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Nominal Spread vs Z Spread

2 primary factors that influence the difference between Nominal spread and Z-spread for a bond are: a)the steeper benchmark spot rate curve, the greater difference between 2 spreads and b) the earlier principle paid back, the greater the difference between 2 spreads. Logic for the 2 statements: 1. N-spread doesnt consider term structure of spot rate. It simply assume benchmark spot rate curve is flat. Thats why it is only a one-point (last point) spread. Z-spread cures this problem; it measures spread along every point of the spot curve. So if the spot curve in flat, Z-spread = N spread; on the other hand, the steeper the curve, the greater of differene of them. What is important to note isThezero-volatility spread(orZ-spread, orstatic spread) is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity, thereby recognizing the term structure of interest rates. Unlike the nominal spread, the Z-spread is not a spread off one point on the Treasury yield curve but a spread over the entire spot rate
curve. It represents a spread to compensate for the target bonds
added risks including credit risk, liquidity risk and volatility risk associated with embedded options. 2. N spread doesnt consider cash flow change. Earlier principal payback definitely change cash flow. Z spread would adress this change. So compared to stable cash flow bond (bullet maturity bond), armortized bond has Z-spread which is different from N-spread. For bullet bonds, unless the yield curve is very steep, the nominal spread will not differ significantly from the Z-spread; for securities where principal is repaid over time rather than just at maturity there can be a significant difference, particularly in a steep yield curve environment. To summarize the reasons for the divergence between z-spread and nominal spread: The slope of the Treasury yield curve.This
is the root cause of the divergence. The steeper the yield curve (either upward sloping or inverted), the greater the divergence. If the yield curve is flat, all spot rates and yields to maturity are the same,
thereby eliminating the divergence. Principal repayment.Assuming
the yield curve is not flat, the faster the principal is repaid, the greater the divergence will be. Therefore, the divergence is greater for
a mortgage-backed security than for a comparable standard coupon bond. Coupon rate.Assuming
the yield curve is not flat, the higher the coupon rate, the greater the divergence. In particular, there is no divergence for zero-coupon bonds. Lets illustrate all of this with an question / example: Mike Weishot wants to purchase the Sysco bond shown below. Its rating
has declined to BBB+, has a coupon of 11.40% and a price of 117.436. Mike is concerned about both the nominal spread and the Z spread and calculates both carefully. The comparable maturity Treasury has a YTM of
5% and the Sysco bond is currently providing bondholders a YTM of 5.822%. Given the Treasury data below and the information provided above, what is the difference between the zero-volatility spread and the nominal spread
Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010
Now Nominal Spread is simply the difference between the Bonds YTM and the YTM of the comparable Treasury. And Z spread is
determined by comparing the purchase price with the discounted cash flows under each spread category (so you have to choose the column of discounted coupons and principals
http://www.finguru.in/blog/[1/31/2014 1:15:41 AM]
Finguru which will sum to 117.436). Last column sums up to the price of the bond. Thus the Nominal Spread is
5.822 5 = 0.822% While the Z-spread is 99Bps. So the difference between Z spread and Nominal spread is 99 82.2 = 16.8bps Now notice the shape of the SPOT rate curve given in the data (3rd column). This is upward sloping curve. Higher rates for longer periods. And we also see that the nominal spread is smaller in this case than the
Z spread.
Corporate Finance, Equity, Portfolio Mgt
Risk Free Rate

The risk free rate is the starting point for all expected return models. For aninvestment to be risk free, it has to meet two conditions. The first is that there can be norisk of default associated with its cash flows. The second is that there can be noreinvestment risk in the investment. Using these criteria, the appropriate risk free rate touse to obtain expected returns should be a default-free (government) zero coupon ratethat
is matched up to when the cash flow or flows that are being discounted occur. Inpractice, however, it is usually appropriate to match up the duration of the risk free assetto the duration of the cash flows being analyzed. In corporate finance and valuation, thiswill
lead us towards long-term government bond rates as risk free rates. In order to calculate the Risk Premium, one needs to use the correct Risk Free Rate.In theory, the risk-free rate is the minimum return an investor should expect for any investment,as any amount of risk would not be tolerated unless the expected rate of return was greater than the risk-free rate.In practice, however, the risk-free rate does not technically exist; even the safest investments carry a very small amount of risk. Most financial analysts use the US Treasury rates as a proxy to the Risk Free Rate.The risk free rate you use should be consistent with the time horizon of the investment.
Typically the yield on the 10-year note is used for stocks. To be more accurate its better to use STRIPS or zero coupon bonds to avoid the effect of reinvestment of the coupons.
Economics
Labor Demand Elasticity

Demand for labor will be less elastic when:a- at lower wage rates than at higher b- in the long run than in the short c- the less labor intenssive the process. Elasticity of labor must also be looked at in terms of the substitutability with capital, the other factor of production. When the wage is low, a lot of labor has been employed. Thus, if the wage rate rises then the labor can be fired to hire more capital. You shouldnt be thinking in terms of the demand curve because that only shows the relationship between price and quantity demanded. Think about an isoquant (set of points at which the same quantity of output is produced while changing the quantities of two or more inputs),
where you have the two factors of production on the two axes. Towards each end of the isoquant, youre employing a lot of one factor and
very little of the other, so its hard to switch away from the factor youre not using much from. Not sure if that makes a lot of
sense, but thats what theyre getting at in this question.
Economics
Economic vs Technological Efficiency

1- Which of the following statements is accurate ?
Finguru a- An economically efficient process must be technologically efficient also b- An economically efficient process is not necessarily technologically efficient c- A production process cannot be technologically efficient unless it is economically efficient The answer to the above question is: A. There are two concepts of efficiency:Technological efficiency occurs when it is not possible to increase output without increasing inputs.Economic efficiency
occurs when the cost of producing a given output is as low as possible.
Technological efficiency is an engineering matter. Given what is
technologically feasible, something can or cannot be done. Economic efficiency depends on the prices of the factors of production. Something
that is technologically efficient may not be economically efficient. But something that is economically efficient is always technologically efficient.A key point to understand is the idea that economic efficiency occurs when the cost of producing a given output is as
low as possible. Theres a hidden assumption here, and that is the assumption thatall else being
equal. A change
that lowers the quality of the good while at the same time lowers the cost of
production does not increase economic efficiency. The concept of
economic efficiency is only relevant when the quality of goods being produced is unchanged.
Alternatives, General
Roll Yield
Rollyieldis the amount of
return generated in a backwardated futures market that is achieved by
rolling a short-term contract into a longer-term contract and profiting from the convergence toward a higher spot price. Now if the inventory of
a commodity is in shortage, the spot price is above the future price (one month later price). In other words, if on 1st September the
Spot Price > Forward Price for the contract expiring on the 30th September (which is called backwardation). As the contract approaches maturity, the forward price approaches the spot price. On 30th September, a new contract which expires on 30th October would be again trading at below the current spot (if the market is still in backwardation). Thus, the old contract which expires on the 30th September can be sold for a higher price, and the new contract can be bought at a lower price. By selling the old at a higher price and buying
the new at a lower price, a return is generated. This is called roll yield. E.g. Spot price Rs.50, Future price Rs.48 (for one month later) and Future price (of a contract 2 months later) is Rs.45. Now if the spot price does not change for the first month and you had bought the first future at 48, as the month passes, this future price of the first month will converge to Rs.50. So you would be able to book your profits of Rs.2 on the contract. But if you wish to maintain exposure of the commodity, you can buy next month contract which if again is trading in backwardation would be priced at Rs. 47 for example. You can sell the future for 50 and then buythe next month contract which was earlier on 45 and assuming has moved to 47. This way you canrollover contract into cheaper rates. Roll Yield is, therefore, positive for the Long Position in Backwardation and Negative in Contango. Note: For the short position the roll yield would be negative in Backwardation and positive in Contango.
Uncategorized
Economics Terms
Crowding Out: Crowding out effect is basically when the government does fiscal deficit, it eats up into the savings of the public, and therefore leaves lesser amount of money for the private sector to use
for investment. Thus, the private investment gets crowded out of the investment due to fiscal deficit of the government.
Governments often borrow money (by issuing bonds) to fund additional spending. The problem occurs when government debt crowds out private companies and individuals from the lending market.
Increased government borrowing tends to increase market interest rates. The problem is that the
Finguru government can always pay the market interest rate, but there comes a point when corporations and individuals can no longer afford to borrow. Money Multiplier: The expansion of a countrys money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement. The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the
money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues as more people deposit money and more banks continue lending it until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect. The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposited. Rent seeking occurs when an individual, organization or firm seeks to
earn income by capturing economic rent through manipulation or exploitation of the economic or political environment, rather than by earning profits through economic transactions and the production of added wealth. While there may be few people in modern industrialized countries who do not gain something, directly or indirectly, through some form or another of rent seeking, rent seeking in the aggregate can impose substantial losses on society. Rent seeking can be performed by either buying a monopoly or by creating a monopoly.
Hence, the firms rent seeking costs are treated as fixed costs, which get added to the total fixed costs and to the average total cost. The ATC curve shifts upward until, at the profit maximisation price, the firm breaks even. This means that a firm which is a rent seeker only makes a normal profit. Monte Carlo Simulation: A problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables. Monte Carlo
simulation is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making. The technique is used by professionals in such widely disparate fields as finance, project management, energy, manufacturing, engineering, research and development, insurance, oil & gas, transportation, and the environment. Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur
for any choice of action.. It shows the extreme possibilitiesthe outcomes of going for broke and for the most conservative decisionalong with all possible consequences for middle-of-the-road decisions.
General, Quantitative Techniques
F-Test
The F-Test is the appropriate test statistic to check the equality of two population variances. It does this by comparing the ratio of two variances. So, if the variances are equal, the ratio of the variances
will be 1. The decision rule is to reject the null hypothesis, of the equality of the two variances, if the calculated test statistic is larger than critical value. It is important to note the following points: The larger variance should always be placed in the numerator The test statistic is F = s1^2 / s2^2 where s1^2 > s2^2 Divide alpha by 2 for a two tail test and then find the right critical value i.e. even if the hypothesis is stated as a 2 tailed, there is only one critical value. If standard deviations are given instead of variances, they must be squared When the degrees of freedom arent given in the table, go with
the value with the larger critical value (this happens to be the smaller degrees of freedom). This is so that you are less likely to
reject in error (type I error) The populations from which the samples were obtained must be normal. The samples must be independent
Finguru The test statistic has two degrees of freedom (n1 1) for the numerator and (n2 1) for the denominator
Corporate Finance, General
Pure Play Beta

The pure play approach or pure play method is a method for estimating the cost of capital for a proposed new project or product line. The basis of the approach is that the company has two main sources of
risk: a) the risk that is inherent in the business (operating risk) and
b) the risk due to leverage of the financial structure. Now the point is, the the first risk which is operational in nature is comparable among companies in the same industry, whereas the financial risk is more
of a management decision. So, therefore, when calculating the beta of a
company in the pure play method or the method of comparables, we remove
the financial risk from the beta of the comparable companies and only take into account the operating beta. The operating beta is then levered
up for the risk of the company we are analyzing. The steps to be used are as follows:
Estimate the beta, based upon comparable firms, and after adjusting for risk.
Step 1: Collect a group of publicly traded comparable firms, preferably in the same line of business, but more generally, affected by the same economic forces that affect the firm being valued. A Simple Test: To see if the group of comparable firms is truly comparable, estimate a correlation between the revenues or operating income of the comparable firms and the firm being valued. If it is high (and positive), of course, your have comparable firms. Step 2: Estimate the average beta for the publicly traded comparable firms. Step 3: Estimate the average market value debt-equity ratio of these
comparable firms, and calculate the unlevered beta for the business. bunlevered = blevered / (1 + (1 tax rate) (Debt/Equity)) Step 4: Estimate a debt-equity ratio for the private firm. The basic
problem, however, is that you have only book values for the private
firms. This can be corrected in one of two ways Assume that the private firm will move to the industry average debt ratio. The beta for the private firm will then also converge on the industry average beta. This might not happen immediately but over the long term. Betaprivate firm = Betaunlevered (1 + (1 tax rate) (Industry Average Debt/Equity)) Estimate the optimal debt ratio for the private firm, based upon its
operating income and cost of capital. Use this optimal debt ratio to calculate the beta. (Be consistent about then using the same debt ratio in your cash flow estimates) Betaprivate firm = Betaunlevered (1 + (1 tax rate) (Optimal Debt/Equity)) Step 5: Estimate a cost of equity for the private firm, based upon this beta.
Hypothesis Testing terms

Explaining in this entry some of the common terms used in Hypothesis Testing: Null Hypothesis: The null hypothesis, H0,
represents a theory that has been put forward, either because it is believed to be true or because it is to be used as a basis for argument,
but has not been proved. For example, in a clinical trial of a new drug, the null hypothesis might be that the new drug
Finguru is no better, on average, than the current drug. We would write H0: there is no difference between the two drugs on average. We either Reject H0 in favour of H1 or Do not reject H0; we never conclude Reject H1, or even Accept H1. If we conclude Do not reject H0,
this does not necessarily mean that the null hypothesis is true, it only suggests that there is not sufficient evidence against H0 in favour of H1. Rejecting the null hypothesis then, suggests that the alternative hypothesis may be true. Alternative Hypothesis: The alternative hypothesis, H1,
is a statement of what a statistical hypothesis test is set up to establish. For example, in a clinical trial of a new drug, the alternative hypothesis might be that the new drug has a different effect, on average, compared to that of the current drug. We would write H1: the two drugs have different effects, on average. The alternative hypothesis might also be that the new drug is
better, on average, than the current drug. In this case we would write H1: the new drug is better than the current drug, on average. The final conclusion once the test has been carried out is always given in terms of the null hypothesis. We either Reject H0 in favour of H1 or Do not reject H0. Note: The equal to (=) sign is always used in the Null Hypothesis. Test Statistic:
A test statistic is a quantity calculated from our sample of data. Its
value is used to decide whether or not the null hypothesis should be rejected in our hypothesis test. The choice of a test statistic will depend on the assumed probability model and the hypotheses under question. Critical Value:
The critical value(s) for a hypothesis test is a threshold to which the
value of the test statistic in a sample is compared to determine whether or not the null hypothesis is rejected. The critical value for
any hypothesis test depends on the significance level at which the test is carried out, and whether the test is one-sided or two-sided. P-Value:
It is equal to the significance level of the test for which we would only just reject the null hypothesis. The p-value is compared with the
actual significance level of our test and, if it is smaller, the result is significant. That is, if the null hypothesis were to be rejected at the 5% signficance level, this would be reported as p < 0.05. Small p-values suggest that the null hypothesis is unlikely to be true. The smaller it is, the more convincing is the rejection of the null hypothesis. It indicates the strength of evidence for say,
rejecting the null hypothesis H0, rather than simply concluding Reject H0 or Do not reject H0.
Alternatives, Equity, General
Exchange Traded Funds

