2012 level 3 mindmaps (all)
TRANSCRIPT
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InformationaboutCFAlevel3exams&modules&ChangesinCFAlevel3curriculum2012
BithiCFAlevel3gm2phn: phnessaybuisng:vit3 ting,s lngcuhivsim1cuhikhngcnh,khngphivit
vnmchyuquantrnglgchracc,tptrungvokeywords,vtnhton phnproblemsetsbuichiu(ginglevel2):10sets,misetc6cuhi.
Khnggingnhlevel1v2cchiathnh10mnhc,level3cchiathnh14mnhcnhsau:1. Ethics:ngoivicntpliccstandardshcgingnhlevel1v2,mnnylevel3thmmtsni
dungmicbitnhCodeofAssetManagement.MnEthicschctrongbithibuichiu(problemsets)chkhngxuthintrongbiessaybuisng.
2. Behavioral finance:nghincutm ltrongu ttichnh.Mnnychimt trngnh,vcthxuthin di dng 1 bi essay ngn tch bit hoc l 1 cu n trong bi essay thuc phn privatewealthmanagement,hoccngcthxuthintrongproblemsetbuichiu.
3. PrivateWealthManagement:cungcpknngcngnhframeworkchocngvicqunltisncnhn.Phntchnhutcnhn,gmcphn tchnhtnhvnh lng, t ln IPS (InvestmentPolicyStatements) choh.Mnny ch yu xuthin trongbiessaybui sng chhim khi xuthin trongproblemsetbuichiu.Trongbiessaybuisng,ncthchimtichoti1/3sim(chim45choti60phtlmbi),nncngviInstitutionalinvestors,mnnychimttrnglnnhtlevel3.
4. InstitutionalInvestors:tngtnhPrivatewealthmanagement,nhnglchoccnhuttchc,cthlccqulnghu(DB,DC),ngnhng,cngtybohim(nhnth,phinhnth),ccqutthin(foundation,endowment)McchcngllncIPS.TtrngvcchracuhitngtnhPrivatewealthmanagement.
5. CapitalMarketExpectations:Phntchkinhtvmvccphngphparadonvm.Cthtrongbibuisnghocchiu.
6. Economics:Lthuytsnxutvmvnhgithtrngcphiuvm.Cthtrongbibuisnghocchiu.
7. AssetAllocation:SdngmtsphngphpnhMarkowitzefficientfrontier,BlackLitterman,resampledefficientfrontierphnbkhonutvoccloihnhutkhcnhauhocvoccngtinkhcnhau.
8. FixedIncome:nulevel1hcvcckhinimcbn,level2hcvnhgilchyu,thlevel3thinvchinlccth:utvitlbaonhiu,muabnbaonhiu,dngcngcnoCthtrongbibuisnghocchiu.
9. Equity:phmvifocusvhnhthcthitngtnhFixedIncome10. Alternativeinvestments:phmvifocusvhnhthcthitngtnhFixedIncome
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11. RiskManagement:phmvifocusvhnhthcthitngtnhFixedIncome12. Execution,Monitoring&Rebalancing:Thchinmuabn,tlnhtrnthtrngthnotitkimchi
ph.Gimstdanhmcvxlmuabnlikhitltrongdanhmcichchkhimctiubanunhthno.Cthtrongbibuisnghocchiu.
13. Performanceevaluationandattribution:Phngphpnhgiperformancecadanhmc,ngthigncngtrng,trchnhimchotngkhu,tngngiphtrchtrongtonbqutrnhut.Cthtrongbibuisnghocchiu.
14. GIPS:ccnguyntcolngvbocoperformance.Cthtrongbibuisnghocchiu.Sovinm2011,thnm2012,slngreadingscalevel3gim5readingscn43readings.Nhngthcraiunykhngngnghavi lngkinthcb loibt,mdomnBehavioralfinancecvit lihontonvi3readingsmi,dihn,thaythcho7readingsngnngytrc.Readingduynhtthcsbloiblreading18c(Goalbased investing: integratingtraditionalandbehavioralfinance)nmtrongmnPrivatewealthmanagement,clldoboverlapvimnbehavioralfinancecvitli.Phnvitlinychpdnhn,logicchtchhnnmcnhiuln.Ccmncnlikhngthayighocchthm,bt13LOS,hocithtccLOS.Ngitnghp:PhmThinQuang&NguynHoiPhng,AFTC.
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CFALEVEL3
STUDYSESSION1&2
CODEOFETHICS&STANDARDSOFPROFESSIONAL
CONDUCT
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1. Code OfEthics AndStandards
OfProfessional
Conduct
a.
