Financial Rounds

Once Again, The Movie Critics And I Disagree

noreply@blogger.com (The Unknown Professor) — Fri, 18 Jul 2008 08:37:35 -0500

The Unknown Mother-In-Law has a cottage on a lake in northern Vermont (Unknown Wife's father built it years ago). I'm not much for the place, and had a lot of work to do. So, the rest of the Unknown Family went up there for about a week, and I get to be a bachelor.

In addition to cylcling when I want (no need to coordinate dinner with the family) and putting in a lot of time at work, I get to see all the guy movies that Unknown Wife doesn't care for.

Last night it was Hancock. The critics were of two minds about the film, but I loved it. First, it's Wil Smith at his best - both as a Bad Boy and his "sweet" side. Second, it's a pretty good "hero" story. And third, what he does to two prisoners was just hilarious (yeah, I know - it was crude. So sue me - I'm a guy). So, the general rule follows - what ever a critic says is almost useless to me as far as determining whether or not I'll like a movie.

Tony Snow - Passed Far Too Young.

noreply@blogger.com (The Unknown Professor) — Thu, 17 Jul 2008 20:41:39 -0500

Tony Snow passed away this past week, and his funeral was today. He was one of the good ones, and I'll miss him. From what I've seen of him and what I've read, he seemed like one of the good ones - a very happy warrior in his job, an extremely loving family man, and a devout Catholic.

Many people saw him as the White House Press Secretary or heard his talk show, but he also was an accomplished musician. His band (Beats Working) actually got to play with Skunk Baxter of the Doobie Brothers and Ian Anderson of Jethro Tull (now THAT's cool!).

Our thoughts and prayers go out to his wife and three children.

I Didn't Know Godzilla Managed A Private Equity Fund

noreply@blogger.com (The Unknown Professor) — Thu, 17 Jul 2008 08:58:14 -0500

You're gotta love an ad that uses old Godzilla footage to slam PE firms - if just for the sheer shlock factor (say that three times fast...).

I was curious about the McCain reference in the video (it seemed to come out of nowhere). Then I checked and found out that the ad was paid for by the Service Employees International Union. Like most other unions, they're big Obama supporters. In fact, they were just mentioned in Wednesday's Wall Street Journal (unfortunately, I can't find a link to the piece just yet).

It's a pretty interesting mishmash of messages with a populist slant. It starts off with the obligatory gas pump picture (the economy is hard, and it's the fault of the eeeeeevil buyout firms) , and then shifts to say that there's a group of people who make millions and slash jobs. And worse yet, /sarcasm on/ they get tax breaks for doing it! /sarcasm off/

So, I guess the message to take from this is that gas prices are high, the economy is tanking, and it's all the fault of buyout firms with tax breaks.

But at least it was educational - I didn't realize John McCain and people at PE firms could breathe fire. That alone would be enough to get them my vote (if just for the coolness factor). Hey - if the Presidential campaign doesn't work out and McCain gets tired of the Senate, he could get a job in commercials.

What Effect Does Professor Quality Have on Student Performance?

noreply@blogger.com (The Unknown Professor) — Wed, 16 Jul 2008 07:44:24 -0500

Whether or not (and how) professor quality affects student performance is an ongoing question in academia. Unfortunately, there are a lot of statistical problems involved in testing these effects. Here are a couple:

Students self-select into professors classes. So, better students might choose to take harder professor, while weaker ones might choose "softball" ones. Or alternately, grade-conscious students might select into classes of "easy graders"
Performance in a class is typically based on an exam that scored by the same professor teaching the class. This means that the professor can increase easily increase (or decrease) scores by "teaching to the test" or simply by inflating/deflating them directly
Student evaluations are subject to a number of biases, including the physical attractiveness of the instructor (oh well, I'm screwed...). In addition, they're endogenous with respect to expected grades.

