crisis or a pandemic. Even a well-run company can be knocked far off its forecast, and debt makes the blow harder to absorb.

The forecast horizon, normalized earnings and long-term forecasts Financial Statement Analysis

Economic flexibility is about the economy that supplies the tax revenue: its size, income per head, diversification, competitiveness and ability to absorb shocks.

Sovereign credit analysis: qualitative factors Fixed Income

Economic goodwill is the value of a company's expected excess returns. It is reflected in the share price whether or not there was ever an acquisition, and a company that built its reputation itself shows none on its balance sheet.

Goodwill: how it is measured and tested Financial Statement Analysis

Economic indicators are statistics that describe the state of an economy. Analysts and policy makers use them to see where the economy is in the cycle and to judge turning points.

Leading, coincident and lagging economic indicators Economics

Economic influences are the business cycle in the short run, and growth and structural change in the long run.

PESTLE and the innovation matrix Equities

An economic moat is a long-lasting competitive advantage, named after the water-filled ditch around a castle. The wider the moat, the longer a firm can keep earning more than its cost of capital.

Porter's Five Forces and economic moats Equities

Economic profit is total revenue less total economic cost, which is explicit (accounting) cost plus implicit cost.

Breakeven and shutdown points Economics

Economic rights are a proportional claim on any dividends or other distributions, and on the company's net assets if it is liquidated.

Share classes and voting rights: dual class structures and differential voting shares Equities

Economic tools reinforce a stance through trade and ownership. Cooperative ones include multilateral trade agreements, common markets and a common currency.

Tools of geopolitics: national security, economic and financial Economics

An economic union adds common economic institutions and coordinated policies, such as shared rules on regulation or fiscal limits.

Trading blocs: free trade areas, customs unions, common markets and economic unions Economics

The stake comes with economic, voting and legal rights: a proportional share of any distributions the company makes, a say in electing the board and in big decisions, and a legal claim on what is left in a liquidation once creditors are paid.

Common shares and preference shares Equities

From 2,000 to 4,000 units the curve falls: economies of scale. Cost per unit drops as output grows.

Economies and diseconomies of scale Economics

Economies of scope are one kind: producing two or more goods or services together costs less than producing each separately, as when one cable carries TV, internet and phone.

Porter's Five Forces and economic moats Equities

So does a larger effect size, a bigger gap between the true value and the value in $H_0$. To lower both errors at once, increase the sample size or test for a larger effect.

Type I and Type II errors and the power of a test Quantitative Methods

With a periodicity of 1 the figure is the effective annual rate: what a dollar actually earns over a year, with all compounding included.

Periodicity: converting yields between compounding frequencies Fixed Income

It moves a benchmark yield curve (for example the government par curve) and asks what happens to the bond's price once the model lets the cash flows react. That is effective duration, and because it is defined by a move in the curve it is a curve duration, not a yield duration.

Effective duration and effective convexity Fixed Income

The company uses the effective interest method: interest expense each period is the opening carrying amount times the market rate at issue.

Non-current liabilities: bonds at amortized cost and deferred taxes Financial Statement Analysis

The effective tax rate is tax expense divided by pretax income, not by revenue. Other comprehensive income is the set of gains and losses that go straight to equity and bypass net income.

Common-size income statements and margin ratios Financial Statement Analysis

Apply the effective tax rate forecast, the rate the company expects to pay on its pretax profit. It can differ from the statutory rate because of credits, foreign profits and non-deductible items.

Building a sales-based pro forma income statement Financial Statement Analysis

The effective tax rate reconciliation starts from the statutory rate of the home country and adds or subtracts each item until it reaches the effective rate.

Income tax disclosures and the tax rate reconciliation Financial Statement Analysis

A market with mature, inelastic demand for a commodity-like product and high entry costs, where one more producer would push everyone's returns below the cost of capital, so no one enters.

Porter's Five Forces and economic moats Equities

An either/or fee gives the manager the greater of a low management fee and a higher incentive fee above a hurdle.

