How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Feedback
Portfolio Management
Learning Module 1 Portfolio Risk and Return: Part I
Introduction
Historical Return and Risk
Nominal Returns of Major US Asset Classes
Real Returns of Major US Asset Classes
Nominal and Real Returns of Asset Classes in Major Countries
Risk of Major Asset Classes
Risk–Return Trade-off
Other Investment Characteristics
Distributional Characteristics
Market Characteristics
Risk Aversion and Portfolio Selection
The Concept of Risk Aversion
Utility Theory and Indifference Curves
Indifference Curves
Application of Utility Theory to Portfolio Selection
Portfolio Risk & Portfolio of Two Risky Assets
Portfolio of Two Risky Assets
Portfolio of Many Risky Assets
Importance of Correlation in a Portfolio of Many Assets
The Power of Diversification
Correlation and Risk Diversification
Historical Risk and Correlation
Historical Correlation among Asset Classes
Avenues for Diversification
Efficient Frontier: Investment Opportunity Set & Minimum Variance Portfolios
Investment Opportunity Set
Minimum-Variance Portfolios
Efficient Frontier: A Risk-Free Asset and Many Risky Assets
Capital Allocation Line and Optimal Risky Portfolio
The Two-Fund Separation Theorem
Efficient Frontier: Optimal Investor Portfolio
Investor Preferences and Optimal Portfolios
Summary
Practice Problems
Solutions
Learning Module 2 Portfolio Risk and Return: Part II
Introduction
Capital Market Theory: Risk-Free and Risky Assets
Portfolio of Risk-Free and Risky Assets
Capital Market Theory: The Capital Market Line
Passive and Active Portfolios
What Is the “Market”?
The Capital Market Line (CML)
Capital Market Theory: CML - Leveraged Portfolios
Leveraged Portfolios with Different Lending and Borrowing Rates
Systematic and Nonsystematic Risk
Systematic Risk and Nonsystematic Risk
Return Generating Models
Return-Generating Models
Decomposition of Total Risk for a Single-Index Model
Return-Generating Models: The Market Model
Calculation and Interpretation of Beta
Estimation of Beta
Beta and Expected Return
Capital Asset Pricing Model: Assumptions and the Security Market Line
Assumptions of the CAPM
The Security Market Line
Capital Asset Pricing Model: Applications
Estimate of Expected Return
Beyond CAPM: Limitations and Extensions of CAPM
Limitations of the CAPM
Extensions to the CAPM
Portfolio Performance Appraisal Measures
The Sharpe Ratio
The Treynor Ratio
M2: Risk-Adjusted Performance (RAP)
Jensen’s Alpha
Applications of the CAPM in Portfolio Construction
Security Characteristic Line
Security Selection
Implications of the CAPM for Portfolio Construction
Summary
References
Practice Problems
Solutions
Corporate Issuers
Learning Module 1 Organizational Forms, Corporate Issuer Features, and Ownership
Introduction
Organizational Forms of Businesses
Organizational Forms of Businesses
Sole Trader or Proprietorship
Partnerships
Limited Companies
Key Features of Corporate Issuers
Legal Identity
Owner–Manager Separation
Owner/Shareholder Liability
External Financing
Taxation
Publicly vs. Privately Owned Corporate Issuers
Exchange Listing, Liquidity, and Price Transparency
Share Issuance
Registration and Disclosure Requirements
Going from Private to Public
Going from Public to Private
The Varieties of Corporate Owners
Practice Problems
Solutions
Learning Module 2 Investors and Other Stakeholders
Introduction
Financial Claims of Lenders and Shareholders
Debt Versus Equity
Debt Versus Equity: Risk and Return
Conflicts of Interest among Lenders and Shareholders
Corporate Stakeholders and Governance
Shareholders versus Stakeholders
Investors
Board of Directors
Managers
Employees
Customers
Suppliers
Governments
Corporate ESG Considerations
Environmental Factors
Social Factors
Governance Factors
Evaluating ESG-Related Risks and Opportunities
Practice Problems
Solutions
