2024 CFA Program Curriculum Level III Box Set E-Book
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- Herausgeber: John Wiley & Sons
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- Sprache: Englisch
Discover the official resource for success on the 2024 CFA Level III exam. Get your copy of the CFA¯® Program Curriculum now. The 2024 CFA Program Curriculum Level III Box Set contains the content you need to perform well on the Level III CFA exam in 2024. Designed for candidates to use for exam preparation and professional reference purposes, this set includes the full official curriculum for Level III and is part of the larger CFA Candidate Body of Knowledge (CBOK). Developed to prepare you for the Level III exam's heavy reliance on information synthesis and solution application regarding portfolio management and wealth planning, the Level III curriculum will help you master both calculation-based and word-based problems. The 2024 CFA Program Curriculum Level III Box Set allows you to: * Develop critical knowledge and skills essential in the industry. * Learn from financial thought leaders. * Access market-relevant instruction. The set also features practice questions to assist with your mastery of key terms, concepts, and formulas. The volumes in Level III's box set are: * Volume 1: Behavioral Finance, Capital Market Expectations, and Asset Allocation * Volume 2: Derivatives, Currency Management, and Fixed Income * Volume 3: Fixed Income and Equity Portfolio Management * Volume 4: Alternative Investment, Portfolio Management, and Private Wealth Management * Volume 5: Institutional Investors, Other Topics in Portfolio Management, and Cases * Volume 6: Ethics and Professional Standards Indispensable for anyone preparing for the 2024 Level III CFA exam, the 2024 CFA Program Curriculum Level III Box Set is a must-have resource for those seeking the advanced skills required to become a Chartered Financial Analyst¯®.
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ISBN 978-1-953337-69-6 (paper)
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May 2023
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Table of Contents
Cover
Copyright Page
Table of Contents
2024 CFA Program Curriculum Level 3 Volume 1: Portfolio Management
Title Page
Table of Contents
How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Prerequisite Knowledge
Feedback
Portfolio Management
Capital Market Expectations, Part 1: Framework and Macro Considerations
Learning Outcomes
1. Introduction & Framework for Developing Capital Market Expectations
1.1. Framework and Challenges
1.1.1.1. A Framework for Developing Capital Market Expectations
2. Challenges in Forecasting
2.1. Limitations of Economic Data
2.2. Data Measurement Errors and Biases
2.3. The Limitations of Historical Estimates
2.4. Ex Post Risk Can Be a Biased Measure of Ex Ante Risk
2.5. Biases in Analysts’ Methods
2.6. The Failure to Account for Conditioning Information
2.7. Misinterpretation of Correlations
2.8. Psychological Biases
2.9. Model Uncertainty
3. Economic and Market Analysis: The Role of Economic Analysis and Analysis of Economic Growth: Exogenous Shocks to Growth
3.1. The Role of Economic Analysis
3.2. Analysis of Economic Growth
3.1.2.1. Exogenous Shocks to Growth
4. Applying Growth Analysis to Capital Market Expectations
4.1. A Decomposition of GDP Growth and Its Use in Forecasting
4.2. Anchoring Asset Returns to Trend Growth
5. Approaches to Economic Forecasting
5.1. Econometric Modeling
5.2. Economic Indicators
5.3. Checklist Approach
5.4. Economic Forecasting Approaches: Summary of Strengths and Weaknesses
6. Business Cycle Analysis, Phases of the Business Cycle and Market Expectations and the Business Cycle
6.1. Phases of the Business Cycle
6.2. Market Expectations and the Business Cycle
7. Inflation and Deflation: Trends and Relations to the Business Cycle
8. Analysis of Monetary and Fiscal Policies
8.1. Monetary Policy
9. What Happens When Interest Rates Are Zero or Negative? And Implications of Negative Rates for Capital Market Expectations
9.1. Implications of Negative Interest Rates for Capital Market Expectations
10. The Monetary and Fiscal Policy Mix and the Shape of the Yield Curve and the Business Cycle
10.1. The Shape of the Yield Curve and the Business Cycle
11. International Interactions
11.1. Macroeconomic Linkages
11.2. Interest Rate/Exchange Rate Linkages
12. Summary
References
Practice Problems
Solutions
Capital Market Expectations, Part 2: Forecasting Asset Class Returns
Learning Outcomes
1. Introduction
2. Overview of Tools and Approaches
2.1. The Nature of the Problem
2.2. Approaches to Forecasting
2.2.1. Statistical Methods
2.2.2. Discounted Cash Flow
2.2.3. Risk Premium Models
3. Forecasting Fixed Income Returns
3.1. Applying DCF to Fixed Income
3.2. The Building Block Approach to Fixed-Income Returns
3.2.1. The Short-term Default-free Rate
3.2.2. The Term Premium
3.2.3. The Credit Premium
3.2.4. The Liquidity Premium
4. Risks in Emerging Market Bonds
4.1. Economic Risks/Ability to Pay
4.2. Political and Legal Risks/Willingness to Pay
5. Forecasting Equity Returns
5.1. Historical Statistics Approach to Equity Returns
5.2. DCF Approach to Equity Returns
5.3. Risk Premium Approaches to Equity Returns
5.3.1. Defining and Forecasting the Equity Premium
5.3.2. An Equilibrium Approach
5.4. Risks in Emerging Market Equities
6. Forecasting Real Estate Returns
6.1. Historical Real Estate Returns
6.2. Real Estate Cycles
6.3. Capitalization Rates
6.4. The Risk Premium Perspective on Real Estate Expected Return
6.5. Real Estate in Equilibrium
6.6. Public vs. Private Real Estate
6.7. Long-Term Housing Returns
7. Forecasting Exchange Rates
7.1. Focus on Goods and Services, Trade, and the Current Account
7.1.1. Trade Flows
7.1.2. Purchasing Power Parity
7.1.3. Competitiveness and Sustainability of the Current Account
7.2. Focus on Capital Flows
7.2.1. Implications of Capital Mobility
7.2.2. Uncovered Interest Rate Parity and Hot Money Flows
7.2.3. Portfolio Balance, Portfolio Composition, and Sustainability Issues
8. Forecasting Volatility
8.1. Estimating a Constant VCV Matrix with Sample Statistics
8.2. VCV Matrices from Multi-Factor Models
8.3. Shrinkage Estimation of VCV Matrices
8.4. Estimating Volatility from Smoothed Returns
8.5. Time-Varying Volatility: ARCH Models
9. Adjusting a Global Portfolio
9.1. Macro-Based Recommendations
9.1.1. Trend Growth
9.1.2. Global Integration
9.1.3. Phases of the Business Cycle
9.1.4. Monetary and Fiscal Policies
9.1.5. Current Account Balances
9.1.6. Capital Accounts and Currencies
9.2. Quantifying the Views
10. Summary
References
Practice Problems
Solutions
Overview of Asset Allocation
Learning Outcomes
1. Introduction
1.1. Asset Allocation: Importance in Investment Management
2. Investment Governance Background
2.1. Governance Structures
2.2. Articulating Investment Objectives
2.3. Allocation of Rights and Responsibilities
2.4. Investment Policy Statement
2.5. Asset Allocation and Rebalancing Policy
2.6. Reporting Framework
2.7. The Governance Audit
3. The Economic Balance Sheet and Asset Allocation
4. Approaches to Asset Allocation
4.1. Relevant Objectives
4.2. Relevant Risk Concepts
5. Modeling Asset Class Risk
6. Strategic Asset Allocation
7. Strategic Asset Allocation: Asset Only
8. Strategic Asset Allocation: Liability Relative
9. Strategic Asset Allocation: Goals Based
10. Implementation Choices
10.1. Passive/Active Management of Asset Class Weights
10.2. Passive/Active Management of Allocations to Asset Classes
10.3. Risk Budgeting Perspectives in Asset Allocation and Implementation
11. Rebalancing: Strategic considerations
11.1. A Framework for Rebalancing
11.2. Strategic Considerations in Rebalancing
12. Summary
References
Practice Problems
Solutions
Principles of Asset Allocation
Learning Outcomes
1. Introduction
2. Asset-Only Asset Allocations and Mean–Variance Optimization
2.1. Mean–Variance Optimization: Overview
3. Monte Carlo Simulation
4. Criticisms of Mean–Variance Optimization
5. Addressing the Criticisms of Mean–Variance Optimization
5.1. Reverse Optimization
5.2. Black–Litterman Model
6. Adding Constraints beyond Budget Constraints, Resampled MVO and Other Non-Normal Optimization Approaches
6.1. Resampled Mean–Variance Optimization
6.2. Other Non-Normal Optimization Approaches
7. Allocating to Less Liquid Asset Classes
8. Risk Budgeting
9. Factor-Based Asset Allocation
10. Developing Liability-Relative Asset Allocations and Characterizing the Liabilities
10.1. Characterizing the Liabilities
11. Approaches to Liability-Relative Asset Allocation: Surplus Optimization
11.1. Surplus Optimization
12. Approaches to Liability-Relative Asset Allocation
12.1. Hedging/Return-Seeking Portfolio Approach
12.1.1. Forming the Hedging Portfolio
12.1.2. Limitations
12.2. Integrated Asset–Liability Approach
12.3. Comparing the Approaches
13. Examining the Robustness of Asset Allocation Alternatives
14. Factor Modeling in Liability-Relative Approaches
15. Developing Goals-Based Asset Allocations
15.1. The Goals-Based Asset Allocation Process
15.2. Describing Client Goals
16. Constructing Sub-Portfolios and the Overall Portfolio
16.1. The Overall Portfolio
17. Revisiting the Module Process in Detail
18. Issues Related to Goals-Based Asset Allocation
18.1. Issues Related to Goals-Based Asset Allocation
19. Heuristics and Other Approaches to Asset Allocation
19.1. The “120 Minus Your Age” Rule
19.2. The 60/40 Stock/Bond Heuristic
19.3. The Endowment Model
19.4. Risk Parity
19.5. The 1/N Rule
20. Portfolio Rebalancing in Practice
21. Summary
References
Practice Problems
Solutions
Asset Allocation with Real-World Constraints
Learning Outcomes
1. Introduction
2. Constraints in Asset Allocation and Asset Size
2.1. Asset Size
3. Liquidity
4. Time Horizon
4.1. Changing Human Capital
4.2. Changing Character of Liabilities
5. Regulatory and Other External Constraints
5.1. Insurance Companies
5.2. Pension Funds
5.3. Endowments and Foundations
5.4. Sovereign Wealth Funds
6. Asset Allocation for the Taxable Investor and After-Tax Portfolio Optimization
6.1. After-Tax Portfolio Optimization
7. Taxes and Portfolio Rebalancing
7.1. Strategies to Reduce Tax Impact
8. Revising the Strategic Asset Allocation
8.1. Goals
8.2. Constraints
8.3. Beliefs
9. Short-Term Shifts in Asset Allocation
9.1. Discretionary TAA
9.2. Systematic TAA
10. Dealing with Behavioral Biases in Asset Allocation
10.1. Loss Aversion
10.2. Illusion of Control
10.3. Mental Accounting
10.4. Representativeness Bias
10.5. Framing Bias
10.6. Availability Bias
11. Summary
References
Practice Problems
Solutions
Glossary
2024 CFA Program Curriculum Level 3 Volume 2: Portfolio Management
Title Page
Table of Contents
How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Prerequisite Knowledge
Feedback
Portfolio Management
Options Strategies
Learning Outcomes
1. Introduction
2. Position Equivalencies
2.1. Synthetic Forward Position
2.2. Synthetic Put and Call
3. Covered Calls and Protective Puts
3.1. Investment Objectives of Covered Calls
3.1.1. Market Participant #1: Yield Enhancement
3.1.2. Market Participant #2: Reducing a Position at a Favorable Price
3.1.3. Market Participant #3: Target Price Realization
3.1.4. Profit and Loss at Expiration
4. Investment Objectives of Protective Puts
4.1. Loss Protection/Upside Preservation
4.2. Profit and Loss at Expiration
5. Equivalence to Long Asset/Short Forward Position
5.1. Writing Puts
6. Risk Reduction Using Covered Calls and Protective Puts
6.1. Covered Calls
6.2. Protective Puts
6.3. Buying Calls and Writing Puts on a Short Position
7. Spreads and Combinations
7.1. Bull Spreads and Bear Spreads
7.1.1. Bull Spread
7.1.2. Bear Spread
7.1.3. Refining Spreads
7.1.3.1. Adding a Short Leg to a Long Position
7.1.3.2. Spreads and Delta
8. Straddle
8.1. Collars
8.1.1. Collars on an Existing Holding
8.1.2. The Risk of a Collar
8.1.3. The Risk of Spreads
8.2. Calendar Spread
9. Implied Volatility and Volatility Skew
10. Investment Objectives and Strategy Selection
10.1. The Necessity of Setting an Objective
10.2. Criteria for Identifying Appropriate Option Strategies
11. Options in Portfolio Management
11.1. Covered Call Writing
11.1.1. Solution:
11.2. Put Writing
11.2.1. Solution:
11.2.1.1. Scenario A:
11.2.1.2. Scenario B:
11.3. Long Straddle
11.3.1. Solution:
11.4. Collar
11.4.1. Solution:
11.5. Calendar Spread
11.5.1. Solution to 1:
11.5.2. Solution to 2:
11.5.2.1. Scenario 1:
11.5.2.2. Scenario 2:
11.5.2.3. Scenario 3:
11.5.2.4. Scenario 4:
12. Hedging an Expected Increase in Equity Market Volatility
12.1.
