Fundamentals: Economic, Market and Analytical Foundations
Economic environment
Begin with the macro backdrop: the business cycle (expansion, peak, contraction, trough), GDP, employment, inflation and interest rates. Know which indicators lead (yield curve, building permits, equity prices, money supply), coincide (industrial production, personal income) and lag (unemployment, CPI, prime rate). Monetary policy works through short rates and liquidity; fiscal policy through spending and taxation. The Fisher relationship links nominal and real rates: (1 + nominal) = (1 + real)(1 + inflation).
Markets, institutions and ethics
Understand primary versus secondary markets, the roles of brokers, dealers and market makers, bid-ask spreads and liquidity, and how regulation (disclosure, fiduciary duty, insider-trading rules) shapes conduct. Ethics is examinable: conflicts of interest, soft-dollar arrangements, fair presentation of results.
Quantitative and analytical tools
Time value of money, present values of annuities and perpetuities, standard deviation, correlation and simple regression underpin every later domain. Valuation basics, discounted cash flow and relative multiples, also appear here.
Traps
Nominal versus real returns; arithmetic versus geometric mean (the geometric mean is lower and is the correct compound growth rate); the approximate Fisher equation (nominal approximately equals real plus inflation) versus the exact version; and confusing leading with lagging indicators.
Worked example
Nominal return is 6.0% and inflation is 2.5%. The exact real return is 1.06 / 1.025 minus 1 = 3.41%, not the 3.5% the approximation gives. Rule of thumb: the Rule of 72 says money doubles in roughly 72 / 6 = 12 years at 6%.