Cfa Mnemonic s Level 1 Sample

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CFA CFA M nemo nic nic sTM Le ve l 1

CFA CF A Mne Mnem m o ni nic c sTM Le v e l 1 Me m o ry Tr Tric k Notes No tes Copyright © 2012 by ACAP Institute Last updated: July 2012 All rights reserved.

These materials contained within this text are the copyrighted property of ACAP Institute and may not be copied without written permission from the author. If this If this book does not have a front and back cover, it was distributed without permission of ACAP Institute, and is in direct violation of global of global copyright laws. The unauthorized duplication of these of these notes is a violation of global copyright laws. Your assistance in pursuing potential violators of this of this law is greatly appreciated. Disclaimer: ACAP Institute ‐ CFA Memory Trick Notes should be used in conjunction with the original readings as set forth by CFA® Institute. CFA® Institute does not endorse, promote, review, or warrant the accuracy of the products offered by ACAP Institute. The information contained in this study notes covers topics contained in the readings produced by CFA® Institute and is believed to be accurate. However, the accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success.

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CFA CFA M nemo nic nic sTM Level 1| Contents

Contents Preface

6

Use of this of this book......................... book.................................................... ...................................................... ................................................... ................................................................... ..................................................................... ................................. ....... 6 What is Mnemonic memory technique?........................... technique?..................................................... ..................................................... ...................................................... ............................................................. .................................. 6 Symbols in the text.......................... text ................................................... ................................................... ..................................................... ..................................................................... ..................................................................... ............................. 7 Chapter 1 – Ethics....................... Ethics................................................. ..................................................... ................................................... ................................................................... ..................................................................... ................................. ....... 8 1.1

Research Record Retention .................................................. ............................................................................. ...................................................... .................................................................. ....................................... 8

1.2

GIPS – GIPS – Compliance Results Retention......................... Retention.................................................. ................................................... ..................................................... .................................................... ......................... 8

1.3

GIPS – GIPS – Discontinued Composites Presentation.......................... Presentation.................................................... ..................................................... ................................................... ................................... ........... 8

1.4

GIPS – GIPS – Eight Major Sections........................ Sections .................................................. ..................................................... ...................................................... .................................................................. ....................................... 9

1.5

GIPS – GIPS – Verification Procedures ................................................... ............................................................................. ..................................................... ........................................................... ................................ 10

1.6

Minimum Elements of a of a Corporate Firewall........................ Firewall ................................................... ..................................................... ..................................................... ....................................... ............ 10

1.7

Duties to Clients and Prospective Clients ................................................. ............................................................................ ..................................................... ............................................ .................. 10

Chapter 2 – Quantitative Methods........................... Methods................................................... ................................................... ...................................................... ..................................................................... ............................................ 11 2.1

Distributions & Skewness ................................................ ........................................................................... ..................................................... ..................................................................... ........................................... 11

2.2

Kurtosis.......................... Kurtosis ................................................... ................................................... ..................................................... ..................................................................... .................................................................... .......................... 12

2.3

Statistical Biases........................... Biases...................................................... ..................................................... .................................................... ..................................................................... ..................................................... .......... 12

2.4

Scale of Measurement of Measurement....................... .................................................. ................................................... ................................................... ..................................................................... ................................................ ...... 12

2.5

Rates/Yields ................................................. ............................................................................ ..................................................... ..................................................................... ............................................................... .................... 13

2.6

Means ................................................. ............................................................................ ................................................... ................................................................... ..................................................................... ............................... ..... 13

Chapter 3 – Financial Reporting and Analysis (FR&A) ..................................................... ................................................................................ ..................................................... ....................................... ............. 14 Example: Capital vs Op Lease (Ratios)......................... (Ratios) .................................................... ...................................................... ..................................................... ................................................................ ...................................... 14 3.1

Capital vs Op Lease (Ratios)........................ (Ratios) .................................................. ..................................................... ..................................................... ................................................................ ...................................... 15

3.2

Capitalize vs Expense (Financial Statement)........................ Statement)................................................... ..................................................... ..................................................... ....................................... ............ 15

3.3

Capital vs Op Lease (Financial Statement) ..................................................... ................................................................................ ..................................................... ....................................... ............. 15

3.4

FIFO vs LIFO (rising price/stable inventory) ................................................... .............................................................................. ...................................................... ....................................... ............ 16

3.5

Depreciation Method .................................................. ........................................................................... ................................................... ..................................................................... ................................................. ...... 16

3.6

Revenue Recognition......................... Recognition ................................................... ................................................... ................................................... ..................................................................... ................................................. ...... 17

3.7

Impairment Effect........................ Effect ................................................... ..................................................... .................................................... ..................................................................... ..................................................... .......... 17


3

CFA CFA M nemo nic nic sTM Level 1| Contents 3.8

CFO Indirect Method .................................................... ............................................................................ ................................................... ..................................................................... ................................................ ...... 19

3.9

FIFO and LIFO Conversions ................................................... .............................................................................. ..................................................... ................................................................ ...................................... 19

