## Tuesday, November 29, 2011

### Last resort of Memorization for some areas of Portfolio/Quant/FRA CFA Level 1 Exam

About some of the formulas in Finance that you  need to memorize for the moment.

Exam Prep Portfolio consist of understanding, memorizing and speed, and you need to balance all these 3 parameters as each one will help you minimize your risk and maximize output. My personal weights used are: understanding & research = 50%, speed is 15%, and memory is 35%. But I have observed that in my class people who are getting higher marks than me have a portfolio (my guess) of 70% memory, 20% speed and 10% understanding.

It has been my attempt to keep things in the most logical and common sensesical way. But there are somethings which requires a lot of research which time doesn't allow. In the later stage you can understand these formulas but for now you need to memorize them.

Other areas that need to be memorized include:
1. Beta is sensitivity of asset with respect to market. It can be also looked upon as Cov-im/sigma-square-m. beta= Pim (sigma-i/sigma-m)
2. M-squared is like sharpe ratio (rp2-rf)(sigma-m/sigma-p2)-(rm-rf), (Trenoy measure, Jensen alpha both are for SML excess and slope): Details about these 3 measures, probably they will come in some later stage with more detailed derivations on my Portfolio thread.
3. Different yield formulas of quant where hpy =(bdy*n/360)/(1-bdy*n/360) , CFO shortcuts (increase in asset means reduced cash flows)
4. Cash convergence cycle in corporate finance, and its derivation
5. Technical Analysis from core readings
6. Enron and Sunbeam Scandal
7. Sale type lease vs other types
8. Difference in USGAP vs IFRS example in held for sale/ for trade/ till maturity
9. Cost of trade credit numerical
10. HHI and other methods to compute monopoly in economics; sum of squared % of market share of top 50 firm. 10,000 for monopoly, above 1800 indicate market is not competitive (HHI).......
11. 4 firm ratio of over 60 depicts oligopoly
12. Money supply * velocity = price level * real output; money multiplier = (1+c)/(c+d)
13. Days of sale outstanding = 365 / receivable turnover ......  Inventory in-hand  = 365 / inventory turnover ..... Number of days payable = 365 / payable turnover ratio
14. Equity Minority interest,  current assets placement in USGAP VS IFRS
15. DOL = % change in EBIT / % change in sales ; DFL = % change in EPS / % change in EBIT
16. DOL = (S - TVC)/(S-TVC-F)
17. DFL = (EBIT/(EBIT-Intrest))
18. Impairment of inventory in USGAP (lower of NPV, historical, replaceable)... CV > UFCF ? long lived assets?
19. Derivative formula  for forward rate agreement. i.e. formula to long the settlement for the notional amount
20. NI ---> CFO (indirect conversion)
21. Cost of trade credit = {1 + PD/(1-PD)}^[365/DAYS post discount]
22. BEQ into BDY (RMM = (360* RBD)/(360 - (t* RBD) ) this has been imp
23. HPY as a function of Bdy
24. ebit=operating income
25. Interest burden = EBI/EBIT; used in DuP (FRA)
26. Operating cycle vs Cash convergence cycle  (Corporate Fin)
27. 9 major sections of GIPS
28. Target FFR= 2% + actual inflation + 0.5(actual inflation - 2%)+ 0.5(output gap)
29. beta in terms of sd of market and port (portfolio management)
30. Margin for equity(maintained margin) vs future (replenish)
31. Renewable source economy demand elastics or inelastic?
32. Eco elasticities  (0-1, greater than 1)
33. hypothesis of paired tests, chia quare, others complex ones
34. Tax loss carry forward, details about loss carry forward
35. Do comparative advantage questions in economics
36. Quality of earning ans scandals
37. different type of markets: again
38. types of data: time series, longitudinal, cross sectional
39. long question of cash convergence cycle
40. long quest of equity 2 methods, p/e forward done by the person in the class
41. maintenance variation initial
42. step-up inverse floater inflation
43. types of unemployment
44. Still dof doo leverages giving problems
45. fundamental weighting techniques
46. Embryonic, mature, shakeout, phases in equity
47. price to earning ratio = dividend payut ratio/ (req ROE rate - growth rate)
48. net income for common or both in diluted earning questions
49. breaking points and operating break even point
50. financial leverage, fin multiplier, d/e,
51. hpy to rmm, rmm to bdy
52. rm to bdy formula 360rb/ (360-trb)
53. Escalation bias, confirmation bias different bias in cfa
54. Classical Keynesian and Monetarists
55. Pension list of all elements
56. technical analysis of all element
57. hypothesis entire revision
58. percentage of completion and all methods of revenue collection
59. what to do about loss in held till maturity, does it comes in OCI
60. money weighted is irr, time weighted returns in quant
61. ordinal interval nominal
62. minute details about proxy statement
63. ifrs usgap differences
64. sale type lease vs operating lease vs direct financing lease
Fixed income (different types of bonds like inflation adjusted bond, tax issues, etc)
Corporate Finance (like Corporate Governance which is theoretical)
From the experience of students who are giving the exam, accuracy is the most important thing, but the questions are also predictable especially of equity.

