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CFA Level 1 Study Notes – Equity Investments

CFA Level 1 Study Notes – Equity Investments

Study Session 12

Reading 33 – Market Organization and Structure

LOS 33a: explain the main functions of the financial system
LOS 33b: describe classifications of assets and markets
LOS 33c: describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes
LOS 33d: describe types of financial intermediaries and services that they provide
LOS 33e: compare positions an investor can take in an asset
LOS 33f: calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call
LOS 33g: compare execution, validity, and clearing instructions
LOS 33h: compare market orders with limit orders
LOS 36i: define primary and secondary markets and explain how secondary markets support primary markets
LOS 33j: describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets
LOS 33k: describe characteristics of a well-functioning financial system
LOS 33l: describe objectives of market regulation

Reading 34 – Security Market Indices

LOS 34a: describe a security market index
LOS 34b: calculate and interpret the value, price return, and total return of an index
LOS 34c: describe the choices and issues in index construction and management
LOS 34d: compare the different weighting methods used in index construction
LOS 34e: calculate and analyze the value and return of an index given its weighting method
LOS 34f: describe rebalancing and reconstitution of an index
LOS 34g: describe uses of security market indices
LOS 34h: describe types of equity indices
LOS 34i: describe types of fixed-income indices
LOS 34j: describe indices representing alternative investments
LOS 34k: compare types of security market indices

Reading 35 – Market Efficiency

LOS 35a: describe market efficiency and related concepts, including their importance to investment practitioners
LOS 35b: distinguish between market value and intrinsic value
LOS 35c: explain factors that affect a market’s efficiency
LOS 35d: contrast weak-form, semi-strong-form, and strong-form market efficiency
LOS 35e: explain the implications of each form of market efficiency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management
LOS 35f: describe market anomalies
LOS 35g: describe behavioral finance and its potential relevance to understanding market anomalies

Study Session 13

Reading 36 – Overview of Equity Securities

LOS 36a: describe characteristics of types of equity securities
LOS 36b: describe differences in voting rights and other ownership characteristics among different equity classes
LOS 36c: distinguish between public and private equity securities
LOS 36d: describe methods for investing in non-domestic equity securities
LOS 36e: compare the risk and return characteristics of different types of equity securities
LOS 36f: explain the role of equity securities in the financing of a company’s assets
LOS 36g: distinguish between the market value and book value of equity securities
LOS 36h: compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return

Reading 37 – Introduction to Industry and Company Analysis

LOS 37a: explain uses of industry analysis and the relation of industry analysis to company analysis
LOS 37b: compare methods by which companies can be grouped
LOS 37c: explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as “growth,” “defensive,” and “cyclical”
LOS 37d: current industry classification systems, and classify a company, given a description of its activities and the classification system
LOS 37e: explain how a company’s industry classification can be used to identify a potential “peer group” for equity valuation
LOS 37f: describe the elements that need to be covered in a thorough industry analysis
LOS 37g: describe the principles of strategic analysis of an industry
LOS 37h: explain the effects of barriers to entry, industry concentration, industry capacity, and market share stability on pricing power and price competition
LOS 37i: describe industry life cycle models, classify an industry as to life cycle stage, and describe limitations of the life-cycle concept in forecasting industry performance
LOS 37j: compare characteristics of representative industries from the various economic sectors
LOS 37k: describe macroeconomic, technological, demographic, governmental, and social influences on industry growth, profitability, and risk
LOS 37l: describe the elements that should be covered in a thorough company analysis

Reading 38 – Equity Valuation: Concepts and Basic Tools

LOS 38a: evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market
LOS 38b: describe major categories of equity valuation models
LOS 38c: describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases
LOS 38d: dividend payment chronology
LOS 38e: explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models
LOS 38f: calculate the intrinsic value of a non-callable, non-convertible preferred stock
LOS 38g: calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate
LOS 38h: identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate
LOS 38i: explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables
LOS 38j: calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value
LOS 38k: describe enterprise value multiples and their use in estimating equity value
LOS 38l: describe asset-based valuation models and their use in estimating equity value
LOS 38m: explain advantages and disadvantages of each category of valuation model

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