Ethical and Professional Standards, Quantitative Methods, and Economics KAPLAN\ SCHOOL OF PROFESSIONAL Ta LAD MN keonun telsonBook 1 — ErHicat AND PROFESSIONAL STANDARDS, QuanTITATIVE METHODS, AND Economics Readings and Learning Outcome Statement on Seady Sesion 1 ~ Ethical and Profesional Sanda. 2 ‘Study Senion 2~ Ethical and Profesional Seandatd: Appleton SAE Test — Ethical and Profesional Sanda rele 128 Sead Sesion 3 ~ Quantitative Methods for Valuation gv 138 ‘SA Tet~ Quantative Methods for Walston nnn 258 264 Study Sesion 4~ Economies for Valtaton 652 ‘Sel-Tnt- Economia for Valuation S°.. Fores geen cence re = Appendices. TeaPp? SCHWESERNOTES™ aucnirn BOOK 1: ETHICAL AND PROFESSIONAL STANDARDS QUANTITATIVE METHODS, AND ECONOMICS (2013 Kaplan, nc A eed Publik n 2013 Bxpolan, Phe me igh sof Ane Ise seep 10 vaz7-9104 Pong oy Seb wie permiaon of Kapa Scwocrs Ds af Kp es and sation a sage oes: prs pl nero a pe oped a ER a SER FT ana ao GOST Eten Stes eh ae er fear ot eee mh al ie eisai geet re sce cn in Sine ce Soman tS [eseal roam wrens aoreferne piri eer ee era enc fs rear oa ore ete enc ce eee oe eee Monee aay ome rane or ny nan enee sue sae am Soe Tictsiel Santon St map Lnesetohcel peed Gitioee (02015 Kaplan neWeLcomE To THE 2014 Leven II ScuweseRNotes™ “Thank you for trating Kaplan Schweter to lp you reach your goal, We areal vary pled be eblc ro belp you prepare forthe Levl l CEA Bens Ln this introduction, T want o expan the resures included withthe SchwererNote, suggest how you can bet we Scheer materiale to prpare for the exam, and diet you toward thet ‘locational saoures you wil nd help a you sty for the ex Ke) ‘8 Seleatonen, Logs eng thet sree ul perdu Besides the SchweseNotes themselves, thee ate many educational esoutes aval ‘when you purchased your SchneserNotes S SdoesrNte!™ Th conf re ie tht inca cmp cng of ame anda Ling Outcome Sates (LOS) wih campo, Cane (enlace quan rey pl wren Cpgngt ens r e ‘opi eviews el you maser he material and check jaregrs. Ate end of than paw induc Sea Sd gua cea whe ca I nim aly re rym pei ow wl ya oh topichar prpaed you for these cam. eo Petes Queion rape sie is i btapaRCR RS el tien We fer CD downline vero ofthe Schwsro™ Ban which ‘comin hua of Levees quem nad epenien,Gocoee {Sealab fo ech LOS or Sty Sein, Bui our ows gene yen thnopc and the pe of uct you chon Schr QBunk wa conta icy id hing te ph of rsieney oe ot el Ian et owee be cided epee for ating amy oss in esr eas er 3s ma Sensi il ha prac xm: exam 1a Volume 2 tcehenein he fal 20-qution came Thea te impor ece fr pning th Speed and ah ou wl cep nam Fas bk coma anes wt ll ‘Slanaton frsl-gading nd elton, By eng your wer ar Sces co, carver Rea talacted sc loncpStin pubs cocpud vt Thr Scere Level cede ‘Scher Libary ‘Weave created vfeence videos, some of which ar aviale wo all SchweserNover purchasers Sehweser Library volumes eange from 20 ro 60 minus in length and cover $c topics a:"Inrodacion lem Set“ Hypothesis Teng” "Foreign Exchange Bhs,” *Raio Analysis” and "Forward Goncacts The fl chweser Library is Incded with out 1-weel live or nll dass and with ou ve insructon (line ered). (02015 Klan. a Pps‘Wacome she 2014 Led ScweerNte™ Ped ‘Online Schwese Sady Planer ‘Use your Online Accesso ell us when you wil ar and whac dys a he week you can say The galineSchweser Study Planner wil eates study pla ust for you, bean ‘ek andy sexe nen daily ead aly tat lyon ot ack wad lp yo, monitor your progress through te euriculum. Addiional Resources Purchases ofthe Enea SE Stody of Premium Instruction Packages alo rexive secs to our lntractored Office Hour, Office Hours low you eo pet your questions Shout the euricalam sneered in rea ie and eo see otc Son (dnd inersctor Snover) a wal, fice Hours ia vent based live interactive onipe bat with or fea ‘of Level IL exper. Archives of previous Ofice Hout selon besotted by epic oF ‘Stead are posted shortly fer exch ese S “The Ler IL CFA cam isa eal halle (6Q,6pYovews nd 477 Leting cn Semen anyone doen inn fie ports propre. Thre ir shore You maser ester, Know th erminlogy {En ehnigucs understand the cone and be le never 120 quongucly nd mos conecy Fite 020 hoga fue for 29 wel ood ema of ‘Resulted on erage, Mn acer al ned mee oletne {bpeningon hind bagkounds an peso Tel ou marsh mide wel prepared rsh CPA Beam, ofr seven other chuaionspfsounesincading et Live Wey Clefain Programs Bem nd wot Pt Sma and rai ‘Online Classes Ir Leek Online Clases re nase at New York time (6:30-9:30 pa) or London “me (6.00-9:00 pra} beginning in January. The approximate schedule or he 16-Weske ‘Online Cases hour sessions eas fellows: cae hae 1) Es Intl Quanitve Methods 8:3. 