Conclusion: You need the very right balance in your approach, depending on time resources, energy and partners, you must dedicate time in understanding and memorizing.

## Monday, November 21, 2011

### Corporate Finance CFA

Interesting area of Corporate Finance:
Beta UN-levering and levering (how to relate b from asset to equity), this is one of the most interesting topics of corporate finance
Payback vs discounted payback
Money market yield & bond(base is price, relevant is like bond) vs discount basis yield(face value)
DTL=DOL*DFL which is :(S-TVC)/(S-TVC-F-I)
Country Risk Premium  (placed in the CAPM model): CRP= sovereign bond yield - T bond yield) *(sd of developing country index/sd or sovereign bonds in US currency)
"2/10 net 60" means 2% discount for paying an invoice within 10 days that is full after 60 days. Where formula is {1 + PD/(1-PD)}^365/days past discount -1
This is like effective of holding period yield annualized, observe it carefully and you will see that.

The cost of equity is sometimes related to cost of Debt + risk premium of equity over debt. Now for this kind of analysis we need to first calculate the cost of debt and add the risk premium. Common sense tells us that whenever we see premium it means something added to the base of a risk free instrument.

Country risk Premium (CRP)= sovereign yield spread * (Annualized Equity SD of developing country/Annualized Sovereign SD of sovereign bond market in terms of the developed currency)
Sovereign yield spread= difference in yield of govt bonds in developing country and treasury bonds
Two terms multiplied in terms where one is bond and other is market of developing country.

Will be updating this post very soon..

## Sunday, November 20, 2011

### Read the questions: Reading Skills & Exam strategy for CFA, FRM etc [continued]

Reading the questions is very important especially in Ethics, focus on these areas in my mock exams taken by the coaching institute:

Post Exam experience:
1. Do each question of Curriculum and Scz
2. Memorize each formula (everyone knows this, but believe me it is imp)
3. More tiny and cliche points
4. Each line of Scz
5. Small things
6. Small difference in options
Some general Strategy:
• Play time bound game
• Look at triggers, adjectives, extreme words and short down your answer to violation vs no violation
• Do short calculations by hand, don't worry about Calculator
• Least likely still a thing that gives trouble
• Ethics is about identification about breach with respect to the rules
• Ethics is like law, intention and acts if any goes wrong you will be punished
• Astrology, photocopying is all banned
• Soft dollar is something very interesting that you must know
• Confidence is the key in this exam
• Cash means cash in FRA, dont read it wrong
• In ethics read the entire case slowly to understand which is primary violation, this depends on your reading skills
• Lease likely vs most likely
• Maintain the same energy level, and keep energy level very high
• never take yourself in extreme pressure scenarios by not following the time bound game
• not let any negative thoughts come into your mind
• Leave the extreme tough questions for the last
• Many questions are straight from the book like FSA (in the internal exams)
• Your leg and back might pain so keep them healthy
• etc
Exam is like any other exam.

Raw List of Topics:
• Why subsidies causes loss
• Intersection of marginal cost and average cost
• technical analysis
• ratios
• spot rates
• expectation theory fixed income
• nopat
• portfolio
• sml cml
• jenson alpha portfolio
• tym vs ror current rates
• baesal 3
• ltcm
• Swedish society website
• Capitalization
• 10k, 10q, 20f US and other things regarding reporting of USA
• Harry Markowitz introduced MP
• hisotry of galeon group
• difference between all durations
• portfolio of bonds
• role and detailed modeling of how rating agency rate
• silver and gold manipulation by JP morgan
• SAS exam
• Debt structure being changed
• CAPM-CEU frequency
• secured and unsecured
• real or inflated
• Bloomberg terminal
• contra account
• treasury stocks
• After tax margin
• cash margin
• CFA L2 batch starts on 30th Oct
• secured vs unsecured loan
• capex
• Mosaic theory
• is it 5 times?
• after tax margin
• Philip curve long run unemployment remains same (all factor vary, vs one factor)
• minority interest
• reform to put real values
• all good movies on federal reserve
• nasdaq is otc?
• Revise regresson and its application for beta
• diverisfied and undiversifeide
• b vs SD are they of portfolios
• why is market most diversifiable
• different type of margins (derivatives and the table)
• international eco and reporting in l3
• comprehensive income l2
• slope remains same diff
• scenario analysis (sensitivity+best case+worst case)
• sql for selection
• growing dividend discount model
• capitalization 100/20
• valuation on of inventory
• imparement of assetss and non tangible assets
• forward rate agrremant
• exchange vs swap vs option in derivatives
• currency swap
• CFO depreciation / impairment / capitalization of long termed assts
• tough questions of calculation of good will where other company has good will etc
• issuing bond at different rates and calculations