All CFA Institute members and candidates arerequired to comply with the Code and Standards
Structure ofthe CFAInstituteProfessionalConductProgram
Basic structurefor enforcingthe Code andStandards
The CFA Institute Bylaws
Rules ofProcedure
Based ontwo primaryprinciples
Fair process tomember and candidateConfidentialityof proceedings
ProfessionalConductprogram(PCP)
The CFAInstituteBoard ofGovernors
Maintains oversightand responsibility
Through theDisciplinary ReviewCommittee (DRC)
Is responsible for theenforcement of theCode and Standards
The CFADesignatedOfficer
DirectsProfessionalConduct Staff
Conducts professionalconduct inquiries
An inquiry can be promptedby several circumstances
Processfor theenforcementof theCodeandStandards
Whenaninquiryisinitiated
The ProfessionalConduct staffconducts aninvestigation thatmay include
Requesting a written explanationfrom the member or candidate
InterviewingThe member or candidateComplaining partiesThird parties
Collecting documents and recordsin support of its investigation
Uponreviewing thematerialobtainedduring theinvestigation,theDesignatedOfficer may
Conclude the inquiry with no disciplinary sanctionIssue a cautionary letter
Continueproceedingsto disciplinethe memberor candidate
If findingthat aviolation ofthe CodeandStandardsoccurred,theDesignatedOfficerproposes adisciplinarysanction
Accepted by member
Rejectedbymember
The matter isreferred to ahearing by a panelof CFA Institutemembers
b.
Six components ofthe Code of Ethics
Seven Standards ofProfessional Conduct
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2.1 Standard IPROFESSIONALISM
A.Knowledgeof the law
Guidance
Understand and comply with applicable laws and regulations
Code and Standards vs. Local law Follow stricter law and regulation
Participation orassociation withviolations by others
Responsible for violations in which they knowingly participate or assist
Dissociate from illegal, unethical activities ->Leave employers (in extreme cases)
Intermediatesteps
Attempt to stop the behavior by bringing it to the attention ofemployer through a supervisor or compliance departmentMay consider directly confronting the involved individuals
If not successful,-> step away anddissociate from the activity by
Removing their name from written reports
Asking for a different assignmentInaction with continued association may be construed as knowing participationNot require reporting violations to govt, CFAI, but...
Investment products andapplicable laws
Recommendedprocedures forcompliance (RPC)
Members and candidates
Stay informed
Review proceduresMaintain current filesWhen in doubt,->seek advice of compliance personnel or legal counselWhen dissociating from violations,-> Document anyviolations and urge firms to stop them
Firms
Develop and/or adopt a code of ethics
Make available to employees info that highlights applicable laws and regulationsEstablish written procedures for reporting suspected violation of laws,...
Application
B. Independenceand objectivity
Guidance
Maintain independence and objectivity in professional activities
How to cope withexternal andinternalpressures
Externalpressures
By benefits
GiftsInvitations to lavish functionsTickets
FavorsJob referralsAllocation of shares in oversubscribedIPOs to investment managers....
FromBuy-sideclients
May try to pressure sell-side analysts
From publiccompanies
To issue favorable reports
Fund managers relationships
Internalpressures
From theirown firms
e.g. to issue favorable researchreports/recommendations for certain companies
Investment-bankingrelationships
to issue favorable research on current orprospective investment-banking clientsConflicts of interest
Credit rating agency opinions
-->
-->Modest gifts and entertainment areacceptable but special care must be taken
-->must disclose to employers
-->Best practice: reject any offer of gift,..threateningindependence and objectivity
-->Recommendations mustconvey true opinionsfree of bias from pressuresbe stated in clear and unambiguous language
-->Portfolio managers must respect and foster honesty of sell-side research
Issuer-paidresearch
Is fraught with conflicts
-->Analysts
Must engage in thorough, independent, and unbiased analysis
Must fully disclose potential conflicts, including the nature of compensationMust strictly limit the type of compensation they accept for conducting research
Bestpractice
Accept only flat fee for their work prior to writing the reportW/O regard to conclusions or recommendations
RPC
Protect integrity of opinionsCreate a restricted listRestrict special cost arrangements
Limit gifts
Restrict employeeinvestments
Equity IPOsPrivate placements
Review proceduresWritten policies on independence and objectivity of research
C. Misrepresentation
Guidance
Definition of"Misrepresentation"
any untrue statement or omission of a factor any false or misleading statement
Must not knowingly make misrepresentationor give false impression in
oral representations, advertisingelectronic communicationswritten materials
Must not misrepresent anyaspect of practice, including
qualifications or credentials, servicesperformance record
characteristics of an investmentany misrepresentation relating tomember's professional activities
Must not guarantee clients specific return on investments that are inherently volatile
PlagiarismStandard I(C) prohibits plagiarism inpreparation of material for distribution to
