Saturday, 31 December 2011

News Pick - Citigroup Poised for Big Returns

Several terminologies and key terms used in Financial Reporting & Analysis which require deep understanding are used in the following article. The joy of reading the article after allegiance with these terminologies certainly multiplies.  FRA is one of the major areas of the CFA Level I curriculum. There is so much to learn in this study session. The link to the article of News Max which throws light on the timeline of Citigroup is worthwhile reading in this regard.


Video Tutorial - Backwardation


Friday, 30 December 2011

Video Tutorial - Contango (Study Session 18 AI - Level I)


News Pick - U.S. Company Credit-Default Swap Index Rises From Three-Week Low

Credit Default Swaps (CDS) are discussed in detail in Level II. They are important tool to hedge against the risk of default and act like an insurance. What exactly are they and how they are different from ordinary insurance has been briefly elaborated in the video posted earlier. The following article, link provided at the bottom, published in Business Week represents a real life example of Credit Default Swaps.

http://www.businessweek.com/news/2011-12-29/u-s-company-credit-default-swap-index-rises-from-three-week-low.html

Important tips after completing 1st Reading.

The first thing one should do after his or her initial read of the material is take at least three, three hour practice exams, grade the exams, and analyize his or her weaknesses. This is key because it will allow you to formulate an effective gameplan for review. While studying the material I recommend you highlight or mark important concepts and formulas, as well as material that you don't understand. Also, after completing practice problems, mark in the book which problems you got wrong (I marked each with a "W"), and also mark which problems you had a hard time with (I marked each with an "H"). That way when you begin reviewing you will know which problems to review. Also, after reading each chapter I rated the chapter on a scale of 1 to 5; five meaning I fully understand the concepts and will remember the material and one meaning I desperately need to review the chapter. This rating system will help you when constructing your review strategy.

After finishing each book, I would go back and reread the chapters (or parts of chapters) I marked as a "one" (remember that "one" indicates an extreme need for review). You may have the urge not to do this because after finishing an entire book you become eager to move onto the next. Fight this urge and conduct mini reviews after finishing each book. Your mini reviews may take a long time, sometimes 3 or more days, however, they will greatly help drive the concepts into your head.


It is important to note that I read these tips somewhere before I started off my preparation, noted them and followed them after I was done with my first reading. They were quite helpful & this is the sole reason why I have shared them here.

Thursday, 29 December 2011

Autoregressive Conditional Heteroskedasticity models (ARCH)


When regression model has (conditional) heteroskedasticity i.e. variance of the error in a particular time-series model in one period depends on the variance of the error in previous periods, standard errors of the regression coefficients in AR, MA or ARMA models will be incorrect, and hypothesis tests would be invalid.


ARCH model: 
ARCH model must be used to test the existence of conditional heteroskedasticity. An ARCH (1) time series is the one in which the variance of the error in one period depends on  size of the squared error in the previous period i.e. if a large error occurs in one period, the variance of the error in the next period will be even larger.

To test whether time series is ARCH (1), the squared residuals from a previously estimated time-series model are regressed on the constant and first lag of the squared residuals



Decision Rule: If the estimate of╬▒1 is statistically significantly different from zero, the time series is ARCH (1). If a time-series model has ARCH (1) errors, then the variance of the errors in period t+1 can be predicted in period t.


Consequences of ARCH: 
• Standard errors for the regression parameters will not be correct.
• When ARCH exists, we can predict the variance of the error terms.



Generalized least squares or other methods that correct for heteroskedasticity must be used to estimate the correct standard error of the parameters in the time-series model.



Autoregressive model versus ARCH model:
• Using AR (1) model implies that model is correctly specified.
• Using ARCH (1) implies that model can not be correctly specified due to existence of conditional heteroskedasticity in the residuals; therefore, ARCH (1) model is used to forecast variance/volatility of residuals.






Video Tutorial - What is Fundamental Analysis?

Fundamental analysis is an important topic in Equity of the curriculum. The following video presents a quick overview on Introduction to Fundamental Analysis.

When should one finish the reading before the exam?

1. Those who have started the preparation 6 to 7 months before the exam must finish their preparation at least 2 months before the exam. It is worthwhile noting that these are group members who do not have any financial background.

2. People who have started the preparation around 5 and 1/2 months and 6 months before the exam they should complete their preparation around 1 and a half month before the exam.

3. People who have started preparation 5 months or 5 1/2 months before the exam should finish by latest 1 month or 3 weeks.

4. People who have started preparation around 4 months before the exam and having adequate knowledge or repeating for Level I should finish by latest 3 weeks of 2 weeks before the exam

Wednesday, 28 December 2011

Apple Inc.'s Long Lived Assets - Form 10K FY 2011

Below is the snapshot taken from Form 10K submitted by Apple Inc. for the year ended on 24th September, 2011.















Following is the extract from Reading 21 Long-lived Assets: Implications for Financial Statements & Ratios.

"Impairment of Long-lived Tangible Assets held for use 
IFRS:
• Impairment losses are recognized when:
Carrying amount of the asset > recoverable amount of the asset where,

Recoverable amount is higher of (Fair value - cost to sell) and value in use.
Value in use = discounted expected future cash flows
• Companies are required to assess at least annually whether there are any indications of impairment of an asset.
• Goodwill and identifiable intangible assets that are not amortized must be tested for impairment at least annually.

U.S. GAAP: 
• Under U.S. GAAP, there is a two step test which is used to determine whether the asset is impaired.
1) Recoverability test:  Asset’s carrying amount is not recoverable when:

Carrying amount of the asset > Undiscounted expected future cash flows
2) Impairment loss measurement: When asset’s carrying amount is not recoverable, then Impairment loss = carrying amount of an asset –  Fair value of an asset (or discounted value of expected future cash flows)
• Companies must undertake an impairment test only when “events or circumstances indicate that carrying value of an asset is not recoverable on permanent basis”.
• Goodwill and identifiable intangible assets that are not amortized must be tested for impairment at least annually.

