2022 CFA Program Curriculum Level I Box Set

Description

Prepare for success on the 2022 CFA Level I exam with the latest official CFA® Program Curriculum. The 2022 CFA Program Curriculum Level I Box Set contains all the material you need to succeed on the Level I CFA exam in 2022. This set includes the full official curriculum for Level I and is part of the larger CFA Candidate Body of Knowledge (CBOK). Highly visual and intuitively organized, this box set allows you to: Learn from financial thought leaders. Access market-relevant instruction. Gain critical knowledge and skills. The set also includes practice questions to assist with your recall of key terms, concepts, and formulas. Perfect for anyone preparing for the 2022 Level I CFA exam, the 2022 CFA Program Curriculum Level I Box Set is a must-have resource for those seeking the foundational skills required to become a Chartered Financial Analyst®. Cover About the pagination of this eBook 2022 CFA® PROGRAM CURRICULUM LEVEL I VOLUMES 1–6 Quantitative Methods Title Page Contents How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback Quantitative Methods Study Session 1 Quantitative Methods (1) Reading 1 The Time Value of Money Introduction Interest Rates Future Value of a Single Cash Flow (Lump Sum) Non-Annual Compounding (Future Value) Continuous Compounding, Stated and Effective Rates Stated and Effective Rates Future Value of a Series of Cash Flows, Future Value Annuities Equal Cash Flows—Ordinary Annuity Unequal Cash Flows Present Value of a Single Cash Flow (Lump Sum) Non-Annual Compounding (Present Value) Present Value of a Series of Equal Cash Flows (Annuities) and Unequal Cash Flows The Present Value of a Series of Equal Cash Flows The Present Value of a Series of Unequal Cash Flows Present Value of a Perpetuity and Present Values Indexed at Times other than t=0 Present Values Indexed at Times Other than t = 0 Solving for Interest Rates, Growth Rates, and Number of Periods Solving for Interest Rates and Growth Rates Solving for the Number of Periods Solving for Size of Annuity Payments (Combining Future Value and Present Value Annuities) Present Value and Future Value Equivalence, Additivity Principle The Cash Flow Additivity Principle Summary Practice Problems Solutions Reading 2 Organizing, Visualizing, and Describing Data Introduction Data Types Numerical versus Categorical Data Cross-Sectional versus Time-Series versus Panel Data Structured versus Unstructured Data Data Summarization Organizing Data for Quantitative Analysis Summarizing Data Using Frequency Distributions Summarizing Data Using a Contingency Table Data Visualization Histogram and Frequency Polygon Bar Chart Tree-Map Word Cloud Line Chart Scatter Plot Heat Map Guide to Selecting among Visualization Types Measures of Central Tendency The Arithmetic Mean The Median The Mode Other Concepts of Mean Quantiles Quartiles, Quintiles, Deciles, and Percentiles Quantiles in Investment Practice Measures of Dispersion The Range The Mean Absolute Deviation Sample Variance and Sample Standard Deviation Downside Deviation and Coefficient of Variation Coefficient of Variation The Shape of the Distributions The Shape of the Distributions: Kurtosis Correlation between Two Variables Properties of Correlation Limitations of Correlation Analysis Summary Practice Problems Solutions Reading 3 Probability Concepts Introduction, Probability Concepts, and Odds Ratios Probability, Expected Value, and Variance Conditional and Joint Probability Expected Value (Mean), Variance, and Conditional Measures of Expected Value and Variance Expected Value, Variance, Standard Deviation, Covariances, and Correlations of Portfolio Returns Covariance Given a Joint Probability Function Bayes' Formula Bayes’ Formula Principles of Counting Summary Practice Problems Solutions Study Session 2 Quantitative Methods (2) Reading 4 Common Probability Distributions Introduction and Discrete Random Variables Discrete Random Variables Discrete and Continuous Uniform Distribution Continuous Uniform Distribution Binomial Distribution Normal Distribution The Normal Distribution Probabilities Using the Normal Distribution Standardizing a Random Variable Probabilities Using the Standard Normal Distribution Applications of the Normal Distribution Lognormal Distribution and Continuous Compounding The Lognormal Distribution Continuously Compounded Rates of Return Student’s t-, Chi-Square, and F-Distributions Student’s t-Distribution Chi- Square and F-Distribution Monte Carlo Simulation Summary Practice Problems Solutions Reading 5 Sampling and Estimation Introduction Sampling Methods Simple Random Sampling Stratified Random Sampling Cluster Sampling Non-Probability Sampling Sampling from Different Distributions Distribution of the Sample Mean and the Central Limit Theorem The Central Limit Theorem Standard Error of the Sample Mean Point Estimates of the Population Mean Point Estimators Confidence Intervals for the Population Mean and Selection of Sample Size Selection of Sample Size Resampling Data Snooping Bias, Sample Selection Bias, Look-Ahead Bias, and Time-Period Bias Data Snooping Bias Sample Selection Bias Look-Ahead Bias Time-Period Bias Summary Practice Problems Solutions Reading 6 Hypothesis Testing Introduction Why Hypothesis Testing? Implications from a Sampling Distribution The Process of Hypothesis Testing Stating the Hypotheses Two-Sided vs. One-Sided Hypotheses Selecting the Appropriate Hypotheses Identify the Appropriate Test Statistic Test Statistics Identifying the Distribution of the Test Statistic Specify the Level of Significance State the Decision Rule Determining Critical Values Decision Rules and Confidence Intervals Collect the Data and Calculate the Test Statistic Make a Decision Make a Statistical Decision Make an Economic Decision Statistically Significant but Not Economically Significant? The Role of p-Values Multiple Tests and Interpreting Significance Tests Concerning a Single Mean Test Concerning Differences between Means with Independent Samples Test Concerning Differences between Means with Dependent Samples Testing Concerning Tests of Variances (Chi-Square Test) Tests of a Single Variance Test Concerning the Equality of Two Variances (F-Test) Parametric vs. Nonparametric Tests Uses of Nonparametric Tests Nonparametric Inference: Summary Tests Concerning Correlation Parametric Test of a Correlation Tests Concerning Correlation: The Spearman Rank Correlation Coefficient Test of Independence Using Contingency Table Data Summary Practice Problems Solutions Reading 7 Introduction to Linear Regression Simple Linear Regression Estimating the Parameters of a Simple Linear Regression The Basics of Simple Linear Regression Estimating the Regression Line Interpreting the Regression Coefficients Cross- Sectional vs. Time- Series Regressions Assumptions of the Simple Linear Regression Model Assumption 1: Linearity Assumption 2: Homoskedasticity Assumption 3: Independence Assumption 4: Normality Analysis of Variance Breaking down the Sum of Squares Total into Its Components Measures of Goodness of Fit ANOVA and Standard Error of Estimate in Simple Linear Regression Hypothesis Testing of Linear Regression Coefficients Hypothesis Tests of the Slope Coefficient Hypothesis Tests of the Intercept Hypothesis Tests of Slope When Independent Variable Is an Indicator Variable Test of Hypotheses: Level of Significance and p-Values Prediction Using Simple Linear Regression and Prediction Intervals Functional Forms for Simple Linear Regression The Log-Lin Model The Lin-Log Model The Log-Log Model Selecting the Correct Functional Form Summary Practice Problems Solutions Appendices Glossary Economics and Financial Statement Analysis Title Page Contents How to Use the CFA Program Curriculum ix Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback Economics Study Session 3 Economics (1) Reading 8 Topics in Demand and Supply Analysis Introduction Demand Concepts Demand Concepts Price Elasticity of Demand Extremes of Price Elasticity Predicting Demand Elasticity, Price Elasticity and Total Expenditure Elasticity and Total Expenditure Income Elasticity of Demand, Cross-Price Elasticity of Demand Cross-Price Elasticity of Demand Substitution and Income Effects; Normal Goods, Inferior Goods and Special Cases Normal and Inferior Goods Supply Analysis: Cost, Marginal Return, and Productivity Marginal Returns and Productivity Economc Profit Versus Accounting Profit Economic Cost vs. Accounting Cost Marginal Revenue, Marginal Cost and Profit Maximization; Short-Run Cost Curves: Total, Variable, Fixed, and Marginal Costs Understanding the Interaction between Total, Variable, Fixed, and Marginal Cost and Output Perfect and Imperfect Competition, Profit Maximization Profit-Maximization, Breakeven, and Shutdown Points of Production Breakeven Analysis and Shutdown Decision The Shutdown Decision Economies and Diseconomies of Scale with Short-Run and Long-Run Cost Analysis Short- and Long-Run Cost Curves Defining Economies of Scale and Diseconomies of Scale Summary Practice Problems Solutions Reading 9 The Firm and Market Structures Introduction & Analysis of Market Structures Analysis of Market Structures Perfect