3.10

Cash Conversion Cycle .................................................. .......................................................................... ................................................... ..................................................................... ................................................ ...... 19

3.11

U.S. GAAP vs IFRS......................... IFRS.................................................... ..................................................... ................................................... ..................................................................... ...................................................... .......... 20

3.12

Intangible Assets Treatments ..................................................... ............................................................................... ..................................................... ........................................................... ................................ 21

3.13

License, Trademarks, Franchise and Brands: Capitalize If Bought/Acquired If Bought/Acquired................................................................... ...................................................................21 21

3.14

% of Completion of Completion Calculation....................... Calculation................................................. ..................................................... ...................................................... ................................................................ ..................................... 21

3.15

Capital Lease Classification......................... Classification ................................................... ..................................................... ..................................................... ................................................................ ...................................... 22

3.16

Impairment Calculation ................................................... ............................................................................. ..................................................... ..................................................................... ............................................ 22

3.17

Accounting Diversity.......................... Diversity .................................................... ................................................... ................................................... ..................................................................... ................................................. ...... 22

3.18

Sales‐type Lease vs. Operating Lease (Lessor’s Perspective)........................ Perspective)................................................... ..................................................... ........................................ .............. 23

3.19

Revenue Recognition......................... Recognition ................................................... ................................................... ................................................... ..................................................................... ................................................. ...... 24

3.20

Quick Ratio......................... Ratio................................................... .................................................... ..................................................... ..................................................................... ............................................................... ..................... 24

3.21

Ratio Calculation.......................... Calculation..................................................... ..................................................... ................................................... ..................................................................... ...................................................... .......... 24

3.22

Unusual & Infrequent (Above the line)....................... line) ................................................ ................................................... ..................................................... .................................................. ....................... 25

3.23

Below the Line Items (No effect on tax) ................................................... ............................................................................. ..................................................... ............................................. .................. 25

3.24

Earnings manipulation....................... manipulation .................................................. ................................................... ................................................... ..................................................................... ................................................ ...... 25

5.1

Bonds Issued at a Premium or Discount ................................................... .............................................................................. ..................................................... ............................................ .................. 26

Chapter 4 – Economics....................... Economics .................................................. ..................................................... ..................................................... ..................................................................... ............................................................... ..................... 27 4.1

Economic Rent vs Opportunity Cost ................................................... .............................................................................. ..................................................... .................................................. ........................ 27

4.2

Optimal Capital Budget ‐ MCC vs IOS Schedules........................ Schedules.................................................. ..................................................... ................................................... ................................. ......... 28

4.3

Attractive investments for the five stages of the of the business cycle ................................................... ........................................................................... .................................. .......... 29

4.4

Profitability Index (PI) .................................................. ........................................................................... .................................................... ..................................................................... ................................................ ...... 29

4.5

NPV vs IRR...................... IRR............................................... ................................................... ..................................................... ..................................................................... .................................................................... .......................... 29

4.6

Types of Company of Company & Stock ................................................... .............................................................................. ..................................................... ................................................................ ...................................... 30

4.7

Divided Payment Chronology .................................................... ............................................................................... ...................................................... ........................................................... ................................ 30

4.8

ROE DuPont Analysis Basic Calculation: PTL (Profit Turnover Leverage).......................... Leverage) .................................................... ............................................... ..................... 31

4.9

ROE DuPont Analysis 5‐Step Calculation .................................................. ............................................................................. ..................................................... ............................................ .................. 31

4.10

Porter’s Five Competitive Forces ..................................................... ............................................................................... ................................................... ...................................................... ............................. 31


CFA CFA M nemo nic nic sTM Level 1| Contents Chapter 5 – Fixed Income and Portfolio Management ................................................... .............................................................................. ...................................................... ....................................... ............ 32 5.2

Fixed Income Relationship......................... Relationship.................................................... ...................................................... ..................................................... ................................................................ ...................................... 32

5.3

Bond Selling Price ................................................... ............................................................................. .................................................... ..................................................................... ..................................................... .......... 32

5.4

Credit Enhancements......................... Enhancements................................................... ................................................... ................................................... ..................................................................... ................................................. ...... 32

Chapter 6 – Derivatives & Alternative Investments ................................................... .............................................................................. ..................................................... ............................................ .................. 33 6.1

Plain Call & Put Option............................................ Option...................................................................... .................................................... ..................................................................... ..................................................... .......... 33

6.2

Options – Options – Max Gain/Loss........................ Gain/Loss ................................................. ................................................... ..................................................... ...................................................................... ........................................... 34

6.3

Roll Yield for Contango and Backwardation Markets .................................................. ............................................................................. ................................................... ........................ 34

6.4

Put Call Parity.......................... Parity.................................................... ..................................................... ..................................................... ..................................................................... .......................................................... ............... 34

6.5

Hedge Fund Unique Risks ................................................ ........................................................................... ..................................................... ..................................................................... ........................................... 35

6.6

Types of Real of Real Estate Investments .................................................... .............................................................................. ................................................... ...................................................... ............................. 35

