CFA Examination ECONOMICS Page 1 of 9
ECONOMICS
A. INTRODUCTION
Economics is the fundamental science of commerce from which the more specialized fields of study
such as corporate finance, security analysis, portfolio management, & business analysis spring
Public misperceives it as a science of prediction. Unfortunately, this prediction is often wrong.
THREE Levels of Economic Analysis:
1. Gathering Relevant Facts or Data. Called DESCRIPTIVE Economics
2. Distilling a Theory on how Economic Variables interact. Called ANALYTICAL Economics
3. Applying Economic Theories to particular problems. Called APPLIED Economics
Deal with humans, so it is an inexact science. Use A Priori Reasoning because cannot do controlled
experiments.
Try to Create Simplistic Models to explain Complex Reality
Traps of Creating Economic Models based on Human Behavior
1. Fallacy of Composition fallacy which concludes that what is good for the individual is
good for the group
2. Economic Truth may be Relative what may be logical during a recession may be
completely irrational during prosperity
3. Cause & Effect are Hard to Distinguish in Economics Correlation does not necessarily
indicate causation
4. Expectations Play an Important Role difficult to measure people’s expectations
5. Intention does not equate with the end result
6. Most models assume a relation, ceteris paribus. But usually, everything else being equal does
not exist
B. RELATION BETWEEN ECONOMICS & INVESTMENT ANALYSIS
There are 2 General Approaches to the Valuation of Securities
1. Bottom Up Approach
Looks for those particular securities that represent the best value regardless of the outlook
for the economy as a whole or of a particular industry. Look at Intrinsic Value of each
Security and determine whether to purchase based on that analysis. Peter Lynch is a
famous Bottoms Up Analyst.
2. Top Down Approach
3 Step Process.
a.)