Wiley's CFA® Program Exam Review Study Guide for 2020 Level 11 CFA Exam Complete Set Thousands of candidates from more than 100 countries have relied on these Study Guides to pass the CFA® Exam. Covering every Learning Outcome Statement (LOS) on the exam, these review materials are an invaluable tool for anyone who wants a deep-dive review of all the concepts, formulas, and topics required to pass. Wiley study materials are produced by expert CFA charterholders, CFA Institute members, and investment professionals from around the globe. For more information, contact us at [email protected]. Wiley's CFA® Program Exam Review Study Guide for 2020 Level II CFA Exam W ILEY Copyright © 2020 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Prior to 2014, the material was published by E/ lan Guides. Published simultaneously in Canada. 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ISBN 978-1-119-64490-3 (ePub) ISBN 978-1-119-64489-7 (ePDF) Contents About the Authors xiii Wiley's CFA® Program Exam Review Study Guide for 2020 Level IICFA Exam Volume 1: Ethics & Quantitative Methods Study Session 1: Ethical and Professional Standards Reading 1: Code of Ethics and Standards of Professional Conduct 3 Lesson 1: Code of Ethics and Standards of Professional Conduct 3 Reading 2: Guidance for Standards l-VII 7 Lesson 1: Standard I: Professionalism 7 Lesson 2: Standard II: Integrity of Capital Markets 32 Lesson 3: Standard III: Duties to Clients 43 Lesson 4: Standard IV: Duties to Employers 67 Lesson 5: Standard V: Investment Analysis, Recommendations, and Actions 81 Lesson 6: Standard VI: Conflicts of Interest 94 Lesson 7: Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 104 Reading 3: Application of the Code and Standards 113 Lesson 1: Application of the Code and Standards 113 Study Session 2: Quantitative Methods (1) Reading 4: Introduction to Linear Regression 133 Lesson 1: Linear Regression 133 Lesson 2: The Standard Error of Estimate, Coefficient of Determination, Hypothesis Testing, and ANOVA 139 Lesson 3: Prediction Intervals and Limitations of Regression Analysis 148 Reading 5: Multiple Regression 151 Lesson 1: Multiple Linear Regression 151 Lesson 2: The F-stat,/?2, ANOVA, and Dummy Variables 157 Lesson 3: Violations of Regression Assumptions 163 Lesson 4: Errors in Specification and Qualitative Dependent Variables 173 Reading 6: Time-Series Analysis 177 Lesson 1: Trend Models 177 Lesson 2: Autoregressive (AR) Time Series Models 183 Lesson 3: Random Walks and Unit Roots 190 Lesson 4: Seasonality, ARCH Models, Regressions with More Than One Time Series 197 © ©2020 Wiley CONTENTS Study Session 3: Quantitative Methods (2) Reading 7: Machine Learning 207 Lesson 1: What is Machine Learning? 207 Lesson 2: Machine Learning Algorithms 213 Reading 8: Big Data Projects 229 Lesson 1: Big Data in Investment Management 229 Lesson 2: Data Preparation and Wrangling 230 Lesson 3: Data Exploration Objectives and Methods 234 Lesson 4: Model Training 236 Lesson 5: Classifying and Predicting Sentiment for Stocks 241 Reading 9: Excerpt from "Probabilistic Approaches: Scenario Analysis, Decision Trees and Simulations" Lesson 1: Simulations 247 Lesson 2: An Overall Assessment of Probabilistic Risk Assessment Approaches 254 Appendix: Probability Tables 257 Wiley's CFA® Program Exam Review Study Guide for 2020 Level IICFA Exam Volume 2: Economics & Financial Reporting and Analysis Study Session 4: Economics Reading 10: Currency Exchange Rates: Understanding Equilibrium Value 3 Lesson 1: Foreign Exchange Market Concepts 3 Lesson 2: Cross Rate Calculations with Bid-Ask Spreads 5 Lesson 3: Foreign Exchange Spreads and Aribtrage Constraints on Spot Exchange Rate Quotes 8 Lesson 4: Forward Markets 12 Lesson 5: International Parity Relations Part I: Important Concepts, Covered and Uncovered Interest Rate Parity 17 Lesson 6: International Parity Relations Part II: Purchasing Power Parity and the Real Exchange Rate 23 Lesson 7: International Parity Relations Part III: The Fisher Effect and Bringing All Parity Relations Together 25 Lesson 8: The Carry Trade 28 Lesson 9: The Impact of Balance of Payments Flows 30 Lesson 10: Monetary and Fiscal Policies 33 Lesson 11: Exchange Rate Management: Intervention and Controls, Currency Crises, and Shorter-Term Forecasting Tools 37 Reading 11: Economic Growth and the Investment Decision 41 Lesson 1: Growth in the Global Economy: Developed versus Developing Countries 41 Lesson 2: Determinants of Economic Growth 