Learning Module 3 Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
Introduction
Stakeholder Conflicts and Management
Shareholder, Board Director, and Manager Relationships
Controlling and Minority Shareholder Relationships
Shareholder versus Creditor Interests
Corporate Governance Mechanisms
Corporate Reporting and Transparency
Shareholder Mechanisms
Creditor Mechanisms
Board and Management Mechanisms
Employee Mechanisms
Customer and Supplier Mechanisms
Government Mechanisms
Corporate Governance Risks and Benefits
Operational Risks and Benefits
Legal, Regulatory, and Reputational Risks and Benefits
Financial Risks and Benefits
Practice Problems
Solutions
Learning Module 4 Working Capital and Liquidity
Introduction
Cash Conversion Cycle
Liquidity
Primary Liquidity Sources
Secondary Liquidity Sources
Factors Affecting Liquidity: Drags and Pulls
Measuring and Evaluating Liquidity
Managing Working Capital and Liquidity
Working Capital Management
Liquidity and Short-Term Funding
Practice Problems
Solutions
Learning Module 5 Capital Investments and Capital Allocation
Introduction
Capital Investments
Going Concern Projects
Regulatory Compliance Projects
Expansion of Existing Business
New Lines of Business and Other Projects
Capital Allocation
Net Present Value (NPV)
Internal Rate of Return
Return on Invested Capital
Capital Allocation Principles and Pitfalls
Capital Allocation Principles
Capital Allocation Pitfalls
Real Options
Practice Problems
Solutions
Learning Module 6 Capital Structure
Introduction
The Cost of Capital
Factors Affecting Capital Structure
Determinants of the Amount and Type of Financing Needed
Determinants of the Costs of Debt and Equity
Modigliani–Miller Capital Structure Propositions
Capital Structure Irrelevance (MM Proposition I without Taxes)
Higher Financial Leverage Raises the Cost of Equity (MM Proposition II without Taxes)
Firm Value with Taxes (MM Proposition II with Taxes)
Cost of Capital (MM Proposition II with Taxes)
Cost of Financial Distress
Optimal Capital Structure
Target Weights and WACC
Pecking Order Theory and Agency Costs
Practice Problems
Solutions
Learning Module 7 Business Models
Introduction
Defining the Business Model
Business Model Features
Pricing and Revenue Models
The Value Proposition (Who + What + Where + How Much)
Business Organization and Capabilities
Business Model Types
Conventional Business Models
Business Model Variations
Business Model Innovation
Network Effects and Platform Business Models
Practice Problems
Solutions
Financial Statement Analysis
Learning Module 1 Introduction to Financial Statement Analysis
Introduction
Financial Statement Analysis Framework
Articulate the Purpose and Context of the Analysis
Collect Data
Process Data
Analyze/Interpret the Data
Develop and Communicate Conclusions and Recommendations
Follow-Up
Scope of Financial Statement Analysis
Regulated Sources of Information
International Organization of Securities Commissions
US Securities and Exchange Commission
Capital Markets Regulation in Europe
Financial Notes and Supplementary Schedules
Business and Geographic Segment Reporting
Management Commentary or Management’s Discussion and Analysis
Auditor's Reports
Comparison of IFRS with Alternative Financial Reporting Systems
Monitoring Developments in Financial Reporting Standards
New Products or Types of Transactions
Evolving Standards and the Role of CFA Institute
Other Sources of Information
Practice Problems
Solutions
Learning Module 2 Analyzing Income Statements
Introduction
Revenue Recognition
General Principles
Accounting Standards for Revenue Recognition
Expense Recognition
General Principles
Capitalization versus Expensing
Capitalization of Interest Costs
Capitalization of Internal Development Costs
Implications for Financial Analysts: Expense Recognition
Non-Recurring Items
Unusual or Infrequent Items