Calculating returns after fees: management, incentive, hurdle and high-water mark Alternative Investments

The slope is an elasticity: the percentage change in Y for a 1% change in X. It is the standard way to estimate a demand curve with constant elasticity.

Functional forms: log-lin, lin-log and log-log models Quantitative Methods

In theory you would estimate the elasticity of demand. If demand is very elastic, the market is close to perfect competition.

Concentration ratio and Herfindahl-Hirschman index Economics

A derivative can be a stand-alone derivative, its own contract, or an embedded derivative, built into another security.

What a derivative is Derivatives

The most common are embedded options: the right to call (redeem early), put (sell back) or convert to shares. They cannot be traded apart from the bond.

The features of a bond Fixed Income

They are called embedded options because they behave like option contracts but cannot be traded apart from the bond.

Callable, putable and convertible bonds Fixed Income

An emerging market sovereign usually grows faster but with a less stable, less diversified economy that swings more over the cycle.

Sovereign debt: who borrows, in what currency, for how long Fixed Income

An emotional bias comes from impulse and intuition. It arises without conscious effort, and the person may not even want to feel it.

Cognitive errors vs emotional biases Portfolio Construction

Empire building arises because managers' pay and status usually rise with the size of the business (revenue, headcount).

Principal-agent problems and stakeholder conflicts Corporate Finance

Bootstrapping skips that choice: the empirical distribution, the pattern of values actually observed, is the distribution.

Bootstrapping: simulating from the data you have Quantitative Methods

Empirical duration takes the opposite route. Fixed-income professionals fit a statistical model to historical prices and yields, with the factors that affect bond prices, over time and in different interest rate environments.

Empirical vs analytical duration Fixed Income

An employee stock ownership plan (ESOP) grants shares or cash from a fund, usually with vesting periods, to retain staff and align their interests with the company.

Corporate governance mechanisms Corporate Finance

What is not sold stays as ending inventory, and what is sold becomes cost of sales (cost of goods sold).

FIFO, LIFO and weighted average when prices rise or fall Financial Statement Analysis

An endowment is a fund held by a non-profit institution, such as a university, to support its services. A foundation is a grant-making entity.

Types of investors, and DB vs DC pension plans Portfolio Construction

Endowment bias is valuing an asset more because you own it. Standard theory says the price you would pay should equal the price at which you would sell, but sellers name higher prices than buyers.

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

The energy transition is the structural shift, mandated by many governments, to cut greenhouse gas emissions from energy use.

PESTLE and the innovation matrix Equities

Uses shareholder rights to change company behavior.

ESG considerations in portfolio planning and construction Portfolio Construction

Enterprise risk management is an overarching approach, applied across the organization and consistent with its strategy, that focuses risk activities on the objectives, health and value of the whole organization.

Risk governance, risk tolerance and risk budgeting Portfolio Construction

Three numbers you can look up: book value of equity (from the financial statements), market capitalization (from the share price) and enterprise value (EV) (from the market values of all claims, net of cash).

Book value, market capitalization and enterprise value Equities

Discounting FCFF at WACC gives the value of the whole firm, its enterprise value from FCFF. Firm value is the market value of debt plus the market value of equity, so subtract the market value of debt to get the value of equity.

Discount rates and terminal values Equities

Enterprise value multiples value the whole firm, for lenders and shareholders. Enterprise value (EV) is the market value of equity plus preferred shares plus debt, minus cash and short-term investments (Lesson 3 builds it).

Equity valuation models: present value, asset-based and relative Equities

The value to book multiple uses debt and equity at market and at book. The enterprise value to book multiple also deducts cash from both.

Enterprise value multiples Equities

Entrenchment is the wish to keep one's job. Tactics include copying competitors, avoiding risk, and building complicated structures that only the current team can run.

Principal-agent problems and stakeholder conflicts Corporate Finance

Environmental factors concern the natural world: climate change, air and water pollution, biodiversity, deforestation, energy efficiency, waste management and water scarcity.

