AFA Accredited Financial Analyst Practice Exam

1. Introduction to Financial Analysis and the Role of a Financial Analyst • Definition and importance of financial analysis in the business world. • The role of a financial analyst: responsibilities, expectations, and skills. • Types of financial analysts: Buy-side, sell-side, corporate, credit, and risk analysts. • Key competencies required for financial analysts: analytical skills, financial modeling, knowledge of financial statements, and industry-specific knowledge. • Understanding the business environment and its impact on financial analysis. • Overview of financial analysis frameworks and tools. • The ethical responsibilities of a financial analyst, including adherence to the CFA Institute’s Code of Ethics and Standards of Professional Conduct. 2. Financial Statement Analysis • Overview of the three main financial statements: Income Statement, Balance Sheet, and Cash Flow Statement. • Key financial ratios and their interpretation: profitability, liquidity, leverage, and efficiency ratios. • Understanding the relationship between financial statements and their importance in business decision-making. • Techniques for horizontal and vertical analysis of financial statements. • Common-size financial statements and their use in financial analysis. • Profitability analysis: Gross Profit Margin, Operating Margin, Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE). • Liquidity analysis: Current Ratio, Quick Ratio, Cash Conversion Cycle. • Leverage analysis: Debt-to-Equity Ratio, Interest Coverage Ratio, Debt Ratio. • Efficiency analysis: Asset Turnover Ratio, Inventory Turnover, Receivables Turnover. • Identifying red flags in financial statements: off-balance-sheet financing, aggressive revenue recognition, and accounting anomalies. 3. Corporate Finance and Capital Structure • Overview of corporate finance: the importance of capital budgeting, financing, and dividend policies. • Capital structure decisions: debt vs. equity financing, and the implications for risk and return. • The Modigliani-Miller Theorem and its application in real-world capital structure decisions. • Cost of capital: definition, components (cost of debt, cost of equity), and methods for calculating the weighted average cost of capital (WACC). • Capital budgeting techniques: Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index. • The role of risk in capital budgeting decisions: risk-adjusted discount rate and sensitivity analysis. • Dividend policies: factors influencing dividend decisions, types of dividend policies, and the relationship between dividends and stock prices. • Impact of capital structure on company valuation, cost of capital, and shareholder value. 4. Investment Analysis and Valuation • Overview of investment analysis: assessing the value and risk of investment opportunities. • Fundamental analysis: assessing the intrinsic value of a company by examining financial statements, industry conditions, and economic factors. • Technical analysis: understanding stock price movements, chart patterns, and market trends. • The role of risk in investment analysis: systematic risk, unsystematic risk, and diversification. • The Capital Asset Pricing Model (CAPM) and its role in estimating expected returns. • Dividend Discount Model (DDM) for valuing stocks based on expected dividends. • Price-to-Earnings (P/E) Ratio, Price-to-Book (P/B) Ratio, and other valuation multiples. • Discounted Cash Flow (DCF) valuation: Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE). • Valuing bonds: pricing, yield to maturity (YTM), current yield, and bond duration. • Real options analysis in investment decisions. 5. Portfolio Management and Asset Allocation • Overview of portfolio management: goal setting, asset allocation, and risk management. • Modern Portfolio Theory (MPT): diversification, efficient frontier, and optimal portfolio. • The Capital Market Line (CML) and the Security Market Line (SML) in portfolio theory. • Risk-adjusted returns: Sharpe Ratio, Treynor Ratio, and Jensen’s Alpha. • Asset allocation strategies: strategic vs. tactical asset allocation, passive vs. active management. • Types of assets in a portfolio: equities, fixed-income securities, real estate, commodities, and alternative investments. • The role of alternative investments in portfolio diversification. • The impact of market conditions, interest rates, and macroeconomic factors on portfolio performance. • Risk management techniques: hedging, options, futures, and swaps. • Rebalancing a portfolio and tax-efficient investing. 