Discontinued Operations
Changes in Accounting Policy
Changes in Scope and Exchange Rates
Earnings per Share
Simple versus Complex Capital Structure
Basic EPS
Diluted EPS: The If-Converted Method
Diluted EPS When a Company Has Convertible Preferred Stock Outstanding
Diluted EPS When a Company Has Convertible Debt Outstanding
Diluted EPS: The Treasury Stock Method
Other Issues with Diluted EPS and Changes in EPS
Changes in EPS
Income Statement Ratios and Common-Size Analysis
Common-Size Analysis of the Income Statement
Income Statement Ratios
Practice Problems
Solutions
Learning Module 3 Analyzing Balance Sheets
Introduction
Intangible Assets
Identifiable Intangibles
Goodwill
Financial Instruments
Non-Current Liabilities
Long-Term Financial Liabilities
Deferred Tax Liabilities
Ratios and Common-Size Analysis
Common-Size Analysis of the Balance Sheet
Some interesting general observations can be made from these data:
Balance Sheet Ratios
Practice Problems
Solutions
Learning Module 4 Analyzing Statements of Cash Flows I
Introduction
Linkages between the Financial Statements
Primary Financial Statements
Relationship between Financial Statements
Linkages Between Current Assets and Current Liabilities
The Direct Method for Cash Flows from Operating Activities
Operating Activities: Direct Method
The Indirect Method for Cash Flows from Operating Activities
Operating Activities: Indirect Method
Conversion from the Indirect to Direct Method
Method to Convert Cash Flow from Indirect to Direct
Cash Flows from Investing Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Cash Flow from Financing activities: Long-Term Debt and Common Stock
Computing Dividends Paid
Differences in Cash Flow Statements Prepared under US GAAP versus IFRS
Practice Problems
Solutions
Learning Module 5 Analyzing Statements of Cash Flows II
Introduction
Evaluating Sources and Uses of Cash
Ratios and Common-Size Analysis
Free Cash Flow Measures
Cash Flow Statement Analysis: Cash Flow Ratios
Practice Problems
Solutions
Learning Module 6 Analysis of Inventories
Introduction
Inventory Valuation
The Effects of Inflation and Deflation on Inventories, Costs of Sales, and Gross Margin
Presentation and Disclosure
Presentation and Disclosure
Inventory Ratios
Practice Problems
Solutions
Learning Module 7 Analysis of Long-Term Assets
Introduction
Acquisition of Intangible Assets
Intangible Assets Purchased in Situations Other Than Business Combinations
Intangible Assets Developed Internally
Intangible Assets Acquired in a Business Combination
Impairment and Derecognition of Assets
Impairment of Property, Plant, and Equipment
Impairment of Intangible Assets with a Finite Life
Impairment of Intangibles with Indefinite Lives
Impairment of Long-Lived Assets Held for Sale
Reversals of Impairments of Long-Lived Assets
Derecognition
Presentation and Disclosure
Using Disclosures in Analysis
Practice Problems
Solutions
Learning Module 8 Topics in Long-Term Liabilities and Equity
Introduction
Leases
Requirements for Lease Accounting
Examples of Leases
Advantages of Leasing
Lease Classification as Finance or Operating
Financial Reporting of Leases
Lessee Accounting—IFRS
Lessee Accounting—US GAAP
Lessor Accounting
Financial Reporting for Postemployment and Share-Based Compensation Plans
Employee Compensation
Deferred Compensation
Defined-Benefit Pension Plans
Accounting for Defined-Benefit Plans under IFRS
Accounting for Defined-Benefit Plan under US GAAP
Pension-Related Disclosures
Share-Based Compensation
Stock Grants
Stock Options
Accounting for Stock Options
Other Types of Share-Based Compensation
Presentation and Disclosure
Presentation and Disclosure of Leases
Lessee Disclosure
Lessor Disclosure
Presentation and Disclosure of Postemployment Plans
Presentation and Disclosure of Share-Based Compensation
Practice Problems
Solutions
Glossary