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AIMR Suggested Equity Readings

Section I. Equity Valuation Approaches Section II. Growth Analysis and Measurement Section III. Risk Section IV. Equity Derivatives and Strate ies Section V. Equity !ort"olio Mana ement Section VI. Selected #opics in $inancial Statement Analysis

STUDY SESSION 1
Framework for Equity Valuation Analysis-The Basic Dividend Discount Model and the Im ortance of !ash Flow"Free !ash Flow
READING 1: %Dividend&Discount Models'% (h. )' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley Sons' .//01' pp. /2&.3). #his readin discusses the stren ths' weaknesses' and 4est uses o" key "orms o" the dividend discount model "or valuin rowth. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING 2: %(ompany Value and the Mana er9s Mission'% !art I ' Valuation: Measuring and Managing the Value of Companies' :niversity Edition *Second Edition1' #om (opeland' #im ;oller' and +ack Murrin *+ohn ,iley - Sons' .//01' pp. <&.<.. #he overall "ocus o" this readin is on e=plorin the mana erial *internal1 implications o" valuation *e=ternal1 methodolo y. #he authors identi"y the so&called value drivers o" a company and relate them to return on invested capital %trees.% #hey present a rationale and de"ense o" a discounted cash "low>lon &term "ree cash "low valuation approach' and they show that accountin &4ased valuation approaches *e. .' those 4ased on earnin s per share1 are value destroyin . An approach to valuin strate ic investments is presented' and the e""ects o" tyin mana erial compensation to cash&"low&4ased valuation metrics are discussed. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 3.8 hours. READING 3: %(ash $low Valuation6 A !ractitioner9s Guide'% !art II' Valuation: Measuring and Managing the Value of Companies' :niversity Edition *Second Edition1' #om (opeland' #im ;oller' and +ack Murrin *+ohn ,iley - Sons' .//01' pp. .<8&30) and 328&<30. #hese readin s present' apply' interpret' and critically evaluate two ma@or "rameworks "or valuation6 the entity DCF model and the economic profit model. #he authors conduct historical analysis o" net operatin pro"it less ad@usted ta=es' invested capital' RA(' and $($ 4y usin a comprehensive' inte rative case study *!reston (orporation1. !er"ormance "orecastin is illustrated' and the strate ic position o" a company and its industry is evaluated and then used to estimate continuin value. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 3.8 hours. READING 4: %Multi&Business Valuation'% (h. ..' Valuation: Measuring and Managing the Value of Companies' :niversity Edition *Second Edition1' #om (opeland' #im ;oller' and +ack Murrin *+ohn ,iley - Sons' .//01' pp. <3C&82. #he process o" valuin a company involved in multiple 4usinesses is conducted 4y "irst comparin the company9s %as is% D($ value with its current market value' then considerin potential value&enhancin restructurin moves. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 5: %$ree&(ash&$low&to&Equity Discount Models'% (h. C' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley - Sons' .//01' pp. .3C&0<. #he author critically evaluates' de"ines' de"ends' illustrates the "ree&cash& "low&to&equity *$($E1 model in several "orms6 the sin le&sta e or constant& rowth>in"inite&horiDon' two&sta e' and three&sta e *the so&called E&model1 models. #he various "orms o" the $($E model are compared and contrasted with the ways in which the dividend discount model is implemented. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING : %Valuin a $irm&#he $ree&(ash&$low&to&$irm Approach'% (h. 2' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley - Sons' .//01' pp. .00&C3. #he author de"ines' de"ends' illustrates' and critically evaluates the "ree&cash&"low&to&"irm *$($$1 approach in the same "orms as considered "or the $($E model. Ee compares and contrasts the $($E and $($$ models and e=plores the relative merits o" each approach. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour.

STUDY SESSION 2
EVA# Valuation Models and Alternative Measures of Added Value
READING 1: %#he EVA $inancial Mana ement System'% (h. 0' The Quest for Value' G. Bennett Stewart III *Earper Business' .//.1' pp. ..2&C2. #he author descri4es the economic value added *EVA1 approach' which involves a residual economic income measure that su4tracts the cost o" capital "rom the operatin pro"its enerated 4y a 4usiness' and e=plains its rationale. Ee uses numerous archetypal companies to illustrate how to calculate and interpret EVA. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 2: %Valuation (oncepts'% (h. C' The Quest for Value' G. Bennett Stewart III *Earper Business' .//.1' pp. 387&<78. #his chapter relates EVA valuation methodolo y to the conceptual underpinnin s o" Miller and Modi liani9s seminal work. #he author presents the value&driver model and e=tols the virtues o" @udicious "inancial levera e&whether "unds are %needed% or not. #he relationship 4etween the de ree o" de4t used and the cost o" de4t is discussed' and valuation is correlated with the industrial li"e cycle. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 3: %A Recipe "or Revivin the (amp4ell Soup (ompany'% (h. .8' The Quest for Value' G. Bennett Stewart III *Earper Business' .//.1' pp. )C<&C</. #his readin presents a comprehensive case analysis o" the (amp4ell Soup (ompany that shows how EVA can 4e used to evaluate and enhance the operatin per"ormance and market value o" a "irm. #he di""erence 4etween the static and dynamic uses o" de4t is emphasiDed. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 4: %Measures o" Value Added'% (h. <' Company Performance and Measures of Value Added' !amela !. !eterson and David R. !eterson *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//)1' pp. ..&<.. #his readin analyDes the di""erences 4etween economic and accountin pro"it and evaluates the various ways in which economic pro"it can 4e calculated. #he authors e=amine the relationship 4etween market value added *MVA1 and measures o" economic value added. #hey also descri4e and critically evaluate Eolt9s cash "low return on investment *($RAI1. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 5: %(omparison o" Alternative !er"ormance Measures'% (h. 0' and %(onclusions'% (h. 8' Company Performance and Measures of Value Added' !amela !. !eterson and David R. !eterson *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//)1' pp. <<&08 and p. 0C. #he authors construct and evaluate empirical tests o" the relationship 4etween companies9 equity market per"ormance and 4oth traditional and value&added measures. #he evidence shows that' "or numerous reasons' market value added measures may not 4e superior to stock returns as measures o" per"ormance. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour

STUDY SESSION 3
Issues in A Models lyin$ the Dividend Discount Model and the %ole of &"E' &"B' and &"( Valuation
READING 1: %Some Evidence on the Value o" Dividend Discount Models !A"ai#a$#e On#ine%'% Eric E. Sorensen and David A. ,illiamson' Financial Analysts Journal' Association "or Investment Mana ement and Research *?ovem4er>Decem4er ./281' pp. )7&)/. #his study uses I>B>E>S consensus earnin s rowth rate "orecasts to test the use"ulness o" several common discounted cash "low *D($1 valuation models6 price&to&earnin s *!>E1' constant rowth>sin le&sta e' two&sta e' and three&sta e. #he authors show that reater model comple=ity enhances the e""icacy o" valuation analysis. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 2: %!rice>Earnin s Ratios'% (h. .7' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley - Sons' .//01' pp. ./C&333. #he nature and challen es o" applyin the !>E valuation approach are e=plained and illustrated "or sta4le "irms and hi h& rowth "irms. #he readin addresses the issues involved in usin "inancial "undamentals to predict !>Es and ives evaluations o" the relative merits o" common variants o" !>E' such as price>"ree cash "low to equity *!>$($E1 and value o" "irm>"ree cash "low to "irm *$irm>$($1. #he use"ulness o" various !>E&4ased investment strate ies is also considered. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour READING 3: %!rice>Book Value Ratios'% (h. ..' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley Sons' .//01' pp. 33<&0<. #his readin discusses the advanta es and disadvanta es o" the price&to&4ook&value *!>B1 valuation approach' especially relative to market&4ased approaches. #he author considers pro4lems associated with comparin the !>B o" a company with compara4le "irms9 !>Bs' the issues associated with estimatin !>Bs "rom "inancial "undamentals' and common variants o" the !>B ratio. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour.

READING 4: %!rice>Sales Ratios'% (h. .3' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley - Sons' .//01' pp. 300&)3. #his readin discusses the advanta es and disadvanta es o" the price&to&sales *!>S1 approach relative to the !>E and !>B valuation methods. #he relationship 4etween pro"it mar ins and the !>S ratio is e=plored' with emphasis on strate ic valuation implications. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 5: %!>E' !>B and the !resent Value o" $uture Dividends'% !atricia M. $air"ield' Financial Analysts Journal' Association "or Investment Mana ement and Research *+uly>Au ust .//01' pp. 3<&<.. #his readin identi"ies and seeks to ad@ust "or pro4lems stemmin "rom the DDM9s implicit assumptions a4out the relationship 4etween accountin num4ers and dividend policy. In this approach' the author restates the DDM without makin any assumptions a4out the relationship 4etween accountin data and "uture dividends or dividend policy. #he "ocus o" the analysis is on estimatin a "irm9s "uture pro"ita4ility 4y considerin how di""erent com4inations o" !>E and !>B are associated with distinct patterns o" "uture pro"ita4ility. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour.

STUDY SESSION 4
Inflation Effects on the Valuation &rocess and ) tion-&ricin$-Based Valuation Models
READING 1: %In"lation and ,orld Equity Selection'% (laude B. Er4' (amp4ell R. Earvey' and #adas E. Viskanta' Financial Analysts Journal' Association "or Investment Mana ement and Research *?ovem4er>Decem4er .//81' pp. 32&03. #his readin e=amines the relationships amon in"lation' asset e=pected returns' and asset risks. It con"irms prior researchers9 "indin s that within a iven country' monthly in"lation and asset returns are ne atively related. Eowever' the authors do not "ind a positive relationship 4etween lon &term in"lation and lon &term asset returns. $urthermore' they "ind that in"lation e=posure helps e=plain di""erences in volatility in di""erent markets lo4ally and that a si ni"icant relationship e=ists 4etween country credit risk and in"lation. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 2: %#he E""ects o" In"lation'% (h. 2' Franchise Value and the Price/ arnings !atio' Martin 5. 5ei4owitD and Stanley ;o elman *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//01' pp. ../&<2. #he primary ar ument o" this readin is that those companies that can increase earnin s to keep pace with in"lation will tend to 4e more valua4le than compara4le companies without this "low&throu h capacity. #he authors evaluate and discuss the speci"ic e""ects o" in"lation "low&throu h a4ility on !>E' the e""ect o" in"lation on earnin s horiDons' and the e""ect o" sta4le and unsta4le in"lation on !>E are discussed. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 3: %:sin Aption !ricin Methods to Value $le=i4ility'% (h. .8' Valuation: Measuring and Managing the Value of Companies' :niversity Edition *Second Edition1' #om (opeland' #im ;oller' and +ack Murrin *+ohn ,iley - Sons' .//01' pp. 0)0&/8. #his readin surveys the use o" option&pricin models to value asset and lia4ility options commonly "aced 4y corporate "inancial mana ers. Emphasis is on developin a use"ul "ramework "or evaluatin and respondin to the need "or "inancial "le=i4ility in decision makin . #he authors develop event trees to illustrate the practical application o" 4inomial option&pricin modelsF and they estimate the cost o" capital is estimated iven calla4ility and converti4ility options. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 4: %Applications o" Aption&!ricin #heory to Valuation'% (h. .)' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley - Sons' .//01' pp. <07&)8. #he emphasis o" the presentation is on valuin equity as an option. #he author e=plores the implications o" this view o" equity 4y valuin natural resource assets and product patents as options. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 5: %Averview and (onclusion'% (h. .C' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley Sons' .//01' pp. <))&C8. #his readin provides an inte rative "ramework "or choosin the ri ht model "or a iven valuation situation. #he author distin uished amon discounted cash "low' relative&value' and option&pricin valuation approaches and develops model choice criteria' such as level o" earnin s' current rowth' sources o" rowth' dividends vs. "ree cash "lows and the sta4ility o" levera e. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour.