Competition & Demand Analysis in Perfectly Competitive Markets Demand Analysis in Perfectly Competitive Markets Elasticity of Demand Other Factors Affecting Demand Consumer Surplus: Value Minus Expenditure Supply Analysis & Optimal Price and Optimal Output In Perfectly Competitive Markets Optimal Price and Output in Perfectly Competitive Markets Factors Affecting Long-Run Equilibrium in Perfectly Competitive Markets Supply, Demand, Optimal Pricing, and Optimal Ouput under Monopolistic Competition Demand Analysis in Monopolistically Competitive Markets Supply Analysis in Monopolistically Competitive Markets Optimal Price and Output in Monopolistically Competitive Markets Long-Run Equilibrium for Monopolistically Competitive Firm Oligopoly & Demand Analysis and Pricing Strategies in Oligopoly Markets: Pricing Independence Portion Demand Analysis and Pricing Strategies in Oligopoly Markets Oligopoly & Demand Analysis and Pricing Strategies in Oligopoly Markets: The Cournot Assumption Part Oligopoly & Demand Analysis and Pricing Strategies in Oligopoly Markets: The Nash Equilibrium part Supply Analysis & Optimal Price and Output & Long-Run Equilibrium in Oligopoly Markets Optimal Price and Output in Oligopoly Markets Factors Affecting Long-Run Equilibrium in Oligopoly Markets Monopoly & Demand & Supply & Optimal Price and Output in Monopoly Markets Demand Analysis in Monopoly Markets Supply Analysis in Monopoly Markets Optimal Price and Output in Monopoly Markets Price Discrimination and Consumer Surplus Factors Affecting Long-Run Equilibrium in Monopoly Markets Identification of Market Structure Econometric Approaches Simpler Measures Summary Practice Problems Solutions Reading 10 Aggregate Output, Prices, and Economic Growth Introduction Aggregate Output and Income Gross Domestic Product The Components of GDP GDP, National Income, Personal Income, and Personal Disposable Income Relationship among Saving, Investment, the Fiscal Balance and the Trade Balance Aggregate Demand and Aggregate Supply Aggregate Demand Aggregate Supply Shifts in the Aggregate Demand Curve Equilibrium GDP and Prices Economic Growth and Sustainability The Production Function and Potential GDP Sources of Economic Growth Measures of Sustainable Growth Measuring Sustainable Growth Summary Practice Problems Solutions Reading 11 Understanding Business Cycles Introduction Overview of the Business Cycle Phases of the Business Cycle Leads and Lags in Business and Consumer Decision Making Market Conditions and Investor Behavior Credit Cycles and Their Relationship to Business Cycles Applications of Credit Cycles Consequences for Policy Business Cycle Fluctuations from a Firm’s Perspective The Workforce and Company Costs Fluctuations in Capital Spending Fluctuations in Inventory Levels Consumer Behavior Consumer Confidence Measures of Consumption Income Growth Saving Rates Housing Sector Behavior Available Statistics Sensitivity to Interest Rates and Relationship to Credit Cycle The Role of Demographics Impact on the Economic Cycle External Trade Sector Behavior Cyclical Fluctuations of Imports and Exports The Role of the Exchange Rate Overall Effect on Exports and Imports Theoretical Considerations Historical Context Neoclassical Economics The Austrian School Monetarism Keynesianism Modern Approach to Business Cycles Economic Indicators Types of Indicators Composite Indicators Leading Indicators Using Economic Indicators Other Composite Leading Indicators Surveys The Use of Big Data in Economic Indicators Nowcasting GDPNow Unemployment Unemployment Inflation Deflation, Hyperinflation, and Disinflation Measuring Inflation: The Construction of Price Indexes Price Indexes and Their Usage Explaining Inflation Summary Practice Problems Solutions Study Session 4 Economics (2) Reading 12 Monetary and Fiscal Policy Introduction to Monetary and Fiscal Policy Monetary Policy Money: Functions, Creation, and Definition The Functions of Money Paper Money and the Money Creation Process Definitions of Money Money: Quantity Theory, Supply and Demand, Fisher Effect The Demand for Money The Supply and Demand for Money The Fisher Effect Roles of Central Banks & Objectives of Monetary Policy The Objectives of Monetary Policy The Costs of Inflation Monetary Policy Tools Open Market Operations The Central Bank’s Policy Rate Reserve Requirements The Transmission Mechanism Inflation Targeting Central Bank Independence Credibility Transparency Exchange Rate Targeting Monetary Policies: Contractionary, Expansionary, Limitations What’s the Source of the Shock to the Inflation Rate? Limitations of Monetary Policy Roles and Objectives of Fiscal Policy Roles and Objectives of Fiscal Policy Deficits and the National Debt Fiscal Policy Tools The Advantages and Disadvantages of Using the Different Tools of Fiscal Policy Modeling the Impact of Taxes and Government Spending: The Fiscal Multiplier The Balanced Budget Multiplier Fiscal Policy Implementation Deficits and the Fiscal Stance Difficulties in Executing Fiscal Policy The Relationship between Monetary and Fiscal Policy Factors Influencing the Mix of Fiscal and Monetary Policy Quantitative Easing and Policy Interaction The Importance of Credibility and Commitment Summary Practice Problems Solutions Reading 13 International Trade and Capital Flows Introduction & International Trade-Basic Terminology International Trade Patterns and Trends in International Trade and Capital Flows Benefits and Costs of International Trade Comparative Advantage and the Gains from Trade: Absolute and Comparative Advantage Gains from Trade: Absolute and Comparative Advantage Ricardian and Heckscher–Ohlin Models of Comparative Advantage Trade and Capital Flows: Restrictions & Agreements- Tariffs, Quotas and Export Subsidies Tariffs Quotas Export Subsidies Trading Blocs, Common Markets, and Economic Unions Capital Restrictions Balance of Payments- Accounts and Components Balance of Payments Accounts Balance of Payment Components Paired Transactions in the BOP Bookkeeping System Commercial Exports: Transactions (ia) and (ib) Commercial Imports: Transaction (ii) Loans to Borrowers Abroad: Transaction (iii) Purchases of Home-Country Currency by Foreign Central Banks: Transaction (iv) Receipts of Income from Foreign Investments: Transaction (v) Purchase of Non-financial Assets: Transaction (vi) National Economic Accounts and the Balance of Payments Trade Organizations International Monetary Fund World Bank Group World Trade Organization Summary Practice Problems Solutions Reading 14 Currency Exchange Rates Introduction & The Foreign Exchange Market The Foreign Exchange Market Market Functions Market Participants, Size and Composition Market Size and Composition Exchange Rate Quotations Exchange Rate Quotations Cross-Rate Calculations Forward Calculations Exchange Rate Regimes- Ideals and Historical Perspective The Ideal Currency Regime Historical Perspective on Currency Regimes A Taxonomy of Currency Regimes Arrangements with No Separate Legal Tender Currency Board System Fixed Parity Target Zone Active and Passive Crawling Pegs Fixed Parity with Crawling Bands Managed Float Independently Floating Rates Exchange Rates and the Trade Balance: Introduction Exchange Rates and the Trade Balance: The Elasticities Approach Exchange Rates and the Trade Balance: The Absorption Approach Summary Practice Problems Solutions Financial Statement Analysis Study Session 5 Financial Statement Analysis (1) Reading 15 Introduction to Financial Statement Analysis Introduction Scope of Financial Statement Analysis Major Financial Statements - Balance Sheet Financial Statements and Supplementary Information Statement of Comprehensive Income Income Statement Other Comprehensive Income Statement of Changes in Equity and Cash Flow Statement Cash Flow Statement Financial Notes, Supplementary Schedules, and Management Commentary Management Commentary or Management’s Discussion and Analysis Auditor's Reports Other Sources of Information Financial Statement Analysis Framework Articulate the Purpose and Context of Analysis Collect Data Process Data Analyze/Interpret the Processed Data Develop and Communicate Conclusions/Recommendations Follow-Up Summary Practice Problems Solutions Reading 16 Financial Reporting Standards Introduction The Objective of Financial Reporting Accounting Standards Boards Accounting Standards Boards Regulatory Authorities International Organization of Securities Commissions The Securities and Exchange Commission (US) Capital Markets Regulation in Europe The International Financial Reporting Standards Framework Qualitative Characteristics of Financial Reports Constraints on Financial Reports The Elements of Financial Statements Underlying Assumptions in Financial Statements Recognition of Financial Statement Elements Measurement of Financial Statement Elements General Requirements for Financial Statements Required Financial Statements General Features of Financial Statements Structure and Content Requirements Comparison of IFRS with Alternative Reporting Systems Monitoring Developments in Financial Reporting Standards New Products or Types of Transactions Evolving Standards and the Role of CFA Institute Summary Practice Problems Solutions