employers
associatesclientsprospectsgeneral public
Work completed for employer
RPC
Factual presentationWritten list of available services, description of firm's qualificationDesignate employees to speak on behalf of firm
Qualification summary Prepare summary of qualifications and experience, list of services capable of performing
Verify outside infoMaintain webpages
To avoid plagiarismMaintain copiesAttribute quotations
Attribute summaries
D.Misconduct
Guidance
Address all conduct reflects poorly onprofessional integritygood reputationcompetence of members and candidates
Violations
Any act involving lying, cheating, stealing, other dishonest conduct that reflects adversely onmember's professional activities would be violationConduct damaging trustworthiness or competence
Absence of appropriate conductLack of sufficient effortAbuse of the CFA Institute Professional Conduct Program
RPCDevelop and/or adopt a code of ethicsDisseminate to all employee a list of potential violationsCheck references of potential employees
a
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2.2 Standard IIINTEGRITY OF
CAPITALMARKET
A. Materialnonpublicinformation(MNI)
Guidance
Definition of "Material nonpublic information"
Must be particularly aware of infoselectively disclosed by corporations
MosaicTheory
Analysis of Public info + nonmaterialnonpublic info --> Investment conclusion
Analysts are free to act on thiscollection of info w/o risking violation
Analysts should save anddocument all their research
RPC
Achieve public dissemination
Make reasonable efforts to achieve public dissemination of material info
If public dissemination is not possible,Must communicate the info only to the designatedsupervisory and compliance personnel within the firm
Must not take investment action on the basis of the infoMust not knowingly engage in conduct inducing insiders to privately disclose MNI
Adopt compliance procedures Encourage firms to
adopt compliance procedurespreventing misuse of MNIdevelop & follow disclosure policies to ensure proper dissemination
use "firewall" Firewall elements
Adopt disclosure procedures
Issue press releases
Appropriateinterdepartmentalcommunications
Physical separation ofdepartments
Prevention of personnel overlap
A reporting system
Personal trading limitations
Record maintenance
Proprietary tradingprocedures
Prohibition of all proprietary trading while firmis in possession of MNI may be inappropriate
Communication to allemployees
B. Market manipulation
Definition
can be related toInfo-based manipulations dissemination of false or misleading info
Transaction-basedmanipulations
transactions that deceive market participants
Standard II(B) not meant to prohibit legitimate trading strategies
prohibit transactions done for tax purposes
The intent of action is critical to determining whether it is a violation of this Standard
Application
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2.3Standard
IIIDUTIES
TOCLIENTS
A. Loyalty,prudence,and care
Guidance
Responsibility to a client includes
duty to exercise reasonable carePrudence require cautionsand discretion
act with care, skill, and diligencefollow the investment parameters set forth by clients & balancing risk & return
duty of loyalty
Understand & adhere to fiduciary duties Must be aware of whether they have "custody" or effective control of client assets
Manage pool of assets in accordance with terms of governing documentsPut their obligation to clientfirst in all dealingsAvoid all real or potentialconflicts of interestForgo using opportunities fortheir own benefit at theexpense of client
Identifying the actualinvestment client
Developing the client's portfolio
Follow any guidelines set outby client for the managementof assetsJudge investment decisions in context of total portfolio
Soft commission policies "Soft dollars"
Proxy voting policies
RPC
Submit to clients at least quarterly itemized statementsSeparate assetsReview investments periodicallyEstablish policies & procedures with respect toproxy voting and the use of client brokerageEncourage firms to addresssome topics
B. Fair dealing
Guidance
Do not discriminate against any clients"Fairly" vs "equally"
Investmentrecommendations
Standard III(B) addresses themanner of disseminatinginvestment recommendationsor changes in priorrecommendations to clientsEnsure fair opportunity to act onEncourage firms to designequitable system to preventselective, discriminatorydisclosure
Material changes should becommunicated to all current clients
particularly clients may haveacted on or been affected byearlier advise
Clients who don't know changes andtherefore place orders contrary to acurrent recommendation
should be advised of thechanged recommendationbefore the order is accepted
Investmentactions
Treat all clients fairly in light of theirinvestment objectives & circumstances
Disclose to clients & prospectswritten allocation procedures
duty of fairness and loyalty to clients cannever be overriden by client consent topatently unfair allocation procedures
Should not take advantage of their position inthe industry to the detriment of clients
Different levels of services
Must NOT disadvantage ornegatively affect clientsDisclosed toclients/prospective clientAvailable to everyone
RPC
C. Suitability
Guidance
In investmentadvisoryrelationships