Examples of indicators of impairment test include:
• Significant adverse change in asset’s physical condition,
• Significant adverse change in legal or economic factors, or
• Significant decrease in the market price among others.
Effects of Impairment loss: 
• It reduces the carrying  amount of the asset on balance sheet.
• It reduces net income on the income statement.
• Impairment loss is a non-cash item and thus, it does not affect operating cash flows.
• Debt-to-total assets and fixed asset turnover ratios increase due to impairment loss because it reduces the carrying amount of fixed assets and thus total assets."

In previous posts I have been mentioning the practical application of the knowledge learned and the skills developed through the CFA curriculum. It is worthwhile to note that financial statements are key sources of information which help in inspecting the position and performance of any business. Understanding financial statements and the financial lingo used in them critical in analyzing them. For me figuring out that what I am studying is adding value to me is for sure a strong motivating factor.


Video Tutorial - Credit Default Swaps (Introduction)


When to start studying - CFA Level I

  1. If you have no prior knowledge of the material and you don't have a technical background (Engineering, quantitative sciences), allow yourself 6-7 months of studying
  2. If you have minimal knowledge of the material. i.e., you took micro or macro economics and statistics in college or you use them lightly at work, but you don't have a finance or accounting background. Allow yourself around 5 and 1/2 months to 6 months.
  3. You have a solid knowledge of the material. i.e., you have seen statistics, economics, and either accounting or finance in school or at work. Allow yourself 5 to 6 months.
  4. You have a vast knowledge of the material. i.e., you are an undergraduate student who has taken or is taking economics, statistics, corporate finance, and accounting or you've thoroughly studied for and already taken level 1 and you are taking it again. Allow yourself around 4 months. 

Tuesday, 27 December 2011

News Pick - Grubb & Ellis considers reverse stock split to avoid delisting

Stock splits & reverse stock splits where maintain the total wealth of a shareholder to be same, adjust increase in no. of stocks by proportionate decrease in the price and decrease in no. of stocks by proportionate increase in the stock price. Companies in order to avoid de-listing or increase shareholder confidence sometimes do stock splits or reverse stock splits. The article, link provided at the bottom, discusses one such strategy which has been explained in the CFA curriculum. It tells how reverse stock split can increase the stock price for Grubb & Ellis and can maintain its listing on NYSE.

Read the article here: "http://www.crainsdetroit.com/article/20111220/FREE/111229994"

Video Tutorial - Collaterized Debt Obligation

Below is the video tutorial of CDOs. An overview was uploaded before. This is a detailed tutorial.

Seasonality in Time Series - Level II Quantitative Methods


When a time series variable exhibit a repeating patterns at regular intervals over time, it is known as seasonality e.g. sales in Dec > sales in Jan. A time series with seasonality also has a non-constant mean and thus is not covariance stationary.


Detecting seasonality:
In case of seasonality in the data, autocorrelation in the model differ by season. For example, in case of quarterly sales data of a company, if the fourth autocorrelations of the error term differ significantly from 0  → This is a sign of seasonality in the model.


Decision Rule:
When t-statistic of the fourth lag of autocorrelations of the error > critical t-value → reject null hypothesis that fourth autocorrelations is 0.  Thus, there is seasonality problem.


Correcting Seasonality: This problem can be solved by adding seasonal lags in an AR model i.e. after including a seasonal lag in case of quarterly sales data, the AR model becomes:

xt = b0 + b1x (t-1) + b2x(t-4) + et

NOTE: R(square) of the model without seasonal lag will be less than the R(square) of the model with seasonal lag. This implies that when time series exhibit seasonality, including a seasonal lag in the model improves the accuracy of the model.




Monday, 26 December 2011

Apple Inc.'s Share based compensation - Extract from Form 10K












Above is the snapshot from Apple inc.'s Form 10K submitted on 24 September, 2011. The above paragraph explains the share-based compensation used by the company and the way of reporting them, the valuation models used and the accounting treatments related to how the expense is recognized and recorded over service periods.

Below are some extracts from the Reading 23, Employee Compensation which totally relate to the extract above.

"Restricted Stock Grant: 
• Compensation expense is reported based on the fair value of the stock on the Grant Date (i.e. market value at grant date).
• Compensation expense is allocated over the service period of the employee

Stock Options:
Definitions: 
• Grant date: It is the day that options are granted to employees.
• Service Period:  It is usually the period between the grant date and the vesting date.
• Vesting Date: It is the date that employees can first exercise stock options. The vesting can be immediate or over a future period.
• Exercise Date: The date when employees actually exercise the options and convert them to stock

Accounting Treatment of Stock Options (IFRS & US GAAP): 
• Compensation expense related to option grant is reported at fair value of the option on the grant date based on the number of options that are expected to vest.
• If the share-based payments vest immediately, then compensation expense is recognized in the income statement on the grant date.
• If share-based compensations do not vest until a specified service period is completed, compensation expense is recognized in the income statement and allocated over the service period (the time between the grant date and the vesting date).
• If the share-based compensation are contingent upon achievement of performance or a market condition e.g. target share price, compensation expense is recognized over the estimated service period in the income statement.

Determining Fair Value: 
Fair value of stock options must be estimated using an appropriate valuation model unlike stock grants whose  fair value is based on the market value at the grant date.

When market price is not available, the firm can use option pricing model i.e. Black scholes or binomial model. No specific method is preferred under IFRS and U.S. GAAP.


