郵箱：cfa@1LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialTheMainFunctionsoftheFinancialSystemAre郵箱：cfa@1LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialTheMainFunctionsoftheFinancialSystemAretoTheachievementofthepurposesforwhichpeopleusethefinancialsystemThediscoveryoftheratesofreturnthatequateaggregatesavingswithaggregateborrowingsTheallocationofcapitaltothebestMarketOrganizationandSecurityMarketIndices03MarketEfficiencyIntroductionoftheStudySessionEthics&ProfessionalStudySessionQuantitativeStudySessionStudySessionFinancialReportingandStudySessionCorporateStudySessionPortfolioManagementandWealthStudySessionEquityStudySessionFixedStudySessionStudySessionAlternative 郵箱：cfa@2LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsofthe郵箱：cfa@2LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialDeterminingEquilibriumRatesofTheaggregateamountofsavingsandtheaggregateofborrowingarerelatedtotheexpectedrateofreturn.EquilibriumrateofreturnistheratethatequatestheaggregatesupplyoffundstotheaggregatedemandforTherequiredratesofreturnfordifferentinvestmentvehiclesvaryduetotheirriskcharacteristics,terms,liquidity,andmaturity.LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialAchievingEntities’purposesinUsingFinancialExchangingForexample:currencyInformation‐motivatedInformation‐motivatedtraderexpecttoearnanadditionalreturnbyidentifyingassetsthatarecurrentlyundervaluedorovervalued.LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialAchievingEntities’purposesinUsingFinancialRaisingEquityCompaniesissueequityinstrumentsthatrepresentownershipandclaimsonearningsinthefuture.Investmentbankshelpissueequities;analystsvaluetheequity;regulatorsandaccountantsensurethedisclosureofManagingRisksincludedefaultrisk,interestraterisk,exchangeraterisk,riskofchangesinprices,etc.LOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialAchievingEntities’PurposesinUsingFinancialBankdeposit,bonds,stocks,mutualfunds,andotherassetsarevehiclesforsaving.Saversrequirearateofreturnthatcompensatesthemfortheriskstaken.Peopleborrowtopayforhomes,cars,orCompaniesborrowtofundoperations,ortoengageinnewprojects.郵箱：cfa@3LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–Equitysecuritiesrepresentownershipin郵箱：cfa@3LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–EquitysecuritiesrepresentownershipinDividendsarepaidonlyafterinterestispaidtodebtholdersandpreferredDebtholdersandpreferredstockholdershavepriorityovercommonstockholdersintheeventoffirmliquidation.Isanequitysecuritywithscheduleddividendsthattypicallydonotchangeoverthesecurity’slifeandmustbepaidbeforeanydividendsoncommonstockmaybepaid.Aresimilartooptionsinthattheygivetheholdertherighttobuyafirm’sequityshares(usuallycommonstock)atafixedexercisepricepriortothewarrant’sexpiration.LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–FixedincomesecuritiesarepromisestorepayborrowedGenerallylong‐term(withmaturitylongerthan10Intermediateterm(withmaturitybetween2to10CommercialBorrowersellsahighqualityassetandhasboththerightandobligationtorepurchaseit(atahigherprice)inthefuture.ConvertibleIsdebtthataninvestorcanexchangeforaspecifiednumberofequitysharesoftheissuingfirmLOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialFinancialFixedEquityPooledinvestmentPublicvs.Financialvs.physicalLOS45.a;CFA?Curriculum,Volume5,P8 TheFunctionsoftheFinancialCapitalAllocationEconomiesareallocationallyefficientwhentheirfinancialsystemsallocatescarcecapitaltothemostproductiveuses.Accurateinformationaboutexpectedratesofreturnandrisksleadstoefficientcapitalallocation.