6. Financial Markets and Instruments • Overview of financial markets: primary vs. secondary markets, market participants, and market types (e.g., stock exchanges, over-the-counter markets). • Types of financial instruments: equities (stocks), debt (bonds), derivatives (options, futures, swaps), and alternative investments (REITs, commodities). • Understanding the bond market: government bonds, corporate bonds, and municipal bonds. • Equity markets: common stock, preferred stock, IPOs, secondary market trading, and market liquidity. • Derivatives markets: options and futures contracts, and their uses in hedging and speculation. • The role of exchanges and clearinghouses in trading financial instruments. • Analyzing market liquidity, efficiency, and volatility. • The role of central banks and monetary policy in financial markets. • Understanding market indices and benchmarks (e.g., S&P 500, Dow Jones, MSCI). • The impact of macroeconomic events (interest rates, inflation, GDP growth) on financial markets. 7. Risk Management and Financial Derivatives • Introduction to risk management: types of financial risks (market risk, credit risk, liquidity risk, operational risk). • The risk management process: identification, assessment, and mitigation strategies. • Risk-adjusted performance measures: Value at Risk (VaR), Conditional VaR, and stress testing. • Hedging with derivatives: using futures, options, and swaps to manage risk. • Options pricing: Black-Scholes Model, option Greeks (Delta, Gamma, Vega, Theta), and strategies for options trading. • Futures contracts: how they work, hedging with futures, and margin requirements. • Swaps: interest rate swaps, currency swaps, and credit default swaps. • Credit risk management and credit derivatives. • The role of insurance and reinsurance in managing risk. • Regulatory frameworks for risk management (e.g., Basel Accords, Dodd-Frank Act). 8. Macroeconomics and Economic Analysis • Understanding macroeconomic indicators: GDP, inflation, unemployment, interest rates, and consumer confidence. • The relationship between economic growth and financial markets. • Monetary policy and its impact on financial markets: role of central banks and interest rate policies. • Fiscal policy and government spending: taxation, government debt, and budget deficits. • Business cycles: expansion, recession, recovery, and stagflation. • The role of international trade and exchange rates in economic performance. • Economic theories: Keynesian economics, classical economics, and supply-side economics. • The impact of global economic events on investment decisions. • Understanding economic forecasts and their application in financial analysis. 9. Ethical and Professional Standards for Financial Analysts • The importance of ethics in financial analysis and the role of financial analysts in maintaining trust and credibility. • The CFA Institute’s Code of Ethics and Standards of Professional Conduct. • Insider trading regulations and the implications of unethical behavior. • Conflicts of interest in financial analysis: maintaining objectivity and transparency. • Ethical decision-making frameworks in financial analysis. • Fiduciary responsibilities and the duty of care and loyalty to clients. • Best practices for maintaining client confidentiality and data protection. • Professional conduct standards in the context of portfolio management, investment analysis, and corporate finance. • Continuing education and the role of certifications (e.g., CFA, CFP, AFA) in upholding professional standards. 10. Financial Reporting and Analysis for Corporations • The role of financial reporting in corporate governance and decision-making. • Financial reporting standards: Generally Accepted Accounting Principles (GAAP) vs. International Financial Reporting Standards (IFRS). • The role of auditors in financial reporting and corporate accountability. • Analyzing corporate financial reports: evaluating income statements, balance sheets, and cash flow statements. • The importance of segment reporting, footnotes, and management discussion and analysis (MD&A). • Earnings quality and the potential for earnings manipulation (creative accounting). • Corporate governance: roles of the board of directors, shareholders, and management. • Evaluating the financial health of a company: profitability, solvency, liquidity, and efficiency. • Risk disclosures in corporate reporting: environmental, social, and governance (ESG) reporting. • Financial statement fraud detection and red flags. 11. Advanced Financial Analysis Techniques • Advanced financial modeling techniques: building financial models, scenario analysis, sensitivity analysis, and forecasting. • Advanced valuation techniques: precedent transactions, comparable company analysis (comps), and LBO (Leveraged Buyout) analysis. • Corporate restructuring: mergers and acquisitions, spin-offs, divestitures, and bankruptcy. • Financial forecasting and budgeting: projecting income statements, balance sheets, and cash flows. • Financial due diligence in mergers and acquisitions. • Leveraged finance and high-yield debt analysis. • Managing multi-asset portfolios and complex investment strategies. • Forecasting economic conditions and their impact on financial analysis. • Use of Monte Carlo simulations and other stochastic models in financial analysis.