Option pricing model is based on the following six inputs: 
1. Exercise price (It is known at the time of grant).
2. Stock price at the grant date.
3. Expected term (It is a highly subjective measure).
4. Expected volatility (It is a highly subjective measure).
5. Expected dividends.
6. Risk-free rate

Effects of changes in inputs on the Estimated fair value of options: 
Inputs that lead to increase in Estimated Fair Value and higher compensation expense:
• Higher volatility
• Longer estimated life
• Higher risk-free rate
• Lower assumed dividend yield

Inputs that lead to decrease in Estimated Fair Value and lower compensation expense:
• Lower volatility
• shorter estimated life
• Lower risk-free rate
• Higher assumed dividend yield"

The reason why this charter is given such respect is evident through the skills & knowledge which it develops. Above is one such example that how preparing for the exam equips one with the knowledge which is being used and applied by large companies. Reading Form 10K after going through FRA segment was a totally new  experience for me. I had never understood the essence so clearly before.

Video Tutorial - CDOs (Level II)


Sunday, 25 December 2011

Real World Application - Active Managers spark row (News Pick)

An article written by Steve Johnson in Financial Times throws light on Active Management & Passive Management. Both investment studies have been fairly discussed in the CFA curriculum. Although how to actively manage portfolio or any specific strategy has not been discussed but the major differences, why re-balancing is done and the types of analysis which analysts use to value stocks, bonds and other investments to be included in their portfolio are discussed in the CFA Curriculum. The article can be understood better if allegiance with the terminologies associated with active & passive management is present.

Read the article here: "http://www.ft.com/cms/s/0/adf228ee-1c2b-11e1-af09-00144feabdc0.html#axzz1hdAsn2G8"

Video Tutorial - Option Delta (Level II)

Understanding & Interpreting Option delta was a difficult for me while studying Derivatives. I had to read the curriculum multiple times to fully understand option delta. Below is an excellent tutorial on Option delta which I personally have found very productive as it helps in visualizing the things and making it quite easier to understand the topic. 

Saturday, 24 December 2011

Application of Level I - Retailers may return some cash to investors in 2012


Share repurchase are extensively discusses in Corporate Finance in the CFA Level I curriculum. The effects of share repurchase, buy backs, the methods of doing so, paying dividend in cash or buying share from that amount, the effect on ratios, stock splits, stock reverse splits, negotiations, dutch auctions etc. are narrated well in the readings. Following article from CNBC requires basic understanding of share repurchase to be apprehended well. 
With excess cash on hand from years of cautious spending and slower store growth, retailers in 2012 will focus on returning capital to investors via share buybacks and dividends, according to a Credit Suisse report.
  • A Home Depot store in Edmond, Okla.
    By Sue Ogrocki, AP
    A Home Depot store in Edmond, Okla.
By Sue Ogrocki, AP
A Home Depot store in Edmond, Okla.
The firm's analysts estimate that share buybacks will reach $36.2 billion next year. That's a slight decline from $37.4 billion in 2011, but well above $20.7 billion in share repurchases seen in 2008.
While capital spending is expected to increase, it will be nowhere near peak levels of 2006-2007.
  • Beyond share buybacks and dividends, retailers are also expected to focus on international growth, e-commerce, marketing programs (including loyalty programs), and remodels.

Offering automotive parts retailer AutoZone as an example, the report underscores that buybacks work best when combined with strong company fundamentals — supporting stock through lower earnings years and amplify earnings improvement in the better years.
For 2012, the report calls Home Depot and Lowe's the most interesting names in the retail space.
"While these names do not have the highest yields in the segment, buybacks can support earnings today, while the housing market remains challenging," says the report. "In the long term, if one believes in a housing recovery and that these companies can deliver upside to margins, the higher earnings combined with the years of buybacks should lead to much stronger [earnings per share] growth and strong stock performance."
Credit Suisse analysts also expect to see significant returns of capital for shareholders from department stores.
Macy's could buy back about $1 billion of stock in 2012 and double its annual dividend to $0.80 from $0.40, says the report.
Kohl's is also seen increasing its dividend, which was initiated for the first time ever in 2011, and buying back about $800 million in stock next year.
In addition, Dillard's and Saks "both will have capacity to return meaningful amounts of capital in the form of share repurchases and dividends in the coming year," says the report.
Strong outlooks and the financial flexibility put CVS and Kroger in a good position to continue returning cash to stockholders for the foreseeable future. "We estimate they should buy back 7% to 8% of their current market capitalization in 2012," says the report.
Just this week, CVS announced a 30% increase in its quarterly dividend.
Equipment suppliers are viewed as most likely to actively repurchase shares in the near-term, with International Game Technology taking the lead. According to the report, every $50 million of stock repurchased could add $0.01 to EPS for the company.
"Earlier this year, the company announced a new $500 million share repurchase program, and with $1.3 billion in free cash flow through fiscal 2013, management appears eager to return cash to shareholders, particularly as fundamentals are improving," says the report.
However, retailers with high cash flow yields but weak fundamentals may not benefit from buybacks. Among them, Best Buy, GameStop, Sears, Staples, and Bon-Ton Stores.
"While buy backs may support EPS in the near term, the stocks may not be rewarded if the companies cannot demonstrate net income growth," says the report.