12.1.1. Solution to 1:
12.1.2. Solution to 2:
12.1.3. Solution to 3:
12.2. Establishing or Modifying Equity Risk Exposure
12.2.1. Long Call
12.2.1.1. Solution:
12.2.2. Risk Management: Protective Put Position
12.2.2.1. Situation A: Before Relais Corporation’s quarterly earnings release:
12.2.2.1.1. Solution to 1:
12.2.2.2. Situation B: One week later, just after Relais Corporation’s earnings release:
12.2.2.2.1. Solution to 2:
13. Summary
Practice Problems
Solutions
Swaps, Forwards, and Futures Strategies
Learning Outcomes
1. Managing Interest Rate Risk with Swaps
1.1. Changing Risk Exposures with Swaps, Futures, and Forwards
1.1.1. Managing Interest Rate Risk
1.1.1.1. Interest Rate Swaps
2. Managing Interest Rate Risk with Forwards and Futures
2.1. Fixed-Income Futures
3. Managing Currency Exposure
3.1. Currency Swaps
3.2. Currency Forwards and Futures
4. Managing Equity Risk
4.1. Equity Swaps
4.2. Equity Forwards and Futures
4.3. Cash Equitization
5. Volatility Derivatives: Futures and Options
5.1. Volatility Futures and Options
6. Volatility Derivatives: Variance Swaps
7. Using Derivatives in Asset Allocation
7.1. Solution:
7.1.1. Scenario A:
7.1.2. Scenario B:
7.2. Cash Equitization
7.2.1. Scenario: Three months later, the FTSE 100 Index has increased by 5%.
8. Using Derivatives in Asset Allocation
8.1. Changing Allocations between Asset Classes Using Futures
8.1.1. Solution to 1:
8.1.2. Solution to 2:
8.1.3. Solution to 3:
8.2. Rebalancing an Asset Allocation Using Futures
8.2.1. Solution:
8.3. Changing Allocations between Asset Classes Using Swaps
8.3.1. Solution:
9. Using Derivatives to Infer Market Expectations
9.1. Using Fed Funds Futures to Infer the Expected Average Federal Funds Rate
9.2. Inferring Market Expectations
9.2.1. Solution to 1:
9.2.2. Solution to 2:
10. Summary
Practice Problems
Solutions
Currency Management: An Introduction
Learning Outcomes
1. Introduction
2. Foreign Exchange Concepts
2.1. Spot Markets
2.2. Forward Markets
2.3. FX Swap Markets
2.4. Currency Options
3. Currency Risk and Portfolio Risk and Return
3.1. Return Decomposition
3.2. Volatility Decomposition
4. Strategic Decisions in Currency Management
4.1. The Investment Policy Statement
4.2. The Portfolio Optimization Problem
4.3. Choice of Currency Exposures
4.3.1. Diversification Considerations
4.3.2. Cost Considerations
5. Spectrum of Currency Risk Management Strategies
5.1. Passive Hedging
5.2. Discretionary Hedging
5.3. Active Currency Management
5.4. Currency Overlay
6. Formulating a Currency Management Program
7. Economic Fundamentals, Technical Analysis and the Carry Trade
7.1. Active Currency Management Based on Economic Fundamentals
7.2. Active Currency Management Based on Technical Analysis
7.3. Active Currency Management Based on the Carry Trade
8. Volatility Trading
9. Forward Contracts, FX Swaps, and Currency Options
9.1. Forward Contracts
9.1.1. Hedge Ratios with Forward Contracts
9.1.2. Roll Yield
9.2. Currency Options
10. Currency Management Strategies
10.1. Over-/Under-Hedging Using Forward Contracts
10.2. Protective Put Using OTM Options
10.3. Risk Reversal (or Collar)
10.4. Put Spread
10.5. Seagull Spread
10.6. Exotic Options
10.7. Section Summary
11. Hedging Multiple Foreign Currencies
11.1. Cross Hedges and Macro Hedges
11.2. Minimum-Variance Hedge Ratio
11.3. Basis Risk
12. Currency Management Tools and Strategies: A Summary
13. Currency Management for Emerging Market Currencies
13.1. Special Considerations in Managing Emerging Market Currency Exposures
13.2. Non-Deliverable Forwards
14. Summary
References
Practice Problems
Solutions
Overview of Fixed-Income Portfolio Management
Learning Outcomes
1. Introduction
2. Roles of Fixed-Income Securities in Portfolios
2.1. Diversification Benefits
2.2. Benefits of Regular Cash Flows
2.3. Inflation-Hedging Potential
3. Classifying Fixed-Income Mandates
3.1. Liability-Based Mandates
3.2. Total Return Mandates
3.3. Fixed-Income Mandates with ESG Considerations
4. Fixed-Income Portfolio Measures
4.1. Portfolio Measures of Risk and Return
4.2. Correlations between Fixed-Income Sectors
4.3. Use of Measures of Risk and Return in Portfolio Management
4.3.1. Portfolio Duration in Total Return Mandates
4.3.2. Managing Credit Exposure Using Spread Duration
4.3.3. Relative Value Concept
5. Bond Market Liquidity
5.1. Liquidity among Bond Market Sub-Sectors
5.2. The Effects of Liquidity on Fixed-Income Portfolio Management
5.2.1. Pricing
5.2.2. Portfolio Construction
5.2.3. Alternatives to Direct Investment in Bonds
6. A Model for Fixed-Income Returns
6.1. Decomposing Expected Returns
6.1.1. Coupon Income
6.1.2. Rolldown Return
6.1.3. Views of Benchmark Yields
6.1.4. Views of Yield Spreads
6.1.5. Views of Currency Value Changes
6.2. Estimation of the Inputs
6.3. Limitations of the Expected Return Decomposition
7. Leverage
7.1. Using Leverage
7.2. Methods for Leveraging Fixed-Income Portfolios
7.2.1. Futures Contracts
7.2.2. Swap Agreements
7.2.3. Repurchase Agreements
7.2.4. Security Lending
7.3. Risks of Leverage
8. Fixed-Income Portfolio Taxation
8.1. Principles of Fixed-Income Taxation
8.2. Investment Vehicles and Taxes
9. Summary
References
Practice Problems
Solutions
Liability-Driven and Index-Based Strategies
Learning Outcomes
1. Introduction
2. Liability-Driven Investing
2.1. Liability-Driven Investing vs. Asset-Driven Liabilities
2.2. Types of Liabilities
3. Managing the Interest Rate Risk of a Single Liability
3.1. A Numerical Example of Immunization
3.1.1. Portfolio Features
3.1.2. Portfolio Duration
3.1.3. Portfolio Dispersion
3.1.4. Portfolio Convexity
3.1.5. Investment Horizon and Immunization
3.1.6. A Drop in the Cash Flow Yield Scenario
3.1.7. An Increase in the Cash Flow Yield Scenario
3.1.8. Immunization and Rebalancing
3.1.9. Immunization and Shifts in the Yield Curve
3.1.10. Structural Risk in Immunization Strategy
4. Managing the Interest Rate Risk of Multiple Liabilities
4.1. Cash Flow Matching
4.2. Laddered Portfolios
4.2.1. Benefits of Using Laddered Portfolios
4.2.2. Using ETFs to Build Laddered Portfolios
4.3. Duration Matching
4.3.1. Duration Matching—Parallel Shift Example
4.3.2. Duration Matching—Yield Curve Twist Scenario
4.4. Derivatives Overlay
4.5. Contingent Immunization
5. Example: Defined Benefit Pension Plan
5.1. Model Assumptions
5.2. Model Inputs
5.3. Calculating Durations
5.4. Addressing the Duration Gap
5.4.1. Using Futures to Reduce the Duration Gap
5.4.2. Using Interest Rate Swaps to Reduce Duration Gap
5.4.3. Using Options to Reduce Duration Gap
5.4.4. Using a Swaption Collar
5.4.5. Selecting a Suitable Hedging Strategy
6. Risks in Liability-Driven Investing
6.1. Model Risk in Liability-Driven Investing
6.2. Spread Risk in Liability-Driven Investing
6.3. Counterparty Credit Risk
6.4. Asset Liquidity Risk
7. Bond Indexes
7.1. Size and Breadth of the Fixed-Income Universe
7.2. Array of Characteristics
7.3. Unique Issuance and Trading Patterns
7.4. Primary Risk Factors
8. Alternative Methods for Establishing Passive Bond Market Exposure
8.1. Full Replication
8.2. Enhanced Indexing
8.2.1. Enhancement Strategies
8.3. Alternatives to Investing Directly in Fixed-Income Securities
9. Benchmark Selection
10. Summary
References
Practice Problems
Solutions
Glossary
2024 CFA Program Curriculum Level 3 Volume 3: Portfolio Management
Title Page
Table of Contents
How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Prerequisite Knowledge
Feedback
Portfolio Management
Yield Curve Strategies
Learning Outcomes
1. Introduction
2. Key Yield Curve and Fixed-Income Concepts for Active Managers
2.1. Yield Curve Dynamics
2.2. Duration and Convexity
3. Yield Curve Strategies
3.1. Static Yield Curve
3.2. Dynamic Yield Curve
3.2.1. Divergent Rate Level View
3.2.2. Divergent Yield Curve Slope View
3.2.2.2. Rolldown Return
