Ethical and Professional Standards, Quantitative Methods, and Economics docx

Book – Ethical and Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements Study Session – Ethical and Professional Standards 14 Study Session – Ethical and Professional Standards: Application 110 Self-Test – Ethical and Professional Standards 128 Study Session – Quantitative Methods for Valuation 138 Self-Test – Quantitative Methods for Valuation 254 Study Session – Economics for Valuation 260 Self-Test – Economics for Valuation 354 Formulas 357 Appendices 361 Index 370 Level Book 1.indb 8/11/2010 4:17:57 PM SCHWESERNOTES™ 2011 CFA LEVEL BOOK 1: ETHICAL AND PROFESSIONAL STANDARDS, QUANTITATIVE METHODS, AND ECONOMICS ©2010 Kaplan, Inc All rights reserved Published in 2010 by Kaplan Schweser Printed in the United States of America ISBN: 978-1-4277-2747-3 / 1-4277-2747-3 PPN: 3200-0068 If this book does not have the hologram with the Kaplan Schweser logo on the back cover, it was distributed without permission of Kaplan Schweser, a Division of Kaplan, Inc., and is in direct violation of global copyright laws Your assistance in pursuing potential violators of this law is greatly appreciated Required CFA Institute® disclaimer: “CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute CFA Institute (formerly the Association for Investment Management and Research) does not endorse, promote, review, or warrant the accuracy of the products or services offered by Kaplan Schweser.” Certain materials contained within this text are the copyrighted property of CFA Institute The following is the copyright disclosure for these materials: “Copyright, 2011, CFA Institute Reproduced and republished from 2011 Learning Outcome Statements, Level 1, 2, and questions from CFA® Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global Investment Performance Standards with permission from CFA Institute All Rights Reserved.” These materials may not be copied without written permission from the author The unauthorized duplication of these notes is a violation of global copyright laws and the CFA Institute Code of Ethics Your assistance in pursuing potential violators of this law is greatly appreciated Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CFA Institute in their 2011 CFA Level Study Guide The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be accurate However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success The authors of the referenced readings have not endorsed or sponsored these Notes Level Book 1.indb 8/11/2010 4:17:57 PM Welcome to the 2011 Level SchweserNotes™ Thank you for trusting Kaplan Schweser to help you reach your goals We are all very pleased to be able to help you prepare for the Level CFA Exam In this introduction, I want to explain the resources included with the SchweserNotes, suggest how you can best use Schweser materials to prepare for the exam, and direct you toward other educational resources you will find helpful as you study for the exam Besides the SchweserNotes themselves, there are many educational resources available at Schweser.com Just log in using the individual username and password that you received when you purchased the SchweserNotes SchweserNotes T M These consist of five volumes that include complete coverage of all 18 Study Sessions and all Learning Outcome Statements (LOS) with examples, Concept Checkers (multiple-choice questions for every topic review), and Challenge Problems for many topic reviews to help you master the material and check your progress At the end of each major topic area, we include a Self-test Self-test questions are created to be examlike in format and difficulty in order for you to evaluate how well your study of each topic has prepared you for the actual exam The Level SchweserNotes Package also includes a sixth volume, the Level Refresher, a review of important Level material Practice Questions To retain what you learn, it is important that you quiz yourself often We offer CD, download, and online versions of the SchweserPro™ QBank, which contains thousands of Level practice questions, item sets, and explanations Quizzes are available for each LOS, topic, or Study Session Build your own exams by specifying the topics and the number of questions you choose Practice Exams Schweser offers six full 6-hour practice exams Practice Exams Volume and Volume each contain three full 120-question exams These are important tools for gaining the speed and skills you will need to pass the exam Each book contains answers with full explanations for self-grading and evaluation By entering your answers at Schweser.com, you can use our Performance Tracker to find out how you have performed compared to other Schweser Level candidates Schweser Library We have created reference videos, some of which are available to all