Economics:
• taylor
• phillip
• M2 mesure
• Laffor curve
• HHI index for monoply
• Symmetry principle
• CPI numerical calation

Companies in Hedge funds:
• Northern trust
• jp
• tesa
• RRD
• DE Shaww
• deulottee
• copal

Research areas:
• degree of freedom, and mathematical Equations used
• Citibank Suzlon deal
• Hedge funds India and USA
• Analysis for merger done by IB
• find Equity holders?
• CFA for hedge funds
• technical analysis
• mutual funds usa in india
• mymv margin maintainence, different type
• boa india
• spv legal and ratings
• greek frm
• oversubscribed
• Euro printing
• NASDAQ, OTC
• freddy and fanny
• credit rating
• nopat
• cfp
• credit ds
• RBI website
• option pricing
• ve nture capitalist vs angel investors
• SWOAT
• frm var 2
• best journals in finance
• 'Nonlinear Markov games
These are list of topics I will slowly expand.

## Saturday, November 19, 2011

### Alternative investment for CFA level 1 and Level 2

Alternative investment for CFA level 1
By: Shivgan Joshi

Introduction
This is a relatively small area but is very interesting, areas like ETF are very fascinating as some of them like Gold ETF are negatively correlated with the index. Also the information on return on an investment for a Venture Capitalist based on failure rate was interesting. The last and the one with some numerical computations was real estate. The whole topic is about common sense, and requires you to be confident and use common sense.

Real estate Investments:
NOI= potential income(1 -vacancy bad debt%) - RE taxes - maintenance - other expense
Real estate value = NOI / required return
Annual after tax cash flow= (NOI - dep - Interest)*(1 - tax rate) - principal repayment + depreciation

Commodities
Collateral Yield is the return on the collateral posted to satisfy margin requirement
Price return is the gain or loss due to change in spot price
Roll Yield is the profit or loss from re-establishing as contract expire

In CFA Level 2 the alternative investment is more to do with Private Equity than anything. How to get in, and how to get out in a private equity investment. There are various ways to find out the exit points and compute the returns. Interest paid questions were quite tricky that I found in my final mock exam.
VC, real estate and Hedge funds are three important parts of Alternative Investments. Then we have Buyouts which again is one the most hot topic of IB. Hedge funds use various techniques and there is separate HF certification, but a bit of idea is given here like merger arbitrage.

Ratchet, waterfall, carried interest are ways to allocate money.

RVPI, PIC etc also are important aspects for the exam.
NAV of private Equity fund.

In all this is an area of great interest, and we can see that there are other Specialization as well for this like HF certification.

Conclusion: Small area,  requires no great deal of effort.

### Portfolio Analysis construction Modeling Financial Engineering CFA L2

Portfolio Analysis construction Modeling Financial Engineering

Abstract: This article will lay the foundation for basics on Portfolio for the CFA and related exams.

There are some important different which related SML CML, and to start with you need to know what are un diversifiable and diversifiable risks which then lead to beta and efficient portfolio constructions. You need to know a little bit of covariance and intercept form of line, and that will be more than enough to understand this topic. There are various softwares like MATLAB, Visual Basics models, macros in Excel, SAP, etc where you can feed in the date and it will create the efficient frontier and compute all parameters.

Beta: This basically comes from regression but you can understand. For example in India Reliance based companies has 1.5 betas, whereas Oiling companies like BP has 0.5 near about. This can be observed and in coming sections we will talk on how to calculate it with regression by curve fitting.

Efficient portfolio construction: you need to know how to combine various variances.There may be some macros to do that, but it can also done in SAS, MATLAB and other software for analysis. These tools will help to see the action when it comes to real world.

Areas of interest: Sensitization in portfolio analysis

Questions on Portfolio CFA Level 2:
1. Beta is there in factor model or not
2. Shorting a part of efficient frontier
3. More diversification than S & P
4. Beta vs SD
6. Average return concept in diversification
7. APT Arbitrage pricing theory has beta or not?
8. ICAPM
9. Equilibrium pricing theory
10. Exchange Rate effects
11. Equally weighted portfolio

R (software language) is going to be an imp tool for portfolio management in industry as it is open source. You need to understand objects in R, Data handling (SAS type) which has merger, retrieving, etc. Preparing data is hence an imp step before the final analysis.