3.2.2.3. Δ Price Due to Benchmark Yield Changes
3.2.3. Divergent Yield Curve Shape View
3.2.4. Yield Curve Volatility Strategies
3.3. Key Rate Duration for a Portfolio
4. Active Fixed-Income Management across Currencies
5. A Framework for Evaluating Yield Curve Strategies
6. Summary
Practice Problems
Solutions
Fixed-Income Active Management: Credit Strategies
Learning Outcomes
1. Introduction
2. Key Credit and Spread Concepts for Active Management
2.1. Credit Risk Considerations
2.1.1. Default Probabilities and Recovery Rates
2.1.2. Default versus Credit Migration
2.1.3. Credit Spread Curves
2.2. Credit Spread Measures
2.2.1. Fixed-Rate Bond Credit Spread Measures
2.2.2. Floating-Rate Note Credit Spread Measures
2.2.3. Portfolio Return Impact of Yield Spreads
3. Credit Strategies
3.1. Bottom-Up Credit Strategies
3.1.1. Defining the Credit Universe
3.1.2. Bottom-Up Credit Analysis
3.1.3. Bottom-Up Relative Value Analysis
3.2. Top-Down Credit Strategies
3.2.1. Assessing Credit Quality in a Top-Down Approach
3.2.2. Sector Allocation in a Top-Down Approach
3.3. Factor-Based Credit Strategies
3.3.1. Key Factors Affecting Credit Spreads
3.3.2. Environmental, Social, and Governance Factors
4. Liquidity and Tail Risk
4.1. Liquidity Risk
4.2. Tail Risk
5. Synthetic Credit Strategies
6. Credit Spread Curve Strategies
6.1. Static Credit Spread Curve Strategies
6.2. Dynamic Credit Spread Curve Strategies
7. Global Credit Strategies
8. Structured Credit
9. Fixed-Income Analytics
10. Summary
References
Practice Problems
Solutions
Overview of Equity Portfolio Management
Learning Outcomes
1. Introduction and the Role of Equities in a Portfolio
1.1. The Roles of Equities in a Portfolio
1.1.1. Capital Appreciation
1.1.2. Dividend Income
1.1.3. Diversification with Other Asset Classes
1.1.4. Hedge Against Inflation
1.1.5. Client Considerations for Equities in a Portfolio
2. Equity Investment Universe
2.1. Segmentation by Size and Style
2.2. Segmentation by Geography
2.3. Segmentation by Economic Activity
2.4. Segmentation of Equity Indexes and Benchmarks
3. Income Associated with Owning and Managing an Equity Portfolio
3.1. Dividend Income
3.2. Securities Lending Income
3.3. Ancillary Investment Strategies
4. Costs Associated with Owning and Managing an Equity Portfolio
4.1. Performance Fees
4.2. Administration Fees
4.3. Marketing and Distribution Costs
4.4. Trading Costs
4.5. Investment Approaches and Effects on Costs
5. Shareholder Engagement
5.1. Benefits of Shareholder Engagement
5.2. Disadvantages of Shareholder Engagement
5.3. The Role of an Equity Manager in Shareholder Engagement
5.3.1. Activist Investing
5.3.2. Voting
6. Equity Investment Across the Passive–Active Spectrum
6.1. Confidence to Outperform
6.2. Client Preference
6.3. Suitable Benchmark
6.4. Client-Specific Mandates
6.5. Risks/Costs of Active Management
6.6. Taxes
7. Summary
References
Practice Problems
Solutions
Passive Equity Investing
Learning Outcomes
1. Indexes as a Basis for Investment
1.1. Choosing a Benchmark
1.1.1. Indexes as a Basis for Investment
1.1.2. Considerations When Choosing a Benchmark Index
2. Index Construction Methodologies
3. Factor-Based Strategies
4. Pooled Investments
4.1. Pooled Investments
5. Derivatives-Based Approaches & Index-Based Portfolios
5.1. Separately Managed Equity Index-Based Portfolios
6. Passive Portfolio Construction
6.1. Full Replication
6.2. Stratified Sampling
6.3. Optimization
6.4. Blended Approach
7. Tracking Error Management
7.1. Tracking Error and Excess Return
7.2. Potential Causes of Tracking Error and Excess Return
7.3. Controlling Tracking Error
8. Sources of Return and Risk in Passive Equity Portfolios
8.1. Attribution Analysis
8.2. Securities Lending
8.3. Investor Activism and Engagement by Passive Managers
9. Summary
References
Practice Problems
Solutions
Active Equity Investing: Strategies
Learning Outcomes
1. Introduction
2. Approaches to Active Management
2.1. Differences in the Nature of the Information Used
2.2. Differences in the Focus of the Analysis
2.3. Difference in Orientation to the Data: Forecasting Fundamentals vs. Pattern Recognition
2.4. Differences in Portfolio Construction: Judgment vs. Optimization
3. Bottom-Up Strategies
3.1. Bottom-Up Strategies
3.1.1.
3.1.1.1. Business Model and Branding.
3.1.1.2. Competitive Advantages.
3.1.1.3. Company Management.
3.1.2. Value-Based Approaches
3.1.2.1. Relative Value
3.1.2.2. Contrarian Investing
3.1.2.3. High-Quality Value
3.1.2.4. Income Investing
3.1.2.5. Deep-Value Investing
3.1.2.6. Restructuring and Distressed Investing
3.1.2.7. Special Situations
3.1.3. Growth-Based Approaches
4. Top-Down Strategies
4.1. Country and Geographic Allocation to Equities
4.2. Sector and Industry Rotation
4.3. Volatility-Based Strategies
4.4. Thematic Investment Strategies
5. Factor-Based Strategies: Overview
6. Factor-Based Strategies: Style Factors
6.1. Value
6.2. Price Momentum
6.3. Growth
6.4. Quality
7. Factor-Based Strategies: Unconventional Factors
8. Activist Strategies
8.1. The Popularity of Shareholder Activism
8.2. Tactics Used by Activist Investors
8.3. Typical Activist Targets
9. Other Active Strategies
9.1. Strategies Based on Statistical Arbitrage and Market Microstructure
9.2. Event-Driven Strategies
10. Creating a Fundamental Active Investment Strategy
10.1. The Fundamental Active Investment Process
10.2. Pitfalls in Fundamental Investing
10.2.1. Behavioral Bias
10.2.1.1. Confirmation Bias
10.2.1.2. Illusion of Control
10.2.1.3. Availability Bias
10.2.1.4. Loss Aversion
10.2.1.5. Overconfidence Bias
10.2.1.6. Regret Aversion Bias
10.2.2. Value and Growth Traps
10.2.2.1. The Value Trap
10.2.2.2. The Growth Trap
11. Creating a Quantitative Active Investment Strategy
11.1. Creating a Quantitative Investment Process
11.1.1. Defining the Market Opportunity (Investment Thesis)
11.1.2. Acquiring and Processing Data
11.1.3. Back-testing the Strategy
11.1.3.1. Information Coefficient
11.1.3.2. Creating a Multifactor Model
11.1.4. Evaluating the Strategy
11.1.5. Portfolio Construction Issues in Quantitative Investment
11.2. Pitfalls in Quantitative Investment Processes
11.2.1. Survivorship Bias, Look-Ahead Bias, Data Mining, and Overfitting
11.2.2. Turnover, Transaction Costs, and Short Availability
12. Equity Investment Style Classification
12.1. Different Approaches to Style Classification
12.1.1. Holdings-Based Approaches
12.1.1.2. Large-Cap, Mid-Cap, and Small-Cap Classifications
12.1.1.3. Measuring Growth, Value, and Core Characteristics
12.1.2. Returns-Based Style Analysis
12.1.3. Manager Self-Identification
12.2. Strengths and Limitations of Style Analysis
13. Summary
References
Practice Problems
Solutions
Active Equity Investing: Portfolio Construction
Learning Outcomes
1. Introduction
2. Building Blocks of Active Equity Portfolio Construction
2.1. Fundamentals of Portfolio Construction
2.2. Building Blocks Used in Portfolio Construction
2.2.1. First Building Block: Overweight or Underweight Rewarded Factors
2.2.2. Second Building Block: Alpha Skills
2.2.3. Third Building Block: Sizing Positions
2.2.4. Integrating the Building Blocks: Breadth of Expertise
3. Portfolio Construction Approaches
3.1. The Implementation Process: The Choice of Portfolio Management Approaches
3.1.1. Systematic vs. Discretionary
3.1.2. Bottom-Up vs. Top-Down
3.1.3. A Summary of the Different Approaches
4. Measures of Benchmark-Relative Risk
5. Objectives and Constraints
6. Absolute vs. Relative Measures of Risk
6.1. Absolute vs. Relative Measures of Risk
6.1.1. Causes and Sources of Absolute Risk
6.1.2. Causes and Sources of Relative/Active Risk
7. Determining the Appropriate Level of Risk
7.1. Implementation constraints
7.2. Limited diversification opportunities
7.3. Leverage and its implications for risk
8. Allocating the Risk Budget
9. Additional Risk Measures
9.1.