ESG factors investors consider Corporate Finance

Environmental influences are often tied to political, social and legal influences; energy producers and heavy energy users feel them most.

PESTLE and the innovation matrix Equities

An environmental, social and governance (ESG) index is commonly built in steps (this is one common approach).

Types of equity indexes Equities

One full pass over the training data is an epoch. Training runs many epochs until accuracy is good enough.

AI and machine learning: supervised, unsupervised, reinforcement, deep Quantitative Methods

the most directly comparable GAAP measure with equal or greater prominence;.

Non-GAAP measures and other presentation choices Financial Statement Analysis

In equal weighting every constituent gets the same weight, 1 ÷ N, at the start of the period. The index return is then the simple average of the constituents' returns, measured from the last rebalancing date.

Price-weighted and equal-weighted indexes Quantitative Methods

In an equal-weighted index each of N constituents gets 1/N. A 40-share index gives every company 2.5% (1 ÷ 40), whether it is 11% or 0.4% of the cap-weighted version.

Types of equity indexes Equities

Portfolio variance is a sum over every pair of assets. Take an equally weighted portfolio of N assets, each with weight 1/N.

How many assets does diversification need? Quantitative Methods

Equity is the owners' money, with no maturity and no promise of any payment. Both are paid from the same cash flows, but in a strict order.

Debt vs equity: lenders and shareholders Corporate Finance

an investor weighing a share purchase or a valuation is doing equity analysis: will profit and per-share value grow?

What financial statement analysis is for Financial Statement Analysis

The shareholders' payoff has the shape of a call: nothing below D, then one-for-one gains above D. That makes the equity as a call option view: a call on the firm's assets with exercise price D.

Equity and debt as options on the firm Derivatives

Equity derivatives reference a single stock, a group of stocks or an index. Options are the most common contract on single stocks, and index derivatives trade as options, forwards, futures and swaps.

What derivatives are written on: the main underlyings Derivatives

An equity exchange is a rules-based venue where shares trade regularly. Its rules aim at liquidity and transparency: scheduled trading hours every business day and an order matching system that pairs buy and sell orders.

Where shares trade: exchanges, off-exchange and over the counter Equities

Equity financing means selling shares or retaining profit. Shareholders have a right to dividends if the board declares them, but no right to be repaid.

Key features of corporate issuers Corporate Finance

An equity index tracks the value of a set of shares. Uses of equity indexes fall into three groups: following market risk and return, evaluating and benchmarking portfolios and managers, and building index funds and other products that track them.

Types of equity indexes Equities

An investor in equity instruments owns a fractional stake in a company. The stake comes with economic, voting and legal rights: a proportional share of any distributions the company makes, a say in electing the board and in big decisions, and a legal claim on what is left in a liquidation once creditors are paid.

Common shares and preference shares Equities

Equity market liquidity is how easily you can buy or sell shares, in terms of both cost and timing. The explicit and implicit costs from the previous lesson vary with the size and timing of an order and with news that moves the price.

Liquidity: market float, average daily volume and turnover Equities

The equity prospectus (also called the offering memorandum) describes the business model, the main industry and business risks, audited financial statements, the number of shares, the expected price range, the timetable and the use of proceeds.

Primary and secondary equity markets: issuing shares and why trading matters Equities

The equity reinvestment rate is the share of net income that stays in the business after borrowing is counted, and long-run FCFE growth is that share earning the return on equity.

Why two analysts using the same model get different values Equities

An equity REIT buys property outright or through partnerships and joint ventures. A mortgage REIT underwrites mortgages or buys mortgage-backed securities.

Real estate: features and ways to invest (direct, REITs, funds) Alternative Investments

An equity research report estimates a company's intrinsic value, compares it with the market price and recommends what to do.

Equity research reports: contents, ratings and price targets Equities

The equity tranche is the lowest tranche: unrated, with no set coupon, and entitled to all excess cash flow once the debt tranches are paid.