SchweserNotes purchasers Schweser Library volumes range from 20 to 60 minutes in length and cover such topics as: “Introduction to Item Sets,” “Hypothesis Testing,” “Foreign Exchange Basics,” “Ratio Analysis,” and “Forward Contracts.” The full Schweser Library is included with our 16-week live or online classes and with our video instruction (online or CDs) ©2010 Kaplan, Inc Level Book 1.indb Page 8/11/2010 4:17:57 PM Welcome to the 2011 Level SchweserNotes ™ Online Schweser Study Planner Use your Online Access to tell us when you will start and what days of the week you can study The online Schweser Study Planner will create a study plan just for you, breaking each study session into daily and weekly tasks to keep you on track and help you monitor your progress through the curriculum Additional Resources Purchasers of the Essential Self-Study or Premium Instruction Packages also receive access to our Instructor-led Office Hours Office Hours allow you to get your questions about the curriculum answered in real time and to see others’ questions (and instructor answers) as well Office Hours is a text-based live interactive online chat with our team of Level experts Archives of previous Office Hours sessions can be sorted by topic or date and are posted shortly after each session The Level CFA exam is a formidable challenge (70 topic reviews and 475+ Learning Outcome Statements), and you must devote considerable time and effort to be properly prepared There is no shortcut! You must learn the material, know the terminology and techniques, understand the concepts, and be able to answer 120 questions quickly and (at least 70%) correctly Fifteen to 20 hours per week for 20 weeks is a good estimate of the study time required on average, but some candidates will need more or less time, depending on their individual backgrounds and experience To help you master this material and be well prepared for the CFA Exam, we offer several other educational resources, including: Live Weekly Classroom Programs We offer weekly classroom programs around the world Please check Schweser.com for locations, dates, and availability 16-Week Online Classes Our 16-Week Online Classes are available at New York time (6:30–9:30 pm) or London time (6:00–9:00 pm) beginning in January The approximate schedule for the 16-Week Online Classes (3-hour sessions) is as follows: Class # 1) Exam Intro/Ethical Standards SS 1, 2) Quantitative Methods SS 3) Economics for Valuation SS 4) Financial Reporting & Analysis SS 5) Financial Reporting & Analysis SS 6) Financial Reporting & Analysis SS 7) Corporate Finance SS 8) Corporate Finance & Equity SS 9, 10 Class # 9) Equity SS 11, 12 10) Equity SS 12 11) Alternative Asset Valuation SS 13 12) Fixed Income SS 14 13) Fixed Income SS 15 14) Derivatives SS 16 15) Derivatives & Portfolio Management SS 17 16) Portfolio Management SS 18 Archived classes are available for viewing at any time throughout the season Candidates enrolled in the 16-Week Online Classes also have full access to supplemental on-demand video instruction in the Schweser Library and an e-mail address to use to send questions to the instructor at any time Page Level Book 1.indb ©2010 Kaplan, Inc 8/11/2010 4:17:57 PM Welcome to the 2011 Level SchweserNotes ™ Late Season Review Whether you use self-study or in-class, online, or video instruction to learn the CFA curriculum, a late-season review and exam practice can make all the difference Our most complete late-season review courses are our residence programs in Windsor, Ontario (WindsorWeek) and Dallas/Fort Worth, Texas (DFW 5-day program) Each covers the entire curriculum at all three levels We also offer 3-day Exam Workshops in many cities (and online) that combine curriculum review with an equal component of hands-on practice with hundreds of questions and problem-solving techniques Please visit us at Schweser.com for complete listings and course descriptions for all our lateseason review offerings Mock Exam and Multimedia Tutorial On May 21, 2011, the Schweser Mock Exam will be offered live in many cities around the world and as an online exam as well The optional Multimedia Tutorial provides extended explanation and topic tutorials to get you exam-ready in areas where you miss questions on the Mock Exam Please visit Schweser.com for a listing of cities and locations How to Succeed There are no shortcuts; depend on the fact that CFA Institute will test you in a way that will reveal how well you know the Level curriculum You should begin early and stick to your study plan You should first read the SchweserNotes and complete the Concept Checkers and Challenge Problems for each topic review You should prepare for and attend a live class, an online class, or a study group each week You should take quizzes often using SchweserPro Qbank