9.2. Formal Constraints
9.3. The Risks of Being Wrong
10. Implicit Cost-Related Considerations
10.1. Implicit Costs—Market Impact and the Relevance of Position Size, Assets under Management, and Turnover
10.2. Estimating the Cost of Slippage
11. The Well-Constructed Portfolio
12. Long/Short, Long Extension, and Market-Neutral Portfolio Construction
12.1. The Merits of Long-Only Investing
12.1.1. Long-term risk premiums
12.1.2. Capacity and scalability
12.1.3. Limited legal liability
12.1.4. Regulatory
12.1.5. Transactional complexity
12.1.6. Management costs
12.1.7. Personal ideology
12.2. Long/Short Portfolio Construction
12.3. Long Extension Portfolio Construction
12.4. Market-Neutral Portfolio Construction
12.5. Benefits and Drawbacks of Long/Short Strategies
13. Summary
References
Practice Problems
Solutions
Glossary
2024 CFA Program Curriculum Level 3 Volume 4: Portfolio Management
Title Page
Table of Contents
How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Prerequisite Knowledge
Feedback
Portfolio Management
Hedge Fund Strategies
Learning Outcomes
1. Introduction and Classification of Hedge Fund Strategies
1.1. Classification of Hedge Funds and Strategies
2. Equity Strategies: Long/Short Equity
2.1. Long/Short Equity
2.1.1. Investment Characteristics
2.1.2. Strategy Implementation
3. Equity Strategies: Dedicated Short Selling and Short–Biased
3.1. Investment Characteristics
3.2. Strategy Implementation
4. Equity Strategies: Equity Market Neutral
4.1. Investment Characteristics
4.2. Strategy Implementation
5. Event-Driven Strategies: Merger Arbitrage
5.1. Merger Arbitrage
5.1.1. Investment Characteristics
5.1.2. Strategy Implementation
6. Event-Driven Strategies: Distressed Securities
6.1. Investment Characteristics
6.2. Strategy Implementation
7. Relative Value Strategies: Fixed-Income Arbitrage
7.1. Fixed-Income Arbitrage
7.1.1. Investment Characteristics
7.1.2. Strategy Implementation
8. Relative Value Strategies: Convertible Bond Arbitrage
8.1. Investment Characteristics
8.2. Strategy Implementation
9. Opportunistic Strategies: Global Macro Strategies
9.1. Global Macro Strategies
9.1.1. Investment Characteristics
9.1.2. Strategy Implementation
10. Opportunistic Strategies: Managed Futures
10.1. Investment Characteristics
10.2. Strategy Implementation
11. Specialist Strategies
11.1. Volatility Trading
11.1.1. Investment Characteristics and Strategy Implementation
11.2. Reinsurance/Life Settlements
11.2.1. Investment Characteristics and Strategy Implementation
12. Multi-Manager Strategies
12.1. Fund-of-Funds
12.1.1. Investment Characteristics
12.1.2. Strategy Implementation
12.2. Multi-Strategy Hedge Funds
12.2.1. Investment Characteristics
12.2.2. Strategy Implementation
13. Analysis of Hedge Fund Strategies using a Conditional Factor Risk Model
13.1. Conditional Factor Risk Model
14. Evaluating Equity Hedge Fund Strategies: Application
15. Evaluating Multi-Manager Hedge Fund Strategies: Application
16. Portfolio Contribution of Hedge Fund Strategies
16.1. Performance Contribution to a 60/40 Portfolio
16.2. Risk Metrics
17. Summary
References
Practice Problems
Solutions
Asset Allocation to Alternative Investments
Learning Outcomes
1. Introduction
1.1. The Role of Alternative Investments in a Multi-Asset Portfolio
1.1.1. The Role of Private Equity in a Multi-Asset Portfolio
1.1.2. The Role of Hedge Funds in a Multi-Asset Portfolio
1.1.3. The Role of Real Assets in a Multi-Asset Portfolio
1.1.4. The Role of Commercial Real Estate in a Multi-Asset Portfolio
1.1.5. The Role of Private Credit in a Multi-Asset Portfolio
2. Diversifying Equity Risk
2.1. Volatility Reduction over the Short Time Horizon
2.2. Risk of Not Meeting the Investment Goals over the Long Time Horizon
3. Traditional Approaches to Asset Classification
3.1. Traditional Approaches to Asset Classification
3.1.1. A Liquidity-Based Approach to Defining the Opportunity Set
3.1.2. An Approach Based on Expected Performance under Distinct Macroeconomic Regimes
4. Risk-Based Approaches to Asset Classification
4.1. Illustration: Asset Allocation and Risk-Based Approaches
4.1.1. Portfolio A.
4.1.2. Portfolio B.
4.2. Comparing Risk-Based and Traditional Approaches
5. Risk Considerations, Return Expectations, and Investment Vehicle
5.1. Risk Considerations
5.1.1. Short-only strategy:
5.1.2. Option payouts:
5.2. Return Expectations
5.3. Investment Vehicle
5.3.1. Direct investment in a limited partnership:
5.3.2. Funds of funds (FOFs):
5.3.3. SMAs/funds of one:
5.3.4. Mutual funds/UCITS/publicly traded funds:
6. Liquidity
6.1. Liquidity Risks Associated with the Investment Vehicle
6.1.1. Secondary markets:
6.1.2. Understanding a drawdown structure:
6.2. Liquidity Risks Associated with the Underlying Investments
6.2.1. Equity-oriented hedge funds:
6.2.2. Event-driven hedge funds:
6.2.3. Relative value hedge funds:
6.2.4. Leverage:
7. Fees and Expenses, Tax Considerations, and Other Considerations
7.1. Tax Considerations
7.2. Other Considerations
8. Suitability Considerations
8.1. Investment Horizon
8.2. Expertise
8.3. Governance
8.4. Transparency
9. Asset Allocation Approaches and Statistical Properties and Challenges
9.1. Statistical Properties and Challenges of Asset Returns
9.1.1. Stale Pricing and Unsmoothing
9.1.2. Skewness and Fat Tails
10. Monte Carlo Simulation
10.1. Simulating Skewed and Fat-Tailed Financial Variables
10.2. Simulation for Long-Term Horizon Risk Assessment
11. Portfolio Optimization
11.1. Mean–Variance Optimization without and with Constraints
11.2. Mean–CVaR Optimization
12. Risk Factor-Based Optimization
13. Liquidity Planning
13.1. Achieving and Maintaining the Strategic Asset Allocation
14. Preparing for the Unexpected
14.1. Preparing for the Unexpected
15. Monitoring the Investment Program
15.1. Overall Investment Program Monitoring
15.2. Performance Evaluation
15.3. Monitoring the Firm and the Investment Process
16. Summary
References
Practice Problems
Solutions
Overview of Private Wealth Management
Learning Outcomes
1. Introduction
1.1. Private Clients versus Institutional Clients
1.1.1. Investment Objectives
1.1.2. Constraints
1.1.2.1. Time horizon
1.1.2.2. Scale
1.1.2.3. Taxes
1.1.3. Other Distinctions
1.1.3.1. Investment Governance
1.1.3.2. Investment Sophistication
1.1.3.3. Regulation
1.1.3.4. Uniqueness and Complexity
2. Information Needed in Advising Private Clients
2.1. Information Needed in Advising Private Clients
2.1.1. Personal Information
2.1.2. Financial Information
2.1.3. Private Client Tax Considerations
2.1.3.1. Common Tax Categories
2.1.3.2. Basic Tax Strategies
2.1.4. Other Relevant Information
3. Client Goals
3.1. Planned Goals
3.2. Unplanned Goals
3.3. The Wealth Manager’s Role
4. Private Client Risk Tolerance
4.1. Risk Tolerance Questionnaire
4.2. Risk Tolerance Conversation
4.3. Risk Tolerance with Multiple Goals
5. Technical and Soft Skills for Wealth Managers
5.1. Technical Skills
5.2. Soft Skills
6. Investment Planning and Capital Sufficiency Analysis
6.1. Capital Sufficiency Analysis
6.1.1. Methods for Evaluating Capital Sufficiency
6.1.2. Inputs to Capital Sufficiency Analysis
6.1.3. Interpreting Monte Carlo Simulation Results
7. Retirement Planning
7.1. Retirement Stage of Life
7.1.1. Analyzing Retirement Goals
7.1.1.1. Mortality Tables
7.1.1.2. Annuities
7.1.1.3. Monte Carlo Simulation Revisited
7.1.2. Behavioral Considerations in Retirement Planning
8. Investment Policy Statement
8.1. Parts of the Investment Policy Statement
8.1.1. Background and Investment Objectives
8.1.2. Investment Parameters
8.1.2.1. Risk Tolerance
8.1.2.2. Investment Time Horizon
8.1.2.3. Asset Class Preferences
8.1.2.4. Other Investment Preferences
8.1.2.5. Liquidity Preferences
8.1.2.6. Constraints
8.1.3. Portfolio Asset Allocation
8.1.4. Portfolio Management
8.1.4.1. Discretionary Authority
8.1.4.2. Rebalancing
8.1.4.3. Tactical Changes
8.1.4.4. Implementation
8.1.5. Duties and Responsibilities
8.1.5.1. Wealth Manager Responsibilities
8.1.5.2. IPS Review
8.1.6. IPS Appendix
8.1.6.1. Modeled Portfolio Behavior
8.1.6.2. Capital Market Expectations
9. Sample Investment Policy Statement
10. Portfolio Construction, Allocation, and Investments for Private Wealth Clients
10.1. Portfolio Allocation and Investments for Private Wealth Clients
10.1.1. Portfolio Construction—Traditional Approach
10.1.2. Portfolio Construction—Goals-Based Investing Approach
11. Portfolio Reporting and Review
11.1. Portfolio Reporting
11.2. Portfolio Review
12. Evaluating the Success of an Investment Program
12.1. Goal Achievement
12.2. Process Consistency
12.3. Portfolio Performance
12.4. Definitions of Success
13. Ethical and Compliance Considerations in Private Wealth Management
13.1. Ethical Considerations
13.1.1. Fiduciary Duty and Suitability
13.1.2. Know Your Customer (KYC)
13.1.3. Confidentiality
13.1.4. Conflicts of Interest
13.2. Compliance Considerations
14. Private Client Segments
14.1. Mass Affluent Segment