II& G'()t* Ana#ysis and Measu'e+ent Section II Study Guides

STUDY SESSION 5
Definin$' Measurin$' Estimatin$' and Valuin$ %elevant *rowth
READING 1: %Growth (ompanies vs. Growth Stocks'% !eter 5. Bernstein' "ar#ard $usiness !e#ie%' Earvard Business School !u4lishin *Septem4er ./8)1' pp. 2C&/2. #his readin addresses the question6 ,hat is a rowth companyG #he article develops a "ramework "or de"inin rowth and "or distin uishin 4etween % rowth companies% and % rowth stocks.% 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 2: %Growth Apportunities vs. Growth Stocks'% Meir Statman' Journal of Portfolio Management' Institutional Investor *Sprin ./201' pp. C7&C0. #his readin e=tends the ideas developed in the Bernstein classic article *Session 0' Readin .1 4y e=aminin the di""erence 4etween sustaina4le rowth and transitory rowth. #he author ar ues that the distinction is particularly important 4ecause only sustaina4le rowth is worth a stock price premium. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 3: %Introduction'% (h. .F %#he $ranchise $actor'% (h. 3F and %#he $ranchise !ort"olio'% (h. <' Franchise Value and the Price/ arnings !atio' Martin 5. 5ei4owitD and Stanley ;o elman *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//01' pp. .&)' C&32' and 3/&0). #hese mono raph chapters e=plore the "actors a""ectin !>Es&in particular' the rowth "actor. $irst' the authors contrast the "ranchise value *$V1 approach to the dividend discount model "ramework. In addition' they discuss and illustrate the elements o" $V analysis. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 ..8 hours. READING 4: %$ranchise Value and the Growth !rocess'% (h. )F %#he Growth Illusion6 #he !>E 9(ost9 o" Earnin s Growth'% (h. CF %Resolvin the Equity Duration !arado='% (h. /F and %#heoretical !rice>Earnin s Ratios and Accountin Varia4les'% (h. .7' Franchise Value and the Price/ arnings !atio' Martin 5. 5ei4owitD and Stanley ;o elman *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//01' pp. 2.&.77' .7.&.2' .</& )8' and .)C&/0. #hese chapters "ocus on the nature' dimensions' and duration o" a company9s "ranchise opportunities. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 ..8 hours. READING 5: &ales'Dri#en Franchise Value' Martin 5. 5ei4owitD *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//C1' pp. .&07. #his mono raph e=tends the value&added valuation concepts developed in Franchise Value and the Price/ arnings !atio *see Readin 01. #he re"inement 4ases the "ranchise value measure on sales rowth rather than earnin s rowth' the "ocus o" the earlier work. A sales&4ased "ranchise mar in is developed that takes into account the cost o" capital required to develop and maintain new sales. (ompanies are evaluated on their a4ility to enerate new sales' the ultimate source o" earnin s rowth' and their a4ility to maintain their pro"it mar ins on those sales. Anly those companies that possess some "orm o" monopolistic power in the "orm o" intellectual property or 4arriers to entry will 4e in a position to reap the "ranchise rewards o" new investment. #o the company that is a4le to maintain 4oth sales rowth and "ranchise mar ins' however' the reward will 4e a hi her market value o" equity. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 3 hours. READING : %Estimation o" Growth Rates'% (h. 8' Damodaran on Valuation' Aswath Damodaran *+ohn ,iley Sons' .//01' pp. )C&/C. #his readin e=amines 4asic techniques "or estimatin rowth rates "or equity valuation modelin . ?umerous illustrations o" the techniques are provided. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING ,: %(ompany Analysis and Stock Selection'% (h. 37' (n#estment Analysis and Portfolio Management' $i"th Edition' $rank ;. Reilly and ;eith (. Brown *Dryden !ress' .//C1' pp. C0C&)<. #his readin incorporates the

notion o" rowth duration' which is developed e=tensively in the "ranchise value "ramework *see Session 0' Readin s < and 01 into a readily applied model "or valuin companies. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING -: %Accountin & and $inance&Based Measures o" Risk'% (h. .2' and %Empirical Research6 Implications "or $inancial Statement Analysis'% (h. 8' The Analysis and )se of Financial &tatements' Second Edition' Gerald I. ,hite' Ashwinpaul (. Sondhi' and Dov $ried *+ohn ,iley - Sons' .//C1' pp. /2<&/.' .73.&38' 3.8&<C' and 300& 8.. #his readin provides an updated and in&depth e=amination o" topics 4earin on rowth and rowth "orecasts. #he techniques and measures introduced can 4e used to re"ine e=pectations o" rowth rates and duration. Also' the authors provide a critical review o" the e=istin empirical literature that considers "actors associated with market returns and valuation 4ehavior "or companies. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 ..8 hour. READING .: %Value versus Growth Stocks6 Book&to&Market' Growth' and Beta'% Ro4ert S. Earris and $elicia (. Marston' Financial Analysts Journal' Association "or Investment Mana ement and Research *Septem4er>Acto4er .//01' pp. .2&30. #his readin contains an empirical e=amination o" the role o" rowth in the market valuation o" equity. #he article investi ates speci"ically' the links amon B>MV' 4eta' and "orecasted rowth in earnin s. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour.

III& Ris/ Section III Study Guides

STUDY SESSION
%isk !once ts and Measurement+ Time Diversification
READING 1: %Risk o" Equity Securities and !ort"olios !A"ai#a$#e On#ine%'% Dan diBartolomeo' ?orth"ield In"ormation Services *$e4ruary 33' .//C1' pp. .&.7. #he author provides a 4road introduction to several important equity risk topics6 a de"inition o" risk' measures o" risk' modelin equity risks with simple and multiple common risk "actors' types o" multiple "actor models' and estimation error in equity port"olio construction. Each o" the sections includes a discussion o" relative stren ths and weaknesses o" the topic. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 2: %Glo4al Risk Mana ement6 Are ,e Missin the !ointG% Richard Booksta4er' Journal of Portfolio Management' Institutional Investor *Sprin .//C1' pp. .73&7C. #he readin discusses risk&mana ement pro4lems arisin "rom the methods used to de"ine and measure uncertainty and risk. Si= key considerations "or risk mana ement hi hli ht the limitations o" volatility as a measure o" risk. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 3: %$inancial Decision&Makin in Markets and $irms6 A Behavioral !erspective'% (h. .<' ,erner $.M. De Bondt and Richard E. #haler' "and*oo+s in ,perations !esearch and Management &cience- Finance' vol. /' Ro4ert +arrow' Vo@islav Maksimovic' and ,illiam #. Hiem4a' eds. *Elsevier&?orth Eolland' .//81' pp. <28&0.7. Behavioral "inance attempts to model the actual 4ehavior o" individuals and companies in the market. #he authors provide a selective review o" recent work in 4ehavioral "inance. #hey descri4e well&known psycholo ical tendencies and illustrate the relevance o" the tendencies to investment theory and corporate "inance. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 3 hours. READING 4: %#he !eculiar !ersistence o" (atastrophic #radin Strate ies !A"ai#a$#e On#ine%'% David Emanuel' presented at the (hica o Board o" #rade $all Research Seminar *$e4ruary .//)1' pp. .&/. #he author ar ues that conventional per"ormance measures overstate the per"ormance and understate the risk o" potentially catastrophic tradin strate ies. $or e=ample' %dou4lin &up% strate ies that eventually lose everythin may e=hi4it little volatility in the short run. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 5: %#he 5on &#erm (ase "or Equities'% !aul A. Samuelson' Journal of Portfolio Management' Institutional Investor *$all .//01' pp. .8&30. #his readin considers issues o" time diversi"ication' the concept that

the standard deviation o" equity returns will decline over time. #he author provides a critique o" "allacies that led to acceptance o" time diversi"ication and ar uments that "avor the concept. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING : %,hat !ractitioners ?eed to ;now a4out #ime Diversi"ication'% Mark ;ritDman' Financial Analysts Journal' Association "or Investment Mana ement and Research *+anuary>$e4ruary .//01' pp. .0&.2. #his readin ' also currently assi ned in the ($A !ro ram' is an e=cellent e=tension o" !aul A. Samuelson9s article' %#he 5on & #erm (ase "or Equities'% Journal of Portfolio Management *$all .//01' pp. .8&30. A"ter reviewin the intuition 4ehind time diversi"ication' the author demonstrates that i" risk aversion is invariant to chan es in wealth' i" risky returns are random' and i" "uture wealth depends only on investment results' the investment horiDon is irrelevant to port"olio choice. #he article concludes with reasons investors mi ht still condition their risk on their investment horiDon. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING ,: %#ime Diversi"ication6 !erspectives "rom Aption !ricin #heory'% (rai Merrill and Steven #horley' Financial Analysts Journal' Association "or Investment Mana ement and Research *May>+une .//)1' pp. .<&./. #his readin demonstrates that securities with option&like "eatures that uarantee a minimum return have reater equity market participation as the investment horiDon increases. I" the cost o" insurance is de"ined as "or one market participation' then increased market participation implies a lower cost o" insurance. #his lower cost su ests that risk itsel" is lower' which is consistent with the concept o" time diversi"ication. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour.

