CFA Level 1 Study Notes – Equity Investments

Study Session 12

Reading 36 – Market Organization and Structure

LOS 36a: explain the main functions of the financial system
LOS 36b: describe classifications of assets and markets
LOS 36c: 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 36d: describe types of financial intermediaries and services that they provide
LOS 36e: compare positions an investor can take in an asset
LOS 36f: 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 36g: compare execution, validity, and clearing instructions
LOS 36h: compare market orders with limit orders
LOS 36i: define primary and secondary markets and explain how secondary markets support primary markets
LOS 36j: describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets
LOS 36k: describe characteristics of a well-functioning financial system
LOS 36l: describe objectives of market regulation

Reading 37 – Security Market Indices

LOS 37a: describe a security market index
LOS 37b: calculate and interpret the value, price return, and total return of an index
LOS 37c: describe the choices and issues in index construction and management
LOS 37d: compare the different weighting methods used in index construction
LOS 37e: calculate and analyze the value and return of an index given its weighting method
LOS 37f: describe rebalancing and reconstitution of an index
LOS 37g: describe uses of security market indices
LOS 37h: describe types of equity indices
LOS 37i: describe types of fixed-income indices
LOS 37j: describe indices representing alternative investments
LOS 37k: compare types of security market indices

Reading 38 – Market Efficiency

LOS 38a: describe market efficiency and related concepts, including their importance to investment practitioners
LOS 38b: distinguish between market value and intrinsic value
LOS 38c: explain factors that affect a market’s efficiency
LOS 38d: contrast weak-form, semi-strong-form, and strong-form market efficiency
LOS 38e: explain the implications of each form of market efficiency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management
LOS 38f: describe market anomalies
LOS 38g: describe behavioral finance and its potential relevance to understanding market anomalies

Study Session 13

Reading 39 – Overview of Equity Securities

LOS 39a: describe characteristics of types of equity securities
LOS 39b: describe differences in voting rights and other ownership characteristics among different equity classes
LOS 39c: distinguish between public and private equity securities
LOS 39d: describe methods for investing in non-domestic equity securities
LOS 39e: compare the risk and return characteristics of different types of equity securities
LOS 39f: explain the role of equity securities in the financing of a company’s assets
LOS 39g: distinguish between the market value and book value of equity securities
LOS 39h: compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return

Reading 40 – Introduction to Industry and Company Analysis

LOS 40a: explain uses of industry analysis and the relation of industry analysis to company analysis
LOS 40b: compare methods by which companies can be grouped, current industry classification systems, and classify a company, given a description of its activities and the classification system
LOS 40c: 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 40d: explain how a company’s industry classification can be used to identify a potential “peer group” for equity valuation
LOS 40e: describe the elements that need to be covered in a thorough industry analysis
LOS 40f: describe the principles of strategic analysis of an industry
LOS 40g: explain the effects of barriers to entry, industry concentration, industry capacity, and market share stability on pricing power and price competition
LOS 40h: 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 40i: compare characteristics of representative industries from the various economic sectors
LOS 40j: describe macroeconomic, technological, demographic, governmental, and social influences on industry growth, profitability, and risk
LOS 40k: describe the elements that should be covered in a thorough company analysis

Reading 41 – Equity Valuation: Concepts and Basic Tools

LOS 41a: evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market
LOS 41b: describe major categories of equity valuation models
LOS 41c: describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases
LOS 41d: dividend payment chronology
LOS 41e: explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models
LOS 41f: calculate the intrinsic value of a non-callable, non-convertible preferred stock
LOS 41g: 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 41h: identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate
LOS 41i: 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 41j: 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 41k: describe enterprise value multiples and their use in estimating equity value
LOS 41l: describe asset-based valuation models and their use in estimating equity value
LOS 41m: explain advantages and disadvantages of each category of valuation model


Related Posts

Factors that Influence Industry Growth, Profitability, and Risk

External factors affecting an industry’s growth include macroeconomic, technological, demographic, governmental, and social...

Factors on Pricing Power and Price Competition

Barriers to Entry High barriers to entry generally entail more pricing power and...