郵箱：cfa@4LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–郵箱：cfa@4LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–aremoniesissuedbynationalmonetaryReservecurrenciesareheldbycentralbanksandothermonetaryauthorities.LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–Publicsecurities:aretradedonexchangesorthroughsecuritiesdealersandaresubjecttoregulatoryoversight.Privatesecurities:arenottradedinpublicmarketswhichareoftenilliquidandnotsubjecttoregulation.LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–PooledMutualfunds(ETFs)¬es(ETNs)tradelikeclosed‐endfunds,buthavespecialprovisionsallowingconversionintoindividualportfoliosecurities,orexchangeofportfoliosharesforETFshares,thatkeeptheirmarketpricesclosetothevalueoftheirproportionalinterestintheoverallportfolio.representaclaimtoaportionofapooloffinancialassetssuchasmortgages,carloans,orcreditcarddebt.Hedgemanagergeneralpartner).undermanagementaswellasontheirinvestmentresults.LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofFinancialAsset–Pooledinvestmentvehiclesrepresentownershipinaninvestmentportfolio,whichmayincludesecurities,currencies,contracts,commodities,orrealassets.Investor’sownershipinterestsarereferredtoasshares,units,depositoryreceipts,andlimitedpartnership郵箱：cfa@5LOS45.c;CFA?Curriculum,Volume5,P16(☆ Classificationsof郵箱：cfa@5LOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofLOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofIncludepreciousmetals,energyproducts,industrialmetals,agriculturalproducts,andcarboncredits.Spotcommoditymarketstradecommoditiesforimmediatedeliverywhereastheforwardandfuturesmarketstradecommoditiesforfuturedelivery.RealLOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofForwardIsanagreementtobuyorsellanassetinthefutureatapricespecifiedinthecontractatitsinceptionFuturesaretradedonanexchangesothattheyareliquidinvestments.SwapOptionGivesitsownertherighttobuyorsellanassetataspecificexercisepriceatsomespecifiedtimeinthefuture.InsurancePaysacashamountifafutureeventoccurs.Theyareusedtohedgeagainstunfavorable,unexpectedevents.CreditdefaultAreaformofinsurancethatmakesapaymentifanissuerdefaultsonitsLOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofIsanagreementamongtraderstodosomethinginthefuture,suchasexchanginganassetforcash.Thevalueofmostcontractsdependsonthevalueofanunderlyingasset,whichmaybeacommodity,asecurity,anindex,orcurrencies.Areclassifiedasphysicalorfinancialderivativesbasedonthenatureoftheunderlyingasset.郵箱：cfa@6LOS45.i;CFA?Curriculum,Volume5,P42(☆ PrimarySecurity郵箱：cfa@6LOS45.i;CFA?Curriculum,Volume5,P42(☆ PrimarySecurityPublicInanunderwrittenoffering,theinvestmentbankguaranteesthesaleoftheissueatanofferingpricethatitnegotiateswiththeissuer.Inabesteffortoffering,theinvestmentbankactsonlyasbroker,andisnotobligatedtobuytheunsoldportioniftheissueisundersubscribed.LOS45.b;CFA?Curriculum,Volume5,P14(☆ ClassificationsofPublicCorporationsgenerallycontractwithaninvestmentbanktohelpthemselltheirsecuritiestothepublic:Indicationsofinterest:theinvestmentbankfindsinvestorswhoagreetobuypartoftheissueTheprocessofgatheringindicationsofinterestiscalledbookbuilding.Thustheinvestmentbankiscalledbookbuilder/bookrunnerIfsecuritiesmustbeissuedquickly,theprocessisLOS45.b;CFA?Curriculum,Volume5,P14(☆ ClassificationsofPrimarymarketisthemarketwherenewlyissuedsecuritiesaresoldbyissuerstoinvestors.NewissuedsecuritiesIPO(initialpublicofferings):first‐timeissuesbyfirmswhosesharesarenotcurrentlypubliclytradedSeasonedofferings(secondaryissues):newsharesissuedbyfirmswhosesharearealreadytradingintheSecondarymarketisthemarketwhereinvestorstradetoeachother.ItsupportstheprimarymarketbyprovidingLOS45.c;CFA?Curriculum,Volume5,P16(☆ ClassificationsofMoneyvs.CapitalMoneymarketstradedebtinstrumentsmaturinginoneyearorless.CapitalmarketstradeinstrumentsoflongerTraditionalmarketstradeallpubliclytradeddebtsandequitiesandsharesinpooledinvestmentvehiclesthatholdpubliclytradeddebtsand/orequities.Alternativemarketsincludehedgefunds,privateequity,commodities,realestatesecuritiesandrealestateis郵箱：cfa@7LOS45.j;CFA?Curriculum,Volume5,P45(☆☆is郵箱：cfa@7LOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary Inquote‐drivenmarkets(price‐drivenmarkets,dealertradeatthepricesquotedbydealers.Almostallbondsandcurrenciesandmostspottradeinquoted‐drivenLOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary ExecutionHowtradescanbeQuote‐drivenOrder‐drivenBrokeredLOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary TradingWhentradescanbeCallTradescanbearrangedonlywhenthemarketiscalledataparticulartimeandplace.Allbuyordersandallsellordersaregathered,andthenasinglepriceischosentomaximizethetotalvolumeofContinuousTradescanbearrangedandexecutedanytimetheLOS45.i;CFA?Curriculum,Volume5,P42(☆ PrimarySecurityPrivatePlacementsandotherPrimaryMarketPrivateplacement:corporationssellsecuritiesdirectlytoasmallgroupofqualifiedinvestors,usuallywiththeassistanceofaninvestmentbank.Shelfregistration:corporationsmakeallpublicdisclosuresasinaregularoffering,butsellthesharesdirectlyintothesecondarymarketovertimewhentheyneedcapital,andwhenthemarketisfavorable.Dividendreinvestmentplan(DRPs):allowshareholderstoreinvesttheirdividendsinnewlyissuedshares郵箱：cfa@8LOS45.j;CFA?Curriculum,Volume5,P45(☆☆郵箱：cfa@8LOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary Inbrokeredmarkets,brokersarrangetradesamongtheirThisserviceisespeciallyvaluablewhenaclienthasauniqueorilliquidinstrumentforwhichfindingabuyerorasellerwillingtotradeisdifficult.Examplesinclude:verylargeblocksofstock,realestate,finearts,etc.LOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary TradingPricingrules:areusedtodeterminethepriceafterordersarecreatedusingordermatchingrulesUniformpricingrule:alltradesareexecutedatthesamepricethatmaximizesthetradingvolume.Discriminatorypricingrule:thelimitpriceoftheorderthatfirstarrivedisthetradeprice.Derivativepricingrule:ordersarebatchedtogetherandmatchedatfixedpointsintimeduringthedayattheLOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary Twosetsofrulesareusedinorder‐drivenOrdermatchingrules:establishanorderprecedencePricepriority:thehighestpricedbuyordersandthelowestpricedsellordersaretradedfirst.Displayprecedence:displayedquantitiesatagivenpricehaveprecedenceovertheundisplayedquantities.LOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary Inorder‐drivenmarkets,tradesarearrangedusingrulestomatchbuyorderstosellorders.Exchangesandautomatedtradingsystemsareexamplesoforderdrivenmarkets.郵箱：cfa@9LOS45.d;CFA?Curriculum,Volume5,P25 Financial郵箱：cfa@9LOS45.d;CFA?Curriculum,Volume5,P25 FinancialBrokershelptheirclientsbuyandsellsecuritiesbyfindingcounterpartiesinacostefficientmanner.Blockbrokershelpwiththeplacementoflargetrades.InvestmentbanksprovideadvicetotheirmostlycorporateclientsandhelpthemarrangetransactionssuchasIPOandseasonedsecuritiesofferings.Exchangesprovideplaceswheretraderscanmeettoarrangetheirtrades.Alternativetradingsystems(ATS)servethesameLOS45.d;CFA?Curriculum,Volume5,P25 