FIRST EXAM

Chapter 1 - Investment overview

• Define the term "investments"
• Discuss how investments are created in the financial markets by the interaction of suppliers (typically households) and users of funds (typically governments and firms)
• List the dimensions that often differentiate financial markets and the securities created - maturity and risk
• Give broad characteristics of three categories of investments
  • Debt is a fixed claim on the income and assets
  • Equity is an ownership and residual claim on income and assets
  • Derivatives derive value from underlying assets but have no claim on a company's physical assets
• Distinguish the goals for individual and institutional investors
• Explain the need for financial intermediaries in financial markets and how their introduction increases the variety and type of investments available (direct vs. indirect investments)
• Outline the steps involved in the investment process especially:
• types of goals for individual investors
• differentiating asset allocation and security selection
• recognizing typical constraints for investors
• If given a tax table, calculate taxable income for individuals
• Determine taxes on investment returns including capital gains, dividends, and interest income

Chapter 2 - Overview of securities

• Determine the cash flows of a bond - ALWAYS ASSUME SEMIANNUAL COUPONS UNLESS OTHERWISE STATED
• Identify the major issuers of bonds, explaining the key characteristics of each
• Explain the role of US government agencies in raising funds in the financial markets
• Find the equivalent tax-exempt yield of taxable bonds given an investor's tax rate
• List the rights of stockholders
• Differentiate important dates related to dividend payments on stock
• Determine the market capitalization of companies
• Understand all the information provided in a stock quote - e.g., Yahoo Finance quote (P/E ratio and div yield)

Chapter 3 - Economic analysis

• Explain top-down investment analysis and the sequence of decisions made
• List items that affect the growth of an economy (spending, capacity, etc.)
• Show how changes in currency values affect competition among domestic and international companies
• Discuss the importance of interest rates to the economy and the effects that the federal government has on interest rates
• Describe the fed funds market
• Explain a typical business cycle and the approximate sequence of events
• Explain the tradeoff between economic growth and inflation
• Differentiate cyclical and defensive stocks and provide examples of each
• Indicate how sector rotation strategies attempt to earn higher returns

Chapter 4 - Measuring risk & return

• Calculate HPRs
• Annualize HPRs using APR and EAR
• Set up the equation that determines IRR and use an excel to find IRR
• Summarize historical returns on investments using average (arithmetic and geometric), variance, and standard deviation and interpret these numbers
• Explain the role of risk aversion in the risk-return tradeoff in finance
• Have a general view of the relative historical performance of major asset classes (no need to memorize every number)
• Discuss the components of investor required returns - real rates of return, inflation, and risk premium
• Create T-accounts and determine equity in transactions involving margin
• Explain the advantages and disadvantages to margin purchases over cash purchases
• Determine the critical stock price when investors receive margin calls - short or long positions
• Construct price-weighted and value-weighted indices
• Adjust the divisor on a price-weighted index after a stock split
• Identify different types of indices: S&P 500, Wilshire 5000, DJIA, Russell 2000, int'l indices

SECOND EXAM

Chapter 5 - Portfolio topics

• Calculate the return and risk of a two-stock portfolio
• Explain correlation and its impact on (1) diversification benefits and (2) the shape of the investment opportunity set
• Distinguish firm specific and market risk and describe how diversification reduces a security's risk
• Define the concept of beta and calculate the beta of a portfolio of securities
• Explain the risk and return tradeoff depicted in CAPM
• Use CAPM to determine the required rate of return of an investment based on its risk
• Graph the security market line and evaluate the attractiveness of individual securities
• Describe how the efficient frontier is determined and why it is important to investors
• Identify an investor's optimal portfolio using the efficient frontier and indifference curves
• Illustrate different levels of risk aversion using indifference curves

Chapter 6 - Fundamental Analysis

• Indicate the steps in performing fundamental analysis on a company
• Explain the general steps involved with top-down security analysis
• Discuss some key issues that are often important to consider when looking at specific industries
• Understand the information contained in a company's financial statements, including a line by line description of each item in a balance sheet and income statement
• Outline the structure of a cash flow statement - discuss differences between net income and cash
• Analyze the financial statements of a company using ratios in four areas: liquidity, asset management, debt management, and profitability
• Use Dupont analysis to decompose ROE into 3 ratios and identify advantages and disadvantages of a company