Here's a very interesting paper that addresses these problems, written by Scott Carroll (of UC-Davis) and James West (at the USAF Academy). The paper, titled "Does Professor Quality Matter? Evidence from Random Assignment of Students to Professors" uses some of the unique features of the class assignment system at the U.S. Air Force Academy to disentangle some of the confounding effects that make testing the professor quality/student performance so challenging. At the USAF, students are randomly assigned to class sections, faculty in common courses teach from a single common syllabus, and exams are jointly graded by all faculty teaching the course. Here's the abstract (note: italics are mine):

It is difficult to measure teaching quality at the post-secondary level because students typically self-select" their coursework and their professors. Despite this, student evaluations of professors are widely used in faculty promotion and tenure decisions. We exploit the random assignment of college students to professors in a large body of required coursework to examine how professor quality affects student achievement. Introductory course professors significantly affect student achievement in contemporaneous and follow-on related courses, but the effects are quite heterogeneous across subjects. Students of professors who as a group perform well in the initial mathematics course perform significantly worse in follow-on related math, science, and engineering courses. We find that the academic rank, teaching experience, and terminal degree status of mathematics and science professors are negatively correlated with contemporaneous student achievement, but positively related to follow-on course achievement. Across all subjects, student evaluations of professors are positive predictors of contemporaneous course achievement, but are poor predictors of follow-on course achievement.

So, "higher quality" professors result in better long-term performance for their students. But at the same time, their students get lower grades in the foundations courses. This could be a result of lower quality instructors "teaching to the test", or of better instructors teaching in a way that's geared more towards follow-on classes at the expense of focusing on the intro materials (those ar tow ways of saying the same thing, BTW).

If you don't have access to NBER, you can read an ungated version of the paper here.

HT: Kids Prefer Cheese

Do PE Firms Manage Portfolio Firms, or Just Manipulate Balance Sheets?

noreply@blogger.com (The Unknown Professor) — Mon, 14 Jul 2008 14:15:19 -0500

PE firms often are described as nothing more than financial engineers - according to their detractors, they buy firm, load them up with debt, pay out recapitalization dividends, and leave lifeless, over levered shells.

Or do they?

A couple of reports by accounting firm Ernst & Young over the last two years give some indications otherwise. According to a summary of last year's report published in the Wall Street Journal's Deal Journal:

Ernst & Young found that the average enterprise value of the companies studied in both Europe and U.S. jumped more than 80% from the time they were acquired. The growth in enterprise value was driven in part by the fact that private-equity-owned companies achieved faster profit growth, two-thirds of which came from business expansion — while a third in Europe — and 23% came from cost reductions.
What does that mean for jobs? The study found that employment was at the same or higher level at the time of exit in 80% of U.S. buyouts and 60% of European buyouts. In the United Kingdom, France and Germany, where fears that the industry will slash jobs has spurred strong opposition and scathing criticism, employment at businesses owned by private-equity firms rose 5% annually. That compares to 3% for equivalent publicly traded companies.

And, in a summary of this year's E&Y report (again in Deal Journal):

...companies being sold off by private-equity firms increased in enterprise value at an annual compound rate of 24% during the time they were in a PE firm’s portfolio, double the rate of comparable publicly traded companies. Buyout firms also increased the earnings before interest, taxes, depreciation and amortization of these portfolio companies 33% faster than their publicly traded counterparts did. Finally, these companies had productivity levels 33% higher than publicly traded company benchmarks.
The out performance wasn’t confined to a specific geographic region or particular industry. Private-equity-owned businesses outperformed their publicly traded counterparts in almost every sector and market as well.

I'd take the result with at least a little grain of salt, though. One reason is that the report was done on "successful" PE deals - those companies taken private that were eventually brought public again in a subsequent IPO. These are likely to be the ones with the biggest increases in market value, and the ones that had the best overall performance (unsuccessful portfolio companies don't get taken back public down the road). So, the results most likely overstate the performance of LBO firms.

Second, there's a big agency problem inherent with the report. E&Y did this report for the PE industry. Since they get a significant amount of fees from doing transactions advisory work (due diligence, forensic accounting, etc...), they have a vested interest in keeping their client companies (i.e. the PE firms) happy. So, there are some biases that could be present in the report (What, the accounting firm could be biased, I'm shocked. Shocked, I say!).