Inquiry should be repeated at least annually/
If clients withhold info -->suitability analysis must be done based on info provided
Risk analysis
Fund managers Be sure investments are consistent with the stated mandate
In case of unsolicited traderequests unsuitable for client
-->refrain from making trade or seek affirmative statement from clientthat suitability is not a consideration
Developing an Investment policyBe sure to gather client info in the form of an IPS and makesuitability analysis prior to making recommendation/takinginvestment action
Understanding the Client's risk profile
Updating an investment policy at least annually/prior to material changes
The need for diversificationManaging to an index/mandate
RPCWritten IPSInvestors' objectives and constraints should be maintained and reviewedperiodically to reflect any changes in clients' circumstances
D. Performancepresentation
Guidance
Standard III(D) prohibits misrepresentations of pastperformance or reasonably expected performance--> Provide credible performance info-->Should not state or imply that clients will obtain orbenefit from rate of return generated in the past
Research analysts promoting the success ofaccuracy of their recommendations
--> ensure that their claims arefair, accurate, and complete
If the presentation is brief, must make available toclients and prospects the detailed info upon request
RPC GIPS
E. Preservation ofconfidentiality
Guidance
Standard III(E) is applicablewhen members receive infoStatus of client
Comply with applicable laws When in doubt-->consult with compliancedepartment/outside counselbefore disclosing
Electronic info and security
Professional conductinvestigations by CFAI
Standard III(E) does NOT prevent cooperating with aninvestigation by CFAI PCP
RPC
a
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2.4 Standard IVDUTIES TO
EMPLOYERS
A. LoyaltyGuidance
Employer-employeerelationship
In matters related to their employment, members and candidates mustnot engage in conduct that harms the interests of the employer
-->Comply with policies and procedures established byemployers that govern employer-employee relationship
Standard IV(A) does not require to place employerinterests ahead of personal interests in all matters
The relationship imposes duties and responsibilities on both parties
Independentpractice
Abstain from independent competitive activitythat could conflict with employer's interests
Provide notification to employer, obtain consent from employer in advance
Leaving anemployer
MustPlanning to leave, must continue to act in employer's best interestFirm records or work performed on behalf of firm stored on ahome computer should be erased or returned to employer
Must notengage in activities conflicting with duty until resignation effectivecontact existing clients/potential clients prior to leaving for solicitingtake records of files to a new employer without written permission
Free to make arrangements/preparations provided that not breaching duty of loyalty
Applicable non-compete agreement
Whistleblowing
Nature of employment
B. Additionalcompensationarrangements
Guidance Obtain written consent from employer before acceptingcompensation or other benefits from third parties...
RPC Should make an immediate written report to their employers
C. Responsibilities ofsupervisors
Guidance
Must have in-depth knowledge of the Code & Standards
Apply knowledge in discharging supervisory responsibilities
Delegation of supervisory duties does not relievemembers of supervisory responsibility
-->Instruct subordinates methodsto prevent and detect violations
Make reasonable efforts to detect violation of laws, rules, regulations, and Code & Standards
Detection procedures
Make reasonable efforts to detect violation of laws, rules, regulations, and Code & Standards
-->Establish and implementingCompliance procedures
Must understand what constitutes an adequate compliance system
Make reasonable efforts to see that appropriate compliance procedures areestablished, documented, communicated to covered personnel and followed
In case of employee's violation,promptly initiate investigationtake steps to ensure no repetition
Inadequate procedures
Bring an inadequate compliance system to senior managers'sattention & recommend corrective action
If clearly cannot discharge responsibilities 'cos of absence ofcompliance system,
-->decline in writing to acceptresponsibilities
Enforcement ofnon-investment-relatedpolicies
RPC
Recommend employer to adopt a code of ethics
If there is aviolation
Respond promptly
Conduct a thorough investigation
Increase supervision or place appropriate limitations onthe wrongdoer pending the outcome of the investigation
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2.5 Standard V
INVESTMENTANALYSIS,
RECOMMENDATIONS& ACTIONS
A. Diligence andreasonable basis
Guidance
The application of StandardV(A) depends on
investment philosophy followedrole of member in the investmentdecision-making processsupport and resourcesprovided by employer
Must make reasonable efforts to cover all pertinent issues when arriving at recommendation
Provide or offer to provide supporting info to clients when makingrecommendations/changing recommendations
Using secondary orthird-party research
-->must make reasonable &diligent efforts todetermine whether 2nd/3rd party research is sound