Collateralized debt obligations and CLOs Fixed Income

That is the rule that equity value equals firm value minus market value of debt.

Discount rates and terminal values Equities

The equity-to-bond volatility ratio scales the bond-market risk up to equity-market risk.

Industry betas, the market risk premium and country risk Equities

The error term, $\varepsilon_i$, is everything about $Y_i$ that the line does not capture. Once the data give estimates of the coefficients, we write them with hats, $\hat{b}_0$ and $\hat{b}_1$.

The regression line: slope, intercept and least squares Quantitative Methods

Regret-aversion bias is avoiding decisions out of fear they will turn out poorly. It has two sides: errors of commission (actions that were taken and went wrong) and errors of omission (actions that could have been taken but were not).

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

Regret-aversion bias is avoiding decisions out of fear they will turn out poorly. It has two sides: errors of commission (actions that were taken and went wrong) and errors of omission (actions that could have been taken but were not).

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

Systematically includes material ESG factors in analysis and valuation.

ESG considerations in portfolio planning and construction Portfolio Construction

The Handbook notes that an IPS may include ESG preferences (environmental, social and governance) as a client constraint.

Standard III(C): Suitability Ethical and Professional Standards

An ESG screening index applies a minimum ESG rating and excludes certain activities, such as tobacco or thermal coal, on top of the usual rules.

Bond indexes and how they differ from equity indexes Fixed Income

ESMA, the European Securities and Markets Authority, is the EU cross-border supervisor that coordinates national regulators, and the European Securities Committee advises the European Commission.

Regulatory filings, notes, MD&A and the audit report Financial Statement Analysis

If depreciation is straight-line with no salvage value, depreciation expense is a constant slice of gross cost, so the ratios become years: the estimated total useful life, the estimated average age (years already used) and the estimated remaining useful life.

PP&E disclosures, fixed asset turnover and asset age Financial Statement Analysis

If depreciation is straight-line with no salvage value, depreciation expense is a constant slice of gross cost, so the ratios become years: the estimated total useful life, the estimated average age (years already used) and the estimated remaining useful life.

PP&E disclosures, fixed asset turnover and asset age Financial Statement Analysis

If depreciation is straight-line with no salvage value, depreciation expense is a constant slice of gross cost, so the ratios become years: the estimated total useful life, the estimated average age (years already used) and the estimated remaining useful life.

PP&E disclosures, fixed asset turnover and asset age Financial Statement Analysis

Gather data. The asset's returns, a broad market index's returns (the proxy for the market portfolio) and a short-term government bill rate (for example one- or three-month) as the risk-free rate, all for the same period.

Estimating beta with a CAPM regression Quantitative Methods

The most prominent is Ether, launched in 2015 on the Ethereum network. Its blockchain is programmable: users can build applications on it and have the chain validate or secure payments and other uses.

How digital assets differ from stocks, bonds and currencies Alternative Investments

Ethical conduct is behavior that follows those principles and balances your self-interest against the consequences of what you do, both direct and indirect, for other people.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

An ethical decision-making framework is a structured way to examine a choice from several viewpoints. Investment professionals already analyze decisions for profit and loss.

A framework for ethical decision making Ethical and Professional Standards

The ethical principles most communities share are honesty, transparency, fairness, diligence and respect for the rights of others.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

Ethical standards are what communities, such as a profession, consider right conduct, and they usually ask for more than the law.

Challenges to ethical behavior, and ethical vs legal standards Ethical and Professional Standards

Ethics is the study of moral principles: beliefs about what is good, acceptable or required, and what is bad or forbidden.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

Every Ethics item is an ethics vignette: a short story and one question. The five steps work on all of them.

How to answer Ethics vignettes: a five-step method Ethical and Professional Standards

Eurobonds are issued outside the jurisdiction of any single country and may be denominated in any currency, including the issuer's own.

