How to Use the CFA Program Curriculum ix
Curriculum Development Process ix
Organization of the Curriculum x
Features of the Curriculum x
Designing Your Personal Study Program xi
Feedback xiii
Ethical and Professional Standards
Study Session 1 Ethical and Professional Standards (1) 3
Reading 1 Code of Ethics and Standards of Professional Conduct 5
Preface 5
Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 6
Standards of Practice Handbook 6
Summary of Changes in the Eleventh Edition 7
CFA Institute Professional Conduct Program 9
Adoption of the Code and Standards 10
Acknowledgments 10
Ethics and the Investment Industry 11
Why Ethics Matters 11
CFA Institute Code of Ethics and Standards of Professional Conduct 15
Preamble 15
The Code of Ethics 15
Standards of Professional Conduct 16
Reading 2 Guidance for Standards I–VII 21
Standard I: Professionalism 21
Standard I(A) Knowledge of the Law 21
Guidance 21
Recommended Procedures for Compliance 26
Application of the Standard 27
Standard I(B) Independence and Objectivity 30
Guidance 30
Recommended Procedures for Compliance 35
Application of the Standard 36
Standard I(C) Misrepresentation 43
Guidance 43
Recommended Procedures for Compliance 46
Application of the Standard 48
Standard I(D) Misconduct 53
Guidance 53
Recommended Procedures for Compliance 54
Application of the Standard 54
Standard II: Integrity of Capital Markets 56
Standard II(A) Material Nonpublic Information 56
Guidance 56
Recommended Procedures for Compliance 60
Application of the Standard 63
Standard II(B) Market Manipulation 68
Guidance 68
Application of the Standard 69
Standard III: Duties to Clients 73
Standard III(A) Loyalty, Prudence, and Care 73
Guidance 73
Recommended Procedures for Compliance 77
Application of the Standard 78
Standard III(B) Fair Dealing 82
Guidance 82
Recommended Procedures for Compliance 84
Application of the Standard 86
Standard III(C) Suitability 90
Guidance 90
Recommended Procedures for Compliance 93
Application of the Standard 94
Standard III(D) Performance Presentation 97
Guidance 97
Recommended Procedures for Compliance 98
Application of the Standard 98
Standard III(E) Preservation of Confidentiality 101
Guidance 101
Recommended Procedures for Compliance 103
Application of the Standard 103
Standard IV: Duties to Employers 105
Standard IV(A) Loyalty 105
Guidance 105
Recommended Procedures for Compliance 109
Application of the Standard 109
Standard IV(B) Additional Compensation Arrangements 116
Guidance 116
Recommended Procedures for Compliance 116
Application of the Standard 116
Standard IV(C) Responsibilities of Supervisors 118
Guidance 118
Recommended Procedures for Compliance 120
Application of the Standard 122
Standard V: Investment Analysis, Recommendations, and Actions 126
Standard V(A) Diligence and Reasonable Basis 126
Guidance 126
Recommended Procedures for Compliance 130
Application of the Standard 130
Standard V(B) Communication with Clients and Prospective Clients 137
Guidance 138
Recommended Procedures for Compliance 140
Application of the Standard 141
Standard V(C) Record Retention 146
Guidance 146
Recommended Procedures for Compliance 147
Application of the Standard 148
Standard VI: Conflicts of Interest 149
Standard VI(A) Disclosure of Conflicts 149
Guidance 149
Recommended Procedures for Compliance 152
Application of the Standard 152
Standard VI(B) Priority of Transactions 157
Guidance 157
Recommended Procedures for Compliance 158
Application of the Standard 160
Standard VI(C) Referral Fees 162
Guidance 162
Recommended Procedures for Compliance 162
Application of the Standard 162
Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 165
Standard VII(A) Conduct as Participants in CFA Institute Programs 165
Guidance 165
Application of the Standard 167
Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program 170