Group research anddecision making
If member does not agreewith the independent andobjective view of the group
-->Not necessarily have to decline to beidentified if believing consensus opinionhas reasonable & adequate basis-->Should document member's difference ofopinion with group
RPC
B. Communicationwith clients andprospective clients
Guidance
Standard V(B) addressesconduct with respect tocommunicating with clients
Developing and maintaining clear,frequent, and thoroughcommunication practices is critical
Informing clients of theinvestment process
present basic characteristicsof the analyzed security inpreparing research reportadequately illustrate to clients & prospective clients the mannerof conducting investment decision-making processkeep them informed with respect tochanges to the chosen investmentprocess
Different forms ofcommunication
Communication is NOT confined to written form butvia any means of communication
Brief communications-->must be supported bybackground report or data onrequest
Capsule formrecommendations
-->should notify clients that additional infoand analyses are available from theproducer of the report
Identifying limitations of analysis
Investment advice based onquantitative research andanalysis
-->must be supported byreadily available referencematerial-->in a manner consistentwith previously appliedmethodology or with changeshighlighted
Should outline known limitations,consider principal risks ininvestment analysis, report
Distinction between facts andopinions in reports
RPC
C. Record retention
Guidance
In hard copy or electric form
Fulfilling regulatory requirements maysatisfy the requirements of this Standard
Must explicitly determine whether it does
Absence ofregulatoryguidance,
CFAI recommends maintainingrecords for at least 7 yrs
RPC
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2.6 Standard VI
CONFLICTS OFINTEREST
A. Disclosureof conflicts
Guidance
Managing conflicts
is a critical part of working ininvestment industry
can take many formsBest practice is to avoid conflicts of interest when possibleIf not, disclosure is necessary
Disclosures must be
prominent
made in plain languagein a manner to effectively communicate the info to clients
Disclosureto clients All matters may impair objectivity
Relationships
between member or their firm and issuerinvestment bankingunderwriting and financialrelationships
Broker/dealer market-making activities
Material beneficial ownership of stock
-->Sell-side membersshould disclose material beneficial ownershipinterest in securities/investment recommended
-->Buy-side membersshould disclose procedures for reportingrequirements for personal transactions
Investment personnel also serves as a director
poses conflicts of interest
between duties to clients and toshareholders of the companymay receive option topurchase securities of thecompany as compensationMNI
-->members providing investmentservices also serving as directorsshould be isolated from thosemaking investment decisions
by firewalls
Disclosure ofconflicts toemployers
What?Same circumstances with clientsAny potential conflict situation
How? Enough info
Other requirementsMust comply with employer's restrictions regarding conflict of interestMust take reasonable steps to avoid conflicts
If conflicts occur inadvertently, must report them promptly
RPC
Should disclose special compensation arrangements with employer that might conflict with client interest
Document request & may consider dissociating from the activity if firmdoes not permit disclosure of special compensation arrangements
Disclose to clients info that fee based on a share of capital gains
Disclose as a footnote to research report published if members haveoutstanding agent options to buy stocks as a part of compensation package
B. Priority oftransactions
Guidance
Avoiding potential conflicts Conflicts of interests
may occur
-->make sure
client is not disadvantaged by the trade
investment professional doesnot benefit personally fromtrades undertaken for clients
investment professionalcomplies with applicableregulatory requirements
Personal trading secondaryto trading for clients
Clients & employers' transactions have priorityMay undertake personal transactions after clients & employers have had adequate opportunity to act on recommendation
Co-investment-->personal investment positionsor transactions should neveradversely affect client investments
Family accounts (that areclient accounts)
should be treated like other accounts
if member has beneficialownership
-->may still be subject topreclearance or reportingrequirements
Standards for nonpublic infoHaving knowledge of pending transactions, assess to info duringnormal preparation of research recommendations
-->Must not convey such info
RPC
C. Referral feesInform
whomemployerclientprospective client
what
compensationconsiderationbenefit
received from, or paid to, others
howbefore entry into any formal agreementnature of the consideration or benefit
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2.7 Standard VII RESPONSIBILITIESAS CFA MEMBER /
CANDIDATE
A. Conduct asmembers andcandidates inthe CFAprogram
Prohibiting any conductthat undermines theintegrity of the CFA charter
Cheating on CFA exam or any examNot following rules andpolicies of the CFA programGiving confidential info on the CFAProgram to candidates or the public.....