Video Tutorial - Mortgage Backed Securities (III)


Friday, 23 December 2011

Preparing for Level I Exam - Important Tips


  • Adjust your studying of a topic to the weight it is given in the exam. For example, if ethics is 15% of the exam, try to spend 15% of your time studying ethics
  • Don't ignore ethics. Many people don't cover ethics well enough. If you study properly, this 15% should be a gimme.
  • Be sure to eat properly and exercise. When you're working 50-70 hours each week and then studying an additional 10-20, it's easy to ignore working out and start eating junk food.
  • Do not underestimate the difficulty of the exam. Even though it's considered the easiest of the three CFA exams, it still covers a wide variety of difficult topics.
  • How much you will have to study is going to depend on a variety of factors, including your academic background, work experience, general intelligence, etc. CFAI recommends at least 250 hours, though.
  • Don't use the study hours as your only measure of progress. Some people will pass level 1 by studying 100 hours, while some will need 400 hours to master the curriculum. The key is studying enough to be able to answer any question in under 1.5 minutes. Taking practice exams will give you a good proxy for your progress.
  • Continuously review all of the material you have covered to date. A major concern with candidates is forgetting information that they covered a month or two ago. This is another area where the 3rd party notes come in handy.
  • Track your studying. A simple excel sheet could help you in tracking the number of hours which you've studied.
  • Take Full Practice exams. Practice is the key to success. Once you are done with your readings take mocks. CFA Institute provides 1 mock. Try to appear in as much mocks as you can. Third  party mocks can be purchased online.
  • Start with the topic that interests you the most . If you think that studying derivatives sounds interesting, start with studying derivatives. If you do this, you're more likely to enjoy the reading, rather than having the feeling of being forced to read - much like when you were forced to read the "classic novels" in high school.
  • Sign up early. I suggest signing up at least before the first deadline, if for no other reason than to save some money. This will also ensure that you'll have enough time to properly prepare.

Video Tutorial - Mortgage Backed Securities (II)


Thursday, 22 December 2011

Tips for remembering and retaining a great deal of information


CFA Level I is more about retaining the information. It requires specific attitude towards education and learning which develops in the first Level and act as a prerequisite to Level II & Level III. Following are some tips which I read somewhere and saved for some later use. This is the best platform for me to share them with you.

Tips for remembering and retaining a great deal of information:
  • Use mnemonic devices,
    • Like in Ethics Standard No. 1 Professionalism the next four sub parts could be remembered by making a mnemonic device KIMM.
  • Review information frequently. Don't review information you've already learned pat. Your review time is best spent, drudging through the hard stuff.
  • Understand what you're reading rather than trying to memorize information without comprehending it. If you read a chapter and a quick review of the key points will solidify the information, take the time to review the key points, else your recall will be poor. If you can not digest a concept, get help. Ask someone who is also taking the exam.
  • Visualize the formula in your head. Do not move on in your readings until you can visualize the formula your head and write it paper.
The Spacing Effect states that one is more likely to remember a set of items when rehearsal is spaced over an extended period of time. This means that you should review the formulas often. Photocopy the formulas in the back of your books and keep them in your bag or maintain some formula sheet to review it often before the practice tests or the exam.

Applying Level I - GE Capital Renews and Expands Credit Facility for Hensall Co-Op


Corporate Finance is an important study session in the CFA Level I curriculum. It gives a comprehensive understanding of working capital management, proforma financial statements, share repurchases, WACC etc. The following article from CNW relates to what the candidates have been studying in Corporate Finance.
TORONTODec. 22, 2011 /CNW Telbec/ - GE Capital, Corporate Finance today announced that it has provided an $80 million revolving credit facility to Hensall District Co-Operative, the largest independent agricultural co-op in Ontario representing about 4,400 member farmers. The facility will be used to refinance Hensall's existing debt and support growth, and includes a $15 million accordion to meet peak seasonal needs.
Founded in 1937, HDC operates 14 locations supporting procurement, processing, marketing and distribution of edible beans, soybeans, grains and fertilizers. HDC also supports its members and customers in over 40 countries by operating feed, petroleum, propane and global logistics businesses. In fiscal 2011, HDC had total sales of $466 millionand net profit before distributions to members and income taxes of $9 million.
"As we've expanded our scope of activities in recent years to better serve our members, growing by 40% last year alone, we appreciate having a financial provider with the resources of GE Capital," said Earl Wagner, chief executive officer of Hensall. "We see GE as a partner in our development, not simply a bank, as they have shown the ability to look beyond the ups and downs of a commodity-driven industry and find ways to help us grow."
"We're very pleased to be able to expand our relationship with HDC as they build their operations," said Ellis Gaston, managing director, GE Capital Corporate Finance, Canada. "Our domain expertise in this industry and our ability to provide the entire facility are important advantages for HDC."
About GE Capital, Canada
With more than 20 offices throughout Canada, GE Capital (gecapital.ca) offers a wide variety of financial products and services to address commercial financing and fleet management needs in all phases of a business' lifecycle. From equipment finance to working capital and growth financing to large asset-based and restructuring loans, we apply our wealth of industry expertise and develop custom solutions for your company. Some of the industry sectors we specialize in include transportation, construction, healthcare, agriculture, forestry, manufacturing, oil & gas, wholesale and retail, restaurant and hotel franchise.
GE Capital offers consumers and businesses around the globe an array of financial products and services. For more information, visit gecapital.com or follow company news via Twitter (@GECapital).
GE (NYSE: GE) works on things that matter. The best people and the best technologies taking on the toughest challenges. Finding solutions in energy, health and home, transportation and finance. Building, powering, moving and curing the world. Not just imagining. Doing. GE works. For more information, visit the company's website at ge.com.

Maintaining Physical State to improve Retention


Your physical state directly affects your psychological state:
  • Eating a balanced diet, avoiding alcohol, and getting good rest will keep you from getting sick and missing study time. These will also keep you happy and motivated.
  • Remember to eat regularly, at least three meals a day. Your retention decreases when you’re hungry.
  • Exercise as much as possible, even if only for 15 minutes a day because weight lifting and cardiovascular exercises are proven to improve memory and reduce stress (which you will have a lot of with work and studying). You can squeeze in an intense cardiovascular work out by jumping rope or running on an uphill treadmill for 15 minutes. 