6.7

Real Estate Valuation Approaches......................... Approaches ................................................... ..................................................... ................................................... ..................................................... ............................. 35

Appendix A ..................................................... ................................................................................ ..................................................... ..................................................................... ..................................................................... ................................... ......... 36 Index


37

CFA CFA M nemo nic nic sTM Level 1| 1| Prefac e

Preface Use of this bo o k As former CFA takers, we shared the same frustration and challenges in the study process. For the Level 1 curriculum, it consists of more of more than 3,000 pages and 450 Learning Outcome Statements across eight to ten major subjects. Further, questions in the exam are never straight forward, they require a firm grasp of the of the concepts, formulae and definitions of the of the topics in order to answer the questions correctly. As CFA is a close‐book exam, success in CFA exam requires as much memory power as intellectual. Given the sheer amount of study of study material and time pressure in the exam day, many candidates express the same feeling: “I understand the materials fairly well throughout my readings, but I just can’t quite remember them exactly when I come across them in the exam.” To address this, we came up with a bank of memory of memory tricks to help our fellow CFA takers. We hope these memory tricks can be of good of good help for you to memorize some of the of the concepts easier and easily retain them during the exams. This note does not attempt to cover the exhaustive list of LOS of LOS in the entire CFA curriculum as NOT every concept can be transformed into accessible memory tricks. But we believe the memory tricks that covered will help you a great deal to knock out some of the of the frequently asked concepts and guaranteed to be able to retain and apply in the actual exam. That will free up more capacity and time to tackle other concepts. We hope this memory note will be a valuable addition to your arsenal of CFA of CFA study tools to enhance your material storing process. Below is the suggestion of your of your workflow in the preparation for the exam.

What is Mnemo nic nic me mory tec hnique? hnique? Basic mnemonic memory techniques are employed in this note to help you associate easy‐to‐remember tricks (such as spatial, images, color, structure, or other meaningful information) to the study contents. The techniques are nothing new. They have been taught in many memory books, seminars, etc. worldwide and practiced by many memory champions. These techniques in fact work particularly well for CFA exam for its structure of multiple of multiple‐choice tests, which do not require special writing prowess, superior phonetic ability, or lengthy memorization. Before jumping Before jumping into the content, you need to have a basic understanding of how they work with our brains. Below are the common techniques that you will see a lot throughout this guide: 1.

Association ‐ this is the fundamental memory rule. All memory, whether trained or untrained, is based on association.

Therefore, to purposely remember a new piece of information, of information, the best way is to associate it to it to something you already know already know or or remember remember .

2.

Meaningfulness ‐ concepts and principles alike are abstractions that are difficult to remember. There’s practically no

way for most people to picture a concept or a principle without associate with other concrete objects. Therefore, the key is key is to make an intangible concept into concept into tangible, meaningful, definite and concrete and concrete object . Once that’s accomplished you’ll be able to picture the item and it can be associated to the concept.

Concept / principle / formula

3.

Tangible and concrete object

Picture and memorize

Absurd images ‐ as the old saying goes “a picture is worth a thousand words”. But not many people are aware of the of the

fact that the more absurd/striking the images, the more stimulating they are to our memory “tracks”. Think about the last time you come out a cinema, the scenes most vividly left with you in your mind are always those scenes with


CFA CFA M nemo nic nic sTM Level 1| 1| Prefac e

4.

illogical/striking imagines. To even further maximize the memory “tracks”, enlarge the images in your mind with rapid animated actions and colors. Acronym ‐ in the CFA® curriculum, a lot of materials of materials cover a list of items. of items. A linking technique that comes in very useful is the acronym for memorizing a list of items. of items. For example, to remember the names of the of the five great lakes, picture (imagine) many HOMES on a lake. HOMES will remind you of Huron, of Huron, Ontario, Michigan, Erie, Superior. Five Great Lakes H

Huron

O

Ontario

M

Michigan

E

Erie

S

Superior

HOMES

Prison Break Mnemonic Tattoos

If you If you have watched American TV serial drama Prison Break, you may have noticed that the famous tattoo on the main character Michael Scofield contains numerous memory tools and mnemonics. For example, CUte POison helps Scofield to remember a chemical formula of a of a corrosive substance to destroy the infirmary’s drainage as part of his of his escape plan. Cu

CuSO4: Copper (II) sulfate

PO

H3PO4: phosphoric acid

Cute POison

Mnemonics for CuSO4: Copper (II) sulfate and H3PO4: phosphoric acid.

Sym b ols in in the text 1. 2.

Smart Head logos symbolize mnemonic memory tricks or helpful tips to help you memorize the topics. Color fonts represent keywords or acronyms that you need to pay attentions and make sure you will be able to

3.

associate and recite them in the exam. LOS represents CFA® Learning Outcome Statements that you can refer back to the topics in official study guide or

4.

other detailed study material for more in‐depth understanding. Short forms and abbreviations are used throughout the text to ensure that the notes are clear and concise.