Not precluded from expressing opinionregarding the CFA Program or CFAI
B. Reference toCFA Institute, theCFA Designationand the CFAprogram
Preventing promotional effortsthat make promises or guaranteestied to the CFA designation
Over-promise the competenceof an individualOver-promise futureinvestment results
Applies to any form ofcommunication
To maintain CFAImembership
Remit annually to CFAI a completedProfessional Conduct Statement
Pay applicable CFAI membership dueson an annual basis
Using the CFA designation
Referencing candidacy in the CFA program
Proper using of the CFA marks
a
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3.4.5 EthicsIn Practice
a. Explain the ethicalresponsibilities requiredby Codes and Standards
b. Casestudy
CS1: ARGENT CAPITALMANAGEMENT
CS2: RIVER CITY PENSION FUND
CS3: MACROECONOMICASSET MANAGEMENT
CS4: BOB EHRLICH
CS5: ALEX KAYE
4. THE CONSULTANT
5. PEARLINVESTMENTMANAGEMENT
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6. AssetManagerCode Of
ProfessionalConduct
a. Explain the ethicalresponsibilities requiredby AMC
b. Interpret AMC insituations
c. Preventing violations
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CFALEVEL3
STUDYSESSION3
BEHAVIORALFINANCE
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7. TheBehavioral
FinancePerspective
a. Contrast
Traditional finance
Behavioral finance
b. Contrast
Expected utility
Prospect theory
c. Effects of
Cognitive
Knowledge capacitylimitations
d. Traditional vs. Behavioral finance on
Capital markets
Portfolio construction
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8. TheBehavioralBiases OfIndividual
a. Distinguish
Cognitive errors
Emotional biases
b,c. Commonlyrecognized behavioralbiases
I. Cognitive errors
I.1 Belief Perseverance biases
Conservatism biasConfirmation biasRepresentativeness
Illusion of controlHindsight
I.2 Information-processing biases
Anchoring and adjustment
Mental accountingFramingAvailability
II. Emotional biases
II.1 Loss-aversionII.2 OverconfidenceII.3 Self-control
II.4 Status quoII.5 EndowmentII.6 Regret-aversion
d. Impact of biaseson Investmentpolicy and assetallocation
d1. Behaviorally modifiedasset allocation
d2. Case studies
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9. BehavioralFinance AndInvestmentProcesses
a. Classifyinginvestors
Uses
Limitations
Behavioral factors affect
b. Adviser-clientinteractions
d. Analystforecasts
e. Investment committeedecision making
c. Applying behavioralfinance for portfolioconstruction
f. Investors' behavior--->
market anomalies
observed marketcharacteristics
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CFALEVEL3
STUDYSESSION4
PRIVATEWEALTHMANAGEMENT
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10.1ManagingIndividualInvestor
Portfolios
a. Risk toleranceaffected by
Sourcesof wealth
Active wealth creation (by entrepreneurial activity)
Passive wealthcreation, acquired
Through inheritanceOne-time windfallsAccumulated over long periods of secure employment
Measuresof wealth Positive correlation between risk tolerance & perceived portfolio size
Stage of life Foundation phase, Accumulation phase, Maintenance phase, Distribution phase
Warm-up: Traditionalassumptions
Risk aversion
Rational expectations
Asset integration
b,c.
Situational profiling vsPsychological profiling
Situationalprofiling
Source of wealth, Measureof wealth, Stage of life
Psychologicalprofiling
Decision-making styles: Feeling vs ThinkingRisk attitudes: More risk averse vs Less risk averse
Behavioral finance vsTraditional finance
Loss aversion vs Risk aversionBiased expectations vs Rational expectations
Asset segregation vs Asset integration
d. Psychologyaffects
Risk tolerance
Investment choice
e,f.Personalitytypes
2 dimensions Risk attitudesDecision-making style
Personalitytypes
Cautious
Methodical
Individualistic
Spontaneous
IPS
g. BenefitsFor client Optimal decisions, Dynamic process, long-term objectives, usable by new advisers
For advisers Suitability clarification, Dispute Resolution, Problem Identification
h. Steps
Planning
ObjectivesRiskReturn
Constraints
Time horizon(s)TaxesLiquidityLegal & regulatory needsUnique circumstances
IPS
Capital Market ExpectationStrategic Asset Allocation
ExecutionPortfolio selectionPortfolio implementation
FeedbackMonitoring & Rebalancing
Evaluation
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10.2ManagingIndividualInvestor
Portfolios(Cont.)