Read Deal Journal's article on last year's report here and on this year's report here.

So what does this mean? That in at least SOME cases, PE firms create value by making substantive operational changes that increase the quality of the portfolio company's business. In other words, they're not "just" restructuring the right hand side of the balance sheet.

Looks like another piece for class...

The Professors, They Are Sneaky!

noreply@blogger.com (The Unknown Professor) — Wed, 09 Jul 2008 14:26:56 -0500

Here's the latest piece for my door. It doesn't really fit me (I'm in my office a lot), but it did fit MY advisor in grad school.

Cash Flows, Earnings Quality, and Stock Returns

noreply@blogger.com (The Unknown Professor) — Sat, 05 Jul 2008 14:43:26 -0500

One of my original purposes in starting this blog was to create a place to keep track of things I came across on the Web that might be useful in my classes. I just found another one: "Cash Flow Is King: Cognitive Errors by Investors" by Todd Houge (of U of Iowa) and Tim Loughran of Notre Dame. Here's the abstract:

When investors fixate on current earnings, they commit a cognitive error and fail to fully value the information contained in accruals and cash flows. Extending the accrual anomaly documented by Sloan [1996], we identify significant excess returns from a cash flow-based trading strategy. The market consistently underestimates the transitory nature of accruals and the long-term persistence of cash flows. We find that the accrual anomaly derives from the poor performance of high accrual firms, which are more likely to manage earnings. Combining the accrual and cash flow information also reveals that investors misvalue the quality of earnings. Contrary to Fama [1998], these anomalies are robust to the three-factor model with equally or value-weighted portfolio returns.

Houge and Loughran find that markets undervalue firms with high operating cash flows to asset ratios and overvalue those with low cash flow/asset ratios. Somewhat surprisingly, Cash Flow/Assets is negatively correlated with Book/Market ratios (i.e. a firm with low CF/Assets is likely to also be a high Book/Market firm), so this is not just another way of capturing the value anomaly. They also find that the negative returns for high accrual firms are mostly evident among firms with the highest accruals.

But the really interesting finding in the paper has to do with earnings quality. The high cash flows/low earnings combination (basically, low accruals) indicates high earnings quality, while low cash flows and high earnings (high accruals) proxies for low earnings quality. When they compare returns to high cash flow/low earnings firms to those with low cash flows and high earnings, the high CF/low earnings firms outperform their opposite numbers by almost 16% per year on a risk adjusted basis. Not too shabby.

The paper was published in the Journal of Psychology and Financial Markets in 2000, but you can get an ungated version here.

Happy Independence Day

noreply@blogger.com (The Unknown Professor) — Fri, 04 Jul 2008 18:59:17 -0500

A happy July 4th to all the Financial Rounds readers out there.

Start by reading the Declaration of Independence here. Then, to get a good feel for the costs born by the Signers of the Declaration, read this (there are a number of versions of it floating around the Internet, and it's been attributed originally to Paul Harvey, but this one is as good as any).

Finally go spend time with family, friends, grill some meat, and light off some fireworks. And if there's apple pie (See above) or baseball involved, so much the better.

As for the Unknown Family, I'm going for a "quick" 20 mile bike ride, followed by our spending the day spent at a family friend's house. We'll have all the essentials - a passel of kids, a grill with lots of critters to cook, various fruit, potato, and pasta salads, a hot tub to hang out in, and fireworks at the park just down the street.

update: the ride went well, Unknown Son was feeling well enough to play with the other kids for about 2 1/2 hours straight in the hot tub (it quickly became the "kiddie pool, so we didn't fire it up above merely warm), and there was plenty of food to be had. The little man is over his recent bout of chemo-induced nausea and vomiting of the recent post, but he still got tired out quickly. So, we left early (we anticipated this, so we took separate cars) and we're now settling in for a little Tom and Jerry action before bed (we believe in a classical education in the Unknown Household - Tom and Jerry, the Three Stooges, Bugs Bunny, etc...).

I suspect Unknown Daughter and Unknown wife will show up around 11 or so. So a happy 4th once again to all.