STUDY SESSION ,
A&T Factor Models
READING 1: %A !ractitioner9s Guide to Ar4itra e !ricin #heory !A"ai#a$#e On#ine%'% Edwin Burmeister' Richard Roll' and Steven Ross' A Practitioner.s /uide to Factor Models *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//01' pp. .&<7. #his readin provides a review o" the development and advanta es o" a multi& "actor model developed "rom the postulates o" a linear "actor returns model and no&ar4itra e condition. #he authors de"ine and e=amine the macroeconomic "actors "ound to in"luence asset returns. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 2: %Multi&Inde= Models :sin Simultaneous Estimation o" All !arameters'% A Practitioner.s /uide to Factor Models' Edwin Elton and Martin Gru4er *Research $oundation o" the Institute o" (hartered $inancial Analysts' .//01' pp. <.&8C. #he authors review the methodolo y "or identi"yin asset risk "actors and estimatin an asset9s sensitivities. #hey provide e=amples o" the use o" "actor analysis to empirically identi"y the risk "actors in a multi"actor model o" returns and discuss estimation issues and the stren ths and weaknesses o" "actor models. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 ..8 hours. READING 3: %BARRA9s Risk Models !A"ai#a$#e On#ine%'% Aamir Sheikh' $A!!A !esearch (nsights *.//)1' pp. .&30. #he author addresses the techniques employed in the construction o" di""erent types o" "actor models and the relative costs and 4ene"its o" the various models used to estimate the risk o" equity securities and port"olios. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 4: %:nited States Equity Version< *E<1 !A"ai#a$#e On#ine%'% $A!!A !is+ Model "and*oo+ *.//21' pp. C&/' 0.&0<' and C0&20. #his readin de"ines the risk&"actor inde=es used 4y BARRA' a consultin "irm that supplies risk models' in its E< :nited States Equity Model. #he industry and sector classi"ication schemes are also descri4ed. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour READING 5: %#he Salomon Brothers :.S. Stock Risk Attri4ute Model !A"ai#a$#e On#ine%'% Quantitati#e &trategy' Eric Sorensen' +oseph MeDrich' and (hee #hum *Salomon Brothers' ./2/1' pp. .&.C. #he authors descri4e the estimation and application o" a multi"actor model o" individual stock returns. In this application o" the A!#' the "actors are de"ined a priori as the di""erence 4etween the actual and e=pected values o" seven macroeconomic series. #he applications include scenario analysis o" stock and port"olio selection. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 3 hours.

STUDY SESSION ,ow (ta-le Is %isk.


READING 1: %Investment Risk and :ncertainty at the End o" Eistory !A"ai#a$#e On#ine%'% 5etter .3.' ;eith Am4achtsheer' The Am*achtsheer 0etter' ;!A Advisory Services *+anuary <7' .//)1' pp. .&0. #he author e=plores the distinction 4etween risk *known "uture states and pro4a4ilities1 and uncertainty *unknown states and pro4a4ilities1. Ee su ests that markets under o re ime shi"ts and that it is these shi"ts that investors should

consider. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 2: %Is the Stock Market More Sta4le #han It :sed to BeG% Edward Renshaw' Financial Analysts Journal' Association "or Investment Mana ement and Research *?ovem4er>Decem4er .//81' pp. 2.&22. #he author presents evidence "rom annual tradin ran es' "inancial return distri4utions' and "luctuations in the S-! 877 Inde= that supports the hypothesis that the :.S. market is more sta4le now than it used to 4e. !ossi4le reasons are a more sta4le :.S. economy' chan in structure o" the :.S. economy' port"olio investment strate ies' and the lo4aliDation o" securities markets. Ee posits that markets dominated 4y ine=perienced investors o"ten 4oom and then crash. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 3: %Daily Stock Market Volatility6 ./32&./2/'% Andrew 5. #urner and Eric +. ,ei el' Management &cience' Institute "or Aperations Research and Mana ement Sciences *?ovem4er .//31' pp. .82)&.)7/. #he authors e=amined the daily return varia4ility o" the S-! 877 inde= and Dow +ones avera e "or the ./32&2/ period. Althou h the ./27s were the third most volatile decade' in standard deviation terms' "or :.S. stock returns' the primary reason was the sharp drop in prices in the "ourth quarter o" ./2C. ?evertheless' returns in the ./27s displayed "ar more skewness and kurtosis than in other decades' and the "requency o" e=treme&return events increased' althou h it was dramatically lower than in the ./37s and ./<7s. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 4: %!eapods and !erils'% (h. .7' Against the /ods: The !emar+a*le &tory of !is+' !eter 5. Bernstein *+ohn ,iley - Sons .//)1' pp. .C3&2). #he author ar ues that markets display mean reversion. Investors' "ollowin the representativeness heuristic' e=pect the "uture to look like the present' and there"ore' they overwei ht current in"ormation at the e=pense o" lon &run in"ormation. #his 4ehavior serves as a rationale "or contrarian *value1 investin and a ainst the serial independence o" returns. $orecastin is complicated' however' 4y either a slow reversion that is interrupted 4y shocks' or a stron reversion that overshoots' or an unsta4le mean. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 5: %A Mean&Revertin ,alk Down ,all Street'% ,erner $.M. De Bondt and Richard E. #haler' Journal of conomic Perspecti#es' American Economic Association *,inter ./2/1' pp. .2/&373. #his readin reviews the evidence o" mean reversion in equity inde=es and the a4ility o" contrarian strate ies to earn e=cess returns. A 4ehavioral model o" investor 4ehavior is proposed to e=plain the results. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 3 hours.