Video Tutorial - Mortgage Back Securities (1)


Wednesday, 21 December 2011

Psychological and Physical Challenges of Preparing for and Taking a Large Exam


While browsing I found the below mentioned challenges which were faced by me and others whom I know, appearing in the exam with me. I have made some additions in them based upon my experience of level I and compiled them to share with you.

Studying for the exam is a major commitment and the preparation process will have a psychological effect on you. For me, the biggest difficulties were:
  1. Decreased time with friends and family
  2. Concern about having to take the level 1 exam again (fear of failure)
  3. Burnout

Decreased time with friends and family:
One result of perusing level 1 is that the time you spend with friends and family will decrease. You’ll find yourself declining social engagements, especially during the immediate period leading up to the exam. Your friends and family may stop inviting you to things, because they feel that you will just say no anyways. You may also feel guilty for neglecting to spend time with people you normally spend time with. 

Before you begin studying for the exam I recommend you personally tell your closest friends and family about your CFA time commitment, letting them know that you won’t be able to spend as much time with them, asking them for their support, and telling them that you apologize in advance for being less accessible. By doing this your friends and family know what to expect and you will feel more comfortable about your time spent away from them.
You can find a way to spend time with your friends by inviting them to your place to do something that is not time consuming. To save time, try doing things in or around your house. By inviting your friends over they will see that although you have little free time you are still making an effort to maintain the relationship.

Concern about having to take level 1 again:
Roughly 60% of people fail the exam which means that the average test taker is more likely to fail than pass. I say this not to discourage you, but to remind you that you will need persistence and determination to pass, and that some people take the level 1 exam twice before they pass, especially if they are new to finance. Taking level 1 multiple times is not bad or embarrassing, however, you should do everything in your power to pass the first time. Remember Life is all about choices, we make them and do not look back. Moreover we fall in order to learn how to stand up. Failing the exam gives an opportunity to learn from the exam environment and revisit the mistakes. Does that mean with the fear of failure one should stop putting in effort? Never. Strive for excellence, success will automatically be achieved.

Burnout:
If your retention becomes poor, your mind drifts while studying, and you don’t feel as motivated as you used to be you might be burnt out.There is no explanation why this happens when it does, but when you become burnt out make sure to recognize it early so you don’t go for two or three weeks without fixing the problem. To fix burnout take a two or three day break, doing relaxing activities that you enjoy. Treat yourself better and try avoiding people with pessimistic ideas. Stay away from media programs which develop in you frustration. Watching an episode of a funny season or a movie can help immensely in overcoming the burnout. You can manage your routine in a way that you take some time out of your daily routine and spend that time for yourself by saving your energy. Exercise helps in developing energies while watching television or doing any other activity which involves brain consumption reduces energy levels. 



Autoregressive (AR) Models Time Series (Part C) - Quantitative Methods Level II

Mean Reversion.

A time series shows mean reversion if it tends to move towards its mean i.e. decrease when its current value is above its mean and increase when its current value is below its mean.When a time series equals its mean-reverting value, then the model predicts that the value of the time series will be the same in the next period.


Multi-period Forecasts and the Chain Rule of Forecasting.

The chain rule of forecasting is a process in which a predicted value two periods ahead is estimated by first predicting the next period’s value and substituting it into the equation of a predicted value two periods ahead. It is important to note that the Multi-period forecast is more uncertain than single-period forecasts because the uncertainty increases when number of periods in the forecast increase.


Comparing Forecasting Model Performance.

The accuracy of the model depends on its forecast error variance. The smaller the forecast error variance, the more accurate the model will be.

In-sample forecast errors: These are the residuals from the fitted time series model i.e. residuals within a sample period.
Out-of-sample forecast errors: These are the residuals outside the sample period. It is more important to have smaller forecast error variance for out-of-sample forecasts because the predicted values are always out of sample. In order to evaluate out-of-sample forecasting accuracy of the model. Root Mean Squared Error (RMSE) is used. RMSE is the square root of average squared error.
Decision Rule: The smaller the RMSE, the more accurate the model will be.


The RMSE (Root Mean Squared Error) is used as a criterion for comparing forecasting performance of different forecasting models. To accurately evaluate uncertainty of forecast, both the uncertainty related to the error term and the uncertainty related to the estimated parameters in the time-series model must be considered.

NOTE: If the model has the lowest RMSE for in-sample data, it does not guarantee that the model will have the lowest RMSE for out-of-sample data as well.

Instability of Regression Coefficients.

When the estimated regression coefficients in one period are quite different from those estimated during another period, this problem is known as instability or nonstationarity. The estimates of regression coefficients of the timeseries model can be different across different sample periods i.e. the estimates of regression coefficients using shorter sample period will be different from using longer sample periods. Thus, sample period selection is one of the important decisions in time series regression analysis.


· Using longer time periods increases statistical reliability but estimates are not stable.
· Using shorter time periods increase stability of the estimates but statistical reliability is decreased.


NOTE: We cannot select the correct sample period for the regression analysis by simply analyzing the autocorrelations of the residuals from a time-series model. In order to select the correct sample, it is necessary that data should be Covariance Stationary.







Video Tutorial - Mortgage Back Securities Overview


Tuesday, 20 December 2011

CFA Related Professions.


