Level 2 Los 2018

CFA Level II - LOS Changes 2017 - 2018
Topic LOS Level II - 2017 (464 LOS) LOS Level II - 2018 (465 LOS) Compared
describe the six components of the describe the six components of the
Ethics 1.1.a Code of Ethics and the seven 1.1.a Code of Ethics and the seven
Standards of Professional Conduct Standards of Professional Conduct
explain the ethical responsibilities explain the ethical responsibilities
required of CFA Institute members required of CFA Institute members
Ethics 1.1.b and candidates in the CFA 1.1.b and candidates in the CFA
Program by the Code and Program by the Code and
Standards Standards
demonstrate a thorough demonstrate a thorough
knowledge of the Code of Ethics knowledge of the Code of Ethics
Ethics 1.2.a and Standards of Professional 1.2.a and Standards of Professional
Conduct by applying the Code and Conduct by applying the Code and
Standards to specific situations Standards to specific situations
recommend practices and recommend practices and
procedures designed to prevent procedures designed to prevent
Ethics 1.2.b violations of the Code of Ethics 1.2.b violations of the Code of Ethics
and Standards of Professional and Standards of Professional
Conduct Conduct
explain the objectives of the explain the objectives of the
Ethics 1.3.a 1.3.a
Research Objectivity Standards Research Objectivity Standards
evaluate company policies and evaluate company policies and
practices related to research practices related to research
objectivity, and distinguish objectivity, and distinguish
Ethics 1.3.b between changes required and 1.3.b between changes required and
changes recommended for changes recommended for
compliance with the Research compliance with the Research
Objectivity Standards Objectivity Standards
evaluate the practices and policies evaluate the practices and policies
Ethics 2.4.a 2.4.a
presented presented
explain the appropriate action to explain the appropriate action to
take in response to conduct that take in response to conduct that
Ethics 2.4.b violates the CFA Institute Code of 2.4.b violates the CFA Institute Code of
Ethics and Standards of Ethics and Standards of
Professional Conduct Professional Conduct
Ethics 2.5.a 2.5.a
presented presented
Financing or Accounting Questions? Go to passingscoreforum.com 1

Ethics 2.6.a 2.6.a
presented presented
evaluate trade allocation practices evaluate trade allocation practices
and determine whether they and determine whether they
comply with the CFA Institute comply with the CFA Institute
Ethics 2.7.a 2.7.a
addressing fair dealing and client addressing fair dealing and client
loyalty loyalty
describe appropriate actions to describe appropriate actions to
take in response to trade take in response to trade
Ethics 2.7.b 2.7.b
allocation practices that do not allocation practices that do not
adequately respect client interests adequately respect client interests
evaluate the disclosure of evaluate the disclosure of

investment objectives and basic investment objectives and basic
Ethics 2.8.a 2.8.a
policies and determine whether policies and determine whether
they comply with the CFA Institute they comply with the CFA Institute
describe appropriate actions describe appropriate actions
needed to ensure adequate needed to ensure adequate
Ethics 2.8.b 2.8.b
disclosure of the investment disclosure of the investment
process process
calculate and interpret a sample calculate and interpret a sample
Quantitative covariance and a sample covariance and a sample
3.9.a 3.9.a
Methods correlation coefficient and correlation coefficient and
interpret a scatter plot interpret a scatter plot
Quantitative describe limitations to correlation describe limitations to correlation
3.9.b 3.9.b
Methods analysis analysis

formulate a test of the hypothesis formulate a test of the hypothesis
that the population correlation that the population correlation
Quantitative coefficient equals zero and coefficient equals zero and
3.9.c 3.9.c
Methods determine whether the hypothesis determine whether the hypothesis
is rejected at a given level of is rejected at a given level of
significance significance
distinguish between the dependent distinguish between the dependent
Quantitative
3.9.d and independent variables in a 3.9.d and independent variables in a
Methods
linear regression linear regression
describe the assumptions explain the assumptions
Quantitative Wording
3.9.e underlying linear regression and 3.9.e underlying linear regression and
Methods Change
interpret regression coefficients interpret regression coefficients
calculate and interpret the calculate and interpret the
standard error of estimate, the standard error of estimate, the
Quantitative
3.9.f coefficient of determination, and a 3.9.f coefficient of determination, and a
Methods
confidence interval for a confidence interval for a
regression coefficient regression coefficient
formulate a null and alternative formulate a null and alternative
hypothesis about a population hypothesis about a population
value of a regression coefficient value of a regression coefficient
Quantitative
3.9.g and determine the appropriate test 3.9.g and determine the appropriate test
Methods
statistic and whether the null statistic and whether the null
hypothesis is rejected at a given hypothesis is rejected at a given
level of significance level of significance
calculate the predicted value for calculate the predicted value for
Quantitative the dependent variable, given an the dependent variable, given an
3.9.h 3.9.h
Methods estimated regression model and a estimated regression model and a
value for the independent variable value for the independent variable
calculate and interpret a calculate and interpret a
Quantitative confidence interval for the confidence interval for the
3.9.i 3.9.i
Methods predicted value of the dependent predicted value of the dependent
variable variable
describe the use of analysis of describe the use of analysis of
variance (ANOVA) in regression variance (ANOVA) in regression
Quantitative
3.9.j analysis, interpret ANOVA results, 3.9.j analysis, interpret ANOVA results,
Methods
and calculate and interpret the F- and calculate and interpret the F-
statistic statistic
Quantitative describe limitations of regression describe limitations of regression
3.9.k 3.9.k
Methods analysis analysis

formulate a multiple regression formulate a multiple regression
equation to describe the relation equation to describe the relation
between a dependent variable and between a dependent variable and
Quantitative
3.10.a several independent variables and 3.10.a several independent variables and
Methods
determine the statistical determine the statistical
significance of each independent significance of each independent
variable variable
Quantitative interpret estimated regression interpret estimated regression
3.10.b 3.10.b
Methods coefficients and their p-values coefficients and their p-values
formulate a null and an alternative formulate a null and an alternative
hypothesis about the population hypothesis about the population
value of a regression coefficient, value of a regression coefficient,
Quantitative
3.10.c calculate the value of the test 3.10.c calculate the value of the test
Methods
statistic, and determine whether statistic, and determine whether
to reject the null hypothesis at a to reject the null hypothesis at a
given level of significance given level of significance
Quantitative interpret the results of hypothesis interpret the results of hypothesis
3.10.d 3.10.d
Methods tests of regression coefficients tests of regression coefficients
calculate and interpret 1) a calculate and interpret 1) a
confidence interval for the confidence interval for the
population value of population value of
a regression coefficient and 2) a a regression coefficient and 2) a
Quantitative
3.10.e predicted value for the dependent 3.10.e predicted value for the dependent
Methods
variable, given an estimated variable, given an estimated
regression model and assumed regression model and assumed
values for the independent values for the independent
variables variables
Quantitative explain the assumptions of a explain the assumptions of a
3.10.f 3.10.f
Methods multiple regression model multiple regression model
calculate and interpret the F- calculate and interpret the F-
Quantitative
3.10.g statistic, and describe how it is 3.10.g statistic, and describe how it is
Methods
used in regression analysis used in regression analysis
distinguish between and interpret distinguish between and interpret
Quantitative
3.10.h the R2 and adjusted R2 in multiple 3.10.h the R2 and adjusted R2 in multiple
Methods
regression regression
evaluate how well a regression evaluate how well a regression
model explains the dependent model explains the dependent
Quantitative
3.10.i variable by analyzing the output of 3.10.i variable by analyzing the output of
Methods
the regression equation and an the regression equation and an
ANOVA table ANOVA table

formulate a multiple regression formulate a multiple regression
equation by using dummy equation by using dummy
Quantitative
3.10.j variables to represent qualitative 3.10.j variables to represent qualitative
Methods
factors and interpret the factors and interpret the
coefficients and regression results coefficients and regression results
explain the types of explain the types of
heteroskedasticity and how heteroskedasticity and how
Quantitative
3.10.k heteroskedasticity and serial 3.10.k heteroskedasticity and serial
Methods
correlation affect statistical correlation affect statistical
inference inference
describe multicollinearity and describe multicollinearity and
Quantitative
3.10.l explain its causes and effects in 3.10.l explain its causes and effects in
Methods
regression analysis regression analysis
describe how model describe how model
misspecification affects the results misspecification affects the results
Quantitative
3.10.m of a regression analysis and 3.10.m of a regression analysis and
Methods
describe how to avoid common describe how to avoid common
forms of misspecification forms of misspecification
Quantitative describe models with qualitative describe models with qualitative
3.10.n 3.10.n
Methods dependent variables dependent variables
Quantitative evaluate and interpret a multiple evaluate and interpret a multiple
3.10.o 3.10.o
Methods regression model and its results regression model and its results
calculate and evaluate the calculate and evaluate the
predicted trend value for a time predicted trend value for a time
Quantitative
3.11.a series, modeled as either a linear 3.11.a series, modeled as either a linear
Methods
trend or a log-linear trend, given trend or a log-linear trend, given
the estimated trend coefficients the estimated trend coefficients
describe factors that determine describe factors that determine
whether a linear or a log-linear whether a linear or a log-linear
Quantitative
3.11.b trend should be used with a 3.11.b trend should be used with a
Methods
particular time series and evaluate particular time series and evaluate
limitations of trend models limitations of trend models
explain the requirement for a time explain the requirement for a time
Quantitative series to be covariance stationary series to be covariance stationary
3.11.c 3.11.c
Methods and describe the significance of a and describe the significance of a
series that is not stationary series that is not stationary
describe the structure of an describe the structure of an
autoregressive (AR) model of autoregressive (AR) model of
Quantitative
3.11.d order p and calculate one- and two- 3.11.d order p and calculate one- and two-
Methods
period-ahead forecasts given the period-ahead forecasts given the
estimated coefficients estimated coefficients
explain how autocorrelations of explain how autocorrelations of
Quantitative the residuals can be used to test the residuals can be used to test
3.11.e 3.11.e
Methods whether the autoregressive model whether the autoregressive model
fits the time series fits the time series
Quantitative explain mean reversion and explain mean reversion and
3.11.f 3.11.f
Methods calculate a mean-reverting level calculate a mean-reverting level
contrast in-sample and out-of- contrast in-sample and out-of-
sample forecasts and compare the sample forecasts and compare the
Quantitative
3.11.g forecasting accuracy of different 3.11.g forecasting accuracy of different
Methods
time-series models based on the time-series models based on the
root mean squared error criterion root mean squared error criterion
Quantitative explain the instability of explain the instability of
3.11.h 3.11.h
Methods coefficients of time-series models coefficients of time-series models
describe characteristics of random describe characteristics of random
Quantitative
3.11.i walk processes and contrast them 3.11.i walk processes and contrast them
Methods
to covariance stationary processes to covariance stationary processes
describe implications of unit roots describe implications of unit roots
for time-series analysis, explain for time-series analysis, explain
when unit roots are likely to occur when unit roots are likely to occur
Quantitative and how to test for them, and and how to test for them, and
3.11.j 3.11.j
Methods demonstrate how a time series demonstrate how a time series
with a unit root can be with a unit root can be
transformed so it can be analyzed transformed so it can be analyzed
with an AR model with an AR model
describe the steps of the unit root describe the steps of the unit root
Quantitative test for nonstationarity and test for nonstationarity and
3.11.k 3.11.k
Methods explain the relation of the test to explain the relation of the test to
autoregressive time-series models autoregressive time-series models
explain how to test and correct for explain how to test and correct for
seasonality in a time-series model seasonality in a time-series model
Quantitative
3.11.l and calculate and interpret a 3.11.l and calculate and interpret a
Methods
forecasted value using an AR forecasted value using an AR
model with a seasonal lag model with a seasonal lag
explain autoregressive conditional explain autoregressive conditional
heteroskedasticity (ARCH) and heteroskedasticity (ARCH) and
Quantitative
3.11.m describe how ARCH models can be 3.11.m describe how ARCH models can be
Methods
applied to predict the variance of a applied to predict the variance of a
time series time series