9) Equity SS 12 2) Eran Vain 584 10) Arse ovement S815 53) Financ Repoing Anal S$5_— 11) Fae some S814 4 Fennel Repcing & Arai 8§6 12) Fed Inca SS 15. 5) Fanci Reparing & Analyt S13) Desa 16 6 Corpor Fane 58 10 Detnaves 517 Popo Hace 8 Equity S59, 10.15) Rolie Manager S18 |) Egat 95 112 16) bel Sandee 81,2 “Archived clases are avaiable for viewing a any’cime throughout the ston. Candidates “nll in the 16- Week Online Cane alo hve fll ccs to soplemenal on-demand ‘ideo instraction inthe Seb Library and link for sending qutons fo the Inervtor ae any tine. (©2013 Kapa IeWee tthe 2014 Lee Schwere Late Seon Resion “Wherer you sels or n-laet, onlne, or video insriction learn the CFA arcu, a tesco review and exam practice can make all the difference. Our tos complete Atoacar evi core er ence program in Winds, Ona (WindsorWel), where we cover the entire curcaum over seven days (May 3-8). We also offer Say Exam Worksop in many cies (ad online) that combine eariclam ‘eviow with handran pracoce wing hundreds of questions and problem sling techniques: Our Dallas/Fort Worth (DFW) review progam extends cuticular review su hands-on practice o Bie day (May 12-16) Please ise wa Schaerer oe Seporismp ten icpaow rst ries mi og, Mock Exam and Mouiedia Tuoi > (On May 24, 2014, the Schweser Mock Exam wil be ofered live in over 60 » “earn mn ait ni cram 1. Code of Ethie aod Standard of rosin The candidate shoal be abl eo: ‘Candide isthe beneficial owner. o> G, Referral Fes, Members and Candidates mut dle to thei empl) clients and prospec clients as appropriate, any compensi omidcratin, or bene ecved by, pdt, thers ar eendaion cients estes ‘VILL RESPONSIBILITIES AS A CFA INSTITUTE MEMBEROR CFA ‘CANDIDATE me |A. Conduct as Member and Candidate in @ CPA Program. Members and (Candidates mien ogee at compeonies the repuston ay rine ofA ae nce Lignaion chee. wii, eset ofthe CFA exe Reference CEA Lostiutthe CFA Designation, and the CFA Program. ‘When elwig to CEA tute, CFA Intute membership the CEA licyin the CFA Program, Members and Candids mast exaggerate che meaning or implications of membership in LOS 2gxTpemonstrae a thorough knowledge of the Code of Ethics and Si Professional Conduct by applying the Code and Standards to specie situations, 1LOS 2.b: Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct. CCEA® Pregn Carel, Volume I page 19 (On Klan te ageSly Sion (Croce to CFA Inne Acie Reding 1 82 — Senate of Pace Handbook rfc Mate While we ce the term eben” in the flowing, note ha all, afte Standards apply candidates aswel Guidence—Cade and Standard Leal Le ‘Members mus now the laws and teultions ring ote professional stvities in sll counties in which they codaee ine, Members must comply with splice Inwrand regulations relating their profesional acy. Do ner wlte Cade or Standards even if dhe sxe is otecise leg Always are othe most sic ules sateen fC art rN nati ci it a Se a, mma iec ees secivic hail or unica even i ive Yenrng an employer (an exc Ce) Wes ecb ay ciate neg tne! Ee on apy Kis rupervnor or compliance deparmeng.gsion wih contnaedasoiacon may Be constted 3s knowing participation, Boe Recommended Pre fr pine +" abe sel hae op ap ih hangs inagpliblews e and wegulatons, + Caplin bred are ghar tay sddees culgt law, CEAI Standards and sepatons . ae Tsinain current reference materi for employee fo aces in Sioecaceante eels rasa rsa Del ak errno vara nhl dsmet vin en hy seine seme fm eter ratena eee termeteetceae QR”. Hikasetietaar ls acicl Garcons oipecoeel sina etary asada lia = ¢ Parag ee pra nell in cl sian Recorded Proce for Compliance—Firmt Members sould encourage thei fem + Develop andlor adopt a code of ethics ‘Make avsble employes information tha highlights appliable laws and sezuaions + Bhablh wien procedure for reporting speed vito of Lvs, regulations of compat polices ‘Members who supervise the creation and maintenance of invent sevice and pradocs shookd