and go back to review previous topics and Study Sessions as well At the end of each topic area, you should take the Self-test to check your progress You should finish the overall curriculum at least four weeks (preferably five weeks) before the Level exam so that you have sufficient time for Practice Exams and for further review of those topics that you have not yet mastered I would like to thank Kevin Rygg, CFA Content Specialist; Stephanie Downey, Director of Print Production; and Jeff Faas, Lead Editor, for their contributions to the 2011 Level SchweserNotes for the CFA Exam Best regards, Bijesh Tolia Dr Bijesh Tolia, CFA VP and CFA Level Manager Kaplan Schweser ©2010 Kaplan, Inc Level Book 1.indb Page 8/11/2010 4:17:57 PM Readings and Learning Outcome Statements Readings The following material is a review of the Ethical and Professional Standards, Quantitative Methods, and Economics principles designed to address the learning outcome statements set forth by CFA Institute STUDY SESSION Reading Assignments Ethical and Professional Standards, CFA Program Curriculum, Volume 1, Level (CFA Institute, 2011) Code of Ethics and Standards of Professional Conduct Guidance for Standards I–VII CFA Institute Soft Dollar Standards CFA Institute Research Objectivity Standards page 14 page 14 page 92 page 101 STUDY SESSION Reading Assignments Ethical and Professional Standards, CFA Program Curriculum, Volume 1, Level (CFA Institute, 2011) 10 The Glenarm Company Preston Partners Super Selection Trade Allocation: Fair Dealing and Disclosure Changing Investment Objectives Prudence in Perspective page 110 page 112 page 115 page 118 page 120 page 121 STUDY SESSION Reading Assignments Quantitative Methods for Valuation, CFA Program Curriculum, Volume 1, Level (CFA Institute, 2011) 11 12 13 Page Level Book 1.indb Correlation and Regression Multiple Regression and Issues in Regression Analysis Time-Series Analysis page 138 page 172 page 218 ©2010 Kaplan, Inc 8/11/2010 4:17:57 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements STUDY SESSION Reading Assignments Economics for Valuation, CFA Program Curriculum, Volume 1, Level (CFA Institute, 2011) 14 15 16 17 18 19 20 Economic Growth Regulation and Antitrust Policy in a Globalized Economy Trading with the World The Exchange Rate and the Balance of Payments Currency Exchange Rates Foreign Exchange Parity Relations Measuring Economic Activity page 260 page 278 page 285 page 296 page 307 page 327 page 348 Learning Outcome Statements (LOS) The CFA Institute Learning Outcome Statements are listed below These are repeated in each topic review; however, the order may have been changed in order to get a better fit with the flow of the review STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: Code of Ethics and Standards of Professional Conduct The candidate should be able to: a state the six components of the Code of Ethics and the seven Standards of Professional Conduct (page 14) b explain the ethical responsibilities required by the Code and Standards (page 15) The topical coverage corresponds with the following CFA Institute assigned reading: Guidance for Standards I–VII The candidate should be able to: a demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations (page 18) b recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct (page 18) The topical coverage corresponds with the following CFA Institute assigned reading: C FA Institute Soft Dollar Standards The candidate should be able to: a define soft-dollar arrangements and state the general principles of the Soft Dollar Standards (page 92) b critique company soft-dollar practices and policies (page 93) c determine whether a product or service qualifies as “permissible research” that can be purchased with client brokerage (page 96) ©2010 Kaplan, Inc Level Book 1.indb Page 8/11/2010 4:17:57 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements The topical coverage corresponds with the following CFA Institute assigned reading: C FA Institute Research Objectivity Standards The candidate should be able to: a explain the objectives of the Research Objectivity Standards (page 101) b critique company policies and practices related to research objectivity, and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards (page 101) STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: The Glenarm Company Preston Partners Super Selection For each of these cases, the candidate should be able to: a critique the practices and policies presented (pages 110, 112, 115) b explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct (pages 110, 112, 115) The topical coverage corresponds with the following CFA Institute assigned reading: Trade Allocation: Fair Dealing and D isclosure The candidate should be able to: a critique trade allocation practices, and determine