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#cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit #study-session-4

Question

imperfect competition is where an individual firm has [...] and is therefore able to exert some influence over price.

Answer

enough share of the market

(or can control a certain segment of the market)

(or can control a certain segment of the market)

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imperfect competition is where an individual firm has enough share of the market (or can control a certain segment of the market) and is therefore able to exert some influence over price.

zation requires that we examine both of those components. Revenue comes from the demand for the firm’s products, and cost comes from the acquisition and utilization of the firm’s inputs in the production of those products. <span>3.1.1. Total, Average, and Marginal Revenue This section briefly examines demand and revenue in preparation for addressing cost. Unless the firm is a pure monopolist (i.e., the only seller in its market), there is a difference between market demand and the demand facing an individual firm. A later reading will devote much more time to understanding the various competitive environments (perfect competition, monopolistic competition, oligopoly, and monopoly), known as market structure . To keep the analysis simple at this point, we will note that competition could be either perfect or imperfect. In perfect competition , the individual firm has virtually no impact on market price, because it is assumed to be a very small seller among a very large number of firms selling essentially identical products. Such a firm is called a price taker . In the second case, the firm does have at least some control over the price at which it sells its product because it must lower its price to sell more units. Exhibit 4 presents total, average, and marginal revenue data for a firm under the assumption that the firm is price taker at each relevant level of quantity of goods sold. Consequently, the individual seller faces a horizontal demand curve over relevant output ranges at the price level established by the market (see Exhibit 5). The seller can offer any quantity at this set market price without affecting price. In contrast, imperfect competition is where an individual firm has enough share of the market (or can control a certain segment of the market) and is therefore able to exert some influence over price. Instead of a large number of competing firms, imperfect competition involves a smaller number of firms in the market relative to perfect competition and in the extreme case only one firm (i.e., monopoly). Under any form of imperfect competition, the individual seller confronts a negatively sloped demand curve, where price and the quantity demanded by consumers are inversely related. In this case, price to the firm declines when a greater quantity is offered to the market; price to the firm increases when a lower quantity is offered to the market. This is shown in Exhibits 6 and 7. Exhibit 4. Total, Average, and Marginal Revenue under Perfect Competition Quantity Sold (Q) Price (P) Total Revenue (TR) Average Re

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#cfa-level-1 #financial-reporting-and-analysis #non-recurring-non-operating-items #understanding-income-statement

Question

Extraordinary items are BOTH [...] in nature AND **[...]** in occurrence, and material in amount.

Answer

unusual

infrequent

infrequent

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Extraordinary items are BOTH unusual in nature AND infrequent in occurrence, and material in amount. They must be reported separately (below the line) net of income tax.

. Subsidiaries and investees also qualify as separate components. Disposal of a portion of a business component does not qualify as discontinued operations. Instead, this is recorded as an unusual or infrequent item. <span>2. Extraordinary items Extraordinary items are BOTH unusual in nature AND infrequent in occurrence, and material in amount. They must be reported separately (below the line) net of income tax. Common examples are: Expropriations by foreign governments. Uninsured losses from earthquakes, eruptions, and tornadoes. Note that gains and losses from the early retirement of debt used to be treated as extraordinary items; SFAS No. 145 now requires them to be treated as part of continuing operations. 3. Unusual or infrequent items These are either unusual in nature OR infrequent in occurrence but not both. They may be disclosed separately (as a single-line

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#cfa-level-1 #reading-23-financial-reporting-mechanics

Question

You can identify the types of accruals and valuation entries in the **[...]** ** section of MD&A** and in the significant accounting policies footnote, both found in the annual report.

Answer

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An important first step in analyzing financial statements is identifying the types of accruals and valuation entries in an entity’s financial statements. Most of these items will be noted in the critical accounting policies/estimates section of management’s discussion and analysi

ions of balance sheet accounts. Accruals and valuation entries require considerable judgment and thus create many of the limitations of the accounting model. Judgments could prove wrong or, worse, be used for deliberate earnings manipulation. <span>An important first step in analyzing financial statements is identifying the types of accruals and valuation entries in an entity’s financial statements. Most of these items will be noted in the critical accounting policies/estimates section of management’s discussion and analysis (MD&A) and in the significant accounting policies footnote, both found in the annual report. Analysts should use this disclosure to identify the key accruals and valuations for a company. The analyst needs to be aware, as Example 4 shows, that the manipulation of earnings and a

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#tvm

Question

- FV of an annuity factor

Answer

\(FV_n=A {(1+r)^n-1 \over r}\)

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#tvm

Question

- the present value factor formula (2)

Answer

\(PV =FV_n {1 \over (1+r)^n}\)

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#discounted-cashflow-applications

Question

In investment management applications, the internal rate of return is called the money-weighted rate of return because it accounts for **[...]** and **[...]** of all cash flows into and out of the portfolio

Answer

the timing and amount

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#reading-9-probability-concepts

Question

A trade in two closely related stocks involving the short sale of one and the purchase of the other.

Answer

Pairs arbitrage trade

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#reading-9-probability-concepts

In investments, the question of whether one event (or characteristic) provides information about another event arises in both time-series settings and cross-sectional settings.

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#reading-9-probability-concepts

Question

A rule explaining the unconditional probability of an event in terms of probabilities of the event conditional on mutually exclusive and exhaustive scenarios.