explain how time-series variables explain how time-series variables
should be analyzed for should be analyzed for
Quantitative
3.11.n nonstationarity and/or 3.11.n nonstationarity and/or
Methods
cointegration before use in a linear cointegration before use in a linear
regression regression
determine an appropriate time- determine an appropriate time-
Quantitative series model to analyze a given series model to analyze a given
3.11.o 3.11.o
Methods investment problem and justify investment problem and justify
that choice that choice
Quantitative describe steps in running a describe steps in running a
3.12.a 3.12.a
Methods simulation simulation
explain three ways to define the explain three ways to define the
Quantitative
3.12.b probability distributions for a 3.12.b probability distributions for a
Methods
simulation’s variables simulation’s variables
Quantitative describe how to treat correlation describe how to treat correlation
3.12.c 3.12.c
Methods across variables in a simulation across variables in a simulation
Quantitative describe advantages of using describe advantages of using
3.12.d 3.12.d
Methods simulations in decision making simulations in decision making
describe some common describe some common
Quantitative
3.12.e constraints introduced into 3.12.e constraints introduced into
Methods
simulations simulations
Quantitative describe issues in using describe issues in using
3.12.f 3.12.f
Methods simulations in risk assessment simulations in risk assessment
Quantitative compare scenario analysis, compare scenario analysis,
3.12.g 3.12.g
Methods decision trees, and simulations decision trees, and simulations
calculate and interpret the bid–ask calculate and interpret the
spread on a spot or forward bid–offer spread on a spot or
Wording
Economics 4.13.a foreign currency quotation and 4.13.a forward currency quotation and
Change
describe the factors that affect the describe the factors that affect the
bid–offer spread bid–offer spread
identify a triangular arbitrage identify a triangular arbitrage
opportunity and calculate its opportunity and calculate its
Economics 4.13.b 4.13.b
profit, given the bid–offer profit, given the bid–offer
quotations for three currencies quotations for three currencies
distinguish between spot and distinguish between spot and
forward rates and calculate the forward rates and calculate the
Economics 4.13.c 4.13.c
forward premium/discount for a forward premium/discount for a
given currency given currency
calculate the mark-to-market calculate the mark-to-market
Economics 4.13.d 4.13.d
value of a forward contract value of a forward contract

explain international parity explain international parity

relations (covered and uncovered conditions (covered and uncovered Wording
Economics 4.13.e 4.13.e
interest rate parity, purchasing interest rate parity, forward rate Change
power parity, and the international parity, purchasing power parity,
Fisher effect) and the international Fisher effect)
describe relations among the describe relations among the
Economics 4.13.f 4.13.f
international parity conditions international parity conditions
evaluate the use of the current evaluate the use of the current
spot rate, the forward rate, spot rate, the forward rate,
purchasing power parity, and purchasing power parity, and
Economics 4.13.g 4.13.g
uncovered interest parity to uncovered interest parity to
forecast future spot exchange forecast future spot exchange
rates rates
explain approaches to assessing explain approaches to assessing
Economics 4.13.h the long-run fair value of an 4.13.h the long-run fair value of an
exchange rate exchange rate
describe the carry trade and its describe the carry trade and its
relation to uncovered interest rate relation to uncovered interest rate
Economics 4.13.i 4.13.i
parity and calculate the profit from parity and calculate the profit from
a carry trade a carry trade
explain how flows in the balance of explain how flows in the balance of
Economics 4.13.j payment accounts affect currency 4.13.j payment accounts affect currency
exchange rates exchange rates
describe the Mundell–Fleming
model, the monetary approach,
Economics 4.13.k and the asset market (portfolio Removed
balance) approach to exchange
rate determination
forecast the direction of the

expected change in an exchange
Economics 4.13.l rate based on balance of payment, Removed
Mundell–Fleming, monetary, and
asset market approaches to
exchange rate determination
explain the potential effects of explain the potential effects of
Economics 4.13.m monetary and fiscal policy on 4.13.k monetary and fiscal policy on
exchange rates exchange rates

describe objectives of central bank
describe objectives of central bank or government intervention and
Wording
Economics 4.13.n intervention and capital controls 4.13.l capital controls and describe the
Change
and describe the effectiveness of effectiveness of intervention and
intervention and capital controls capital controls
describe warning signs of a describe warning signs of a
Economics 4.13.o 4.13.m
currency crisis currency crisis
describe uses of technical analysis
Economics 4.13.p Removed
in forecasting exchange rates
compare factors favoring and compare factors favoring and
limiting economic growth in limiting economic growth in
Economics 4.14.a 4.14.a
developed and developing developed and developing
economies economies
describe the relation between the describe the relation between the
long-run rate of stock market long-run rate of stock market
appreciation and the sustainable appreciation and the sustainable
growth rate of the economy growth rate of the economy
explain why potential GDP and its explain why potential GDP and its
Economics 4.14.c growth rate matter for equity and 4.14.c growth rate matter for equity and
fixed income investors fixed income investors
distinguish between capital distinguish between capital
deepening investment and deepening investment and
Economics 4.14.d technological progress and explain 4.14.d technological progress and explain
how each affects economic growth how each affects economic growth
and labor productivity and labor productivity
forecast potential GDP based on forecast potential GDP based on
growth accounting relations growth accounting relations
explain how natural resources explain how natural resources

affect economic growth and affect economic growth and
evaluate the argument that limited evaluate the argument that limited
availability of natural resources availability of natural resources
constrains economic growth constrains economic growth
explain how demographics, explain how demographics,
immigration, and labor force immigration, and labor force
Economics 4.14.g 4.14.g
participation affect the rate and participation affect the rate and
sustainability of economic growth sustainability of economic growth
explain how investment in physical explain how investment in physical
capital, human capital, and capital, human capital, and
Economics 4.14.h 4.14.h
technological development affects technological development affects
economic growth economic growth
compare classical growth theory, compare classical growth theory,
Economics 4.14.i neoclassical growth theory, and 4.14.i neoclassical growth theory, and
endogenous growth theory endogenous growth theory
explain and evaluate convergence explain and evaluate convergence
Economics 4.14.j 4.14.j
hypotheses hypotheses
describe the economic rationale describe the economic rationale
for governments to provide for governments to provide
Economics 4.14.k 4.14.k
incentives to private investment in incentives to private investment in
technology and knowledge technology and knowledge
describe the expected impact of describe the expected impact of
removing trade barriers on capital removing trade barriers on capital
Economics 4.14.l investment and profits, 4.14.l investment and profits,
employment and wages, and employment and wages, and
growth in the economies involved growth in the economies involved
describe classifications of describe classifications of
Economics 4.15.a 4.15.a
regulations and regulators regulations and regulators
describe uses of self-regulation in describe uses of self-regulation in
financial markets financial markets
describe the economic rationale describe the economic rationale
Economics 4.15.c 4.15.c
for regulatory intervention for regulatory intervention
describe regulatory describe regulatory
Economics 4.15.d interdependencies and their 4.15.d interdependencies and their
effects effects
describe tools of regulatory describe tools of regulatory
intervention in markets intervention in markets
explain purposes in regulating explain purposes in regulating
commerce and financial markets commerce and financial markets
describe anticompetitive behaviors describe anticompetitive behaviors
targeted by antitrust laws globally targeted by antitrust laws globally
Economics 4.15.g and evaluate the antitrust risk 4.15.g and evaluate the antitrust risk
associated with a given business associated with a given business
strategy strategy
describe benefits and costs of describe benefits and costs of
Economics 4.15.h 4.15.h
regulation regulation
evaluate how a specific regulation evaluate how a specific regulation
Economics 4.15.i affects an industry, company, or 4.15.i affects an industry, company, or
security security

describe the classification, describe the classification,
measurement, and disclosure measurement, and disclosure
under International Financial under International Financial
Reporting Standards (IFRS) for 1) Reporting Standards (IFRS) for 1)
Financial investments in Financial assets, 2) investments in financial assets, 2)
5.16.a 5.16.a
Reporting investments in associates, 3) joint investments in associates, 3) joint
ventures, 4) business ventures, 4) business
combinations, and 5) special combinations, and 5) special
purpose and variable interest purpose and variable interest
entities entities
distinguish between IFRS and US distinguish between IFRS and US
GAAP in the classification, GAAP in the classification,
measurement, and disclosure of measurement, and disclosure of
Financial investments in financial assets, investments in financial assets,
5.16.b 5.16.b
Reporting investments in associates, joint investments in associates, joint
ventures, business combinations, ventures, business combinations,
and special purpose and variable and special purpose and variable
interest entities interest entities
analyze how different methods analyze how different methods
Financial used to account for intercorporate used to account for intercorporate
5.16.c 5.16.c
Reporting investments affect financial investments affect financial
statements and ratios statements and ratios
describe the types of post- describe the types of post-
Financial
5.17.a employment benefit plans and 5.17.a employment benefit plans and
Reporting
implications for financial reports implications for financial reports
explain and calculate measures of explain and calculate measures of
a defined benefit pension a defined benefit pension
Financial obligation (i.e., present value of obligation (i.e., present value of
5.17.b 5.17.b
Reporting the defined benefit obligation and the defined benefit obligation and
projected benefit obligation) and projected benefit obligation) and
net pension liability (or asset) net pension liability (or asset)
describe the components of a describe the components of a
Financial
5.17.c company’s defined benefit pension 5.17.c company’s defined benefit pension
Reporting
costs costs
explain and calculate the effect of explain and calculate the effect of
a defined benefit plan’s a defined benefit plan’s
Financial
5.17.d assumptions on the 5.17.d assumptions on the
Reporting
defined benefit obligation and defined benefit obligation and
periodic pension cost periodic pension cost

explain and calculate how explain and calculate how
adjusting for items of pension and adjusting for items of pension and
Financial other post-employment benefits other post-employment benefits
5.17.e 5.17.e
Reporting that are reported in the notes to that are reported in the notes to
the financial statements affects the financial statements affects
financial statements and ratios financial statements and ratios
interpret pension plan note interpret pension plan note
Financial
5.17.f disclosures including cash flow 5.17.f disclosures including cash flow
Reporting
related information related information
explain issues associated with explain issues associated with
Financial
5.17.g accounting for share-based 5.17.g accounting for share-based
Reporting
compensation compensation
explain how accounting for stock explain how accounting for stock
grants and stock options affects grants and stock options affects
Financial financial statements, and the financial statements, and the
5.17.h 5.17.h
Reporting importance of companies’ importance of companies’
assumptions in valuing these assumptions in valuing these
grants and options grants and options
distinguish among presentation distinguish among presentation
Financial
5.18.a (reporting) currency, functional 5.18.a (reporting) currency, functional
Reporting
currency, and local currency currency, and local currency
describe foreign currency describe foreign currency
transaction exposure, including transaction exposure, including
Financial
5.18.b accounting for and disclosures 5.18.b accounting for and disclosures
Reporting
about foreign currency transaction about foreign currency transaction
gains and losses gains and losses
analyze how changes in exchange analyze how changes in exchange
Financial rates affect the translated sales of rates affect the translated sales of
5.18.c 5.18.c
Reporting the subsidiary and parent the subsidiary and parent
company company
compare the current rate method compare the current rate method
and the temporal method, and the temporal method,
evaluate how each affects the evaluate how each affects the
Financial
5.18.d parent company’s balance sheet 5.18.d parent company’s balance sheet
Reporting
and income statement, and and income statement, and
determine which method is determine which method is
appropriate in various scenarios appropriate in various scenarios