whether compliance exists with the CFA Institute Standards of Professional Conduct addressing fair dealing and client loyalty (page 118) b discuss appropriate actions to take in response to trade allocation practices that not adequately respect client interests (page 119) The topical coverage corresponds with the following CFA Institute assigned reading: Changing Investment Objectives The candidate should be able to: a critique the disclosure of investment objectives and basic policies and determine whether they comply with the CFA Institute Standards of Professional Conduct (page 120) b discuss appropriate actions needed to ensure adequate disclosure of the investment process (page 120) The topical coverage corresponds with the following CFA Institute assigned reading: 10 Prudence in Perspective The candidate should be able to: a explain the basic principles of the new Prudent Investor Rule (page 121) b explain the general fiduciary standards to which a trustee must adhere (page 122) c differentiate between the old Prudent Man Rule and the new Prudent Investor Rule (page 123) d explain the key factors that a trustee should consider when investing and managing trust assets (page 123) Page Level Book 1.indb ©2010 Kaplan, Inc 8/11/2010 4:17:57 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: 11 Correlation and Regression The candidate should be able to: a calculate and interpret a sample covariance and a sample correlation coefficient, and interpret a scatter plot (page 138) b explain the limitations to correlation analysis, including outliers and spurious correlation (page 142) c formulate a test of the hypothesis that the population correlation coefficient equals zero, and determine whether the hypothesis is rejected at a given level of significance (page 143) d distinguish between the dependent and independent variables in a linear regression (page 144) e explain the assumptions underlying linear regression, and interpret the regression coefficients (page 146) f calculate and interpret the standard error of estimate, the coefficient of determination, and a confidence interval for a regression coefficient (page 150) g formulate a null and alternative hypothesis about a population value of a regression coefficient, select the appropriate test statistic, and determine whether the null hypothesis is rejected at a given level of significance (page 152) h calculate a predicted value for the dependent variable, given an estimated regression model and a value for the independent variable, and calculate and interpret a confidence interval for the predicted value of a dependent variable (page 153) i describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and interpret an F-statistic (page 154) j discuss the limitations of regression analysis (page 159) The topical coverage corresponds with the following CFA Institute assigned reading: 12 Multiple Regression and Issues in Regression Analysis The candidate should be able to: a formulate a multiple regression equation to describe the relation between a dependent variable and several independent variables, determine the statistical significance of each independent variable, and interpret the estimated coefficients and their p-values (page 173) b formulate a null and an alternative hypothesis about the population value of a regression coefficient, calculate the value of the test statistic, determine whether to reject the null hypothesis at a given level of significance by using a one-tailed or two-tailed test, and interpret the results of the test (page 175) c calculate and interpret 1) a confidence interval for the population value of a regression coefficient and 2) a predicted value for the dependent variable, given an estimated regression model and assumed values for the independent variables (page 179) d explain the assumptions of a multiple regression model (page 181) e calculate and interpret the F-statistic, and discuss how it is used in regression analysis (page 181) f distinguish between and interpret the R2 and adjusted R2 in multiple regression (page 183) ©2010 Kaplan, Inc Level Book 1.indb Page 8/11/2010 4:17:57 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements g infer how well a regression model explains the dependent variable by analyzing the output of the regression equation and an ANOVA table (page 185) h formulate a multiple regression equation by using dummy variables to represent qualitative factors, and interpret the coefficients and regression results (page 189) i discuss the types of heteroskedasticity and the effects of heteroskedasticity and serial correlation on statistical inference (page 193) j describe multicollinearity, and discuss its causes and effects in regression analysis (page 199) k discuss the effects of model misspecification on the results of a