FinancialFinancialIntermediariesBrokers,exchanges,andalternativetradingDepositoryInsuranceSettlementandCustodialLOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Atradingsystemthatmatchesbuyersandsellersbasedonpriceandtimeprecedenceismostlikelya(n):Quote‐drivenAnswer:Inanorder‐drivenmarket,buyordersandsellordersarematchedupbytheexchangeaccordingtoordermatchingrules.Inaquote‐drivenmarket,customerstradewithdealersatbidandaskpricessetbythedealers.Inabrokeredmarket,brokersorganizetradesamongtheirclients.LOS45.j;CFA?Curriculum,Volume5,P45(☆☆☆ Secondary Pre‐tradetransparent:themarketpublishesreal‐timedataaboutquotesandorders.Post‐tradetransparent:themarketpublishestradepricesandsizessoonaftertradesoccur.Bid‐askspreadandtransactioncostsarelargerinopaque郵箱：cfa@LOS45.d;CFA?Curriculum,Volume5,P25 FinancialPeople郵箱：cfa@LOS45.d;CFA?Curriculum,Volume5,P25 FinancialPeoplehaveshortpositionswhentheyhavesoldassetsthattheydonotown,orwhentheywriteandsellcontracts.Shortpositionsbenefitfromadecreaseinthepricesoftheassetsorcontractssold.Examples:sellshort,purchaseputs,sellorwriteLOS45.d;CFA?Curriculum,Volume5,P25 FinancialApositioninanassetisthequantityoftheinstrumentthatanentityorapeopleownsorowes.Peoplehavelongpositionwhentheyownassetsorcontracts.Longpositionsbenefitfromanappreciationinthepricesoftheassetsorcontractsowned.sellorwriteputs.LOS45.d;CFA?Curriculum,Volume5,P25 FinancialArbitrageurstradewhentheycanidentifyopportunitiestobuyandsellidenticalorsimilarinstrumentsatdifferentpricesindifferentmarkets.Clearinghousesguaranteecontractperformancebyactingasbuyerorsellertotheircustomers.Custodiansalsoimprovemarketintegritybyholdingclientsecuritiesandpreventingtheirlossduetofraudorothereventsthatinfluencethebrokerorinvestmentmanager.LOS45.d;CFA?Curriculum,Volume5,P25 FinancialDealerstradebybuyingfororsellingfromtheirowninventory,andthusprovideliquidityinthemarketSecuritizersbuyassets,placetheminapool,andthensellsecuritiesthatrepresentownershipofthepool.Depositoryinstitutionsincludecommercialbanks,savingsandloanbanks,creditunions,andsimilarinstitutionsthatraisefundsfromdepositorsandotherinvestorsandlendittoInsurancecompanieshelppeopleandcompaniesoffset郵箱：cfa@LOS45.e;CFA?Curriculum,Volume5,P33(☆郵箱：cfa@LOS45.e;CFA?Curriculum,Volume5,P33(☆ Buyer’sequityistheportionofthesecuritypricethatbelongstothebuyer.Initialmarginrequirement:theminimumfractionofpurchasepricethatmustbebuyer’sMaintenancemarginrequirement:theminimumofequityinbuyer’sMargincall:ifthevalueoftheequityfallsbelowthemaintenancemarginrequirement,thebuyerwillreceiveaLOS45.e;CFA?Curriculum,Volume5,P33(☆ LeveragedPositions:investorsbuysecuritiesbyborrowingsomeofthepurchaseprice.Theyaresaidtobuyonmargin.TheborrowedloaniscalledthemarginTheinterestratethatthebuyerspayfortheirmarginloaniscalledthecallmoneyrate.LOS45.e;CFA?Curriculum,Volume5,P33(☆ RulesofSellingPayments‐in‐lieu:shortsellerspaythesecuritylendersalldividendsorinterestthattheyotherwisewouldhavereceivedhadtheynotlenttheirsecurities.Shortsellersmustdeposittheproceedsoftheshortsalewiththesecuritylendersascollateral.Securitylendersinvestthecollateralinshort‐termandmayreturnaportionofinterestearnedtotheshortsellersatratescalledshortrebaterates.IfthesecurityishardtoborrowortheshortsellerisLOS45.d;CFA?Curriculum,Volume5,P25 FinancialProceduresofSellingInvestorborrowsstockandsellsLater,repurchasesthestockandreturnsittothelender(coverstheshortposition).Shortseller'sprofit(loss)istheoriginalsellingpriceminustherepurchaseprice(interest,commissions). Unlikealongposition,thepotentialgainsonashortpositionarelimitedtonomorethan100percentwhereasthepotentiallossesareunlimited..