Exchange Traded Funds: Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. They enable investors to gain broad exposure to entire stock markets in different Countries and specific sectors with relative ease, on a real-time basis
and at a lower cost than many other forms of investing. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the
net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in realtime at a price that change throughout the day. By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is
that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that youd pay on any regular order. ETFs offer several advantages to investors: 1. Can easily be bought / sold like any other stock on the exchange through terminals across the country. 2. Can be bought / sold anytime during market hours at a price close to the actual NAV of the Scheme. 3. No separate form filling. Just a phone call to your broker or a click on the net.
Finguru 4. Ability to put limit orders. 5. Minimum investment is one unit. 6. Enjoy flexibility of a stock and diversification of index fund. 7. Expense Ratio is lower. 8. Provides arbitrage between Futures and Cash Market In Kind creation and redemption of ETFs: The authorised participant generally a large financial institution creates ETF shares by depositing a portfolio of stocks into the applicable fund in exchange for an institutional block of ETF shares (usually 50,000). This is known as in kind creation because a basket of stocks is exchanged for ETF shares rather than using cash. The basket of shares that is deposited by the authorised participant represents the weighting of such shares in a particular index (e.g., the NASDAQ-100 Index).
Similarly the redemption of the ETFs can also be done In-kind.
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Equity, General
Growth vs Value Stocks

Growth stocks are associated with
high-quality, successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. The
open market often places a high value on growth stocks; therefore, growth stock investors also may see these stocks as having great worth and may be willing to pay more to own shares. Investors
who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value), rather than dividends. Although dividends are sometimes paid to shareholders of growth stocks, it has historically been more common for growth companies to reinvest retained earnings in capital projects. At times, growth stocks may be seen as expensive and overvalued, which is why some investors prefer value stocks, which are considered undervalued by the market. Value stocks are those that tend to trade at a lower price relative to their
fundamentals (including dividends, earnings, and sales). Value stocks generally have good fundamentals, but they may have fallen out of favor
in the market and are considered bargain priced compared with their competitors. They may have prices that are below the stocks historic levels or may be associated with new companies that arent recognized by investors. Its possible that these companies have been affected by some problem that raises some concerns about their long-term prospects.Value
stocks generally have low current price-to-earnings ratios and low price-to-book ratios. Investors buy these stocks in the hope that they will increase in value when the broader market recognizes their full potential, which would result in rising share prices. Thus, they hope that if they buy these stocks at bargain prices and they eventually increase in value, they have the ability to make more money than if they had invested in higher-priced stocks that increased modestly in value.
Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives
Growth Stocks are usually characterized by:

1. High expected growth of earnings
2. High ROE as compared to its peers in the industry
3. High Price Multiples as the future growth is priced into the prices.
If the actual growth comes out to be lower than expected, the stock could take a beating and vice versa.
March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010
Value Stocks are usually characterized by:

1. Low Price multiples. These stocks have similar fundamentals to those
in the industry, but are currently undervalued. Thus, the price appreciation is expected due to correction in the market.
2. Low PEG ratio i.e. the PE / growth ratio is less than 1. This
means the that companys PE is less than the expected growth of the company.
3. Debt to Equity is about 1. The company is not heavily leveraged, therefore the financial risk is not high of the company.
Economics, General
Price Floor & Price Ceiling

Why should Price Ceiling be set below the current market price and price floor be set above the current market price: Well price ceiling is like a maximum price that can be charged. It is
legally set by the government to help the consumers. So if the Oil prices were say Rs75 per liter the government sets is at Rs50 per liter to help the consumer. If the government was to set the limit as Rs100 as the max price, then how would that help the consumer. In fact this price limit would be of no use, as the seller is willing to
http://www.finguru.in/blog/?paged=2[1/31/2014 1:22:41 AM]
Finguru sell at 75 and the consumer is still having to pay 75. So a limit like 100 will not
be effective. Thats why to make the price ceiling work, the ceiling must be below the existing price, otherwise it will have no effect.
Same is a the case of the price floor which is applied to benefit the producer. So If the price in the market is Rs.100 per KG for wheat, the
government would like to support the farmer and therefore sets the price as Rs120 per Kg. Now the farmer would benefit as he can sell the produce at a higher price. While if the government was to set this price
floor below the existing price, how would that help the farmer ? It wouldnt and the price floor would be ineffective.
Fixed Income, General
Interest Rate Risk vs Yield Curve Risk

Interest Rate Risk (Market Risk):
Interest rate risk is the risk that a change in market interest rates causes a change in the value of a bond. Since the price of a bond fluctuates with market interest rates, the risk that an investor faces is the price of a bond held in a portfolio will decline if market
interest rates rise. The greater the changes in interest rates, the greater the swings in bond price. The magnitude of interest rate risk can be measured by a bonds price sensitivity to changes in interest rates. The degree of sensitivity depends on many factors such as coupon rate, maturity, and embedded options. Interest rate risk arises only because the market interest rates change and the coupon rate of a bond doesnt. If the coupon rate could be reset daily or even hourly, the interest rate risk would be nonexistent as the bond would always pay the same yield as the market. There is NOT one interest rate or yield in the economy. The bond market has a structure of yields. The yield curve is the graphical depiction of the relationship between yield and maturity for bonds of the same credit quality.
Finguru
Yield Curve Risk: The

risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument.The risk is
associated witheither a flattening or steepening of the yield curve, which is a result of changing yields amongcomparable bonds
withdifferent maturities. As market conditions change, the yield at each maturity changes too, causing the yield curve to shift up or down. If the yields at all maturities change by the same amount, the entire yield curve will shift
in a parallel manner. However, when interest rates change, typically yields do not change by an equal amount of basis points for all maturities. This results in a non-parallel shift of the yield curve. A bond portfolio has many bond issues usually with different maturities. When interest rates change, the price of each bond issue in
the portfolio will change and the portfolios value will change. Portfolios have different exposures to how the yield curve shifts (parallel or nonparallel). This risk exposure is called yield curve risk. It refers to the risk that the price change of a bond portfolio varies depending on the shape of the yield curve. When the yield curve shifts, the price of the bond, which was initially priced based on the initial yield curve, will change in price. If the yield curve flattens, then the yield spread between long-
and shortterm interest rates narrows, and the price of the bond will change accordingly. If the bond is a shortterm bond maturing inthree years and the three-year yield decreases,the price of this bond will increase. If the yield curve steepens, this means that the spread between long- and short-term interest rates increases. Therefore, long-term bond prices will decrease relative to short-term bonds. Changes in the yield curve are based on bondrisk premiums and expectations of future interest rates.
Equity, General, Portfolio Mgt
Security Market Line (SML) vs Capital Market Line (CML)
Finguru
Differences between SML and CML: 1. The CML is a line that is used to show the rates of return, which depends on risk-free rates of return and levels of risk for a specific portfolio. SML, which is also called a Characteristic Line, is a graphical representation of the markets risk and return at a given time. One of the differences between CML and SML, is how the risk factors are measured. While standard deviation is the measure of risk for CML, Beta coefficient determines the risk factors of the SML. The CML measures the risk through standard deviation, or through a total risk factor. On the other hand, the SML measures the risk through
beta, which helps to find the securitys risk contribution for the portfolio. 2. While the Capital Market Line graphs define efficient portfolios, the Security Market Line graphs define both efficient and non-efficient
portfolios i.e. the securities and portfolios that plot above the SML are undervalued and the ones below that are Overvalued. The securities and portfolio which plot on the SML are correctly value. 3. While calculating the returns, the expected return of the portfolio for CML is shown along the Yaxis. On the contrary, for SML, the return of the securities is shown along the Y-axis. The standard deviation of the portfolio is shown along the X-axis for CML, whereas, the Beta of security is shown along the X-axis for SML. 4. Where the market portfolio and risk free assets are determined by the CML, all security factors are determined by the SML. 5. Unlike the Capital Market Line, the Security Market Line shows the
expected returns of individual assets. The CML determines the risk or return for efficient portfolios, and the SML demonstrates the
Finguru risk or return for individual stocks. The SML shows the required return on the security / portfolio based on its systematic risk. If the expected return on the security is higher than the required rate, then security is Undervalued and vice versa.
General, Portfolio Mgt
Required Return vs Expected Return

Required return is the amount that you would need in order to get you to put your money into that investment. Its an opportunity cost. If you could put extra money toward your mortgage that had an interest rate
of 7 then 7 percent or more would be the required return that you would
need on an alternative investment in order to get you to invest in the alternative. This is the return that the investor wants to compensate him for the risk that he is taking. This can be calculated using the
various asset pricing models like the CAPM. Thus, for a certain level of of beta for an investment, the investor would expect the rate of return calculated by CAPM. Expected return is the weighted average of all probable outcomes for that investment. Its the most likely return you would expect from an investment based on its risk. But its not guaranteed. This return is based on the expected price of the security and the current price at which the security is quoting. If the security is correctly valued then the required return would equal to the expected return. However, if the security is overvalued then the required return would be more than the expected return. An investor would want to sell this overvalued security. On the other hand,
the security is undervalued if the required return is less than the expected return. In such a case the investor would want to buy this security.
Spread Measures on a Bond

Three measures of spreads in Bond are: Nominal Yield Spread, Zero Volatility Spread, Option Adjusted Spread. Nominal Yield Spread: This is difference between the YIELD of a Corporate Bond vs the YIELD of a similar maturity Treasury Bond. The Yield mentioned here is the YTM (Yield to Maturity) for the bond. This is basically a measure of the distance between the YTM of the Corporate Bond and the Treasury Bond of the same maturity. As it uses a single discount rate to value the cash flows, it ignores the shape of the yield
curve i.e. the Yields at other maturities (other than the maturity of the 2 bonds relevant) are ignored. The problem with this measure is that for example, in a positively sloped Yield Curve environment and comparing two bonds with the same cash flow dates and maturity A higher coupon bond will offer a
lower YTM than a low coupon bond. Thus two fairly and correctly priced corporate bonds from the same borrower and having the same cash flow dates and maturity may well have significantly different Yields to Maturity. It follows that when these Yields are compared to that of a same-maturity benchmark, the resulting spreads may be markedly different i.e the nominal spread. Zero Volatility Spread (Z-Spread): This is the parallel difference between the SPOT RATE curve of the Corporate Bond and the SPOT RATE curve of the Treasury Bond. Here a fixed value (in basis points) is added to all the Treasury Spot rates to measure the approx. parallel distance between the spot rate curves of the 2 bonds. Unlike the Nominal
Yield Spread, this measure takes into account the rate of return for the entire maturity range. The idea is that the present value of the cash flows will equal to the price of the bond. TheZ-spreadis calculated as the spreadthat will make the present value of cash flows from the non-benchmark security when they are discounted at the benchmark Zero rates (plus theZ-spread) equal to the non-benchmark securitys price. This is done by trial and error. This is different than the nominalspreadbecause the nominalspreadjust uses one point on the curve. As theZ-Spreadis not dependent upon
only one point on the Yield Curve and takes account of all of the
relevant term-structure, the distortions of Yield-to-Maturity spreads outlined above are eliminated.
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The Z-spread includes the higher spread due to Credit Risk, Interest Rate Risk, Liquidity Risk and Option Risk. The drawback of the Z-spread is that it does not take into account the change in the cash flows due to Option embedded in the Bond. OAS: This is similar to the Z-spread, but now the spread is calculated after adjusting for the cash flows for the option embedded in
the bond. So the calculation of the Z-spread and the OAS is very similar, just with the difference being that the cash flows in the OAS are adjusted. Also note, that in calculating the OAS the parallel distance between the Spot Rate curves is being calculated. OAS adjusts the Option Risk from the bond and then measures the spread. Therefore, the OAS takes into account only the Credit Risk, Liquidity Risk and the Interest rate risk.
Mortgage Backed Securities (MBS)

Once the bank issues the mortgage (home) loans, it can sell these loans to investors. The secondary mortgage market allows banks to sell mortgages, giving them new funds to offer more mortgages to new borrowers. If banks had to keep these mortgages the full 15 or 30 years, they would soon use up all their funds, and potential home buyers would have a more difficult time to find mortgage lenders. Many of the mortgages on the secondary market are bought by Fannie Mae. Other are packaged into mortgage-backed securities, and sold to investors. This process can be done by creating a SPV to which these loans are transferred and then securities are issued to investors which
are backed by these loans. These securities are called Mortgage backed
securities (MBS). The securitization process (the process of creating the MBS) can be described simply by the following 4 steps: STEP 1
A pool of mortgages are owned by a bank or lender. They are grouped into categories by credit risk including subprime, alt-a (between subprime and prime), and prime. STEP 2 The pool of mortgages are packaged into a mortgage backed security. STEP 3 The mortgage backed security is then sliced and diced
into different classes with varying maturities (called tranches). Each
tranche offers varying degrees of risk to the investor. The first loan to default will be placed into the Junk tranche while the strongest loans receive the highest credit rating of AAA and are placed at the top of the tranche division. As with any asset associated
with risk, the highest risk tranche receives the highest rate of return or yield while the lowest risk (AAA rated) will receive the lowest yield. STEP 4 The tranches are then resold to investors who are willing to take on the varying degrees of risk and maturities. Now is these same securities are structured to have different level of exposure to risk, then the name changes to Collateralized Mortgage Obligations. The repayments on the home loans come to the SPV and then are paid to the investors who had invested in these securities. For example: The investors in the CMO are divided up into three classes. They are called either class A, B or C investors. Each class differs in
the order they receive principal payments, but receivesinterest payments as long asitis not completely paid off.Class
A investors are paid out first with prepayments and repayments until they are paid off. Then class B investors are paid off, followed by class C investors.
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Yield / Credit Spread

Yield Spread:
Yield spread is the difference between the yield of a normal corporate
bond and the yield on a similar maturity treasury bond. The difference
in the spread would measure the credit risk, liquidity risk, interest rate risk and the option risk on the corporate bond. Thus the extra return on the corporate bond can be explained due to the additional risks on the corporate bond as compared to the treasury bond. Further, the risk is that this spread would change as the perception of investors with respect to risk changes. If the investors become more
risk averse (i.e. they demand higher return to take on risk) then this
credit spread would widen and therefore the price of the corporate bonds would fall and vice-versa. In periods of economic crises the credit spreads widen and in periods of prosperity the credit spreads narrow. Therefore, the credit spreads reflect the risk appetite of the investors. Also note, as the rating of the bond changes the credit spread also changes accordingly. For e.g. if the bond rating falls from AAA to A the credit spread would widen to accommodate this change in rating.
Yield Curve
Yield curve:
Yield curve is the curve which plots the relationship between yield and time to maturity i.e. how would the yield on the bonds change as the time to maturity changes. This means will a bond with 5 years to maturity have a higher or lower rate of return as compared to a 1 year bond. So by taking the time to maturity on the x-axis and yield on the y-axis you can draw the yield curve. The shape of the yield curve can be upward sloping, downward sloping, humped or any other shape. There are 3 theories which are proposed to explain the shapes of the yield curve a) Pure
Expectation Hypothesis, b) Liquidity Preference Theory c) Market Segmentation Hypothesis (preferred habitat theory) Pure Expectation Hypothesis:
According to the market expectations hypothesis, the various
maturities are supposed to be the perfect substitutes. The hypothesis also suggests that the shape of the yield curve is dependent on the expectations of the market participants on the future interest rates. The assumptions of the arbitrage opportunities being minimal, the expected rates offer enough information in order to construct a yield curve in a complete manner. This theory argues in favor of the no arbitrage principle and says that the return from investing for a period of 2 years is equal to
Finguru investing the funds for 1 year and then reinvesting for a period of 1 year again. This way the rates in the future would be a function of the spot rates today. So if the rates are
rising, then the pure expectation hypothesis argues for a rising term structure and vice-versa. Shortcomings of expectations theory: Neglects the risks inherent in investing in bonds (because forward rates are not perfect predictors of future rates). 1) Interest rate risk 2) Reinvestment rate risk Liquidity Preference Theory: The
Liquidity Preference Theory, also known as the Liquidity Premium Theory, is an offshoot of the Pure Expectations Theory. The Liquidity Preference Theory asserts that long-term interest rates not only reflect
investors assumptions about future interest rates but also
include a premium for holding long-term bonds (investors prefer short term bonds to long term bonds), called the term premium or the liquidity premium. This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty. Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward. Long term yields are also higher not just because of the liquidity premium, but also because of the risk premium added by the risk of default from holding a security over the long term. Market Segmentation Hypothesis:
The Preferred Habitat Theory or the Market Segmentation theory, states
that in addition to interest rate expectations, investors prefer specific investment horizons and require a meaningful premium to buy bonds with maturities outside their preferred maturity, or habitat. For e.g. if an investor wants to invest money for 2 years, he will only look at the 2 year rate and will require a high premium to invest in any other maturity. Proponents of this theory believe that short-term investors are more prevalent in the fixed-income market, and
therefore longerterm rates tend to be higher than short-term rates, for the most part, but short-term rates can be higher than long-term rates occasionally. This theory is consistent with both the persistence
of the normal yield curve shape and the tendency of the yield curve to
shift up and down while retaining its shape. The basic idea of this theory is that the rate for each maturity is decided as per the supply and demand for funds concerning that specific maturity.
Duration Macaulay, Modified, Effective