regression analysis, and explain how to avoid the common forms of misspecification (page 202) l discuss models with qualitative dependent variables (page 206) m interpret the economic meaning of the results of multiple regression analysis and critique a regression model and its results (page 206) The topical coverage corresponds with the following CFA Institute assigned reading: 13 Time-Series Analysis The candidate should be able to: a calculate and evaluate the predicted trend value for a time series, modeled as either a linear trend or a log-linear trend, given the estimated trend coefficients (page 218) b discuss the factors that determine whether a linear or a log-linear trend should be used with a particular time series, and evaluate the limitations of trend models (page 224) c explain the requirement for a time series to be covariance stationary, and discuss the significance of a series that is not stationary (page 225) d discuss the structure of an autoregressive (AR) model of order p, and calculate one- and two-period-ahead forecasts given the estimated coefficients (page 226) e explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series (page 227) f explain mean reversion, and calculate a mean-reverting level (page 228) g contrast in-sample and out-of-sample forecasts, and compare the forecasting accuracy of different time-series models based on the root mean squared error criterion (page 229) h discuss the instability of coefficients of time-series models (page 230) i describe the characteristics of random walk processes, and contrast them to covariance stationary processes (page 231) j discuss the implications of unit roots for time-series analysis, explain when unit roots are likely to occur and how to test for them, and demonstrate how a time series with a unit root can be transformed so it can be analyzed with an AR model (page 232) k discuss the steps of the unit root test for nonstationarity, and explain the relation of the test to autoregressive time-series models (page 232) l discuss how to test and correct for seasonality in a time-series model, and calculate and interpret a forecasted value using an AR model with a seasonal lag (page 235) m explain autoregressive conditional heteroskedasticity (ARCH), and discuss how ARCH models can be applied to predict the variance of a time series (page 239) n explain how time-series variables should be analyzed for nonstationarity and/or cointegration before use in a linear regression (page 240) Page 10 Level Book 1.indb 10 ©2010 Kaplan, Inc 8/11/2010 4:17:57 PM Index A absolute purchasing power parity 331 additional compensation arrangements 50 ad hoc trade allocation 118 adjusted R2 183, 359 agency trade 92, 94 alternative hypothesis 152 analysis of variance (A N O VA) 150, 154, 185, 358 ask price 309 autocorrelation 159, 196 autoregressive (AR) model 226 autoregressive conditional heteroskedasticity (ARC H ) 239, 243, 359 autoregressive models (AR) 226, 243, 359 B balance of payments accounting 327 accounts 301 equation 301 balance on current account 327 barriers to trade 288 best execution 93 bid-ask spread 309 bid price 309 Bloomberg 96 Breusch-Pagan test 194, 195, 359 brokerage 92 budget deficit 328 C capital account 301 capital consumption 348 C APM 206 capture hypothesis 281 chain rule of forecasting 226 changes in the investment climate 329 changing investment objectives 120 chi-square test 194, 359 classical growth theory 265 client brokerage 92 client-directed brokerage 92, 94 client relationships 118 Code and Standards 101 Code of Ethics 14 coefficient of determination 150, 162, 183, 358 coefficient t-test 357 cointegration 241 Page 370 Level Book 1.indb 370 communication with clients 57 comparative advantage 285 compensation arrangements 118 compliance and enforcement 105 conditional heteroskedasticity 193 conduct as members and candidates 69 confidence interval 153 for a predicted value (simple linear regression only) 357 for coefficient 357 regression coefficient 150, 179, 358 constant price 350 correcting serial correlation 199 correlation analysis 142 correlation coefficient 139 sample 139 test of significance 144 cost-of-service 279 covariance 138, 147 covariance, sample 138 covariance stationary 225, 240 covered employee 101, 102 covered interest arbitrage 317 crawling peg exchange rate policy 302 creative response 280 cross rate 310 cross rates with bid-ask spreads 311 cumulative Z-Table 361 currency board 330 currency demand 297 currency supply 298 currency swap market 309 current account 301, 327 current account deficits 328 current account surpluses 328 current price 350 current prices 350 D degrees of freedom 143, 156, 162, 175, 179, 185, 195, 198, 227 delegation of duty 123 dependent variable 144 lagged 205 predicting 180 qualitative 206 Depression 121 determinants