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1、 2012 PASSMAX. All Rights Reserved. PASSMAX 2012 CFA LEVEL I STUDY GUIDE STUDY SESSION 2: QUANTITATIVE METHODS 2012 PASSMAX. All Rights Reserved. SS2-2 HOW TO USE THIS BOOK: This book only has one objective: to maximize your chances of passing the CFA Exam. To achieve this objective, we have incorpo
2、rated a number of features into this book: First of all, the CFA Institute has made it very clear that every examination question will be based on one or more Learning Outcome Statement (LOS). Consequently, these notes are a direct response to each LOS, nothing more and nothing less. Instead of re-s
3、tating the LOSs word for word, we have simply titled each one based on the core concept that underlies it. Furthermore, when we found an LOS to be incorporating multiple concepts, we broke down the LOS into its separate components and explained each one individually. For example, LOS# 3.11.c asks th
4、e candidate to: “define and interpret a decision rule and the power of a test, and explain the relation between confidence intervals and hypothesis tests.” In this study guide, you will find this LOS explained in the following components: 3.11.c.(i) DECISION RULE 3.11.c.(ii) POWER OF THE TEST 3.11.c
5、.(iii) CONFIDENCE INTERVALS AND HYPOTHESIS TESTS Therefore, mastery of each of these components will ensure that the candidate is well prepared to handle any examination question related to this LOS. This study guide will explain each concept from the ground up, thus minimizing the need for candidat
6、es to memorize formulas. Each study session is summarized into a separate booklet. This serves a number of benefits: i) Convenience: Since you will be studying the sessions one at a time, it would be very inconvenient to be logging along an entire book comprised of multiple study sessions. ii) Psych
7、ological: With each booklet only containing one study session, you can see the quantity of material that needs to be covered in order to master that study session Having a thick book with multiple study session to go through can seem overwhelming and discouraging. Therefore, with our study guides, y
8、oull be able to measure your progress in 18 small manageable steps, as opposed to taking 5 or 6 giant leaps. We have deliberately not included any practice questions with these study guides because we believe that it is imperative for the candidate to attempt all the practice questions found in the
9、CFA readings as well as the sample tests and mocks provided by the CFA Institute. For any kind of support related to your exam preparation, you may contact The Exam Coach at coachpassmax.org. Good luck and best wishes in your pursuit of the CFA charter. PASSMAX. 2012 PASSMAX. All Rights Reserved. SS
10、2-3 2.5. THE TIME VALUE OF MONEY 2.5.a) INTERPRETING INTEREST RATES Suppose that Bank M is offering 6% per annum on its deposit accounts. Across the street, Bank Q is also inviting savers to deposit with them. We may interpret the 6% in a number of ways: 1) Its the return that savers require in orde
11、r to deposit their funds with Bank M. 2) If savers instead deposit with Bank Q, they would forgo making 6% with Bank M. Thus, the 6% may be viewed as the opportunity cost of depositing funds with Bank Q. In other words, 6% is the yield on the best available investment alternative thats of equal risk
12、. 3) If one were to deposit $100 today, the account would be worth $106 in one year. Alternatively, we can view the $100 today as being the present value of $106 discounted at 6% over one year. Thus, the 6% may also be regarded as the discount rate. 2.5.b) COMPONENTS OF INTEREST RATE FOR AN INVESTME
13、NT No matter how its interpreted, a “nominal” value for interest rate may be found by summing the values of the following components: 1) The real risk free rate (RFR): reflects investors willingness to forego current consumption in order to invest today and thus have a greater consumption potential
14、in the future. The more resistant investors are to sacrificing current consumption, the higher the real return must be in order to induce them to do otherwise. 2) The inflation premium: reflects the expected price appreciation of goods and services during the life of the investment. An investment mu
15、st yield enough to cover inflation so that the purchasing power of the investors capital would not diminish. For example, if an investment were to yield 3%, while the prices of goods were to increase by 5%, then an investor would be able to purchase less number of goods a year from now. As a result, an investor would demand that the investment must yield more than the expected inflation. The sum of the real risk free rate and the inflation premium yields us the “nominal” risk free rate (NRFR). This would be the yield thats observed on Treasuries. Consequently,
