Question for Vivre

JoeyD, I heard this issue mentioned immediately after the exam in June but haven’t seen any follow up to it. Here is the gist of it (from another candidate on another forum): "In the Equity Section of the morning section, there were two questions in consecutive order that required two calculations. I believe the first question called for the calculation of the franchise P/E and the second question asked for the calculation of the intrinsic P/E. "Both questions were covered under (2007) LOS 47.f - Evaluate two common approaches of equity analysis (ratio analysis and discount cash flow models including the concept of franchise value) and demonstrate how to find attractively priced stocks by using either of these models and (2007) LOS 51.a – Describe the elements of a franchise P/E. “Neither LOS states the candidate was required to “calculate” the franchise P/E nor the intrinsic P/E, as instructed in the two examination questions.” The CFAI was notified about this discrepancy immediately after the test, but they never responded. Did you hear or see anything from the CFAI about this issue? It is obviously too late to retabulate and candidates have no input in the grading process, but it would satisfy my curiosity to know if CFAI gave all candidates points on these questions or penalized those that didn’t know how to calculate the answer. (For the record, I think I got one right and one wrong).

I’m not that far in the loop at CFAI! I would bet at pretty decent odds that CFAI just graded the question as is and disregarded the mismatch between the LOS and the question. The “demonstrate”/“calculate” thing is pretty close, although I basically agree with you that they are different and such a question does not follow from the LOS.

“demonstrate how to find attractively priced stocks by using either of these models” I could definitely see how this could go either way. Although they don’t explicitly state “calculate”, it would be difficult to demonstrate the above without a calculation. It’s best to not take chances with stuff like this.

“It’s best to not take chances with stuff like this.”

The applicable LOS for the 2006 exam specifically used the word “calculate”. The LOS for 2007 changed the wording to say “demonstrate”. When preparing for LII for 2007 and reviewing the LOSs in comparison to 2006, there appeared to be a shift away from the term “calculate” in more than one LOS. While I agree with TMurf about not taking chances, the CFAI changed the wording from crystal clear instructions to murky instructions regarding calculations. Hence the reason for the CFAI inquiry immediately after this year’s exam by another candidate.

So if the los says identify, this does not translate to calculate? I am raising this question with regards to LOS64j “…and IDENTIFY the appropriate pricing model for European options.” According to this los, all I need to know is that we use the black model to price European options on futures. Further, the CFAI hasn’t marked this formula (they are usually highlighted in blue and given a number) as it does with all the crutial ones. Page 208 volume 6. In 2007, the los kept on saying given the formula, calculate… so I didn’t bother getting to understand/cram some of these formulas eg the BSM. However this time this is not the case so it looks like we might have to cram all formulas (though this is not necessay if you understand) Please share your thoughts on the interpretation of the word identify, I don’t want to take chances. And is CFA becoming a literature course where we have to analyze the words used and not the content of the material?

I don’t know about exactly what “identify” means, but there is no chance you have to memorize BSM, B, or any other option pricing model or even enter numbers into it.