STUDY SESSION .
%isk Measures and A lications
READING 1: %Value&at&Risk *.16 :nderstandin the Various ,ays to (alculate VAR'% (harles Smithson with 5yle Minton' !is+ *+anuary .//)1. E=tracted "rom Canadian (mperial $an+ of Commerce Class 1otes. #he authors de"ine value at risk *VAR1 as the ma=imum an institution can lose over a speci"ied time horiDon at a speci"ied pro4a4ility level. #he article descri4es the concept and reviews di""erent methods o" calculatin VAR. #he authors compare the VARs produced 4y three di""erent common methods and assess the stren ths and weakness o" each method. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING 2: %Value&at&Risk *316 #he De4ate on the :se o" VAR'% (harles Smithson with 5yle Minton' !is+ *$e4ruary .//)1. E=tracted "rom (anadian Imperial Bank o" (ommerce (lass ?otes. #he authors discuss the e=tent to which VAR is used 4y various market participants. ;ey issues concernin which "irms should use VAR and the 4est way to calculate the risk measure are considered. #he article also surveys and evaluates the various ways in which the analytic method can 4e used to incorporate options into the calculation o" VAR usin . 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 3: %VAR6 Seductive 4ut Dan erous'% #anya Sty4lo Beder' Financial Analysts Journal' Association "or Investment Mana ement and Research *Septem4er>Acto4er .//81' pp. .3&30. #he author uses techniques common amon market participants to calculate ei ht measures "or three hypothetical port"olios. #he calculations are e=tremely dependent on the parameters' data' assumptions' and methodolo y used. #he author concludes that' althou h they are necessary "or e""ective risk mana ement' quantitative techniques "or the measurement and control o" risk are not su""icient. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 4: %Dividend Iield and Equity Duration'% (h. C' Richard Bernstein' &tyle (n#esting *+ohn ,iley Sons' .//81' pp. .37&0.. #he author e=amines ways to measure interest rate sensitivity "or equities' how interest rates a""ect di""erent styles o" investin ' and how di""erences in companies9 a4ility to pass in"lation throu h to

customers can o""set the interest rate sensitivity o" certain investment styles. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 5: %An the :se and Misuse o" Downside Risk'% $rank A. Sortino and Eal +. $orsey' Journal of Portfolio Management' Institutional Investor *,inter .//)1' pp. <8&03. #he authors a ree that downside deviation' the deviation o" return 4elow some set value that must 4e earned' is a valua4le measure o" risk. #heir intent is to caution a ainst its misuse and its assumed completeness. #he correct calculation o" downside deviation requires that attention 4e paid to a4normal returns and measurement errors. #hey conclude that no sin le risk measure is su""icient. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour READING : %Business (onditions' Monetary !olicy and E=pected Security Returns'% Gerald R. +ensen' +e""rey M. Mercer' and Ro4ert R. +ohnson' Journal of Financial conomics' Elsevier&?orth Eolland *$e4ruary .//)1' pp. 3.<&<C. #he authors reconsider the evidence that e=pected returns can 4e "orecast 4y the term premium' de"ault premium' and dividend yield. #hey "ind that the monetary policy environment in"luences investors9 required rates o" return in the :nited States. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 3 hours. READING ,: %SiDe and Book&to&Market $actors in Earnin s and Returns'% Eu ene $. $ama and ;enneth R. $rench' Journal of Finance' American $inance Association *March .//81' pp. .<.&88. #his readin provides empirical support "or the proposition that siDe and the 4ook&to&market ratio are pro=ies "or a company9s pro"ita4ility. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 3 hours. READING -: %Makin Sense o" Beta' SiDe and Book&to&Market'% Eersh She"rin and Meir Statman' Journal of Portfolio Management' Institutional Investor *,inter .//81' pp. 3)&<0. :sin $ortune ma aDine surveys' the authors e=amine the relationship 4etween % ood% companies and % ood% stocks. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. I0& Equity De'i"ati"es and St'ategies Section IV Study Guides

STUDY SESSION 11
Equity Derivatives and (trate$ies/
READING 1: %Addin Value with Equity Derivatives6 !art I'% Gary 5. Gastineau' Derivative Strate ies "or Mana in !ort"olio Risk' ;eith (. Brown' ed. *Association "or Investment Mana ement and Research' .//<1' pp. 80&).. Derivatives are use"ul in implementin strate ic and tactical port"olio mana ement and are o"ten more "le=i4le and cheaper than movin in and out o" the underlyin securities' especially in lo4al applications. Strate ic applications include statistical ar4itra e and market makin ' port"olio insurance' and asymmetrical asset allocation. #actical applications include ta= ar4itra e in eneral *and dividend capture in particular1' re ulatory ar4itra e' yield enhancement' equity collars' and symmetrical international diversi"ication. !ort"olio per"ormance measurement and evaluation is di""icult with such applications 4ecause o" the challen es o" measurin risk in derivatives positions. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING 2: %Addin Value with Equity Derivatives6 !art II'% +oanne M. Eill' Deri#ati#e &trategies for Managing Portfolio !is+' ;eith (. Brown' ed. *Association "or Investment Mana ement and Research' .//<1' pp. )3&C<. Equity derivatives allow the equity port"olio mana er to achieve a num4er o" di""erent investment o4@ectives at relatively low cost. #hey can 4e used to participate in lo4al equity markets and are use"ul in risk mana ement' asset allocation' and active port"olio mana ement. #he primary applications Eill e=plores are o4tainin equity e=posure to a particular non&:.S. market usin "utures and mana in risk usin equity inde= options. #he author considers the various ways in which "utures can 4e used to own an inde= "und and e=amines the primary di""erences 4etween "utures and swaps and 4etween listed and A#( option markets. She ar ues that "utures are most use"ul in mana in symmetrical *i.e.' upside and downside or untruncated1 equity e=posure to a iven country market whereas inde= options are most e""ective in risk mana ement. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING 3: %#he :ses and Risks o" Derivatives'% +oanne M. Eill' (n#esting 2orld%ide V(' Association "or Investment Mana ement and Research *+anuary .//)1' pp. 0)&82. #his presentation traces the history and market& driven evolution o" equity derivatives and port"olio strate ies. #he author presents the various ways in which an international inde= can 4e replicated with "utures' evaluates their relative merits' and discusses issues in the implementation o" these "utures strate ies. Inde= option strate ies discussed include overwritin ' tailored hed es' option sales in tactical asset allocation' and return enhancement with volatility tradin . #he author compares A#(