45 Lesson 3: Classical Growth Theory and Neoclassical Growth Theory (Part I) 52 Lesson 4: Neoclassical Growth Theory (Part II) and Endogenous Growth Theory 56 Lesson 5: The Convergence Debate and Growth in an Open Economy 61 © ©2020 Wiley CONTENTS Reading 12: Economics of Regulation 65 Lesson 1: Economics of Regulation 65 Study Session 5: Financial Reporting and Analysis (1) Reading 13: Intercorporate Investments 75 Lesson 1: Investments in Financial Assets 75 Lesson 2: Investments in Associates and Joint Ventures 85 Lesson 3: Investments in Business Combinations 91 Lesson 4: Investments in SPEs/VIEs 99 Reading 14: Employee Compensation: Post-Employment and Shared-Based 107 Lesson 1: Types of Post-Employment Benefit Plans and Measuring a Defined Benefit Pension Plan's Obligations 107 Lesson 2: Components of Periodic Pension Cost: IFRS versus U.S. GAAP 116 Lesson 3: Effects of Changes in Key Assumptions 124 Lesson 4: Disclosures of Pension and Other Post-Employment Benefits, and Cash Flow Related Information 127 Lesson 5: Share-Based Compensation 134 Reading 15: Multinational Operations 139 Lesson 1: Defining the Presentation Currency, Functional Currency, Local Currency, and Foreign Currency Transaction Exposure 139 Lesson 2: Translation of Foreign Currency Financial Statements: The Current Rate and Temporal Methods 144 Lesson 3: Translation of Foreign Currency Financial Statements: Hyperinflationary Economics 158 Lesson 4: Multinational Operations and the Company's Effective Tax Rate and Foreign Currency-Related Disclosures 166 Reading 16: Analysis of Financial Institutions 171 Lesson 1: Introduction to Analysis of Financial Institutions 171 Lesson 2: Analyzing a Bank 172 Lesson 3: Analyzing an Insurance Company 183 Study Session 6: Financial Reporting and Analysis (2) Reading 17: Evaluating Quality of Financial Reports 193 Lesson 1: Quality of FinancialR eports 193 Lesson 2: Evaluating the Quality of Financial Reports 201 Lesson 3: Earnings Quality 205 Lesson 4: Cash Flow Quality 217 Lesson 5: Balance Sheet Quality 221 Lesson 6: Sources of Information About Risk 225 Reading 18: Integration of Financial Statement Analysis Techniques 227 Lesson 1: Case Study: Long-Term Equity Investment 227 ©2019 Wiley © Wiley's CFA® Program Exam Review Study Guide for 2020 Level II CFA Exam Volume 3: Corporate Finance & Equity Study Session 7: Corporate Finance (1) Reading 19: Capital Budgeting 3 Lesson 1: Introduction and Level I Recap 3 Lesson 2: Cash Flow Projections 6 Lesson 3: Project Analysis and Evaluation 14 Lesson 4: Other Income Measures and Valuation Models 25 Reading 20: Capital Structure 31 Lesson 1: The Capital Structure Decision Part I: Capital Structure and the MM Propositions with No Taxes 31 Lesson 2: The Capital Structure Decision Part II: MM Propositions with Taxes, the Costs of Financial Distress, Agency Costs, Asymmetric Information and the Statis Trade-OffTheory 35 Lesson 3: The Target Capital Structure and Practical Issues in Capital Structure Policy 41 Reading 21: Analysis of Dividends and Share Repurchases 45 Lesson 1: Dividends: Forms and Effects on Shareholder Wealth and Issuing Company's Financial Ratios 45 Lesson 2: Dividend Policy and Company Value: Theory 50 Lesson 3: Factors Affecting Dividend Policy in Practice 55 Lesson 4: Payout Policies 58 Lesson 5: Share Repurchases 61 Lesson 6: Global Trends in Payout Policy and Analysis of Dividend Safety 68 Study Session 8: Corporate Finance (2) Reading 22: Corporate Governance and Other ESG Considerations in Investment Analysis 73 Lesson 1: Global Variations in Ownership Structures 73 Lesson 2: Evaluating Corporate Governance Policies and Procedures 77 Lesson 3: Identifying ESG-Related Risks and Opportunities 79 Lesson 4: Evaluating ESG-Related Risks and Opportunities 81 Reading 23: Mergers and Acquisitions 89 Lesson 1: Mergers and Acquisitions: Definitions, Classifications, Motives, Transaction Characteristics, and Regulation 89 Lesson 2: Target Company Valuation 102 Lesson 3: Bid Evaluation and Corporate Restructuring 112 Study Session 9: Equity Valuation (1) Reading 24: Equity Valuation: Applications and Processes 119 Lesson 1: Value Definitions and Valuation Applications 119 Lesson 2: The Valuation Process and Communicating Valuation Results 122 Reading 25: Return Concepts 131 Lesson 1: Return Concepts and the Equity Risk Premium 131 Lesson 2: The Required Return on Equity, the Weighted Average Cost of Capital, and Discount Rate Selection 137 ©2019 Wiley