Schweser Notes 2012 CFA Level 11 Book 1: Ethical and Professional Standards, Quantitative Methods, and Economics

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BooK 1 - ETHICAL AND PROFESSIONAL STANDARDS, QuANTITATIVE METHODS, AND EcoNOMICS

Readings and Learning Outcome Statements •.•.•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.•.•.• 6 Stndy Session 1 - Ethical and Professional Standards •.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.•.• 13 Stndy Session 2- Ethical and Professional Standards: Application•••.•.•.•.•.•.•.•.•.•.• 110 Self-Test- Ethical and Professional Standards .•.•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 128 Stndy Session 3 - Quantitative Methods for Valuation •.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 138 Self-Test- Quantitative Methods for Valuation .•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 256 Stndy Session 4 - Economics for Valuation .•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 262 Self-Test- Economics for Valuation .•......•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 346 Formulas •.••••••.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•......•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 349 Appendices ••••.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•......•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.•.••••••.•.•.•.•.•.•.•.•.•.• 353 Index ................................................................................................................. 362

SCHWESERNOTESTM 2012 CFA LEVEL 11 BOOK 1: ETHICAL AND PROFESSIONAL STANDARDS, QUANTITATNE METHODS, AND ECONOMICS ©2011 Kaplan, Inc. All rights reserved. Published in 2011 by Kaplan Schweser. Printed in the United States of America. ISBN: 978-1-4277-3620-8/1-4277-3620-0 PPN: 3200-1729

If this book does not have the hologram with the Kaplan Schweser logo on the back: cover, it was distributed without permission of Kaplan Schweser, a Division of Kaplan, Inc., and is in direct violation of global copyright laws. Your assistance in pursuing potential violators of this law is gttacly appreciated.

Required CFA Institute111 disclaimer: "CFA111 and Chartered Financial Analyst111 are trademarks owned by CFA Institute. CFA Institute (formerly the Association for Investment Management and Research) does not endorse, promote, review, or warrant the accuracy of the products or services offered by Kaplan Schweser.,. Certain materials contained within this text are the copyrighted property of CFA Institute. The following is the copyright disclosure for these materials: "Copyright, 2012, CFA Institute. Reproduced and republished from 2012 Learning Outcome Statements, Level I, II, and III questions from CPA® Program Materials, CPA Institute Stand.atds of Professional Conduct, and CPA Institute's Global Investment Performance Standards with permission from CPA Institute. All Rights Reserved."' These materials may not be copied without written permission from the author. The unauthorized duplication of these notes is a violation of global copyright laws and the CPA Institute Code of Ethics. Your assistance in pursuing potential violators of this law is gready appreciated. Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CPA Institute in their 2012 CPA Levd II Srudy Guide. The information contained in these Notes covers topics contained in the readings referenced by CPA Institute and is believed to be accurate. However, their accuracy cannot be guaranteed nor is any wuranry conveyed as to your ultimate exam success. The: authors of the referenced readings have not endorsed or sponsored these Notes.

WELCOME TO THE 2012 LEVEL SCHWESERNOTES™

II

Thank you for rrusting Kaplan Schweser ro help you reach your goals. We are all very pleased to be able to help you prepare for the Level II CFA Exam. In this introduction, I want to explain the resources included with the SchweserNotes, suggest how you can best use Schweser materials to prepare for the exam, and direct you toward other

educational resources you will find helpful as you study for the exaro. Besides the SchweserNotes themselves, there are many educational resources available at Schweser.com. Just log in using the individual username and password that you received

when you purchased the SchweserNotes. SchweserNotes™ These consist of five volumes that include complete coverage of all 18 Study Sessions

and all Learning Outcome Statements (LOS) with exaroples, Concept Checkers (multiple-choice questions for every topic review), and Challenge Problems for many topic reviews to help you master the material and check your progress. At the end of each major topic area, we include a Self·test. Self·test questions are created to be exam·

like in format and difficulty in order for you to evaluate how well your study of each topic has prepared you for the actual exaro. The Level II SchweserNotes Package also includes a sixth volume, the Level I Refresher, a review of important Level I material. Practice Questions Studies have shown that to retain what you learn, it is important that you quiz yourself

often. We offer CD, download, and online versions of the SchweserProTM QBank, which contains thousands of Level II practice questions, item sets, and explanations. Questions

are available for each LOS, topic, or Study Session. Build your own quizzes by specifying the topics and the number of questions you choose. SchweserPro QBank is an essential

learning aid for achieving the depth of proficiency needed at Level II. It should not, however, be considered a replacement for practicing "exam-type" questions as found in our Practice Exams, Volumes 1 & 2.

Practice Exams Schweser offers six full 6-hour practice exams. Practice Exams Volume 1 and Volume 2 each contain three full 120-question exams. These are important tools for gaining the

speed and skills you will need to pass the exaro. Each book contains answers with full explanations for self-grading and evaluation. By entering your answers at Schweser.com, you can use our Performance Tracker to find out how you have performed compared to

other Schweser Level II candidates. Schweser Library We have created reference videos, some of which are available to all SchweserNotes

purchasers. Schweser Library volumes range from 20 to 60 minutes in length and cover such topics as: "Introduction to Item Sets," "Hypothesis Testing," "Foreign Exchange

Basics," "Ratio Analysis," and "Forward Contracts." The full Schweser Library is included with our 16-week live or online classes and with our video instruction (online

or COs). ©20 11 Kaplan, Inc.

