"Mastering Financial Command Words: LOS, Calculate, Compare, Evaluate, Explain, Identify, | Study notes Ethics

LOS Command Words

The reading specific Learning Outcome Statements (LOS) contained in the study sessions are carefully

designed to indicate what you should learn from each assignment. Although the format of the exam

may not lend itself to using the following command words in the actual questions, you should be able to

answer the exam questions if you can successfully accomplish the learning outcomes described by the

command words in the LOS. The CFA® Program and CIPM® Program make use of the seventeen official

command words defined below. The definitions explain only those senses in which the command word

may be used in the CFA Program and CIPM Program LOS items; other senses, possibly relevant in other

contexts, are not given.

Analyze Definition: to examine the constituent parts of something and how the parts relate to each

other and to the whole

Explanation: Analyze asks you to be able to take apart something for study (e.g., a financial

statement or an investment strategy) in order to understand the whole in full detail. In

the first example of use below, the phrase “including …” highlights points that must be

included in an analysis.

Examples:

 analyze bottom-up active strategies, including their rationale and associated processes

 analyze the effects of currency movements on portfolio risk and return

Calculate Definition: to compute, to determine by mathematical processes

Explanation: This command word asks you to be able to show that you can find a correct

numerical value for a quantity of interest, such as a rate of return, a present value, or a

cost of capital. When the numerical value is not found using math but by some other

means determine may replace calculate. Calculate is frequently used in the phrase

“calculate and interpret,” in which interpret addresses the ability to explain verbally the

numerical result.

Examples:

 calculate and interpret the cost of equity capital using the capital asset pricing model

 calculate and interpret the leverage ratio

Compare Definition: to state the similarities and differences between

Explanation: Compare asks you to be able to explain how two (or more ) things are similar

and how they differ. Compare subsumes the ability to describe and explain each thing

individually. In the first example, the phrase “including …” highlights points that are

expected to be included in a comparison.

Examples:

 compare inflation measures, including their uses and limitations

 compare share repurchase methods

Contrast Definition: to state the differences between

Explanation: Contrast, rather than compare, is used when the key points of understanding

several related things relate only to their differences.

Examples:

 contrast weak-form, semi-strong-form, and strong-form market efficiency

 contrast absolute and relative valuation models

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LOS Command Words

The reading specific Learning Outcome Statements (LOS) contained in the study sessions are carefully designed to indicate what you should learn from each assignment. Although the format of the exam may not lend itself to using the following command words in the actual questions, you should be able to answer the exam questions if you can successfully accomplish the learning outcomes described by the command words in the LOS. The CFA®^ Program and CIPM®^ Program make use of the seventeen official command words defined below. The definitions explain only those senses in which the command word may be used in the CFA Program and CIPM Program LOS items; other senses, possibly relevant in other contexts, are not given. Analyze Definition : to examine the constituent parts of something and how the parts relate to each other and to the whole Explanation : Analyze asks you to be able to take apart something for study (e.g., a financial statement or an investment strategy) in order to understand the whole in full detail. In the first example of use below, the phrase “including …” highlights points that must be included in an analysis. Examples :  analyze bottom-up active strategies, including their rationale and associated processes  analyze the effects of currency movements on portfolio risk and return Calculate Definition : to compute, to determine by mathematical processes Explanation : This command word asks you to be able to show that you can find a correct numerical value for a quantity of interest, such as a rate of return, a present value, or a cost of capital. When the numerical value is not found using math but by some other means determine may replace calculate. Calculate is frequently used in the phrase “calculate and interpret,” in which interpret addresses the ability to explain verbally the numerical result. Examples :  calculate and interpret the cost of equity capital using the capital asset pricing model  calculate and interpret the leverage ratio Compare Definition : to state the similarities and differences between Explanation : Compare asks you to be able to explain how two (or more ) things are similar and how they differ. Compare subsumes the ability to describe and explain each thing individually. In the first example, the phrase “including …” highlights points that are expected to be included in a comparison. Examples :  compare inflation measures, including their uses and limitations  compare share repurchase methods Contrast Definition : to state the differences between Explanation : Contrast , rather than compare , is used when the key points of understanding several related things relate only to their differences. Examples :  contrast weak-form, semi-strong-form, and strong-form market efficiency  contrast absolute and relative valuation models