14.2. High-Net-Worth Segment
14.3. Very-High-Net-Worth Segment
14.4. Ultra-High-Net-Worth Segment
14.5. Robo-Advisors
15. Summary
References
Practice Problems
Solutions
Topics in Private Wealth Management
Learning Outcomes
1. Introduction
2. Components of Return and Tax Status of the Account
2.1. Taxation of the Components of Return
2.1.1. Interest, Dividends, and Withholding Taxes
2.1.2. Capital Gains Taxes
2.1.3. Real Estate Taxes
2.2. The Tax Status of the Account
3. The Jurisdiction that Applies to the Investor
4. Measuring Tax Efficiency with After-Tax Returns
4.1. Tax Efficiency of Various Asset Classes and Investment Strategies
4.2. Calculating After-Tax Returns
4.2.1. After-Tax Holding Period Returns
4.2.2. After-Tax Post-Liquidation Returns
4.2.3. After-Tax Excess Returns
4.2.4. Tax-Efficiency Ratio
5. Capital Accumulation and Asset Location
5.1. Capital Accumulation in Taxable, Tax-Deferred, and Tax-Exempt Accounts
5.2. Asset Location
6. Decumulation Strategies and Charitable Giving Strategies
6.1. Tax Considerations in Charitable Giving
7. Tax Management and Basic Tax Strategies
7.1. Basic Portfolio Tax Management Strategies
8. Application of Tax Management Strategies
8.1. Investment Vehicles
8.2. Tax Loss Harvesting
8.3. Quantitative Tax Management
9. Managing Concentrated Portfolios
9.1. Risk and Tax Considerations in Managing Concentrated Single-Asset Positions
9.1.1. Approaches to Managing the Risk of Concentrated Positions
10. Strategies for Managing Concentrated Positions in Public Equities
10.1. Staged Diversification and Completion Portfolios
10.1.1. Let’s explore how this might work using Michael Stark’s situation.
10.2. Tax-Optimized Equity Strategies—Equity Monetization, Collars, and Call Writing
10.3. Tax-Free Exchanges
10.4. Charitable Remainder Trust
11. Managing Concentrated Positions in Privately Owned Businesses and Real Estate
11.1. Personal Line of Credit Secured by Company Shares
11.2. Leveraged Recapitalization
11.3. Employee Stock Ownership Plan
11.4. Strategies for Managing Concentrated Positions in Real Estate
11.5. Mortgage Financing
11.6. Real Estate Monetization for the Charitably Inclined—An Asset Location Strategy
12. Directing and Transferring Wealth
12.1. Objectives of Gift and Estate Planning
13. Introduction to Estate Planning
13.1. Introduction to Estate Planning: Wills, Probate, and Legal Systems
13.2. Lifetime Gifts and Testamentary Bequests
13.3. Efficiency of Lifetime Gifts versus Testamentary Bequests
14. Estate Planning Tools
15. Managing Wealth Across Generations
15.1. General Principles of Family Governance
15.2. Family Conflict Resolution
15.3. Family Dynamics in the Context of Business Exit
16. Planning for the Unexpected
16.1. Divorce
16.2. Incapacity
17. Summary
References
Practice Problems
Solutions
Risk Management for Individuals
Learning Outcomes
1. Introduction
2. Human Capital, Financial Capital, and Economic Net Worth
2.1. Human Capital
2.2. Financial Capital
2.2.1. Personal Assets
2.2.2. Investment Assets
2.2.3. Publicly Traded Marketable Assets
2.2.4. Non-Publicly Traded Marketable Assets
2.2.4.1. Real Estate
2.2.4.2. Annuities
2.2.4.3. Cash-Value Life Insurance
2.2.4.4. Business Assets
2.2.4.5. Collectibles
2.2.5. Non-Marketable Assets
2.2.5.1. Employer Pension Plans (Vested)
2.2.5.2. Government Pensions
2.2.6. Account Type
2.3. Economic Net Worth
3. A Framework for Individual Risk Management
3.1. The Risk Management Strategy for Individuals
3.1.1. Specify the Objective
3.1.2. Identify Risks
3.1.3. Evaluate Risks and Select Appropriate Methods to Manage the Risks
3.1.4. Monitor Outcomes and Risk Exposures and Make Appropriate Adjustments in Methods
3.2. Financial Stages of Life
3.2.1. Education Phase
3.2.2. Early Career
3.2.3. Career Development
3.2.4. Peak Accumulation
3.2.5. Pre-retirement
3.2.6. Early Retirement
3.2.7. Late Retirement
4. The Individual Balance Sheet
4.1. Traditional Balance Sheet
4.2. Economic (Holistic) Balance Sheet
4.3. Changes in Economic Net Worth
5. Individual Risk Exposures
5.1. Earnings Risk
5.2. Premature Death Risk
5.3. Longevity Risk
5.4. Property Risk
5.5. Liability Risk
5.6. Health Risk
6. Life Insurance: Uses, Types, and Elements
6.1. Life Insurance
6.1.1. Uses of Life Insurance
6.1.2. Types of Life Insurance
6.1.3. Basic Elements of a Life Insurance Policy
7. Life Insurance Pricing, Policy Cost, and Amount Needed
7.1. Mortality Expectations
7.2. Calculation of the Net Premium and Gross Premium
7.3. Cash Values and Policy Reserves
7.4. Consumer Comparisons of Life Insurance Costs
7.5. How Much Life Insurance Does One Need?
8. Other Types of Insurance
8.1. Property Insurance
8.1.1. Homeowner’s Insurance
8.1.2. Automobile Insurance
8.2. Health/Medical Insurance
8.3. Liability Insurance
8.4. Other Types of Insurance
9. Annuities: Types, Structure, and Classification
9.1. Parties to an Annuity Contract
9.2. Classification of Annuities
9.2.1. Deferred Variable Annuities
9.2.2. Deferred Fixed Annuities
9.2.3. Immediate Variable Annuities
9.2.4. Immediate Fixed Annuities
9.2.5. Advanced Life Deferred Annuities
10. Advantages and Disadvantages of Fixed and Variable Annuities
10.1. Volatility of Benefit Amount
10.2. Flexibility
10.3. Future Market Expectations
10.4. Fees
10.5. Inflation Concerns
10.6. Payout Methods
10.7. Annuity Benefit Taxation
10.8. Appropriateness of Annuities
11. Risk Management Implementation
11.1. Determining the Optimal Risk Management Strategy
11.2. Analyzing an Insurance Program
11.2.1. Current Insurance Plan
11.2.1.1. Life Insurance.
11.2.1.2. Health Insurance.
11.2.1.3. Disability Insurance.
11.2.1.4. Long-Term Care Insurance.
11.2.1.5. Property Insurance.
11.2.2. Program Review
11.2.2.1. Life Insurance.
11.2.3. Recommendations
11.2.3.1. Health Insurance.
11.2.3.2. Disability Insurance.
11.2.3.3. Long-Term Care Insurance.
11.2.3.4. Property Insurance.
11.2.3.5. Longevity Insurance.
12. The Effect of Human Capital on Asset Allocation and Risk Reduction
12.1. Asset Allocation and Risk Reduction
13. Summary
References
Practice Problems
Solutions
Glossary
2024 CFA Program Curriculum Level 3 Volume 5: Portfolio Management
Title Page
Table of Contents
How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Prerequisite Knowledge
Feedback
Portfolio Management
Portfolio Management for Institutional Investors
Learning Outcomes
1. Institutional Investors: Types and Common Characteristics
1.1. Institutional Investors: Common Characteristics
1.1.1. Scale
1.1.2. Long-Term Investment Horizon
1.1.3. Regulatory Frameworks
1.1.4. Governance Framework
1.1.5. Principal–Agent Issues
2. Overview of Investment Policy
3. Pension Funds: Types and Stakeholders
3.1. Stakeholders
3.1.1. Defined Benefit Pension Plans
3.1.2. Defined Contribution Pension Plans
4. Pension Funds: Liabilities, Investment Horizon, and Liquidity Needs
4.1. Liabilities and Investment Horizon
4.1.1. Defined Benefit Pension Plans
4.1.2. Defined Contribution Pension Plans
4.2. Liquidity Needs
5. Pension Funds: External Constraints
5.1. Legal and Regulatory Constraints
5.2. Tax and Accounting Constraints
6. Pension Funds: Risk Considerations
7. Pension Funds: Investment Objectives and Asset Allocation
7.1. Investment Objectives
7.1.1. Defined Benefit Pension Plans
7.1.2. Defined Contribution Pension Plans
7.2. Asset Allocation by Pension Plans
8. Sovereign Wealth Funds: Types and Stakeholders
8.1. Stakeholders
9. Sovereign Wealth Funds: Other Considerations
9.1. Liabilities and Investment Horizons
9.1.1. Budget Stabilization Funds
9.1.2. Development Funds
9.1.3. Savings Funds
9.1.4. Reserve Funds
9.1.5. Pension Reserve Funds
9.2. Liquidity Needs
9.2.1. Budget Stabilization Funds
9.2.2. Development Funds
9.2.3. Savings Funds
9.2.4. Reserve Funds
9.2.5. Pension Reserve Funds
9.3. External Constraints Affecting Investment
9.3.1. Legal and Regulatory Constraints
9.3.2. Tax and Accounting Constraints
10. Sovereign Wealth Funds: Investment Objectives and Asset Allocation
10.1. Investment Objectives
10.1.1. Budget Stabilization Funds
10.1.2. Development Funds
10.1.3. Savings Funds
10.1.4. Reserve Funds
10.1.5. Pension Reserve Funds
10.2. Asset Allocation by Sovereign Wealth Funds
11. University Endowments and Private Foundations
11.1.
11.1.1. University Endowments
11.1.2. Private Foundations
11.2. External Constraints Affecting Investment
11.2.1. Legal and Regulatory Constraints
11.2.2. Tax and Accounting Constraints
12. University Endowments: Other Considerations
12.1. University Endowments—Liabilities and Investment Horizon
12.2. University Endowments—Liquidity Needs
13. Private Foundations
13.1. Private Foundations—Liabilities and Investment Horizon
13.2. Private Foundations—Liquidity Needs
14. University Endowments: Investment Objectives and Asset Allocation
14.1. University Endowments
14.2. Asset Allocation
14.2.1. University Endowments
15. Private Foundations: Investment Objectives and Asset Allocation
15.1. Private Foundations
16. Banks and Insurers
16.1.