of the demand for any currency 297 determinants of the supply for any currency 298 ©2010 Kaplan, Inc 8/11/2010 4:24:19 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Index foreign currency risk premium 337 foreign exchange expectation relation 337 foreign-exchange markets 308, 309 forward discount 315 forward markets 309, 313 forward premium 315 free float (FF), independent variable 205 front running 105 F-statistic 157, 181, 358 F-statistic, interpreting 159, 182 F-test for multiple regression 359 FX appreciation and depreciation 308 FX markets 309 df, denominator 182 D F–E G test 241 df, numerator 182 D ickey and Fuller 232 D ickey Fuller (D F) 241 differences in income growth 328 differences in inflation rates 328 differences in real interest rates 328 diligence and reasonable basis 53, 116 direct quotes 308 disclosure 95, 106 disclosure of conflicts 61, 111, 116 disclosure of investment objectives 120 discovery of new technologies 265 discriminant models 206 disturbance term 146 diversification 122 dummy variables 189, 206 Durbin-Watson 197, 199, 359 duties to clients 113, 117 duties to employers 111, 114, 116 G DP at factor cost 349 G DP at market prices 349 G DP deflator 350 gross domestic product (G DP) 348 gross national income (G N I) 348 gross national product (G NP) 348 E H economic growth 260 economic regulation 278 endogenous variable 144 Engle and Granger (E G) 241 equilibrium exchange rate 300 error term 146 evaluation of research 94 exchange rate 296, 299, 327 exchange rate policies 302 exogenous variable 144 expansionary fiscal policy 329 expansionary monetary policy 329 expenditure method of G DP estimation 349 H ansen method 199 heteroskedastic 159 heteroskedasticity 193 hypothesis testing 152 hypothesis testing, regression coefficients 175 G F factor cost 350 factors of production 261 factors that affect currency movements 329 fair dealing 37 feedback effect 280 fiduciaries 92 fiduciary standards 122 financial account 328 financial account deficits 328 financial account surpluses 328 first differencing 233 fixed exchange rate system 330 fixed rate policy 302 flexible exchange rate policy 302 forecasting 229 forecasting the past 205 I immediate family 102 imports 327 inadequate disclosure 120 independence and objectivity 21, 111 independent variable 144 indirect quotations 308 in-sample forecasts 229 instability 230 interbank market 309 intercept term 146, 174, 357 interest rate parity 300, 316 international Fisher relation 333 international parity relations 330 interpretation of p-values 176 investment banking 103 investment in human capital 265 investment manager 102 IPOs 104, 105, 106, 118 K knowledge capital 269 knowledge of the law 18 ©2010 Kaplan, Inc Level Book 1.indb 371 Page 371 8/11/2010 4:24:19 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Index L O labor productivity 261, 262 law of comparative advantage 285 law of diminishing returns 262 law of one price 331 linear regression, assumptions 146 linear trend 218 logit model 206 log-linear trend model 222, 243 loyalty, prudence, and care 35 loyalty (to employer) 46 official reserve account 328 official reserves 301 official settlements account 301 one-tailed test 158, 178, 361 O ne-Third Rule 263 opportunity cost 267 ordinary least squares (O LS) 147, 219 outliers 142 out-of-sample forecasts 230 P M market manipulation 33 market prices 349 material nonpublic information 30 mean regression sum of squares (MSR) 156, 181, 359 mean reversion 228 mean reverting level 359 mean squared error (MSE) 156, 181, 359 measures of economic activity 348 methods of measuring G DP 349 misconduct 29 misrepresentation 26 mixed use 96 mixed use research 92 model fit 227 model misspecification 199, 201, 202 model misspecification, see model specification 203 monetary exchange 261 multicollinearity 199 multiple regression 172 analysis 172 assumptions 181 assumption violations 192 dummy variable 192 formulation 173 interpretation 174 N natural monopolies 278 negative correlation 140 negative serial correlation 197 neoclassical growth theory 266 net national income (N N I) 348 new growth theory 268 nominal exchange rate 296 nonlinear relationships 143 nonstationarity 230 null hypothesis 152 Page 372 Level Book 1.indb 372 parameter instability 159 partial slope coefficients 174 pegged exchange rate system 330 performance presentation 42 permissible research 96 perpetual motion economy 270 personal investments and trading 105 pooling data 204 population growth 266 portfolio context 123 positive correlation 140 positive serial correlation 196 preconditions for economic growth 261 predicted value 147 confidence interval 153 dependent variable 153, 357 preservation of confidentiality 44 principal trade 92 priority of transactions 65, 117 probit model 206 productivity curve 262 