In Level 2 trenor black model is interesting, also FRM 1 also talks about Portfolio in a great deal which will be interesting to note.

Conclusion: Very easy but highly weighted area.

## Thursday, November 17, 2011

### SOA exams

SOA exams

I will update this post to talk about these exams for financial students.

These exams are US based for actuarial purposes, and they are generally thought to be very tough.

The Exams happen at Prometric centers in India, when I inquired in March 2012 they were in Hyderabad.

Path to ASA the one thing that makes most sense of Actuarial for finance guys.

There are aprox 5 papers to pass to get to ASA with other requirement.

1. Prob
2. Financial Maths
Then next level it becomes all about Actuarial exams.

1. Models for Financial Economics
2. Construction and Evaluation of Actuarial Models
3. Life Contingencies Exams
These are 3 exams of Actuarial Models
Even if I do not want to give the 3 Actuarial exams I still would give these two exams.

I will put here some stuff to help you understand the Actuarial Model.

Conclusion: SOA introduction

## Wednesday, November 16, 2011

### Gold and Silver Prices and Returns: Basic Financial Analysis and Overview (till Nov-11)

Gold and Silver Prices and Returns of the last 5 years.

Courtesy: Yahoo finance
If you observe the price carefully, the return from 2007 till date varies between approximately 15-20% yearly in the worst case scenarios(bad timings), this is close to what we get as risk free today in India, i.e. 9-10% yearly. Gold and Silver might see a correction if the volumes of the Gold ETF increase specially in countries like India where people donot understand the risks associated when these instruments.

Interesting to see is that today when the interest rate are high and making an FD(Fixed deposit) at 10% is a very unique feature here.

• Gold is negatively correlated with Stock market
• beta of Gold is negative
• Gold etf are nice instruments
• USD is not  Gold backed Gold
Conclusion: Gold is a alternative investment, but ETF are something which needs more evolution and an area of research.

## Monday, November 14, 2011

### Formulas for CFA and how to deal with all the vast syllabus (CFA vs FRM correlations)

Formulas for exams and how to deal with all the vast syllabus
CFA vs FRM correlations

Most of these formulas can be broken down into deep logical and sensible notions. Very few of them requires complex maths.

It was noticed that people said to me that formula would be a tough thing to understand but when I started reading there is no even a single formula that I need to memorize. All are based on common sense, all ratios, yes I do agree that being from engineering background and experience in reliability engineering some things of stat were easy for me. But then also I dont find anything to memorize.

There are 2 strategy to revise the formula, one is that you can use a formula or a summary book such as scz sause, or the other is that you can read all the LOS and think and understand what are the questions based on the LOS.

With less time for the exam, you should decide on what are the time constrains and depending on which you should decide a strategy for revision of formula.

There are list of formulas which you can get from various 3rd part sources, those would be very helpful but over doing memorization is not a good idea.

2 weeks before the Exam strategy should be very carefully made.

Linking CFA Level 1 to CFA level 2(CFA Level 1 vs. CFA level 2):
1. Financial reporting analysis of Level 1 comes very much in level 2
2. Corporate Finance depends a lot on Financial Reporting and are related, hence both are carried away same as they are
3. Economics is not related but it is very tough to understand it, it is least related to level 2 (so least required level for 2)
4. Alternative investment is an are that should not be taken lightly that is not interlinked with other areas and also less related to level 2

Linking CFA Level 1 to FRM Level 1(CFA Level 1 vs. FRM Level 1):
1. Derivatives, Portfolio, Fixed income remains the same
2. Corporate Finance is not related to FRM

Linking CFA Level 2 to FRM Level 1(CFA Level 2 vs. FRM Level 1):
Derivatives, Portfolio, Fixed income, Quant remains the same and are useful

Hence depending on your combinations you can work this out.

## Sunday, November 13, 2011

### Equity Valuation models / stock pricing / Shares CFA

Equity Valuation models / stock pricing / Shares CFA
By: Shivgan Joshi

Introduction
Human mind is very strange, you need to give it the right reason to do something. And the very right reason to study this subject is that stocks can help you decide your portfolio, analyze things, nevertheless this is the largest of the topics in level 2. In this regard this becomes a very important topic. The merger and acquisiton price analysis and other very important phenomenon are dependent on how well you understand this area.

Thus this is a thing that you must motivate yourself to understand a lot.

When it comes to picking a price for a share or deciding to play in investment banking this area again becomes very important.

In totality I am trying to develop some interest in this area before we formally move into it.