16.1.1. Banks
16.1.2. Insurers
16.2. External Constraints Affecting Investment
16.2.1. Legal and Regulatory Constraints
16.2.2. Accounting and Tax Considerations
17. Banks: Other Considerations
17.1. Banks—Liabilities and Investment Horizon
17.2. Banks—Liquidity Needs
18. Insurers
18.1. Insurers—Liabilities and Investment Horizon
18.1.1. Life Insurers
18.1.2. Property & Casualty Insurers
18.2. Insurers—Liquidity Needs
19. Banks and Insurers: Investment Objectives
19.1. Banks
19.2. Insurers
20. Banks and Insurers: Balance Sheet Management and Investment Considerations
21. Banks and Insurers: Investment Strategies and Asset and Liability Volatility
22. Banks and Insurers: Implementation of Portfolio Decisions
23. Summary
References
Practice Problems
Solutions
Trade Strategy and Execution
Learning Outcomes
1. Introduction
2. Motivations to Trade
2.1. Profit Seeking
2.1.1. Michigan Index of Consumer Sentiment (short-term profit seeking)
2.1.2. Value manager (long-term profit seeking)
2.2. Risk Management/Hedging Needs
2.3. Cash Flow Needs
2.4. Corporate Actions/Index Reconstitutions/Margin Calls
3. Trading Strategies and Strategy Selection
3.1. Trade Strategy Inputs
3.1.1. Order Characteristics
3.1.2. Security Characteristics
3.1.3. Market Conditions
3.1.4. User-Based Considerations: Trading Cost Risk Aversion
3.1.5. Market Impact and Execution Risk
3.1.5.1. Trader’s dilemma.
4. Reference Prices
4.1. Pre-Trade Benchmarks
4.1.1. Decision price
4.1.2. Previous close
4.1.3. Opening price
4.1.4. Arrival price
4.2. Intraday Benchmarks
4.2.1. VWAP
4.2.2. TWAP
4.3. Post-Trade Benchmarks
4.3.1. Closing price
4.4. Price Target Benchmarks
5. Trading Strategies
5.1. Short-Term Alpha Trade
5.2. Long-Term Alpha Trade
5.3. Risk Rebalance Trade
5.4. Client Redemption Trade
5.5. New Mandate Trade
6. Trade Execution
6.1. Trade Implementation Choices
6.2. Algorithmic Trading
6.2.1. Execution algorithms
6.2.2. Profit-seeking algorithms
6.2.3. Execution Algorithm Classifications
6.2.3.1. Scheduled (POV, VWAP, TWAP)
6.2.3.2. Liquidity seeking
6.2.3.3. Arrival price
6.2.3.4. Dark strategies/liquidity aggregators
6.2.3.5. Smart order routers
6.2.3.5.1. Market orders.
6.2.3.5.2. Limit orders.
7. Comparison of Markets
7.1. Equities
7.2. Fixed Income
7.3. Exchange-Traded Derivatives
7.4. Over-the-Counter Derivatives
7.5. Spot Foreign Exchange (Currency)
8. Trade Cost Measurement
8.1. Implementation Shortfall
8.2. Expanded Implementation Shortfall
8.2.1. Improving Execution Performance
8.2.2. Delay Cost
8.2.2.1. Scenario 1:
8.2.2.2. Scenario 2:
8.2.3. Opportunity Cost
8.2.3.1. Scenario 1:
8.2.3.2. Scenario 2:
9. Evaluating Trade Execution
9.1. Arrival Price
9.2. VWAP
9.3. TWAP
9.4. Market on Close
9.5. Market-Adjusted Cost
9.5.1. Buying in a Rising Market
9.6. Added Value
10. Trade Governance
10.1. Meaning of Best Order Execution within the Relevant Regulatory Framework
10.2. Factors Used to Determine the Optimal Order Execution Approach
10.3. List of Eligible Brokers and Execution Venues
10.4. Process Used to Monitor Execution Arrangements
11. Summary
Practice Problems
Solutions
Portfolio Performance Evaluation
Learning Outcomes
1. Introduction
2. Performance Evaluation and Attribution
2.1. Performance Attribution
3. Equity Return Attribution
3.1. A Simple Return Attribution Example
3.2. Equity Return Attribution—The Brinson–Hood–Beebower Model
3.3. Brinson–Fachler Model
4. Fixed-Income Return Attribution
4.1. Fixed-Income Return Attribution
4.2.1. Exposure Decomposition—Duration Based
4.2.2. Yield Curve Decomposition—Duration Based
4.2.3. Yield Curve Decomposition—Full Repricing
4.2.4. Fixed-Income Attribution—Worked Example
5. Risk Attribution
6. Return Attribution Analysis at Multiple Levels
6.1. Macro Attribution—An Example
6.2. Micro Attribution—An Example
7. Asset- and Liability-Based Benchmarks
7.1. Asset-Based Benchmarks
8. Benchmarks
8.1. Evaluating Benchmark Quality: Analysis Based on a Decomposition of Portfolio Holdings and Returns
8.2. Importance of Choosing the Correct Benchmark
9. Benchmarking Alternative Investments
9.1. Benchmarking Hedge Fund Investments
9.2. Benchmarking Real Estate Investments
9.3. Benchmarking Private Equity
9.4. Benchmarking Commodity Investments
9.5. Benchmarking Managed Derivatives
9.6. Benchmarking Distressed Securities
10. Performance Appraisal: Risk-Based Measures
10.1. Distinguishing Investment Skill from Luck
10.2. Appraisal Measures
10.2.1. The Sharpe Ratio
10.2.2. The Treynor Ratio
10.2.3. The Information Ratio
10.2.4. The Appraisal Ratio
10.2.5. The Sortino Ratio
11. Performance Appraisal: Capture Ratios and Drawdowns
11.1. Capture Ratios
11.2. Drawdown
12. Evaluation of Investment Manager Skill
12.1. Performance Attribution Analysis
12.2. Appraisal Measures
12.3. Sample Evaluation of Skill
13. Summary
References
Practice Problems
Solutions
Investment Manager Selection
Learning Outcomes
1. Introduction
2. A Framework for Investment Manager Search and Selection
2.1. Defining the Manager Universe
3. Type I and Type II Errors in Manager Selection
3.1. Qualitative considerations in Type I and Type II errors
3.2. Performance implications of Type I and Type II errors
4. Quantitative Elements of Manager Search and Selection
4.1. Style Analysis
5. Capture Ratios and Drawdowns in Manager Evaluation
6. The Manager's Investment Philosophy
6.1. Investment Philosophy
6.2. Investment Personnel
7. The Manager's Investment Decision-making Process
7.1. Signal Creation (Idea Generation)
7.2. Signal Capture (Idea Implementation)
7.3. Portfolio Construction
7.4. Monitoring the Portfolio
8. Operational Due Diligence
8.1. Firm
8.2. Investment Vehicle
8.3. Evaluation of the Investment’s Terms
8.3.1. Liquidity
9. Management Fees
9.1. Assets under Management Fees
9.2. Performance-Based Fees
10. Summary
References
Practice Problems
Solutions
Case Study in Portfolio Management: Institutional
Learning Outcomes
1. Introduction
2. Background: Liquidity Management
2.1. Liquidity Profiling and Time-to-Cash Tables
2.2. Rebalancing, Commitments
2.3. Stress Testing
2.4. Derivatives
2.5. Earning an Illiquidity Premium
3. Quadrivium University Investment Company Case: Background
3.1. Quadrivium University Investment Company
3.2. Investment Strategy: Background and Evolution
3.1.2.1. Current Scenario
4. QUINCO Case: Strategic Asset Allocation
5. QUINCO Case: Liquidity Management
6. QUINCO Case: Asset Manager Selection
7. QUINCO Case: Tactical Asset Allocation
8. QUINCO Case: Asset Allocation Rebalancing
9. QUINCO Case: ESG Integration
9.1. Student Activity
9.2. QUINCO ESG Approach
9.3. QUINCO
9.4. Investment Response
10. Summary
Practice Problems
Solutions
Case Study in Risk Management: Private Wealth
Learning Outcomes
1. Introduction and Case Background
1.1. Background of Eurolandia
1.1.1. Government defined benefit (DB) pension plan
1.1.2. Health system
1.1.3. Unemployment insurance
1.1.4. Disability insurance
1.1.5. Education
1.1.6. Social security contributions and tax rates
1.2. The Schmitt Family in Their Early Career Stage
1.2.1. Initial case facts
2. Identification and Analysis of Risk Exposures: Early Career Stage
2.1. Specify the Schmitts’ Financial Objectives
2.2. Identification of Risk Exposures
2.3. Analysis of Identified Risk
2.3.1. Earnings risk
2.3.2. Premature death risk
2.3.3. Car accident and repair costs
2.3.4. Liability risk
2.3.5. House purchase
3. Risk Management Recommendations: Early Career Stage
3.1. Recommendations for Managing Risks
3.1.1. Earnings risk
3.1.2. Premature death risk
3.1.3. Car accident and repair costs
3.1.4. Risks to lifestyle arising from the proposed house purchase
3.1.5. Other risks
3.2. Monitoring Outcomes and Risk Exposures
4. Risk Management Considerations associated with Home Purchase
4.1. Review of Risk Management Arrangements Following the House Purchase
5. Identification and Analysis of Risk Exposures: Career Development Stage
5.1. Case Facts: The Schmitts Are 45
5.2. Financial Objectives in the Career Development Stage
5.3. Identification and Evaluation of Risks in the Career Development Stage
5.3.2. Assessment of earnings risk
5.3.3. Analysis of the investment portfolio risks
5.3.4. Analysis of the retirement savings plans
5.3.5. Other risks
6. Risk Management Recommendations: Career Development Stage
6.1. Disability insurance
6.2. Life Insurance
6.3. Investment Risk Recommendations
6.4. Retirement Planning Recommendation
6.5. Additional Suggestions
7. Identification and Analysis of Risk Exposures: Peak Accumulation Stage
7.1. Review of Objectives, Risks, and Methods of Addressing Them
7.1.1. Financial objectives
7.1.2. Review of Risks and Related Risk Management Methods
8. Retirement Lifestyle and Bequest Goals: Peak Accumulation Stage
8.1. Analysis of Investment Portfolio
8.2.1. The goal of supporting Peter
8.2.2. Leaving inheritance to Roxane
8.2. Analysis of Asset Allocation
8.3.1. Peter’s care
8.3.2. Leaving an inheritance for Roxane
8.3. Recommendations for Risk Management at Peak Accumulation Stage
8.4.1. Risk to earnings
8.4.2. Recommendations for retirement savings
8.4.3. Recommendations for the investment portfolio
9. Retirement Objectives, Assets, and Drawdown Plan
9.1. Key Issues and Objectives
9.2. Analysis of Retirement Assets and Drawdown Plan
10. Income and Investment Portfolio Recommendations: Retirement Stage
10.1. Investment Portfolio Analysis and Recommendations
10.2. The Adviser’s Recommendations for the Investment Portfolio in Retirement
11. Summary
Practice Problems
Solutions
Case Study in Risk Management: Institutional
Learning Outcomes
1. Introduction
2. Financial Risks Faced by Institutional Investors
2.1. Long-Term Perspective
2.2. Dimensions of Financial Risk Management
2.2.1. Top-down vs. bottom-up risk analysis
2.2.2. Portfolio-level risk vs. asset-class-specific risk
2.2.3. Return-based vs. holdings-based risk approaches
2.2.4. Absolute vs. relative risk
2.2.5. Long-term vs. short-term risk metrics
2.2.6. Quantitative vs. qualitative risks
2.2.7. Pre- and post-investment risk assessment
2.3. Risk Considerations for Long-Term Investors
2.4. Risks Associated with Illiquid Asset Classes
2.4.1. Cash flow modeling
2.4.2. Addressing return smoothing behavior of illiquid asset classes
2.4.3. Direct vs. fund investments in illiquid asset classes
2.5. Managing Liquidity Risk
2.6. Enterprise Risk Management for Institutional Investors
3. Environmental and Social Risks Faced by Institutional Investors