i,j. Objectives
Returnobjective Required
Desired
Riskobjective
Ability totake risk
Short-term & Long-term goalsPrimary & Secondary goalsMax Volatility
Willingnessto take risk
k. Constraints
Timehorizon
Short-term vs. long-termPre-retirement, Retirement, Post-retirementNew time horizon
Taxconcerns
Classification: Income tax, Capital gain tax, Transfer tax,Wealth tax or personal property tax
Reduceadverseimpact of tax
Tax deferralTax avoidanceTax reductionWealth transfer taxes
Liquidity
NeedsNormal expensesSufficient surplusMajor planned events
Liquiditycharacteristics ofportfolio assets
Transaction costsVolatilityIlliquid holdings
Legal & regulatory factors
Unique circumstances
l. Formulate & justifyan IPS for anindividual investor
m. Strategicasset allocation
After-tax return requirements
Liquidity requirements
Risk tolerance: Safety first rule
Unique circumstances: no disallowed assets
Minimize cash
Maximize Sharpe ratio
n. Retirementplanning
Traditionaldeterministictechniques Use single estimates of inputs and yield point estimate of outcome
Monte Carlosimulationtechniques-->advantages
Better indication of risk/return trade off
Show tradeoffs of short-term risks and risks of not meeting goals
Incorporate tax calculation nuances better
Better incorporate the compounding effect of reinvestment
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11. Taxes &PrivateWealth
ManagementIn A Global
Context
a. Globaltaxationregimes
Taxes on Income (What you make)
Taxes on Wealth (What you have and transfer)
Taxes on consumption (What you spend)
7 Global tax regimes
b. Tax regimes
Future value interest factor
Tax drag/Gain lost to taxes
d. Return, Investmenthorizon & tax impact
Accrual Taxes
Deferred Capital Gains Taxes With cost basisOnly market value
Wealth-based Taxes
Realized tax rate & Effective capital gain taxes
c. Accrual equivalentafter-tax returns
Accrual equivalent tax rates
After-tax returns
e. Accounttax profiles
Tax-deferred account (TDA)
Tax advantaged account (CGBT)
Tax-Exempt account (TEA)
f. Taxes &investment risk
Reduction in investment risk
g. The tax effects oftrading behavior
Traders
Active Investors
Passive Investors
Exempt Investors
h. Tax loss harvesting &HIFO tax lot accounting
Tax-loss harvesting
HIFO tax lot accounting
i. Taxes &Mean-Varianceoptimization
Accrual equivalent after-tax returns
After-tax risk
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12.1 EstatePlanning In
A GlobalContext
a. Estate planning
Estates
Wills
Probate
b. Wealthtransfertaxes
Forms of transferring assets GiftsBequests
Law systems Civil law system
Common law system
Forced heirship Is...
If avoided --> claw-back
Marital property regimecommunity property rights
separate property rights
c. Corecapital
Mortality probabilities
Monte Carlo analysis
d. Relativeafter-taxvalues
Tax-free gift
Taxable gift
e. Gifttaxes
Recipient pays gift taxes
Donor pays gift taxes
f. Estateplanningstrategies
Generation skipping
Spousal exemptions
Valuation discounts
Charitable gifts (charitablegratuitous transfers)
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12.2 EstatePlanning In
A GlobalContext(Cont.)
g. Trusts
Grantor/Settlor --> Beneficiaries outside of probate process
Trustee
Distinguish Revocable trusts
Irrevocable trusts
Concepts
Fixed trust
Discretionary trust
Spendthrift trust
h. Life insurance
i,j. Tax jurisdiction(Source jurisdiction vsResidence jurisdiction)
Income taxes
Wealth transfer taxes
Exit taxes
k. Relief fromdouble taxation
ConflictsResidence-residence
Source-source
Residence-source
Reliefmethods
Credit
Exemption
Deduction
l. Internationaltransparency
Tax avoidance vs Tax evasion
Global treaties and agreement
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13. LowBasic Stock
a,b,c.
Source of wealth Psychological Issues Risk Considerations
Entrepreneurs
Executives
Investors
Equity holding life
d. Diversificationtechniques
Outright sales
Exchangefunds
Publicexchangefunds
Privateexchangefunds
Completionportfolios
Hedging
Equity collars
Sell calls and Buy puts
No constructive saleShort identical securitiesSwap of the same notional amountForward contract of same/idential assets
Variable pre-paid forwards
-
14. LifetimeFinancialAdvice:HumanCapital,Asset
Allocation &Life
Insurance
a. Human capital
Formulation
Human Capital vs Financial Capital
Equity-like vs Debt-like
b.
Earning riskSavings rateCorrelation of humanand financial capitalRelative risk
Mortality risk
Longevity risk
c. Assetallocationpolicy
Total return perspective
Risk allocation
d. Lifeinsurance
Formula:
Probability of death
Bequest desire
LIPO(LifeInsurancePayout)
Financial wealth & demandfor life insurance
Human capital volatility &demand for life insurance
Risk aversion & demandfor life insurance
Probability of death &demand for life insurance
e. Risk inretirement
Financial market risk
Longevity risk
Savings risk
f. Longevityhedges
Fixed annuities
Variable annuities
g. Exam review
-
CFALEVEL3
STUDYSESSION5
PMFORINSTITUTIONALINVESTORS
-
15.1Managing
InstitutionalInvestor
Portfolios
Warm-up:Pension plans
General pension definitions
Types ofpension plans
Defined-benefit planCash balance planDefined-contribution plan
Pension planfunding
Funded statusFully fundedUnderfundedSurplus
Pension planliabilities
ABOPBOTotal future liabilityRetired livesActive lives
a. Contrast
Advantages Disadvantages
Defined-benefit plans
Defined-contribution plans
b,c. Defined-benefit planobjectives
Objectives Return
DB planconstraints
LiquidityTime horizonLegal & regulatory factorsUnique circumstances
Risktolerance
Plan surplusSponsor financial status & profitabilitySponsor & pension fundcommon risk exposurePlan featuresWorkforce characteristics
e. RiskManagementin Investingpension planassets
Plan Assets &Firm operations
Plan Assets &Plan Liabilities
g.