and listed options and surveys the use o" structured notes to capture inde= returns. #he readin concludes with a discussion o" risk mana ement and derivatives' sources o" risk' and the need "or internal risk controls. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING 4: %Advanced Derivatives and Strate ies'% (h. .8' An (ntroduction to Deri#ati#es' $ourth Edition' Don M. (hance *Dryden !ress' .//21' pp. )38&<<. #his chapter descri4es equity derivatives' analyDes their risk&return characteristics' and discusses common uses o" equity "orwards' 4reak "orwards' equity swaps' and equity collars. #he author provides practical e=amples o" the derivatives9 use in mana in equity port"olios. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 5: %:sin Swaps in Equity !ort"olios'% Gary 5. Gastineau' Deri#ati#e &trategies for Managing Portfolio !is+' ;eith (. Brown' ed. *Association "or Investment Mana ement and Research' .//<1' pp. C0&CC. Equity swaps have 4een a small part o" the overall swap market' 4ut port"olio mana ers do use them to overcome such constraints as ta=es and re ulations that make direct ownership o" equity e=pensive or inaccessi4le in many markets. #he "our key issues related to equity swaps that Gastineau discusses are :.S. Internal Revenue Service *IRS1 swap re ulations' the si ni"icance o" swaps "or industry structure' the use o" swaps to e=tend the e""icient "rontier port"olio' and the importance o" credit risk. #he author also e=plores the implications o" the a4ility o" plan sponsors to swap port"olio 4enchmarks. #his a4ility can have a si ni"icant e""ect on how plan sponsors allocate "unds amon competin port"olio mana ers. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING : %Application o" Derivative Strate ies in Mana in Glo4al !ort"olios'% Ro er G. (larke' Deri#ati#e &trategies for Managing Portfolio !is+' ;eith (. Brown' ed. *Association "or Investment Mana ement and Research' .//<1' pp. C2&/.. #his readin e=amines the use o" derivative strate ies in e""ectin asset allocations in lo4al port"olios. Derivatives can 4e used to create new market e=posure' protect e=istin e=posure' and enhance returns. #he 4ene"its o" usin "utures include the a4ility to leave most or all o" the underlyin assets in place and the separation o" allocation duties and takin risks. #hat is' the assets can 4e handled 4y one set o" mana ers and the derivative position can 4e handled 4y an overlay mana er. #he issues that must 4e evaluated in usin "utures include trackin error' liquidity' mispricin ' and rollover risk. #he readin discusses a variety o" options&related strate ies desi ned to create new market e=posure' to protect e=istin market e=posure' or to enhance port"olio returns. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING ,: %#he (omparison o" Strate ies :sin Derivatives'% Maarten 5. ?ederlo"' Deri#ati#e &trategies for Managing Portfolio !is+' ;eith (. Brown' ed. *Association "or Investment Mana ement and Research' .//<1' pp. ..<&./. #his readin discusses the nature and port"olio mana ement implications o" options9 asymmetrical return distri4utions. #he asymmetrical outcome o" options o""ers use"ul ways to alter the risk&return comple=ion o" a port"olio. Asymmetry leads to distorted risk measures' however' and can lead to missed opportunities. #he author illustrates the potential e""ects o" addin derivatives to a port"olio 4y usin protective put and covered call strate ies. Ee also presents' a eneral "ramework "or evaluatin whether an option strate y is appropriate "or a particular port"olio. Ee emphasiDes that options are attractive 4ecause they can 4e "ocused to lock in a particular scenario and 4ecause they can 4e customiDed. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING -: %Advanced Derivatives and Strate ies'% (h. .8' An (ntroduction to Deri#ati#es' $ourth Edition' Don M. (hance *Dryden !ress' .//21' pp. )<<&<8. #his chapter e=cerpt provides an overview o" e=chan e&listed warrants 4ased on "orei n stock inde=es *equity warrants1 and de4t with interest payments linked to a stock market inde= *equity&linked de4t1. #he author presents payo"" structures and valuation issues and descri4es common variations o" these securities. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING .: %Equity Swap A reement and Synthetic Equity !A"ai#a$#e On#ine%% and %,arrants and (overed ,arrants'% Gary 5. Gastineau' #ina R. Ruy rok' Sian A9Shea' Mar aret A. Sher alis' and (aroline A. ,ilkinson' A Compendium of 3uity (nstruments *S.G. ,ar4ur ' .//81' pp. <0&<2 and 0<&88. #hese readin s descri4e several equity warrants and equity&linked de4t securities. Emphasis is on the rationales "or their use' the structure o" the markets in which the securities are traded' valuation issues' and strate ic applications. #he speci"ic securities are equity swap a reements and synthetic equity' warrants and covered warrants' and equity&linked notes. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 11: %Advanced Derivatives and Strate ies'% (h. .8' An (ntroduction to Deri#ati#es' $ourth Edition' Don M. (hance *Dryden !ress' .//21' pp. )0)&8/. #his material descri4es the characteristics and payo"" structures o" a wide variety o" so&called e=otic options&a cate ory that includes virtually any option that is not traded on an e=chan e and is not essentially identical to one traded on an e=chan e. #he e=otic options' which are analyDed and illustrated usin market data include asset&or&nothin ' cash&or&nothin ' chooser' and Asian options. ?umerous other e=otic options are descri4ed' althou h the author does not develop e=amples o" them. #hese include compound'

installment' 4arrier' down&and&out' up&and&out' multi&asset' rain4ow' outper"ormance' look&4ack' and "orward&start options. 5evel o" di""icult6 Moderately di""icult. Estimated study time6 . hour.

0& Equity 2('t3(#i( Manage+ent Section V Study Guides

Study Sessi(n 11
Equity (tyle Mana$ement/ 0hat Is It and ,ow Is It 1sed.
READING 1: %Equity Style6 ,hat It Is and ,hy It Matters'% (h. .' +on A. (hristopherson and (. ?ola ,illiams' #he Eand4ook o" Equity Style Mana ement' Second Edition' #. Daniel (o in' $rank +. $a4oDDi' and Ro4ert D. Arnott' eds. *$rank +. $a4oDDi Associates' .//C1' pp. .&./. #his readin introduces the topic o" equity style port"olio mana ement. Style mana ement is de"ined and issues associated with the various styles and 4enchmarks are e=plored. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 2: & %Is Equity Style Mana ement ,orth the E""ortG Some (ritical Issues "or !lan Sponsors'% (h. 37' (harles #rDcinka' The "and*oo+ of 3uity &tyle Management' Second Edition' #. Daniel (o in' $rank +. $a4oDDi' and Ro4ert D. Arnott' eds. *$rank +. $a4oDDi Associates' .//C1' pp. <7.&<72 *throu h the top para raph1 and p. <.3 o" chapter %Summary and (onclusion.% #he author e=amines the purposes o" style mana ement "rom the plan sponsor9s perspective. ,hile the primary purpose must 4e to increase port"olio return' other important purposes include enhancin communication with the money mana er' evaluatin per"ormance' and diversi"yin "unds under mana ement. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 3: %:nderstandin the Di""erences and Similarities o" Equity Style Inde=es'% (h. 3' Melissa R. Brown and (laudia E. Mott' The "and*oo+ of 3uity &tyle Management' Second Edition' #. Daniel (o in' $rank +. $a4oDDi' and Ro4ert D. Arnott' eds. *$rank +. $a4oDDi Associates' .//C1' pp. 3.&8<. #his readin e=amines the construction and 4ehavior o" a num4er o" style 4enchmarks that are widely used "or per"ormance assessment and asset allocation. #he authors consider what the 4enchmarks reveal re ardin the nature o" the styles and how the inde=es "or the same style di""er "rom one another. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 4: %Asset Allocation6 Mana ement Style and !er"ormance Measurement'% ,illiam $. Sharpe' Journal of Portfolio Management' Institutional Investor *,inter .//31' pp. C&./. #he author presents an overview o" return& 4ased style analysis usin a "actor model re ression approach to identi"y the style*s1 o" a mana er. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 5: %Equity Style (lassi"ications'% +on A. (hristopherson' Journal of Portfolio Management' Institutional Investor *Sprin .//81' pp. <3&0<. #he article discusses the relative stren ths and weaknesses o" two methods "or determinin a port"olio mana er9s investment style6 .1 analysis o" equity characteristics' and 31 analysis o" return patterns *correlation analysis1. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour.

