CFA Level 1 – EQUITY Study Guide

assets for immediate or future use, enable growth in saving for future, raise capital via equity issuance, trade on information, borrow money for current use, risk management - in a properly functioning financial system, transaction costs are low, participants are able to accurately estimate asset value and expected returns, and capital is allocated to its best use Determining Rates of Return CORRECT ANSWER - money is constantly moving between the present and the future - investors who buy bonds/stocks are essentially transferring capital to the future, while borrowers/equity issuers are moving funds from the future to use them today - the amount of money invested/consumed depends on the expected rate of return on the funds, with lower rates stimulating consumption and higher rates prompting increased capital flows from investors Capital Allocation Efficiency CORRECT ANSWER - companies/governments obtain funds in the primary capital markets - funds are allocated efficiently if they are being used for the most productive projects available - given that investment capital is limited, investors