Guidance 170
Recommended Procedures for Compliance 172
Application of the Standard 173
Practice Problems 175
Solutions 193
Study Session 2 Ethical and Professional Standards (2) 205
Reading 3 Application of the Code and Standards 207
Introduction 207
Edvard Stark 208
Duties to Clients 209
Duties to Employers 210
Investment Analysis, Recommendations, and Actions 211
Conflicts of Interest 211
Subath Agarway 212
Professionalism 214
Conflicts of Interest 215
Peter Sherman 216
Loyalty to One’s Employer 217
Solicitation of Clients and Prospects 218
Misappropriation of Employer Property 218
Disclosure of Additional Compensation and Conflicts 219
Preston Partners 220
Responsibilities to Clients and Interactions with Clients 221
Allocation of Trades 222
Responsibilities of Supervisors 223
Super Selection 224
Responsibilities of Supervisors 225
Employees and the Employer/Supervisor 226
Reasonable Basis 227
Duties to Clients 227
Investment Recommendations and Actions 227
Priority of Transactions 228
Reading 4 Trade Allocation: Fair Dealing and Disclosure 229
Reading 5 Changing Investment Objectives 233
Quantitative Methods
Study Session 3 Quantitative Methods 237
Reading 6 Fintech in Investment Management 239
Introduction 239
What Is Fintech? 240
Big Data 241
Sources of Big Data 242
Big Data Challenges 244
Advanced Analytical Tools: Artificial Intelligence and Machine Learning 244
Types of Machine Learning 245
Data Science: Extracting Information from Big Data 247
Data Processing Methods 247
Data Visualization 247
Selected Applications of Fintech to Investment Management 249
Text Analytics and Natural Language Processing 249
Robo-Advisory Services 250
Risk Analysis 252
Algorithmic Trading 253
Distributed Ledger Technology 253
Permissioned and Permissionless Networks 255
Applications of Distributed Ledger Technology to Investment Management 256
Summary 257
Practice Problems 259
Solutions 261
Reading 7 Correlation and Regression 263
Introduction 264
Correlation Analysis 264
Scatter Plots 264
Correlation Analysis 265
Calculating and Interpreting the Correlation Coefficient 268
Limitations of Correlation Analysis 270
Uses of Correlation Analysis 273
Testing the Significance of the Correlation Coefficient 282
Linear Regression 285
Linear Regression with One Independent Variable 286
Assumptions of the Linear Regression Model 289
The Standard Error of Estimate 292
The Coefficient of Determination 295
Hypothesis Testing 297
Analysis of Variance in a Regression with One Independent Variable 305
Prediction Intervals 308
Limitations of Regression Analysis 311
Summary 311
Practice Problems 314
Solutions 323
Reading 8 Multiple Regression and Machine Learning 327
Introduction 328
Multiple Linear Regression 328
Assumptions of the Multiple Linear Regression Model 334
Predicting the Dependent Variable in a Multiple Regression Model 339
Testing whether All Population Regression Coefficients Equal Zero 341
Adjusted R2 343
Using Dummy Variables in Regressions 344
Violations of Regression Assumptions 348
Heteroskedasticity 349
Serial Correlation 355
Multicollinearity 359
Heteroskedasticity, Serial Correlation, Multicollinearity: Summarizing the Issues 362
Model Specification and Errors in Specification 363
Principles of Model Specification 363
Misspecified Functional Form 364
Time-Series Misspecification (Independent Variables Correlated with Errors) 372
Other Types of Time-Series Misspecification 376
Models with Qualitative Dependent Variables 376
Machine Learning 378
Major Focuses of Data Analytics 379
What Is Machine Learning? 380
Types of Machine Learning 381
Machine Learning Algorithms 383
Supervised Machine Learning: Training 390
Summary 391
Practice Problems 396
Solutions 421
Reading 9 Time-Series Analysis 433
Introduction to Time-Series Analysis 434