Following are some examples of CFA related professions:

  • Equity (stock) analysis
    • Examples of companies are any major investment bank, Standard and Poors, Value Line, etc.
  • Credit (bond) analysis
    • Standard and Poors, Moody’s, Fitch Ratings, DBRS
  • Mergers, acquisitions, and divestitures
    • Any major investment bank, namely Goldman Sachs, JP Morgan Chase etc. There are also a number of boutique M&A firms.
  • Investment banking
    • Conduct initial public offerings of stocks
    • Conduct placements of bonds
    • Trading etc.
  • Private equity
    • Carlyle group, Texas Pacific Group, Blackstone, KKR, Goldman Sachs
  • Real estate investing
    • Vornado, Equity Office Properties, Equity Residental,Brookfield Properties
  • Pension & Endowment management/consulting
    • Russell, Cambridge Associates, Ennis Knupp, Barclays Global
  • Private wealth management (private banking)
    • All major investment banks, Mellon Financial, Stanford Financial, US Trust
  • Hedge funds
    • Bridgewater, D.E. Shaw, SAC Capital Partners, etc.
  • Mutual funds
    • Fidelity, American Funds (a Capital Group Company), Vanguard, etc.
  • Economic consulting
    • NERA, LECG
  • Tax and transaction consulting (i.e., accounting firm)
    • KPMG, Deloitte & Touche, PriceWaterhouseCoopers, Ernst & Young, Grant Thornton, etc.
Disclaimer: List of company names include Charter holders which have been  working there and only mentioned as examples. It was compiled before some time and may contain some names which have faced credit event and therefore acquired, merged or ceased to exist. 

Kopin weakens below Moving Average Price (MAP); 50-day MAP trails 200-day MAP


Kopin (KOPN.O), NASDAQ's 55th largest electronics company by market capitalisation, has dropped below its trend. The 200-day moving average price (MAP) was US$4.181. The price to 200-day MAP ratio is 0.88, a bearish indicator. In the past 200 days this ratio has been under 0.88 50 times suggesting further downside. The stock is trading below both its MAPs and the 50-day MAP of US$3.815 is lower than the 200-day MAP of US$4.181, another bearish indicator. The stock fell for a second day on Monday bringing its two-day fall to 36.0c or 8.9%. The stock price fell 14.0c (or 3.7%) to close at US$3.67. Compared with the NASDAQ-100 index, which fell 22.9 points (or 1.0%) on the day, this was a relative price change of -2.7%.