Various methods are used for various people for valuations. This subject holds 20% and is the most important subject for the CFA Level 2. Hence learning it here will make things in future very easy and interesting.

One thing that took a very long time to understand is the formula for margin with maintenance call, that the last thing in the CFA level 1 which drove me into understanding more. But finally I figured it out. The 2 calls are made to restrict your loss and protect the broker from incurring any loss due to your investment.

Earning multiplier, and role of dividend in the valuation, and linking ratios for valuation of a stock are some the important things.

A very big confusion point here is how to interpret dividend payout ratio and growth in the company with the effect of retaining income. The company with higher retention will cause faster growth.

Another very interesting thing is with divisor when there is stock split in price weighted index. We find out divisor for split for the values before the next one and then use the same divisor which has an embedded weighted effect in itself. There are some examples which you can see.

Now, lets move something called the divisor-for-adjusting-split, in this case we find the divisor of the base year and use the same after the split and the values of stock has changed. In general what we do is that we find the average price of the base, then do the split and put a divisor X so that average price remains the same and find this new divisor. After than we use the same divisor for the new year when the price has changed significantly.

Growth stock, speculative stock and cyclical stock.

Discussion: If payout ratio increases, then PE multiple increases or decreases?

Conclusion: An overview of interesting and deeply engaging topics for equity required for CFA and other similar exams are given.

### Ethics in Financial Analysis an introduction for the CFA exams

This post will talk about ethics for the CFA.

These are some important strategy sets which you need to understand to practice ethics:
1. Reading LOS verbatim is important.
2. GIPS is tricky to read, its about performance presentations.. therr are few aspects and play of words here and there
3. Answers are diplomatic means they never ask you to go extreme
4. Typical question of IB vs research
5. Leaving a job and joining new
6. Encourage people to make info public
7. Don't exaggerate in your reports, any kind of exaggeration is wrong
8. Soft dollar allowed, but paying your CFA fee form the money of research is not allowed
9. Most tricky are when there is something we do in exchange for soft dollar like research that benefits the clients we have and cause no personal benefits
10. Investment bank vs research / brokerage cells and how one person can avoid conflicts
11. Leaving a company and how to act in the last month, access to old data of the company and copying and taking data and contacting old clients
12. Disclose vs dont do, when in doubt dont do vs when in doubt disclose
13. Fair dealing with all.. implied meaning in short words
14. Avoiding situation of controversy like vocal or oral permission
15.  GIPs: definition of firm asset should include all fee paying and non fee paying, discretionary and non-discretionary accounts
16. GIPs: composite must include all fee-paying discretionary accounts. non-fee paying can be added if disclosed. non-discretionary cannot be added
There are many cases in the book which you can study, I will point out the interesting things in this subject.
Two interesting areas which are there which will fascinate you are: you can receive soft dollar & Mosaic Theory.
There are around 35-40 questions which will open your mind given in the books.

GIPS: Broad overview, 10 key characteristic, disclosures, compliance

### Test taking Strategy for CFA (June 2012 CFA Level 1 strategy: results and analysis)

Strategies and Game plans for taking the exam (personal opinion, apply at your own risk)

June 2012 CFA Level 1 strategy:
1. Starting with Financial Statement Analysis & Economics (Scz + Core readings 15*2 hours)
2. Then corporate Finance (Scz + Core readings 10 hours)
3. Alternative Assets (Scz + Core readings 8 hours)
4. Derivatives+Fixed Income+Quant+Portfolio are in FRM (hence can be diluted)
Feb 2012: Economics / FSA / Alternative assets
March 2012: Corporate / Portfolio
April 2012: Quantitative / Derivatives / Fixed income
May 2012: Other exams

June 3 2012 Exam

Introduction: Often it is said that Election are won not by performance and good governance but by good political management. Similarly exams are cracked not just by hard studies but exam management that includes time management, psychological management, other soft issues. Hence sooner or later one finds his way by his own ways of playing.