Domestic, foreign and Eurobonds, and how bonds are taxed Fixed Income

Paper issued in the international market is Eurocommercial paper (ECP). It is similar to US paper, but typical deals are much smaller and the market is less liquid.

Short-term funding for companies: credit lines, secured loans and commercial paper Fixed Income

A European depositary receipt (EDR) lets non-European shares trade in European markets, typically in euros (EUR).

Investing across jurisdictions: dual listings and depositary receipts Equities

Some schemes are regional: the North American Industry Classification System (NAICS) and the European Nomenclature of Economic Activities (NACE) are used within those regions.

Industry classification: GICS, ICB, TRBC and other groupings Equities

European options can be exercised only at expiration. American options can be exercised at any time up to expiration.

Call and put options: payoff and profit at expiration Derivatives

Update EV for any financing announced since: that is the idea of EV after a change in capital structure.

Enterprise value multiples Equities

An EV multiple divides enterprise value by a measure available to all capital providers: revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA) or operating profit.

Book value, market capitalization and enterprise value Equities

Sorvik Gas has an EV of USD 4,800 million and developed reserves of 400 million barrels of oil equivalent, so its EV/developed reserves is 4,800 ÷ 400 = USD 12.00 per barrel to compare with other producers.

Enterprise value multiples Equities

EV/EBITA and EV/EBIT follow the same logic with the charges that matter. EV/sales divides EV by revenue and replaces P/S when a firm carries significant debt.

Enterprise value multiples Equities

EV/EBITA and EV/EBIT follow the same logic with the charges that matter. EV/sales divides EV by revenue and replaces P/S when a firm carries significant debt.

Enterprise value multiples Equities

EV/EBITDA controls for differences in depreciation and amortization practices, so it is frequently used for capital-intensive businesses with substantial depreciation and amortization.

Enterprise value multiples Equities

The EV/FCFF multiple pairs EV with next year's FCFF. Under constant growth the value to FCFF is one divided by the gap between WACC and growth.

Enterprise value multiples Equities

Oil and gas analysts also use EV/production, EV per unit of daily output.

Enterprise value multiples Equities

EV/sales divides EV by revenue and replaces P/S when a firm carries significant debt.

Enterprise value multiples Equities

Ex ante and ex post returns differ in timing. An ex ante (expected) return is a forecast made before the outcome is known.

Holding period return Quantitative Methods

Here $P_{t-1}$ is the close the day before the ex-date, $r_{market}$ is the broad index's change that day, and $r_{company}$ is the company-specific price change, found as what is left over. The whole change on that day is the ex-date price change.

Dividends, share repurchases, stock splits and the dividend timetable Equities

The ex-dividend date (the ex-date) is the first day the share trades without the dividend. Anyone who buys on or after this date does not receive it.

Dividends, share repurchases, stock splits and the dividend timetable Equities

Exam security is a duty of the candidates and members alike.

Standard VII(A): Conduct as Participants in CFA Institute Programs Ethical and Professional Standards

ROIC above WACC means the industry earns an excess accounting return.

Industry size, growth, profitability and concentration Equities

Price is above marginal cost (the markup survives), and the firm produces less than the output that minimizes average cost. That shortfall is excess capacity.

Monopolistic competition: price, output and the long run Economics

Because 3 is the benchmark, analysts usually work with excess kurtosis.

Skewness and kurtosis Quantitative Methods

An excess return is the return over a reference rate or benchmark: the risk-free rate, the real risk-free rate or a market index.

Required return: risk-free rate, inflation and risk premia Quantitative Methods

When investors value the firm's assets above their carrying amounts, market capitalization exceeds book equity. Comparing the two shows excess value and value shortfall.

Book value, market capitalization and enterprise value Equities

Take the asset's excess returns (its return minus the risk-free rate) and the benchmark index's excess returns, and correlate them. This is the excess-return correlation.

Covariance and correlation Quantitative Methods

The excess-return regression follows the CAPM directly. A short-term risk-free rate is subtracted from both the stock's and the market's returns, usually weekly or monthly over one to five years, and the slope is the historical beta.