CFA CFA M nemo nic nic sTM Level 1| 1| Cha pte r 2 – Qua ntitative ntitative Method s

1.5

GIPS – GIPS – Verification Procedures

D

Definition of the of the firm

C

Composite construction

A

Account review

P

Performance measurement

M

Maintenance of record of record

D

Disclosures

N

Non‐discretionary

S

Sample account selection

DCAPM‐NDS NDS:: Play DCAPM on NDS

Imagine you can play DCAPM (Dynamic Capital Asset Pricing Model) on your NDS (Nintendo DS).

LOS: Explain the requirements for verification of compliance of compliance with GIPS standard.

1.6

Minimum Elements of a of a Corporate Firewall

M

Monitoring of employee of employee trading

N

Confinement of material of material nonpublic information

C

Control of interdepartmental of interdepartmental communications

C

Heightened restrictions under certain conditions ‐

S

Segregation of personnel of personnel

R

Restricted list

MNC‐CSR CSR:: MNC must have CSR Think about MNC (Multi‐National Company) should have proper CSR (Corporate Social Responsibility).

of Interests ‐ Recommended Procedures for Compliance. LOS: Conflicts of Interests

1.7

Duties to Clients and Prospective Clients

Clients > Employers > Employees

Remember that the company always put you (as an employee) behind employers and clients.

LOS: Duties to Clients and Prospective Clients – Clients – Loyalty, Prudence and Care. Members must always act for the benefit of clients of clients and place

clients’ interests before their employer’s or their own interests.



2.2

Kurtosis LNP:: London “N” Paris (Alphabetical Order Kurtosis) LNP

Kurtosis distributions are typically classified as three types: Leptokurtic, Normal and Platykurtic. A higher kurtosis distribution has a sharper peak and longer/fatter tails. Picture the shape of the three overlapping kurtosis as the Eiffel Tower to associate it with LNP LNP:: London “N” Paris. Then remember the order of magnitude of magnitude is the same as the alphabetical order from top to bottom (i.e. L Æ N Æ P). The top has the highest kurtosis and the bottom has the lowest. They are differentiated by a measure of “3” which is shown in the centre of the of the tower in the picture. LOS: Define and interpret kurtosis, and measures of population of population and sample skew and kurtosis.

2.3

Statistical Biases S‐STD‐L: Small ST STan anD Dard Large

S

Survivorship bias

S

Sample selection bias

T

Time‐period bias

D

Data‐mining bias

L

Look‐ahead bias

There are five major statistical biases. To memorize the acronym, think about clothes are usually sold by three sizes: Small ‐> STD (Standard) ‐> Large.

of the appropriate sample size, data‐mining bias, sample selection bias, survivorship bias, look‐ LOS: Discuss the issues regarding selection of the ahead bias, and time ‐period bias.

2.4

Scale of Measurement of Measurement NOIR:: NOIR Chocolate NOIR

N

Nominal

O

Ordinal

I

Interval

R

Ratio

The order of magnitude of magnitude for the four scales of measurement of measurement are always asked in the exam. To memorize the order, associate the scales with NOIR (NOIR means dark in French) chocolate from lowest scale (Nominal) to the highest (Ratio)

LOS: Differentiate between descriptive statistics and inferential statistics, and between a population and a sample, and explain the

differences among the types of measurement of measurement scales.



2.5

Rates/Yields MBE

M

MMY (Money Market Yield): More or less version so just do a simple pro‐rota using 360 days

B

BEY (Bond Equivalent Yield): 2 x Semi‐annual (think “Bi‐semi‐annual”) bond yield

E

EAY (Effective Annual Yield): Exact version so do compound interest using 365 days

MMY < BEY < EAY

There are three types of rates/yields of rates/yields that are always asked to compare the order of magnitude in the exam. To memorize the order, associate it with the acronym MBE that abbreviates “Members of the Order of the British Empire”, such as Beatles are each appointed MBE in 1965.

LOS: Calculate and interpret the bank discount yield, holding period yield, effective annual yield, and money market yield for a U.S. Treasury

bill; and interpret and convert among holding period yields, money market yields, effective annual yields and the bond equivalent yields.

2.6

Meanss Mean AGH: A Gift Horse

A

Arithmetic Mean

G

Geometric Mean

H

Harmonic Mean

AM > GM > HM

There are three types of means of means that are always being asked to compare the order of magnitude in the exam. To memorize them, first remember the acromyn AGH as A Gift Horse. Think about the idiom “Don’t be mean. Don’t look Don’t look at at ift H orse orse in the Mouth”. A G ift Secondly, they are in alphabetical order: A, G, H. The largest is arithmetic mean and the smallest is harmonic mean.

LOS: Define, calculate, and interpret measures of central of central tendency, including the population mean, sample mean, arithmetic mean, weighted

average or mean, geometric mean, harmonic mean, median, and mode, quartiles, quintiles, deciles, and percentiles.