Proposed order of Attempting:
1. Ethics (2 min / question)
2. Eco
3. FSA
4. Equity
5. Derivatives and Alternative Income
6. Corporate Finance
7. Fixed income
8. Quantitative Analysis (1 min per question)
Other important issues to take care of:
• The reason to attempt questions in this order is that Ethics is v imp to pass the exam, and eco is something that I am new to. FSA being the longest section and again new to me goes at No.3. Finally Quant and related subjects are moved to end as I can do them with less energy and can do them in short time.
• I am thinking to follow this or just the reverse, but the problem is that in the last 30 minutes mind become drained and I cannot focus on tough and long questions of Ethics and FSA, hence to do the tough first and easy at the last.
• A point to note here is that we don't need an overall good score, rather we need to have 70% accuracy in the exam in all subjects. Where the key to pass is do good in ethics & FSA (ignoring quant as it is easy for me).
• Also the questions which you have reduced to 50-50, should be marked so that in the end you can pick between the 2. It is good to keep them in record. Also marking questions properly as sometimes the line on a/b/c is not good to make a distinction.
• If you don't practice even questions you know will take more time.
• Fear and Negativity should not slow you down in the exam. These are psychological barriers.
• Hence one needs to break down exams into time bound games and have a strategy on sequencing.
• Reading LOS and thinking we know it might be a good idea as questions are directly made form them.  Questions are directly made from a statement of LOS that find this thing, no indirect or tricks involved.
• Least likely catch and reading errors killed me.
• Petty terms like Payback period, profitability index (of Corporate Finance) can create trouble, although they are very easy but you need a good memory. Same happens in economics with laffar curve, etc
• It is a lot about Data interpretations as redundant values are given with lots of junk data.
Cash is real cash in CFs
Go long, means do it on paper
(A post on this topic exist: Check the list)

Last 15 days strategy:
1. Read each LOS carefully and read it from Scz as questions are directly picked from there.
2. Old CFA mock for years 2011,2011,2009 and also the free paid mock at the CFA website.
Beside this you can check the mock of Scz.
Common things:
• If we are given NI and elements then we must remove the effects
• Reference word is important
• Interest expense in the bond questions need to be done with common sense
• The wordings are very important
List of silly mistakes. There are list of silly mistakes available on internet which you can see my list goes as follows:
Warrants are not to be added but the different amount causes dilutions.

Conclusion: Finally decide on a plan that suites you well. Be positive and practice to tame your mind.\

 25 Days before the Exam

## Friday, November 11, 2011

### Research areas in Financial Engineering and Trends

Introduction: This blog is aimed to deliver you the latest research and innovation in financial and risk engineering. I will be posting topics related to Energy risk, financial game theory, financial war simulations, modeling developments on derivatives, and other areas of finance. Also I will try to link these areas to the studies for CFA/FRM and other courses.

Game theory is to predict how a game would look like and what can be the moves. It identifies the game into a type link the probabilities and then find the best path to move so that ultimately the result is the best.

Portfolio is defined by the modern portfolio theory also covered in the exams, but in real we need to adjust various parameters. For example in real the risk may not be just SD, distributions needs to tweaked, time lines needs to adjusted and selection of right tiem interval, etc. There are also various software available for the same and there are lots of complexities which needs to be modeled.

Option pricing is another very very quant based areas which use physics from quantum mechanics. All those who like physics will like this area of derivative pricing.

Energy risk with focus on  Investment banking for alternative energy sources like solar, wind and fuel cell is any area that will play a very important role. The current energy companies needs to make a very right strategy so that they can create wealth.

Financial Engineering includes Java/C++ modeling and advanced Engineering maths which has calculus, vector, advanced probability which is one step up from the the CFA prep. With CFA and FRM in your resume you must look into this area, as in real life these kinds of models are seen.

Some of the Journals that I am referring are:
Review of Quantitative Finance and Accounting @ Springer

Mathematical Finance @ Wiley
Quantitative Finance @ Taylor & Francis
Applied Mathematical Finance  @ Taylor & Francis
Journal of Empirical Finance  @ ScienceDirect

I will post some of the review about the recent developments in Quantitative Finance in the Blog in the coming days.

Application of what we have in CFA1/2 FRM 1/2 SAS/Matlab can be seen very clearly in international business and green energy business models. Economics of CFA L2 is quite interesting and talks about important international economics. Whereas international strategy for international business is very much dependent of aspects of foreign exchange, and investment accounting taxing etc.

I will be looking for how game theory can be imbibed in the financial studies I am doing especially when it comes to areas like Nanotechnology. This becomes even more important when you are aware of all areas of CFA and FRM and then move to research and I can see that benefit.

### Quantitative Methods Finance for CFA & FRM Exams

This part is for CFA Level 2:

Regression

Below are the content for CFA Level 1

The areas that you will find the most interesting and require deep research are different types of distribution.
You need to understand some types of distributions, where T or F distribution and some other ones needs a greater understand so that they become useful when we do our own research or build pricing models for stocks or derivatives.

Important areas that generally students find tough:
• Conversion of cumulative to density
• Variance comparison of 2 values
• Prior probability
• Short fall risk
• Null 2 tailed tests
• Kurtosis
• Mathematical form of Bayes theorem
• Skewed
• Seventh decile
• Linking it properly Type 1 and Type 2
• Chebyshev’s inequality, proportion of lying within  k deviation, 1-1/(k^2)
• Nominal (weakest) vs. ordinal (categorized) vs. interval (stronger) vs. ratio.
• Standard error of the mean:  s/{(n)^0.5}, here we are trying to relate sd of sample to population.
• Bayes theorem putting this here and there and moving here and there.