Estimating the cost of equity with the CAPM and the market model Equities

An exchange rate is the price of one currency in terms of another. This site writes it as A/B, which means units of currency A per one unit of currency B.

Exchange rate quotes and percentage change in a currency Economics

An exchange rate regime is the framework a country uses to manage its currency. The ideal currency regime would have three properties: exchange rates between any two currencies credibly fixed, all currencies fully convertible (so capital flows freely), and each country free to run its own monetary policy.

Exchange rate regimes and their effects on trade and capital flows Economics

Exchange rate targeting sets a fixed level or a band against a major currency, and the central bank supports it by buying and selling its own currency in the foreign exchange market.

Inflation targeting vs exchange rate targeting Economics

Exchange-rate effects reach an industry through its costs and its sales. When the home currency depreciates, imported inputs such as raw materials and energy cost more, so margins shrink unless firms have the pricing power to pass the cost on.

PESTLE and the innovation matrix Equities

An exchange-traded derivative (ETD) is a futures, option or other contract listed on an exchange. The exchange sets the terms, so every contract is the same.

OTC vs exchange-traded derivatives and central clearing Derivatives

An exchange-traded fund (ETF) is an investment fund that trades on an exchange like a stock and is generally structured as an open-end fund.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

Exchange-traded products (ETPs) are exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that suit investors restricted to listed shares or wanting a simple brokerage account.

Commodities: sectors, ways to invest, contango and backwardation Alternative Investments

In the execution step the manager builds a portfolio that fits the IPS.

The three steps of the portfolio management process Portfolio Construction

On the exercise date the employee buys the shares, and unexercised options expire later, often 5 or 10 years after grant.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

The price at which the underlying may be bought or sold is the exercise price, X, also called the strike price.

Call and put options: payoff and profit at expiration Derivatives

The exercise value is what the option would be worth if it could be exercised right now. The time value is everything else the buyer pays for: the chance that the option ends up worth more than that.

Exercise value, moneyness and time value Derivatives

Positive gap opens (boom late on)

The business cycle and its four phases Economics

Expansion projects grow the size or scope of the business the firm already knows: more stores, a bigger plant, research and development, or acquisitions inside the core business.

Types of capital investments Corporate Finance

When it is below neutral, policy is expansionary; it adds liquidity and supports growth.

The neutral rate and the limits of monetary policy Economics

The rule is simple: expansionary fiscal policy is a rise in the budget deficit (or fall in the surplus), and contractionary fiscal policy is a fall in the deficit (or rise in the surplus).

Fiscal stance, structural deficits and policy lags Economics

Auditors give an independent opinion on whether statements are fairly presented. In the United States, large listed companies also receive an opinion on internal control over financial reporting.

Why managers misreport, and what stops them Financial Statement Analysis

The number behind either kind is the expected appreciation to the target.

Equity research reports: contents, ratings and price targets Equities

The counts you actually see are the observed frequency; the counts independence predicts are the expected frequency.

Chi-square test of independence with a contingency table Quantitative Methods

The expected future price, E(S_T), is what investors think it will be worth at T. The two differ because investors who hold a risky asset demand a reward for the risk.

Cost of carry: income, storage and convenience yield Derivatives

Its credit analog is expected loss given default: if the borrower defaults, how much do we lose on average?

Measuring risk: probability, VaR, CVaR and sensitivities Portfolio Construction

Weight the two call payoffs with π and 1 − π, then discount by 1 + r. The result is the expected payoff discounted at the risk-free rate.

Pricing calls and puts with risk-neutral probabilities Derivatives

The expected portfolio return is the weighted average of the expected returns of its assets. The weights are each holding's share of the portfolio's value at the start of the period, and they add to 1 (the first lesson of this module shows how they drift).

Portfolio expected return, variance and the role of correlation Quantitative Methods

The $E(\cdot)$ marks an expected value, because the future price is not known today. The expected price at the end is often an analyst's price target.