Chapter 7 - Stock Valuation

• Differentiate different stock "values" - par, book, intrinsic, and market
• Calculate the stock price using the dividend discount model - constant growth and multi-stage
• Recognize some of the implications when using the Gordon model
• Explain various approaches to determining the constant growth rate of dividends for a company
• Value stocks using the earnings valuation approach (a.k.a. dividends and earnings) - Project the cash flows for a stock including dividends and future stock price based on a sales forecast, profit margin, and a P/E ratio
• Discuss some of the issues that impact P/E ratios and make it difficult to estimate
• Use market multiple analysis to derive the value of stocks
• Determine if you would buy a stock: (1) intrinsic vs. market value or (2) IRR vs. required return

Chapter 8 - Technical Analysis

• Explain the overall purpose of technical analysts - using statistical data to monitor supply and demand of securities
• Briefly describe the purpose and trends in Dow Theory
• For each explicit strategy, know how to calculate the statistic and interpret its use for trading purposes
• Explain how trading volume is used by technical analysts to convey the significance of a price move
• Define and use specific technical indicators: advance/decline line or NH/NL, short sales, odd lots, arms ratio (trin), OBV
• Discuss the mechanics of short selling and how investors profit from stock price movements
• Identify different types of charts used by technical analysts: lines, bar, point and figure, moving averages
• Examine the role of support and resistance levels in identifying chart patterns

THIRD EXAM

Chapter 9 - Market efficiency

• Describe the basic premise of market efficiency and the implications if true
• Differentiate three forms of market efficiency based on the type of information used
• Recognize specific anomalies for different forms of market efficiency: day of the week, January effect, P/E ratios, Value Line enigma
• Explain why testing market efficiency is difficult

Chapter 10 - Bond valuation

• Determine the cash flows of a bond - ALWAYS ASSUME SEMIANNUAL COUPONS UNLESS OTHERWISE STATED
• Explain how the relationship between coupon and yield influences the price of a bond (premium, discount, par)
• Illustrate how STRIPS are created from coupon bearing bonds
• Provide an overview of bond ratings and discuss what they indicate
• Identify the components that determine the interest rates on bonds
• Discuss common shapes of the term structure that have been observed in US history
• Given the yield to maturity (yield), price a bond by discounting all the cash flows (Use PV function in Excel)
• Given the current price of a bond, calculate the yield (Use RATE function in Excel)
• Differentiate YTM, YTC, and realized yield - set up the IRR equation and solve using Excel
• Illustrate the relationship between bond prices and yields (draw a price-yield curve)
• Explain the call provision in bonds and explain why an issuer would exercise their option to call the bond prior to maturity
• Draw a price-yield curve for a callable bond and contrast it with a non-callable bond
• Calculate the interest rate sensitivity of a bond through Macaulay and modified duration
• Compare bonds that have different interest rate sensitivity

Chapter 11 - Investment companies

• Discuss some reasons for buying mutual funds vs. investing money yourself
• Describe different types of investment companies: UITs vs. managed funds
• Distinguish open end and closed end managed investment companies
• Explain how ETFs combine features of both open-end and closed-end funds
• Illustrate how loads and expenses can affect investment returns: front-end, back-end, and 12b-1 fees, plus operating/mgmt fees
• Calculate NAV and premium/discount for closed end funds
• Incorporate sources of return to compute HPR for closed end and open ended funds
• Provide an overview of general types of funds available: equity (growth vs. value, market cap), bonds, diversified
• Define other types of investment vehicles including REITs and hedge funds

Chapter 12 - Primary and secondary markets

• Explain the differences among the primary market, secondary market, third market, and fourth market
• Provide an overview of a primary market transaction - IPO or seasoned offering
• Discuss the roles of an investment banker in a primary market transaction
• Clarify the advantages and disadvantages of best efforts or a standby commitment
• Characterize the returns of IPOs
• List the roles filled by the specialist on the NYSE
• Distinguish bid vs. ask prices and determine the inside spread of NASDAQ
• Talk about how trades are done on secondary exchanges such as NYSE and NASDAQ

• Describe the rights/obligations for owners/writers for both puts and calls
• Determine the payoff and profit profiles for puts and calls
• Identify the advantages and disadvantages of options over stock purchases

Chapter 14 - Futures

• Distinguish spot contracts, forwards, and futures
• Discuss the counterparty risk in forwards and how futures contracts resolve this risk