calculate the translation effects calculate the translation effects
and evaluate the translation of a and evaluate the translation of a
Financial
5.18.e subsidiary’s balance sheet and 5.18.e subsidiary’s balance sheet and
Reporting
income statement into the parent income statement into the parent
company’s presentation currency company’s presentation currency
analyze how the current rate analyze how the current rate
Financial method and the temporal method method and the temporal method
5.18.f 5.18.f
Reporting affect financial statements and affect financial statements and
ratios ratios
analyze how alternative translation analyze how alternative translation
methods for subsidiaries operating methods for subsidiaries operating
Financial
5.18.g in hyperinflationary economies 5.18.g in hyperinflationary economies
Reporting
affect financial statements and affect financial statements and
ratios ratios
describe how multinational describe how multinational
Financial
5.18.h operations affect a company’s 5.18.h operations affect a company’s
Reporting
effective tax rate effective tax rate
explain how changes in the explain how changes in the
Financial
5.18.i components of sales affect the 5.18.i components of sales affect the
Reporting
sustainability of sales growth sustainability of sales growth
analyze how currency fluctuations analyze how currency fluctuations
Financial potentially affect financial results, potentially affect financial results,
5.18.j 5.18.j
Reporting given a company’s countries of given a company’s countries of
operation operation
demonstrate the use of a demonstrate the use of a
Financial conceptual framework for conceptual framework for
6.19.a 6.19.a
Reporting assessing the quality of a assessing the quality of a
company’s financial reports company’s financial reports
explain potential problems that explain potential problems that
Financial Wording
6.19.b affect the quality of financial 6.19.b affect the quality of financial
Reporting Change
reports report
describe how to evaluate the describe how to evaluate the
Financial
6.19.c quality of a company’s financial 6.19.c quality of a company’s financial
Reporting
reports reports
Financial evaluate the quality of a evaluate the quality of a
6.19.d 6.19.d
Reporting company’s financial reports company’s financial reports
Financial describe the concept of describe the concept of
6.19.e 6.19.e
Reporting sustainable (persistent) earnings sustainable (persistent) earnings
Financial describe indicators of earnings describe indicators of earnings
6.19.f 6.19.f
Reporting quality quality

explain mean reversion in earnings explain mean reversion in earnings
Financial and how the accruals component and how the accruals component
6.19.g 6.19.g
Reporting of earnings affects the speed of of earnings affects the speed of
mean reversion mean reversion
Financial evaluate the earnings quality of a evaluate the earnings quality of a
6.19.h 6.19.h
Reporting company company
Financial describe indicators of cash flow describe indicators of cash flow
6.19.i 6.19.i
Reporting quality quality
Financial evaluate the cash flow quality of a evaluate the cash flow quality of a
6.19.j 6.19.j
Reporting company company
Financial describe indicators of balance describe indicators of balance
6.19.k 6.19.k
Reporting sheet quality sheet quality
Financial evaluate the balance sheet quality evaluate the balance sheet quality
6.19.l 6.19.l
Reporting of a company of a company
Financial describe sources of information describe sources of information
6.19.m 6.19.m
Reporting about risk about risk
demonstrate the use of a demonstrate the use of a
framework for the analysis of framework for the analysis of
financial statements, given a financial statements, given a
particular problem, question, or particular problem, question, or
purpose (e.g., valuing equity purpose (e.g., valuing equity
Financial based on comparables, critiquing a based on comparables, critiquing a
6.20.a 6.20.a
Reporting credit rating, obtaining a credit rating, obtaining a
comprehensive picture of financial comprehensive picture of financial
leverage, evaluating the leverage, evaluating the
perspectives given in perspectives given in
management’s discussion of management’s discussion of
financial results) financial results)
identify financial reporting choices identify financial reporting choices
and biases that affect the quality and biases that affect the quality
Financial and comparability of companies’ and comparability of companies’
6.20.b 6.20.b
Reporting financial statements and explain financial statements and explain
how such biases may affect how such biases may affect
financial decisions financial decisions

evaluate the quality of a evaluate the quality of a
company’s financial data and company’s financial data and
recommend appropriate recommend appropriate
adjustments to improve quality adjustments to improve quality
Financial
6.20.c and comparability with similar 6.20.c and comparability with similar
Reporting
companies, including adjustments companies, including adjustments
for differences in accounting for differences in accounting
standards, methods, and standards, methods, and
assumptions assumptions
evaluate how a given change in evaluate how a given change in
Financial accounting standards, methods, or accounting standards, methods, or
6.20.d 6.20.d
Reporting assumptions affects financial assumptions affects financial
statements and ratios statements and ratios
analyze and interpret how balance analyze and interpret how balance
sheet modifications, earnings sheet modifications, earnings
normalization, and cash flow normalization, and cash flow
Financial
6.20.e statement related modifications 6.20.e statement related modifications
Reporting
affect a company’s financial affect a company’s financial
statements, financial ratios, and statements, financial ratios, and
overall financial condition overall financial condition
calculate the yearly cash flows of calculate the yearly cash flows of
expansion and replacement capital expansion and replacement capital
Corporate
7.21.a projects and evaluate how the 7.21.a projects and evaluate how the
Finance
choice of depreciation method choice of depreciation method
affects those cash flows affects those cash flows
Corporate explain how inflation affects explain how inflation affects
7.21.b 7.21.b
Finance capital budgeting analysis capital budgeting analysis
evaluate capital projects and evaluate capital projects and

determine the optimal capital determine the optimal capital
project in situations of 1) mutually project in situations of 1) mutually
Corporate
7.21.c exclusive projects with unequal 7.21.c exclusive projects with unequal
Finance
lives, using either the least lives, using either the least
common multiple of lives approach common multiple of lives approach
or the equivalent annual annuity or the equivalent annual annuity
approach, and 2) capital rationing approach, and 2) capital rationing
explain how sensitivity analysis, explain how sensitivity analysis,
scenario analysis, and Monte Carlo scenario analysis, and Monte Carlo
Corporate
7.21.d simulation can be used to assess 7.21.d simulation can be used to assess
Finance
the stand-alone risk of a capital the stand-alone risk of a capital
project project
explain and calculate the discount explain and calculate the discount
Corporate rate, based on market risk rate, based on market risk
7.21.e 7.21.e
Finance methods, to use in valuing a methods, to use in valuing a
capital project capital project
describe types of real options and describe types of real options and
Corporate
7.21.f evaluate a capital project using 7.21.f evaluate a capital project using
Finance
real options real options
Corporate describe common capital describe common capital
7.21.g 7.21.g
Finance budgeting pitfalls budgeting pitfalls
calculate and interpret accounting calculate and interpret accounting
Corporate
7.21.h income and economic income in 7.21.h income and economic income in
Finance
the context of capital budgeting the context of capital budgeting
distinguish among the economic distinguish among the economic
profit, residual income, and claims profit, residual income, and claims
Corporate
7.21.i valuation models for capital 7.21.i valuation models for capital
Finance
budgeting and evaluate a capital budgeting and evaluate a capital
project using each project using each
explain the Modigliani–Miller explain the Modigliani–Miller
propositions regarding capital propositions regarding capital
structure, including the effects of structure, including the effects of
Corporate leverage, taxes, financial distress, leverage, taxes, financial distress,
7.22.a 7.22.a
Finance agency costs, and asymmetric agency costs, and asymmetric
information on a company’s cost information on a company’s cost
of equity, cost of capital, and of equity, cost of capital, and
optimal capital structure optimal capital structure
describe target capital structure describe target capital structure
Corporate and explain why a company’s and explain why a company’s
7.22.b 7.22.b
Finance actual capital structure may actual capital structure may
fluctuate around its target fluctuate around its target
Corporate describe the role of debt ratings in describe the role of debt ratings in
7.22.c 7.22.c
Finance capital structure policy capital structure policy
explain factors an analyst should explain factors an analyst should
Corporate consider in evaluating the effect of consider in evaluating the effect of
7.22.d 7.22.d
Finance capital structure policy on capital structure policy on
valuation valuation
describe international differences describe international differences
in the use of financial leverage, in the use of financial leverage,
Corporate factors that explain these factors that explain these
7.22.e 7.22.e
Finance differences, and implications of differences, and implications of
these differences for investment these differences for investment
analysis analysis
describe the expected effect of
regular cash dividends, extra
dividends, liquidating dividends,
Corporate
7.23.a stock dividends, stock splits, and New
Finance
reverse stock splits on
shareholders’ wealth and a
company’s financial ratios
compare theories of dividend compare theories of dividend
policy and explain implications of policy and explain implications of
Corporate
7.23.a each for share value given a 7.23.b each for share value given a
Finance
description of a corporate dividend description of a corporate dividend
action action
describe types of information describe types of information
Corporate (signals) that dividend initiations, (signals) that dividend initiations,
7.23.b 7.23.c
Finance increases, decreases, and increases, decreases, and
omissions may convey omissions may convey
explain how clientele effects and explain how clientele effects and
Corporate Wording
7.23.c agency issues may affect a 7.23.d agency costs may affect a
Finance Change
company’s payout policy company’s payout policy
Corporate explain factors that affect dividend explain factors that affect dividend Wording
7.23.d 7.23.e
Finance policy policy in practice Change
effective tax rate on a given effective tax rate on a given
Corporate currency unit of corporate currency unit of corporate
7.23.e 7.23.f
Finance earnings under double taxation, earnings under double taxation,
dividend imputation, and split-rate dividend imputation, and split-rate
tax systems tax systems
compare stable dividend, constant compare stable dividend, constant
dividend payout ratio, and residual dividend payout ratio, and residual
Corporate
7.23.f dividend payout policies, and 7.23.g dividend payout policies, and
Finance
calculate the dividend under each calculate the dividend under each
policy policy
Corporate compare share repurchase
7.23.h New
Finance methods
calculate and compare the effect
of a share repurchase on earnings
per share when 1) the repurchase
Corporate
7.23.i is financed with the company’s New
Finance
surplus cash and 2) the company
uses debt to finance the
repurchase
calculate the effect of a share
Corporate
7.23.j repurchase on book value per New
Finance
share
explain the choice between paying explain the choice between paying
Corporate
7.23.g cash dividends and repurchasing 7.23.k cash dividends and repurchasing
Finance
shares shares
Corporate describe broad trends in corporate describe broad trends in corporate Wording
7.23.h 7.23.l
Finance dividend policies payout policies Change
calculate and interpret dividend calculate and interpret dividend
Corporate
7.23.i coverage ratios based on 1) net 7.23.m coverage ratios based on 1) net
Finance
income and 2) free cash flow income and 2) free cash flow
identify characteristics of identify characteristics of
Corporate
7.23.j companies that may not be able to 7.23.n companies that may not be able to
Finance
sustain their cash dividend sustain their cash dividend
compare interests of key compare interests of key
Corporate stakeholder groups and explain stakeholder groups and explain
8.24.a 8.24.a
Finance the purpose of a stakeholder the purpose of a stakeholder
impact analysis impact analysis
discuss problems that can arise in discuss problems that can arise in
Corporate principal–agent relationships and principal–agent relationships and
8.24.b 8.24.b
Finance mechanisms that may mitigate mechanisms that may mitigate
such problems such problems
discuss roots of unethical behavior discuss roots of unethical behavior
Corporate and how managers might ensure and how managers might ensure
8.24.c 8.24.c
Finance that ethical issues are considered that ethical issues are considered
in business decision making in business decision making
compare the Friedman doctrine, compare the Friedman doctrine,
Utilitarianism, Kantian Ethics, and Utilitarianism, Kantian Ethics, and
Corporate
8.24.d Rights and Justice Theories as 8.24.d Rights and Justice Theories as
Finance
approaches to ethical decision approaches to ethical decision
making making
describe objectives and core describe objectives and core