CFA CFA M nemo nic nic sTM Level 1| 1| Cha p ter 4 – Ec ono mics

3.12

Intangible Assets Treatments

Items

Treatments

License, Trademarks, Franchise and Brands (LTFB)

Capitalize if if bought/acquired bought/acquired

Patents & copyrights

Expense if if developed, developed, capitalize if if bought/acquired bought/acquired

Advertising costs

Expense if if developed, developed, capitalize if if direct direct‐response (i.e. ordered externally)

Goodwill

Capitalize during acquisition; impairment exercise is performed each yr to expense it.

Research & developments (R&D)

GAAP: Expense when incurred; IAS: Optional

Software development (for internal use)

Expense before technological feasibility establishment

Software development (as products)

Expense like R&D

LOS: Explain the circumstances in which intangible assets, including software development costs and research and development costs are

capitalized.

3.14

% of Completion of Completion Calculation

Current Period (Not Accum)

% of of C Completion

Completed Contract

Revenue (A)

% of of Exp Exp X Total Rev

$0

Exp (B)

Actual Exp

$0

Net Income

A – B

$0

Cash Flow

Actual Cash Flow

Actual Cash Flow

Net CIP (Asset) or Net Adv Bill (Liab)

Total Adv Bill Bill – – CIP*

Actual Cash Flow

Acct Receivable

Total Exp Exp – – Paid Exp

Total Ex p – Paid Exp

Current Period (Not Accum)

% of of C Completion

Completed Contract

* CIP = Accumulated Revenue

Bolded are commonly asked items in the exam questions. LOS: Compare the percentage‐of ‐completion method with the completed contract method and contrast the effects of the of the two methods on the income statement, balance sheet, statement of cash of cash flows and selected financial ratios.

3.15

Capital Lease Classification OWNS

O

Ownership transfers at the end of lease of lease

W

Written option for bargain purchase

N

Ninety percent (90%) of leased of leased property

S

Seventy‐five percent (75%) of asset of asset economic life is being committed in lease term

There are four criteria for capital lease classification. The memory acronym is an easy OWNS. Just do not forget the “S” at the back “N” and “S” represent ninety % and seventy‐five % respectively. We use a key to represent ownership. Captial lease has a sense of ownership of ownership at the need.

LOS: Discuss the motivations for leasing assets instead of purchasing of purchasing them and the incentives for reporting the leases as operating leases

rather than capital leases.


CFA CFA M nemo nic nic sTM Level 1| 1| Cha pte r 5 – Fixed Inc om e a nd Portfoli ortfolio o M ana ge me nt

3.16

Impairment Calculation CAP‐I

C

Cost of the of the machinery

+

A

Accumulated depreciation

+

P

PV of the of the remaining cash flow

=

I

Impairment Cost

The table shows the formula of impairment of impairment cost. The acronym is C + A + P = I. To memorize the formula, remember a cap with a big “I” as the logo (i.e. CAP I).

LOS: Define impairment of long of long‐lived assets and explain what effect such impairment has on a company’s financial statements and ratios.

3.17

Accounting Diversity SPLIT

S

Source of financing of financing

P

Political

L

Law

I

Inflation

T

Tax

There are five elements that cause accounting diversity. To memorize the acronym, think about diversity has a similar meaning as SPLIT.

LOS: Discuss the general principles of the of the financial reporting system and explain the objectives of financial of financial reporting accounting to the

Financial Accounting Standards Board (FASB) conceptual framework.



4.3

Attractive investments for the five stages of the of the business cycle (1) Recovery: Cyclical and Commodities (2) Early Expansion: Stocks and Real Estate (3) Late Expansion: Bonds and interest‐sensitive Stocks (4) Slowing, Entering Recession: Bonds and interest‐ sensitive Stocks (5) Recession: Commodities and Stocks To memorize these five stages, picture the radar chart on the left side that clusters different attractive investment asset types in different stages of the of the business cycle. In addition, it is worth to note that all five stages are recommended to invest in certain type of stocks. of stocks.

LOS: Classify business cycle stages and identify, for each stage, attractive investment opportunities.

4.4

Profitability Index (PI)

Proitability Index Index PI PI 

PV of Future Cash Flow Initial Investment

 1

NPV CF

NPV

Accept Project

If PI If PI > 1

NPV is positive (+)

Yes

If PI If PI < 1

NPV is negative (‐)

No

The key to profitability index is to remember the formula as in 1 + NPV/CF0. That means, if the project generates positive return, NPV/CF0 will be positive. Then profitability index will be bigger than 1.

LOS: Calculate and interpret the results produced from each of the of the following methods when evaluating a single capital project: net present

value (NPV), internal rate of return of return (IRR), payback period, discounted payback period, average accounting rate of return of return (AAR), and profitability Index.

4.6

Types of Company of Company & Stock Company

Stock

Valuations

Defensive

Insensitive to downturn (utility, gr groc ocer ery) y)

Beta Be ta < 1

Cyclical

Business Cycle

Beta > 1

Speculative

Risky, high upside

Low/‐ive return, overpriced

‐‐ ‐‐ ‐‐

Growth

Mmg ability ‐> high NPV projects

Earn higher return than other stocks with same risk

High P/E, P/B

Value

‐‐

‐‐

Low P/E, P/B

LOS: Differentiate between 1) a growth company and a growth stock, 2) a defensive company and a defensive stock, 3) a cyclical company

and a cyclical stock, 4) a speculative company and a speculative stock and 5) a value stock and a growth stock.