Bond Duration is a measure of the sensitivity of the Bonds price to interest rate movements. That is, what will be the percentage change in the price of the bond for a 1% change in the market yield.
Duration also means the length of time before the asset is due to be repaid. Therefore, duration can be defined as the change in the value of a fixed income security that will result from a 1% change in interest rates .
Duration is stated in years. For example, a 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase
in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Unlike maturity, duration takes into account interest payments that occur throughout the course of holding the bond. Basically, duration is a weighted average of
the maturity of all the income streams from a bond or portfolio of bonds. So, for a two-year bond with 4 coupon payments every six months of $50 and a $1000 face value, duration (in years) is 0.5(50/1200) + 1(50/1200)+ 1.5(50/1200)+ 2(50/1200) + 2(1000/1200) = 1.875 years. Generally,
the higher the duration (the longer an investor needs to wait for the bulk of the payments), the more its price will drop as interest rates go
up. Of course, with the added risk comes greater expected returns. If an investor expects interest rates to fall during the course of the time
the bond is held, a bond with a long duration would be appealing because the bonds price would increase more than comparable bonds with shorter durations. Macaulay, Modified and Effective are difference ways of calculating Duration for bond. Macaulay
Duration calculates the percentage change in the price of the bond with
respect to the changes in the market yield. It does not take into account whether the bond has an option embedded in it and also does not consider the point that Duration for a bond is not constant. Duration also changes as market yield changes. As low market yield the duration is high and at high market yield the duration is low. This is reflected in the slope of the tangent line drawn on the bond price vs yield relationship. The slope of this line changes as the bond prices rise at an increasing rate when the market yields fall, but prices fall at a decreasing rate when the market yield rises. Therefore, the slope of the
line changes. Modified
duration corrects the Macaulay duration measure and takes into account the second point i.e. that duration for a bond is not constant. Therefore, modified duration is derived from the Macaulay
Finguru duration, based on the current market yield. The formula is
Modified
duration does not take into account the embedded options in the bond. Therefore, is an incomplete measure for bonds which have options in them. Effective
Duration is the measure which takes into account all the aspects i.e. the embedded options and the current market yield. This is the correct measure of duration if the bond has embedded options in it. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. Effective duration for a bond with no options would be the same as Modified Duration.
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Economics, General
Inflation Targeting vs Taylor Rule

Question: What is the diffrence b/w targeting rule and inflation targeting? Answer: Inflation targeting:Inflation targeting is an economic policy in which a central bank estimates and makes public a
projected, or target, inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools. Because interest rates and the inflation rate tend to be inversely related, the likely moves of the central bank to raise or lower interest rates become more transparent under the policy of inflation targeting. This is the Indian
case the RBI makes a public announcement on what it expects the short and the long term inflation rates to be. These announcements are hopefully credible announcements and people accordingly modify their inflation expectations in the economy. The RBI in turn makes changes in the interest rates as as to influence the inflation rates in
the economy. In the words of Ben Bernanke Inflation targeting rule is,
This approach is characterized by the announcement of official target ranges for the inflation rate at one or more horizons, and by the explicit acknowledgment that low and stable inflation is the
overriding goal of monetary policy. Other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers, and, in many cases, increased accountability of the central bank for attaining those objectives Targeting Rule (Taylor Rule): This refers to the monetary policy rule followed by some central banks like the US Federal Reserve, which stipulates how much the central bank would or should change the nominal
interest rates in response to divergence from the target inflation rates and the actual GDP from potential GDP. This rule was first proposed by the US Economist John B Taylor and is therefore named after
him as the Taylor Rule. The Taylor rule therefore takes into account the deviations from the equilibrium condition of full level of employment and the inflation rate that is good for the economy. This rule helps to decide the Federal Funds Rate and that in turn would impact that level of inflation and the unemployment in the economy. The
FFR is a function of the deviations of inflation and output from their
target values. So the two are different approaches to handling the issue of inflation in an economy. In India the RBI follows the Inflation targeting while in the US the Federal Reserve follows the Taylor (targeting) Rule.
Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010
Equity, General
Prospect Theory
I cant understand prospect theory ? what would be an example (withno.s ) for it ? Prospect Theory: The prospect theory says that the investor looks at gains and losses with different perspective. To explain this if a person were given two equal choices, one expressed in terms of
possible gains and the other in possible losses, people would choose the former even when they achieve the same economic end result.
According to prospect theory, losses have more emotional
impact than an equivalent amount of gains. For example, in a traditional way of thinking, the amount of utility gained from receiving $50 should be equal to a situation in which you gained $100 and then lost $50. In both situations, the end result is a net gain of $50. However, despite the fact that you still end up with a $50 gain in
either case, most people view a single gain of $50 more favorably than
Finguru gaining $100 and then losing $50. For example, the following questions were used in their study: 1. You have $1,000 and you must pick one of the following choices:
Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0.
Choice B: You have a 100% chance of gaining $500. 2. You have $2,000 and you must pick one of the following choices:
Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0.
Choice B: You have a 100% chance of losing $500. If the subjects had answered logically, they would pick either A or B in both situations. (People choosing
B would be more risk adverse than those choosing A). However, the results of this study showed that an overwhelming majority of people chose B for question 1 and
A for question 2. The implication is that people are willing to settle for a reasonable level of gains (even if they have a
reasonable chance of earning more), but are willing to engage in risk-seeking behaviors where they can limit their losses. In other words, losses are weighted more heavily than an equivalent amount of gains.
Fixed Income doubts

1.why does bond with higher coupon rate has lower duration or interest rate risk ? The bond with a higher coupon
has a lower interest rate risk as the cash flows in the bond are coming faster (as compared to a bond with a lower coupon) and therefore
reducing the level of volatility in the price of the bond. Similar to the example I gave in class about the Maturity risk premium that the bond in which the cash flow comes faster, the volatility in the price of the bond due to changes in interest rate is lower. Therefore, higher
the coupon rate, lower the duration or interest rate risk. 2.why does increase in interest ratesdecreasesbond value ?
Bond Price = The relationship between interest rates and bond prices is inverse. Since the price is the present value of the cash flows, there is an inverse relationship between price and discount rate: the higher the discount rate the lower
the value of the bond. 3.why is value of a call option greater at loweryields ? The call option will be exercised only when it is in the money, and it is in the money only at low interest rates. This is because, the person who has issued the bond
would call the bond back only when the interest rates in the markets have reduced below the coupon rate. It would not make sense for the bond to be called back otherwise. Therefore the call option is valuable
only at lower yields. 4.how does increase in credit spread increases theyield?? Increasing credit spread means that the spread between the treasury
bond and the rated bond has increased. This would imply that the investor perceives a greater risk on the same bond and therefore now demands a higher level of return therefore the price falls down and the yield on the bond increases. 5.ididntunderstand the reason behind the mechanism between volatility risk and callable n
putablebonds ..? As the volatility increases the value of options increases. This is
because the probability of the option getting exercised increases. Therefore with increased volatility, the value of the call and the put option increases. The value of the callable bond decreases, as the option is with the bond issuer, and the value of the call is subtracted from the bond value. Whereas, the value of the putable bond increases as the option to put the bond is with the bond holder. Thus, as the volatility of interest rate increases, the value of the callable bond decreases and the value of the putable bond falls.
FRA, General
Annual Report Sections

Question: Sir please tell me the basic difference between the information which is shown under the following heads:
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- footnotes
- supplementary schedules
- MDA
- proxy statements Answer: The basic diff b/w info is as follows 1) Footnotes contain information about accounting policies used , accounting estimates used and any assumption taken to prepare the
financial statements. 2) Supplementary schedules contain additional information beyond what is required by law. These are non-auditable. 3) MDA written by the management, it presents the qualitative
perspective of the business market share, competition, risk in the business, future prospects, etc. 4) Proxy statements Contains issues which require shareholders approval to vet any any decision. Before the Annual General Meeting, company issues these to the shareholders and also files
it with the SEC.
Technical Vs Fundamental Analysis

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors to explain the changes in stock prices. A technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By
looking at the balance sheet, cash flow statement and income statement,
a fundamental analyst tries to determine a companys value. In financial terms, an analyst attempts to measure a companys intrinsic value. Technicians believe that all the information they need about a stock can be found in its charts. Technical Analysis focuses on the changes in demand and supply of stocks and analysts following technicals believe they can predict when the supply or demand will change and therefore impact the prices. On the other hand, fundamental analysis focuses on the reasons for changes
in demand and supply of stocks. For e.g. the company has come up with the great product and therefore would increase market share and increase sales, which would lead to increase in demand for the stock of
the company. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a time-frame of weeks, days or even
minutes, fundamental analysis often looks at data over a number of years. Not only is technical analysis more short term in nature that fundamental analysis, but the goals of a purchase (or sale)
of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
Equity, General
Short Selling
Short selling means selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase,
as the seller will pay less to buy the assets than the seller received
on selling them. Conversely, the short seller will incur a loss if the
price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets.
Finguru The act of buying back the securities that were sold short is called covering the short or covering the
position. A short position can be covered at any time before the securities are due to be returned. The two primary reasons for selling short are opportunism and portfolio protection. Occasionally investors see a stock that they believe has been hyped to a ridiculously high level. They believe that the stock price will fall when reality replaces the hype. A short sale provides the opportunity to profit from the overpriced stock. Short sales are also used to protect an investors portfolio against a market downturn. By shorting
stocks that the investor believes will fall sharply when the market as a whole falls, investors can help insulate the value of
their portfolios against sudden market drops. Short selling just like long buying is essential for proper functioning of the stock market. It provides essential liquidity which in turn leads to proper price discovery. The following 3 rules govern short selling: Uptick rule stocks can only be shorted in an up market i.e. short sale can only trade at a price higher than the previous trade Dividends on the security belong to the owner of the security Short seller must deposit collateral to guarantee the eventual purchase of the security Note: SEC eliminated the uptick rule for short sales as of June07
Mean Variance
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The variance of a real-valued random variable is its second central moment, and it also happens to be its second cumulant. Just as some distributions do not have a mean, some do not have a variance. The mean exists whenever the variance exists, but not vice-versa
1. Kindly suggest me any eg. of distribution which do not have (i) mean, (ii) variance 2. last line of the above paragraph ..but not vice versa. kindly explain Answer 1: What sort of a distribution does not have mean: When U and V are two independent normally distributed random variables with expected value 0 and variance 1, then the ratio U/V
has the standard Cauchy distribution. The Cauchy distribution is an example of a distribution which has no mean, variance or higher moments defined. Its mode and median are well defined and are both equal to x0. Answer 2: The mean exists whenever the variance exists, but not vice-versa: This
means that if the variance exists then it is sure that the mean also exists. Because there is no way of calculating the variance if the mean is not known. So if there is a finite variance then there must be a mean of the data. But it is not necessary that just because a mean exists, there will be a variance to the data. To read more on this check out http://en.wikipedia.org/wiki/Cauchy_distribution Please note: This is not required to be known for the CFA Level 1 Exam.
STRIP Bonds
Question: Can you please explain the following statement: STRIPS are taxed by the IRS on their implicit interest(movement toward par value),which,for fully taxable investors, results in negative cash flows in years prior to maturity. Although
you receive no tangible income(in case of STRIPS),
youtypicallystill have to pay federal income tax on the bonds accretion for the year. Ans: Lets first explain what is a STRIP Bond: A STRIP bond separates the Principal and the coupon part of the bond and then sells them separately. The two types of bonds thus formed, PO (Principal Only) and IO (Interest Only) have now different risk characteristics and attract different types of investors. Strip bonds are created from federal treasury notes and bonds. They are created in large quantities for institutional clients. Once stripped, the securities are not technically
treasury issues but are securities backed by United States treasury issues. Explaining the question statement: The principal part of the STRIP bond is like a zero coupon bond which does not give any explicit cash coupon payments during the tenure of the bond. But the tax authorities tax the implicit interest earned as income and therefore the investor has to pay a tax without having received the cash flow. This results in
a negative cash flow for the investor in the initial years of the STRIP bond. It is also important to know that the PO Strip bond would have higher
interest rate risk as the volatility in its price would be more than that of the original bond. The holder of the PO would want the interest rates in the market to go down, so that the prepayment happens quickly and therefore the money comes faster. On the other hand, the IO Strip bond is to some extent positively related to interest rates (this is contrary to the usual relationship of
bonds which have a negative relationship to interest rates). If the interest rates rise the price of the IO bonds would rise to some extent as the prepayment would slow down and thus causing the IO to receive interest for a longer time thus increasing the yield on such
bonds.
Asset Allocation Importance

Please explain the following statement: approximately 90% of the variation in a single portfolio returns over time can be explained by their target asset allocations and asset allocation explains an
Finguru average of 40% of the variation in fund returns. Approximately 90% of the variation in a
single portfolio returns over time can be explained by their target asset allocations: The returns on a fund over time are driven by the funds policy benchmark that they are following (for e.g. BSE500 is the policy benchmark for numerous mutual funds) and by the active returns generated by the asset managers ability to over or under weight
asset classes and securities relative to the policy and magnitude and timing of those bets. Research study shows that more than 90% of the returns over time on a fund are explained by their policy benchmarks. Asset
allocation explains an average of 40% of the variation in fund returns: This statement talks about the cross sectional differences among fund returns i.e. the reasons why the returns of one fund is different from the other. The main point here is that the difference between the fund returns is 40% attributable to the policy asset allocation. The idea of both the statements is to demonstrate the importance of portfolio management over the idea of security selection. The CFA Curriculum therefore argues that as the return on the fund over time is largely explained by the policy asset allocation, and so is the variation among fund returns, the Portfolio Manager should focus on building an Investment Policy Statement which helps the client understand his objectives of investing money and the portfolio manager helps the investor allocate money on the basis of his long term requirements.
FRA
Ratio Calculation FSA