Fun With Nausea

noreply@blogger.com (The Unknown Professor) — Thu, 03 Jul 2008 16:37:16 -0500

Unknown Son had his regularly scheduled chemo round yesterday. Unfortunately, it was followed by nausea and vomiting starting about 5:00 and continuing throughout the night. So, this morning it was back to the clinic for anti-nausea meds and fluids (that much vomiting leads to dehydration, which isn't a good thing).

By the afternoon, he was back up to code, and we came home. Unfortunately, we had another incident later on at home. Without going into too many details, let's just say that our plans to get a new couch (our old one is about 10 years old) have now been accelerated...

Ah well, "stuff" happens (sometimes figuratively, and sometimes literally).

Investor Sentiment and Stock Returns

noreply@blogger.com (The Unknown Professor) — Tue, 01 Jul 2008 12:11:26 -0500

Here's a paper that will definitely make it into the class readings the next time I teach investments. In their paper "How Does Investor Sentiment Affect the Cross-Section of Stock Returns?", Malcolm Baker, Johnathan Wang and Jeffrey Wurgler investigate whether factors that make firms' securities harder to arbitrage (like firm size) result in differences in returns between high and low-sentiment market periods.

They construct an index of sentiment based on factors like share turnover on the NYSE, the dividend premium, the volume and first-day returns from IPOs, discounts on closed-end funds, and the equity share of news issues. Here's the conclusions section from their paper (normally I post the abstract, but this section gives a better feel for their results):

Investor sentiment affects the cross-section of stock returns. For practitioners, the main takeaway is that the cross-section of future stock returns varies with beginning-of-period investor sentiment. The patterns are intuitive and consistent with economic theory. When sentiment is high, stocks that are prone to speculation and difficult to arbitrage, namely stocks of young, small, unprofitable, non-dividend-paying, highly volatile, distressed, and extreme growth firms, tend to earn relatively lower subsequent returns. When sentiment is low, the reverse mostly holds. Most strikingly, several characteristics that exhibit no unconditional predictive power actually exhibit predictive power once we condition on beginning-of-period investor sentiment. These results suggest there is much to be done in terms of understanding more about investor sentiment and its effects.

The paper is downloadable from SSRN here.

HT: CXO Advisory Group

Obama and Intrade

noreply@blogger.com (The Unknown Professor) — Sat, 28 Jun 2008 13:32:24 -0500

I use the Intrade prediction market contracts in class to illustrate how markets aggregate and process information. At present, the Obama 2008 Presidential Contract is trading between $0.66 and $0.67 (in other words, it pays $1 if Obama wins, and costs about $0.66 to play).

Jeff Matthews has an interesting piece on how a recent Obama campaign email makes him wonder if the Obama contract might be a good candidate to short (they indicate that there was a shortfall in fund raising relative to the last month's figure). It;'ll be interesting to see how this plays out.

Read the piece - Jeff notes some interesting parallels to earnings management, discounting, and channel stuffing.

Ah well - back to SAS coding.

I'm Baaaaaaack!

noreply@blogger.com (The Unknown Professor) — Sat, 28 Jun 2008 11:33:41 -0500

Sorry for the lack of posting lately - it's been a crazy week. But then, lately they all seem like crazy weeks. We survived last week without any need for trips to the emergency room, or grandparents getting injured, but there was still more to come in the Unknown Household.

I woke up last Saturday with my back severely out of whack - my lower back was in a knot, and it hurt to do just about anything other than sit (or lie) completely still). This continued until Monday, when I saw my doctor. She adjusted my sacrum (no, she's not a chiropractor, but she still was able to do it), gave me some very strong muscle relaxants, and told me I need to do more stretching.

On Wednesday my back felt much better so I took the Unknown Son to the Clinic for the routine follow up scans for his original cancer (although he's in remission from the neuroblastoma, he still has scans every six months just in case). Then it was off to the neighboring state for a charity golf tournament my sister and husband started as a means of raising money for neuroblastoma research (their son died of the cancer last year).