Glossary Financial Statement Analysis and Corporate Issuers Title Page Contents How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback Financial Statement Analysis Study Session 6 Financial Statement Analysis (2) Reading 17 Understanding Income Statements Introduction Components and Format of the Income Statement Revenue Recognition General Principles Accounting Standards for Revenue Recognition Expense Recognition: General Principles General Principles Issues in Expense Recognition: Doubtful Accounts, Warranties Doubtful Accounts Warranties Issues in Expense Recognition: Depreciation and Amortization Implications for Financial Analysts: Expense Recognition Non-Recurring Items and Non-Operating Items: Discontinued Operations and Unusual or Infrequent items Discontinued Operations Unusual or Infrequent Items Non-Recurring Items: Changes in Accounting Policy Non-Operating Items Earnings Per Share and Capital Structure and Basic EPS Simple versus Complex Capital Structure Basic EPS Diluted EPS: the If-Converted Method Diluted EPS When a Company Has Convertible Preferred Stock Outstanding Diluted EPS When a Company Has Convertible Debt Outstanding Diluted EPS: the Treasury Stock Method Other Issues with Diluted EPS and Changes in EPS Changes in EPS Common-Size Analysis of the Income Statement Common-Size Analysis of the Income Statement Income Statement Ratios Comprehensive Income Summary Practice Problems Solutions Reading 18 Understanding Balance Sheets Introduction and Components of the Balance Sheet Components and Format of the Balance Sheet Balance Sheet Components Current and Non-Current Classification Liquidity-Based Presentation Current Assets: Cash and Cash Equivalents, Marketable Securities and Trade Receivables Current Assets Current Assets: Inventories and Other Current Assets Other Current Assets Current liabilities Non-Current Assets: Property, Plant and Equipment and Investment Property Property, Plant, and Equipment Investment Property Non-Current Assets: Intangible Assets Identifiable Intangibles Non-Current Assets: Goodwill Non-Current Assets: Financial Assets Non-Current Assets: Deferred Tax Assets Non-Current Liabilities Long-term Financial Liabilities Deferred Tax Liabilities Components of Equity Components of Equity Statement of Changes in Equity Common Size Analysis of Balance Sheet Common-Size Analysis of the Balance Sheet Balance Sheet Ratios Summary Practice Problems Solutions Reading 19 Understanding Cash Flow Statements Introduction Classification Of Cash Flows and Non-Cash Activities Classification of Cash Flows and Non-Cash Activities Cash Flow Statement: Differences Between IFRS and US GAAP Cash Flow Statement: Direct and Indirect Methods for Reporting Cash Flow from Operating Activities Cash Flow Statement: Indirect Method Under IFRS Cash Flow Statement: Direct Method Under IFRS Cash Flow Statement: Direct Method Under US GAAP Cash Flow Statement: Indirect Method Under US GAAP Linkages of Cash Flow Statement with the Income Statement and Balance Sheet Linkages of the Cash Flow Statement with the Income Statement and Balance Sheet Preparing the Cash Flow Statement: The Direct Method for Operating Activities Operating Activities: Direct Method Preparing the Cash Flow Statement: Investing Activities Preparing the Cash Flow Statement: Financing Activities Long-Term Debt and Common Stock Dividends Preparing the Cash Flow Statement: Overall Statement of Cash Flows Under the Direct Method Preparing the Cash Flow Statement: Overall Statement of Cash Flows Under the Indirect Method Conversion of Cash Flows from the Indirect to Direct Method Cash Flow Statement Analysis: Evaluation of Sources and Uses of Cash Evaluation of the Sources and Uses of Cash Cash Flow Statement Analysis: Common Size Analysis Cash Flow Statement Analysis: Free Cash Flow to Firm and Free Cash Flow to Equity Cash Flow Statement Analysis: Cash Flow Ratios Summary Practice Problems Solutions Reading 20 Financial Analysis Techniques Introduction The Financial Analysis Process Analytical Tools and Techniques Financial Ratio Analysis The Universe of Ratios Value, Purposes, and Limitations of Ratio Analysis Sources of Ratios Common Size Balance Sheets and Income Statements Common-Size Analysis of the Balance Sheet Common-Size Analysis of the Income Statement Cross-Sectional, Trend Analysis & Relationships in Financial Statements Trend Analysis Relationships among Financial Statements The Use of Graphs and Regression Analysis Regression Analysis Common Ratio Categories & Interpretation and Context Interpretation and Context Activity Ratios Calculation of Activity Ratios Interpretation of Activity Ratios Liquidity Ratios Calculation of Liquidity Ratios Interpretation of Liquidity Ratios Solvency Ratios Calculation of Solvency Ratios Interpretation of Solvency Ratios Profitability Ratios Calculation of Profitability Ratios Interpretation of Profitability Ratios Integrated Financial Ratio Analysis The Overall Ratio Picture: Examples DuPont Analysis: The Decomposition of ROE Equity Analysis and Valuation Ratios Valuation Ratios Industry-Specific Financial Ratios Research on Financial Ratios in Credit and Equity Analysis Credit Analysis The Credit Rating Process Historical Research on Ratios in Credit Analysis Business and Geographic Segments Segment Reporting Requirements Segment Ratios Model Building and Forecasting Summary Practice Problems Solutions Study Session 7 Financial Statement Analysis (3) Reading 21 Inventories Introduction Cost of inventories Inventory valuation methods Specific Identification First-In, First-Out (FIFO) Weighted Average Cost Last-In, First-Out (LIFO) Calculations of cost of sales, gross profit, and ending inventory Periodic versus perpetual inventory systems Comparison of inventory valuation methods The LIFO method and LIFO reserve LIFO Reserve LIFO liquidations Inventory method changes Inventory adjustments Evaluation of inventory management: Disclosures & ratios Presentation and Disclosure Inventory Ratios Illustrations of inventory analysis: Adjusting LIFO to FIFO Illustrations of inventory analysis: Impacts of writedowns Summary Practice Problems Solutions Reading 22 Long-Lived Assets Introduction & Acquisition of Property, Plant and Equipment Introduction Acquisition of Long-Lived Assets Property, Plant, and Equipment Acquisition of Intangible Assets Intangible Assets Purchased in Situations Other Than Business Combinations Intangible Assets Developed Internally Intangible Assets Acquired in a Business Combination Capitalization versus Expensing: Impact on Financial Statements and Ratios Capitalisation of Interest Costs Capitalisation of Interest and Internal Development Costs Depreciation of Long-Lived Assets: Methods and Calculation Depreciation Methods and Calculation of Depreciation Expense Amortisation of Long-Lived Assets: Methods and Calculation The Revaluation Model Impairment of Assets Impairment of Property, Plant, and Equipment Impairment of Intangible Assets with a Finite Life Impairment of Intangibles with Indefinite Lives Impairment of Long-Lived Assets Held for Sale Reversals of Impairments of Long-Lived Assets Derecognition Sale of Long-Lived Assets Long-Lived Assets Disposed of Other Than by a Sale Presentation and Disclosure Requirements Using Disclosures in Analysis Investment Property Summary Practice Problems Solutions Reading 23 Income Taxes Introduction Differences Between Accounting Profit and Taxable Income Current and Deferred Tax Assets and Liabilities Deferred Tax Assets and Liabilities Determining the Tax Base of Assets and Liabilities Determining the Tax Base of an Asset Determining the Tax Base of a Liability Changes in Income Tax Rates Temporary and Permanent Differences Between Taxable and Accounting Profit Taxable Temporary Differences Deductible Temporary Differences Examples of Taxable and Deductible Temporary Differences Exceptions to the Usual Rules for Temporary Differences Business Combinations and Deferred Taxes Investments in Subsidiaries, Branches, Associates and Interests in Joint Ventures Unused Tax Losses and Tax Credits Recognition and Measurement of Current and Deferred Tax Recognition of a Valuation Allowance Recognition of Current and Deferred Tax Charged Directly to Equity Presentation and Disclosure Comparison of IFRS and US GAAP Summary Practice Problems Solutions Reading 24 Non-Current (Long-Term) Liabilities Introduction Bonds Payable & Accounting for Bond Issuance Accounting for Bond Issuance Accounting for Bond Amortisation, Interest Expense, and Interest Payments Accounting for Bonds at Fair Value Derecognition of Debt Debt Covenants Presentation and Disclosure of Long-Term Debt Leases Examples of Leases Advantages of Leasing Lease Classification as Finance or Operating Financial Reporting of Leases Lessee Accounting—IFRS Lessee Accounting—US GAAP Lessor Accounting Introduction to Pensions and Other Post-Employment Benefits Evaluating Solvency: Leverage and Coverage Ratios Summary Practice Problems Solutions Study Session 8 Financial Statement Analysis (4) Reading 25 Financial Reporting Quality Introduction & Conceptual Overview Conceptual Overview GAAP, Decision Useful Financial Reporting GAAP, Decision-Useful, but Sustainable? Biased Accounting Choices Within GAAP, but “Earnings Management” Departures from GAAP Differentiate between Conservative and Aggressive Accounting Conservatism in Accounting Standards Bias in the Application of Accounting Standards Context for Assessing Financial Reporting Quality: Motivations and Conditions Conducive to Issuing Low Quality Financial Reports Motivations Conditions Conducive to Issuing Low-Quality Financial Reports Mechanisms That Discipline Financial Reporting Quality Market Regulatory Authorities Auditors Private Contracting Detection of Financial Reporting Quality Issues: Introduction & Presentation Choices Presentation Choices Accounting Choices and Estimates and How Accounting Choices and Estimates Affect Earnings and Balance Sheets How Accounting Choices and Estimates Affect Earnings and Balance Sheets How Choices that Affect the Cash Flow Statement Choices that Affect Financial Reporting Warning Signs 1) Pay attention to revenue. 