Corporate attributes of an effective corporate attributes of an effective corporate
8.25.a 8.25.a
Finance governance system and evaluate governance system and evaluate
whether a company’s corporate whether a company’s corporate
governance has those attributes governance has those attributes
compare major business forms compare major business forms
Corporate
8.25.b and describe the conflicts of 8.25.b and describe the conflicts of
Finance
interest associated with each interest associated with each

explain conflicts that arise in explain conflicts that arise in
Corporate agency relationships, including agency relationships, including
8.25.c 8.25.c
Finance manager–shareholder conflicts manager–shareholder conflicts
and director–shareholder conflicts and director–shareholder conflicts
describe responsibilities of the describe responsibilities of the
board of directors and explain board of directors and explain
Corporate qualifications and core qualifications and core
8.25.d 8.25.d
Finance competencies that an investment competencies that an investment
analyst should look for in the analyst should look for in the
board of directors board of directors
explain effective corporate explain effective corporate
governance practice as it relates governance practice as it relates
Corporate to the board of directors and to the board of directors and
8.25.e 8.25.e
Finance evaluate strengths and evaluate strengths and
weaknesses of a company’s weaknesses of a company’s
corporate governance practice corporate governance practice
describe elements of a company’s describe elements of a company’s
Corporate statement of corporate statement of corporate
8.25.f 8.25.f
Finance governance policies that governance policies that
investment analysts should assess investment analysts should assess
Corporate describe environmental, social, describe environmental, social,
8.25.g 8.25.g
Finance and governance risk exposures and governance risk exposures
Corporate explain the valuation implications explain the valuation implications
8.25.h 8.25.h
Finance of corporate governance of corporate governance
classify merger and acquisition classify merger and acquisition
Corporate (M&A) activities based on forms of (M&A) activities based on forms of
8.26.a 8.26.a
Finance integration and relatedness of integration and relatedness of
business activities business activities
Corporate explain common motivations explain common motivations
8.26.b 8.26.b
Finance behind M&A activity behind M&A activity
explain bootstrapping of earnings explain bootstrapping of earnings
Corporate
8.26.c per share (EPS) and calculate a 8.26.c per share (EPS) and calculate a
Finance
company’s post-merger EPS company’s post-merger EPS
explain, based on industry life explain, based on industry life
Corporate cycles, the relation between cycles, the relation between
8.26.d 8.26.d
Finance merger motivations and types of merger motivations and types of
mergers mergers

contrast merger transaction contrast merger transaction
characteristics by form of characteristics by form of
Corporate
8.26.e acquisition, method of payment, 8.26.e acquisition, method of payment,
Finance
and attitude of target and attitude of target
management management
distinguish among pre-offer and distinguish among pre-offer and
Corporate
8.26.f post-offer takeover defense 8.26.f post-offer takeover defense
Finance
mechanisms mechanisms
Herfindahl–Hirschman Index and Herfindahl–Hirschman Index and
Corporate
8.26.g evaluate the likelihood of an 8.26.g evaluate the likelihood of an
Finance
antitrust challenge for a given antitrust challenge for a given
business combination business combination
compare the discounted cash flow, compare the discounted cash flow,
comparable company, and comparable company, and
Corporate comparable transaction analyses comparable transaction analyses
8.26.h 8.26.h
Finance for valuing a target company, for valuing a target company,
including the advantages and including the advantages and
disadvantages of each disadvantages of each
calculate free cash flows for a calculate free cash flows for a
Corporate target company and estimate the target company and estimate the
8.26.i 8.26.i
Finance company’s intrinsic value based on company’s intrinsic value based on
discounted cash flow analysis discounted cash flow analysis
estimate the value of a target estimate the value of a target
Corporate company using comparable company using comparable
8.26.j 8.26.j
Finance company and comparable company and comparable
transaction analyses transaction analyses
evaluate a takeover bid and evaluate a takeover bid and
calculate the estimated post- calculate the estimated post-
Corporate acquisition value of an acquirer acquisition value of an acquirer
8.26.k 8.26.k
Finance and the gains accrued to the and the gains accrued to the
target shareholders versus the target shareholders versus the
acquirer shareholders acquirer shareholders
explain how price and payment explain how price and payment
Corporate method affect the distribution of method affect the distribution of
8.26.l 8.26.l
Finance risks and benefits in M&A risks and benefits in M&A
transactions transactions
Corporate describe characteristics of M&A describe characteristics of M&A
8.26.m 8.26.m
Finance transactions that create value transactions that create value

distinguish among equity carve- distinguish among equity carve-
Corporate
8.26.n outs, spin-offs, split-offs, and 8.26.n outs, spin-offs, split-offs, and
Finance
liquidation liquidation
Corporate explain common reasons for explain common reasons for
8.26.o 8.26.o
Finance restructuring restructuring
define valuation and intrinsic value define valuation and intrinsic value
Equity 9.27.a and explain sources of perceived 9.27.a and explain sources of perceived
mispricing mispricing
explain the going concern explain the going concern
assumption and contrast a going assumption and contrast a going
Equity 9.27.b 9.27.b
concern value to a liquidation concern value to a liquidation
value value
describe definitions of value and describe definitions of value and
justify which definition of value is justify which definition of value is
Equity 9.27.c 9.27.c
most relevant to public company most relevant to public company
valuation valuation
describe applications of equity describe applications of equity
Equity 9.27.d 9.27.d
valuation valuation
describe questions that should be describe questions that should be
Equity 9.27.e addressed in conducting an 9.27.e addressed in conducting an
industry and competitive analysis industry and competitive analysis
contrast absolute and relative contrast absolute and relative
Equity 9.27.f valuation models and describe 9.27.f valuation models and describe
examples of each type of model examples of each type of model
describe sum-of-the-parts describe sum-of-the-parts
Equity 9.27.g valuation and conglomerate 9.27.g valuation and conglomerate
discounts discounts
explain broad criteria for choosing explain broad criteria for choosing
an appropriate approach for an appropriate approach for
Equity 9.27.h 9.27.h
valuing a given valuing a given
company company
distinguish among realized holding distinguish among realized holding
period return, expected holding period return, expected holding
period return, required return, period return, required return,
Equity 9.28.a 9.28.a
return from convergence of price return from convergence of price
to intrinsic value, discount rate, to intrinsic value, discount rate,
and internal rate of return and internal rate of return
calculate and interpret an equity calculate and interpret an equity
risk premium using historical and risk premium using historical and
Equity 9.28.b 9.28.b
forward-looking estimation forward-looking estimation
approaches approaches
estimate the required return on an estimate the required return on an
equity investment using the equity investment using the
capital asset pricing model, the capital asset pricing model, the
Fama–French model, the Fama–French model, the
Equity 9.28.c Pastor–Stambaugh model, 9.28.c Pastor–Stambaugh model,
macroeconomic multifactor macroeconomic multifactor
models, and the build-up method models, and the build-up method
(e.g., bond yield plus risk (e.g., bond yield plus risk
premium) premium)
explain beta estimation for public explain beta estimation for public
companies, thinly traded public companies, thinly traded public
Equity 9.28.d 9.28.d
companies, and nonpublic companies, and nonpublic
companies companies
describe strengths and describe strengths and
weaknesses of methods used to weaknesses of methods used to
Equity 9.28.e 9.28.e
estimate the required return on an estimate the required return on an
equity investment equity investment
explain international explain international
Equity 9.28.f considerations in required return 9.28.f considerations in required return
estimation estimation
explain and calculate the weighted explain and calculate the weighted
Equity 9.28.g average cost of capital for a 9.28.g average cost of capital for a
company company
evaluate the appropriateness of evaluate the appropriateness of
using a particular rate of return as using a particular rate of return as
a discount rate, given a a discount rate, given a
Equity 9.28.h 9.28.h
description of the cash flow to be description of the cash flow to be
discounted and other relevant discounted and other relevant
facts facts
compare top-down, bottom-up, compare top-down, bottom-up,
and hybrid approaches for and hybrid approaches for
Equity 10.29.a 10.29.a
developing inputs to equity developing inputs to equity
valuation models valuation models
compare “growth relative to GDP compare “growth relative to GDP
growth” and “market growth and growth” and “market growth and
Equity 10.29.b 10.29.b
market share” approaches to market share” approaches to
forecasting revenue forecasting revenue
evaluate whether economies of evaluate whether economies of
scale are present in an industry by scale are present in an industry by
Equity 10.29.c 10.29.c
analyzing operating margins and analyzing operating margins and
sales levels sales levels
forecast the following costs: cost forecast the following costs: cost
of goods sold, selling general and of goods sold, selling general and
Equity 10.29.d 10.29.d
administrative costs, financing administrative costs, financing
costs, and income taxes costs, and income taxes
describe approaches to balance describe approaches to balance
Equity 10.29.e 10.29.e
sheet modeling sheet modeling
describe the relationship between describe the relationship between
Equity 10.29.f return on invested capital and 10.29.f return on invested capital and
competitive advantage competitive advantage
explain how competitive factors explain how competitive factors
Equity 10.29.g 10.29.g
affect prices and costs affect prices and costs
judge the competitive position of a judge the competitive position of a
Equity 10.29.h company based on a Porter’s five 10.29.h company based on a Porter’s five
forces analysis forces analysis
explain how to forecast industry explain how to forecast industry
and company sales and costs and company sales and costs
Equity 10.29.i 10.29.i
when they are subject to price when they are subject to price
inflation or deflation inflation or deflation
evaluate the effects of evaluate the effects of
technological developments on technological developments on
Equity 10.29.j 10.29.j
demand, selling prices, costs, and demand, selling prices, costs, and
margins margins
explain considerations in the explain considerations in the
Equity 10.29.k choice of an explicit forecast 10.29.k choice of an explicit forecast
horizon horizon
explain an analyst’s choices in explain an analyst’s choices in
Equity 10.29.l developing projections beyond the 10.29.l developing projections beyond the
short-term forecast horizon short-term forecast horizon
demonstrate the development of a demonstrate the development of a
Equity 10.29.m sales-based pro forma company 10.29.m sales-based pro forma company
model model
compare dividends, free cash flow, compare dividends, free cash flow,
and residual income as inputs to and residual income as inputs to
Equity 10.30.a 10.30.a
discounted cash flow models and discounted cash flow models and
identify investment situations for identify investment situations for
which each measure is suitable which each measure is suitable

calculate and interpret the value of calculate and interpret the value of
Equity 10.30.b a common stock using the 10.30.b a common stock using the
dividend discount model (DDM) for dividend discount model (DDM) for
single and multiple holding periods single and multiple holding periods
calculate the value of a common calculate the value of a common
stock using the Gordon growth stock using the Gordon growth
Equity 10.30.c 10.30.c
model and explain the model’s model and explain the model’s
underlying assumptions underlying assumptions
calculate and interpret the implied calculate the value of a common
growth rate of dividends using the stock using the Gordon growth Wording
Equity 10.30.d 10.30.d
Gordon growth model and current model and explain the model’s Change
stock price underlying assumptions
calculate and interpret the present calculate and interpret the present
value of growth opportunities value of growth opportunities
Equity 10.30.e (PVGO) and the component of the 10.30.e (PVGO) and the component of the
leading price-to-earnings ratio leading price-to-earnings ratio
(P/E) related to PVGO (P/E) related to PVGO
calculate and interpret the justified calculate and interpret the justified
Equity 10.30.f leading and trailing P/Es using the 10.30.f leading and trailing P/Es using the
Gordon growth model Gordon growth model
calculate the value of noncallable calculate the value of noncallable
Equity 10.30.g fixed-rate perpetual preferred 10.30.g fixed-rate perpetual preferred
stock stock
describe strengths and limitations describe strengths and limitations
of the Gordon growth model and of the Gordon growth model and
Equity 10.30.h 10.30.h
justify its selection to value a justify its selection to value a
company’s common shares company’s common shares
explain the assumptions and explain the assumptions and
justify the selection of the two- justify the selection of the two-
stage DDM, the H-model, the stage DDM, the H-model, the
Equity 10.30.i 10.30.i
three-stage DDM, or spreadsheet three-stage DDM, or spreadsheet
modeling to value a company’s modeling to value a company’s
common shares common shares
explain the growth phase, explain the growth phase,
Equity 10.30.j transitional phase, and maturity 10.30.j transitional phase, and maturity
phase of a business phase of a business
describe terminal value and describe terminal value and
explain alternative approaches to explain alternative approaches to
Equity 10.30.k 10.30.k
determining the terminal value in determining the terminal value in
a DDM a DDM
common shares using the two- common shares using the two-
Equity 10.30.l 10.30.l
stage DDM, the H-model, and the stage DDM, the H-model, and the
three-stage DDM three-stage DDM
estimate a required return based estimate a required return based
Equity 10.30.m on any DDM, including the Gordon 10.30.m on any DDM, including the Gordon
growth model and the H-model growth model and the H-model
explain the use of spreadsheet explain the use of spreadsheet
Equity 10.30.n modeling to forecast dividends and 10.30.n modeling to forecast dividends and
to value common shares to value common shares

sustainable growth rate of a sustainable growth rate of a
Equity 10.30.o 10.30.o
company and demonstrate the use company and demonstrate the use
of DuPont analysis to estimate a of DuPont analysis to estimate a
company’s sustainable growth rate company’s sustainable growth rate
evaluate whether a stock is evaluate whether a stock is
overvalued, fairly valued, or overvalued, fairly valued, or
Equity 10.30.p 10.30.p
undervalued by the market based undervalued by the market based
on a DDM estimate of value on a DDM estimate of value
compare the free cash flow to the compare the free cash flow to the
firm (FCFF) and free cash flow to firm (FCFF) and free cash flow to
Equity 11.31.a 11.31.a
equity (FCFE) approaches to equity (FCFE) approaches to
valuation valuation
explain the ownership perspective explain the ownership perspective
Equity 11.31.b 11.31.b
implicit in the FCFE approach implicit in the FCFE approach
explain the appropriate explain the appropriate
adjustments to net income, adjustments to net income,
earnings before interest and taxes earnings before interest and taxes
(EBIT), earnings before interest, (EBIT), earnings before interest,
Equity 11.31.c 11.31.c
taxes, depreciation, and taxes, depreciation, and
amortization (EBITDA), and cash amortization (EBITDA), and cash
flow from operations (CFO) to flow from operations (CFO) to
calculate FCFF and FCFE calculate FCFF and FCFE
Equity 11.31.d calculate FCFF and FCFE 11.31.d calculate FCFF and FCFE
describe approaches for describe approaches for
Equity 11.31.e 11.31.e
forecasting FCFF and FCFE forecasting FCFF and FCFE
compare the FCFE model and compare the FCFE model and
Equity 11.31.f 11.31.f
dividend discount models dividend discount models

explain how dividends, share explain how dividends, share
repurchases, share issues, and repurchases, share issues, and
Equity 11.31.g 11.31.g
changes in leverage may affect changes in leverage may affect
future FCFF and FCFE future FCFF and FCFE
evaluate the use of net income evaluate the use of net income
Equity 11.31.h and EBITDA as proxies for cash 11.31.h and EBITDA as proxies for cash
flow in valuation flow in valuation
explain the single-stage (stable- explain the single-stage (stable-
growth), two-stage, and three- growth), two-stage, and three-
stage FCFF and FCFE models and stage FCFF and FCFE models and
Equity 11.31.i 11.31.i
select and justify the appropriate select and justify the appropriate
model given a company’s model given a company’s
characteristics characteristics
estimate a company’s value using estimate a company’s value using
Equity 11.31.j the appropriate free cash flow 11.31.j the appropriate free cash flow
model(s) model(s)
explain the use of sensitivity explain the use of sensitivity
Equity 11.31.k analysis in FCFF and FCFE 11.31.k analysis in FCFF and FCFE
valuations valuations
describe approaches for describe approaches for
Equity 11.31.l calculating the terminal value in a 11.31.l calculating the terminal value in a
multistage valuation model multistage valuation model
Equity 11.31.m 11.31.m
undervalued based on a free cash undervalued based on a free cash
flow valuation model flow valuation model
distinguish between the method of distinguish between the method of
comparables and the method comparables and the method
based on forecasted fundamentals based on forecasted fundamentals
Equity 11.32.a as approaches to using price 11.32.a as approaches to using price
multiples in valuation, and explain multiples in valuation, and explain
economic rationales for each economic rationales for each
approach approach
calculate and interpret a justified calculate and interpret a justified
Equity 11.32.b 11.32.b
price multiple price multiple
describe rationales for and describe rationales for and
possible drawbacks to using possible drawbacks to using
Equity 11.32.c 11.32.c
alternative price multiples and alternative price multiples and
dividend yield in valuation dividend yield in valuation
calculate and interpret alternative calculate and interpret alternative
Equity 11.32.d 11.32.d
price multiples and dividend yield price multiples and dividend yield
calculate and interpret underlying calculate and interpret underlying
earnings, explain methods of earnings, explain methods of
Equity 11.32.e normalizing earnings per share 11.32.e normalizing earnings per share
(EPS), and calculate normalized (EPS), and calculate normalized
EPS EPS
explain and justify the use of explain and justify the use of
Equity 11.32.f 11.32.f
earnings yield (E/P) earnings yield (E/P)
describe fundamental factors that describe fundamental factors that
Equity 11.32.g influence alternative price 11.32.g influence alternative price
multiples and dividend yield multiples and dividend yield
calculate and interpret the justified calculate and interpret the justified
price-to-earnings ratio (P/E), price- price-to-earnings ratio (P/E), price-
Equity 11.32.h 11.32.h
to-book ratio (P/B), and price-to- to-book ratio (P/B), and price-to-
sales ratio (P/S) for a stock, based sales ratio (P/S) for a stock, based
on forecasted fundamentals on forecasted fundamentals
calculate and interpret a predicted calculate and interpret a predicted
P/E, given a cross-sectional P/E, given a cross-sectional
Equity 11.32.i regression on fundamentals, and 11.32.i regression on fundamentals, and
explain limitations to the cross- explain limitations to the cross-
sectional regression methodology sectional regression methodology
evaluate a stock by the method of evaluate a stock by the method of
comparables and explain the comparables and explain the
Equity 11.32.j 11.32.j
importance of fundamentals in importance of fundamentals in
using the method of comparables using the method of comparables
calculate and interpret the P/E-to- calculate and interpret the P/E-to-
Equity 11.32.k growth ratio (PEG) and explain its 11.32.k growth ratio (PEG) and explain its
use in relative valuation use in relative valuation
calculate and explain the use of calculate and explain the use of
price multiples in determining price multiples in determining
Equity 11.32.l 11.32.l
terminal value in a multistage terminal value in a multistage
discounted cash flow (DCF) model discounted cash flow (DCF) model
explain alternative definitions of explain alternative definitions of
cash flow used in price and cash flow used in price and
Equity 11.32.m enterprise value (EV) multiples 11.32.m enterprise value (EV) multiples
and describe limitations of each and describe limitations of each
definition definition
calculate and interpret EV calculate and interpret EV
Equity 11.32.n multiples and evaluate the use of 11.32.n multiples and evaluate the use of
EV/EBITDA EV/EBITDA

explain sources of differences in explain sources of differences in
Equity 11.32.o cross-border valuation 11.32.o cross-border valuation
comparisons comparisons
describe momentum indicators describe momentum indicators
Equity 11.32.p 11.32.p
and their use in valuation and their use in valuation
explain the use of the arithmetic explain the use of the arithmetic
mean, the harmonic mean, the mean, the harmonic mean, the
Equity 11.32.q weighted harmonic mean, and the 11.32.q weighted harmonic mean, and the
median to describe the central median to describe the central
tendency of a group of multiples tendency of a group of multiples
Equity 11.32.r 11.32.r
undervalued based on undervalued based on
comparisons of multiples comparisons of multiples
calculate and interpret residual calculate and interpret residual
Equity 11.33.a income, economic value added, 11.33.a income, economic value added,
and market value added and market value added
describe the uses of residual describe the uses of residual
Equity 11.33.b 11.33.b
income models income models
calculate the intrinsic value of a calculate the intrinsic value of a
common stock using the residual common stock using the residual
Equity 11.33.c income model and compare value 11.33.c income model and compare value
recognition in residual income and recognition in residual income and
other present value models other present value models
explain fundamental determinants explain fundamental determinants
Equity 11.33.d 11.33.d
of residual income of residual income
explain the relation between explain the relation between
residual income valuation and the residual income valuation and the
Equity 11.33.e 11.33.e
justified price-to-book ratio based justified price-to-book ratio based
on forecasted fundamentals on forecasted fundamentals
calculate and interpret the intrinsic calculate and interpret the intrinsic
value of a common stock using value of a common stock using
Equity 11.33.f single-stage (constant-growth) 11.33.f single-stage (constant-growth)
and multistage residual income and multistage residual income
models models
calculate the implied growth rate calculate the implied growth rate
in residual income, given the in residual income, given the
Equity 11.33.g market price-to-book ratio and an 11.33.g market price-to-book ratio and an
estimate of the required rate of estimate of the required rate of
return on equity return on equity

explain continuing residual income explain continuing residual income
and justify an estimate of and justify an estimate of
Equity 11.33.h continuing residual income at the 11.33.h continuing residual income at the
forecast horizon, given company forecast horizon, given company
and industry prospects and industry prospects
compare residual income models compare residual income models
Equity 11.33.i to dividend discount and free cash 11.33.i to dividend discount and free cash
flow models flow models
explain strengths and weaknesses explain strengths and weaknesses
of residual income models and of residual income models and
Equity 11.33.j justify the selection of a residual 11.33.j justify the selection of a residual
income model to value a income model to value a
company’s common stock company’s common stock
describe accounting issues in describe accounting issues in
Equity 11.33.k 11.33.k
applying residual income models applying residual income models
Equity 11.33.l 11.33.l
undervalued based on a residual undervalued based on a residual
income model income model
compare public and private compare public and private
Equity 11.34.a 11.34.a
company valuation company valuation
describe uses of private business describe uses of private business
valuation and explain applications valuation and explain applications
Equity 11.34.b 11.34.b
of greatest concern to financial of greatest concern to financial
analysts analysts
explain various definitions of value explain various definitions of value
and demonstrate how different and demonstrate how different
Equity 11.34.c 11.34.c
definitions can lead to different definitions can lead to different
estimates of value estimates of value
explain the income, market, and explain the income, market, and
asset-based approaches to private asset-based approaches to private
Equity 11.34.d company valuation and factors 11.34.d company valuation and factors
relevant to the selection of each relevant to the selection of each
approach approach
explain cash flow estimation issues explain cash flow estimation issues
Equity 11.34.e related to private companies and 11.34.e related to private companies and
adjustments required to estimate adjustments required to estimate
normalized earnings normalized earnings

calculate the value of a private calculate the value of a private
company using free cash flow, company using free cash flow,
Equity 11.34.f 11.34.f
capitalized cash flow, and/or capitalized cash flow, and/or
excess earnings methods excess earnings methods
explain factors that require explain factors that require
adjustment when estimating the adjustment when estimating the
Equity 11.34.g 11.34.g
discount rate for private discount rate for private
companies companies
compare models used to estimate compare models used to estimate
the required rate of return to the required rate of return to
Equity 11.34.h private company equity (for 11.34.h private company equity (for
example, the CAPM, the expanded example, the CAPM, the expanded
CAPM, and the build-up approach) CAPM, and the build-up approach)
calculate the value of a private calculate the value of a private
company based on market company based on market
Equity 11.34.i approach methods and describe 11.34.i approach methods and describe
advantages and disadvantages of advantages and disadvantages of
each method each method
Equity 11.34.j describe the asset-based approach 11.34.j describe the asset-based approach
to private company valuation to private company valuation
explain and evaluate the effects on explain and evaluate the effects on
private company valuations of private company valuations of
Equity 11.34.k 11.34.k
discounts and premiums based on discounts and premiums based on
control and marketability control and marketability
describe the role of valuation describe the role of valuation
Equity 11.34.l standards in valuing private 11.34.l standards in valuing private
companies companies
describe relationships among spot describe relationships among spot
rates, forward rates, yield to rates, forward rates, yield to
Fixed Income 12.35.a maturity, expected and realized 12.35.a maturity, expected and realized
returns on bonds, and the shape returns on bonds, and the shape
of the yield curve of the yield curve
describe the forward pricing and describe the forward pricing and
forward rate models and calculate forward rate models and calculate
Fixed Income 12.35.b 12.35.b
forward and spot prices and rates forward and spot prices and rates
using those models using those models
describe how zero-coupon rates describe how zero-coupon rates
Fixed Income 12.35.c (spot rates) may be obtained from 12.35.c (spot rates) may be obtained from
the par curve by bootstrapping the par curve by bootstrapping

describe the assumptions describe the assumptions
concerning the evolution of spot concerning the evolution of spot
Fixed Income 12.35.d rates in relation to forward rates 12.35.d rates in relation to forward rates
implicit in active bond portfolio implicit in active bond portfolio
management management
describe the strategy of riding the describe the strategy of riding the
Fixed Income 12.35.e 12.35.e
yield curve yield curve
explain the swap rate curve and explain the swap rate curve and
Fixed Income 12.35.f why and how market participants 12.35.f why and how market participants
use it in valuation use it in valuation
calculate and interpret the swap calculate and interpret the swap
Fixed Income 12.35.g 12.35.g
spread for a given maturity spread for a given maturity
Fixed Income 12.35.h describe the Z-spread 12.35.h describe the Z-spread
describe the TED and Libor–OIS describe the TED and Libor–OIS
Fixed Income 12.35.i 12.35.i
spreads spreads
explain traditional theories of the explain traditional theories of the
term structure of interest rates term structure of interest rates
Fixed Income 12.35.j and describe the implications of 12.35.j and describe the implications of
each theory for forward rates and each theory for forward rates and
the shape of the yield curve the shape of the yield curve
describe modern term structure describe modern term structure
Fixed Income 12.35.k 12.35.k
models and how they are used models and how they are used
explain how a bond’s exposure to explain how a bond’s exposure to
each of the factors driving the each of the factors driving the
Fixed Income 12.35.l yield curve can be measured and 12.35.l yield curve can be measured and
how these exposures can be used how these exposures can be used
to manage yield curve risks to manage yield curve risks
explain the maturity structure of explain the maturity structure of
Fixed Income 12.35.m yield volatilities and their effect on 12.35.m yield volatilities and their effect on
price volatility price volatility
explain what is meant by arbitrage- explain what is meant by arbitrage-
Fixed Income 12.36.a free valuation of a fixed-income 12.36.a free valuation of a fixed-income
instrument instrument
calculate the arbitrage-free value calculate the arbitrage-free value
Fixed Income 12.36.b of an option-free, fixed-rate 12.36.b of an option-free, fixed-rate
coupon bond coupon bond
describe a binomial interest rate describe a binomial interest rate
Fixed Income 12.36.c 12.36.c
tree framework tree framework

describe the backward induction describe the backward induction
valuation methodology and valuation methodology and
Fixed Income 12.36.d calculate the value of a fixed- 12.36.d calculate the value of a fixed-
income instrument given its cash income instrument given its cash
flow at each node flow at each node
describe the process of calibrating describe the process of calibrating
Fixed Income 12.36.e a binomial interest rate tree to 12.36.e a binomial interest rate tree to
match a specific term structure match a specific term structure
compare pricing using the zero- compare pricing using the zero-
coupon yield curve with pricing coupon yield curve with pricing
Fixed Income 12.36.f 12.36.f
using an arbitrage-free binomial using an arbitrage-free binomial
lattice lattice
describe pathwise valuation in a describe pathwise valuation in a
binomial interest rate framework binomial interest rate framework
Fixed Income 12.36.g and calculate the value of a fixed- 12.36.g and calculate the value of a fixed-
income instrument given its cash income instrument given its cash
flows along each path flows along each path
describe a Monte Carlo forward- describe a Monte Carlo forward-
Fixed Income 12.36.h 12.36.h
rate simulation and its application rate simulation and its application
describe fixed-income securities describe fixed-income securities
Fixed Income 13.37.a 13.37.a
with embedded options with embedded options
explain the relationships between explain the relationships between
the values of a callable or putable the values of a callable or putable
Fixed Income 13.37.b bond, the underlying option-free 13.37.b bond, the underlying option-free
(straight) bond, and the (straight) bond, and the
embedded option embedded option
describe how the arbitrage-free describe how the arbitrage-free
Fixed Income 13.37.c framework can be used to value a 13.37.c framework can be used to value a
bond with embedded options bond with embedded options
explain how interest rate volatility explain how interest rate volatility
Fixed Income 13.37.d affects the value of a callable or 13.37.d affects the value of a callable or
putable bond putable bond
explain how changes in the level explain how changes in the level
and shape of the yield curve affect and shape of the yield curve affect
Fixed Income 13.37.e 13.37.e
the value of a callable or putable the value of a callable or putable
bond bond
calculate the value of a callable or calculate the value of a callable or
Fixed Income 13.37.f putable bond from an interest rate 13.37.f putable bond from an interest rate
tree tree
explain the calculation and use of explain the calculation and use of
option-adjusted spreads option-adjusted spreads
explain how interest rate volatility explain how interest rate volatility
Fixed Income 13.37.h 13.37.h
affects option-adjusted spreads affects option-adjusted spreads
calculate and interpret effective calculate and interpret effective
Fixed Income 13.37.i duration of a callable or putable 13.37.i duration of a callable or putable
bond bond
compare effective durations of compare effective durations of
Fixed Income 13.37.j callable, putable, and straight 13.37.j callable, putable, and straight
bonds bonds
describe the use of one-sided describe the use of one-sided
durations and key rate durations durations and key rate durations
Fixed Income 13.37.k to evaluate the interest rate 13.37.k to evaluate the interest rate
sensitivity of bonds with sensitivity of bonds with
embedded options embedded options
compare effective convexities of compare effective convexities of
Fixed Income 13.37.l callable, putable, and straight 13.37.l callable, putable, and straight
bonds bonds
calculate the value of a capped or
Fixed Income 13.37.m New
floored floating-rate bond
describe defining features of a describe defining features of a
Fixed Income 13.37.m 13.37.n
convertible bond convertible bond
Fixed Income 13.37.n components of a convertible 13.37.o components of a convertible
bond’s value bond’s value
describe how a convertible bond is describe how a convertible bond is
Fixed Income 13.37.o valued in an arbitrage-free 13.37.p valued in an arbitrage-free
framework framework
compare the risk–return compare the risk–return
characteristics of a convertible characteristics of a convertible
bond with the risk–return bond with the risk–return
Fixed Income 13.37.p 13.37.q
characteristics of a straight bond characteristics of a straight bond
and of the underlying common and of the underlying common
stock stock
explain probability of default, loss explain probability of default, loss
given default, expected loss, and given default, expected loss, and
present value of the expected loss present value of the expected loss
and describe the relative and describe the relative
importance of each across the importance of each across the
credit spectrum credit spectrum
explain credit scoring and credit
Wording
Fixed Income 13.38.b ratings, including why they are 13.38.b explain credit scoring and credit
Change
called ordinal rankings ratings
explain strengths and weaknesses explain strengths and weaknesses
Fixed Income 13.38.c 13.38.c
of credit ratings of credit ratings
explain structural models of explain structural models of
corporate credit risk, including corporate credit risk, including
Fixed Income 13.38.d 13.38.d
why equity can be viewed as a call why equity can be viewed as a call
option on the company’s assets option on the company’s assets
explain reduced form models of explain reduced form models of
corporate credit risk, including corporate credit risk, including
Fixed Income 13.38.e why debt can be valued as the 13.38.e why debt can be valued as the
sum of expected discounted cash sum of expected discounted cash
flows after adjusting for risk flows after adjusting for risk
explain assumptions, strengths, explain assumptions, strengths,
and weaknesses of both structural and weaknesses of both structural
Fixed Income 13.38.f 13.38.f
and reduced form models of and reduced form models of
corporate credit risk corporate credit risk
explain the determinants of the explain the determinants of the
term structure of credit spreads term structure of credit spreads
calculate and interpret the present calculate and interpret the present
Fixed Income 13.38.h value of the expected loss on a 13.38.h value of the expected loss on a
bond over a given time horizon bond over a given time horizon
compare the credit analysis compare the credit analysis
required for asset-backed required for asset-backed
Fixed Income 13.38.i 13.38.i
securities to analysis of corporate securities to analysis of corporate
debt debt
describe credit default swaps describe credit default swaps
(CDS), single-name and index (CDS), single-name and index
CDS, and the parameters that CDS, and the parameters that
define a given CDS product define a given CDS product
describe credit events and describe credit events and
Fixed Income 13.39.b settlement protocols with respect 13.39.b settlement protocols with respect
to CDS to CDS
explain the principles underlying, explain the principles underlying,
Fixed Income 13.39.c and factors that influence, the 13.39.c and factors that influence, the
market’s pricing of CDS market’s pricing of CDS
describe the use of CDS to describe the use of CDS to
manage credit exposures and to manage credit exposures and to
Fixed Income 13.39.d express views regarding changes 13.39.d express views regarding changes
in shape and/or level of the credit in shape and/or level of the credit
curve curve

describe the use of CDS to take describe the use of CDS to take
advantage of valuation disparities advantage of valuation disparities
Fixed Income 13.39.e among separate markets, such as 13.39.e among separate markets, such as
bonds, loans, equities, and equity- bonds, loans, equities, and equity-
linked instruments linked instruments
describe and compare how equity, describe and compare how equity,
interest rate, fixed-income, and interest rate, fixed-income, and
Derivatives 14.40.a 14.40.a
currency forward and futures currency forward and futures
contracts are priced and valued contracts are priced and valued
calculate and interpret the no- calculate and interpret the no-
arbitrage value of equity, interest arbitrage value of equity, interest
Derivatives 14.40.b 14.40.b
rate, fixed- income, and currency rate, fixed- income, and currency
forward and futures contracts forward and futures contracts
describe and compare how interest describe and compare how interest
Derivatives 14.40.c rate, currency, and equity swaps 14.40.c rate, currency, and equity swaps
are priced and valued are priced and valued
calculate and interpret the no- calculate and interpret the no-
Derivatives 14.40.d arbitrage value of interest rate, 14.40.d arbitrage value of interest rate,
currency, and equity swaps currency, and equity swaps
describe and interpret the binomial describe and interpret the binomial
Derivatives 14.41.a option valuation model and its 14.41.a option valuation model and its
component terms component terms
calculate the no-arbitrage values calculate the no-arbitrage values
Derivatives 14.41.b of European and American options 14.41.b of European and American options
using a two-period binomial model using a two-period binomial model
identify an arbitrage opportunity identify an arbitrage opportunity
Derivatives 14.41.c involving options and describe the 14.41.c involving options and describe the
related arbitrage related arbitrage
describe how interest rate options
Derivatives 14.41.d are valued using a two-period Removed
binomial model
Derivatives 14.41.e an interest rate option using a two- 14.41.d an interest rate option using a two-
period binomial model period binomial model
describe how the value of a describe how the value of a
European option can be analyzed European option can be analyzed
Derivatives 14.41.f as the present value of the 14.41.e as the present value of the
option’s expected payoff at option’s expected payoff at
expiration expiration

identify assumptions of the identify assumptions of the
Derivatives 14.41.g Black–Scholes–Merton option 14.41.f Black–Scholes–Merton option
valuation model valuation model
interpret the components of the interpret the components of the
Black–Scholes–Merton model as Black–Scholes–Merton model as
Derivatives 14.41.h applied to call options in terms of 14.41.g applied to call options in terms of
a leveraged position in the a leveraged position in the
underlying underlying
describe how the describe how the
Black–Scholes–Merton model is Black–Scholes–Merton model is
Derivatives 14.41.i 14.41.h
used to value European options on used to value European options on
equities and currencies equities and currencies
describe how the Black model is describe how the Black model is
Derivatives 14.41.j used to value European options on 14.41.i used to value European options on
futures futures
describe how the Black model is describe how the Black model is
used to value European interest used to value European interest
Derivatives 14.41.k 14.41.j
rate options and European rate options and European
swaptions swaptions
Derivatives 14.41.l 14.41.k
interpret each of the option Greeks interpret each of the option Greeks
describe how a delta hedge is describe how a delta hedge is
Derivatives 14.41.m 14.41.l
executed executed
describe the role of gamma risk in describe the role of gamma risk in
Derivatives 14.41.n 14.41.m
options trading options trading
define implied volatility and define implied volatility and
Derivatives 14.41.o explain how it is used in options 14.41.n explain how it is used in options
trading trading
describe how interest rate, describe how interest rate,
currency, and equity swaps, currency, and equity swaps, Wording
Derivatives 14.42.a 14.42.a
futures, and forwards can be used futures, and forwards can be used Change
to modify risk and return to modify portfolio risk and return
describe how to replicate an asset describe how to replicate an asset
Derivatives 14.42.b by using options and by using cash 14.42.b by using options and by using cash
plus forwards or futures plus forwards or futures
describe the investment describe the investment
Derivatives 14.42.c objectives, structure, payoff, and 14.42.c objectives, structure, payoff, and
risk(s) of a covered call position risk(s) of a covered call position


Derivatives 14.42.d 14.42.d
objectives, structure, payoff, and objectives, structure, payoff, and
risks(s) of a protective put position risks(s) of a protective put position
calculate and interpret the value calculate and interpret the value
at expiration, profit, maximum at expiration, profit, maximum
profit, maximum loss, and profit, maximum loss, and
Derivatives 14.42.e 14.42.e
breakeven underlying price at breakeven underlying price at
expiration for covered calls and expiration for covered calls and
protective puts protective puts
contrast protective put and contrast protective put and
covered call positions to being covered call positions to being
Derivatives 14.42.f 14.42.f
long an asset and short a forward long an asset and short a forward
on the asset on the asset
objective(s), structure, payoffs, objective(s), structure, payoffs,
Derivatives 14.42.g and risks of the following option 14.42.g and risks of the following option
strategies: bull spread, bear strategies: bull spread, bear
spread, collar, and straddle spread, collar, and straddle
calculate and interpret the value calculate and interpret the value
at expiration, profit, maximum at expiration, profit, maximum
profit, maximum loss, and profit, maximum loss, and
Derivatives 14.42.h breakeven underlying price at 14.42.h breakeven underlying price at
expiration of the following option expiration of the following option
strategies: bull spread, bear strategies: bull spread, bear
spread, collar, and straddle spread, collar, and straddle
Derivatives 14.42.i describe uses of calendar spreads 14.42.i describe uses of calendar spreads
identify and evaluate appropriate identify and evaluate appropriate
Derivatives 14.42.j derivatives strategies consistent 14.42.j derivatives strategies consistent
with given investment objectives with given investment objectives
Alternative classify and describe basic forms classify and describe basic forms
15.43.a 15.43.a
Investments of real estate investments of real estate investments
describe the characteristics, the describe the characteristics, the
Alternative
15.43.b classification, and basic segments 15.43.b classification, and basic segments
Investments
of real estate of real estate
explain the role in a portfolio, explain the role in a portfolio,
economic value determinants, economic value determinants,
Alternative
15.43.c investment characteristics, and 15.43.c investment characteristics, and
Investments
principal risks of private real principal risks of private real
estate estate

describe commercial property describe commercial property
Alternative
15.43.d types, including their distinctive 15.43.d types, including their distinctive
Investments
investment characteristics investment characteristics
compare the income, cost, and compare the income, cost, and
Alternative
15.43.e sales comparison approaches to 15.43.e sales comparison approaches to
Investments
valuing real estate properties valuing real estate properties
estimate and interpret the inputs estimate and interpret the inputs
(for example, net operating (for example, net operating
Alternative income, capitalization rate, and income, capitalization rate, and
15.43.f 15.43.f
Investments discount rate) to the direct discount rate) to the direct
capitalization and discounted cash capitalization and discounted cash
flow valuation methods flow valuation methods
calculate the value of a property calculate the value of a property
Alternative using the direct capitalization and using the direct capitalization and
15.43.g 15.43.g
Investments discounted cash flow valuation discounted cash flow valuation
methods methods
compare the direct capitalization compare the direct capitalization
Alternative
15.43.h and discounted cash flow valuation 15.43.h and discounted cash flow valuation
Investments
methods methods
calculate the value of a property calculate the value of a property
Alternative
15.43.i using the cost and sales 15.43.i using the cost and sales
Investments
comparison approaches comparison approaches
Alternative describe due diligence in private describe due diligence in private
15.43.j 15.43.j
Investments equity real estate investment equity real estate investment
Alternative discuss private equity real estate discuss private equity real estate Wording
15.43.k 15.43.k
Investments investment indices, including their investment indexes, including their Change
construction and potential biases construction and potential biases
explain the role in a portfolio, the explain the role in a portfolio, the
major economic value major economic value
Alternative determinants, investment determinants, investment
15.43.l 15.43.l
Investments characteristics, principal risks, and characteristics, principal risks, and
due diligence of private real estate due diligence of private real estate
debt investment debt investment
calculate and interpret financial calculate and interpret financial
Alternative ratios used to analyze and ratios used to analyze and
15.43.m 15.43.m
Investments evaluate private real estate evaluate private real estate
investments investments
Alternative describe types of publicly traded describe types of publicly traded
15.44.a 15.44.a
Investments real estate securities real estate securities

explain advantages and explain advantages and
Alternative disadvantages of investing in real disadvantages of investing in real
15.44.b 15.44.b
Investments estate through publicly traded estate through publicly traded
securities securities
explain economic value explain economic value
determinants, investment determinants, investment
Alternative characteristics, principal risks, and characteristics, principal risks, and
15.44.c 15.44.c
Investments due diligence considerations for due diligence considerations for
real estate investment trust (REIT) real estate investment trust (REIT)
shares shares
Alternative
15.44.d 15.44.d
Investments describe types of REITs describe types of REITs
justify the use of net asset value justify the use of net asset value
per share (NAVPS) in REIT per share (NAVPS) in REIT
Alternative
15.44.e valuation and estimate NAVPS 15.44.e valuation and estimate NAVPS
Investments
based on forecasted cash net based on forecasted cash net
operating income operating income
describe the use of funds from describe the use of funds from
Alternative operations (FFO) and adjusted operations (FFO) and adjusted
15.44.f 15.44.f
Investments funds from operations (AFFO) in funds from operations (AFFO) in
REIT valuation REIT valuation
compare the net asset value, compare the net asset value,
relative value (price-to-FFO and relative value (price-to-FFO and
Alternative
15.44.g price-to-AFFO), and discounted 15.44.g price-to-AFFO), and discounted
Investments
cash flow approaches to REIT cash flow approaches to REIT
valuation valuation
calculate the value of a REIT share calculate the value of a REIT share
Alternative using net asset value, price-to-FFO using net asset value, price-to-FFO
15.44.h 15.44.h
Investments and price-to-AFFO, and discounted and price-to-AFFO, and discounted
cash flow approaches cash flow approaches
Alternative explain sources of value creation explain sources of value creation
15.45.a 15.45.a
Investments in private equity in private equity
explain how private equity firms explain how private equity firms
Alternative align their interests with those of align their interests with those of
15.45.b 15.45.b
Investments the managers of portfolio the managers of portfolio
companies companies
distinguish between the distinguish between the
Alternative
15.45.c characteristics of buyout and 15.45.c characteristics of buyout and
Investments
venture capital investments venture capital investments

Alternative
15.45.d describe valuation issues in buyout 15.45.d describe valuation issues in buyout
Investments
and venture capital transactions and venture capital transactions
explain alternative exit routes in explain alternative exit routes in
Alternative
15.45.e private equity and their impact on 15.45.e private equity and their impact on
Investments
value value
explain private equity fund explain private equity fund
structures, terms, valuation, and structures, terms, valuation, and
Alternative
15.45.f due diligence in the context of an 15.45.f due diligence in the context of an
Investments
analysis of private equity fund analysis of private equity fund
returns returns
Alternative explain risks and costs of investing explain risks and costs of investing
15.45.g 15.45.g
Investments in private equity in private equity
interpret and compare financial interpret and compare financial
Alternative performance of private equity performance of private equity
15.45.h 15.45.h
Investments funds from the perspective of an funds from the perspective of an
investor investor
calculate management fees, calculate management fees,
carried interest, net asset value, carried interest, net asset value,
Alternative distributed to paid in (DPI), distributed to paid in (DPI),
15.45.i 15.45.i
Investments residual value to paid in (RVPI), residual value to paid in (RVPI),
and total value to paid in (TVPI) of and total value to paid in (TVPI) of
a private equity fund a private equity fund
calculate pre-money valuation, calculate pre-money valuation,
post-money valuation, ownership post-money valuation, ownership
fraction, and price per share fraction, and price per share
Alternative
15.45.j applying the venture capital 15.45.j applying the venture capital
Investments
method 1) with single and multiple method 1) with single and multiple
financing rounds and 2) in terms financing rounds and 2) in terms
of IRR of IRR
demonstrate alternative methods demonstrate alternative methods
Alternative
15.45.k to account for risk in venture 15.45.k to account for risk in venture
Investments
capital capital
Alternative compare characteristics of compare characteristics of
15.46.a 15.46.a
Investments commodity sectors commodity sectors
compare the life cycle of compare the life cycle of
Alternative commodity sectors from commodity sectors from
15.46.b 15.46.b
Investments production through trading or production through trading or
consumption consumption

contrast the valuation of contrast the valuation of
Alternative
15.46.c commodities with the valuation of 15.46.c commodities with the valuation of
Investments
equities and bonds equities and bonds
Alternative describe types of participants in describe types of participants in
15.46.d 15.46.d
Investments commodity futures markets commodity futures markets
analyze the relationship between analyze the relationship between
Alternative spot prices and expected future spot prices and expected future
15.46.e 15.46.e
Investments prices in markets in contango and prices in markets in contango and
markets in backwardation markets in backwardation
Alternative compare theories of commodity compare theories of commodity
15.46.f 15.46.f
Investments futures returns futures returns
describe, calculate, and interpret describe, calculate, and interpret
Alternative the components of total return for the components of total return for
15.46.g 15.46.g
Investments a fully collateralized commodity a fully collateralized commodity
futures contract futures contract
contrast roll return in markets in contrast roll return in markets in
Alternative
15.46.h contango and markets in 15.46.h contango and markets in
Investments
backwardation backwardation
describe how commodity swaps describe how commodity swaps
Alternative
15.46.i are used to obtain or modify 15.46.i are used to obtain or modify
Investments
exposure to commodities exposure to commodities
describe how the construction of describe how the construction of
Alternative
15.46.j commodity indexes affects index 15.46.j commodity indexes affects index
Investments
returns returns
Portfolio explain the importance of the explain the importance of the
16.47.a 16.47.a
Management portfolio perspective portfolio perspective
describe the steps of the portfolio describe the steps of the portfolio
Portfolio
16.47.b management process and the 16.47.b management process and the
Management
components of those steps components of those steps
explain the role of the investment explain the role of the investment
policy statement in the portfolio policy statement in the portfolio
Portfolio
16.47.c management process and describe 16.47.c management process and describe
Management
the elements of an investment the elements of an investment
policy statement policy statement

explain how capital market explain how capital market

expectations and the investment expectations and the investment
Portfolio policy statement help influence the policy statement help influence the
16.47.d 16.47.d
Management strategic asset allocation decision strategic asset allocation decision
and how an investor’s investment and how an investor’s investment
time horizon may influence the time horizon may influence the
investor’s strategic asset allocation investor’s strategic asset allocation
define investment objectives and define investment objectives and
constraints and explain and constraints and explain and
Portfolio
16.47.e distinguish among the types of 16.47.e distinguish among the types of
Management
investment objectives and investment objectives and
constraints constraints
contrast the types of investment contrast the types of investment
time horizons, determine the time time horizons, determine the time
Portfolio
16.47.f horizon for a particular investor, 16.47.f horizon for a particular investor,
Management
and evaluate the effects of this and evaluate the effects of this
time horizon on portfolio choice time horizon on portfolio choice
justify ethical conduct as a justify ethical conduct as a
Portfolio
16.47.g requirement for managing 16.47.g requirement for managing
Management
investment portfolios investment portfolios
describe arbitrage pricing theory describe arbitrage pricing theory
Portfolio (APT), including its underlying (APT), including its underlying
16.48.a 16.48.a
Management assumptions and its relation to assumptions and its relation to
multifactor models multifactor models
define arbitrage opportunity and define arbitrage opportunity and
Portfolio
16.48.b determine whether an arbitrage 16.48.b determine whether an arbitrage
Management
opportunity exists opportunity exists
calculate the expected return on calculate the expected return on
Portfolio an asset given an asset’s factor an asset given an asset’s factor
16.48.c 16.48.c
Management sensitivities and the factor risk sensitivities and the factor risk
premiums premiums
describe and compare describe and compare
Portfolio macroeconomic factor models, macroeconomic factor models,
16.48.d 16.48.d
Management fundamental factor models, and fundamental factor models, and
statistical factor models statistical factor models
explain sources of active risk and explain sources of active risk and
Portfolio
16.48.e interpret tracking risk and the 16.48.e interpret tracking risk and the
Management
information ratio information ratio

describe uses of multifactor describe uses of multifactor
Portfolio models and interpret the output of models and interpret the output of
16.48.f 16.48.f
Management analyses based on multifactor analyses based on multifactor
models models
describe the potential benefits for describe the potential benefits for
Portfolio investors in considering multiple investors in considering multiple
16.48.g 16.48.g
Management risk dimensions when modeling risk dimensions when modeling
asset returns asset returns
Portfolio explain the use of value at risk explain the use of value at risk
16.49.a 16.49.a
Management (VaR) in measuring portfolio risk (VaR) in measuring portfolio risk
compare the parametric compare the parametric
(variance–covariance), historical (variance–covariance), historical
Portfolio
16.49.b simulation, and Monte Carlo 16.49.b simulation, and Monte Carlo
Management
simulation methods for estimating simulation methods for estimating
VaR VaR
estimate and interpret VaR under estimate and interpret VaR under
Portfolio the parametric, historical the parametric, historical
16.49.c 16.49.c
Management simulation, and Monte Carlo simulation, and Monte Carlo
simulation methods simulation methods
Portfolio describe advantages and describe advantages and
16.49.d 16.49.d
Management limitations of VaR limitations of VaR
Portfolio
16.49.e 16.49.e
Management describe extensions of VaR describe extensions of VaR
describe sensitivity risk measures describe sensitivity risk measures
Portfolio
16.49.f and scenario risk measures and 16.49.f and scenario risk measures and
Management
compare these measures to VaR compare these measures to VaR
demonstrate how equity, fixed- demonstrate how equity, fixed-
income, and options exposure income, and options exposure
Portfolio
16.49.g measures may be used in 16.49.g measures may be used in
Management
measuring and managing market measuring and managing market
risk and volatility risk risk and volatility risk
describe the use of sensitivity risk describe the use of sensitivity risk
Portfolio
16.49.h measures and scenario risk 16.49.h measures and scenario risk
Management
measures measures
describe advantages and describe advantages and
Portfolio limitations of sensitivity risk limitations of sensitivity risk
16.49.i 16.49.i
Management measures and scenario risk measures and scenario risk
measures measures
describe risk measures used by describe risk measures used by
Portfolio
16.49.j banks, asset managers, pension 16.49.j banks, asset managers, pension
Management
funds, and insurers funds, and insurers
explain constraints used in explain constraints used in
managing market risks, including managing market risks, including
Portfolio
16.49.k risk budgeting, position limits, 16.49.k risk budgeting, position limits,
Management
scenario limits, and stop-loss scenario limits, and stop-loss
limits limits
Portfolio explain how risk measures may be explain how risk measures may be
16.49.l 16.49.l
Management used in capital allocation decisions used in capital allocation decisions
explain the notion that to affect explain the notion that to affect
market values, economic factors market values, economic factors
must affect one or more of the must affect one or more of the
Portfolio following: (1) default-free interest following: 1) default-free interest
17.50.a 17.50.a
Management rates across maturities, (2) the rates across maturities, 2) the
timing and/or magnitude of timing and/or magnitude of
expected cash flows, and (3) risk expected cash flows, and 3) risk
premiums premiums
explain the role of expectations explain the role of expectations
Portfolio
17.50.b and changes in expectations in 17.50.b and changes in expectations in
Management
market valuation market valuation
explain the relationship between explain the relationship between
the long-term growth rate of the the long-term growth rate of the
Portfolio
17.50.c economy, the volatility of the 17.50.c economy, the volatility of the
Management
growth rate, and the average level growth rate, and the average level
of real short-term interest rates of real short-term interest rates
explain how the phase of the explain how the phase of the
business cycle affects policy and business cycle affects policy and
short-term interest rates, the short-term interest rates, the
Portfolio
17.50.d slope of the term structure of 17.50.d slope of the term structure of
Management
interest rates, and the relative interest rates, and the relative
performance of bonds of differing performance of bonds of differing
maturities maturities
describe the factors that affect describe the factors that affect
Portfolio yield spreads between non- yield spreads between non-
17.50.e 17.50.e
Management inflation-adjusted and inflation- inflation-adjusted and inflation-
indexed bonds indexed bonds
business cycle affects credit business cycle affects credit
Portfolio
17.50.f spreads and the performance of 17.50.f spreads and the performance of
Management
credit-sensitive fixed-income credit-sensitive fixed-income
instruments instruments

explain how the characteristics of explain how the characteristics of
Portfolio the markets for a company’s the markets for a company’s
17.50.g 17.50.g
Management products affect the company’s products affect the company’s
credit quality credit quality
Portfolio business cycle affects short-term business cycle affects short-term
17.50.h 17.50.h
Management and long-term earnings growth and long-term earnings growth
expectations expectations
explain the relationship between explain the relationship between
Portfolio the consumption-hedging the consumption-hedging
17.50.i 17.50.i
Management properties of equity and the equity properties of equity and the equity
risk premium risk premium
Portfolio describe cyclical effects on describe cyclical effects on
17.50.j 17.50.j
Management valuation multiples valuation multiples
describe the implications of the describe the implications of the
Portfolio business cycle for a given style business cycle for a given style
17.50.k 17.50.k
Management strategy (value, growth, small strategy (value, growth, small
capitalization, large capitalization) capitalization, large capitalization)
Portfolio describe how economic analysis is describe how economic analysis is
17.50.l 17.50.l
Management used in sector rotation strategies used in sector rotation strategies
describe the economic factors describe the economic factors
Portfolio
17.50.m affecting investment in commercial 17.50.m affecting investment in commercial
Management
real estate real estate
Portfolio describe how value added by describe how value added by
17.51.a 17.51.a
Management active management is measured active management is measured
Portfolio information ratio (ex post and ex information ratio (ex post and ex
17.51.b 17.51.b
Management ante) and contrast it to the Sharpe ante) and contrast it to the Sharpe
ratio ratio
state and interpret the state and interpret the
fundamental law of active portfolio fundamental law of active portfolio
management including its management including its
Portfolio
17.51.c component terms—transfer 17.51.c component terms—transfer
Management
coefficient, information coefficient, coefficient, information coefficient,
breadth, and active risk breadth, and active risk
(aggressiveness) (aggressiveness)
explain how the information ratio explain how the information ratio
Portfolio may be useful in investment may be useful in investment
17.51.d 17.51.d
Management manager selection and choosing manager selection and choosing
the level of active portfolio risk the level of active portfolio risk

compare active management compare active management
strategies (including market timing strategies (including market timing
Portfolio and security selection) and and security selection) and
17.51.e 17.51.e
Management evaluate strategy changes in evaluate strategy changes in
terms of the fundamental law of terms of the fundamental law of
active management active management
describe the practical strengths describe the practical strengths
Portfolio
17.51.f and limitations of the fundamental 17.51.f and limitations of the fundamental
Management
law of active management law of active management
Portfolio
17.52.a 17.52.a
Management define algorithmic trading define algorithmic trading
distinguish between execution distinguish between execution
Portfolio
17.52.b algorithms and high-frequency 17.52.b algorithms and high-frequency
Management
trading algorithms trading algorithms
describe types of execution describe types of execution
Portfolio
17.52.c algorithms and high-frequency 17.52.c algorithms and high-frequency
Management
trading algorithms trading algorithms
describe market fragmentation describe market fragmentation
Portfolio
17.52.d and its effects on how trades are 17.52.d and its effects on how trades are
Management
placed placed
describe the use of technology in describe the use of technology in
Portfolio
17.52.e risk management and regulatory 17.52.e risk management and regulatory
Management
oversight oversight
describe issues and concerns describe issues and concerns
Portfolio related to the impact of related to the impact of
17.52.f 17.52.f
Management algorithmic and high-frequency algorithmic and high-frequency
trading on securities markets trading on securities markets

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CFA Level II - LOS Changes 2017 - 2018

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evaluate the disclosure of evaluate the disclosure of

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explain international parity explain international parity

forecast the direction of the

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explain how natural resources explain how natural resources

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evaluate capital projects and evaluate capital projects and

describe objectives and core describe objectives and core

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calculate and interpret the calculate and interpret the

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describe the investment describe the investment

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explain how capital market explain how capital market

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