4.7

Divided Payment Chronology

Table below shows the timely+ne of the of the dividend payment chronology.

DE‐HP

Remember DELL is competing fiercely with HP in the PC segment.

LOS: Review dividend payment chronology including declaration, holder of record, of record, ex‐dividend, and payment dates and indicate when the

share price will mostly likely reflect the dividend.

4.10

Porter’s Five Competitive Forces RNB‐SS

R

Rivalry among the existing competitors

N

New entrants threat

B

Buyers bargaining power

S

Suppliers bargaining power

S

Substitute products threat

To easily memorize Porter’s five forces, think about Beyonce has distinctive competitive advantage as an RNB (“R & B”) Super Star.

LOS: Discuss, with respect to global industry analysis, the elements related to risk, and describe the basic forces that determine industry

competition.


CFA CFA M nemo nic nic sTM Leve l 1| 1| Cha p ter 6 – Deriva Deriva tives & A lternative Investme Investme nts

6.2

Options – Options – Max Gain/Loss Max Gain

Max Loss

(Buyer) Long

Unlimited

Premium

(Seller) Short

Premium

Unlimited

Breakeven

X + Premium

X + Premium

(Buyer) Long

X ‐ Premium

Premium

(Seller) Short

Premium

X ‐ Premium

Breakeven

X ‐ Premium

X ‐ Premium

Call UP, Put XP

Call

To memorize the table, remember “call UP the tech support to put XP (as in “Windows XP”) in your computer”. This mnemonics is for “Buyers” and just and just reverse it for Seller. For breakeven, both memorize by XP, but call is positive and put is negative.

Put

LOS: Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration.

6.4

Put Call Parity SP‐CK CK:: SiP a CoKe

 

 1  Rfr RfrT

S = the value of the of the share P = the value of the of the put C = the value of the of the call K = the strike price (discounted by the risk free rate for time T) RFR = risk free rate

SiP a CoKe” can be used to remind you of option of option put‐call parity: The prices of a of a Stock + the Put = those of the of the Call + the present value of the of the striKe price. “

LOS: Explain put‐call parity for European options, given the payoffs on a fiduciary call and a protective put.


CFA CFA M nemo nic nic sTM Level 1| 1| Index

Index %

Debt Equity ratio............ ratio......................... .......................... .......................... ......................... ............ 13

% of Completion of Completion............. .......................... .......................... .......................... ........................ ........... 22

Defensive............. Defensive .......................... .......................... .......................... .......................... ...................... ......... 31 Depreciation Method .......................... ....................................... .......................... ................ ... 16

A

Absurd images............. images .......................... .......................... .......................... .......................... ................ ... 4

Derivatives & Alternative Investments............................. Investments............................. 36 Development cost............. cost.......................... ......................... ......................... ....................... .......... 20

Account payable............. payable .......................... .......................... .......................... ........................ ........... 26 Account Payable .......................... ....................................... .......................... ........................ ........... 19

DISC........... DISC ........................ .......................... .......................... .......................... .......................... .................... ....... 39 Disclosure ......................... ...................................... .......................... .......................... ........................ ........... 7

Account Receivable ......................... ...................................... .......................... .................... ....... 19 Accounting changes............. changes......................... ......................... .......................... .................... ....... 27

Discontinued Composites Presentation ............................. 6 Discount........... Discount ........................ .......................... .......................... .......................... .................... ....... 34, 35

Accounting Diversity............ Diversity......................... ......................... ......................... .................... ....... 24 Acronym ........................ ..................................... .......................... .......................... .......................... ............... 5 Advertising costs............. costs.......................... .......................... .......................... ........................ ........... 22

Disposal/Restructuring (Separation) ................................27 ................................ 27 Distributions & Skewness ......................... ...................................... ........................ ........... 10 Divided Payment Chronology .......................... ....................................... ................. .... 32

Arithmetic mean............. mean .......................... .......................... .......................... ........................ ........... 12 Asset turnover............. turnover .......................... .......................... .......................... .......................... ............... 13

Dividend Paid .......................... ....................................... .......................... .......................... ................ ... 20 Dividend Received .......................... ....................................... .......................... ..................... ........ 20

Association ........................ ..................................... .......................... .......................... ....................... .......... 4

Duties to Clients and Prospective Clients ........................... 9

B

E

Beatles........... Beatles ........................ .......................... .......................... .......................... .......................... ............... .. 12 Bond Equivalent Yield............ Yield ......................... .......................... .......................... ................. .... 12

Earnings manipulation............ manipulation ......................... .......................... .......................... ................ ... 27

Bond Issues........... Issues ........................ .......................... .......................... .......................... ..................... ........ 35 Bond Selling Price .......................... ....................................... .......................... ...................... ......... 34