2) Pay attention to signals from inventories. 3) Pay attention to capitalization policies and deferred costs. 4) Pay attention to the relationship of cash flow and net income. 5) Other potential warnings signs. Summary Practice Problems Solutions Reading 26 Applications of Financial Statement Analysis Introduction & Evaluating Past Financial Performance Application: Evaluating Past Financial Performance Application: Projecting Future Financial Performance as an Input to Market Based Valuation Projecting Performance: An Input to Market-Based Valuation Projecting Multiple-Period Performance Application: Assessing Credit Risk Screening for Potential Equity Investments Framework for Analyst Adjustments & Adjustments to Investments & Adjustments to Inventory A Framework for Analyst Adjustments Analyst Adjustments Related to Investments Analyst Adjustments Related to Inventory Adjustments Related to Property, Plant, and Equipment Adjustments Related to Goodwill Summary Practice Problems Solutions Corporate Issuers Study Session 9 Corporate Issuers (1) Reading 27 Introduction to Corporate Governance and Other ESG Considerations Introduction and Overview of Corporate Governance Corporate Governance Overview Stakeholder Groups Stakeholder Groups Principal–Agent and Other Relationships in Corporate Governance Shareholder and Manager/Director Relationships Controlling and Minority Shareholder Relationships Manager and Board Relationships Shareholder versus Creditor Interests Other Stakeholder Conflicts Overview and Mechanisms of Stakeholder Management Overview of Stakeholder Management Mechanisms of Stakeholder Management Mechanisms to Mitigate Associated Stakeholder Risks Employee Laws and Contracts Contractual Agreements with Customers and Suppliers Laws and Regulations Company Boards and Committees Composition of the Board of Directors Functions and Responsibilities of the Board Board of Directors Committees Relevant Factors in Analyzing Corporate Governance and Stakeholder Management Market Factors Non-Market Factors Risks and Benefits of Corporate Governance and Stakeholder Management Risks of Poor Governance and Stakeholder Management Benefits of Effective Governance and Stakeholder Management Factors Relevant to Corporate Governance and Stakeholder Management Analysis Economic Ownership and Voting Control Board of Directors Representation Remuneration and Company Performance Investors in the Company Strength of Shareholders’ Rights Managing Long-Term Risks Summary of Analyst Considerations ESG Considerations for Investors and Analysts Introduction to Environmental, Social, and Governance issues ESG Investment Strategies ESG Investment Approaches Catalysts for Growth in ESG Investing ESG Market Overview ESG Factors in Investment Analysis Summary Practice Problems Solutions Reading 28 Uses of Capital Introduction The Capital Allocation Process Investment Decision Criteria Net Present Value Internal Rate of Return Corporate Usage of Capital Allocation Methods Real Options Timing Options Sizing Options Flexibility Options Fundamental Options Common Capital Allocation Pitfalls Summary Practice Problems Solutions Reading 29 Sources of Capital Introduction Corporate Financing Options Internal Financing Financial Intermediaries Capital Markets Other Financing Considerations Affecting Financing Choices Managing and Measuring Liquidity Defining Liquidity Management Measuring Liquidity Evaluating Short-Term Financing Choices Summary Practice Problems Solutions Glossary Corporate Issuers, Equity, and Fixed Income Title Page Contents How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback Corporate Issuers Study Session 10 Corporate Issuers (2) Reading 30 Cost of Capital-­Foundational Topics Introduction Cost of Capital Taxes and the Cost of Capital Costs of the Various Sources of Capital Cost of Debt Cost of Preferred Stock Cost of Common Equity Estimating Beta Estimating Beta for Public Companies Estimating Beta for Thinly Traded and Nonpublic Companies Flotation Costs Methods in Use Summary Practice Problems Solutions Reading 31 Capital Structure Introduction Capital Structure and Company Life Cycle Background Start-­Ups Growth Businesses Mature Businesses Unique Situations Modigliani–Miller Propositions MM Proposition I without Taxes: Capital Structure Irrelevance MM Proposition II without Taxes: Higher Financial Leverage Raises the Cost of Equity MM Propositions with Taxes: Taxes, Cost of Capital, and Value of the Company Costs of Financial Distress Optimal and Target Capital Structure Factors Affecting Capital Structure Decisions Capital Structure Policies and Target Capital Structures Financing Capital Investments Market Conditions Information Asymmetries and Signaling Agency Costs Stakeholder Interests Shareholder vs. Stakeholder Theory Debt vs. Equity Conflict Preferred Shareholders Private Equity Investors/Controlling Shareholders Bank and Private Lenders Other Stakeholders Summary Practice Problems Solutions Reading 32 Measures of Leverage Introduction Leverage Business and Sales Risks Business Risk and Its Components Sales Risk Operating Risk and the Degree of Operating Leverage Financial Risk, the Degree of Financial Leverage and the Leveraging Role of Debt Total Leverage and the Degree of Total Leverage Breakeven Points and Operating Breakeven Points The Risks of Creditors and Owners Summary Practice Problems Solutions Equity Investments Study Session 11 Equity Investments (1) Reading 33 Market Organization and Structure Introduction The Functions of the Financial System Helping People Achieve Their Purposes in Using the Financial System Determining Rates of Return Capital Allocation Efficiency Assets and Contracts Classifications of Assets and Markets Securities Fixed Income Equities Pooled Investments Currencies, Commodities, and Real Assets Commodities Real Assets Contracts Forward Contracts Futures Contracts Swap Contracts Option Contracts Other Contracts Financial Intermediaries Brokers, Exchanges, and Alternative Trading Systems Dealers Arbitrageurs Securitizers, Depository Institutions and Insurance Companies Depository Institutions and Other Financial Corporations Insurance Companies Settlement and Custodial Services and Summary Summary Positions and Short Positions Short Positions Leveraged Positions Orders and Execution Instructions Execution Instructions Validity Instructions and Clearing Instructions Stop Orders Clearing Instructions Primary Security Markets Public Offerings Private Placements and Other Primary Market Transactions Importance of Secondary Markets to Primary Markets Secondary Security Market and Contract Market Structures Trading Sessions Execution Mechanisms Market Information Systems Well-­functioning Financial Systems Market Regulation Summary Practice Problems Solutions Reading 34 Security Market Indexes Introduction Index Definition and Calculations of Value and Returns Calculation of Single-­Period Returns Calculation of Index Values over Multiple Time Periods Index Construction Target Market and Security Selection Index Weighting Index Management: Rebalancing and Reconstitution Rebalancing Reconstitution Uses of Market Indexes Gauges of Market Sentiment Proxies for Measuring and Modeling Returns, Systematic Risk, and Risk-­Adjusted Performance Proxies for Asset Classes in Asset Allocation Models Benchmarks for Actively Managed Portfolios Model Portfolios for Investment Products Equity indexes Broad Market Indexes Multi-­Market Indexes Sector Indexes Style Indexes Fixed-­income indexes Construction Types of Fixed-­Income Indexes Indexes for Alternative Investments Commodity Indexes Real Estate Investment Trust Indexes Hedge Fund Indexes Summary Practice Problems Solutions Reading 35 Market Efficiency Introduction The Concept of Market Efficiency The Description of Efficient Markets Market Value versus Intrinsic Value Factors Affecting Market Efficiency Including Trading Costs Market Participants Information Availability and Financial Disclosure Limits to Trading Transaction Costs and Information-­Acquisition Costs Forms of Market Efficiency Weak Form Semi-­Strong Form Strong Form Implications of the Efficient Market Hypothesis Fundamental Analysis Technical Analysis Portfolio Management