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Welcome to the 2012 Level II SchwcscrNotcsiM Online Schweser Study Planner Use your Online Access ro rdl us when you will srart and what days of rhe week you can study. The online Schweser Study Planner will create a study plan just for you, breaking each study session into daily and weekly tasks to keep you on track and hdp you

monitor your progress through the curriculum. Additional Resources Purchasers of rhe Essential Sdf-Study or Premium Instruction Packages also receive access to our Instructor-led Office Hours. Office Hours allow you to get your questions

about the curriculum answered in real time and to see others' questions (and instructor answers} as wdl. Office Hours is a text-based live interactive online chat with our team of Level II experts. Archives of previous Office Hours sessions can be sorted by topic or date and are posted shortly after each session.

The Level II CFA exam is a formidable challenge (64 topic reviews and 450+ Learning Outcome Statements), and you must devote considerable time and effort to be properly

prepared. There is no shortcut! You must learn the material, know the terminology and techniques, understand the concepts, and be able to answer 120 questions quickly and (at least 70%) correctly. Fifteen to 20 hours per week for 20 weeks is a good estimate of the study time required on average, but some candidates will need more or less time, depending on their individual backgrounds and experience.

To help you master rhis material and be wdl prepared for rhe CFA Exam, we offer several other educational resources, including: Live Weekly Classroom Programs We offer weekly classroom programs around the world. Please check Schweser.com for locations, dates, and availability. 16-Week Online Classes Our 16-Week Online Classes are available at New York time (6:30-9:30 pm) or London time (6:00-9:00 pm) beginning in January. The approximate schedule for the 16-Week Online Classes (3-hour sessions} is as follows: Class# I) Exam lntro/Ethical Standards SS I, 2 2) Quantitative Methods SS 3 3) Economics for Valuation SS 4 4) Financial Reporting & Analysis SS 5 5) Financial Reporting & Analysis SS 6 6) Financial Reporting & Analysis SS 7 7) Corporate Finance SS 8 8) Corporate Finance & Equity SS 9, 10

Class# 9) Equity ss 11, 12 10) Equity SS 12 11) Alternative Asset Valuation SS 13 12) Fixed Income SS 14 13) Fixed Income SS 15 14) Derivatives SS 16 15) Derivatives & Portfolio Management SS 17 16) Portfolio Management SS 18

Archived classes are available for viewing at any time throughout the season. Candidates enrolled in rhe 16-Week Online Classes also have foil access to supplemental on-demand video instruction in the Schweser Library and an e-mail address to use to send questions to the instructor at any time.

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©2011 Kaplan, Inc.

Welcome to the 2012 Level II SchwcserNotes'I>I Late Season Review Whether you use self-study or in-class, online, or video instruction to learn the CFA curriculum, a late-season review and exam practice can make all the difference. Our most complete late-season review course is our residence program in Windsor, Ontario

(WindsorWeek), where we cover the entire curriculum at all three levels over seven days (May 5-11). We also offer 3-day Exam Workshops in many cities (and online) that combine curriculum review with an equal component of hands-on practice with

hundreds of questions and problem-solving techniques. Our Dallas/Fort Worth (DFW) review program extends curriculum review and hands-on practice to five days (May 14-18). Please visit us at Schweser.com for complete listings and course descriptions for all our late-season review offerings.

Mock Exam and Multimedia Tutorial On May 19, 2012, the Schweser Mock Exam will be offered live in over 60 cities around the world and as an online exam as well. The optional Multimedia Tutorial provides extended explanation and topic tutorials to get you exam-ready in areas where you miss questions on the Mock Exam. Please visit Schweser.com for a listing of cities and locations.

How to Succeed There are no shortcuts; depend on the fact that CFA Institute will test you in a way

that will reveal how well you know the Level II curriculum. You should begin early and stick to your study plan. You should first read the SchweserNotes and complete the Concept Checkers and Challenge Problems for each topic review. You should prepare for and attend a live class, an online class, or a study group each week. You should take

quizzes often using SchweserPro Qbank and go back to review previous topics and Study Sessions as well. At the end of each topic area, you should talce the Self-test to check your progress. You should finish the overall curriculum at least four weeks (preferably five weeks) before the Level II exam so that you have sufficient time for Practice Exams and for further review of those topics that you have not yet mastered.

I would like to thank Kent Wesrlund, CFA Content Specialist; Stephanie Downey, Director of Print Production; and Jeff Faas, Lead Editor, for their contributions to the

2012 Level II SchweserNotes for the CFA Exam. Best regards,

Dr. Bijesh Tolia, CFA VP and CFA Level II Manager Kaplan Schweser

©20 11 Kaplan, lnc.

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READINGS AND LEARNING OuTCOME STATEMENTS READINGS

The following material is a review ofthe Ethical and Professional Standards, Q;