Economics ......................... ...................................... .......................... .......................... ...................... ......... 28 Effective Annual Yield .......................... ....................................... .......................... ................ ... 12

Brands and trademarks .......................... ....................................... .......................... ............. 22 Business cycle ......................... ...................................... .......................... .......................... ................ ... 30

Eiffel Tower............. Tower .......................... .......................... .......................... .......................... ................... ...... 11 Eight Major Sections............. Sections .......................... .......................... .......................... .................... ....... 7 Environment ........................ ..................................... .......................... .......................... ................... ...... 27

C

Ethics............. Ethics.......................... .......................... .......................... .......................... .......................... .................. ..... 6

Calculation Methodology .......................... ....................................... ......................... ............ 7 Capital Lease Classification............. Classification.......................... .......................... ..................... ........ 23

F

Economic Rent vs. Opportunity Cost ................................28 ................................ 28

Capital vs. Op Lease (Financial Statement)....................... 15 Capital vs. Op Lease (Ratios)............. (Ratios).......................... .......................... ............... 13, 15 Capitalize vs. Expense (Financial Statement) ................... 15

FIFO and LIFO Conversions ......................... ...................................... ...................... ......... 19 FIFO vs. LIFO..................... LIFO.................................. .......................... .......................... ....................... .......... 16 Financial Reporting and Analysis ......................... ...................................... ............. 13

Cash Conversion Cycle .......................... ....................................... .......................... ............... .. 20 CFO Indirect Method .......................... ....................................... .......................... ................. .... 19

Five Great Lakes............. Lakes.......................... .......................... .......................... .......................... ............... 5 Fixed Asset........... Asset ........................ .......................... .......................... .......................... ...................... ......... 19

Completed Contract ........................ ..................................... .......................... .................... ....... 22 Compliance Results Retention............. Retention.......................... .......................... .................. ..... 6

Fixed Income and Portfolio Management ........................ 34 Fixed Income Relationship............. Relationship.......................... ......................... ...................... .......... 34 Fundamentals of compliance of compliance........... ........................ .......................... ...................... ......... 7

Composite Construction............. Construction......................... ......................... .......................... ............... .. 7 Corporate Firewall............ Firewall ......................... .......................... .......................... ........................ ........... 9 Credit Enhancements ......................... ...................................... .......................... ................. .... 34 Current ratio............ ratio ......................... .......................... .......................... .......................... .................. ..... 13 Cute Poison........... Poison........................ .......................... .......................... .......................... ....................... .......... 5

G

Geometric Mean............ Mean ......................... .......................... .......................... ......................... ............ 12 GIPS........... GIPS........................ .......................... .......................... .......................... .......................... .................. ..... 7, 9

Cyclical ........................ ..................................... .......................... .......................... .......................... ............... .. 31

going‐concern assumptions............. assumptions.......................... .......................... .................... ....... 20 Goodwill........... Goodwill........................ .......................... .......................... .......................... .......................... ............. 22

D

Growth............. Growth .......................... .......................... .......................... .......................... .......................... ............. 31

Data‐mining bias............. bias.......................... .......................... .......................... ........................ ........... 11


CFA CFA M nemo nic nic sTM Leve l 1| 1| Cha p ter 6 – Deriva Deriva tives & Alterna Alterna tive Inves Investme tme nts

H

P

Harmonic mean ........................ ..................................... .......................... .......................... ............... 12 Hedge Fund Unique Risks .......................... ....................................... ....................... .......... 37

Par............. Par.......................... .......................... .......................... .......................... .......................... ............... 34, 35 Patents & copyrights............. copyrights.......................... .......................... .......................... .................. ..... 22

I

Impairment ........................ ..................................... .......................... .......................... ..................... ........ 27

Plain Call & Put Option .......................... ....................................... .......................... ............... 36 Platykurtic............ Platykurtic......................... .......................... .......................... .......................... ...................... ......... 11 Porter’s Five Competitive Forces............. Forces .......................... ......................... ............ 33

Impairment Calculation............. Calculation .......................... .......................... .......................... ............. 23 Impairment Effect............. Effect.......................... .......................... .......................... ...................... ......... 17 Input Data............. Data.......................... .......................... .......................... .......................... ....................... .......... 7

Presentation and Reports............ Reports ......................... .......................... .......................... ............. 7 Private Equity............. Equity.......................... .......................... .......................... .......................... .................. ..... 7

Intangible Assets....................... Assets.................................... .......................... .......................... ............... 20 Intangible Assets Treatments............ Treatments ......................... ......................... .................. ...... 22

Profitability Index .......................... ...................................... ......................... ....................... .......... 30 Put Call Parity............. Parity.......................... .......................... .......................... .......................... ................ ... 38

Integration (M&A) ......................... ...................................... .......................... ...................... ......... 27 Interest Paid ......................... ...................................... .......................... .......................... .................. ..... 20

