Video Tutorial - Call Payoff Diagram

A very important Video tutorial on Call Payoff diagram. Though graphs are unlikely to be tested but the concept is very important to understand especially the difference between gain and payoff.

Suggested Steps in Time-Series Forecasting (Part A) - CFA Level II

Following is a guideline to determine an accurate model to predict a time series.

1. Select the model on the basis of objective i.e. if the objective is to predict the future behavior of a variable based on the past behavior of the same variable, use Time series model and if the objective is to predict the future behavior of a variable based on assumed casual relationship with other variables Cross sectional model should be used.

2. When time-series model is used, plot the series to detect Covariance Stationarity in the data. Trends in the time series data include:
· A linear trend
· An exponential trend
· Seasonality
· Structural change i.e. a significant shift in mean or variance of the time series during the sample period.

3. When there is no seasonality or structural change found in the data, linear trend or exponential trend is appropriate to use i.e.
i. Use linear trend model when the data plot on a straight line with an upward or downward slope.
ii. Use log-linear trend model when the plot of the data exhibits a curve.
iii. Estimate the regression model.
iv. Compute the residuals
v. Use Durbin-Watson statistic to test serial correlation in the residual.

Video Tutorial - Lower Bound on Forward Settlement Price

Coca-Cola Form 10K 2010 - Pension Plan Valuations

The above snapshot is taken from the Form 10K submitted by Coca Cola for year 2010. The snapshot is about the pension plan valuations, the assumptions used, estimated discount rate, actuarial assumptions, the return on planned asset, the estimated obligations etc. A brief overview of these terminologies has been given in the CFA Level I Curriculum under FRA while detailed discussion is found in Reading 23, Employee Compensation in FRA for Level II. How 'actually' actuarial assumptions are made is beyond the scope whereas the amount of obligation, how it is calculated, what disclosures are necessary, how change in assumptions is treated and their impact is discussed in detail. As I am done with Reading 23 and going through the snapshot for me is very enjoyable and more or less a 'real life revision'.

Video Tutorial - Introduction to Enterprise Value

Regression with more than One Time Series - CFA Level II Quantitative Methods

1. When neither of the time series (dependent & independent) has a unit root, linear regression can be used.
2. One of the two time series (i.e. either dependent or independent but not both) has a unit root, we should not use linear regression because error term in the regression would not be covariance stationary.
3. If both time series have a unit root, and the time series are not cointegrated, we cannot use linear regression.
4. If both time series have a unit root, and the time series is cointegrated, linear regression can be used. Because, when two time series are cointegrated, the error term of the regression is covariance stationary and the t-tests are reliable.

Cointegration: Two time series are cointegrated if
· A long term financial or economic relationship exists between them.
· They share a common trend i.e. two or more variables move together through time.

Detecting Cointegration: The Engle-Granger Dickey- Fuller test can be used to determine if time series are cointegrated.
Engle and Granger Test:
1. Estimate the regression
2. Unit root in the error term is tested using Dickeyfuller test but the critical values of the Engle- Granger are used.
3. If test fails to reject the null hypothesis that the error term has a unit root, then error term in theregression is not covariance stationary. This implies that two time series are not cointegrated and regression relation is spurious.
4. If test rejects the null hypothesis that the error term has a unit root, then error term in the regression is covariance stationary. This implies that two time series are cointegrated and regression results and parameters will be consistent.

NOTE:
· When the first difference is stationary, series has a single unit root. When further differences are required to make series stationary, series is referred to have multiple unit roots.
· For multiple regression model, rules and procedures for unit root and stationarity are the same as that of  single regression.

Applying CFA Level 1 - Citigroup Accounting Shenanigans

There is a complete chapter in Level I curriculum under Financial Reporting & Analysis which discusses Accounting Shenanigans, how limiting oneself with in the accounting principles organizations can be aggressive or conservative to not represent their true financial picture for several objectives. A real life application is discussed in the following article.

"http://seekingalpha.com/article/316594-citigroup-s-tricky-accounting-and-balance-sheet-shenanigans"

Video Tutorial - Upper Bound on Forward Settlement Price

CFA Exam Test taking Important Tips (Continued)

1. Accept the facts as a given - In other words, you might think the scenario given in the question is far-fetched or even incorrect. No matter - assume it's true, and work from there.
2. Read Carefully! - in particular, watch for negatives and double-negatives. Make sure you pick up words like "least", "most", etc... In fact, you might want to underline them. I used to make cross on least likely and plus sign on most likely. Sometimes it can be tested like this 'most likely incorrect' or 'least likely correct'.
3. If you work out of order, make sure you fill in the correct bubbles. If you mess up (even if you catch it later), it could cost you a lot of time to fix.
4. Read ALL the answer choices - in particular for questions that ask for the "most" or "least" correct. Don't stop at the first seemingly correct one.
5. Rephrase the question - sometimes there can be complicated phrasing.
6. Underline the relevant facts
7. Try to answer the question in your own mind before reading the answer choices & better hide the choices while reading the question with your hand.

Motivation Pick - Senior Managing Director, Equity Research at Raymond James Ltd.

Daryl Swetlishoff was named Head of Research of Raymond James Ltd. (Canada) in 2007. Based in Vancouver, he is responsible for a group of 40 research and publishing professionals, providing equity research coverage on over 250 companies across seven industrial sectors. Daryl is also a ranked analyst covering Forest sector equities since joining the firm in 2001. Daryl holds the Chartered Financial Analyst designation, and earned a Master of Arts, Applied Economics (1995) from the University of Victoria.

Source: "http://www.raymondjames.ca/en_ca/equity_capital_markets/equity_research/analyst_profiles/"