productivity slowdowns 264 productivity speedup 264 properties of productivity curves 262 property rights 261 proprietary research 92 proxy variable 205 prudence in perspective 121 Prudent Investor Rule 121 Prudent Man Rule 121 public appearance 102, 103 public good 269 purchasing power parity 300 p-value 176 Q qualitative dependent variable 206 quiet periods 104 quotas 289 ©2010 Kaplan, Inc 8/11/2010 4:24:19 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Index R R2 156 R2, adjusted 183 R2, coefficient of determination 183 random walks 231 random walk with a drift 231 rate-of-return regulation 279 rating system 106 real exchange rate 296 reasonable and adequate basis 103 record keeping 95 record retention 60 reference to C FA Institute, the C FA designation, and the C FA Program 72 referral fees 67 regression analysis 192 heteroskedasticity 194 limitations 159 model misspecification 201 multicollinearity 200 serial correlation 197 regression coefficient 149 confidence interval 150, 179 hypothesis testing 175 tail tests 178 t-test 152 regression model specification 201 regression sum of squares (RSS) 155, 181, 358 regulation negative side effects of 280 regulator behavior 280 relationships with subject companies 104 relative purchasing power parity (relative PPP) 332 research 92 research analyst 102 research analyst compensation 104 research objectivity policy 102 Research Objectivity Standards 101 residual 146 residual plot 194 responsibilities of supervisors 51 rho 143 risk management 123 robust standard errors 196 root mean squared error (RMSE) 230, 243 rule of 70 260 S sample correlation coefficient 357 sample covariance 357 saving and investment in new capital 265 scatter plot 140 seasonality 243 selection of brokers 94 serial correlation 196, 243 share-the-gains, share-the-pains theory 281 simple linear regression 144 slope coefficient 146, 147, 357 social regulation 279 soft dollars 92 sources of economic growth 261 S&P 500 180 spot FX markets 313 spot market 309 spot rates 313 spreads in foreign markets 314 spurious correlation 142 standard error of estimate (SEE) 150, 156, 358 standard error of the forecast 153 standard error of the regression 150 standard error of the residual 150 standard errors 199 standard errors, White-corrected 196 Standards of Professional Conduct 14 statistical inferences 225 statistical significance 175 statistical software packages 151 structural change 242 structural shift 243 subject company 102 subsistence level 265 subsistence real wage 266 suitability 40 sum of squared errors (SSE) 147, 155, 181, 358 T target rate of return 267 tariff 288 technological change 262 theory of uncovered interest rate parity 335 third-party research 92 timeliness 105 time series 218 total sum of squares (SST) 155, 358 total variation 155 trade allocation 118 trade restrictions 290 reasons for 291 t-test 152 t-test for correlation coefficient 357 t-test for regression coefficient 358 two-tailed test 143 two-tailed test example 362 two-tail test 178 Type I errors 197 Type II errors 197, 200 ©2010 Kaplan, Inc Level Book 1.indb 373 Page 373 8/11/2010 4:24:20 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Index U unbiased predictor 337 unconditional heteroskedasticity 193 uncovered interest rate parity 335 V variable omission 204 variable transformation 204 voluntary export restraints (V ER) 290 W White-corrected standard errors 199 Page 374 Level Book 1.indb 374 ©2010 Kaplan, Inc 8/11/2010 4:24:20 PM N otes N otes N otes N otes N otes N otes N otes N otes N otes Required Disclaimers: C FA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by Kaplan Schweser C FA Institute, C FA ®, and Chartered Financial Analyst® are trademarks owned by C FA Institute Certified Financial Planner Board of Standards Inc owns the certification marks C FP®, C ERT IFIE D FI N A N C IAL PLA N N ER ™ , and federally registered C FP (with flame design) in the U.S., which it awards to individuals who successfully complete initial and ongoing certification requirements Kaplan University does not certify individuals to use the C FP®, C ERT IFIE D FI N A N C IAL PLA N N ER ™ , and C FP (with flame design) certification marks C FP® certification is granted only by 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Kaplan, Inc 8/11/2010 4:17:57 PM Book – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements o select and justify the choice of a particular... Outcome Statements Readings The following material is a review of the Ethical and Professional Standards, Quantitative Methods, and Economics principles designed to address the learning outcome statements... Assignments Ethical and Professional Standards, CFA Program Curriculum, Volume 1, Level (CFA Institute, 2011) Code of Ethics and Standards of Professional Conduct Guidance for Standards I–VII