Since some relatives on Unknown Wife's side were visiting, she and the kids decided to stay over so that they could visit with family. So, I've almost two full days to myself (they arrive back at the unknown household late Saturday night). I've gotten a fairly good amount of work done (even sent an article out to a journal) and slept in past 9:00 both Friday and Saturday (hey - when you have young kids, sleeping in is a rare occasion)

In any event, it's a beautiful, warm, sunny Saturday afternoon, and I'm SITTING AT MY OFFICE DESK WORKING ON RESEARCH.

Ah well, such is the life of an untenured professor.

RIP George Carlin

noreply@blogger.com (The Unknown Professor) — Mon, 23 Jun 2008 07:59:12 -0500

George Carlin went into St. John's Health Center on Sunday afternoon, complaining of chest pain. He died at 5:55 p.m. PT.

Carlin was one of the icons of my generation. He constantly pushed the edge, and his routines contained some of the best social commentary around. While one of his pithier ones, his best known routine is Seven Words You Can Never Say On Television

(caution: definitely not safe for work), which my classmates had memorized shortly after it came out.

However, if you want more Carlin, there are a lot of other routines linked to the YouTube piece.

Another Week In the Unknown Household

noreply@blogger.com (The Unknown Professor) — Sat, 21 Jun 2008 14:32:14 -0500

Another week gone by, with the usual ups and downs.

Last week's Friday the 13th episode continued the next day with a phone call from the Unknown Elder Brother to tell me that my mother (age 78) had caught her foot on a rug, fell, and broke her hip. So, we packed ourselves into the car and drove the 80 miles to the adjoining state and to my hometown to see her after she got out of surgery.

The next day, we got another phone call to tell us that she was disoriented and having difficulty speaking. We though a stroke was a possibility, but it resolved itself in quick order, and turned out to be just a reaction to the anesthetic. So now she's in rehab for the next three weeks.

The following day, we got the Shrek-quality toxic waste out of the car (detailing was well worth it), followed by the kids having their last day of school before summer vacation.

The remainder of the week passed without incident, and turned out to be a pretty good one as far as research went. The programming for one project has turned out to be a bit of a hairball (the measure I'm constructing to measure analyst performance is not behaving well). I'll figure out what's the problem, but for now, I'll getting a bit sick of it.

So, I put it aside for a few days to work on another project. I'm looking forward to this one for a couple of reasons: first, because it's with two classmates from graduate school. Second, because it's using a relatively new dataset (I have another paper using the same data set in progress, but one of my coauthors got extremely sick, and we're putting it on the shelf until he recovers). And finally, I just think it;s a pretty good idea. The initial results look as good as any I've seen in recent projects, and overall, it looks like it has the potential (if the results hold up) to be the makings of a really good study.

Then I got preliminary results on another study (with another new coauthor) that also look pretty good. So, this almost makes up for the multiple rejections last week. Hey - it's all part of the game.

What makes both projects kind of interesting is that they both use either a data set or an approach that was initially tried in another project or projects that didn't work out. However, they did give me some ideas for other projects which seem to be coming together.

Finally, we have a minor guest infestation starting tomorrow (the Unknown Wife's college roommate is in town for a couple of days). So, while she madly cleans the house, I took the Unknown Kids to see the Incredible Hulk. They didn't understand a lot of it, but 9-foot tall hyper-thyroidal, muscle-bound savages that like to fight and throw things (like cars) translate to all ages pretty well.

Investment Advice

noreply@blogger.com (The Unknown Professor) — Fri, 20 Jun 2008 10:51:08 -0500

Here's a classic

"I appreciate your honesty"

Lower Interest Rates

noreply@blogger.com (The Unknown Professor) — Tue, 17 Jun 2008 09:40:47 -0500

This NY Times cartoon is from the early 80's, but it plays just as well today:

HT: The Big Picture

Friday The Thirteenth Hits the Unknown Household

noreply@blogger.com (The Unknown Professor) — Mon, 16 Jun 2008 13:45:46 -0500

I'm not superstitious, but sometimes you have to wonder. Here's a Friday the Thirteenth play in five acts

Act 1:
We go to Unknown Son's regular chemo treatment (he's now on a once every three week schedule). While Unknown Wife and U.S. were taking care of the chemo, I took Unknown Daughter to an outside garden that's part of the hospital. She starts running around (U.D. has a LOT of energy), promptly falls, and badly skins both knees, her chin, and her forehead (it was a pretty impressive fall). The one bright spot in this episode there's no better spot to skin your knees than at a hospital.