Define Definition : To state exactly the meaning of Explanation : Define is used when it is important to know the exact meaning of a market or technical term. Learning outcomes with define are often building blocks to more advanced knowledge or skills. Examples :  define primary and secondary markets  define forward contracts, futures contracts, options (calls and puts), swaps, and credit derivatives Demonstrate To show practical mastery of Explanation : Demonstrate asks you to show that you accomplish something using some stated means. In the first example, the skill is applying the Code of Ethics and Standards of Professional Conduct to workplace situations. In the second example, the skill is modifying a portfolio’s risk and return and “how …” narrows the focus to using interest rate swaps, forwards, and futures, as the means of modification. Where calculations are relevant and covered in the text, “ demonstrate how…” subsumes the ability to make those calculations. Examples :  demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity  demonstrate how interest rate swaps, forwards, and futures can be used to modify a portfolio’s risk and return Practice notes for staff and authors: Demonstrate can be used to ask candidates to show in action almost any skill. “ Demonstrate how…” is a useful construction for competency- oriented LOS. Demonstrate has a high location in the RBT. Describe Definition : to state characteristic features of something, to portray it in words. Explanation : Describe , explain , and discuss constitute a sequence of command words associated with increasingly greater expectations about the depth of your knowledge of a topic. “ Describe how …” means “provide an account of the ways …” Examples :  describe sum-of-the-parts valuation and conglomerate discounts  describe the effect on a portfolio’s risk of investing in assets that are less than perfectly correlated  describe how commodity swaps are used to obtain or modify exposure to commodities Determine Definition : to decide on through analysis of alternatives, to find or ascertain definitely Explanation : In the first example, determine asks you process facts about alternative ways to address a problem and choose the best alternative. In the second example, determine asks you to find a breakeven point, and the associated content shows a graphical method (so calculate is not used). “ Determine whether …” addresses the ability to come to a “yes” or “no” conclusion. Examples :  determine an appropriate time-series model to analyze a given investment problem and justify that choice.  determine breakeven and shutdown points of production  determine whether the hypothesis is rejected at a given level of significance Practice notes for staff and authors: Determine asks for a clear and exact decision or finding. Determine will substitute for state and select in approximately nine learning outcomes in which those command word figure.

Identify Definition : To recognize, to correctly pick out or name Explanation : Identify ask you to pinpoint what something is. In the first example, the learning outcome stops with identification. The second example asks you first to recognize when an arbitrage opportunity is present and then further asks you to calculate profit. Examples :  identify tax considerations affecting a private client’s investments  identify a triangular arbitrage opportunity and calculate its profit, given the bid–offer quotations for three currencies Interpret Definition : To explain the meaning or implications of something, to reach a conclusion about something by application of knowledge Explanation : In the phrase “ calculate and interpret ,” interpret asks you to communicate an understanding of what you have calculated. The understanding extends to not only the result but any underlying formula. In the second example, you are asked to explain the implications of a feature of the yield curve. In the third example, the ask is to reach conclusions from the results of a performance attribution. Note that the LOS is not asking you to perform the attribution, but to interpret its results. Examples :  calculate and interpret measures of central tendency  interpret the shape of the yield curve as an economic predictor  interpret the sources of portfolio returns using a specified attribution approach Justify Definition : To provide good reasons for, to show to be valid or appropriate Explanation : Justify asks you to defend some practice or decision with good reasons why it appropriate or correct. In “ recommend and justify ” your tasks are, first, to make a recommendation and, second, provide good reasons why the recommendation is appropriate. Examples :  justify the use of net asset value per share (NAVPS) in REIT valuation  recommend and justify portfolio allocations and investments for a private client;  recommend and justify a plan to manage risks to an individual’s retirement lifestyle goals. Recommend Definition : To advise as suitable or fit for purpose Explanation : Often found in recommend and justify Examples :  recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.  recommend and justify an asset allocation using mean–variance optimization

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LOS Command Words