PRICE DYNAMICS
Volatility: the stock traded between an intraday high of US$3.942 and a six-day low of US$3.66, suggesting a trading opportunity between peaks and troughs. Today its volatility of 7.7% was 6.3 times its average volatility of 1.2%. A price fall on high volatility is a bearish signal. The average daily volatility of 4.3% places the stock in the 2nd quartile in the market meaning it is moderately volatile.
% Discount to high: the last price is at a discount of 29.7% to the 12-month high of US$5.22 seven months ago on 31 May, 2011.
% Premium to low: the last price is at a premium of 19.5% to the 12-month low of US$3.07 three months ago on 04 Oct, 2011.
Volume weighted price (VWP): the price is equal to its 1-month volume weighted average price of US$3.682.
Beta: The Beta of this stock is 1.31. A Beta greater than 1 suggests this is a high risk, high return stock with volatility greater than that of the market.
Standard Deviation (SD): SD is a statistical measure of deviation from the mean. The SD of 3.5% gives it a percentile rank of 58 meaning that 58% of stocks in the NASDAQ market are less volatile than this stock.
Trailing month: in the last 21 trading sessions there has been a net decline of 5.9%; the stock has retreated 16 times and the biggest one day decline was 7.2% on Nov 23.
AGGREGATE VOLUMES, PRICES AND TURNOVER PERIOD
[Volume Index or VI in brackets; 1 is average]
NASDAQ: KOPN.O 190,463 [VI of 0.7]; volume 81.96% of aggregate. Price: US$3.67.
BATS: KOPN.BATS 41,909 [VI of 1.3]; volume 18.04% of aggregate. Price: US$3.67.
Aggregate volume: there were 232,372 shares worth US$852,805 traded. The aggregate volume was 0.8 times average trading of 299,610 shares.
Access comprehensive Stock Research on http://www.buysellsignals.com/19711370
PRICE PERFORMANCE RANK IN INDEX AND SECTORS
The stock is in 1 index and 2 sectors.
The following index and sectors fell setting the trend for its fall of 3.7%:
Electronics sector of 139 stocks traded today, which was down 21.1 points or 2.2% to 938.3,
The Total NASDAQ Market of 2416 stocks traded today, which was down 21.6 points or 1.2% to 1,753.6,
NASDAQ-100 index which was down 22.9 points or 1.0% to 2,215.3
RELATIVE VALUATION INDICATORS [RVI] FUNDAMENTAL ANALYSIS
The stock meets the following value criteria set by Benjamin Graham:
-"Current ratio of two or more"; current assets are 7.44 times current liabilities.
The stock has a score of 5 out of 9 set by Joseph Piotroski [pass mark >=5 ]:
Positive net income; Positive operating cashflow; Good quality of earnings [operating cashflow exceeds net income]; Reduction in total shares on issue; Improvement in asset turnover [growth in revenue of 5.0% exceeded growth in assets of 4.84%].
Other Bullish Signals:
- The earnings yield of 3.62% is 1.9 times the 10-year bond yield of 1.86%.
- The Price to Book of 1.5 lower than average of 2.2 for the Electronics sector and 3.4 for the Total NASDAQ Market. We estimate the shares are trading at a current year Price to Book of 1.4 and a forward year Price to Book of 1.3.
- The company is cash rich with Cash to Market Capitalisation at 20.2%.
Bearish Signals:
- Price/Earnings of 27.6 versus sector average of 12.4 and market average of 20.0. We estimate the shares are trading at a current year P/E of 13.1 and a forward year P/E of 6.3.
- Price/Sales of 1.96 versus sector average of 0.7 and market average of 1.5. We estimate the shares are trading at a current year Price/Sales of 1.8 and a forward year Price/Sales of 1.7.
- Return on Equity of 5.4% versus sector average of 13.9% and market average of 10.7%.
- Return on Assets of 4.7% versus sector average of 6.0% and market average of 4.0%.
- The average annual compound return on the share price in the last 5 years was 0.9%, underperforming the average annual compound return on the NASDAQ-100 index of 4.7%
RELATIVE VALUATION INDICATORS [RVI] TECHNICAL ANALYSIS
Bullish Signals:
- The Moving Average Convergence Divergence (MACD) indicator of 12-day Exponential Moving Average (EMA) minus the 26-day EMA is positive suggesting a bullish signal.
Bearish Signals:
- The price weakened 2.4% in the last week.
- This has been exacerbated by firm volume of 1.5 times average for the week.
- Compared with the NASDAQ-100 index which fell 1.7% for the month, this represented a relative price decrease of 4.7% for the month.
- In the NASDAQ market of 2,416 stocks traded today, the stock has a 6-month relative strength of 34 which means it has underperformed 66.0% of the market.
- The price to 50-day EMAP ratio is 0.97. In the past 50 days this ratio has been under 0.97 just nine times suggesting a support level. The 50-day EMAP has decreased to US$3.782. A decrease is another bearish indicator.
- In the last three months the stock has hit a new 52-week low twice.
- The price to 200-day MAP ratio is 0.88, a bearish indicator. In the past 200 days this ratio has been under 0.88 50 times suggesting further downside. The stock is trading below both its MAPs and the 50-day MAP of US$3.815 is lower than the 200-day MAP of US$4.181, another bearish indicator.
SHAREHOLDER RETURNS
Trailing one week: the stock fell three times (60% of the time) and rose twice (40% of the time). The aggregate volume was 1.5 times average trading of 1,491,500 shares. The value of US$1,000 invested a week ago is US$918 [vs US$967 for the NASDAQ-100 index], for a capital loss of US$82(or loss of 8.2%).
Trailing one month: the stock rose eleven times (55% of the time) and fell nine times (45% of the time). The aggregate volume was 0.9 times average trading of 6,562,600 shares. The value of US$1,000 invested a month ago is US$936 [vs US$986 for the NASDAQ-100 index], for a capital loss of US$64(or loss of 6.4%).
Trailing one year: the value of US$1,000 invested one year ago is US$821 [vs US$1,009 for the NASDAQ-100 index], for a capital loss of US$179. The total return to shareholders for 1 year is -17.9%.
Trailing five years: the value of US$1,000 invested five years ago is US$1,046, for a capital gain of US$46.
The present value of US$1000 invested at a previous date is shown below:
FINANCIALS
Quarterly Report:
In the quarter to September 24, 2011 total revenue of US$29.6 million; net profit of US$797,000; EPS of 2.0c.
Annual Report for the year ended December 25, 2010 (year-on-year comparisons with previous corresponding period)-
Favourable Changes: total revenue up 1.5% to $US125.6m; a track record of profits in 3 of the last 3 years; Net tangible assets per share up 4.6% to $US2.51.
Unfavourable Changes: net profit slumps 54.1% to $US8.9m; EPS slumps 55.2% to 13.0 U.S. cents; although the Total Liabilities to Operating Cash Flow ratio of 1.5 compares favourably with the Joseph Piotroski benchmark of <4, it had deteriorated by 90.1% from the previous year.; total liabilities to total assets up 10.0% to 0.1; current ratio down 12.0% to 7.4; Working capital to total assets down 6.1% to 68.8%; total revenue to total assets down 3.2% to 0.7.
Major Common Size Ratios: total current assets to total assets down from 83.1% to 79.5%; cash to total assets down from 29.9% to 25.9%; fixed assets to total assets up from 11.3% to 17.0%; current inventory to total assets up from 9.0% to 11.2%; current debtors to total assets down from 8.0% to 7.6%; cost of goods sold to sales up from 61.4% to 64.7%; sales and marketing expenses to sales up from 11.4% to 11.8%; profit before tax to sales down from 15.7% to 7.8%; profit after tax to sales down from 15.7% to 7.1%; depreciation to sales up from 4.8% to 5.2%.
FUNDAMENTALS
ISSUED CAPITAL
Based on 67,246,000 issued equity shares the market capitalisation is US$246.8 million. It is NASDAQ's 78th largest Electronics company by total revenue.
ACTIVITIES
Kopin Corporation is a developer and manufacturer of III-V products and miniature flat panel displays. The Company uses its semiconductor material technology to design, manufacture and market its III-V and display products. The Company products enable its customers to develop and market a generation of products for applications in wireless and consumer electronic products. The Company commercially develops and manufactures Gallium Arsenide-based heterojunction bipolar transistor wafers (HBT transistor wafers) and other commercial semiconductor products that use Gallium Nitride and Gallium Arsenide-based substrates. The Company operates in two segments: Kopin US, which includes the operations in the United States and the Company's equity method investments, and Kowon.
TOP MANAGEMENT
The chief financial officer is Richard A. Sneider and the chief executive officer and chairman is John C.C. Fan.
REPORTED BUYING
Reported Buying:
May 03: Kopin insider buys
Kopin (KOPN.O) insider Brewington James K bought 10,000 shares worth approximately US$48,100 on April 29, 2011. The last price was US$4.80.
May 03: Kopin insider buys
Kopin (KOPN.O) insider Brook David bought 10,000 shares worth approximately US$48,100 on April 29, 2011. The last price was US$4.80.
May 03: Kopin insider buys
Kopin (KOPN.O) insider Landine Michael J bought 10,000 shares worth approximately US$48,100 on April 29, 2011. The last price was US$4.80.
May 03: Kopin insider buys
Kopin (KOPN.O) insider Collins Morton bought 10,000 shares worth approximately US$48,100 on April 29, 2011. The last price was US$4.80.
May 03: Kopin insider buys
Kopin (KOPN.O) insider Hsieh Chi Chia Dr. bought 10,000 shares worth approximately US$48,100 on April 29, 2011. The last price was US$4.80.
BUSINESS NEWS ROUND UP
The last 5 company announcements are:
December 13: Kopin insider gift shares
Kopin (KOPN.O) insider Fan John C C gifted 30,201 shares worth approximately US$120,804 on December 09, 2011.
June 16: Kopin Wins $23.2 Million in Follow-On Orders for U.S. Army's Thermal Weapon Sight Program
[News Story] TAUNTON, Mass.--(BUSINESS WIRE)-- Kopin(Registered) Corporation (NASDAQ: KOPN), the leading U.S. manufacturer of display systems for mobile consumer and military applications, today announced it has been awarded $23.2 million in follow-on production orders for display systems in support of U.S.
May 31: Kopin and Its Subsidiary Forth Dimension Displays Introduce Replicating Reality(TradeMark)
TAUNTON, Mass.(BUSINESS WIRE) Forth Dimension Displays (FDD), a leading provider of display components for fighter jet and helicopter simulators, and subsidiary of Kopin(Registered) Corporation, will introduce Replicating Reality(TradeMark). Replicating Reality is a new concept to create the ultimate experience by making the user feel fully immersed in a different world or hyper-reality.
May 17: Kopin Brings High-Definition, Large-Picture Viewing Experience to Mobile Users
TAUNTON, Mass.--(BUSINESS WIRE)-- Kopin(Registered) Corporation (NASDAQ: KOPN), the leader in microdisplays for consumer and military applications, will showcase its newest high-resolution displays and module products at the SID (Society for Information Display) 2011 Exhibition.
May 11: Kopin Receives CLARUS Award at MDB Capital's Bright Lights Conference 2011
[News Story] TAUNTON, Mass.--(BUSINESS WIRE)-- Kopin(Registered) Corporation (NASDAQ: KOPN), a leading supplier of advanced semiconductor materials and microdisplays for mobile applications including smartphones, tablet PCs, military thermal weapons sights and wearable computers, today announced that it received the CLARUS Award, presented by MDB Capital Group at the second annual Bright Lights Conference in New York City.Kopin was selected as one of the 40 most innovative public companies from more than 1,500 small-cap companies with granted U.S.
Source: www.BuySellSignals.com