ACT 2: The fall
That night, we get home and U.W. goes on a walk with a neighbor. While I'm upstairs changing to get ready for my bike ride, I hear a thump followed by a moan. I run downstairs to see U.D. sprawled across the stairs moaning. Apparently, she'd slipped on the stairs while walking down and landed hard. The edge of the stairs nailed her right in the back (across the floating ribs). I carried her to the couch and all she could do was gasp in pain, unable to take a full breath. At this point Unknown Wife gets back, and we decide to take her to the emergency room to get her ribs x-rayed.

ACT 3: Projectile Vomiting
Since it was almost 7:30, we decided to take both cars -- U.W. took U.D. and U.S. in the SUV, and I followed in the old beater my kids refer to as "the stinky car" (a 1993 Honda civic with 150,000 miles on it (but it's paid for). That way, I I can be there to help out, and UW can leave
Epilogue: sore back, US is fine, car needs detailing, and UW can leave early with US if there's a need to stay for a while. The hospital's close (about 6 miles), but halfway there, I see U.W. pull over into a parking lot and open the rear passenger door. It seems U.S. announced "I have a headache and I feel sick". This was followed immediately by extreme chemo-induced vomiting. Of course, we forgot his basin, there was not enough warning to get the door open, so the back to our SUV is now covered in Shreck-worthy quantities of vomit.

We transfer him to my car and follow U.W. and U.D. to the ER.

ACT 4: Two for the Price of one
While on the way to the ER, we have to stop three more times for U.S. to empty the remaining contents of his stomach. Once at the ER, he continues vomiting (once it starts, he gets into a cycle). So, while U.D. is waiting to get X-rayed, we have him admitted to get fluids and Zophran (an anti-nausea medication).

ACT 5: The aftermath
Unknown Daughter was given a clean bill of health (it was only a bruise), so I took her home at approximately midnight. Once there, I cleaned the SUV as best I could (that's why I got to go home earlier). Meanwhile, Unknown Wife stayed with Unknown Son until the fluids and Zofran took effect, and crawled home at 1:30.

By next morning, both kids were fine. And it'll only cost about $200 to have the SUV detailed (believe me - after this episode, this is definitely a job for a professional).

Oh, and Unknown Daughter has a mild case of paraskevidekatriaphobia.

Coffee

noreply@blogger.com (The Unknown Professor) — Mon, 16 Jun 2008 11:22:23 -0500

My kids already know "When Daddy doesn't have coffee, he gets GRUMPY"

more graph humor and song chart memes

And just in case you don't refill the pot, watch the first 30 seconds of this:

"You kill the jo, you make some mo. You know that, baby!"

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Stretching Accounts Payables

noreply@blogger.com (The Unknown Professor) — Sat, 14 Jun 2008 11:23:20 -0500

"Stretching" Accounts Payables (i.e. paying accounts payables past the due date without remitting the penalty, or paying after the discount period has expired but still taking the discount) is a common way that some firms gain cheap financing. However, a firm can only get away with it if they have an imbalance of power between them and the vendor. Here are a few Dilbert cartoons that illustrate the basic idea almost perfectly:

Unfortunately, unless you're a Wal-Mart (notorious for abusing their vendors), the flyswatter eventually ends up in the vendors' hands. So, "free" isn't always "free".

If a textbook vendor was smart, they'd just use Scott Adams for most of their illustrations.