On the exam, when trying to calculate a ratio that mixes income statement and balance
sheet statement information, when should Iuse the average values of the balance sheet information as opposed to the beginning- or end-of-year values? The way ratios are calculated depends on the availability of data and how particular ratios are going to be used. There is no one size fits all
solution, and such differences are part of the nature of financial analysis. You should be familiar with the assigned curriculum and be prepared to perform calculations and interpretations based on that curriculum. If it is relevant, the exam questions will normally specify how the calculation is to be performed (e.g., use beginning-of-year balance sheet data for your calculations). Source: www.cfainstitute.org
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Quant Doubts
Question 1..Mr.
X plans to send his child to college for 4 years starting 18 years from
now. He has already set aside money for the tuition, and now wants to provide for the room and other expenses. He estimates $20000 per year payable at beginning of each year by the time his child goes to college.
If he starts next year and makes 17 payments into the savings account paying 5% p.a, what annual payments must he make?
Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives
You first need to calculate the present value of the 4 payments that
need to be made 18 years from now. The first payment will be made at the beginning of 19th. So with PMT = 20000, N = 4, 1/Y = 5%, PV = 70919.01 This present value will become the FV for the 17 equal payments that need to be made. Therefore, N = 17, FV = 70919.01, 1/Y = 5%, PMT = 2744.50 So its quite a simple question. Question 2: Earnings
per share for a company for the last 5 years is $4.00, $4.50, $5.00, $6.00 and $7.00. Calculate the
compound annual rate of growth for EPS during these years
To calculate the CAGR you need to use the formula (Ending Value / Beginning Value) ^ (1/n) 1. In this case you will do so by (7/4)
^ (1/4) 1 = 15.02%
By admin | No comments yet March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010
Duration, Yield, Principal Only, Interest Only bonds

1. Higher market yield means lower duration. How? Duration is the slope of the line (relationship between the yield and price of the bond). This is convex to the origin and decreases from
left to right. The rate at which is falls decreases as you move from
left to right. So the duration is lower at higher yields while it is higher when the yield is low. To put the same thing in other words, the
sensitivity of bond prices to change in interest rates is higher when the interest rates are low as compared to when interest rates are high.
This is because the percentage change in the interest rates is much higher when the interest rates are low as compared to when interest rates are high. To state it simply, Increases in market yield rates cause a decrease in the present value factors of each cashflow. Since Duration is a product of the present value of each cashflow and time, higher yield rates also lower Duration. Therefore Duration varies inversely with yield rates. 2. In a strip bond, the owner of principal strip pays a discounted price to get face value at maturity (like a zero coupon bond). But what does the owner of coupon strip pay? Will a selling action taken by any party affect the holding of another? What situation is favourable for each party? Yes, the owner of principal strip pays a discounted price to get face value at maturity (like a zero coupon bond). The owner of the coupon pays the present value of the expected interest payments. If the
interest payments exceed than what he paid for he would gain, and if the interest payments fall short of what he paid for he would loose.
Finguru No Selling of the bond by any party will not impact the other. An investor would want to invest in Interest Only bonds when he expects the interest rates to increase. As this will cause the prepayment to fall and therefore the interest payments will continue for a longer time. Thus the interest only holder will want the interest
rates to go up. While on the other hand the Principal only would want the interest rates to go down so that the prepayment happens faster and his annualized yield ends up being higher, as the money would come faster.
Corporate Finance, Fixed Income, General
CD vs Savings Deposit
How are certificates of deposits different form bank deposits? Why would investors prefer CDs over bank deposits?
A certificate of deposit
(CD) is a fixed-deposit investment option offered by banks and lending institutions. It offers higher interest rates than conventional savings accounts
because it requires investors to deposit funds for a specified term ranging from one month to more than five years. However, like savings accounts, CDs are a secure form of investment, as they are insured by government agencies.
How
does a CD work: A person can buy a certificate of deposit (CD) by depositing the minimum requisite amount. In general, the higher the deposited amount, the better will be the interest rate offered on it. The buyer of a CD receives a written declaration or certificate where the applicable interest rate,
term of deposit and date of maturity are stated. At the time of maturity, buyers are entitled to receive the principle amount and the interest earned. In order to encourage buyers to maintain their long-term investment, banking institutions levy heavy penalties on the early withdrawal of the amount deposited in a CD. The penalty can be in
the form of either the interest earned over six months or an overall
reduction in the interest rate.
CDs
are similar to savings accounts in that they are insured and thus virtually risk-free; they are money in the bank. They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest. In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand.
Call Option embedded in bond

Why value of a call option greater at lower yields ? Call option gives the Owner of the bond the option to call the bond back. The issuer would want to call the bond back when the interest rates in the market go down i.e. the yields decrease. He would do this because he can then refinance his funding at a cheaper cost that prevails at the market. When the yields are higher than the coupon rate being paid on the bond then the bond owner would rather not call the bond back as he is paying a lower rate than in the market. Therefore the
call option is valuable only when the rates / yield is low in the market. You can also see this from the shape of the bond price relationship when there is a call option embedded.
Finguru
Derivatives, General
Derivatives Doubts
1. Is swap a type of forward? A series of forward make one swap. So its like saying lots of forward contract together make one swap agreement. 2. What is a contingent claim? How are forwards contingent claims? How is a future contract least likely to be a
contingent claim?? Contingent Claim
A claim for expenses not yet incurred that is dependent on some
future event that may or may not happen. Claims on Forward contracts and other Derivative instruments are contingent on the movement of the prices of the underlying instrument. For a long on the forward contract
the claim is contingent that the prices of the underlying increase while the payment to the short is contingent on the prices of the underlying decreasing. Financial derivatives (aka derivative assets, contingent claims)
are securities whose value depends on another security or some benchmark, such as a particular interest rate or the value of a financial index at a specified time. In derivatives securities the investor will be paid if the event happens in his favor i.e. for a long position the price of the underlying rises, so the claim is contingent on the movement of prices. 3. what do you mean by backed by a/the clearinghouse If a trade is backed by the clearing house (all trades done on the exchange are backed by the clearing
house) then even if one party (for e.g. buyer) defaults, the other party (for e.g. seller) will get the money for the sale at the price at
which the sale happened. The clearing house ensures that the trade happens and there is no counter-party risk. The clearing house is the buyer to every seller and seller to every buyer. They take the opposing
side of each transaction and ensure that the transaction will continue. They may impose a penalty on the defaulting traders and also maintain a contingency fund to ensure availability of funds to meet the liability of a default by one party.
Finguru 4. Can you please explain the two concepts Diversification and Arbitrage? The two concepts Diversification and Arbitrage are not related to each other. I will try to explain both of these in the easiest way possible:
Diversification: To put it simply, diversification means not to put all
your eggs in the same basket because if say this basket drops all the eggs would break. So if you diversify your baskets i.e. put the eggs in
more than one basket then falling of one basket may not impact
the other basket and therefore save the other eggs from breaking. The same way, the risk reduces when we combine two assets which do not have
perfectly positive correlation. This is because if one asset does not do well, it does not lead to the other also doing badly. So the return on the portfolio may not be impacted too badly. This would be true on the upside as well. So therefore diversification reduces the magnitude of impact on the portfolio due to movement in a single asset. This same
concept can be illustrated through the variance of the portfolio which
is a function of the individual standard deviations of the assets, the
weights in which they are combined, and the correlation between the returns of the assets in the portfolio. Hope the basic concept is clear. The mathematics of it is illustrated by the following equation:
The correlation here can be less than positive 1 and therefore the variance of the portfolio would be less than the simple combination of the two assets. Thus, diversification into securities that are not
perfectly positively correlated would cause risk of the portfolio to reduce. Arbitrage:
Law of one price says that assets which have the same cash flows in the future irrespective of the future events, should have the same price today. For e.g. the price of Reliance on NSE and BSE cannot be different. If it is then you can buy from one exchange and sell on the other to make a riskless profit. That is what arbitrage is a
riskless profit due to mis-pricing of securities in the market. An investor who spots an arbitrage can make money by selling the security that is more expense and buying the one which is cheaper. So while the future may be uncertain, the two securities give the same return in every possible scenario therefore the price of these securities should be the same today. It is not then you will be able to make money out of it due to arbitrage. 5. Is the key difference between A futures Contract and a forward commitment is just that, that the former
is more standardized? since we know forwards is mostly a tool of the OTC. The key difference between the Forward and Future contract is that forward trade OTC while Futures trade on the Exchange. As the futures trade on the exchange, they are more standardized, there is no counterparty risk, there is a mechanism of mark to market which is followed, initial margin (performance guarantee) has to be put forward etc. So the key difference is where the
forwards and futures trade and because of that the other differences arise.
Fixed Income doubts

Q1. What is the difference between mortgage backed/asset backed securities and bank loans? Arent
bank loans also mortgage/asset backed? To create MBS or ABS, the bank puts the Mortgage (Home) Loans or Other loans into a SPV through which it issues securities which are backed by the security of the home /
other loans. The securities thus issued are called Mortgage Backed Securities or Asset Backed Securities. The main difference between MBS
& ABS is the underlying asset. In case of MBS the underlying security is the Mortgage loan i.e. Home Loan while in the case of ABS, the underlying can be any other load i.e. Car loans, corporate loans, credit card loans, student loans etc !! Q2. An institutional investor who plans to hold an issue to maturity but is periodically marked to
market is concerned with liquidity risk. Can you explain this statement? Yes, this is true. If an investor is say holding an asset which is highly illiquid, then it is possible that
the prices of the security do not change much and become stale due to illiquidity of the security. Marking to market involves bringing in money if there is a loss prior to maturity of the security. For ex. during the credit crisis, the value of houses went down drastically and they stayed there for some time due
Finguru to the fact that there was no buyer

for these assets and the sellers were not willing to sell them at a
very cheap price. So the prices quoting in the market were on very low volume. Now, the banks which were holding these assets had to mark to market the loss on these investments, and therefore take a hit on the P&L. In actuality this price should have been higher but wasnt due to low liquidity. So
even if the investor wants to hold the security upto maturity and if the security requires marking to market during the life of the asset, illiquidity will be a risk for the investor. Q3. In the regular auction cycle mutiple price method, is the highest or lowest yield used? Regular auction cycle can be done in both single and multiple price. In case of multiple price method, winning bidders are allocated securities at the yield they bid. Out of all the bids put in, the Government chooses to allocate the securities to those who bid at the lowest yield (i.e. the highest price). In case of multiple price method, all winning bidders are awarded securities at the highest yield accepted by the government. The government has a target in terms of raising money, and then they see the max yield at which their demand will get satisfied and then award the same (max) yield (lowest price) to all winning bidders. Q4. What is the concept of pre-refunded bonds? Pre-refunding a bond means: A type of bond issued to fund another callable bond, where the issuer actually decides to exercise its right to buy its bonds back before the scheduled maturity date. The proceeds from the issue of the lower yieldand/or longer maturingpre-refunding bond will usually be invested in Treasury bills (T-bills) until the scheduled call dateof the original bond issue occurs. For example, suppose that in June 2006, XYZ Corpdecided to call its 9% callable bond (that is originally set tomature in 2009)for $1,100 on its first call date of January 2007. In July, XYZ Corp wouldhave issued a new bond yielding7% and tookall the proceeds from that bond andinvested them into Tbills ensuring thatenough moneywould beavailable to retire the issue come January. Q5. How is the credit spread higher when the credit rating is lower? Credit spread is the additional yield on the bond the investor gets for buying a lower credit rating bond as compared to the risk free security. As the credit rating drops the spread would need to be higher to get the investor to invest in the security with higher credit risk. (Lower credit rating means higher credit risk. A security with a credit rating of AAA will have a lower credit spread than a security with a credit rating of A).
Ethics, General
Importance of Ethics on the CFA Program

We often talk in class about the importance of Ethics on the CFA Program and what implications could there be for an unethical behaviour.
The following link on the CFA Website gives a good detail of the
ethical standards which are important from the perspective of candidate: http://www.cfainstitute.org/ethics/conduct/Pages/candidate_sanctions.aspx
Equity, General
Equity Beta / Cost of Capital

Q1. I came across a question where ROE was less than the K.
In that case equity share holders want to pull out money,eitherthey will demand 100%DPratio,
sohow can a company survive.or what is the solution in that case. Yes you are absolutely right. If the sustainable ROE of the company is below the K then it does not make sense to stay invested in that company and the shareholders would rather want their money to be returned to them. The management may however not do this as they would otherwise loose their jobs. So in such a case till the company survives,
the management would try and choose projects which have a return greater than the cost of capital. If this does not happen for long the company will go bust!!
Finguru Q2. If the beta of the company is vethe K will be less than RFR.is it possible. 2. Yes a negative beta (using the CAPM model) would imply that a company has a cost of capital less than the risk free rate and a risk which is less than the risk free security. Now honestly that doesnt
make sense. So it is highly unlikely to have negative beta for anything
but gold stocks. In CAPM, beta represents the systemic risk of a stock
by regressing the stocks excess returns against the market
portfolios excess returns. The slope of the regression equation is the beta. It IS possible to have a negative regression slope, but it
would be RARE. If you have found a negative beta then you should cross
check your calculations and see if everything is correct. The other way of looking at a negative beta is to say that the expected rate of return of the stock would be less than the risk free rate of investment. So most investors would not want to stay invested in such a security and therefore the price would fall and therefore the
expected return would go up.
Equity, General
Behavioural Finance
How does Behavioural Finance create mispricing of securities and refute the EMH. Behavioural finance basically says that the investor may not act rational all the time. He is not guided only by his rationality to make decisions. He also is guided by certain behaviours which can cause the
mispricing in the market not to correct. If he was rational then he would not be overconfident about his estimates, nor would he hold a loss
making position too long. He would treat good and bad news in the same
light and make rational decisions. But as rationality is not true all the time some stocks which should be bought because they are undervalues are not bought and some stocks which should be sold because they are overvalued are not sold. And for EMH to be true the investor needs to be rational and buy undervalued and sell overvalued securities.
Quant Doubts
Q1.
Plz explain the following conceptual part: one of the property of normal distribution says a linear combination of randomly distributed random variable is also normally distributed This means that if X and Y are two random variables, for example X is Daily returns of Reliance and Y is the Daily returns of Google, then if I combine X and Y to make a portfolio,
the portfolio would also have daily returns that are normally distributed. So the linear combination of X and Y is also normally
distributed. Q2. what is the diff between standard normal distribution and normal distribution and what is the use or application of standard normal distribution Standard Normal distribution is a special case of the Normal Distribution. Standard Normal Distribution is denoted as N ~ (0, 1) i.e. normally distributed with mean 0 and variance of 1. While, a normal distribution is the general definition i.e. N~(,2). The use of Standard Normal distribution is that it standardizes the normal distribution and helps us compare and measure the area under the curve for all normal distributions. Q3. Please explain: Geometric mean is used
in measuring compound growth rate??? does AM amd HM doesnt inculde compound growth rate??? if they dont then what is the usefulness of them???? Average compound growth rate is a measure of how much something grew on average, per year, over a multiple-year period, after considering the effects of compounding. CAGR is not the arithmetic mean but the geometric mean of the growth. By using the AM to
calculate the average, we would overestimate the growth. So to calculate the compounded growth we need to calculate GM. So CAGR is a percentage that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns. The reason why we cant use arithmetic mean here
is because growth is not additive, it is multiplicative.
Finguru Let me quote an example: The profit of Company A, has grown over the last three years by 10 million, 12 million, and 14 million dollars.
It is appropriate to say that it has grown by an average of 12 million
dollars yearly, for which we use the arithmetic mean. The profit of Company B, has grown the over
last three years by 2.5%, 3%, and 3.5%. Here we cannot use the arithmetic mean and say that the average growth was 3%. Why not? Suppose that Company B, started with
a 100-million-dollar profit. Three years later it will have
become: $100,000,000 * 1.025 * 1.03 * 1.035 = $109,270,125 This is less than a yearly increase of 3% would yield, since: $100,000,000 * 1.03 * 1.03 * 1.03 = $109,272,700 Here we see that we should use the geometric mean of the growth factors 1.025, 1.03, and 1.035 to
find the average percentage. That is always less than the arithmetic mean would yield. Q4. A client has $202971.39 in an account that earns 8% per year, compounded monthly. The clients 35th
birthday was yesterday and she will retire when the account value is $1Mn. At what age can she retire if she puts no more money in the account? At what age can she retire if she puts $250/month into
the account every month beginning one month from today? Its a simple question. Out of 10 years, 7 have passed. Now you have to value the bonds cash flows using the info for the next 3 yrs. This is an interesting question.
Part 1) PV = -$202971.39, 1/Y = 8% / 12 = 0.67%, FV = $1000000, PMT = 0
and now calculate for N. N is in the format of months. Divide by 12 and add to 35 years.
Part 2) PV = -$202971.39, 1/Y = 8% / 12 = 0.67%, FV = $1000000, PMT = -$250, calculate for N. Remember, N is in the format of months. Divide by 12 and add to 35 years to get the answer. Q5. The bionomial distribution. It is hard to explain the entire concept in written here. Will try to give it shot nonetheless. Just think how would you calculate the probability of getting 8 heads when you toss a coin 10 times. In this case you would use a binomial distribution. Binomial means 2 possibilities, thats why the prefix Bi. So when you toss a coin, there are 2 possibilities, a head and a tail or like pass or fail. So there is nothing in between. Thus, using a binomial distribution, you try and calculate the probability of getting x number of successes in n trials and as each trial is independent of the other, the probability of success in each respective trial is constant. Hope this explains it. Q6. Could you please elaborate the usage of MAD-mean absolute deviation and its usage with an example. Mean absolute deviations measure the ABSOLUTE deviations in the data from the mean. Like any other measure of
deviation, this tells us how scattered the data is i.e. how far away from the mean are observations in the data set collected. So the deviations on either side of the mean are added up (ignoring the signs) and divided by number of observations to see the average absolute deviations. So its usage is same as that of any other measure of dispersion. For e.g. if we take the average heights of males in India and Australia. MAD tells us where would you find greater average variation in the heights of people, India or Australia. Q7. Please explain me the concept of continous uniform distribution. The continuous uniform distribution is a family of probability distributions such that for each member of the family, all intervals of the same length on the distributions support are equally probable. Q8. Is the +ve or -ve skwed distribution is also a normal distb or not?? and if the prob of dist of
population +ve or -ve skewed can its sample can be plotted to construct
confindence interval???? if yes it means it mean sample of skwed popultn distb would reach normal as n kept increasing let me know
is it correct and if ans is no than also let me knw y??? Lets take one question at a time. No, A normal distribution has zero as skewness i.e. it is neither positively nor negatively skewed. It is symmetric in shape. Confidence intervals can theoretically be drawn for ve or -ve skewed distributions, but this is not in your course. You will have to bother about only the confidence intervals of normal distributions.
Finguru Dont mix up the two concepts i.e. Central Limit theorem and Confidence intervals. CLT says that for any distribution, as you draw samples of size n and plot the sample means, the distribution of the sample means approaches a normal distribution with a mean same as that of the population and a variance of population
variance divided by n. Confidence interval on the other hand tries to draw the inference of where the population parameter would lie. Q9.
Page 285 Q17 schwezer at the back ans the formula should have been used is point estimate _ Reliability factor*standard error but in calculating S.D he has not taken the whole
formula of SE instead he has used the formula used to in previous chapter where we calculated value of Z is this fine???? This is an interesting question. Always remember that the average of the confidence interval is the sample mean. This is because you are adding the subtracting the same amount from the sample mean to get to the confidence interval. So once you have the mean, in this case it is 31.5, and you know the value of z for
95% confidence interval, all that you need to do is to find the standard error. 31.5 /- 1.96 SE = 44 and 19. So just calculate for this equation and would you get the SE. Q10. Pl let me knw am I right or wrong in the statement below. a) We use normal distb curve cz
it is easy to estimate the confidence interval for stocks with the help of normal disb curve and we r able to predict the 90% or 99% probability of stock in that range??? Yes and also because it has been observed the financial asset returns tend to follow a normal distribution. So it
is an effective tool to study the return distributions. b) What is the use of standard error. The standard error of a statistic is the standard deviation of the sampling distribution of that statistic. Standard errors are important because they reflect how much sampling fluctuation a statistic will show. The inferential statistics involved in the construction of confidence intervals and significance testing are
based on standard errors. The standard error of a statistic depends on
the sample size. c) Is t-dist a leptokurtic distribution? No, the student t-distribution is not a leptokurtic distribution. Because it has a smaller head and fatter
tails. So its head is like that of a platykurtic shorter than a Normal distribution, but has tails that are fatter than the normal distribution therefore tails like leptokurtic. Therefore, t-distribution
is neither leptokurtic, nor platykurtic. t-distribution approaches a normal distribution as the sample size gets larger. Q11. Hypothesis test for equality of poplationn mean of 2 samples with equal and unequal assumed
variance the T-statstic is used but as told by u when populaton variance is knwn we use z test now here y r v using t test then??? In testing for equality of 2 population means, we always use a t-stat. The choice between a z and t comes only in case of a single mean test.
Q12. plz explain me what is meant by equal and unequal variance and whats its application of these wordz in this test??? You draw two samples from the same population. The variances of the two populations can be same and different. So if they are same i.e. equal then use the formula for the t
test which has equal variance; otherwise they will be unequal so the formula would change accordingly. The implication is that the t-stat calculation changes slightly in case of unequal variance. The case of equal variance is a
Finguru special case and the formula becomes simplified. Q13. is it true when v increase our sample size its is difficult to reject null hypothesis??? The rejection of the null would depend on what the null is and not on the sample size. It would also depend on the degree of confidence with which you want to reject the null. If we keep everything else constant and just increase the sample size then the
standard error will get smaller and therefore the z or t stat will get larger. At the same level of confidence it would actually become easier to reject the null. Q14. Assume that Interest rates have fallen
over the past seven years since a Rs1,000 par, 10-year bond was issued with a coupon of 7 percent annual payments. Calculate the present value of this bond if the required rate of return is currently 4.5%? This questions says that the bond has a life of 10 years but out of that 7 years have passed. And during the 7 years the interest rates have decreased. Given that 3 years are left to
maturity and 7% is the annual coupon payment and the required rate of return is only 4.5% what is the current value of this bond. Basically you can put
N=3
1/Y = 4.5
PMT = 70
FV = 1000
and compute PV = -1068.724 Q14. A security with a normal distribution of returns has an annual return of 10 percent with a standard deviation of annual returns of 5 percent. What is the probability of a return that
exceeds 20 percent in any given year? Question is very simple. Its simply asking
you the probability of one tail i.e. greater than 20%. As 95% of data is within /- 2 st.dev, only 5% data is left. As the question asks for only one part of the remaining 5%, therefore the answer is 2.5%. The option should be B, as explained in the answer as well. Q15. A cricketer played in 25 matches and averaged 35 runs per game. If runs scored are normally distributed, what
would be the range of points corresponding with a confidence interval of 90 percent? A) 15 to 55 B) 14 to 88 C) 10 to 75 Only
n = 25 and X = 35 is given and the standard deviation is not given so how do we calculate the confidence interval. Well technically we cant. But as this is a multiple choice question its easy to work backwards just look at the choices and calculate the average of the two extremes. The average of the 2 should be the mean which in this case is 35. So that will be the answer.
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Economics, General
Stagflation
Question: Can imposition of quota on some sector lead to stagflation in that particular sector? Stagflation is
when the economy experiences slow GDP growth (stagnation) with high inflation. Therefore inflation rate and unemployment rate both are high
at the same time. This is a difficult economic condition for a country, as both inflation and economic stagnation occur simultaneously
and no macroeconomic policy can address both of these problems at the same time. Reason for Stagflation: There are two principal explanations for why stagflation occurs. 1) First, stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable. This type of stagflation presents a policy dilemma because actions that are
meant to assist with fighting inflation might worsen economic stagnation and vice versa. 2) Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets, Either of these factors can cause stagflation. Excessive growth of the money supply taken to such an
extreme that it must be reversed abruptly can clearly be a cause. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary
policy to counteract the resulting recession, causing a runaway wage-price spiral. Now coming to your question on Quota and Stagflation. Yes, if the OPEC countries put excessive control on the quantity produced, it is very much possible that the countries importing oil might face the issue of stagflation.
Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010
Economics, General
June 2010
Floor Price
Why does the government fix a minimum price (price floor) above the
equilibrium price, as the producers already earns a profit at equilibrium price? It is not necessary that the producer always makes a profit, and the minimum wage rate is put into place to support such producers. For e.g minimum wage rate or agricultural commodities producer. If the
government doesnt fix these then there could be exploitation with the low skilled labour. Similarly, in case of agricultural goods farmers can be ill treated by consumers if the government doesnt
have a min price. So the floor price is set to promote production and provide a better bargaining power to the producer. Therefore, support prices are mostly set in cases where the equilibrium price is not be
profitable for the producer and could lead to excess power with the consumer. So by putting a floor price some power is shifted from the consumer to producer.
Finguru
Corporate Finance, General By admin | No comments yet
Corporate Finance Good Questions (Doubts)

Q.1. An investment has an outlay of 100 and the after tax cash flows of 40 annually for four years. A project enhancement increases the
outlay by 15 and the annual after tax cash flows by 5. As a result, the
vertical intercept of the NPV profile of the enhanced project shifts a. up and the horizontal intercept shifts left. b. up and the horizontal intercept shifts right c. down and the horizontal intercept shifts left This is a very good question and can come on the exam. The NPV profile basically shows the NPV of the project at different levels of discount rate. If the discount rate of the project is zero, and if we
simply sum the cash flows we would get the vertical intercept of the NPV
profile. In the question above the vertical intercept would increase from 60 to 65. The horizontal intercept measures the IRR as this is the rate at which NPV is zero. This intercept would move to the left in the question above. This can be seen by putting in the cash flow in the question into the calculator. IRR declines from 21.86% to 20.68%. Thus the answer to the above question should be A. Q.2> Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both the projects the required rate of return is 10%. Cash Flows Year
0 1
2 3 4
NPV IRR Project 1 -100 36 36 36 36 14.12 16.37% Project 2 -100
0
0 0 175 19.53 15.02% What discount rate would result in the same NPV for both projects? a. A rate between 0-10 % b. A rate between 10-15.02% c. A rate between 15.02-16.37% This question has been asked to me before. I said that time you would
need to plot the 2 curves. But on giving it a greater thought, its actually very simple. In the same problem, youre given the cash flows of the two projects. Take the difference of every two cash flows and input the difference as if its a new project. Calculate its IRR and that is
your crossover rate. This is how you solve the problem: -100 (-100) = 0 <- Year 0 (difference)
36 0 = 36 <- Year 1 (difference)
36 175 = -139 <- Year 4 (difference) CF0 = 0
CF1 = 36
CF2 = 36
CF3 = 36
CF4 = -139
Solve for IRR. It will return 13.16%, which is the ratio provided by the key answer. The logic to the above lies in the following 2 points: 1) The IRR is the discount rate that results in an NPV of zero
2) NPVs are additive
Finguru So, by (1), the IRR of the difference project (i.e. the
synthetic project you created by taking the differences in cash flows) is the discount rate that forces the NPV of that project to zero. By (2) the NPV of the difference is equal to the difference in the NPVs. In other words, at that rate, NPV1`-NPV2 = ), so
NPV1 = NPV2. Q.3> Wilson Flannery is concerned that this project has multiple IRRs. Year
0
1
2 3 Cash Flows -50 100 0 -50 How many discount rates produce a zero NPV for this project? 1. One, a discount rate of 0 percent 2. Two, discount rates of 0 percent and 32 percent. 3. Two, discount rates of 0 percent and 62 percent When a sequence of cash flows has two or more sign changes, there may
be more than one solution for IRR. In cases where there is more than one solution, the BA II PLUS and the BA II PLUS PROFESSIONAL will display the solution that is closest to zero. If this question comes on the exam you would have to see the NPV on discount rate = 0, 32 and 62. One IRR is 0% and the second one is 62%.
Ethics, General
Discretionary Accounts Ethics Level 1

Discretionary accounts are the ones in which the client has given authority to the portfolio manager to exercise his discretion and trade on the clients account. the client would have discussed with the PM his requirements, risk / return profile etc. Portfolio manager would keep those in mind while transacting in his clients discretion portfolio. Non-discretion accounts are the ones in which PM acts as the broker / trader for the client. Client tells him what to do and he does so. PM may recommend the client and suggest him strategies, but cannot trade without the consent of the client.
Economics, General
Phillips curve
In economics, the Phillips curve is an inverse relation between the
rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of
increase in nominal wages in the economy. Whenever unemployment is low, inflation tends to be high. Whenever unemployment is high, inflation tends to be low. This inverse relationship between inflation and unemployment is called the Phillips
curve.
The Phillips curve is a relative relationship. Unemployment is considered low or high relative to the socalled natural rate of unemployment. Inflation is considered low or high relative to the expected rate of inflation.
Remember that at Natural rate of unemployment there was no cyclical unemployment and only structural and frictional unemployment exists. Now, for the unemployment rate to be below the natural rate of unemployment, it would mean that there is a shortage of quality labor with the adequate skills. Due to the shortage, the money wage rate would
get pushed up. Producers would pass on the increase in the costs due to
increase in wage rate to the customers as increase in prices. Thus inflation.
The relation would be true vice versa as well in the short run. In the long run however the economy operates as the natural rate of unemployment and therefore any increase in money wages / money supply would directly cause prices to rise without impacting the unemployment rate.
Finguru
Hope this explains it !!
F(X) Cummulative Distribution

QUES: A continuous uniform distribution is given with a= 4 , b = 10. find F( 20). ANS: 1 The explanation given is F(X) = 1 whenever X > b F(x) denotes the cumulative distribution function for a random variable. Therefore if X> b, where b is the upper limit then F(X) will be equal to 1 as all the possible probabilities are being summed up.
Ethics, General
Ethics Level 1 Doubts

Question 1: Example 7 under 4-A (Source: Schweser CFA Level 1 Book 1)
Doubt: How is he considered an employee when not paid? Answer: Whether paid or unpaid the work done here belongs to the firm. And you as a member are not allowed to take the work along with you without the written permission of the Firm. Question 2: Example 3 under 6-C (Source: Schweser CFA Level 1 Book 1) Doubt:
Unable to decipher the question. Answer: The point in the question is that the fund manager is promoting a proprietary product offering.
Now there is a potential conflict of interest here, and this must be disclosed to the potential client. The conflict is that the referal fee that the portfolio manager will earn by offering this
product. As mentioned in the second para if the product was any other product general of the firm, then the disclosure may not be required. Question 3: CFA Institute Book 1 Page 111.
Finguru
Sir, is this material non public information? if yes how? Sir, i am confused between option b and c. Mr. Branson, who is the fund manager of the Private Endowment fund, must not disclose information about the proposed expenses of the fund as this info is pvt to the fund trustees. He can give this pvt info to any one only after taking permission from his client, or if it is legally required. Question 4: Schweser CFA Level 1 Book Sir, I feel he violates both the
standards, because his solvency is because of his poor investment decisions (3d) and he should not report to the regulatory authorities, also a violation on part of 3-d.
Personal Bankruptcy due to poor investments made are not a reflection of
bad professional standards. Whether the investments were good or bad can be found out only retrospectively. While making the investment we make assumptions about the future which may very well turn out to be incorrect. Also, he is not required to report this to the CFA Institute. Question 5: Source Schweser CFA Level 1 Book 1
Finguru
Doubt: Sir, he has informed his employer about all the gifts, then how come he is in violation? Plus the clock is a modest gift, the high society dinner is an inconclusive about objectivity hampered. The clock for sure can be accepted without disclosure. But the high society dinner tickets could very well be something that he must not accept. If he believes that this will benefit his employer, the employer
must pay for it, not the client. By accepting the tickets to this high society dinner his objectivity could be in question. Question 6: Source Schweser CFA Level 1 Book 1 Doubt: Sir, how can he say that the
information given in the question

is a fact and not an opinion. There are no facts according to me. Sir, am a little confused between what exactly are facts and opinions and how
do you distinguish between them? The statement clearly distinguishes between fact and opinion. The statement is Based on the fact .. and then once the fact has been stated he says We expect which is his opinion. So he is therefore not in violation. Question 7: Source: Schweser CFA Book 1 Level 1 Doubt: Sir, even planning is a CFA violation? Well you cannot cheat
Finguru
on the CFA Exam. That is a violation of

the code of ethics. If you plan to do so and make arrangements to do so, it has serious questions on your professional ethics and integrity. You may not do so in the end, but the fact that your intentions were wrong it is possible you can be reported to the CFA Institute and get a warning from them. If the intent is proved, if could be a
violation of the code too.
Interest rate risk Fixed Income

Interest rate risk of zero coupon bonds ?
Questions: CFA Book, P293, Q24: An amortizing security has more interest rate risk than a ZCB or not ?
Answer is NO, zero coupon bonds have the highest interest rate risks. Schweser, P42, Q11:
Which of the following 5-yr bonds has the highest interest rate risk ?
A. A floating rate bond
B. A Zero Coupon Bond
C. A 5% fixed coupon bond
Answer is B Zero Coupon Bond But why is that so. As the interest rates rise, the amortizing bond, fixed coupon bond and the ZCB, all will fall in price. Why is that ZCB will fall more ? Is it because we are talking about %change. And as ZCB are the cheapest, so the changes in % is more than others ? Explanation: The concept of Interest rate risk is the same as that of
Duration. The duration of a zero coupon bond is the highest, nearly equal to its maturity. Further, if you remember the example of interest rate sensitivity that I gave in class: 2 zero coupon bonds of face value
1000 and with maturity 3 years and 7 years. If the interest rate changes, which bonds price today will change more in percentage terms. Of course the bond with the longer maturity. Also, if you add coupons to
the picture the interest rate sensitivity would reduce. Interest rate risk & embedded options
Schweser, P41, Q5:
Which of the following has the highest interest rate risk ?
1. 5% 10-yr callable bond
2. 5% 10-yr putable bond
3. 5% 10-yr option-free bond
Ans is 3, Option Free Bond But when the interest rate rise, the value of the call option becomes
0, so why is there any difference b/w 1 & 3 options ? Also if we take the same logic, then callable bonds are cheapest, so % change
should be largest in them ?
Finguru
Look at the diagram of the bond price relation of a normal bond, callable bond and putable bond. The movement of price is far much more in case of a normal bond as compared to when you have options embedded in the bond. With an option in the bond, the price of the bond becomes a
little less volatile as there is either a cap price (in the form of a call option) or there is a floor price (in the form of a put option.) So
the interest rate sensitivity actually reduces with embedded options in
the bond.
Equity, General, Quantitative Techniques
Investor and Data Biases

Please explain: -Equity-Investor Biases (Overconfidence, Confirmation and Escalation Bias) -Quant-The various biases (Data mining, sample selection, survivorship, look ahead and time period bias) Equity Overconfidence Bias The investor is overconfident about his ideas and projections. Therefore, the investor does excess trading. Overconfident investors/traders tend to believe they are better than
others at choosing the best stocks and best times to enter/exit a position. Excess trading actually leads to higher commissions and lower profits. Escalation Bias This is a resultant of overconfidence, as you
dont pull out of a loosing position and instead commit more money and time to it. So instead of accepting ones mistake and moving ahead, the investor invests more money into it and calls it averaging. Confirmation Bias The investor seeks out information / opinions that match with his. When the others say the same thing as him,
he feels he is making the right decision, just because the others are confirming it as well. Putting in other words, the confirmation bias suggests that an investor would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it. As a result, this bias can often result in faulty decision making because one-sided information tends to skew an investors frame of reference, leaving them with an incomplete picture of the situation.
Finguru Quant: Data Mining Bias: Data mining is the practice of searching through historical data in an effort to find significant patterns, with which researchers can build a model and make conclusions on how this
population will behave in the future. The results obtained from the data
mining however could very well be coincidental and have no predictive power. Sample Selection: Some data has been systematically been excluded from the sample and thus, the choice of the sample is not random and therefore the results obtained are not correct either. Look Ahead Bias: If you remember the P/E example that I gave in class, that the price and earnings of 31st March 2009 is used to calculate the P/E for that year, but on that date the earnings value was not available. So therefore the price does not reflect the full info. Time period bias: The relationships in variables change over time due
to structural changes in the economy. Thus, too long time period data or too short ones (due to lack of data)could give you results which are not correct.
Corporate Finance, General
Cumulative Voting
Question: Is cumulative voting good for shareholders or not? Lets first understand what cumulative voting is? Cumulative voting is
a type of voting process that helps strengthen the ability of minority shareholders to elect a director. This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board. In contrast, in regular or statutory voting, shareholders may not give more than one vote per share to any single nominee. For example, if the election is for four directors and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for any one candidate (giving you 2,000 votes total 500 votes per each of the four candidates). With cumulative voting, you could choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or otherwise divide your votes
whichever way you wanted. So in general it strengthens the corporate governance of the company as the minority shareholders will also have a say in the company.
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Market Portfolio Question

Question: According to CAPM, the market portfolio: A.includes all risky assets in equal amounts
B.is exposed to unsystematic and systematic risk
C.is perfectly positively correlated with other portfolio on the CML The answer to this question would be option C. This is because, the market portfolio does not include all the risky assets in equal amounts but in the proportion of their market cap. So option A is incorrect. The
market portfolio is completely diversified therefore is only exposed to
systematic risk and not the unsystematic risk. Therefore option B is also incorrect. Option C is correct because, Market portfolio plots on the CML and as CML is a straight line, it has positive correlation with all other portfolios on the CML.
Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z Spread
Economics, General
Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield
Natural Monopoly
Question: Natural monopoly. I did not understand why is the MC curve horizontal, when would the firm produce quantity Qac and Qmc and weather subsidy is provided at quantity Qac or Qmc. Answer: The concept of Natural Monopoly is that a very large player in the market has a significant cost advantage which cannot be matched by other smaller players due to lack of scale. Therefore, it makes sense
to have one large player who can help to reduce the costs of manufacturing the commodity. This concept is most often seen in capital intensive industries such as Oil Refineries, Electricity Manufacturing etc. To put it in other words, A natural monopoly is defined
in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a natural reason for this industry being a monopoly, namely that the economies of scale require one, rather
than several, firms. Small-scale ownership would be less efficient. To prevent these natural monopolies from exploiting with high prices,
they are regulated by government. Looking at the graph below, leaving the monopolist alone the output produced would be less than the efficient level as the monopolist would wish to maximize profits. He would produce at Qm and charge Pm. Now most Natural monopolies produce commodities which are essential for mass consumption therefore the government intervenes and makes the monopolist charge lower and produce more. If the govt. makes the monopolist charge Qr then the monopolist will make no profit and no loss as he will charge a price equal to his cost at Pr. If due to any reason the government makes the monopolist produce even more the monopolist would produce Qc and charge Pc. Here the monopolist is making a loss and would need to be subsidized.
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To summarize: The properties of a natural monopoly are as follows. Fixed costs are very large relative to their variable costs. Therefore, average costs are very large at small amounts of output and
fall as output increases. Thus, average costs exceed marginal costs over a wide range of output. It is not necessary for the MC curve to be flat its just that it is below the AC curve. Average costs exceed marginal costs over the relevant range of output
(i.e., the range between the first unit of output and the amount consumers would demand at a zero price). Therefore, average costs continue to fall over the relevant range of output. As a result, one firm, a natural monopoly, can provide a given amount of output at a lower average cost than could several competing firms. There are at least four policies the government could follow in regards to a natural monopoly. 1. Allow the monopoly to maximize profits by producing at the monopoly level. This results in a deadweight loss. 2. Require the monopoly to set its price where the average cost curve crosses the demand curve. This transfers some surplus from
the monopoly to consumers, expands output, increases social surplus, and reduces deadweight loss. 3. Require the monopoly to set its price where the marginal cost curve crosses the demand curve. This eliminates deadweight loss but revenues no longer cover costs. As a result, tax money must be used to subsidize the production of the good. 4. Require the monopoly to charge a zero price. This also results in a deadweight loss and causes costs to exceed revenues, necessitating subsides.
Derivatives, General
Open Interest
What is Open Interest? Open Interest is the total number of options and/or futures contracts
that are not closed or delivered on a particular day. Open interest is not the same thing as the volume. Lets illustrate with an example:
On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
-On January 2, C and D create trading volume of5 and there are alsofive more options left open.
-On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1.
-On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.
Economics, General
Finguru
Micro Economics Doubts

Just got 3 questions on Micro Economics. 1) Unit elastic is neither elastic nor Inelastic true or not ?? Yes Unitelastic is neither elastic nor inelastic.Unitary elasticity refers to a situation where a change in the market price of a
good results in no change in the total amount spent for the good within
the market. This happens on the mid point of a downward sloping demand curve. 2) Not clear about the relationship between normal profit, economic profit and Accounting profit Accounting Profit is the profit made as per the accounting rules. This includes on the explicit costs and not the implicit costs. For e.g.
a company uses the skills and premises of the owner, but no rent or
salary is given for those services that is an implicit cost and not an explicit cost as the company does not pay anything for it. Ifwe include all the implicit costs along with the explicit costs and subtract them from the revenue I would get the economic profit. Normal profit is a concept something similar to getting market returns when you invest in an asset. For example if you take some
risk, you get compensated for it. That is called Normal profit. Normal
profit includes in it the opportunity cost of capital as well, whereas accounting profit need not. If you earn more than the risk adjusted return, over and you would earn super-normal profits. In a perfect competition, no one would earn super normal profits in the Long run (i.e. on a consistent basis) as that would be wiped out by the firms that enter the market. All firms would earn only
normal profits i.e. a return equivalent to the risk. Or simply said, they would earn their opportunity cost of capital. Therefore, normal profit does not mean zero accounting profits. It means ROE = Cost of capital. 3) In schweser it is given that Producer surplus is defined as the sum of the difference between the price of each unit of good and its opportunity cost. I am not able to understand this Opportunity cost of a good is the amount of resources you would need to give up from another good to produce the good & services you want. i.e. to produce 10 cars you will have to use some factors of
production which cannot be used somewhere else. Now that is the opportunity cost of producing 10 cars. If the producer is able to charge
the customer a price higher than his opportunity cost of capital he would make something called a producer surplus. This concept is similar to that concept of consumer surplus example I
gave in class where you draw a benefit of more than Rs.10 when you drink the first bottle of water as you were very thirsty. i.e. had the price been 15 you would have still bought it. But because you had to pay only 10 there was a 5 Rs consumer surplus for you.
Standard Error
The standard error of a statistic is the standard deviation of the sampling distribution of that statistic. The standard error of the mean is designated as: M. It is the standard deviation of the sampling distribution of the mean. The formula for the standard error of the mean is:
where is the standard deviation of the original distribution and N is the sample size. Standard errors are important because they reflect how much sampling fluctuation a statistic will show.
The inferential statistics involved in the construction of confidence intervals and significance testing are based on standard errors. The standard error of a statistic depends on the sample size. The larger the
sample size the smaller the standard error. Read further on the topic at http://en.wikipedia.org/wiki/Standard_error_(statistics)
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General, Quantitative Techniques By admin | No comments yet
CFA L1 Quant Doubts

Given below are some common questions that we are asked in the Quantitative section of the CFA Level 1 curriculum. Questions here are from multiple sources viz. the course material provided by the CFA Institute, Schweser Level 1 books (www.schweser.com), in the classes at FinGuru, and any other question sent to us byour students. 1. NPV method assumes the reinvestment of a projects cash flows at the opportunity cost of capital, while the IRR method assumes that the reinvestment rate is the IRR. What would be the best way to understand/Remember this? Good question. NPV discounts all future cash flows at a single rate which is the discount rate. Mathematically, all the cash flows generated are assumed to be reinvested in the project and the rate
earned by this is the same as the discount rate or the opportunity cost of capital. IRR on the other hand, mathematically, assumes that the cash
flows generated are reinvested at the IRR. The way to remember this is just remember which discount factor is used in NPV and which one
in IRR i.e. NPV uses opportunity cost of capital while IRR method uses the Internal rate of return itself. This is one of the reasons why NPV is a prefered method of project evaluation because, the reinvestment rate in NPV is lower (as discount rate is usually lower than IRR). So to
generate an IRR the company would need to continuously find investment opportunities which generate the IRR. 2. In the formula for mean of a sample and mean of a population we use n in the denominator. Whereas in Variance / Std. Deviation we use n for a population and n-1 for a sample in the denominator. Is this correct? Also, in case of MAD is denominator always n irrespective of sample or population? Yes, this is correct. The reason why sample St.dev (variance)is divided by n-1 is because, sample st.dev (variance)is a biased estimator
of the population st.dev i.e. it is too low. It systematically
underestimates the population st.dev (variance). In order to correct for
this bias, we use Bessels Correction to adjust for
the biasnes in the sample statistic.Check out the following linkhttp://en.wikipedia.org/wiki/Bessel%27s_correction 3.
Source: Schweser (www.schweser.com) Is there a way to solve this problem without changing calc function from END -> BGN. i.e. if we have PV of annuity due, int. rate, no. of
years and have to calculate PMT. Instead of calculating the PV of the cash flows for the cruises at t=0 (like given in the book) you can calculate the FV, by taking thecostof the first cruise as $6814.49, then second cruise as $6530.55 (6814.49 x [1.035 / 1.08])and third cruise as $6258.45. Add the three to get 19603.49. This becomes the FV, and N = 10, 1/y = 8 and compute PMT = $1353.22. 4. APR is the rate with the effect of compounding and APY is the yield without considering effect of compounding. Is this correct? No the other way round. APY (yield) is the rate which takes the impact of compounding. The other one is like the stated annual
rate. 5. TWR will be same if the same stock (or 2 stocks that performed similarly) is held for the same amount of time irrespective of the no. of shares. And MWR will depend on the no. of shares you had during each period where the stock performed differently. Is this correct. Yes. TWR eliminates the effect of addition and withdrawals that can distort the MWR. 6. Is avg. compound rate of return = TWR?
Finguru Yes, TWR is the rate at which Re.1 compounds over a specified performance horizon. Check out the following link for more info http://www.investopedia.com/terms/t/time-weightedror.asp 7. Schweser Book 1 pg. 187 Q1(F) Did not understand how to solve this. The question asks you to calculate the holding period rate of return on the 6 year investment. Holding period return is basically the return generated over the period of the investment. The question asks for the HPR for the Emfund from 1999 for the entire period. The last column on the right gives the HPR returns earned by this fund every year. Now to understand what the book has done, just think you make an investment of Rs.1 in the begining
of 1999. This investment grew at 3% in first year, 4% the second year and so on. What would be value of the investment at the end of 2004
simply multiply (1.03) (1.04) .. Subtract the original investment which was Rs.1 and divide by Rs. 1 and you get the answer. 8. Schweser Book 1 pg. 187 Q1(G) Is avg. price paid per share = HM (harmonic mean) of the prices of the share? Yes. Harmonic mean gives a better average in this case. The harmonic mean is a better average when the numbers are defined in relation to some unit. The common example is averaging speed. The harmonic mean is the preferable method for averaging multiples, such as the price/earning ratio, in which price is in the numerator. If these ratios are averaged using an arithmetic mean (a common error), high data
points are given greater weights than low data points. The harmonic mean, on the other hand, gives equal weight to each data point. For more
on harmonic mean visit: http://www.ehow.com/how_4856820_use-harmonic-means-statistical-analysis.html 9. Schweser Book 1 pg. 187 Q1(C) Did not understand how to solve this. Average annual compound rate of return refers to the Geometric mean of the rates of return. Whenever you are asked to calculate the compount
rate of return it is the Geometric mean. And because you are dealing here with rates of return, you need to add 1 to each number and then calculate the GM and then subtract 1. We do this because the rates of return can be negative and GM cannot be calculated if the numbers are
negative. 10. CFA Book 1 pg. 220 Q4 (Practice problems for reading 5) I understand the stated rate is the rate without
considering the effect of compounding, but is it always true that the stated rate one would earn if one were to cash out rather than reinvest the interest payments. Or does both of these mean the same thing? Banks and financial institutions usually state the rate of interest without the compounding effect. They would state 10% p.a compounded annually, monthly or quarterly. The 10% here is the stated annual
interest rate. It is the rate at which only the principal would grow without reinvestment of the interest. Both your statements are the same. 11. How we are supposed to calculate NPV or IRR if perpetuity is given as annual incremental cash flow Remember to calculate the IRR we need to equate the NPV equal
to zero. Thediscount rate which makes the NPV = 0 is the IRR.Simply (incremental cash flow / IRR) expense = 0. Calculate for IRR. For more on IRR visit: http://en.wikipedia.org/wiki/Internal_rate_of_return
The Three Cos

Threeconceptsbetween which you tend to confuse on the exam: Coefficient of variation, Covariance, Correlation coefficient Coefficient of variation
I know this was slightly a confusing one (and not everyonein class understood the concept well)- so thought of
explaining it to you guys with an example. We know that standard deviation is considered ameasure of risk. Now consider 2 Mutual funds (A & B). Atakes great risk (standard deviation of 25%) while B is a safer investment (standard deviations of 12%). A
generated a return of20%while B generated a return of 10%. Which one is better out of the two? To compare the two you need to measure the risk relative to the return
generated by these funds. Therefore, we can calculate the Standard Deviation / Mean return generated by these funds and then
Finguru compare which one has a lesser risk (variability, standard deviation). In the example above thiswould be 1.25 for A and 1.2 for B. Implies, for every unit of return generated, B took lesser risk. 1.25 and 1.2 are the Coefficient of Variations. We couldnt compare the two standard deviations directly so we had to standardize them. Covariance -
this is simply how one variable moves with another i.e. if X increases by 10% what happens to Y. It is similar to the concept of variance (in which one variable moves with itself). Because the covariance could range from negative to positive infinite
and like variance has squared units is hard to interpret. Therefore, we standardize it by dividing it by the standard deviation of
the 2 variables. Cov (X, Y) / Stdev (X) Stdev (Y) = Correlation Coefficient (X, Y) Hope these concepts are clear now and dont confuse between them.
Time Value of Money Basic Questions

1. A deposit of $1300 earns $339.45 interest in 3 years. If interest is compounded monthly, what is the effective rate? N = 3 x 12 = 36
PV = 1300
PMT = 0
FV = -1639.45 I/Y = ? (Periodic rate) Nominal Rate = Periodic rate x 12 = 7.76% Effective Rate = (1+periodic rate)^12 = 8.04% 2) A deposit of $1500 grows to $4262.04 in 7 years. If the interest is compounded quarterly, what is the effective rate? N = 7 x 4 = 28
PV = 1500
PMT = 0
FV = -4264.04 I/Y = ? (periodic rate) Nominal Rate =Periodic ratex4 = 15.2% Effective Rate = (1+periodic rate)^4 =16.09% 3) 9% compounded quarterly is equivalent to what effective rate? On the calculator press 2nd -> ICONV -> Nominal = 9% -> down arrow -> CPT Effective Rate = ? -> 9.31% 3) At what nominal rate compounded monthly will money double in 6 years? N = 6 x12 = 72 months
PV = 1
PMT = 0
FV = 2 I/Y = ? (Periodic rate) Nominal Rate = I/Y x 12= 11.61% 4) A present value of $1301.69 has a future value of $2569.26 in 7 years and 7 months. What is the nominal rate compounded monthly? N = (7 Years * 12) + 7 months = 91 months
PV = 1301.60
PMT = 0
Finguru
FV = 2569.26 I/Y = ? (Periodic rate) Nominal Rate = Periodic rate x 12 =9% 5) A person opens a bank account with a deposit of $150. At the end of 3 years there is $179.34 in the account. What nominal interset rate compounded quarterly was earned on the account? N = 3 x 4= 12
PV = 150
PMT = 0
FV = -179.34 I/Y = ? (Periodic rate) Nominal Rate = Periodic rate x 4 = 6%
General
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Cracking CFA Exams: The Guru Mantra

The CFA Charter is fast becoming a highlypreferred designation for finance professionals, but at the same time it is only getting harder to attain it. Global pass rates for the CFA Level1 have dropped significantly over the last 15 years and the trend is surely downwards.
Source: CFA Institute www.cfainstitute.org So how can you be better prepared for this exam, and increase your chances of success on this program? There is no doubt that passing the exam requires considerable effort.
The more you do to prepare, the more likely it is you will pass. Therefore the 3 key points to remember are: Commitment, Hard work, &
Perseverance. Your first hurdle is the Level 1 CFA exam which is held twice a year (in June and December). The preparation for this exam could be a formidable challenge as the curriculum includes 74 Readings and 450+ Learning Outcome Statements all being tested on the same day, so you must devote considerable time and effort to be well prepared. There is no shortcut, you must know the material, the terminologies and techniques, understand the concepts and be able to answer (at least 70% of) 240 questions quickly and correctly. Topic Weights: The Course is divided into 4 broad heads: a) Ethics & Professional Standards, b) Investment Tools, c)
Finguru Asset Classes and d) Portfolio Management. There are a total of 10 subjects, weightage of each in the Level 1 Exam is given below: Topic Areas Ethics/ Professional Standards Quantitative Methods Economics Financial Statements Analysis (FSA) Corporate Finance Investment Tools (Sub Total) Equity Analysis Fixed Income Derivatives Alternative Investments Asset Classes (Sub Total) Portfolio Management Exam Structure: The Level I exams will include 240 multiple choice questions, divided
between 2 exams held on the same day i.e. 120 on the Morning Session from 9:00 AM to 12:00PM and another 120 questions on the Afternoon Session from 2:00PM to 5:00 PM. Each multiple choice question is free-standing (not dependent on other questions) and has three possible answers: A, B, and C. All questions are equally
weighted and there is no penalty for guessing. For Level 1 the most important topics are FSA, Quantitative Techniques, Fixed Income, Equity Analysis, and Ethics. These 5 topics comprise approx. 70% of the course. If you score well in these 5 topics, there is a good chance of clearing the paper. Having said that, you cannot ignore the other topics. Some of the other topics are easier and you may be able to score good points in them. So the key to success on the CFA Exam is to be thorough in your preparation and cover the basics of all topics. How to prepare: 1. Develop a study plan:
You need to be systematic and methodical in your study. An orderly,
systematic approach is essential to successful completion of the exam. The curriculum is vast therefore you need to be regular and consistent. This is not like the other exam for which you can study in the last one month and expect to clear it. You must devote adequate time on each Study Session and understand the concepts. Ideally, you should spend about 1215 hours per week for 18 weeks on going through the concepts. 2. Periodic review: Review the Learning Outcome Statements (LOS) both before and after you study each reading to ensure that you have mastered the applicable content and can complete the action(s) specified. Complete all reading assignments and the associated problems and solutions in each study session. 3. Focus on the core material:
The material is the same for everyone, so it just means that u need to
use the material available to the best n try to leave nothing out of it.
Focus on the material provided by the CFA Institute, and if you find it
too extensive and feel pressure of time, you can take classes and use preparatory material. Focus on Learning Outcome Statements (LOS)
the Level I Weightage 15% 12% 10% 20% 8% 50% 10% 12% 5% 3% 30% 5%
Finguru curriculum of the exam is very well structured and no question will
be out of the course. Read the LOS to make sure you know the syllabus. You do not need to go to your school books to prepare your fundamentals before starting to work through this course. 4. Conceptual Clarity over mugging:
The CFA exam checks your concepts not your memory. Make sure you understand the basics of the all the topics. There are very few concepts
/ topics on the CFA exam which you would need to mug up. 5. Ethics & Professional Standards:
This section of the curriculum is critical. The CFA Institute gives
importance to your understanding of the code of ethics prescribed by the
institute. If you do not clear ethics, there is good chance you will not clear the exam. Also, do not start your preparation with this section. If you understand the work of a Financial Analyst and his job profile, which you will by first going through the topics on Valuation and Financial Analysis, you will be able to appreciate the relevance of Ethics. This way your retention and understanding of this section would also be higher. 6. Practice and Revision:
Use the final four to six weeks before the exam to review study materials and take online sample exams. Last 45 days your focus on problem solving: practice as much as possible and reduce the component of luck. 7. Common Mistakes: No
one has ever scored 100% on the CFA exam, so there would be some errors you make on the CFA exam. The trick is to make the least number of them. The way to reduce your mistakes is to make a list of your common mistakes made during practice tests, and review them often especially just before sitting for another test. You will be in due course turn your weakness into strength. 8. Mental & Physical Strength:
Lastly, most of you have not often given 6 hour exams on a single day.
So it would be a good idea to take some practice tests for 6 hours on the same day with only a 2 hour break in the middle, to give you the mental and physical strength to face the grueling conditions on the exam
day. Dont let the challenge or the low worldwide pass rates discourage you. The pass rates are not representative of the probability
of passing the examination for people who prepare properly. On the Exam Day 1. No negative marking:
Remember there is no negative marking on the CFA Exam, so it would be
unwise to leave any question unmarked even if you have no clue on it. Make an intelligent guess by eliminating the most improbable options. 2. Time management is critical. Keep a track of the time and a good pace throughout the paper.
Have time targets like 40-45 Questions in an hour and about 20-22 questions every half hour. If you are going too slow you can pick up pace and if you are going too fast you might want to slow down to make sure you get the accuracy higher. As each question has one point, do not spend too much time one question. You do not want to miss attempting questions. Dont get stuck on questions. It is possible
that you have done that concept before but just are not able to recall the concept or answer for it that moment. Dont just sit on it till you get the answer. Move on and come back later to mark the most probable answer from the options. There will be sitters (Easy Questions) throughout the paper so make sure you go through the entire paper. On average, you should allocate 1.5 minutes to each multiple choice question, including time to record your answer on the answer sheet. 3. Strict Invigilation:
As mentioned, the CFA Institute gives high importance to the Ethical Standards of the candidate. So it is very important that you follow the instructions of the instructions of the proctor / examiner and stop writing when he calls time. Do not even accidently write anything on
your examination ticket or carry anything that is not allowed in the examination hall. Read and follow the instructions given on your examination ticket to avoid unnecessary scrutiny. 4. Mental Strength: Morning and Afternoon exams are equally important. Doing well or badly in the morning paper should not impact your performance in the afternoon. It is easy to get carried away with a good performance in the
morning and get complacent. Also, it is easy to get disheartened if the
paper didnt go well. Dont let either happen to you. 5. Read the question carefully:
This is the most common mistake on the exam. Read carefully if the
question is asking for the Correct / Incorrect or Least Likely / Most Likely option etc. You may know the question, but might make a silly mistake by trying to read the question too fast. Read the questions carefully. A careless skimming of the question may lead you to a completely different, and incorrect, answer. 6. Nobody knows everything:
You should expect to encounter questions that you will not be able to
answer correctly. There is a great deal of material to master and exam questions are challenging. Standard setters and the Board of Governors (at all three levels) take account of exam difficulty in setting Minimum
Passing Scores.
Finguru You are bound to feel nervous and anxious about the paper. Its
very natural to feel that way. Some level of it is in fact good. I would like to remind you that even the best in the world feel the same.
Like Sachin Tendulkar said He is anxious and nervous before a big game. But over the years he has learnt that this is the way
his body prepares for a big match. So your internal mechanism is
also doing the same and preparing you for the big day.
General
7 Key Tips to Pass the CFA Level 1 Exam