be ere of tnd comply with the gletions ai ines ogg sec Pag 18 (02015 Kaplan neSey Sion 1 Co Ree to CFA ice ndboc, bevel prods both in the sunt Fined the counts whet hey wil Application of Sundard 1A) Knowledge ofthe Lae pets Mie en vrs or aaa fm andi response fora andering of tenes Acompey oficial gr ln norman neg tar shone feet Ble tg evsar da eet cag: Aan saver ofthc ahs rl gel ee ne a at lite ry ‘Serpe po lls hs bn n ny vegan Cen s (Athol ts cine ht rebut ct sol ‘oun tear on ach advice dor notable a member oad fom he ‘sey ih ew ein leu gah ton UStreperies porte fncrrmdes bl rit, ad ogee should ben doth x sample & Kami Washing fr veri spt x6 Ponce orb sharing the 10- year return of composite of cl tweet Washington discovers dat the “pono prance ct ar te om ding de 1 (pata and lt this rnision hs XQ flared perrmanee Spee, Washingt Ir asked to te promorional meat includes the eroncou performance mmber acne be fom xl i secre tonite atu te py tole a ge ree eae aera creeanltgas og on calatog ack saphsticcons seseictpnsaiciesokowee ie riershe ena ae ine oases Sheri en cigsiemey pensar! Smal me eh emg ueairts cou tiiren mama uremcets Sisters ieedschechncbieeedinactcentehe Eeample 3: An employe ofan investment bank is woskng onan underiing and nds ou the liver ha sered ther nancial vatements to hie operating lowes none division, “Ther mined daa are includ ina pelminary prompt tha has already been rele, (02015 Klan. a age 9Saal Sion (Croce to CFA Inne Acie Reding 1 82 — Senate of Pace Handbook Coca: “The cmployse should repor the problem this supervisors. Ihe Sem does get he smistatement fed he employe should disocate fom the undereing and, Farther, teckel mtn out whet he ssinld drone eSkiowal rpeting roth Example 4: [Laur Jamenon, 2 US. cae, works Foran investment advisor based inthe U.S. and woke ina sour where interment manages reprobed from prising POs for thee own account Comment oe? Jameson mast comply with theses mrs law (here er rm {sbase the CPA Insciate Code and Sanda 20 ofthe county whcresbe ig i cs me hg yb ey 2 ample ~ or pct zn map kr epee er om ep oauy Uhig eg prin often esa be ty Plo serpent oboe norm ory mal opi nd nti Hes IF a Brg peel ao vlna ofthe nae of thee payments and any resarch hati bing Guidance 1 not le the inveumene proces be infuensed by any eternal sources, Mode gifts se perl, Alloetion of shares in rerubacbed IPOs to petonl accounts NOT permiced. Disingush beeen gifts from cents and its fom ene scking influence to the detriment ofthe dient Gifts must be dss wo the memb employer in any case, ciher pier secapanc f posible, o subesuendly Guidance—Ineeiment Banking Relationships Do no be presred by sls rms to ise favorable research on current of rospecive investment banking cients Tes appropriate to have analy work with Pag 20 (02015 Kaplan neSey Sion 1 Co Ree to CFA eset bankint in “odsham” any hn the canes are adept ae ‘ficial managed and disclosed. Be sure shee ae ffecive “real between tesere/inestment management and inesment banking ves. Gaidence—Pailic Compenie “Aalyts shoud a be pressed ro ie fvorable research bythe companies hey Tallow, Do not confine ferearch co discussions with company management, but ater swe ase of source, ineluding supple, caxomers, nd compete meee Sl ie sf Buy side ints may uy to pesue sl sid analysts, Portfolio manages postions in «pail scr, and a rating damngrade may hve a8 of (palate Ata a br gee ons Za fowter neler honey of ellie reser ie Ne ee ora et 2° ee me ghana eae re Cte id Bac RemenXQir this type of renarch i ght with ponent conic Aah? rion for preparing sch esearch sould be limited and he preference is fora thot regu to conclusions or the reports recommendations Gace Travel Be practice for analas pay fr sei awn commercial rave when attending information evens ours sponsored by the fn being aad, Recommended Procedure for Compliance 1 Rhos ticket aFupiors—roakcrer acre wali, + Greate rested Ist and dsibate only facta nfomacion about companies on the Tt 1+ Rese special com arangements—pay for one own commer tznsportation| and hud limi we of corporate ara to css in which commercal aspoctaion| noe salable (02015 Klan. a agaiSly Sion (Croce to CFA Inne Acie Reding 1 82 — Senate of Pace Handbook + Limit gi—toten item ny: Ost, butieeeaedeatrsamene lay slong ai purpose i nor rinflence a member profesional independence oF ‘ject. Firms should impose cer value limits on gifts. 