CFA III

operating ROA = Operating Income/Average total assets

Return on total capital = EBIT/ short & long ter debt and equity

ROE = net income/average total equity

return on common equity =

• net income - preferred divs
• Average commone equity

• 1. Specified in advance
• 2. Appropriate
• 3. Measurable
• 4. Unambiguous
• 5. Reflective of (the manager’s) current
• investment opinions
• 6. Accountable
• 7. Investable

• 1. Absolute
• 2. Manager universes
• 3. Broad market indices
• 4. Style indices
• 5. Factor-model-based
• 6. Returns-based
• 7. Custom security-based

• objective (e.g., aims to exceed a minimum
• return target)
• -Manager universes – usually associated
• with the “median manager” – the fund that
• falls at the median when funds are ranked
• from highest to lowest by performance
• -Broad market indexes – well known broad
• market indices that are used as benchmarks

Optimization uses a factor model to match the factor exposures of the index. It accounts for the covariances between the risk factors but the risk sensitivities may change through time. It may also provide misleading results and lead to frequent rebalancing. An optimization approach, however, leads to lower tracking risk than stratified sampling.

The first is that although a firm’s earnings are depressed now, the earnings will rise in the future as they revert to the mean. The second justification for value investors is that growth investors expose themselves to the risk that earnings and price multiples will contract for high-priced growth stocks.

Buy-side equity research is used to formulate investment recommendations for an investment management firm. The analyst usually must present their investment recommendations to and have them approved by a committee. Buy-side research is not usually available to those outside the firm because this is how the firm hopes to establish their competitive advantage.

Sell-side research is often used by an investment bank to promote stocks the bank is selling. It is thus available to the public