Debt to Equity Ratio - Video Tutorial


Monday, 19 December 2011

Salary for Chartered Financial Analyst (in US as of 18 Dec. 2011)



















The above snapshots are taken from payscale.com which updated the data from 151 individuals from US, as of 18th December, 2011. The data suggests the salary range of Chartered Financial Analysts from $34,906 - $116,703. The bonuses are from $1,454 - $41,217. The Profit sharing is from $23.49 - $28,118. This results in Total Pay ranging from $37,477 - $139,591.

The popular industries which have hired such people in increasing order of Salary are Financial Services, Investment Services, Banking, Investment Banking, Insurance & Financial Services.

It is important to note that irrespective of the Degrees the median salary is almost the same. Medical benefits are most common.

Motivation Pick - Jens Peers & Matthew Sheldon

Kleinwort Benson Investors International Ltd is a leading Dublin-based SRI firm whose principals have expertise in the fast-growing, nascent alternative energy sector, a long history of socially responsible investing, and a strong reputation in multi-cap global investing. Kleinwort Benson Investors International Ltd has one of the longest track records of any manager in alternative energy assets. The firm uses a combination of quantitative and fundamental investment processes to evaluate potential investments. Top-down views on industries, sectors, or regions act as risk controls, while a fair-value target model may be used to help determine the purchase or sale of a stock.


Jens PeersCFA is the lead Portfolio Manager of Calvert Global Alternative Energy Fund and Calvert Global Water Fund. Mr. Peers joined KBC Bank in 1998 and KBI in 2003. He holds a Licentiate (equivalent to a master's degree) in Applied Economics from the University of Antwerp in Belgium.



Matthew Sheldon joined the Environmental Strategies team at Kleinwort Benson Investors International, Ltd. as a portfolio manager in April 2011. He has extensive specialist knowledge and experience in investing in the water sector, including both global public equities and private equity. Prior to joining the firm, Mr. Sheldon worked at Water Asset Management, where he was an Investment Analyst, and at Wedge Capital Management, where he was an Equity Analyst. Mr. Sheldon graduated summa cum laude from Tufts University with a BS in Chemical Engineering. He holds an MBA in Finance from Columbia Business School, and is a CFA charter holder.

Why take Practice Problems?

Taking practice problems is extremely important. By doing lots of practice problems you will be able to convert your knowledge into question answering ability, which is key to passing Level 1.

One should take as many practice problems as possible, however, be sure not to over-focus your time on taking practice problem such that you forgo a thorough reading reviewing of the material.

In order to develop adequate question answering abilities try doing the following: 
  • Complete each practice problem at the end of each chapter.
  • Immediately following completion of practice problems review incorrect problems and problems that you had a hard time with. The best way to review problems is to read over the solution then try to answer the problem again from scratch. This helps cement the solution.
  • After finishing each book, take a sample test with questions only from that book. Save your practice exams, keeping track of what questions you got wrong and had a hard time with.
  • After finishing your first read of the entire body of knowledge take at least two, six hour, timed, practice tests (mocks), to adequately prepare and simulate the actual exam. Review the questions you got wrong and had a hard time with.
Ethics practice questions:
  • To prepare for the Ethics portion I recommend taking a disproportionately large amount of practice questions. There are lots of small and seemingly minor rules you will be tested on for Ethics that are easiest learned via taking practice problems. Try completing Ethics from CFAI Text books and focus well on understanding the examples before you take practice questions.