Market Pricing Anomalies - Time Series and Cross-­Sectional Time-­Series Anomalies Cross-­Sectional Anomalies Other Anomalies, Implications of Market Pricing Anomalies Closed-­End Investment Fund Discounts Earnings Surprise Initial Public Offerings (IPOs) Predictability of Returns Based on Prior Information Implications for Investment Strategies Behavioral Finance Loss Aversion Herding Overconfidence Information Cascades Other Behavioral Biases Behavioral Finance and Investors Behavioral Finance and Efficient Markets Summary Practice Problems Solutions Study Session 12 Equity Investments (2) Reading 36 Overview of Equity Securities Importance of Equity Securities Equity Securities in Global Financial Markets Characteristics of Equity Securities Common Shares Preference Shares Private Versus Public Equity Securities Non-­Domestic Equity Securities Direct Investing Depository Receipts Risk and Return Characteristics Return Characteristics of Equity Securities Risk of Equity Securities Equity and Company Value Accounting Return on Equity The Cost of Equity and Investors’ Required Rates of Return Summary Practice Problems Solutions Reading 37 Introduction to Industry and Company Analysis Introduction Uses of Industry Analysis Approaches to Identifying Similar Companies Products and/or Services Supplied Business-­Cycle Sensitivities Statistical Similarities Industry Classification Systems Commercial Industry Classification Systems Constructing a Peer Group Describing and Analyzing an Industry and Principles of Strategic Analysis Principles of Strategic Analysis Barriers to Entry Industry Concentration Industry Capacity Market Share Stability Price Competition Industry Life Cycle External Influences on Industry Macroeconomic Influences Technological Influences Demographic Influences Governmental Influences Social Influences Environmental Influences Industry Comparison Company Analysis Elements That Should Be Covered in a Company Analysis Spreadsheet Modeling Summary Practice Problems Solutions Reading 38 Equity Valuation: Concepts and Basic Tools Introduction Estimated Value and Market Price Categories of Equity Valuation Models Background for the Dividend Discount Model Dividends: Background for the Dividend Discount Model Dividend Discount Model (DDM) and Free-­Cash-­Flow-­to-­Equity Model (FCFE) Preferred Stock Valuation The Gordon Growth Model Multistage Dividend Discount Models Multipler Models and Relationship Among Price Multiples, Present Value Models, and Fundamentals Relationships among Price Multiples, Present Value Models, and Fundamentals Method of Comparables and Valuation Based on Price Multiples Illustration of a Valuation Based on Price Multiples Enterprise Value Asset-­Based Valuation Summary Practice Problems Solutions Fixed Income Study Session 13 Fixed Income (1) Reading 39 Fixed-­Income Securities: Defining Elements Introduction and Overview of a Fixed-­Income Security Overview of a Fixed-­Income Security Bond Indenture Bond Indenture Legal, Regulatory, and Tax Considerations Tax Considerations Principal Repayment Structures Principal Repayment Structures Coupon Payment Structures Floating-­Rate Notes Step-­Up Coupon Bonds Credit-­Linked Coupon Bonds Payment-­in-­Kind Coupon Bonds Deferred Coupon Bonds Index-­Linked Bonds Callable and Putable Bonds Callable Bonds Putable Bonds Convertible Bonds Summary Practice Problems Solutions Reading 40 Fixed-­Income Markets: Issuance, Trading, and Funding Introduction Classification of Fixed-­Income Markets Classification of Fixed-­Income Markets Fixed-­Income Indexes Investors in Fixed-­Income Securities Primary Bond Markets Primary Bond Markets Secondary Bond Markets Sovereign Bonds Characteristics of Sovereign Bonds Credit Quality of Sovereign Bonds Types of Sovereign Bonds Non-­Sovereign, Quasi-­Government, and Supranational Bonds Non-­Sovereign Bonds Quasi-­Government Bonds Supranational Bonds Corporate Debt: Bank Loans, Syndicated Loans, and Commercial Paper Bank Loans and Syndicated Loans Commercial Paper Corporate Debt: Notes and Bonds Maturities Coupon Payment Structures Principal Repayment Structures Asset or Collateral Backing Contingency Provisions Issuance, Trading, and Settlement Structured Financial Instruments Capital Protected Instruments Yield Enhancement Instruments Participation Instruments Leveraged Instruments Short-­Term Bank Funding Alternatives Retail Deposits Short-­Term Wholesale Funds Repurchase and Reverse Repurchase Agreements Structure of Repurchase and Reverse Repurchase Agreements Credit Risk Associated with Repurchase Agreements Summary Practice Problems Solutions Reading 41 Introduction to Fixed-­Income Valuation Introduction Bond Prices and the Time Value of Money Bond Pricing with a Market Discount Rate Yield-­to-­Maturity Relationships between the Bond Price and Bond Characteristics Pricing Bonds Using Spot Rates Prices and Yields: Conventions For Quotes and Calculations Flat Price, Accrued Interest, and the Full Price Matrix Pricing Annual Yields for Varying Compounding Periods in the Year Yield Measures for Fixed-­Rate Bonds Yield Measures for Floating-­Rate Notes Yield Measures for Money Market Instruments The Maturity Structure of Interest Rates Yield Spreads Yield Spreads over Benchmark Rates Yield Spreads over the Benchmark Yield Curve Summary Practice Problems Solutions Reading 42 Introduction to Asset-­Backed Securities Introduction: Benefits of Securitization Benefits of Securitization for Economies and Financial Markets How Securitization Works An Example of a Securitization Parties to a Securitization and Their Roles Structure of a Securitization Key Role of the Special Purpose Entity Residential Mortgage Loans Maturity Interest Rate Determination Amortization Schedule Prepayment Options and Prepayment Penalties Rights of the Lender in a Foreclosure Mortgage Pass-­Through Securities Mortgage Pass-­Through Securities Collateralized Mortgage Obligations and Non-­Agency RMBS Sequential-­Pay CMO Structures CMO Structures Including Planned Amortization Class and Support Tranches Other CMO Structures Non-­Agency Residential Mortgage-­Backed Securities Commercial Mortgage-­Backed Securities Credit Risk CMBS Structure Non-­Mortgage Asset-­Backed Securities Auto Loan ABS Credit Card Receivable ABS Collateralized Debt Obligations CDO Structure An Example of a CDO Transaction Covered Bonds Summary Practice Problems Solutions Glossary Fixed Income, Derivatives, Alternative Investments, and Portfolio Management Title Page Contents How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback Fixed Income Study Session 14 Fixed Income (2) Reading 43 Understanding Fixed-­Income Risk and Return Introduction Sources of Return Macaulay and Modified Duration Macaulay, Modified, and Approximate Duration Approximate Modified and Macaulay Duration Effective and Key Rate Duration Key Rate Duration Properties of Bond Duration Duration of a Bond Portfolio Money Duration and the Price Value of a Basis Point Bond Convexity Investment Horizon, Macaulay Duration and Interest Rate Risk Yield Volatility Investment Horizon, Macaulay Duration, and Interest Rate Risk Credit and Liquidity Risk Empirical Duration Summary Practice Problems Solutions Reading 44 Fundamentals of Credit Analysis Introduction Credit Risk Capital Structure, Seniority Ranking, and Recovery Rates Capital Structure Seniority Ranking Recovery Rates Rating Agencies, Credit Ratings, and Their Role in the Debt Markets Credit Ratings Issuer vs. Issue Ratings ESG Ratings Risks in Relying on Agency Ratings Traditional Credit Analysis: Corporate Debt Securities Credit Analysis vs. Equity Analysis: Similarities and Differences The Four Cs of Credit Analysis: A Useful Framework Credit Risk vs. Return: Yields and Spreads Credit Risk vs. Return: The Price Impact of Spread Changes High-­Yield, Sovereign, and Non-­Sovereign Credit Analysis High Yield Sovereign Debt Non-­Sovereign Government Debt Summary Practice Problems Solutions Derivatives Study Session 15 Derivatives Reading 45 Derivative Markets and Instruments Derivatives: Introduction, Definitions, and Uses Derivatives: Definitions and Uses The Structure of Derivative Markets Exchange-­Traded Derivatives Markets Over-­the-­Counter Derivatives Markets Types of Derivatives: Introduction, Forward Contracts Forward Commitments Types of Derivatives: Futures Types of Derivatives: Swaps Contingent Claims: Options Options Contingent Claims: Credit Derivatives Types of Derivatives: Asset-­Backed Securities and Hybrids Hybrids Derivatives Underlyings Equities Fixed-­Income Instruments and Interest Rates Currencies Commodities Credit Other The Purposes and Benefits of Derivatives Risk Allocation, Transfer, and Management Information Discovery Operational Advantages Market Efficiency Criticisms and Misuses of Derivatives Speculation and Gambling Destabilization and Systemic Risk Elementary Principles of Derivative Pricing Storage Arbitrage Summary Practice Problems Solutions Reading 46 Basics of Derivative Pricing and Valuation Introduction Basic Derivative Concepts, Pricing the Underlying Basic Derivative Concepts Pricing the Underlying The Principle of Arbitrage The (In)Frequency of Arbitrage Opportunities Arbitrage