Q

Interest Received ......................... ...................................... .......................... ........................ ........... 20 Interval .......................... ....................................... .......................... .......................... ......................... ............ 11

Quantitative Methods ......................... ...................................... .......................... ................ ... 10 Quick Ratio........... Ratio........................ .......................... .......................... .......................... ...................... ......... 26

Inventory .......................... ....................................... .......................... ......................... ...................... .......... 19 K

Kurtosis............. Kurtosis .......................... .......................... .......................... .......................... ......................... ............ 11 L

Left‐Skewed Distribution............ Distribution ......................... ......................... ......................... ............. 10 Leptokurtic ........................ ..................................... .......................... .......................... ..................... ........ 11 License, Trademarks, Franchise and Brands..................... Brands ..................... 22 Log‐normal Distribution ......................... ...................................... .......................... ............. 10 Look‐ahead bias........... bias........................ .......................... .......................... .......................... ............... 11 Lower of cost of cost or market (LCM)............ (LCM) ......................... .......................... ................ ... 20 M

MCC vs IOS Schedules............ Schedules......................... .......................... .......................... ................. .... 29 Meaningfulness ........................ ..................................... .......................... .......................... ................ ... 4 Means............ Means ......................... .......................... .......................... .......................... .......................... ............... .. 12 MOLA............. MOLA .......................... .......................... .......................... .......................... .......................... ............... .. 39 Money Market Yield ........................ ..................................... .......................... .................... ....... 12 N

Nominal ......................... ...................................... .......................... .......................... ......................... ............ 11 Normal ........................ ..................................... .......................... .......................... .......................... ............... .. 11 NPV............ NPV ......................... .......................... .......................... .......................... .......................... ................... ...... 30 NPV vs IRR.................... IRR................................. .......................... .......................... .......................... ............... 30 O

Optimal Capital Budget .......................... ....................................... .......................... ............. 29 Options – Options – Max Gain/Loss............ Gain/Loss........................ ......................... .......................... ............. 37 Ordinal........... Ordinal ........................ .......................... .......................... .......................... .......................... ............... .. 11

Premium .......................... ....................................... .......................... .......................... ....................... .......... 34

R

Rates/Yields ......................... ...................................... .......................... .......................... ................... ...... 12 Ratio............. Ratio .......................... .......................... ......................... ......................... .......................... .................. ..... 11 Ratio Calculation............ Calculation......................... .......................... .......................... ......................... ............ 26 Real Estate ........................ ..................................... .......................... .......................... ........................ ........... 7 Real Estate Valuation............ Valuation......................... .......................... .......................... .................. ..... 39 Record Retention........... Retention ........................ .......................... .......................... .......................... ............... 6 Research & developments (R&D) ......................... ..................................... ............ 22 Research Record Retention .......................... ....................................... ...................... ......... 6 Revenue Recognition............ Recognition ......................... .......................... ......................... ............ 17, 26 Right‐Skewed Distribution............. Distribution .......................... .......................... ...................... ......... 10 ROA........... ROA ........................ .......................... .......................... .......................... .......................... .................... ....... 13 ROE ........................ ..................................... .......................... .......................... .......................... .................... ....... 13 ROE DuPont ......................... ...................................... .......................... .......................... ................... ...... 32 Roll Yield vs Price Return .......................... ....................................... ........................ ........... 37 S

Sales of assets/investments of assets/investments............. .......................... .......................... .................... ....... 27 Sales‐type Lease vs. Operating Lease ............................... 25 Sample selection bias .......................... ....................................... .......................... ................ ... 11 Scale of Measurement of Measurement............ ......................... .......................... .......................... ................ ... 11 SiP‐a‐CoKe............ CoKe ......................... .......................... .......................... .......................... ...................... ......... 38 Software development (as products) ............................... 22 Software development (for internal use) ......................... 22 Speculative........... Speculative........................ .......................... .......................... .......................... ...................... ......... 31 Statistical Biases...................... Biases................................... .......................... .......................... ................ ... 11 Survivorship bias............ bias ......................... .......................... .......................... ......................... ............ 11 T

The Magnificent Seven .......................... ....................................... .......................... ............... 17 © AC A P Institu Institu te

CFA CFA M nemo nic nic sTM Leve l 1| 1| Cha p ter 6 – Deriva Deriva tives & Alterna Alterna tive Inves Investme tme nts Time‐period bias............. bias .......................... .......................... .......................... ........................ ........... 11 Types of Company of Company & Stock............. Stock .......................... .......................... ..................... ........ 31 Types of Real of Real Estate Investments............. Investments.......................... ........................ ........... 39 U

U.S. GAAP vs. IFRS ......................... ...................................... .......................... ...................... ......... 20 V

Value............. Value.......................... .......................... .......................... ......................... ......................... ................. .... 31


Verification Procedures ......................... ...................................... .......................... ................ ... 9 W

Working capital........... capital........................ .......................... .......................... .......................... ............... .. 13 Y

Yield‐to‐maturity ........................ ..................................... .......................... ......................... ............ 34

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Cfa Mnemonic s Level 1 Sample

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