Questions of these areas are of good difficulty.

Research areas:
• Skewness derivation and maths behind it
• Monte Carlo vs. Historical
• More on Normal distribution
• T Distribution, distribution analysis with both side probability
• F distribution.

In this we have checking of means of 2 normal pop, with equal/unequal variance:
t stat = (x1-x2 )/(sp^2/n1 + sp^2/n2)^.5
sp= ((n1-1)s1^2+ (n2-1)s2^2/(n1+n2-2)
dof=  n1+n2-2.

Another are in paired comparison in intuitive t = (dbar-u )/sdbar, where dbar is sample mean diff, sd is sample std deviation.

Chi Square = (n-1)s^2/hypo pop var
s is sample variance.

Variance of normally distributed pop, vs for 2 normally distributed pop.

Interesting points:
Kurtosis greater than 3 makes fatter tails and not thin.

Tend to forget items:
• Hypothesis
• Videoed by root number of observation
• Different yields etc.

Yields

Some formulas of Money market yields and Bank discount yields, there are 5-6 formula in this area which needs memorization and you can understand it later. Bank discount yield uses it face value whereas money market yield is HPY(360/t).This yield chapter has given me trouble from long time due to the enormous terminology.
The only formula with a tricky derivation is Rmm= {360*Rbd}/{360-(t*Rbd)}.
This can be alternative viewed as conversion from Mmy to Bdy and vice versa, I will look into this formula and add its derivations and root. Rmm is money market whereas Rbd is bank discount yield respectively.

Dollar discount is the difference and is used to calculate bank discount yield, where we use 360 in Bdy.

Mmy = (HPY)*(360/t).

Technical Analysis is the most interesting part in the entire CFA after FRA. For ex., Momentum Indicators shows are about Breadth of Market and Stocks above their 200-day moving average.
Kondratieff cycle is 54 years. Fibonacci series converge at 0.618 or 1.628. Short index ratio is the ratio of shorted/avg daily volume trading. Relative strength index shows (total-price-increase/total-price-decrease). Increasing margin debt shows bullish sentiment.

Paired comparison test

Conclusion: I have separated the quantitative techniques into areas which you can view as daunting, and also which can be seen more mathematically.

Feedback:
Feedback from a CFA Level 1 aspirant:

Hi! This is Vikas!
Today when i was doing quant question, i found difficulty in probability n hypothesis, problem is that they are not asking practical question they are asking most question on theory basis. For ex., what is Monte-Carlo simulation, safe ratio etc. So, what i found here is that in CFA Level 1 you have to focus on theory also. Generally,  they ask near about 75% question on theory. So, when you preparing for Level 1 focus not only on practical question but also on very short point of theory.

## Thursday, November 10, 2011

### Economics for CFA Level 1 / BAT and Intro to Strategy

Economics for CFA and Valuations

Abstract: CFA Level 1 Economics and its important topics are discussed with some motivation on how and why to study this.

Introduction
Before we move into the area, I wanted to share with you what I like the most about this subject.
Since the time I was 20 yrs old I got this habit of watching documentaries and the most talked about instrument in the documentary of finance is "Federal Reserve", and I always wanted to understand how:
• Fed works,
• how acts of fed are related to business,
• how would it change the yield, cost of capital, share pricing
• and things like the role of fed in big events

I also wanted to interpret how beneficial are fed's moves to common man vs big corporation. So, when I got this subject it was pleasure to read and understand things. Especially the supply and demand of money, read GDP's dependencies on various stimulus and operations are all very interesting area.

When it comes to understand areas like currency warfare, job loss, etc this subject holds the key.

Exam preparations
I would like to discuss something that I found very interesting in the Economics of the CFA curriculum. I am new to this area, and found things like:
Short term vs long term behavior quite interesting.
Why interception of ATC vs MC.

I gave some mock tests on Eco and found these questions particular interesting which broadly defines the syllabus:
Taylor
Phillip
M2
laffer Curve
HHI Index
CPI
Symmetry Principle which says the results should be symmetrical
Automatic Stabilizers

And some other topics...

Specialties: News analysis is the best thing in the book

Some interesting areas in Micro Economics which need deep thinking:
• Tax on seller vs tax on buyers
• Small areas of interest is the tax effect on the supply and movement and how they would shift when the tax burden is placed on either of the sides.
• When we come to the area of curves, the notion about MC=MR is an important concept which is the pillar for 4-5 chapters.
Personally speaking the Chapter: Market for factors of production was the most tough. I am still reading some graphs of this chapter.