郵箱：cfa@LOS45.f;CFA?Curriculum,Volume5,P36郵箱：cfa@LOS45.f;CFA?Curriculum,Volume5,P36(☆☆ CalculatingReturnsandLeverageRatioonMarginLeverage=1/minimummargin=1/0.50=Ignoringtransactionscostsandcommissions,areturnof+10%onthestockwouldresultinareturnof+20%onequityLOS45.f;CFA?Curriculum,Volume5,P36(☆☆ CalculatingReturnsandLeverageRatioonMarginAninvestorbuys1,000sharesofastockonmarginatapriceof$60pershareInitialmarginrequirementis50%andmarginloanrateisStockpaysannualdividendof$0.40perCommissionis$0.01pershareonpurchase,Oneyearlater,investorsellsstockat$66perLOS45.f;CFA?Curriculum,Volume5,P36(☆☆ Computationofthepricetriggeringamargincall(MarginCallPrice) PP1IM 01Phere:0=margincall=initialIM=initialmarginMM=maintenancemarginLOS45.f;CFA?Curriculum,Volume5,P36(☆☆ Financialleverageratioistheratioofthevalueofthepositiontothevalueoftheequityinvestmentinit.Theleverageratioindicateshowmuchmoreriskyaleveragedpositionisrelativetoanunleveragedposition.郵箱：cfa@LOS45.g;CFA?Curriculum,Volume5,P38(郵箱：cfa@LOS45.g;CFA?Curriculum,Volume5,P38(☆☆ InstructionsAttachedtoExecutioninstructionsindicatehowtofilltheValidityinstructionsindicatewhentheordermaybeClearinginstructionsindicatehowtosettletheLOS45.g;CFA?Curriculum,Volume5,P38(☆☆ PricesQuotedbyDealers(MarketBidpriceisthepriceatwhichadealeriswillingtobuyaAsk/offerpriceisthepriceatwhichadealeriswillingtosellasecurity.Bid‐askspreadisthedifferencebetweenthebidpriceandaskprice.Bid‐askspreadsareanimplicitcostofThebestbidisthehighestbidintheLOS45.f;CFA?Curriculum,Volume5,P36(☆☆ CalculatingReturnsandLeverageRatioonMarginDividends=1,000x$0.40=Interestonloan=$30,000x2%=Saleproceeds=$66x1,000=Commissiononsale=$0.01x1,000=Remainingequity$66,000$400一$30,000$600一 =LOS45.f;CFA?Curriculum,Volume5,P36(☆☆ CalculatingReturnsandLeverageRatioonMarginInvestorequity=0.50x$60x1,000=Commissiononpurchase=$0.01x1,000=Totalinvestment=郵箱：cfa@LOS45.h;CFA?Curriculum,Volume5,P38(☆☆ Execution郵箱：cfa@LOS45.h;CFA?Curriculum,Volume5,P38(☆☆ ExecutionComparisonofmarketorderswithlimitMarketLimitGenerallyexecuteMaynotexecuteThelimitbuypriceistooThelimitsellpriceistooMayexecuteatunfavorablepricesthinlytradedsecuritytradingactivityinthemarketdomarketordersLOS45.g;CFA?Curriculum,Volume5,P38(☆☆ ExecutionSomeexecutioninstructionsspecifyconditionsonAll‐or‐nothingorderscanonlytradeiftheentiresizescanbetraded.SomeexecutioninstructionsindicatethevisibilityofHiddenordersareexposedonlytothebrokersorexchangesthatreceivethem.ExecutioninstructionsoftenindicateaspecificdisplayLOS45.g;CFA?Curriculum,Volume5,P38(☆☆ ExecutionMakethemarket:alimitbuyorderplacedatthebestbid,oralimitsellorderplacedatthebestask.Makeanewmarket:alimitbuy/sellorderplacedbetweenthebestbidandthebestask.Behindthemarket:alimitbuyorderplacedbelowthebestbid,oralimitsellorderplacedabovethebestask.Farfromthemarket:alimitbuyorderplacedconsiderablybelowthebestbid,oralimitsellorderplacedconsiderablyLOS45.g;CFA?Curriculum,Volume5,P38(☆☆ ExecutionMarketordersinstructthebroker/exchangetobuyorsellatthebestcurrentprice.Limitordersalsoinstructthebrokertoobtainthebestpriceimmediatelyavailable,butinnocaseacceptapricehigherthanaspecifiedlimitpricewhenbuyingoracceptapricelowerthanaspecifiedlimitpricewhenselling.Alimitbuy/sellorderisaggressivelypricedwhenthelimitpriceishigh/lowrelativetothemarketprices.