CFA Glossary

CFA Glossary
Tuesday, May 31, 2011
Active portfolio management: justifications
Why active portfolio management might add value in an efficient market environment?
Economic argument (logic)
If investors only invested in passively managed portfolios, then actively managed portfolios would cease to exist. As a consequence, inefficiencies will arise in securities markets and the resulting profit opportunities will lure active managers back thus enabling them to outperform passively managed portfolios.
(Incorrect description) If active managers were not able to consistently beat a passive investment strategy, investors would not be willing to pay high fees for active managers and funds under active management would cease to exist. Since there are many active managers, economic logic suggests they must be outperforming passive strategies.
Empirical evidence
Some managers have consistently produced excess returns relative to a passive strategy, suggesting skill rather than luck.
Active portfolio management: justifications
Why active portfolio management might add value in an efficient market environment?
Economic argument (logic)
If investors only invested in passively managed portfolios, then actively managed portfolios would cease to exist. As a consequence, inefficiencies will arise in securities markets and the resulting profit opportunities will lure active managers back thus enabling them to outperform passively managed portfolios.
(Incorrect description) If active managers were not able to consistently beat a passive investment strategy, investors would not be willing to pay high fees for active managers and funds under active management would cease to exist. Since there are many active managers, economic logic suggests they must be outperforming passive strategies.
Empirical evidence
Some managers have consistently produced excess returns relative to a passive strategy, suggesting skill rather than luck.
Posted by Spanish Key at 2:17 PM No comments:
Labels: A, CFA Level 2 (June 2011)
Affirmative covenant
A covenant calls upon a borrower (debt issuer) to do a certain thing (rather than restrictions on a certain ratio threshold/action).
Posted by Spanish Key at 11:57 AM No comments:
Labels: A, CFA Level 2 (June 2011)
Tuesday, May 10, 2011
Accounting income
Accounting income = Net income = Taxable income * (1-Tax rate) Taxable income = Operating income before tax - Interest expense Operating income before tax = Sales - Variable cash expenses - Fixed cash expenses - Depreciation = EBIT
Posted by Spanish Key at 10:03 PM No comments:
Labels: A, CFA Level 2 (June 2011)
Wednesday, May 4, 2011
All-current method and Temporal method
Local currency price: constant FC: depreciation (vs. DC)
 All-current method and Temporal method

method
Temporal
in DC
All-current

Net income (before translation gains and losses)

<


D/E

<


Gross profit margin = (Revenue - COGS)/Revenue
(A-H)/A
<
(A-A)/A

COGS
H
>
A

Posted by Spanish Key at 2:07 PM No comments:
Labels: A, CFA Level 2 (June 2011)
Sunday, April 17, 2011
Acquisition: goodwill, amount reported in the B/S
The pre-acquisition balance sheets

12/31/2007 in $ thousands
Acquirer
Target
Target

Book value/Fair value

BV
FV

Assets




Cash
710
100
100

Marketable securities
2,550
-
-

Inventory
2,000
400
400

Accounts receivable
3,000
500
500

PP & E
2,450
1,000
1,200

Total assets
10,710
2,000
2,200






Liabilities




Accounts payable
3,310
400
400

Long-term debt
5,000
1,000
1,000

Equity
2,400
600
800

Total liabilities and equity
10,710
2,000
2,200


On 12/31/2007, Acquirer purchased a 35% ownership interest in a strategic new firm called Target for $300,000 in cash.
The remaining useful life of the PP&E is 10 years with no salvage value. Both firms use the straight-line depreciation method.
For the year ended 2008, Target reported net income of $250,000 and paid dividends of $100,000.
During the first quarter of 2009, Target sold goods to Acquirer and recognized $15,000 of profit from the sale. At the end of the quarter, half of the goods purchased from Target remained in Acquirer`s inventory.


[Question] The amount of (partial) goodwill as a result of Acquirer`s acquisition of Target is: 300,000 - 35% * 800,000 = 300,000