Supply of renewable source is in-elastic and non-renewable source is elastic. I took a long time to get this idea. Example oil you the nations will supply less even if we increase the price. Note that supply curve is the willingness of producer to supply at increasing rates.

Spirituality in macro economics: Whatever you do, in the long run things will be where they deserve to be. This applies to potential GDP a lot, where we have changes is SAS and its effect on GDP.

Money multiplier effect: money multiplier = (1+c) / (d+c)
where c is the currency as a percent of deposit and d is the desired reserve ratio

Aggregate supply and Aggregate demand for two scenarios where the GDP is below full employment and above full employment. It is quite interesting to note that when demand increases the real supply decreases and when demand decreases the real supply increases. The important term here is real as the prices will be more or less which will effect the measure of demand supply.

Conclusion: I have talked about some of the areas on Eco for CFA level 2.

CFA Level 2:
I started with Forex which is an area that I like and will look into it more deeply.

## Wednesday, November 9, 2011

### Career Path / Basic info on CFA and FRM for strategic advantages and growth (CFA vs MBA, CFA vs IIM)

Career Path / Basic info on CFA and FRM for strategic advantages and growth

CFA-FRM Exam prep / Basic info on how to deal with Finance.
What I like about CFA: The exam gives you 360 degree idea about finance and all inter related fields like accounting, quant, economics and hence is one of the best exams in entire world. I think a CFA is the best to do things like hedge fund management, portfolio management, investment banking, etc.

About FRM: Focuses more on risk and VAR, but this is more important in times of recession and less important in times of boom... Things like risk in Fixed Income, and risk of portfolio is something I enjoy reading in the course.

 CA+CFA Vs. CFA+FRM+Modeling(SAS)+Mathematical(Mathematical Finance or Financial Engg)

 How to excel and buildup
 Estimated growth rate by taking CFA & FRM vs IIM based profile, figures in lac INR

 Job Scenario in India: Parameters to get in MS MIS(management information system: courses to strengthen your profile and movement toward finance)
MIS: Data Mining, Java, Oracle, SAS, Php, etc might help to cover some part of the area.

As a finance student you should talk about supply demand. If they need you or you are that damn good then they take you. Now, either if you are not good, or they have no place, or they cannot effort you then they talk about all the negativity in you rather than talking about these three reasons. Its all about getting the best knowledge at the cheapest marginal cost.

Things also depend on your directions you take and areas that you like:
Portfolio Manager
Equity Research
FI
Quant (Complex Maths)
Risk Manager
I Banker
Programmer
Operations
Wealth Manager (Personal Finance)
Hedge Fund manager
Algorithmic Analyst
Manager of all of the above
Treasury
Working Capital managment
Data handler
etc
etc

My favorite area is Quant.
Learning on areas like High Frequency Trading a kind of Algorithmic Trading. I think when computer decides to trade these algos might be linked down to technical analysis, thought I will read some books to confirm and will add the details here.

Understanding that the education is a very tricky and high fee is involved, hence consider these options:
Case 1: PGDF (India 1 year)+ CFA all levels + FRM all level+ SAS Base&Advanced&Predictive modeling+Advanced Excel VBA Macros (integrated with CFA done in PGDF) + GMAT 700(hedging against recessions)+ 1 foreign language
vs
Case2: MS financial engg in USA
vs
Case 3: MBA IIM Finance?

Lets look at case 1 PGDF(Excel+VBA+Macro)+CFA+FRM+SAS(Base/Adv/Predictive)+GMAT 700+: You should do modeling on Excel+VBA and depending on your very specific spez area. My research on Spez in Fin Engg and stat skills are given in this blog. Example SAS stat software used for risk engineering  has 3 exams: and clearing, predictive SAS certificate gives you a shot at Fin risk jobs and with this strategy you can break into the "supply-demand game". Today the supply is very strange with convention MBA finance needs experience to move in real risk/quant jobs hence these real-life credentials can help. And you can never be on the firing side.

Opportunity Cost (CFA+PGDF vs MBA):

PGDF Opportunity cost:
3.5 lack (forgone job)
2.7 lack (fee+ 1 year interest)
= 6.2 lacks
Suppose he would have done the same job he would have saved 6.2 lacks,
Now, if he gets job to get back he need to recover it in 3 years which goes to 2.4 lack per year for 3 years. Hence 3.5+2.4=5.9 will make him in different for  years with 0 sum.

What are the results in all 3 cases, depends on a lot of things like money invested, social networking, but yes things are really interesting once you look for in terms of ROE.