郵箱：cfa@LOS45.k;CFA?Curriculum,Volume5,P49(郵箱：cfa@LOS45.k;CFA?Curriculum,Volume5,P49(☆☆ AwellfunctioningfinancialsystemhasthefollowingCompletemarkets:instrumentsavailabletoservethepurposesofpeople/entities.Operationalefficient:lowtransactionInformationallyefficient:securitypricesreflecttheirfundamentalvalues(intrinsicvalues).Allocationallyefficient:resourcesgowheretheyaremostLOS45.g;CFA?Curriculum,Volume5,P38(☆☆ Youhaveplacedasellmarket‐on‐openorder–amarketorderthatwouldautomaticallybesubmittedatthemarket’sopentomorrowandwouldfillatthemarketprice.Yourinstruction,tosellthesharesatthemarketopen,isa(n):ClearingAnswer:Aninstructionregardingwhentofillanorderisconsideredavalidityinstruction.LOS45.g;CFA?Curriculum,Volume5,P38(☆☆ Stopordersareordersthatmaynotbefilleduntilthestoppriceconditionhasbeensatisfied.Forastopsellorder,theexecutionissuspendeduntilaoccursatorbelowthespecifiedstopForastopbuyorder,theexecutionissuspendeduntilatradeoccursatorabovethespecifiedstopprice.SituationswherestopordersareTradershopetostoplossesonpositionsthattheyhaveTradersbelievethatasecurityisundervaluedbutisLOS45.g;CFA?Curriculum,Volume5,P38(☆☆ Dayordersareordersthatexpireifunfilledbytheendofthetradingday.Good‐till‐cancelledordersarevaliduntiltheordersareiftheycannotbefilledinpartorinwhole.Good‐on‐closeorderscanonlybefilledatthecloseof郵箱：cfa@MarketOrganizationandSecurityMarketIndices郵箱：cfa@MarketOrganizationandSecurityMarketIndices03MarketEfficiency Practice Inanunderwrittenoffering,theriskthattheentireissuemaynotbesoldtothepublicatthestipulatedofferingpriceisbornebythe:Investment:Theinvestmentbankbearstheriskthattheissuemaybeundersubscribedattheofferingprice.Iftheentreissueisnotsold,theinvestmentbankunderwritingtheissuewillbuytheunsoldsecuritiesattheofferingprice. Practice Currently,themarketinastockis“54.62bid,offeredat54.71”.Anewselllimitorderisplacedat54.62.thislimitorderissaidto:MakethemarketsaranewThisorderissaidtotakethemarket.Thenewsellorderis54.62,whichisatthecurrentbestbid.Therefore,thenewsellorderwillimmediatelytradewiththecurrentbestbidandistakingthemarket.LOS45.l;CFA?Curriculum,Volume5,P51(☆ Market TheObjectivesofmarketregulationRequireminimumstandardsofPreventtradingoninsideRequirecommonfinancialreportingRequireminimumlevelsof郵箱：cfa@LOS46.b;CFA?Curriculum,Volume5,P67 TheValueandReturnofan郵箱：cfa@LOS46.b;CFA?Curriculum,Volume5,P67 TheValueandReturnofanTRIVPRI1=ThetotalreturnoftheindexVPRI0=ThevalueofthepricereturnindexattheendoftheIncI=Thevalueofthepricereturnindexatthebeginningofthe TRi=thetotalreturnofconstituentsecuritywi=theweightofsecurityNThriurroctiisecurity:TRPi1Pi0Inci i VPRI1VPRI0Inc VPRILOS46.b;CFA?Curriculum,Volume5,P67 TheValueandReturnofanCalculationofSingle‐PeriodPricePRIVPRI1=ThepricereturnoftheindexVPRI0=Thevalueofthepricereturnindexattheendofthe PRi=thepricereturnofconstituentsecuritywN=theweightofsecurity Pi1Pi i VPRI1VPRI VPRILOS46.b;CFA?Curriculum,Volume5,P67 TheValueandReturnofanThevalueofapricereturnindexiscalculatedNniVPRIi DVPRIni=Thevalueofthepricereturn=Thenumberofunitsofconstituentsecurityiheldinthe Pi=ThenumberofconstituentsecuritiesintheD=TheunitpriceofconstituentsecurityThTeivilurndvichosensothatthepriceindexhasaconvenientinitialvalue,suchas1000.LOS46.a;CFA?Curriculum,Volume5,P67 DefinitionofSecurityMarketAsecuritymarketindexrepresentsagivensecuritymarket,marketsegment,orassetclass.Theindividualsecuritiesincludedinasecurityindexareknownasconstituentsecurities.Apricereturnindex(apriceindex)reflectsonlythepricesoftheconstituentsecuritieswithintheindex.Atotalreturnindexreflectsnotonlythepricesoftheconstituentsecuritiesbutalsothereinvestmentofallincomereceivedsinceinception.Atinception,thevaluesofapriceindexandatotal郵箱：cfa@LOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index郵箱：cfa@LOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index