3.1. Universal Ownership, Externalities, and Responsible Investing
3.2. Material Environmental Issues for an Institutional Investor
3.2.1. Physical climate risks
3.2.2. Impact on real assets
3.2.3. Climate transition risks
3.2.4. Climate opportunities
3.2.4.1. Climate mitigation
3.2.4.2. Climate adaptation
3.3. Material Social Issues for an Institutional Investor
3.3.1. Managing community relations and the social license to operate
3.3.2. Labor issues in the supply chain
3.3.3. The “just” transition
4. Case Study
4.1. Case Study: Introduction
4.2. Case Study: Background
4.3. R-SWF’S Investments: 1.0
4.3.1. Initial Case Facts (1.0)
4.4. Investment Committee Meeting 1.0
4.4.1. Participants
4.4.1.1. Chief Investment Officer:
4.4.2. Infrastructure Investment Discussion
4.4.2.1. Head of Infrastructure:
4.4.2.2. Chief Investment Officer:
4.4.2.3. Head of Infrastructure:
4.4.2.4. Chief Investment Officer:
4.4.3. Private Equity Investment Discussion
4.4.3.1. Head of PE:
4.4.3.2. Chief Investment Officer:
4.4.3.3. Head of PE:
4.4.3.4. Chief Investment Officer:
4.4.3.5. Head of Risk:
4.4.3.6. Head of PE:
4.4.3.7. Chief Investment Officer:
4.4.3.8. Head of Risk:
4.4.3.9. Head of PE:
4.4.3.10. Chief Investment Officer:
4.4.3.11. Head of Equities:
4.4.3.12. Head of PE:
4.4.3.13. Chief Investment Officer:
4.4.3.14. Head of Risk:
4.4.3.15. Chief Investment Officer:
4.4.3.16. Head of Equities:
4.4.3.17. Head of PE:
4.4.3.18. Chief Investment Officer:
4.4.3.19. Head of PE:
4.4.3.20. Head of Equities:
4.4.3.21. Chief Investment Officer:
4.4.3.22. Head of Risk:
4.4.3.23. Head of PE:
4.4.3.24. Head of Equities:
4.4.3.25. Chief Investment Officer:
4.4.3.26. Head of PE:
4.4.4. General Discussion on Risk
4.4.4.1. Chief Investment Officer:
4.4.4.2. Head of Risk:
4.4.4.3. Head of PE:
4.4.4.4. Head of Infrastructure:
4.4.4.5. Head of Risk:
4.4.4.6. Head of Infrastructure:
4.4.4.7. Head of Risk:
4.4.4.8. Head of Infrastructure:
4.4.4.9. Head of Risk:
4.4.4.10. Head of Equities:
4.4.4.11. Head of Infrastructure
4.4.4.12. Head of Risk:
4.4.4.13. Head of Infrastructure:
4.4.4.14. Chief Investment Officer:
4.4.4.15. Head of Infrastructure:
4.4.4.16. Head of PE:
4.4.4.17. Head of Risk:
4.4.4.18. Head of PE:
4.4.4.19. Head of Infrastructure:
4.4.4.20. Chief Investment Officer:
4.4.4.21. Head of Risk:
4.4.4.22. Head of Infrastructure:
4.4.4.23. Head of PE:
4.4.4.24. Head of Equities:
4.4.4.25. Head of Infrastructure:
4.4.4.26. Head of PE:
4.4.4.27. Chief Investment Officer
4.4.4.28. Head of Risk:
4.4.4.29. Head of Equities:
4.4.4.30. Head of Risk:
4.4.4.31. Head of Infrastructure:
4.4.5. Voting on Infrastructure Investment
4.4.5.1. Chief Investment Officer:
4.4.5.2. Head of Infrastructure:
4.4.5.3. Chief Investment Officer:
4.4.5.4. Head of Risk:
4.4.5.5. Chief Investment Officer:
4.4.5.6. Head of PE:
4.4.5.7. Chief Investment Officer:
4.4.5.8. Head of Equities:
4.4.5.9. Chief Investment Officer:
4.4.6. Voting on Private Equity Investment
4.4.6.1. Chief Investment Officer:
4.4.6.2. Head of PE:
4.4.6.3. Chief Investment Officer:
4.4.6.4. Head of Equities:
4.4.6.5. Chief Investment Officer:
4.4.6.6. Head of Infrastructure:
4.4.6.7. Chief Investment Officer:
4.4.6.8. Head of Risk:
4.4.6.9. Chief Investment Officer:
4.4.6.10. Head of PE:
4.4.6.11. Head of Risk:
4.4.6.12. Head of PE:
4.4.6.13. Chief Investment Officer:
4.4.7. —The End—
4.5. R-SWF’S Investments: 2.0
4.5.1. Extension of Case Facts (2.0)
4.6. Investment Committee Meeting 2.0
4.6.1. Participants
4.6.1.1. Chief Investment Officer:
4.6.1.2. Head of Infrastructure:
4.6.1.3. Chief Investment Officer:
4.6.1.4. Head of PE:
4.6.1.5. Chief Investment Officer:
4.6.1.6. Head of PE:
4.6.1.7. Head of Risk:
4.6.1.8. Head of PE:
4.6.1.9. Head of Risk:
4.6.1.10. Head of PE:
4.6.1.11. Chief Investment Officer:
4.6.1.12. Head of PE:
4.6.1.13. Head of Risk:
4.6.1.14. Chief Investment Officer:
4.6.1.15. Head of PE:
4.6.1.16. Chief Investment Officer:
4.6.1.17. Head of Risk:
4.6.1.18. Head of Infrastructure:
4.6.1.19. Head of Equities:
4.6.1.20. Head of Infrastructure:
4.6.1.21. Chief Investment Officer:
4.6.1.22. Head of PE:
4.6.1.23. Head of Infrastructure:
4.6.1.24. Chief Investment Officer:
4.6.1.25. Head of Risk:
4.6.1.26. Chief Investment Officer:
4.6.1.27. Head of Risk:
4.6.1.28. Head of Infrastructure:
4.6.1.29. Head of Risk:
4.6.1.30. Head of PE:
4.6.1.31. Head of Equities:
4.6.1.32. Head of PE:
4.6.1.33. Chief Investment Officer:
4.6.1.34. Head of Equities:
4.6.1.35. Chief Investment Officer:
4.6.1.36. Head of Infrastructure:
4.6.1.37. Chief Investment Officer:
4.6.1.38. Head of Risk:
4.6.1.39. Chief Investment Officer:
4.6.1.40. Head of Equities:
4.6.1.41. Chief Investment Officer:
4.6.2. —The End—
4.7. R-SWF’S Investments: 3.0
4.7.1. Second Extension of Case Facts (3.0)
4.7.1.1. Update on Infrastructure Investment
4.7.1.2. Update on PE Investment
References
Glossary
2024 CFA Program Curriculum Level 3 Volume 6: Ethical and Professional Standards
Title Page
Table of Contents
How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Prerequisite Knowledge
Feedback
Ethical and Professional Standards
Code of Ethics and Standards of Professional Conduct
Learning Outcomes
1. Preface
1.1. Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct
1.2. Standards of Practice Handbook
1.3. Summary of Changes in the Eleventh Edition
1.3.1. Inclusion of Updated CFA Institute Mission
1.3.2. Updated Code of Ethics Principle
1.3.3. New Standard Regarding Responsibilities of Supervisors [IV(C)]
1.3.4. Additional Requirement under the Standard for Communication with Clients and Prospective Clients [V(B)]
1.3.5. Modification to Standard VII(A)
1.3.6. General Guidance and Example Revision
1.4. CFA Institute Professional Conduct Program
1.5. Adoption of the Code and Standards
1.6. Acknowledgments
2. Ethics and the Investment Industry
2.1. Why Ethics Matters
2.1.1. Ethics, Society, and the Capital Markets
2.1.2. Capital Market Sustainability and the Actions of One
2.1.3. The Relationship between Ethics and Regulations
2.1.4. Applying an Ethical Framework
2.1.5. Commitment to Ethics by Firms
2.1.6. Ethical Commitment of CFA Institute
3. CFA Institute Code of Ethics and Standards of Professional Conduct
3.1. Preamble
3.2. The Code of Ethics
3.3. Standards of Professional Conduct
Guidance for Standards I–VII
Learning Outcomes
1. Standard I(A): Professionalism - Knowledge of the Law
1.1. Standard I(A) Knowledge of the Law
1.2. Guidance
1.2.1. Relationship between the Code and Standards and Applicable Law
1.2.2. Participation in or Association with Violations by Others
1.2.3. Investment Products and Applicable Laws
2. Standard I(A): Recommended Procedures
2.1. Members and Candidates
2.2. Distribution Area Laws
2.3. Legal Counsel
2.4. Dissociation
2.5. Firms
3. Standard I(A): Application of the Standard
3.1. Example 1 (Notification of Known Violations):
3.2. Example 2 (Dissociating from a Violation):
3.3. Example 3 (Dissociating from a Violation):
3.4. Example 4 (Following the Highest Requirements):
3.5. Example 5 (Following the Highest Requirements):
3.6. Example 6 (Laws and Regulations Based on Religious Tenets):
3.7. Example 7 (Reporting Potential Unethical Actions):
3.8. Example 8 (Failure to Maintain Knowledge of the Law):
4. Standard I(B): Professionalism - Independence and Objectivity
4.1. Guidance
4.1.1. Buy-Side Clients
4.1.2. Fund Manager and Custodial Relationships
4.1.3. Investment Banking Relationships
4.1.4. Performance Measurement and Attribution
4.1.5. Public Companies
4.1.6. Credit Rating Agency Opinions
4.1.7. Influence during the Manager Selection/Procurement Process
4.1.8. Issuer-Paid Research
4.1.9. Travel Funding
5. Standard I(B): Recommended Procedures
6. Standard I(B): Application of the Standard
6.1. Example 1 (Travel Expenses):
6.2. Example 2 (Research Independence):
6.3. Example 3 (Research Independence and Intrafirm Pressure):
6.4. Example 4 (Research Independence and Issuer Relationship Pressure):
6.5. Example 5 (Research Independence and Sales Pressure):
6.6. Example 6 (Research Independence and Prior Coverage):
6.7. Example 7 (Gifts and Entertainment from Related Party):
6.8. Example 8 (Gifts and Entertainment from Client):
6.9. Example 9 (Travel Expenses from External Manager):
6.10. Example 10 (Research Independence and Compensation Arrangements):
6.11. Example 11 (Recommendation Objectivity and Service Fees):
6.12. Example 12 (Recommendation Objectivity):
6.13. Example 13 (Influencing Manager Selection Decisions):
6.14. Example 14 (Influencing Manager Selection Decisions):
6.15. Example 15 (Fund Manager Relationships):
6.16. Example 16 (Intrafirm Pressure):
7. Standard I(C): Professionalism – Misrepresentation
7.1. Guidance
7.1.1. Impact on Investment Practice
7.1.2. Performance Reporting
7.1.3. Social Media
7.1.4. Omissions
7.1.5. Plagiarism
7.1.6. Work Completed for Employer
8. Standard I(C): Recommended Procedures
8.1. Factual Presentations
8.2. Qualification Summary
8.3. Verify Outside Information
8.4. Maintain Webpages
8.5. Plagiarism Policy
9. Standard I(C): Application of the Standard
9.1. Example 1 (Disclosure of Issuer-Paid Research):
9.2. Example 2 (Correction of Unintentional Errors):
9.3. Example 3 (Noncorrection of Known Errors):
9.4. Example 4 (Plagiarism):
9.5. Example 5 (Misrepresentation of Information):
9.6. Example 6 (Potential Information Misrepresentation):
9.7. Example 7 (Plagiarism):
9.8. Example 8 (Plagiarism):
9.9. Example 9 (Plagiarism):
9.10. Example 10 (Plagiarism):
9.11. Example 11 (Misrepresentation of Information):
9.12. Example 12 (Misrepresentation of Information):
9.13. Example 13 (Avoiding a Misrepresentation):
9.14. Example 14 (Misrepresenting Composite Construction):
9.15. Example 15 (Presenting Out-of-Date Information):
9.16. Example 16 (Overemphasis of Firm Results):
10. Standard I(D): Professionalism – Misconduct
10.1. Guidance
11. Standard I(D): Recommended Procedures
12. Standard I(D): Application of the Standard
12.1. Example 1 (Professionalism and Competence):
12.2. Example 2 (Fraud and Deceit):
12.3. Example 3 (Fraud and Deceit):
12.4. Example 4 (Personal Actions and Integrity):
12.5. Example 5 (Professional Misconduct):
13. Standard II(A): Integrity of Capital Markets - Material Nonpublic Information
13.1. Standard II(A) Material Nonpublic Information
13.2. Guidance
13.2.1. What Is “Material” Information?
13.2.2. What Constitutes “Nonpublic” Information?
13.2.3. Mosaic Theory
13.2.4. Social Media
13.2.5. Using Industry Experts
13.2.6. Investment Research Reports