1. Commit to learning the material: You must really be motivated to pursue the course. Focus on key concepts of all the material, not just the topics you like. 2. Start early:
4-5 months of dedicated study is a good time to prepare. Make a weekly plan of study and build in some slack to allow for emergencies later. 3. Study with the exam in mind: Focus on the Learning Outcome Statements (LOS) and study with the exam in mind. Pay close attention to the command words in each 4. Practice loads of questions:
The time pressure on the exam is intense and many candidates run out of
time. A primary reason is less practice questions and making silly mistakes. Another reason is not being familiar with your calculator. Use
your calculator often so that you will be proficient when it is time to
take the exam. 5. Study every topic: The trick is to know at least a little of everything, so that you can eliminate the wrong choices from a tough question. 6. Intelligent Guessing:
Nobody knows everything. There will be questions that will confuse you, or you may not remember the answer to. Try to eliminate the most improbably choice and make an intelligent guess. There is no negative marking on the paper. 7. Build an Exam Strategy:
Do lots of mock tests in the last one month and build a strategy of how
will you approach the exam. There is no one right way but you need to figure out which one will work for you. Note also that an important part of your study is reviewing what you have studied. A good rule of thumb is to have completed all the readings
at least one month in advance of the examination. The final month should be spent reviewing the material. The bottom linethere is no substitute for preparation.
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charter is globally regarded as a designation of excellence in the investment community. It is a key certification for investment professionals, especially in the areas of Research and Portfolio Management. The CFA designation sets the standard in exam based qualifications for the global financial industry and is recognized by employers as a badge of distinction by which to measure serious investment professionals. The CFA designation is now entering its fifth decade having been established in 1962. The CFA Institute network boasts: Almost 100,000 members in 135 countries. More than 88,000 CFA charter holders. 137 member societies in 58 countries Benefits of CFA Designation The CFA designation is desirable for career progression in a bull market but also greater job security in bearish markets. Regarded as the Global Gold Standard and is considered a designation of excellence in the investment community. Portable reputation the charter remains a mark of quality, whether you change company or move country. Global relevance an international standard for measuring competence and integrity - principles that are common to any market. Career-enhancing demonstrates your commitment to knowledge and high ethical standard to employers and clients Credible praised and supported by the clients, employers and regulators; the investment community at large More and more of our corporate clients view participation in the CFA program as a prerequisite for job progression. Advantages over an MBA
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Unlike MBA program the CFA content and exam are standardized around the world. The CFA program can cost one tenth of an MBA and allows you to carry on working whilst studying, unlike an MBA. The 2005 CFA Institute and Russell Reynolds Associates Survey indicated CFA charterholders out earned their MBA counterparts by 18%. How do I earn the CFA Charter (Requirements)
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To earn the CFA charter, you must first become a candidate and sign up for the Level 1 exam. To become a CFA charterholder, you must:
1. Pass three rigorous six-hour exams over at least three years. 2. Have at least four years of professional investment experience. 3. Become a regular member of CFA Institute 4. Commit to abiding by CFA Institute's Code of Ethics and Standards of Professional
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Conduct. CFA Program Curriculum The curriculum is based on the Candidate Body of Knowledge which is divided into 4 major areas: Ethical and professional standards Tools and inputs for investment valuation and management Asset valuation Portfolio management
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The focus of the questions alters as you progress through the CFA levels. CFA Institute also ensures they reflect changes within the global investment community. Every Level
places an emphasis on ethical and professional standards within the industry.
Source: www.cfainstitute.org
Source: www.cfainstitute.org
Exam Structure: The exam is structured as 3 Levels: Level 1, 2 and 3. Level 1 Exam is conducted twice every year in June and December. Level 2 and 3 Exams are
conducted only once every year in June every year. Exam format: Level 1 & 2 arecompletely multiple choice. Level 3 has one written paper and one paper which is multiple choice. Number of Questions 240
Level
Type of Questions
Duration of the Exam
Multiple Choice Multiple Choice vignette Style
2 Exams of 3 Hrs Each
II
120
III
50% essay type, 50% multiple choice
60
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You
do not need to have a Finance/Commerce background to start your journey tobecome CFA Charter holder. Our coaching is structured to ensure
students from all backgrounds are able to quickly learn the concepts and apply them in solving tricky questions on the exam. We
provide special focus to students from non-finance backgrounds, while at the same time encourage students with any prior knowledge on the topics to actively participate in discussions in the class Apart
from Chartered Accountants, MBAs in Finance and other finance specialists, we have had students from various backgrounds such as Non-Finance bachelors, Engineering, Human Resource, Hospitality Management and Doctorsetc. Level 1 Coaching: Coaching for Level 1 is divided into 22 sessions of 4 hours each Time
is allocated to topics in accordance to their weightage and approximate
time taken by an average student to grasp the important concepts. More than 3000 Practice Questions are provided Concise and Exam oriented study material is provided in the classes The classes are highly interactive and ensure quality education Personal attention is ensured We help students gain:
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A solid understanding of the basic concepts Provide ample practice questions on testable areas Our
vibrant and competitive classroom atmosphere helps students to maintain regularity in studies and get motivated to excel in the exam Level1 Exam Weightage
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Coaching Course structure: Topic Areas Ethics/ Professional Standards Quantitative Methods Economics Weightage 15% 12% 10% Approx Hours 4 16
12
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Financial Statements Analysis Corporate Finance Equity Analysis Fixed Income Derivatives Alternative Investments Portfolio Management Mid Term & End Term Tests 4 Full Length Tests Other Tests Doubt Clearing Sessions Total Schedule & Location:
20% 8% 10% 12% 5% 5% 3% 50% Each 100% Each
24 6 8 8 8 4 4 10 12 24
10 150
Classes are held over the weekends (Saturday & Sunday) For New batchers stating check out our home page For professionals who alsomayface difficulty coming onSaturday day time, we have a batch with timings 5:00 to 9:00PM on Saturday and Sunday. Classes are held at India Social Institute,10 Institutional Area,Lodi Road, New Delhi 110003
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Level 2, you are required to demonstrate advanced knowledge on the same
topics as in Level 1. Our coaching for Level 2 is, therefore, highly rigorous. Our
experienced faculty not only help you understand and learn key concepts but also provide loads of classroom practice questions All
faculty have practical experience in applying financial techniques being taught - which means our students learn the practical application of what they are learning too. Our
coaching is not just focused on getting our students through the Level 2 exam but also to apply financial techniques on their jobs Level 2 Exam Weightage
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Coaching Course structure Level 2 Exam Weights 10% 5-10% 5-10% 15-25% 5-15% 20-30% 5-15% 5-15% 5-15% Approx. Class Room Hours 4
12
Topic Areas
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Ethics/ Professional Standards Quantitative Methods Economics Financial Statements Analysis Corporate Finance Equity Analysis Fixed Income Derivatives Alternative Investments
4 12 8 16 8 8 4
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Portfolio Management 2 Mid Term Tests 2 Full Length Tests Total Schedule & Location:
5-15% 50% Each 100% Each 100%
8 8 12 100
Classes are held over the weekends (Saturday & Sunday) For New batches - check out updates on the home page Classes are held at India Social Institute,10 Institutional Area,Lodi Road, New Delhi 110003 Map to Indian Social Institute
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If you have cleared the first 2 Levels of the CFA Exam, then let us
first congratulate you. You have demonstrated great commitment and ability to be a CFA Charterholder. You must continue the effort and maintain discipline for your preparation for the CFA Level 3 Exam. Level 3 How is it different from the Level 1 and 2? CFA Level 3 is a whole new ball game. The curriculum may not look as challenging and lengthy as the first 2 levels. However, that does not mean that Level 3 is anyway easier than the first 2 levels. It only means the preparation strategy used in the Level 1 and 2 is not going to
work in Level 3. At Levels 1 and 2, the material is tested much the way it is presented in the curriculum and memorization alone could get you through
these levels. The Level 3 curriculum is not as heavy on the content (theories and formulas). Its all about application of the concepts that you have learnt over the first 2 levels. You must learn each study session well enough so as to integrate your knowledge of it with that of the other study sessions. A single item set or essay question can incorporate concepts from several study sessions. Exam Format? Morning Session: 10 to 12 multi-part essay questions worth a total of
180 points. The weight of each essay question and each of the parts is denoted in minutes. For example, a question allocated 12 minutes would carry 12 points. As the morning exam is an essay paper, it is possible to get some marks for correct method and incorrect final answer. Therefore, clearly show your calculations. Also, it is possible and sometimes even necessary that the answer from one question is used as an input for another.
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Afternoon Session: Similar to the Level 2 exam, there are 10 cases followed with 6 multiple choice questions each. So a total of 60 questions from any of the topics.
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What are the pass rates at Level 3? Although the pass rates for Level 3 are higher than for Level 1 and 2, but the trend is similar, downwards. Especially post 2007, the pass rates for Level 3 have dropped significantly and now range around 45-50%.
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Topic Weights in Level 3
Topic
Weight
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Ethical and Professional Standards 10%
Equity
5-15%
Fixed Income
10-20%
Derivatives
5-15%
Alternatives
5-15%
Portfolio Management
45-55%
How should I study for the Level 3 Exam? Time management is extremely critical in the morning Level 3 Exam. Candidates must attempt all questions in the time allocated and keep their answers to the point. Attempt the easy questions first and come back to tougher questions. Try not to leave anything blank. There is no negative marking for guessing. The afternoon exam is similar to the Level 2 exam, and is usually manageable. But the difference, of course, is the possible combination of several study sessions in the same item set. Remember, at Level 3 you sometimes have to use what you learn about one topic to answer a question about another topic. How can we help you pass the Level 3 exam? We conduct rigorous classes for the CFA Level 3 on the weekends and help candidates prepare well for the exam. However, as the exam format of Level 3 is unlike the first 2 levels (esp the morning exam), the training methodology must also be accordingly suited. For our Level 3 Classes: All faculty besides being CFA Charterholders, have practical experience in Portfolio Management and thus are able to help connect the
content with real world examples. Take up real exam questions in the class and train students on writing well structured answers. As discussing the topics is the best way to learn and understand them, we encourage candidates in our classes to participate in discussions and even try to explain the concepts to each other. We help you learn how to manage time effectively, especially on the morning exam, by practicing to write answers within allocated time. We spread out our classes over a long period (at least 3-4 months) so that you spend a long period to go through the topic and review it. We ensure you get enough time to do self study, by giving you breaks
after every 4-5 classes. This ensures you are upto speed with the classes.
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have no doubt the program was tough and challenging. There are no shortcuts to doing well on the exam. The program requires commitment and dedication, the 250 recommended study hours are a minimum. The 6 hour exam on a Sunday can be very stressful. These elements, combined with long working hours, can make an indigestible cocktail. Working full time only makes the preparation tougher. But the
rewards of earning the CFA charter are worth all the effort. One gets to be a part of an elite club which is well respected and recognized by
anyone in the financial world. The global fraternity of Charterholders
is a great source for networking. Having the three letters (CFA) against my name has helped me getconnectedwith
seniorpeople in companies across the globe. CFA research publications are an excellent source for research ideas. The monthly magazines, quarter journals allow Charterholders to share research ideas on current relevant topics. Despite
having done a Masters in Economics and Finance, the CFA charter has
significantly added to my financial knowledge and immensely improved my
job prospects.
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Saurabh Basrar, CFA (Director Altais Advisors)

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believe CFA has an excellent curriculum for anyone who is interested in the financial markets. It helps one develop different frameworks to analyze different investment classes be it equities, debt, derivatives,
real estate etc. It gave me a wider perspective to look at things which is a key ingredient of success in the investment field. CFA is a globally recognized qualification and surely adds weight to
anyones resume. Being a CA it was not very difficult for me to write the CFA exam as it was more objective based. It did test my understanding of the basics and how to co-relate the different frameworks and modules of the curriculum like economics, equity, debt, financial statements etc
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Days until the 7th June 2014 CFA Exam Karan Mehta, Level 3 Candidate (Director, Mefcom Securities Ltd) "In my opinion, the CFA charter is a must for any serious finance professional. The charter bodes well with employers, both in India and abroad, primarily because of its rigorous course content and strong relevance to industry needs. Specifically in India, given a dearth of world-class finance courses, the CFA Program opens an
important window of opportunity for professionals who seek to advance their knowledge of theoretical finance, without having to attend a costly masters program at a foreign university. Obtaining the CFA charter is, however, a tough ask specially for those with a limited background in maths, economics and accountancy. Such applicants are best off preparing under the guidance of coaching institute such as FinGuru, with experienced instructors who can help them clear the exam in a single attempt."
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"CFA course is a great help in enhancing ones analytical skills and developing sound fundamental base of financial concepts. This course is
helpful in getting clarity about investment concepts and getting s in depth understanding of various valuation tools. Unlike other courses that do not have practical applicability most of the concepts learnt are used in work assignments. The exams tests our analytical abilities which is what is required in investment profile globally. It was at my first job at one of the portfolio management firm, I realized that my MBA (finance & marketing) background is not sufficient to grow and develop understanding of markets and various asset classes. I came to know about CFA from one of the candidate in this program and found that its quite helpful for investment professionals. I enrolled for this course and started preparing on my own but always felt
a need for guidance. I really had to struggle in getting around on topics in FSA and Economics. The vastness of the course and paucity of time made all this more complicated. I found that the guidance provided
by other CFA candidates and charter holders was indeed valuable in all
the three levels."
Swati Sethi, Level 3 Candidate Upon

completing my Master's Degree, I eagerly hunted around for a Course that would assist me in gaining a foothold in the world of finance. After mulling over the several available alternatives, I opted for the CFA Program. What I love the most about the Program is its dynamic approach and comprehensive in-depth coverage of the various aspects of finance. The curriculum is undoubtedly exceptionally challenging, therefore enables one to acquire a considerable wealth of knowledge the foundation of a successful career. In my view, it is absolutely essential to put in a minimum of recommended 250 hours of dedicated effort. The focus of the preparation should be on a thorough understanding of the study material & mastering all the key concepts. Also,itis of significanthelp to devise a preparationstrategy, effectively allocating time & effort
among his strong & weak areas. I can confidently say that the last three years of my involvement with the CFA Program has been a splendid learning experience. It is most encouraging and rewarding to witness the kind of recognition & credibility the Program commands in the Industry.
Dr. Abhishek Sharma, Level 3 Candidate "I trained as a medical Doc and thereafter completed my MBA a few years back. I had planned to start my CFA after a few years of work experience. Its only when I landed in a financial services firm, did I begin to truely appreciate the importance of CFA. The CFA curicullum is
very topical and takes one through many financial concepts in an exhaustive manner. Most of the stuff taught in CFA can be immediately and directly applied to one's work. The course content is so relevant that I usually reference study material in case of doubt with my work. CFA also helps establish credentials for job opportunities as it reflects one's focus to pursue this line as career. It serves both to open new doors and also to send the right signals to recuiters. At
senior level positions, CFA qualification assumes an entirely different
meaning by providing financial discipline to strategic efforts."
Vivek Agarwal, Level 2 Candidate (NTU Singapore) Coming

for an engineering background I decided topursue the CFA charter
after much deliberation. Having worked on the IT side in an asset management company, the proverb "The grass is always greener on the other side" botheredme. The greener side here being the core of asset management - "Aiding and making investment decisions". The CFA charter is indisputable in its recognition across the industryand is relevant for bothbeginners and veterans and thus it was my only option. The tripartite structure and curriculum of the CFA is both exhaustive and rigorous. Level 1 is all about the fundamentals and getting to know the
basic valuation tools and techniques. I did struggle with topics in FSA and Economics to begin with but they are very doable with that extra push at times. For having cleared the Level 1I can only recommend being regular and spending at least the last 4 weeks on
questions and test papers before the exam.
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