STUDY SESSION 12
%eturns to (tyle/ Im lications for Investment Mana$ement
READING 1: %#he Earnin s E=pectations 5i"e (ycle'% Richard Bernstein' Financial Analysts Journal' Association "or Investment Mana ement and Research *March>April .//<1' pp. /7&/<. #he author develops a raphical "ramework that links investors9 earnin s e=pectations and stock prices to equity style mana ement. ;ey pro4lems associated with the implementation o" equity style strate ies' which are 4ased on e=pectations' are discussed. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 2: %Makin Sense o" Beta' SiDe' and Book&to&Market'% Eersh She"rin and Meir Statman' Journal of Portfolio Management' Institutional Investor *,inter .//81' pp. 3)&<0. #his article relates $ortune ma aDine survey data on the %quality% o" companies to returns to style and risk "actors. #he study updates earlier literature that e=plores the di""erences 4etween % ood companies% and % ood stocks.% 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour.

READING 3: %Eistorical #endencies o" Equity Style Returns and the !rospects "or #actical Style Allocation'% (h. .3' Dou las ,. (ase and Steven (usimano' 3uity &tyle Management' Ro4ert A. ;lein and +ess 5ederman' eds. *Irwin !ro"essional !u4lishin ' .//81' pp. 38/&2C. #his chapter e=amines the ains "rom "orecastin style and implementin an intra&asset&class style allocation system "or equity port"olio mana ement. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 ..8 hours. READING 4: %Value' Relative Stren th' and Volatility in Glo4al Equity (ountry Selection'% Rosemary Macedo' Financial Analysts Journal' Association "or Investment Mana ement and Research *March>April .//81' pp. C7&C2. #his article e=tends style investin to country selection in lo4al equity port"olios usin relative value and relative stren th * rowth1. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour. READING 5: %!art II&International Equity Style Mana ement'% !art 3 o" (h. 8' David :mstead' 3uity &tyle Management' Ro4ert A. ;lein and +ess 5ederman' eds. *Irwin !ro"essional !u4lishin ' .//81' pp. ..2&0.. #his chapter e=amines the same issue addressed 4y Macedo *Readin )1' 4ut assumes a "i=ed style tilt in the analysis6 rowth or value. #he author "inds that value outper"orms rowth in all periods e=amined. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour.

0I& Se#e4ted T(5i4s in 6inan4ia# State+ent Ana#ysis Section VI Study Guides

STUDY SESSION 13
Earnin$s 2uality and International Financial (tatement Analysis
READING 1: %Mana in Earnin s !A"ai#a$#e On#ine%'% !at Mc(onnell and +anet !e ' Accounting (ssues' Bear' Stearns - (ompany *Septem4er .7' .//)1' pp. .&<C. #his readin provides a structured' comprehensive "ramework "or analyDin ' evaluatin ' and comparin the quality o" earnin s "or individual companies over time and "or more than one company. E=amples o" recent SE( en"orcement actions illustrate how mana ers may attempt to mana e reported earnin s. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour READING 2: %#he Juality o" Reported Earnin s Eas Improved' But . . . !ointers on ,hat to 5ook "or in (ompany Reports !A"ai#a$#e On#ine%'% Ga4rielle ?apolitano and A44y +oseph (ohen' :.S. Research *Goldman' Sachs (ompany' +anuary 3' .//C1 pp. .&.7. ?apolitano and (ohen discuss why the quality o" earnin s may have improved in recent years. In addition' they discuss continuin sources o" quality o" earnin s pro4lems' includin timin o" revenue reco nition' chan es in depreciation schedules' use o" loss reserves' capitaliDation o" costs' recurrin use o" restructurin char es' and use o" the de"erred ta= asset valuation allowance. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 3: %Earnin s&Based Analysis and Valuation'% (h. .<' Financial &tatement Analysis: TheoryApplication- and (nterpretation' Si=th Edition' 5eopold A. Bernstein and +ohn +. ,ild *Irwin>McGraw&Eill' .//21' pp. )3.&8<. #his readin considers the importance o" earnin s quality and persistence in valuation' individual ad@ustments to recast earnin s and earnin s components o" "inancial statements "or analysis' and the role o" earnin power in "orecastin and valuation. ?umerous e=amples o" real companies9 reportin practices are provided to illustrate the analysis. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 4: %(orporate $inancial Disclosure6 A Glo4al Assessment'% (h. .2' (arol A. $rost and ;urt !. Ramin' (nternational Accounting and Finance "and*oo+' Second Edition' $rederick D.S. (hoi' ed. *+ohn ,iley - Sons' .//C1' pp. .2..&.2.<<. #his readin presents a descriptive analysis o" selected annual report disclosures "or 377 companies "rom "ive countries6 $rance' Germany' +apan' the :nited ;in dom' and the :nited States. $orty companies were selected "or each country' and the reports were analyDed with particular attention to disclosures in the "ollowin areas6 "orward&lookin in"ormation' industry and eo raphical se ment in"ormation' accountin policies' cash and "unds "low statements' and special in"ormation "or nondomestic "inancial statement users. #he items were selected "or analysis on the 4asis o" their importance to "inancial analysts and other users o" "inancial statements. Strikin di""erences were o4served amon the countries in items disclosed and in the e=tent o" disclosure. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour.

