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Reading 58: Introduction to Alternative Investments

The CFA curriculum is always changing and this last reading of Level 1 has been completely overhauled by the Institute and is considered a new reading. There is only this one reading regarding alternative investments, but you still don’t want to overlook the material in this section. As alternatives become more important in the market, it’s safe to expect this to play a bigger role in higher level curriculums in the future.

Alternative investments include any assets that do not fall into the traditional asset class categories of equity and fixed income. It can include derivatives, real estate, commodities, short-selling of stocks, or many others. Common characteristics of alternative investments include limited liquidity, low correlation of returns with traditional assets, lax regulation, low transparency, and special tax and legal considerations. The primary benefit of investing in alternatives is the diversification effect due to the low correlation of returns compared to traditional investments.

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Reading 56 – Derivative Markets and Instruments

Derivative securities are an asset class where they derive (hence the name) their value from an underlying asset. These underlying assets can be financial assets like equities or bonds or real assets like commodities. Derivatives allow investors to buy or sell exposure to these assets without having to buy the assets themselves. A derivative is a legal contract between the buyer and seller, who are referred to as the “long” and “short” (respectively) sides of the trade.

Mathjax Reading 50 – Fixed-Income Securities: Defining Elements A bond is a debt instrument that entitles the buyer to future cash flows from the issuing entity. Bonds can be issued by a variety of organizations, including companies, governments, and even supranational groups like the European Union. Bonds are categorized into three primary sectors based on issuer and structure: Government, Corporate,…

Reading 39 – Portfolio Management: An Overview

Portfolio management is about creating a diversified approach to meet one’s investment goals. Diversification involves avoiding too much exposure to a single asset or asset type. Diversifying the risks of a portfolio help reduce downside risk without necessarily decreasing the expected rate of return. Portfolio risk is measured by the standard deviation of returns and the correlations between different assets can lead to decreased overall risk when combined. The principle behind this diversification effect is based on Harry Markowitz’s research and is known as Modern Portfolio Theory.

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Reading 44 – Market Organization and Structure

Financial markets serve a wide variety of purposes, but there are six main categories of activity. They are used for Saving by individuals and organizations in order to grow their assets over time. Borrowing is also done when money is needed now that will be repaid in the future. Companies also Raise Equity Capital by selling ownership shares in exchange for cash today. Derivative securities like futures and forwards contracts can be used to Manage Risk. Spot Market Trading allows for the immediate exchange of one currency or other good for another. Information Motivated-Trading is done by investors who intend to use informational advantages to buy undervalued securities.

Reading 34 – Corporate Governance and ESG: An Introduction

Corporate Governance is the managerial system by which a company is controlled. There are two primary theories that drive corporate governance structures, though they have been converging more closely together in their influence more recently. The Shareholder Theory operates under the assumption that the most important responsibility of company management is to maximize returns to shareholders. The Stakeholder Theory emphasizes the needs of all relevant stakeholders in making decisions about the company’s operations. These additional stakeholders include customers, employees, and even supplier and creditors.

There’s no getting around it, financial reporting and analysis is a big part of the CFA level 1 curriculum and there is a lot of material with which you’ll need to become familiar. As one of the largest sections of the exam, you will want to be familiar with the FRA formula sheet information, as many of the questions will involve giving you a snippet of information from a financial statement and asking you to calculate a specific value from that. Knowing which data points go into specific formulas will be necessary to get a good score here.

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Reading 14 – Topics in Demand and Supply Analysis

You will need to be able to calculate and explain the importance of Price Elasticity on the exam. Elasticity measures the sensitivity of one variable to another. If something is highly elastic, it will experience a large price change in response to a small change in the related variable. Elasticity is calculated as follows:

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Reading 6 – The Time Value of Money

The Time Value of Money is an important concept for the level 1 exam. You will need to be comfortable discounting the Present Value and Future Value of cash flows for individual and ongoing payments in the exam. Your calculator has functions built in to make these calculations easier. Here are the calculations that you need to know: