Reading 54: Efficient Capital Markets

SCW: 7 Pages

Lessons Learned:

• I really enjoyed the concepts in this chapter
• The EMH is surprisingly interesting
• Only 1 formula, common sense
• A lot of sub-theories, predictions, assumptions
• I would have liked to read more on behavioral finance
• Know the various market anomalies and their implications on the EMH
• Another short chapter, not much to mention here.

Reading 53: Security Market Indexes

SCW: 8 Pages

Lessons Learned:

• Calculating different types of indexes is relatively simple and helps clarify some fundamental differences between them
• Little overlap with the CSC, was the only a one chapter thing?
• Low correlation in global indexes was a pretty interesting read, I wouldn’t mind reading more about that
• Arithmetic vs geometric mean; need more clarification application examples
• Total return index is the term used to describe the return on an index under the assumption that dividends are reinvested
• Purpose of adjusting the denominator in certain indexes
• 3 major types of bond indexes
• Short chapter, pretty basic, fairly interesting

Reading 52: Organization & Functioning of Securities Markets

SCW: 7 Pages

Lessons Learned:

• There is a lot of crossover here with the CSC, in fact, the CSC is more detailed for most parts referenced in this chapter
• The trigger price formula is new and quite interesting
• Personally, I believe this material would be much more confusing without the knowledge from the CSC or a finance degree/diploma.
• call vs continuous markets
• The specialist is another name for a market maker….took me awhile to clue into that one (duh….)
• Types of orders are fairly standard, not really into the more complex types of equity orders yet (likely being saved???)
• The uptick rule is something I kept hearing about, and finally figured it out thanks to page 159 of Schweser.
• The trigger price was the only formula in this chapter, which is a nice relief

Reading 51: An Introduction to Asset Pricing Models

SCW: 13 pages

Lessons Learned

• I really enjoyed the sections on systematic and unsystematic risk, I can’t wait to tackle more risk concepts with PRM later on.
• I had quite a bit of trouble with expected return of a portfolio and portfolio standard deviation
• I am still trying to sort out CAPM v CML v SML in my head
• The formulas in this chapter looked really big, but they can be shortened to fairly small equations, making them easier to memorize
• Efficiency frontier is a set of portfolios that give you the highest return at a given level of risk
• Total risk = systematic risk + unsystematic risk****
• Definitely know the formula for CAPM
• Using the CAPM to identify mispriced securities is an essential review topic for the exam, know it well.

Reading 49: The Asset Allocation Decision

CFAI 28 pages, SCW 4 pages

Lessons Learned:

• Everything here seemed to be common sense, nothing relatively complex
• There were no CFAI questions and only 4 schweser questions for this reading
• Asset allocation is the process of deciding how to distribute an investors wealth among different asset classes.
• Individual life cycle: preliminaries, accumulation, consolidation, spending, gifting
• Page 198 exhibit 3 of CFAI; a must have for this chapter
• Income is taxed when it is received
• Unrealized capital gains/losses reflect the price change in currently held assets that have not been sold
• Capital gains/losses are taxed only when an asset is sold
• marginal vs average tax rate in CFAI (not in SCW)

Reading 74: Investing in Commodities

CFAI 12 pages, SCW: 3 pages

Lessons Learned:

• Schweser indicates this topic is brand new for 2009
• Very small topic, it really could have been thrown into another topic at the end and it wouldn’t have made a difference
• Contango sounds like Disney’s next feature film…..who comes up with these names anyways
• Contango/Backwardation seemed really complex until I realized your virtually replacing bonds with commodities (with some minor adjustments to the methodology)

Dear Quant: Please jump off a tall bridge and plumet to your untimely demise…..thanks.

Disclaimer:  I had originally intended for this to be a one post deal, but the content was just way to large, so I intend to split it up into three posts: (1) this one, (2) Quant: Schweser v. CFAI (3) Quant: SS2 – Reading 5 notes

I take back whatever I said about quant in the past. Reading 5 was, simply, ridiculous.  I spent time figuring out the process to each example on all 41 pages of reading 5 in the CFA Curriculum. This was the original plan and I knew it would extend my overall projected time.   I think it really helped with my retention and understanding of the material, however it took me approximately 15 hours over two days to complete.  15 hours to cover 41 pages is by any measure, absolutely ridiculous, redundant and most importantly, extremely frustrating.  I finished the reading around 4 PM today, at which point I was supposed to move on to reading 6, but frankly, I was much to frustrated and discouraged to move on tonight.  It’s not that I found any of the content in this chapter relatively complex (although some minor details did give me some trouble at times), but its just the depth of the material and content inside this reading was immense.  Some of these issues stemmed from simple misunderstandings with basic mathematical principles and rules, while others required me to change variables and settings on my BA II Plus.

I am aware that we will not have to do these combersome questions on the exam, but I wanted to learn it for a number of reasons:

1. To increase my knowledge base
2. To prepare for more advanced quant I will be studying for FRM in November
3. To prepare for more advanced quant in CFA-L2

Quant in finance is a fundamental component of any valuation and analysis, and I knew I had a long road ahead of me before I truly mastered quant the way I want to.  However, truly mastering the minute details associated with each formula was a daunting task.  This chapter is supposed to be a fundamental part of the course, as well as the CAIA and CFP designations I will be taking in the near future.  So justifying the time is not the problem.  However, I am also under time constraints and my study schedule has now be severely altered.  I am also not sure if this chapter is a representative of the amount of time I need to put into every reading to gain this level of mastery or not.  These questions are causing a little bit of anxiousness and nervousness when looking at the overall study plan.  What makes me more nervous is the relative amount of content I have to cover.  I assume this is a natural feeling, and it will dissipate once I get through Quant, Economics & FSA.  However, at this pace quant would take 18 days for the curriculum material alone, which is not acceptable.  Its the not knowing that drives me nuts, so I hope I can get a feeling of my overall progress in this section soon.

For me, the ultimate frustration came in that, every single example I went through I had some sort of problem with. Whether it was my calculator rounding up, or entering in the wrong numbers, misreading the question, recalling the purpose of the formula or how to calculate a portion of a larger formula. I am usually a fairly patient guy, but when every single problem presents some sort of issue, I begin to get a tad bit irritated.  I am sure other people have similar issues, this is just me venting my own personal opinions.  Ultimately I feel that at the end of this painful process, I will be much better off.  Being done reading 5 I am fairly confident that I can score a 60% and above without having any revision or looking at the schweser notes.  This may not sound very good to some of you, but a 60% for me in quant is a significant improvement.  With my process (described in other posts) and thorough review, I think this painful approach will pay off. Not only do I review the extend content, but I review the narrowed down content (schweser notes & secret sauce), memory retention (cue cards) and practice (end of chapter problems, calculating examples, qbank).  This process for quant will be cumbersome and difficult to make it through, but I think I can really nail the concepts to my goal of 80%.  I also must say that these frustrating rants may continue while I am in quant, if these circumstances continue as well.

- Steve

Secret Sauce Arrived!!!!

I decided to order secret sauce from schweser a couple days ago.  It arrived 2 days after I ordered it, which does not surprise me.  Schweser has consistently outperformed Stalla in my personal experience, at every turn.  That’s a debate that has been beaten to death, and i’m not about to start again here.  It’s amazing how Schweser really trims the content down to the relative stuff.  If I was to recommend only one study solution, it would be this one.  Trust me, worth the money and convenience.

I read the first section on ethics, and I was pleasantly surprised.  They managed to cut the entire ethics section down to 6 pages, and it was written very well.  The thing I liked most about the secret sauce was that the writers recommended which parts of the content to focus on.  So for example, they would mention how to study the standards of conduct, instead of just straight memorization.  Everything was in condensed format in lists and a lot easier to read, though I don’t see how you would use just the secret sauce without background knowledge in the content.  I definitely agree that you can purely study off this after you’ve read everything.  The book is small enough to become your essential notes for the final weeks.  Anyways, I am very glad I bought secret sauce, definitely a solid grouping of the essential content of the curriculum.

Studying Starts Tommorow…..

Tomorrow starts my CFA mass studying.  Only about 3.5 months behind the regulars…..which is both motivating and slightly depressing.  However, I chose in January to take the CSC and CPH before the CFA and so far I don’t regret it.  Ask me in a couple days and I will likely have a different answer for you.  None-the-less its time to buckle down, log-in some insane hours, hope there is enough red bull to sustain me the next 2 months.  I have developed a system in excel that tracks my progress within each reading, including the pages read and the time spent.  Its extremely practical and requires very little attention.  I like to see progress, and what i have left to do so I think it will be a valuable addition to my efficiency and effectiveness.

Tomorrow the plan is to start on the first page of the first book.  My calendar says reading 1 and 2, but that is a guideline.  I will likely try to hammer out all of ethics, or at least a large majority of it.  Right now I am not sure what kind of pace I will be proceeding through the material, and that will affect any initial revisions I complete at the end of next week.  I also have a study group on Sundays which is just starting up, which I have chosen to not participate in. I can’t assume the meetings will be more effective then personal study time, as the CFA-L1 is said to be almost entirely conceptual.  Working in teams has to many complexities in setting up and administration that I don’t have the luxury to waste.  Furthermore the travel time is only justified if I can justify the end result, which I can’t in this case.  I can justify the 3 times a week I travel to the gym to train for some upcoming marathons.

My plan for this blog (hopefully) is to complete a post per day on all of the items I have covered.  If I cover three readings, I will make one post with all those reading.  Unlike the CSC and CPH I wont be making an individual post for every reading as that would detract from my studies to much.  I think a post per day in relation to the material I have covered is adequate.  I will try to upload other content as it becomes relevant in the course of my studying.  From here I am going to upload some links to the site, and play with the lay out a bit and then head over to analyst-forums for a quickie.  I have a bunch of odds and ends to wrap up today as well, so hopefully the red bull lasts long enough to keep the blood flowing.

- Steve

CFA Level 1 Course Curriculum

Below are some pictures of the CFA-L1 2009 Curriculum books provided by the CFAI for students enrolled in the June or December exams.  If it looks intimidating…..well it is.  Just wait till I add the Schweser books.  Personally, I am excited to get reading these.  I have browsed through some of the chapters, and the material looks very interesting.  Of course, ask me how interesting it is after 250+ hours of studying.