and Derivatives Arbitrage and Replication Risk Aversion, Risk Neutrality, and Arbitrage-­Free Pricing Limits to Arbitrage Pricing and Valuation of Forward Contracts: Pricing vs. Valuation; Expiration; Initiation Pricing and Valuation of Forward Commitments Pricing and Valuation of Forward Contracts: Between Initiation and Expiration; Forward Rate Agreements A Word about Forward Contracts on Interest Rates Pricing and Valuation of Futures Contracts Pricing and Valuation of Swap Contracts Pricing and Valuation of Options European Option Pricing Lower Limits for Prices of European Options Put-­Call Parity, Put-­Call-­Forward Parity Put–Call–Forward Parity Binomial Valuation of Options American Option Pricing Summary Practice Problems Solutions Alternative Investments Study Session 16 Alternative Investments Reading 47 Introduction to Alternative Investments Introduction Why Investors Consider Alternative Investments Categories of Alternative Investments Investment Methods Methods of Investing in Alternative Investments Advantages and Disadvantages of Direct Investing, Co-­Investing, and Fund Investing Due Diligence for Fund Investing, Direct Investing, and Co-­Investing Investment and Compensation Structures Partnership Structures Compensation Structures Common Investment Clauses, Provisions, and Contingencies Hedge Funds Characteristics of Hedge Funds Hedge Fund Strategies Hedge Funds and Diversification Benefits Private Capital Overview of Private Capital Description: Private Equity Description: Private Debt Risk/Return of Private Equity Risk/Return of Private Debt Diversification Benefits of Investing in Private Capital Natural Resources Overview of Natural Resources Characteristics of Natural Resources Risk/Return of Natural Resources Diversification Benefits of Natural Resources Instruments Real Estate Overview of the Real Estate Market Characteristics: Forms of Real Estate Ownership Characteristics: Real Estate Investment Categories Risk and Return Characteristics Diversification Benefits Infrastructure Introduction and Overview Description Risk and Return Characteristics Diversification Benefits Issues in Performance Appraisal Overview of Performance Appraisal for Alternative Investments Common Approaches to Performance Appraisal and Application Challenges Private Equity and Real Estate Performance Evaluation Hedge Funds: Leverage, Illiquidity, and Redemption Terms Calculating Fees and Returns Alternative Asset Fee Structures and Terms Custom Fee Arrangements Alignment of Interests and Survivorship Bias Summary Portfolio Management Study Session 17 Portfolio Management (1) Reading 48 Portfolio Management: An Overview Introduction Portfolio Perspective: Diversification and Risk Reduction Historical Example of Portfolio Diversification: Avoiding Disaster Portfolios: Reduce Risk Portfolio Perspective: Risk-­Return Trade-­off, Downside Protection, Modern Portfolio Theory Historical Portfolio Example: Not Necessarily Downside Protection Portfolios: Modern Portfolio Theory Steps in the Portfolio Management Process Step One: The Planning Step Step Two: The Execution Step Step Three: The Feedback Step Types of Investors Individual Investors Institutional Investors The Asset Management Industry Active versus Passive Management Traditional versus Alternative Asset Managers Ownership Structure Asset Management Industry Trends Pooled Interest - Mutual Funds Mutual Funds Pooled Interest - Type of Mutual Funds Money Market Funds Bond Mutual Funds Stock Mutual Funds Hybrid/Balanced Funds Pooled Interest - Other Investment Products Exchange-­Traded Funds Hedge Funds Private Equity and Venture Capital Funds Summary Practice Problems Solutions Reading 49 Portfolio Risk and Return: Part I Introduction Investment Characteristics of Assets: Return Return Money-­Weighted Return or Internal Rate of Return Time-­Weighted Rate of Return Annualized Return Other Major Return Measures and their Applications Gross and Net Return Pre-­tax and After-­tax Nominal Return Real Returns Leveraged Return Historical Return and Risk Historical Mean Return and Expected Return Nominal Returns of Major US Asset Classes Real Returns of Major US Asset Classes Nominal and Real Returns of Asset Classes in Major Countries Risk of Major Asset Classes Risk–Return Trade-­off Other Investment Characteristics Distributional Characteristics Market Characteristics Risk Aversion and Portfolio Selection & The Concept of Risk Aversion The Concept of Risk Aversion Utility Theory and Indifference Curves Indifference Curves Application of Utility Theory to Portfolio Selection Portfolio Risk & Portfolio of Two Risky Assets Portfolio of Two Risky Assets Portfolio of Many Risky Assets Importance of Correlation in a Portfolio of Many Assets The Power of Diversification Correlation and Risk Diversification Historical Risk and Correlation Historical Correlation among Asset Classes Avenues for Diversification Efficient Frontier: Investment Opportunity Set & Minimum Variance Portfolios Investment Opportunity Set Minimum-­Variance Portfolios Efficient Frontier: A Risk-­Free Asset and Many Risky Assets Capital Allocation Line and Optimal Risky Portfolio The Two-­Fund Separation Theorem Efficient Frontier: Optimal Investor Portfolio Investor Preferences and Optimal Portfolios Summary Practice Problems Solutions Reading 50 Portfolio Risk and Return: Part II Introduction Capital Market Theory: Risk-­Free and Risky Assets Portfolio of Risk-­Free and Risky Assets Capital Market Theory: The Capital Market Line Passive and Active Portfolios What Is the “Market”? The Capital Market Line (CML) Capital Market Theory: CML - Leveraged Portfolios Leveraged Portfolios with Different Lending and Borrowing Rates Systematic and Nonsystematic Risk Systematic Risk and Nonsystematic Risk Return Generating Models Return-­Generating Models Decomposition of Total Risk for a Single-­Index Model Return-­Generating Models: The Market Model Calculation and Interpretation of Beta Estimation of Beta Beta and Expected Return Capital Asset Pricing Model: Assumptions and the Security Market Line Assumptions of the CAPM The Security Market Line Capital Asset Pricing Model: Applications Estimate of Expected Return Beyond CAPM: Limitations and Extensions of CAPM Limitations of the CAPM Extensions to the CAPM Portfolio Performance Appraisal Measures The Sharpe Ratio The Treynor Ratio M2: Risk-­Adjusted Performance (RAP) Jensen’s Alpha Applications of the CAPM in Portfolio Construction Security Characteristic Line Security Selection Implications of the CAPM for Portfolio Construction Summary Practice Problems Solutions Glossary Portfolio Management and Ethical and Professional Standards Title Page Contents How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback Portfolio Management Study Session 18 Portfolio Management (2) Reading 51 Basics of Portfolio Planning and Construction Introduction Portfolio Planning, the Investment Policy Statement (IPS) and Its Major Components The Investment Policy Statement Major Components of an IPS IPS Risk and Return Objectives Return Objectives IPS Constraints: Liquidity, Time Horizon, Tax Concerns, Legal and Regulatory Factors, and Unique Circumstances Liquidity Requirements Time Horizon Tax Concerns Legal and Regulatory Factors Unique Circumstances and ESG Considerations Gathering Client Information Portfolio Construction and Capital Market Expectations Capital Market Expectations The Strategic Asset Allocation Steps Toward an Actual Portfolio and Alternative Portfolio Organizing Principles New Developments in Portfolio Management ESG Considerations in Portfolio Planning and Construction Summary Practice Problems Solutions Reading 52 The Behavioral Biases of Individuals Introduction and Categorizations of Behavioral Biases Categorizations of Behavioral Biases Cognitive Errors Belief Perseverance Biases Processing Errors Emotional Biases Loss-­Aversion Bias Overconfidence Bias Self-­Control Bias Status Quo Bias Endowment Bias Regret-­Aversion Bias How Behavioral Finance Influences Market Behavior Defining Market Anomalies Momentum Bubbles and Crashes Value Summary Practice Problems Solutions Reading 53 Introduction to Risk Management Introduction The Risk Management Process The Risk Management Framework Risk Governance - An Enterprise View An Enterprise View of Risk Governance Risk Tolerance Risk Budgeting Identification of Risk - Financial and Non-­Financial Risk Financial Risks Non-­Financial Risks Identification of Risk - Interactions Between Risks Measuring and Modifying Risk - Drivers and Metrics Drivers Metrics Methods of Risk Modification - Prevention, Avoidance, and Acceptance Risk Prevention and Avoidance Risk Acceptance: Self-­Insurance and Diversification Methods of Risk Modification - Transfer, Shifting, Choosing a Method for Modifying Risk Shifting How to Choose Which Method for Modifying Risk Summary Practice Problems Solutions Reading 54 Technical Analysis Introduction Technical Analysis: Principles, Assumptions, and links to Investment Analysis Principles and Assumptions Technical Analysis and Behavioral Finance Technical Analysis and Fundamental Analysis The Differences in Conducting/Interpreting Technical Analysis in Various