READING 5: %(orporate Disclosure and #ransnational $inancial Reportin in Selected (ountries'% (h. 0' Shahrokh M. Sauda aran' (nternational Accounting and Finance "and*oo+' Second Edition' $rederick D.S. (hoi' ed. *+ohn ,iley - Sons' .//C1' pp. 0.)&0.33. #his readin surveys the diversity in "inancial statement reportin and disclosure practices in (anada' Germany' +apan' the :nited ;in dom' and the :nited States. Attention is paid to the primary aspects o" statements that are likely to 4e o" interest to a nondomestic user o" the in"ormation. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING : %International $inancial Statement Analysis'% (h. 2' Ronald Sherman and Re4ecca #odd' (nternational Accounting and Finance "and*oo+' Second Edition' $rederick D.S. (hoi' ed. *+ohn ,iley - Sons' .//C1' pp. 2..&2.).. #his readin provides discussion o" the various motivations "or per"ormin international "inancial statement analysis' the "actors a""ectin cross&4order analysis' systems "or classi"yin and cate oriDin countries9 accountin and disclosure practices' and sources o" "inancial in"ormation. #echniques "or trans"ormin and analyDin statements to compare cross&4order companies are introduced. #he techniques are illustrated with a comparative analysis o" a :.S. company and an Italian company. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 ..8 hour. READING ,: %Achievin (ompara4ility o" :.S. and +apanese !rice&Earnin s Ratios'% (h. C' !aul R. Brown' Vir inia E. Soy4el' and (lyde !. Stickney' (nternational Accounting and Finance "and*oo+' Second Edition' $rederick D.S. (hoi' ed. *+ohn ,iley - Sons' .//C1' pp. C..&C..2. #his readin e=amines the 4ody o" research into the question o" why +apanese !>Es have historically 4een much hi her than those in other countries' such as the :nited States. #he question revolves around the distinction 4etween accountin disclosure di""erences and cultural di""erences that may lead to hi her or lower risk tolerances' amounts o" equity used' and so on. #he reasons "or some o" the di""erences are e=plained in the readin . 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 7.8 hour.

STUDY SESSION 14
( ecial To ics/ Intellectual &ro erty and )ther Intan$i-le Assets and Financial (ervices ) erations
READING 1: %Averview6 Intellectual !roperty&#he ?ew Glo4al (urrency'% (olleen Sprin Himmerman and 5eslie +. Dunlop' The 1e% !ole of (ntellectual Property in Commercial Transactions' Melvin Simensky and 5annin G. Bryer' eds. *+ohn ,iley - Sons' .//01' pp. .&30. Himmerman and Dunlop review current trends and issues that illustrate the increasin value and importance o" intellectual property as an economic asset and an essential tool in 4usiness. #hey e=amine the pressures that these trends e=ert on the traditional le al dimensions o" the lo4al economy. $irst' they outline the 4asic ways in which intellectual property is created and protected and the 4asic rationale underlyin such protection. ?e=t' they discuss various trends in the markets and courts that re"lect the e=tension and e=ploitation o" the value o" intellectual property. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING 2: %Intan i4le Assets'% (h. C' The Analysis and )se of Financial &tatements' Second Edition' Gerald I. ,hite' Ashwinpaul (. Sondhi' and Dov $ried *+ohn ,iley - Sons' .//21' pp. <<.&<0 and <03&0C. $or many companies' intellectual property and other intan i4le assets are the ma@or source o" revenue' pro"ita4ility' and hi h rowth. #his readin "ocuses on the di""erent accountin techniques applied to the various types o" intan i4les and on the implications "or "inancial statement analysis o" the accountin methods. #he article discusses trans"ormations an analyst may wish to make to "inancial statements to enhance compara4ility amon companies and provide a 4etter 4asis "or valuin the companies. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 3: %Juantitative Methods o" Valuin Intellectual !roperty'% (h..' Russell 5. !arr and Gordon V. Smith' The 1e% !ole of (ntellectual Property in Commercial Transactions' Melvin Simensky and 5annin G. Bryer' eds. *+ohn ,iley - Sons' .//01' pp. </&)2. !arr and Smith discuss ways in which intellectual properties contri4ute to corporate value and methods 4y which intellectual property values can 4e quanti"ied. #hey present the roles o" active and passive intellectual property in 4usiness value creation and e=plore strate ic alliances as a mechanism "or controllin development time' cost' and risk. #hey present three eneral methods "or valuin intellectual property' and they compare and contrast the stren ths and weaknesses o" these methods. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour. READING 4: %Risk and Return in R-D&Intensive Industries'% Stewart (. Myers' Corporate Financial Decision

Ma+ing and 3uity Analysis' Randall S. Billin sley' ed. *Association "or Investment Mana ement and Research' .//81' pp. 3)&<<. Myers addresses "our pro4lems in the valuation o" R-D&intensive companies&accountin disclosure distortion' risk and the related cost o" capital' the risk&return %staircase% *i.e.' the pattern o" return and risk in the various phases o" development1' and valuin R-D investments that display severely skewed return patterns. #he conclusion is that techniques used "or investment and risk mana ement in venture capital partnerships capture the essence o" R-D investments. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING 5: %#he $inancial Services Industry6 Depository Institutions'% (h. .' Financial (nstitutions Management' Second Edition' Anthony Saunders *Irwin>McGraw&Eill' .//C1' pp. .&33. #his readin provides a eneral introduction to the primary operations and activities o" "inancial institutions' with a "ocus on commercial 4anks and thri"ts. A"ter reviewin the eneral 4usiness environment "or these companies' Saunders e=amines the types o" "inancial reports issued 4y 4anks and thri"ts and considers re ulatory "actors a""ectin these institutions. Ee then analyDes trends in the operations o" the institutions and the implications o" chan es "or "uture operations and chan es in the institutions. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 . hour. READING : %#he $inancial Services Industry6 Ather $inancial Institutions'% (h. <' Financial (nstitutions Management' Second Edition' Anthony Saunders *Irwin>McGraw&Eill' .//C1' pp. 0.&80. #his chapter covers a num4er o" intermediaries other than commercial 4anks6 investment 4anks' "inance companies *includin manu"acturin companies9 "inance su4sidiaries1' securities "irms' and mutual "unds. Saunders compares and contrasts the nature o" the "irms9 activities' their asset and lia4ility port"olios' the services they provide' and the customers they serve. 5evel o" di""iculty6 ?ot di""icult. Estimated study time6 7.8 hour. READING ,: %Evaluatin the !er"ormance o" $inancial Intermediaries'% (h. 2' Marcia M. (ornett' Fundamentals of Financial (nstitutions Management' Anthony Saunders' ed. *Irwin>McGraw&Eill' "orthcomin in .///1' pp. .08& C8. (ornett provides a "ramework "or analyDin the "inancial statements o" "inancial institutions' includin "inance company su4sidiaries o" manu"acturin companies. As an e=ample o" the kind o" "inancial statement analysis required o" analysts' she provides an in&depth analysis o" the "inancial statements o" one type o" "inancial "irm' the commercial 4ank. 5evel o" di""iculty6 Moderately di""icult. Estimated study time6 . hour.

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