How Do They Determine A Passing Score on The CFA Exams?

noreply@blogger.com (The Unknown Professor) — Mon, 16 Jun 2008 09:33:37 -0500

Since the CFA June exams are now done, there's a lot of concern as to how CFAI determines a passing score. So, here's a breakdown for Levels 1 and 2:

In the past CFAI used a strictly numeric method of calculating the pass rate - they'd take 70% of the 95th percentile score. So, back in the day, the minimum passing score would be no greater than 70%, and would typically be even less.

Now, their scoring system has a significant subjective component to it. Here's how it works: CFA Institute brings a number of charterholders that they call "Standard Setters" to Charlotte sometime in June. These people then discuss what they think a "minimally qualified" candidate should know (for L1 and L2). CFAI is pretty opaque as to what this actually means, but my understanding is that they look at the exams and come up with "the score".

They refer to what's know as the "Angoff method". If they apply this method in its strictest sense, this would involve each standard setter examining each question and making a subjective determination as to what percentage of well-qualified candidates would answer correctly on the question. For each question, the standard-setters percentages are averaged to get a percentage for that question. The individual question-percentages are then summed to get the passing score (in terms of number of correct answers needed).

So theoretically, the minimum passing score could be above 70%. But according to the scuttlebut on analyst forum, the minimum has likely been below 70% in each year. So, my gut reaction is that a 70% would get it done, and even slightly less.

But that's just a guess on my part.

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Let The Second-Guessing Of The CFA Exam Begin!

noreply@blogger.com (The Unknown Professor) — Tue, 10 Jun 2008 09:12:11 -0500

One of the frustrating parts of taking the CFA exam is that there's between a 6 and 8 week (depending on which level you took) lag from the time you took the exam to the time you get results. So, there's a lot of time for second-guessing, wild mood swings, and so on. Several of my students and I took the exam at the same test center, and we all shot the breeze over lunch. They were all pretty confident after the morning session. I've already talked to one of them this week (yesterday), and he said that right after the exam, he felt pretty good overall.

Now today, he said he's started the second-guessing. I warned my guys about this, but it's still hard to avoid.

I'm a regular reader of (and sometimes contributor to ) AnalystForum. It seems like the same thing is going on there in the Level 2 forum. It's understandable, since the group there is a pretty open one, with a lot of participation (damn! - I wish I could get a bunch like that in MY classes).

But relax, all. What's done is done, and we'll know the results when we know. If we make it, there'll be plenty of time to start studying for the next level. If not, we'll have plenty of time to start plugging the holes in the current one that we'll have to retake.

But it's still hard to wait.

Ah well. In addition to the exam, I also got two rejections this week. Now I have to patch them up and ship them back out so I can stay compliant with Mungo's Rule (see #5-b). And there's more data to torture for new projects.

To the Bat Cave, Robin!

Back In The Research Saddle Again

noreply@blogger.com (The Unknown Professor) — Mon, 09 Jun 2008 14:45:29 -0500

What a relief to have the CFA exam behind me. So far today, I've worked on two projects and talked with two coauthors. They should make for interesting projects - both are using existing data in entirely new settings, and both seem to have the potential for ending up in good quality journals.

One project is with a former grad school classmate that I've wanted to do a paper with since we graduated. On this one, I get to play "data monkey" (it involves a LOT of data manipulation, and he'll be responsible for the initial writeup. On the other project, I get to use some stuff I worked on several years ago that never went anywhere, but with a new data set. The paper is with a new coauthor that I met at a recent conference. In this one, I'll end up doing some data work on the front end, and will probably end up doing more of the writing.

I have high hopes for both projects. They're both "core" finance (dividend policy and bankruptcy), but both papers approach the issues in what I think are novel ways. And to make it more fun, I get to work with two new data sets, and with two new coauthors. I'll have to be careful not to say too much more, since both are regular readers of the blog.

So, as far as I'm concerned, the summer research season is now officially open. So, as Elmer Fudd would say, "Be vewwy vewwy qwiet. I'm hunting data."

Time to close up shop for the day and go on a bike ride. Either that, or rent advertising space on my overly large posterior.