Answer

Total probability rule

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#reading-9-probability-concepts

For readers familiar with mathematical treatments of probability, *S,* a notation usually reserved for a concept called the sample space, is being appropriated to stand for *scenario.*

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#reading-9-probability-concepts

Question

P(A) = P(AS)+P(AS

Answer

Total probability rule

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#reading-9-probability-concepts

Question

P(A|S_{1})P(S_{1}) + P(A|S_{2})P(S_{2}) +…+ P(A|S_{n})P(S_{n})

What does this equation say?

What does this equation say?

Answer

The probability of any event [*P*(*A*)] can be expressed as a weighted average of the probabilities of the event, given scenarios [terms such *P*(*A* | *S*_{1})]

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#reading-9-probability-concepts

Question

The scenarios for the total probability rule must be **[...]**

Answer

mutually exclusive and exhaustive

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#reading-9-probability-concepts

Question

The probability-weighted average of the possible outcomes of a random variable.

Answer

Expected value

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#reading-9-probability-concepts

Expected value (for example, expected stock return) looks either to the future, as a forecast, or to the “true” value of the mean (the population mean, discussed in the reading on statistical concepts and market returns). We should distinguish expected value from the concepts of historical or sample mean. The sample mean also summarizes in a single number a central value. However, the sample mean presents a central value for a particular set of observations as an equally weighted average of those observations. To summarize, the contrast is forecast versus historical, or population versus sample.

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#reading-9-probability-concepts

Question

E(X)=

Answer

\(E(X) = {\displaystyle\sum_{i=1}^{n} P(Xi)Xi}\)

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#reading-9-probability-concepts

For simplicity, we model all random variables in this reading as discrete random variables, which have a countable set of outcomes. For continuous random variables, which are discussed along with discrete random variables in the reading on common probability distributions, the operation corresponding to summation is integration.

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#reading-9-probability-concepts

Question

The **[...]** of a random variable is the expected value of squared deviations from the random variable’s expected value

Answer

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#reading-9-probability-concepts

Question

\(\sigma^2(X)=\)

Answer

\(\sigma^2 =E( {(X-E(X))^2}\)

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#reading-9-probability-concepts

Question

The two notations for variance are **[...]**

Answer

σ^{2}(*X*) and Var(*X*).

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#reading-9-probability-concepts

Variance is a number greater than or equal to 0 because it is the sum of squared terms. If variance is 0, there is no dispersion or risk. The outcome is certain, and the quantity *X* is not random at all. Variance greater than 0 indicates dispersion of outcomes. Increasing variance indicates increasing dispersion, all else equal.

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#reading-9-probability-concepts

The unconditional variance of EPS is the sum of two terms:

1) the expected value (probability-weighted average) of the conditional variances (parallel to the total probability rules) and

2) the variance of conditional expected values of EPS.

The second term arises because the variability in conditional expected value is a source of risk. Term 1 is σ^{2}(EPS) = *P*(*declining interest rate environment*) σ^{2}(EPS | *declining interest rate environment*) + *P*(*stable interest rate environment*) σ^{2}(EPS | *stable interest rate environment*) = 0.60(0.004219) + 0.40(0.0096) = 0.006371.

Term 2 is σ^{2}[*E*(EPS | interest rate environment)] = 0.60($2.4875 − $2.34)^{2} + 0.40($2.12 − $2.34)^{2} = 0.032414. Summing the two terms, unconditional variance equals 0.006371 + 0.032414 = 0.038785.

1) the expected value (probability-weighted average) of the conditional variances (parallel to the total probability rules) and

2) the variance of conditional expected values of EPS.

The second term arises because the variability in conditional expected value is a source of risk. Term 1 is σ

Term 2 is σ

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#reading-9-probability-concepts

Question

The order of calculation is always **[...]** , then **[...]** , then standard deviation.

Answer

expected value

variance

variance

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#reading-9-probability-concepts

Question

Variance summarized proceedure equation:

Var(X)=

Var(X)=

Answer

\(\sigma^2 = {P(Xi)}\left\{Xi-E(Xi)\right\}^2\)

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#reading-9-probability-concepts

Question

The expected value of a stated event given that another event has occurred.

Answer

Conditional expected value

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#reading-9-probability-concepts

Question

Total probability rule for expected value:

E(X)=**[...]**

E(X)=

Answer

E(X)=E(X|S)P(S)+E(X|S^{C})P(S^{C})

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#reading-9-probability-concepts

Question

so small or unimportant as to be not worth considering; insignificant.

Answer

Negligible

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#reading-9-probability-concepts

Question

A diagram with branches emanating from nodes representing either mutually exclusive chance events or mutually exclusive decisions.

Answer

Tree diagram

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#reading-9-probability-concepts

Question

Each value on a binomial tree from which successive moves or outcomes branch.

Answer

Nodes

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#reading-9-probability-concepts

Question

The variance of one variable, given the outcome of another.

Answer

Condicional variances

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#reading-9-probability-concepts

To analyze a portfolio’s expected return and variance of return, we must understand these quantities are a function of characteristics of the individual securities’ returns. Looking at the dispersion or variance of portfolio return, we see that the way individual security returns move together or covary is important. To understand the significance of these movements, we need to explore some new concepts, covariance and correlation.

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