Types of Markets Chart Types Types of Technical Analysis Charts Trend, Support, and Resistance Common Chart Patterns Reversal Patterns Continuation Patterns Technical Indicators: Moving Averages and Bollinger Bands Technical Indicators Technical Indicators: Oscillators, Relative Strength, and Sentiment Rate of Change Oscillator Relative Strength Index Stochastic Oscillator Moving-­Average Convergence/Divergence Oscillator (MACD) Sentiment Indicators Intermarket Analysis Principles of Intermarket Analysis Technical Analysis Applications to Portfolio Management The Role of the Technical Analyst in Fundamental Portfolio Management Summary Practice Problems Solutions Reading 55 Fintech in Investment Management Introduction and What is Fintech What Is Fintech? Big Data Sources of Big Data Big Data Challenges Advanced Analytical Tools: Artificial Intelligence and Machine Learning Types of Machine Learning Data Science: Extracting Information from Big Data Data Processing Methods Data Visualization Selected Applications of Fintech to Investment Management Text Analytics and Natural Language Processing Text Analytics and Natural Language Processing Robo-­Advisory Services Risk Analysis Algorithmic Trading Distributed Ledger Technology, and Permissioned and Permissionless Networks Permissioned and Permissionless Networks Applications of Distributed Ledger Technology to Investment Management Cryptocurrencies Tokenization Post-­Trade Clearing and Settlement Compliance Summary Practice Problems Solutions Ethical and Professional Standards Study Session 19 Ethical and Professional Standards Reading 56 Ethics and Trust in the Investment Profession Introduction Ethics Ethics and Professionalism How Professions Establish Trust Professions Are Evolving Professionalism in Investment Management Trust in Investment Management CFA Institute as an Investment Management Professional Body Challenges to Ethical Conduct Ethical vs. Legal Standards Ethical Decision-­Making Frameworks The Framework for Ethical Decision-­Making Applying the Framework Conclusion Summary Practice Problems Solutions Reading 57 Code of Ethics and Standards of Professional Conduct Preface Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct Standards of Practice Handbook Summary of Changes in the Eleventh Edition CFA Institute Professional Conduct Program Adoption of the Code and Standards Acknowledgments Ethics and the Investment Industry Why Ethics Matters CFA Institute Code of Ethics and Standards of Professional Conduct Preamble The Code of Ethics Standards of Professional Conduct Practice Problems Solutions Reading 58 Guidance for Standards I–VII Standard I(A): Professionalism - Knowledge of the Law Standard I(A) Knowledge of the Law Guidance Standard I(A): Recommended Procedures Members and Candidates Distribution Area Laws Legal Counsel Dissociation Firms Standard I(A): Application of the Standard Example 1 (Notification of Known Violations): Example 2 (Dissociating from a Violation): Example 3 (Dissociating from a Violation): Example 4 (Following the Highest Requirements): Example 5 (Following the Highest Requirements): Example 6 (Laws and Regulations Based on Religious Tenets): Example 7 (Reporting Potential Unethical Actions): Example 8 (Failure to Maintain Knowledge of the Law): Standard I(B): Professionalism - Independence and Objectivity Guidance Standard I(B): Recommended Procedures Standard I(B): Application of the Standard Example 1 (Travel Expenses): Example 2 (Research Independence): Example 3 (Research Independence and Intrafirm Pressure): Example 4 (Research Independence and Issuer Relationship Pressure): Example 5 (Research Independence and Sales Pressure): Example 6 (Research Independence and Prior Coverage): Example 7 (Gifts and Entertainment from Related Party): Example 8 (Gifts and Entertainment from Client): Example 9 (Travel Expenses from External Manager): Example 10 (Research Independence and Compensation Arrangements): Example 11 (Recommendation Objectivity and Service Fees): Example 12 (Recommendation Objectivity): Example 13 (Influencing Manager Selection Decisions): Example 14 (Influencing Manager Selection Decisions): Example 15 (Fund Manager Relationships): Example 16 (Intrafirm Pressure): Standard I(C): Professionalism – Misrepresentation Guidance Standard I(C): Recommended Procedures Factual Presentations Qualification Summary Verify Outside Information Maintain Webpages Plagiarism Policy Standard I(C): Application of the Standard Example 1 (Disclosure of Issuer-­Paid Research): Example 2 (Correction of Unintentional Errors): Example 3 (Noncorrection of Known Errors): Example 4 (Plagiarism): Example 5 (Misrepresentation of Information): Example 6 (Potential Information Misrepresentation): Example 7 (Plagiarism): Example 8 (Plagiarism): Example 9 (Plagiarism): Example 10 (Plagiarism): Example 11 (Misrepresentation of Information): Example 12 (Misrepresentation of Information): Example 13 (Avoiding a Misrepresentation): Example 14 (Misrepresenting Composite Construction): Example 15 (Presenting Out-­of-­Date Information): Example 16 (Overemphasis of Firm Results): Standard I(D): Professionalism – Misconduct Guidance Standard I(D): Recommended Procedures Standard I(D): Application of the Standard Example 1 (Professionalism and Competence): Example 2 (Fraud and Deceit): Example 3 (Fraud and Deceit): Example 4 (Personal Actions and Integrity): Example 5 (Professional Misconduct): Standard II(A): Integrity of Capital Markets - Material Nonpublic Information Standard II(A) Material Nonpublic Information Guidance Standard II(A): Recommended Procedures Achieve Public Dissemination Adopt Compliance Procedures Adopt Disclosure Procedures Issue Press Releases Firewall Elements Appropriate Interdepartmental Communications Physical Separation of Departments Prevention of Personnel Overlap A Reporting System Personal Trading Limitations Record Maintenance Proprietary Trading Procedures Communication to All Employees Standard II(A): Application of the Standard Example 1 (Acting on Nonpublic Information): Example 2 (Controlling Nonpublic Information): Example 3 (Selective Disclosure of Material Information): Example 4 (Determining Materiality): Example 5 (Applying the Mosaic Theory): Example 6 (Applying the Mosaic Theory): Example 7 (Analyst Recommendations as Material Nonpublic Information): Example 8 (Acting on Nonpublic Information): Example 9 (Mosaic Theory): Example 10 (Materiality Determination): Example 11 (Using an Expert Network): Example 12 (Using an Expert Network): Standard II(B): Integrity of Capital Markets - Market Manipulation Guidance Standard II(B): Application of the Standard Example 1 (Independent Analysis and Company Promotion): Example 2 (Personal Trading Practices and Price): Example 3 (Creating Artificial Price Volatility): Example 4 (Personal Trading and Volume): Example 5 (“Pump-­Priming” Strategy): Example 6 (Creating Artificial Price Volatility): Example 7 (Pump and Dump Strategy): Example 8 (Manipulating Model Inputs): Example 9 (Information Manipulation): Standard III(A): Duties to Clients - Loyalty, Prudence, and Care Standard III(A) Loyalty, Prudence, and Care Guidance Standard III(A): Recommended Procedures Regular Account Information Client Approval Firm Policies Standard III(A): Application of the Standard Example 1 (Identifying the Client—Plan Participants): Example 2 (Client Commission Practices): Example 3 (Brokerage Arrangements): Example 4 (Brokerage Arrangements): Example 5 (Client Commission Practices): Example 6 (Excessive Trading): Example 7 (Managing Family Accounts): Example 8 (Identifying the Client): Example 9 (Identifying the Client): Example 10 (Client Loyalty): Example 11 (Execution-­Only Responsibilities): Standard III(B): Duties to Clients - Fair Dealing Guidance Standard III(B): Recommended Procedures Develop Firm Policies Disclose Trade Allocation Procedures Establish Systematic Account Review Disclose Levels of Service Standard III(B): Application of the Standard Example 1 (Selective Disclosure): Example 2 (Fair Dealing between Funds): Example 3 (Fair Dealing and IPO Distribution): Example 4 (Fair Dealing and Transaction Allocation): Example 5 (Selective Disclosure): Example 6 (Additional Services for Select Clients): Example 7 (Minimum Lot Allocations): Example 8 (Excessive Trading): Example 9 (Limited Social Media Disclosures): Example 10 (Fair Dealing between Clients): Standard III(C): Duties to Clients – Suitability Guidance Standard III(C): Recommended Procedures Investment Policy Statement Regular Updates Suitability Test Policies Standard III(C): Application of the Standard Example 1 (Investment Suitability—Risk Profile): Example 2 (Investment Suitability—Entire Portfolio): Example 3 (IPS Updating): Example 4 (Following an Investment Mandate): Example 5 (IPS Requirements and Limitations): Example 6 (Submanager and IPS Reviews): Example 7 (Investment Suitability—Risk Profile): Example 8 (Investment Suitability): Standard III(D): Duties to Clients - Performance Presentation Guidance Standard III(D): Recommended Procedures Apply the GIPS Standards Compliance without Applying GIPS Standards Standard III(D): Application of the Standard Example 1 (Performance Calculation and Length of Time): Example 2 (Performance Calculation and Asset Weighting): Example 3 (Performance Presentation and Prior Fund/Employer): Example 4 (Performance Presentation and Simulated Results): Example 5 (Performance Calculation and Selected Accounts Only): Example 6 (Performance Attribution Changes): Example 7 (Performance Calculation Methodology Disclosure): Example 8 (Performance Calculation Methodology Disclosure): Standard III(E): Duties to Clients - Preservation of Confidentiality Guidance Standard III(E): Recommended Procedures Communicating with Clients Standard III(E): Application of the Standard Example 1 (Possessing Confidential Information): Example 2 (Disclosing Confidential Information): Example 3 (Disclosing Possible Illegal Activity): Example 4 (Disclosing Possible Illegal Activity): Example 5 (Accidental Disclosure of Confidential Information): Standard IV(A): Duties to Employers – Loyalty Standard IV(A) Loyalty Guidance Standard IV(A): Recommended Procedures Competition Policy Termination Policy Incident-­Reporting Procedures Employee Classification Standard IV(A): Application of the Standard Example 1 (Soliciting Former Clients): Example 2 (Former Employer’s Documents and Files): Example 3 (Addressing Rumors): Example 4 (Ownership of Completed Prior Work): Example 5 (Ownership of Completed Prior Work): Example 6 (Soliciting Former Clients): Example 7 (Starting a New Firm): Example 8 (Competing with Current Employer): Example 9 (Externally Compensated Assignments): Example 10 (Soliciting Former Clients): Example 11 (Whistleblowing Actions): Example 12 (Soliciting Former Clients): Example 13 (Notification of Code and Standards): Example 14 (Leaving an Employer): Example 15 (Confidential Firm Information): Standard IV(B): Duties to Employers - Additional Compensation Arrangements Guidance Standard IV(B): Recommended Procedures Standard IV(B): Application of the Standard Example 1 (Notification of Client Bonus Compensation): Example 2 (Notification of Outside Compensation): Example 3 (Prior Approval for Outside Compensation): Standard IV(C): Duties to Employers - Responsibilities of Supervisors Guidance Standard IV(C): Recommended Procedures Codes of Ethics or Compliance Procedures Adequate Compliance Procedures Implementation of Compliance Education and Training Establish an Appropriate Incentive Structure Standard IV(C): Application of the Standard Example 1 (Supervising Research Activities): Example 2 (Supervising Research Activities): Example 3 (Supervising Trading Activities): Example 4 (Supervising Trading Activities and Record Keeping): Example 5 (Accepting Responsibility): Example 6 (Inadequate Procedures): Example 7 (Inadequate Supervision): Example 8 (Supervising Research Activities): Example 9 (Supervising Research Activities): Standard V(A): Investment Analysis, Recommendations, and Actions - Diligence and Reasonable Basis Standard V(A) Diligence and Reasonable Basis Guidance Standard V(A): Recommended Procedures Standard V(A): Application of the Standard Example 1 (Sufficient Due Diligence): Example 2 (Sufficient Scenario Testing): Example 3 (Developing a Reasonable Basis): Example 4 (Timely Client Updates): Example 5 (Group Research Opinions): Example 6 (Reliance on Third-­Party Research): Example 7 (Due Diligence in Submanager Selection): Example 8 (Sufficient Due Diligence): Example 9 (Sufficient Due Diligence): Example 10 (Sufficient Due Diligence): Example 11 (Use of Quantitatively Oriented Models): Example 12 (Successful Due Diligence/Failed Investment): Example 13 (Quantitative Model Diligence): Example 14 (Selecting a Service Provider): Example 15 (Subadviser Selection): Example 16 (Manager Selection): Example 17 (Technical Model Requirements): Standard V(B): Investment Analysis, Recommendations, and Actions - Communication with Clients and Prospective Clients Guidance Standard V(B): Recommended Procedures Standard V(B): Application of the Standard Example 1 (Sufficient Disclosure of Investment System): Example 2 (Providing Opinions as Facts): Example 3 (Proper Description of a Security): Example 4 (Notification of Fund Mandate Change): Example 5 (Notification of Fund Mandate Change): Example 6 (Notification of Changes to the Investment Process): Example 7 (Notification of Changes to the Investment Process): Example 8 (Notification of Changes to the Investment Process): Example 9 (Sufficient Disclosure of Investment System): Example 10 (Notification of Changes to the Investment Process): Example 11 (Notification of Errors): Example 12 (Notification of Risks and Limitations): Example 13 (Notification of Risks and Limitations): Example 14 (Notification of Risks and Limitations): Standard V(C): Investment Analysis, Recommendations, and Actions - Record Retention Guidance Standard V(C): Recommended Procedures Standard V(C): Application of the Standard Example 1 (Record Retention and IPS Objectives and Recommendations): Example 2 (Record Retention and Research Process): Example 3 (Records as Firm, Not Employee, Property): Standard VI(A): Conflicts of Interest - Disclosure of Conflicts Standard VI(A) Disclosure of Conflicts Guidance Standard VI(A): Recommended Procedures Standard VI(A): Application of the Standard Example 1 (Conflict of Interest and Business Relationships): Example 2 (Conflict of Interest and Business Stock Ownership): Example 3 (Conflict of Interest and Personal Stock Ownership): Example 4 (Conflict of Interest and Personal Stock Ownership): Example 5 (Conflict of Interest and Compensation Arrangements): Example 6 (Conflict of Interest, Options, and Compensation Arrangements): Example 7 (Conflict of Interest and Compensation Arrangements): Example 8 (Conflict of Interest and Directorship): Example 9 (Conflict of Interest and Personal Trading): Example 10 (Conflict of Interest and Requested Favors): Example 11 (Conflict of Interest and Business Relationships): Example 12 (Disclosure of Conflicts to Employers): Standard VI(B): Conflicts of Interest - Priority of Transactions Guidance Standard VI(B): Recommended Procedures Standard VI(B): Application of the Standard Example 1 (Personal Trading): Example 2 (Trading for Family Member Account): Example 3 (Family Accounts as Equals): Example 4 (Personal Trading and Disclosure): Example 5 (Trading Prior to Report Dissemination): Standard VI(C): Conflicts of Interest - Referral Fees Guidance Standard VI(C): Recommended Procedures Standard VI(C): Application of the Standard Example 1 (Disclosure of Referral Arrangements and Outside Parties): Example 2 (Disclosure of Interdepartmental Referral Arrangements): Example 3 (Disclosure of Referral Arrangements and Informing Firm): Example 4 (Disclosure of Referral Arrangements and Outside Organizations): Example 5 (Disclosure of Referral Arrangements and Outside Parties): Standard VII(A): Responsibilities as a CFA Institute Member or CFA Candidate - Conduct as Participants in CFA Institute Programs Standard VII(A) Conduct as Participants in CFA Institute Programs Guidance Standard VII(A): Application of the Standard Example 1 (Sharing Exam Questions): Example 2 (Bringing Written Material into Exam Room): Example 3 (Writing after Exam Period End): Example 4 (Sharing Exam Content): Example 5 (Sharing Exam Content): Example 6 (Sharing Exam Content): Example 7 (Discussion of Exam Grading Guidelines and Results): Example 8 (Compromising CFA Institute Integrity as a Volunteer): Example 9 (Compromising CFA Institute Integrity as a Volunteer): Standard VII(B): Responsibilities as a CFA Institute Member or CFA Candidate - Reference to CFA Institute, the CFA Designation, and the CFA Program Guidance Standard VII(B): Recommended Procedures Standard VII(B): Application of the Standard Example 1 (Passing Exams in Consecutive Years): Example 2 (Right to Use CFA Designation): Example 3 (“Retired” CFA Institute Membership Status): Example 4 (Stating Facts about CFA Designation and Program): Example 5 (Order of Professional and Academic Designations): Example 6 (Use of Fictitious Name): Practice Problems Solutions Reading 59 Introduction to the Global Investment Performance Standards (GIPS) Why Were the GIPS Created, Who Can Claim Compliance & Who Benefits from Compliance Who Can Claim Compliance? Who Benefits from Compliance? Composites Fundamentals of Compliance Verification Practice Problems Solutions Reading 60 Ethics Application Introduction Professionalism Knowledge of the Law Independence and Objectivity Misrepresentation Misconduct Integrity of Capital Markets Material Nonpublic Information Market Manipulation Duties to Clients Loyalty, Prudence, and Care Fair Dealing Suitability Performance Presentation Preservation of Confidentiality Duties to Employers Loyalty Additional Compensation Arrangements Responsibilities of Supervisors Investment Analysis, Recommendations, and Actions Diligence and Reasonable Basis Communication with Clients and Prospective Clients Record Retention Conflicts of Interest Disclosure of Conflicts Priority of Transactions Referral Fees Responsibilities as a CFA Institute Member or CFA Candidate Conduct as Participants in CFA Institute Programs Reference to CFA Institute, the CFA Designation, and the CFA Program Glossary EULA