Last Minute Fun With The CFA Exam

noreply@blogger.com (The Unknown Professor) — Mon, 09 Jun 2008 14:30:45 -0500

T'was the night before the CFA exam, and of course the Unknown Son starts complaining loudly of severe stomach pains. Of course, this ended all possibility of any last-minute reviewing. He started vomiting repeatedly, and ended up sleeping in our bed with the Unknown Wife, and I went to the guest bedroom (no way I'd get to sleep with a sick kid in the bed).

I got up early the next morning and went to the exam. Just before heading in, I called home to find out that unknown Son was on his way to the hospital. He was admitted in the morning after tests revealed elevated liver enzymes, which typically indicates some kind of viral thingy in the liver.

Despite concerns in the back of my mind about Unknown Son, the morning session of the exam went surprisingly well - or at least I thought so. The afternoon session, on the other hand, was a different story. The best way to describe it is "They didn't call, they didn't send flowers, and they didn't respect me in the morning." So, I have no clue if I made it over the hump or not.

Ah well, done is done. I headed home, changed, and went to the hospital to relieve U.W. and sleep overnight in Unknown Son's room. At least, I slept from 12 until about 6 - he was more interested in reading me sections of his latest book selection (Diary of A Wimpy Kid). His liver results were more normal today, so he got discharged this afternoon, with follow-up tests for later in the week.

With this behind me, I'm eager to put the books down and get back to research tomorrow. For tonight, it's SLEEP (I already took at two-hour nap this afternoon, and should get a good 10-12 hours in).

Forecast For Blogging: Light

noreply@blogger.com (The Unknown Professor) — Fri, 06 Jun 2008 08:56:17 -0500

Blogging will be light for the next two days - the CFA L2 exam is all day tomorrow. I'm doing my final reviews today, and will probably go out and see Iron Man tonight with the Unknown Wife to relax (and yes, we'll ditch the kids first).

Another Few CFA Test Taking Tips

noreply@blogger.com (The Unknown Professor) — Tue, 03 Jun 2008 11:48:48 -0500

It's a time for a break from studying. So, here area few more CFA test-taking tips:

Accept the facts as a given - In other words, you might think the scenario given in the question is far-fetched or even incorrect. No matter - assume it's true, and work from there.
Read Carefully! - in particular, watch for negatives and double-negatives. Make sure you pick up words like "least", "most", etc... In fact, you might want to underline them.
If you work out of order, make sure you fill in the correct bubbles. If you mess up (even if you catch it later), it could cost you a lot of time to fix.
Read ALL the answer choices - in particular for questions that ask for the "most" or "least" correct. Don't stop at the first seemingly correct one.
Rephrase the question - sometimes there can be complicated phrasing (see #2 above).
Underline the relevant facts
Try to answer the question in your own mind before reading the answer choices.

As far as what's the best order in which to answer questions, there are a couple of schools of thought. In my opinion, it's best to start with a section you're most comfortable with. That way, you'll build your confidence and "bank" some points." But if you take this approach, keep these points in mind:

Try not to start with ethics - the questions can be lengthy, and can suck up a lot of time.
If you do start out of order, make sure you enter your answers in the correct parts of the answer sheet (see # 3 above). Doing your "most comfortable" section first makes sense. But I'd recommend against doing the whole exam in this way -- if you do, it's all too easy to get confused. So, it might make more sense to do only one or (at most) two "strong" areas and then just work the rest of the exam in order.
Some questions can be real time-wasters (like multistage stock valuation ones). If you're pressed for time, mark these and go back later. A real "time waster" can suck up the same amount of time that it would take to tackle 2-3 easier ones.
Check your answers when you're done.
Don't change an answer unless you have a good reason.
Don't panic if you hit a string of hard questions. There are a total of 240 questions on the Level 1 exam and 120 on Level 2. Although CFA Institute is not very clear about the level needed to pass, a 70% should be plenty (and as low as a 65 or so might do it, but that's just a guess on my part with no empirical support). So, keep moving, and don't panic.
Finally, plan on checking yourself at the 90 minute mark to see how your progress is and check once again with a half-hour left to make sure you haven't left things blank, put answers in the wrong spaces, etc...

Good luck, and keep studying.

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