Challenges of Working with Time Series 436
Trend Models 437
Linear Trend Models 437
Log-Linear Trend Models 440
Trend Models and Testing for Correlated Errors 446
Autoregressive (AR) Time-Series Models 447
Covariance-Stationary Series 448
Detecting Serially Correlated Errors in an Autoregressive Model 449
Mean Reversion 452
Multiperiod Forecasts and the Chain Rule of Forecasting 453
Comparing Forecast Model Performance 456
Instability of Regression Coefficients 458
Random Walks and Unit Roots 461
Random Walks 461
The Unit Root Test of Nonstationarity 465
Moving-Average Time-Series Models 469
Smoothing Past Values with an n-Period Moving Average 470
Moving-Average Time-Series Models for Forecasting 472
Seasonality in Time-Series Models 474
Autoregressive Moving-Average Models 480
Autoregressive Conditional Heteroskedasticity Models 481
Regressions with More than One Time Series 484
Other Issues in Time Series 488
Suggested Steps in Time-Series Forecasting 489
Summary 490
Practice Problems 494
Solutions 510
Reading 10 Excerpt from “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations” 519
Introduction 519
Simulations 520
Steps in Simulation 520
An Example of a Simulation 523
Use in Decision Making 526
Simulations with Constraints 527
Issues 528
Risk-Adjusted Value and Simulations 529
An Overall Assessment of Probabilistic Risk Assessment Approaches 530
Comparing the Approaches 530
Complement or Replacement for Risk-Adjusted Value 531
In Practice 532
Conclusion 533
Economics
Study Session 4 Economics 537
Reading 11 Currency Exchange Rates: Understanding Equilibrium Value 539
Introduction 540
Foreign Exchange Market Concepts 540
Arbitrage Constraints on Spot Exchange Rate Quotes 544
Forward Markets 548
The Mark-to-Market Value of a Forward Contract 552
A Long-Term Framework for Exchange Rates 556
International Parity Conditions 557
The Carry Trade 572
The Impact of Balance of Payments Flows 575
Current Account Imbalances and the Determination of Exchange Rates 576
Capital Flows and the Determination of Exchange Rates 579
Monetary and Fiscal Policies 585
The Mundell–Fleming Model 585
Monetary Models of Exchange Rate Determination 587
The Portfolio Balance Approach 590
Exchange Rate Management: Intervention and Controls 593
Warning Signs of a Currency Crisis 596
Summary 600
Appendix 605
Practice Problems 606
Solutions 614
Reading 12 Economic Growth and the Investment Decision 619
Introduction 620
Growth in the Global Economy: Developed vs. Developing Economies 620
Savings and Investment 623
Financial Markets and Intermediaries 623
Political Stability, Rule of Law, and Property Rights 624
Education and Health Care Systems 624
Tax and Regulatory Systems 625
Free Trade and Unrestricted Capital Flows 625
Summary of Factors Limiting Growth in Developing Countries 626
Why Potential Growth Matters to Investors 628
Determinants of Economic Growth 633
Production Function 633
Capital Deepening vs. Technological Progress 635
Growth Accounting 637
Extending the Production Function 639
Natural Resources 639
Labor Supply 641
Labor Quality: Human Capital 646
Capital: ICT and Non-ICT 647
Technology 649
Public Infrastructure 653
Summary 653
Theories of Growth 658
Classical Model 659
Neoclassical Model 659
Endogenous Growth Theory 671
Convergence Debate 674
Growth in an Open Economy 678
Summary 686
Practice Problems 690
Solutions 697
Reading 13 Economics of Regulation 701
Introduction 701
Overview of Regulation 702
Classification of Regulations and Regulators 702
Economic Rationale for Regulation 705
Regulatory Tools 708
Regulation of Commerce 713
Regulation of Financial Markets 717
Cost–Benefit Analysis of Regulation 718
Analysis of Regulation 720
Effects of Regulations 722
Summary 725
Practice Problems 728
Solutions 732
Appendices 734
Glossary G-1
Index I-1