4+ Rene employe invesemene inequity IPOs and private placements, Reqs pe approval of IPO purchases, ‘vie pred have Cie erro ivr pec, 2 imestiuld have formal writen plies independence and obesity of research, ‘+ ims should appoint a compliance oft and provide clear procedures for cnploe pong of nel bran lon of apie lions Art ha iy >” a Sheen Tp ising le with Honea sat by Pretisan Meals Pa ae ee eer ee company aranges for chartered group fight fansite ste and for acommodations In Spartan Motel, th only cain with abynodtions nea the mis, for thee nigh ‘Taylor slows rein Metals pik’ ha aba do the other analy, wth one Comment oS The poy ofthe GIy whe Adams wor compli cls wih Sanda 18) by edge ex af conocer bt pled th cher aay Se ney lng Scr (In pra wh aog copie poy Toren ande scommodsionr unde these crcumsancr, member ad andes ‘Boel julgen,ecping in nda uch sagem muna aplage BS ier nantes ndopendence ad obey a cis cxample he ip Eee eine Se a ee GT ee Sar Ss ee eat Sapien eee Be eet fem generar ter ian teen Eenagt2t ‘ale re ian equity analyse with Hilton Brokerage whe covers he mining indy. He has concladed tha the stock of Metal e Mining is orerpiced ats current evel bute i concerned chara acatve esearch report wl ut the goed eatonshp [erween Metal Mining pd he ivermene baling vision of his Bm. In fc, 2 senior manage of Hilton Brokerage has ust sent hin copy of «propos his Brn has ‘made to Merl & Mining ro underwrite deb offering. Fite acs to produce a report Fight avay and isconcered abot ating se thantavorble aig Coen Frid analysis of Mee Mining mas be objective and bated solely on consideration ‘of company fundamen. Any pesure fom other ivons of his tm i inappropriate. Page 22 (02015 Kaplan neSey Sion 1 Co Ree to CFA ice ndboc, "Thisconlice could have ben dinate if in aniipation ofthe fering, Hilton Brokerage had placed Male &¢ Mining ona tested ifr ale force, Example 3: "Tom Wayne ithe inverrment manager ofthe Frain City Employers Pension an, He recenly completed a soc vearch fr fums o mnanage the orcgn equity allocation ofthe plas dnesied por. He flowed the plas standard procedae ‘of secking presemaion fom nme of gulifed rms and recommended cha his board sec enguin Advor because of ir experience, welldefind nsestene sae and performance card, which was compel and ved in acon withthe ‘CEA Instat Global Ivessment Performance Standards. Following the plan ecg ‘of Penguin, eprter fiom the Fanklin City Reon elle wo aif hte a Cmnetion between te ution and dhe fcr ha Pain was one ofthe fe “nvesmen finding rip co As tha Wayne made exer i he yar Thestiy was ‘one of several conducted by the Pension Invextment Academy, which dl rangd te Ineay of mecingy with eonomie, government and corporate alain maior ets {insert Asan counties. The Penson Invesemen Academy efor che co ‘ofthese ips fom a umber of investment manages, ned Penguin Advisors che ‘esky san py th ard pra of te ti pu gn cap cep ‘nde sme an scans pee of Rei vi oe fiom anche c 3 Com: ¢ ai os Alehough Wayne an probably pur thc rice eed Fem tip “eel er areay of managing the pension plan hie ‘ecemmtendtion of Penguin AANGOM my be cle bythe pole conic incuved ‘shen fe paricpated in eal for party by Denguin Adiors and when he wa 0 the daly company ofthe geen of Penguin Advisors To avoid violating Standard 1), Wye forse ad commodo eld hve en paid Uelismopbencntp Fewinlarcoues off eieatiec thes Alter Sud tare Toifamatnal or ection en olan thei the sopra iecpse hal kann cde ea apc cd eo ‘ctiong eh not in Violation of Sandard (8), Wayne should hare Bee sensitive othe publ perception of the wip when reported in the newspape and the exten to which, {he subj cements of is decision might have ben fered by the Emir that the dally consc of sch ip would encourage. Tir advantage would probably nc be ‘hare by competing Sem. Emple te An analysc in the corporate ance department promises clench her provide fll zeech coverage ofthe ining compar the olleing Comment: Tiss not a violation, bu she cannot promis favorable eeach coverage, Reseach rant be objective and independent. Example 5 An erployed bon tl hin costume coverage ofa eck and moana bay sting, (02015 Klan. a ge