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So one of the calculations they have us do in the Statistics section is to calculate the "safer" investment. The one less likely to have returns below our worst-case of say, a 10% loss. In a cold, windy harbinger of things to come, i.e., Modern Portfoli Theory, the whole thing is based on inferences from normally-distributed price movements.
Right.
Well, that depends, but not on what you think. One of the liberals' most common proposals is to "make corporations pay," in lieu of making individuals pay. One of conservatives' most common comebacks is, "corporations don't pay taxes, individuals do," because companies will just pass the cost along to their customers. The conservatives are closer to being right, but not for the reasons they might think.
The fact is, companies may not be able to pass taxes along to customers. Customers may not be willing to pay them. We've gotten used to the idea that certain costs can just be passed along to clientele. A fertilizer company I covered briefly used to talk about transportation costs as a pass-through, meaning they just tacked on a transportation charge to the farmers. A specialty alloy company I covered used to talk about the cost of copper as a pass-through; they routinely mentioned the fact that they were able to pass 90% of the cost on to customers.
The can (or could) do this because the demand for their product didn't depend much on price. The technical term for this was that the demand was, "inelastic." Conservatives, when they talk about individuals paying taxes, are often treating demand as though it were inelastic. Meaning that companies will just pass the cost along. This may be true for a few products, but not many, and people are very good at finding substitutes. (Liberals like Chuck Schumer are just clueless; they think corporate taxes are cost-free. Others are a little smarter, and they assume the corporate demand for labor is inelastic. They're both very wrong.)
In fact, both individuals and corporations pay taxes. If demand is normal, companies will be able to pass along some, but not all, of the tax. People pay to the extent they're willing to, and companies to the extent they're willing to. Without the tax, consumers could buy more of the product, and companies could sell more of it.
I've fallen victim to the sort of conservative reasoning above myself, when it comes to Social Security and Medicare/Medicaid taxes. I had always more or less modeled my thought on my own experience paying the emploeyer's portion - as tghe "self-employment tax." I figured that if a company didn't have to pay its portion of the payroll tax, then I'd see all or most of that in my salary. And I, being in a high-demand industry like programming, probably would have. From my own experience as an independent contractor, my demand for my own labor was fairly inelastic - I wanted as much work as I could get.
In fact, for most workers, the amount of that payroll tax they would see would probably fluctuate, depending on the market conditions for their labor.
No, not stonewall. This isn't about Cuomo & Spitzer. I neglected writing about the beginning of the course for a reason. It belongs at the end.
You're all ready to start studying. You've got your nice shiny new books lined up on the shelf. You've looked through the smartly-organized course of studies. You're dragging out notes from b-school and trying to remember which order derivative bond curvature is. And the first thing you're confronted with is the law.
OK, not really the law, usually. But same thing: ethics. It's interesting in a Talmudic sort of way. Still, it lacks context. I know why they place it up front, to show how important it is. And of course, ethics are important. The whole point of having a CFA in the first place is to denote trustworthiness. But frankly, it makes much more sense at the end. After having reviewed the material, I'll have more context for these rules, and it'll be easier to remember them. Each rule, each type of rule, will have a place in the structure that I can attach it to.
It's also the only part of the course that's actually new material. (Except for the Economics, if you went to DU's graduate program.) It'll be easier to remember at the end than at the beginning.
Which is why I'm saving it for last.
OK, maybe that's a bit extreme. But the idea of having to memorize the formulas for covariance, correlation, and the various t-scores, p-scores, chi-square scores is a bit much. I know it's typical for professional certification exams. But after having spent my undergrad physics & math career, and most of my graduate career, with open-book or cheat-sheet exams, it seems a bit silly.
The fact is, the calcuator will do most of this for us, anyway. What it won't do is tell us which test is appropriate for which type of data. And that's really what the exam ought to be testing, anyway.
...or The Key To The Universe.
OK, not really, but the first few readings focus on this simple equation: compound interest, and how to make it flow in both directions.
Basically, it lets you take money flows for any period into the future and compare them. One of the obvious uses is to compare projects using something called Net Present Value. The initial investment (and any subsequent investments) are negative cash flows, while the returns are positive cash flows. Discount them back to today, and see what the total are. Then, pick the project that has the highest value.
The CFA also teaches something called the Internal Rate of Return, or the effective interest rate that a project's investment would appreciate at over the life of the project. It's a more complex calculation, and interestingly, because it's much more sensitive to assumptions. It's completely unclear what value this calculation is, since we're told to ignore it when it disagrees with Net Present Value.