Price return, total return and the price of a share Equities

Expected return is what an investor anticipates earning in the future. In practice analysts often use the long-run historical mean as a stand-in for the expected return, but a single decade can look nothing like the long-run average, so the two should never be treated as the same number.

How the major asset classes compare on return and risk Portfolio Construction

In profit each period under US GAAP: service cost, interest cost on the opening obligation, and the expected return on plan assets, which is a reduction of cost.

Defined contribution vs defined benefit pension plans Financial Statement Analysis

The expense or profit margin model covers pricing power, materials and labor costs, efficiencies and margins.

Why build a disaggregated model, and at what level of detail Equities

An early form was the expert system: hand-coded "if–then" rules written by human experts.

AI and machine learning: supervised, unsupervised, reinforcement, deep Quantitative Methods

"The portfolio would lose EUR 610,000 if markets moved as they did on day 202" is a sentence a board understands. That explainability is the method's best-known strength.

Historical simulation and historical value at risk Quantitative Methods

Trading costs come in two kinds. explicit costs are out-of-pocket fees and commissions.

Where shares trade: exchanges, off-exchange and over the counter Equities

The explicit forecast horizon is the number of years you model line by line before switching to a simpler long-term assumption.

The forecast horizon, normalized earnings and long-term forecasts Financial Statement Analysis

A voluntary export restraint (VER) is like a quota, except that the exporting country imposes it on itself. An export subsidy is a payment per unit exported.

Tariffs, quotas, export subsidies and their welfare effects Economics

Actions of standard setters and user groups. The IASB and FASB publish an exposure draft for each proposed standard, and users can send comment letters.

IFRS vs US GAAP, new standards and other information sources Financial Statement Analysis

The Standard does not cover expressing opinions about CFA Institute, the CFA Program or other programs. You may disagree with its policies, procedures or advocacy positions.

Standard VII(A): Conduct as Participants in CFA Institute Programs Ethical and Professional Standards

When rates rise, nobody refinances and some people even delay buying a new home. Here extension risk is the risk that principal comes back slower than expected, so the bond's life lengthens.

Prepayment risk and time tranching Fixed Income

When you hire an outside manager for part of the portfolio, review the external advisers as diligently as you would review an individual fund or security.

Standard V(A): Diligence and Reasonable Basis Ethical and Professional Standards

The money-weighted rate of return (also called the dollar-weighted rate of return) is an internal rate of return applied to a portfolio. It uses only the investor's external cash flows: money paid in or taken out by the investor, which the portfolio manager does not decide on investment grounds.

Money-weighted vs time-weighted rate of return Quantitative Methods

An external credit enhancement comes from a third party, so the deal also depends on that party's own credit.

Credit enhancement and credit tranching Fixed Income

domestic debt is issued in the local currency and held mostly by local banks, funds and other domestic investors. external debt is owed to foreign creditors.

Sovereign debt: who borrows, in what currency, for how long Fixed Income

A higher external debt burden and a higher share of debt falling due within 12 months are weaker.

Sovereign credit analysis: the key ratios Fixed Income

Assess external influences with PESTLE (political, economic, social, technological, legal and environmental influences).

Why analyze an industry, and the steps to do it Equities

Finally, external status covers the country's international standing: the global status of its currency, its access to foreign funding and geopolitical risk.

Sovereign credit analysis: qualitative factors Fixed Income

External trade. Exports depend on foreign growth and the exchange rate. Imports rise with domestic demand, so a domestic boom often widens a trade deficit.

Employment, capital spending, inventories, housing and trade over the cycle Economics

An extraordinary general meeting (EGM) is called when a matter needs shareholder approval, or when a specified minimum number of shareholders request one.

Corporate governance mechanisms Corporate Finance

An extraordinary or special cash dividend is paid by a company that does not pay on a regular schedule, or as a one-time payment on top of the regular dividend.

Dividends, share repurchases, stock splits and the dividend timetable Equities