Thevalueoftheprice‐weightedindexisthearithmeticaverageofcurrentsecurityprices.HighlypricedsecuritieshaveagreaterinfluenceontheWhenastocksplitoccurs,thedivisorisadjustedbydividingthesumoftheconstituentpricesafterthesplitbythevalueoftheindexbeforethesplit,sothattheindexvalueismaintainedTheindexismatchedbybuyinganequalnumberofsharesofeachsecurityintheindex.Theprimaryadvantageisitssimplicity,themaindisadvantageLOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index IndexweightingmethodsPriceweightedEqualweightedMarket‐capitalizationFundamentallyweightedLOS46.c;CFA?Curriculum,Volume5,P71 ChoicesandIssuesinIndexConstructionandInconstructingandmanagingasecuritymarketindex,theprovidermustdecidethefollowing:WhichtargetmarketshouldtheindexWhichsecuritiesshouldbeselectedfromthattargetHowmuchweightshouldbeallocatedtoeachsecurityintheindex?WhenshouldtheindexbeWhenshouldthesecurityselectionandweightingLOS46.b;CFA?Curriculum,Volume5,P67 TheValueandReturnofanVPRI0VPRIT=ThevalueofthepricereturnindexatPRIT=Thevalueofthepricereturnindexattime= 2,….,VTRI0VTRIT=ThevalueofthetotalreturnindexatTRIT=Thevalueofthetotalreturnindexattime=Thetotalreturnontheindexoverperiodt,t=1,2,….,hepricereturnontheindexoverperiodt,t=VTRITVTRI0(1TRI1)(1TRI2)...(1TRITVPRITVPRI0(1PRI1)(1PRI2)...(1PRIT郵箱：cfa@LOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index Indexweightingmethods–Market‐CapitalizationInmarket‐capitalizationweighting(valueweighting),theweightoneachsecurityisdeterminedbydividingitsmarketcapitalizationbythetotalmarketcapitalizationofallthesecuritiesintheindex.Firmswithlargermarketcapitalizationshaveagreaterontheindex’sTheindex郵箱：cfa@LOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index Indexweightingmethods–Market‐CapitalizationInmarket‐capitalizationweighting(valueweighting),theweightoneachsecurityisdeterminedbydividingitsmarketcapitalizationbythetotalmarketcapitalizationofallthesecuritiesintheindex.Firmswithlargermarketcapitalizationshaveagreaterontheindex’sTheindexismatchedbysettingtheweightofeachsecurityequaltoitspercentageofthetotalmarketvalueofindexstocks.Momentumtilt:OverpricedsecuritiesareLOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index returnonanequal index sumofsecurity numberof inArithmeticmean=(‐10%+50%+10%)/3=16.67%Initialindexvalue=100Currentindexvalue=InitialSecurityXYZLOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index Indexweightingmethods–EqualWeighting(UnEqualweightingassignsanequalweighttoeachconstituentIndexreturnisthearithmetic/geometricmeanofHPRsonindexTheindexismatchedbyinvestingequaldollaramountineachindexstockTheweightsarearbitrarilyassignedbytheindexTheprimaryadvantageisitssimplicity.Themaininclude:1)large‐capstocksareunder‐weighted,small‐capstocksareover‐weighted;2)maintainingequalweightsrequiresfrequentadjustments(rebalancing)totheindexaspriceschange.LOS46.d/e;CFA?Curriculum,Volume5,P72(☆☆ Index valueofaprice- index sumofsecurity numberofsecuritiesinindexadjustedforBeginningvalueoftheindex=90/3=30Endingvalueoftheindex=93/3=31Returnoftheindex=(31‐30)/30=3.33%Nov.Dec.NrofNrofABC郵箱：cfa@LOS46.f;CFA?Curriculum,Volume5,P78 RebalancingandRebalancingreferstoadjustingtheweightsoftheconstituentsecuritiesintheindex.RebalancingisnecessarybecausetheweightschangemarketpricesRebalancing郵箱：cfa@LOS46.f;CFA?Curriculum,Volume5,P78 RebalancingandRebalancingreferstoadjustingtheweightsoftheconstituentsecuritiesintheindex.Rebalancingisnecessarybecausethe