14. Standard II(A): Recommended Procedures
14.1. Achieve Public Dissemination
14.2. Adopt Compliance Procedures
14.3. Adopt Disclosure Procedures
14.4. Issue Press Releases
14.5. Firewall Elements
14.6. Appropriate Interdepartmental Communications
14.7. Physical Separation of Departments
14.8. Prevention of Personnel Overlap
14.9. A Reporting System
14.10. Personal Trading Limitations
14.11. Record Maintenance
14.12. Proprietary Trading Procedures
14.13. Communication to All Employees
15. Standard II(A): Application of the Standard
15.1. Example 1 (Acting on Nonpublic Information):
15.2. Example 2 (Controlling Nonpublic Information):
15.3. Example 3 (Selective Disclosure of Material Information):
15.4. Example 4 (Determining Materiality):
15.5. Example 5 (Applying the Mosaic Theory):
15.6. Example 6 (Applying the Mosaic Theory):
15.7. Example 7 (Analyst Recommendations as Material Nonpublic Information):
15.8. Example 8 (Acting on Nonpublic Information):
15.9. Example 9 (Mosaic Theory):
15.10. Example 10 (Materiality Determination):
15.11. Example 11 (Using an Expert Network):
15.12. Example 12 (Using an Expert Network):
16. Standard II(B): Integrity of Capital Markets - Market Manipulation
16.1. Guidance
16.1.1. Information-Based Manipulation
16.1.2. Transaction-Based Manipulation
17. Standard II(B): Application of the Standard
17.1. Example 1 (Independent Analysis and Company Promotion):
17.2. Example 2 (Personal Trading Practices and Price):
17.3. Example 3 (Creating Artificial Price Volatility):
17.4. Example 4 (Personal Trading and Volume):
17.5. Example 5 (“Pump-Priming” Strategy):
17.6. Example 6 (Creating Artificial Price Volatility):
17.7. Example 7 (Pump and Dump Strategy):
17.8. Example 8 (Manipulating Model Inputs):
17.9. Example 9 (Information Manipulation):
18. Standard III(A): Duties to Clients - Loyalty, Prudence, and Care
18.1. Standard III(A) Loyalty, Prudence, and Care
18.2. Guidance
18.2.1. Understanding the Application of Loyalty, Prudence, and Care
18.2.2. Identifying the Actual Investment Client
18.2.3. Developing the Client’s Portfolio
18.2.4. Soft Commission Policies
18.2.5. Proxy Voting Policies
19. Standard III(A): Recommended Procedures
19.1. Regular Account Information
19.2. Client Approval
19.3. Firm Policies
20. Standard III(A): Application of the Standard
20.1. Example 1 (Identifying the Client—Plan Participants):
20.2. Example 2 (Client Commission Practices):
20.3. Example 3 (Brokerage Arrangements):
20.4. Example 4 (Brokerage Arrangements):
20.5. Example 5 (Client Commission Practices):
20.6. Example 6 (Excessive Trading):
20.7. Example 7 (Managing Family Accounts):
20.8. Example 8 (Identifying the Client):
20.9. Example 9 (Identifying the Client):
20.10. Example 10 (Client Loyalty):
20.11. Example 11 (Execution-Only Responsibilities):
21. Standard III(B): Duties to Clients - Fair Dealing
21.1. Guidance
21.1.1. Investment Recommendations
21.1.2. Investment Action
22. Standard III(B): Recommended Procedures
22.1. Develop Firm Policies
22.2. Disclose Trade Allocation Procedures
22.3. Establish Systematic Account Review
22.4. Disclose Levels of Service
23. Standard III(B): Application of the Standard
23.1. Example 1 (Selective Disclosure):
23.2. Example 2 (Fair Dealing between Funds):
23.3. Example 3 (Fair Dealing and IPO Distribution):
23.4. Example 4 (Fair Dealing and Transaction Allocation):
23.5. Example 5 (Selective Disclosure):
23.6. Example 6 (Additional Services for Select Clients):
23.7. Example 7 (Minimum Lot Allocations):
23.8. Example 8 (Excessive Trading):
23.9. Example 9 (Limited Social Media Disclosures):
23.10. Example 10 (Fair Dealing between Clients):
24. Standard III(C): Duties to Clients – Suitability
24.1. Guidance
24.1.1. Developing an Investment Policy
24.1.2. Understanding the Client’s Risk Profile
24.1.3. Updating an Investment Policy
24.1.4. The Need for Diversification
24.1.5. Addressing Unsolicited Trading Requests
24.1.6. Managing to an Index or Mandate
25. Standard III(C): Recommended Procedures
25.1. Investment Policy Statement
25.2. Regular Updates
25.3. Suitability Test Policies
26. Standard III(C): Application of the Standard
26.1. Example 1 (Investment Suitability—Risk Profile):
26.2. Example 2 (Investment Suitability—Entire Portfolio):
26.3. Example 3 (IPS Updating):
26.4. Example 4 (Following an Investment Mandate):
26.5. Example 5 (IPS Requirements and Limitations):
26.6. Example 6 (Submanager and IPS Reviews):
26.7. Example 7 (Investment Suitability—Risk Profile):
26.8. Example 8 (Investment Suitability):
27. Standard III(D): Duties to Clients - Performance Presentation
27.1. Guidance
28. Standard III(D): Recommended Procedures
28.1. Apply the GIPS Standards
28.2. Compliance without Applying GIPS Standards
29. Standard III(D): Application of the Standard
29.1. Example 1 (Performance Calculation and Length of Time):
29.2. Example 2 (Performance Calculation and Asset Weighting):
29.3. Example 3 (Performance Presentation and Prior Fund/Employer):
29.4. Example 4 (Performance Presentation and Simulated Results):
29.5. Example 5 (Performance Calculation and Selected Accounts Only):
29.6. Example 6 (Performance Attribution Changes):
29.7. Example 7 (Performance Calculation Methodology Disclosure):
29.8. Example 8 (Performance Calculation Methodology Disclosure):
30. Standard III(E): Duties to Clients - Preservation of Confidentiality
30.1. Guidance
30.1.1. Status of Client
30.1.2. Compliance with Laws
30.1.3. Electronic Information and Security
30.1.4. Professional Conduct Investigations by CFA Institute
31. Standard III(E): Recommended Procedures
31.1. Communicating with Clients
32. Standard III(E): Application of the Standard
32.1. Example 1 (Possessing Confidential Information):
32.2. Example 2 (Disclosing Confidential Information):
32.3. Example 3 (Disclosing Possible Illegal Activity):
32.4. Example 4 (Disclosing Possible Illegal Activity):
32.5. Example 5 (Accidental Disclosure of Confidential Information):
33. Standard IV(A): Duties to Employers – Loyalty
33.1. Standard IV(A) Loyalty
33.2. Guidance
33.2.1. Employer Responsibilities
33.2.2. Independent Practice
33.2.3. Leaving an Employer
33.2.4. Use of Social Media
33.2.5. Whistleblowing
33.2.6. Nature of Employment
34. Standard IV(A): Recommended Procedures
34.1. Competition Policy
34.2. Termination Policy
34.3. Incident-Reporting Procedures
34.4. Employee Classification
35. Standard IV(A): Application of the Standard
35.1. Example 1 (Soliciting Former Clients):
35.2. Example 2 (Former Employer’s Documents and Files):
35.3. Example 3 (Addressing Rumors):
35.4. Example 4 (Ownership of Completed Prior Work):
35.5. Example 5 (Ownership of Completed Prior Work):
35.6. Example 6 (Soliciting Former Clients):
35.7. Example 7 (Starting a New Firm):
35.8. Example 8 (Competing with Current Employer):
35.9. Example 9 (Externally Compensated Assignments):
35.10. Example 10 (Soliciting Former Clients):
35.11. Example 11 (Whistleblowing Actions):
35.12. Example 12 (Soliciting Former Clients):
35.13. Example 13 (Notification of Code and Standards):
35.14. Example 14 (Leaving an Employer):
35.15. Example 15 (Confidential Firm Information):
36. Standard IV(B): Duties to Employers - Additional Compensation Arrangements
36.1. Guidance
37. Standard IV(B): Recommended Procedures
38. Standard IV(B): Application of the Standard
38.1. Example 1 (Notification of Client Bonus Compensation):
38.2. Example 2 (Notification of Outside Compensation):
38.3. Example 3 (Prior Approval for Outside Compensation):
39. Standard IV(C): Duties to Employers - Responsibilities of Supervisors
39.1. Guidance
39.1.1. System for Supervision
39.1.2. Supervision Includes Detection
40. Standard IV(C): Recommended Procedures
40.1. Codes of Ethics or Compliance Procedures
40.2. Adequate Compliance Procedures
40.3. Implementation of Compliance Education and Training
40.4. Establish an Appropriate Incentive Structure
41. Standard IV(C): Application of the Standard
41.1. Example 1 (Supervising Research Activities):
41.2. Example 2 (Supervising Research Activities):
41.3. Example 3 (Supervising Trading Activities):
41.4. Example 4 (Supervising Trading Activities and Record Keeping):
41.5. Example 5 (Accepting Responsibility):
41.6. Example 6 (Inadequate Procedures):
41.7. Example 7 (Inadequate Supervision):
41.8. Example 8 (Supervising Research Activities):
41.9. Example 9 (Supervising Research Activities):
42. Standard V(A): Investment Analysis, Recommendations, and Actions - Diligence and Reasonable Basis
42.1. Standard V(A) Diligence and Reasonable Basis
42.2. Guidance
42.2.1. Defining Diligence and Reasonable Basis
42.2.2. Using Secondary or Third-Party Research
42.2.3. Using Quantitatively Oriented Research
42.2.4. Developing Quantitatively Oriented Techniques
42.2.5. Selecting External Advisers and Subadvisers
42.2.6. Group Research and Decision Making
43. Standard V(A): Recommended Procedures
44. Standard V(A): Application of the Standard
44.1. Example 1 (Sufficient Due Diligence):
44.2. Example 2 (Sufficient Scenario Testing):
44.3. Example 3 (Developing a Reasonable Basis):
44.4. Example 4 (Timely Client Updates):
44.5. Example 5 (Group Research Opinions):
44.6. Example 6 (Reliance on Third-Party Research):
44.7. Example 7 (Due Diligence in Submanager Selection):
44.8. Example 8 (Sufficient Due Diligence):
44.9. Example 9 (Sufficient Due Diligence):
44.10. Example 10 (Sufficient Due Diligence):
44.11. Example 11 (Use of Quantitatively Oriented Models):
44.12. Example 12 (Successful Due Diligence/Failed Investment):
44.13. Example 13 (Quantitative Model Diligence):
44.14. Example 14 (Selecting a Service Provider):
44.15. Example 15 (Subadviser Selection):
44.16. Example 16 (Manager Selection):
44.17. Example 17 (Technical Model Requirements):
45. Standard V(B): Investment Analysis, Recommendations, and Actions - Communication with Clients and Prospective Clients
45.1. Guidance
45.1.1. Informing Clients of the Investment Process
45.1.2. Different Forms of Communication
45.1.3. Identifying Risks and Limitations
45.1.4. Report Presentation
45.1.5. Distinction between Facts and Opinions in Reports
46. Standard V(B): Recommended Procedures
47. Standard V(B): Application of the Standard
47.1. Example 1 (Sufficient Disclosure of Investment System):
47.2. Example 2 (Providing Opinions as Facts):
47.3. Example 3 (Proper Description of a Security):
47.4. Example 4 (Notification of Fund Mandate Change):
