Cfa Notes

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CFA Level I Study Notes
Working on: SS11: Financial Statement Analysis
SS 5 – Understanding Business Cycles

Table of Contents
Study Session 3 – Assigned Reading #12 – Technical Analysis4
Study Session 5 – Assigned Reading #18 – Understanding Business Cycles13
Study Session 11 – Assigned Reading #36 – Capital Budgeting15
Study Session 11 – Assigned Reading #37 – Cost of Capital19
Study Session 11 – Assigned Reading #38 – Measures of Leverage22
Study Session 11 – Assigned Reading #39 – Dividends and Share Repurchases25
Study Session 11 – Assigned Reading #40 – Working Capital Management29
Study Session 11 – Assigned Reading #41 – Financial Statement Analysis33
Study Session 11 – Assigned Reading #42 – The Corporate Governance of Listed Companies: A Manual for Investors34
Study Session 13 – Assigned Reading #47 – Market Organization Structure35

Study Session 3 – Assigned Reading #12 – Technical Analysis

Technical analysis – study of collective market segment, as expressed in buying/selling of assets to predict future behaviour * Based on the idea that prices are determined by supply and demand * Individuals who trade affect the prices

* Better informed individuals = buy in larger volumes
* Key assumption: efficient markets hypothesis does not hold – market prices reflect both rational and irrational behavior * Uses share price and trading volume data to project a target price * Not concerned with identifying the reasons for trading, but only what trades have occurred * Advantage: actual price and volume data is observable, can be applied to the prices of assets that do not produce future cash flows (dividends or interest), such as commodities, can be used when fraud occurs * Disadvantages: limited in markets where price and volume data might not truly reflect supply and demand (e.g. illiquid markets and markets that can be manipulated; currency market)

Fundamental analysis – attempts to determine the intrinsic value of an asset * Uses financial statements
* Data used is subject to assumptions/restatements
* Require subjective judgment

Line Charts
* Simplest technical analysis chart
* Prices of each period as a continuous line

Bar Charts
* Display high/lows for each trading period
* Often include opening price
* Each period displayed as a vertical line with
* Closing price is dash on the right side of the line
* Opening price is dash on the left side of the line

Candlestick Charts
* Same data as bar charts, but there is a box around opening/close instead of a line; box can be: * Clear – closing price is higher than opening
* Filled in – closing price is lower than opening

Point and figure charts
* Useful in identifying changes in direction of price movements * Drawn on graph paper; price is on y-axis
* Price increments chosen = box size for the chart
* Unique characteristic: x-axis represents change in direction (not unit of time)

Volume charts – typically displayed below price charts with each period’s volume shown as a vertical line

Relative strength analysis – to perform this, you need to calculate the ratios of an asset’s closing prices to benchmark values and draws a line chart of the ratios * Increasing trend outperforming benchmark (positive relative strength) * Decreasing trend underperforming the benchmark (negative relative strength) Trendlines

* Identifies whether a trend is continuing/reversing
* Breakdown/breakup can signify end of the previous trend * Represent level of support resistance
* Support level – buying prevents further price decrease * Resistance level – selling prevents further price increase * Breakdown/breakout tend to occur at important prices or historical high/lows

Uptrend
* Prices are constantly reaching higher highs
* Prices are retracting to higher lows
* Demand is increasing relative...
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