Hybrid plans
ESOPs
h. Foundations
Description Purpose Source of funds Annual spending requirement
Independent
Company sponsored
Operating
Community
IPS
d. IPS for DB plan
f. IPS for DC plan
j. IPS for foundation, endowment,insurance company & bank
-
15.2Managing
InstitutionalInvestor
Portfolios(Cont.)
WARM-UP
Endowments
Are...
Spending rulesSimple spending ruleRolling 3-year average spending ruleGeometric spending rule
Life Insurancecompanies
Traditional policiesWhole lifeTerm life
New policiesUniversal lifeVariable life
Nonlife insurancecompanies
Asset/Liability management
Banks
Bank security portfolios
Duration, Credit risk, Income & Liquidity
Bank risk measures
i.
OBJECTIVES CONSTRAINTS
Return Risk Liq. TimeH Taxes Legal Unique
Endowments
Life Insurance companies
NonlifeInsurancecompanies
Banks
m.Asset/Liabilitymanagementneeds of
DB pensionfunds
DC pensionfunds
Foundations
Endowments
Insurancecompanies
Banks
k.
Investment companies
Commodity pools
Hedge funds
l,n. Investment policiesof institutional investors
-
16. LinkingPension
Liabilities ToAssets
a. Assumptionsconcerningpension liabilityrisk in
Asset-only approach
Liability-relative approach
b. Pensionliabilityexposures
Market exposures dueto accrued benefits Active part
Inactive part
Market exposuresdue to future benefits
Future wage growthFuture services renderedFuture entrants
Non-market exposures Plan demographicModel uncertainty
c. The liability-relativeapproach in practice
-
17.Allocating
ShareholderCapital ToPension
Plans
a. Funding shortfall &asset/liability mismatch
Funding shortfall
Asset/Liability mismatch
b. The weightedaverage cost ofcapital
Formulas
Implications
c. Changing pensionasset allocations
Total assets betas
Debt-to-equity ratio
Equity capital needed tomaintain equity beta
-
CFALEVEL3
STUDYSESSION6
CAPITALMARKETEXPECTATIONS
-
18.1. CapitalMarket
Expectations
a. Formulating CME(beta research # alpha research)
CME Macro expectationsMicro expectations
7 steps
1. Determine CME needed2. Investigate asset's historical performance & determinants3. Identify valuation model and its requirements4. Collect best data possible5. Interpret current investment conditions6. Formulate CMEs7. Monitor performance and refine the process
b. Problems inforecasting
1. Limitations to usingeconomic data
2. Data measurementerrors and biases
Transcription errorsSurvivorship biasAppraisal data (smoothed)
3. Limitations ofhistorical estimates
Regime changes -->nonstationary data. Span ofdata
4. Using ex post data
5. Non-repeatingdata patterns Data mining
Time period bias
6. Failing to account forconditioning information
7. Misinterpretationof correlations
8. Psychological traps
AnchoringStatus quo trapConfirming evidenceOverconfidence trapPrudence trap (fear of regret)Recallability trap
9. Model & input uncertainty
c. Forecasting tools
Statistical tools
Projecting historical data
Shrinkage estimators
Time series analysis
Multifactor models
DCF models Gordon growth model
Grinold & Kroner
Risk premium approach
Financial equilibrium models
d. Using
Surveys
Panel method
Judgment
e. Cyclicalanalysis
The inventory and business cycle
Inflation
Consumer & business spending
Monetary policy
Fiscal policy
-
18.2. CapitalMarket
Expectations(Cont.)
f,g.
Business cycle &Asset returns
Initial recoveryEarly expansionLate expansionSlowdownRecession
Inflation &Asset returns
h. The Taylor rule
i. The yield curve
Economicgrowth trends
J. Components of econ growth trendsApplication to formulation of CME
k. Exogenous shocks
l. Linkagesbetweeneconomies
m. Emerging markets
Risks
Country risk analysis
n. Economicforecasting
Econometric analysis
Economic indicators
Checklist approach
o.p. Economicconditions & assetclass returns
Cash instruments
Credit risk-free bonds
Credit risky bonds
Emerging market government bonds
Inflation indexed bonds
Common stock
Emerging market stocks
Real estate
q. Forecastingexchange rates
q. Reallocating aglobal portfolio
-
CFALEVEL3
STUDYSESSION7
ECONOMICCONCEPTSFORASSETVALUATION
-
19. EquityMarket
Valuation
a,c. Cobb-Douglasproduction function
Terms
Used to model growthin real output
c. Used in DDM
b. Growth in
Total factor productivity
Capital stock
Labor input
d. Estimating intrinsic value of anequity market by using
DDM
Macroeconomic forecasting
e. ForecastEPS of index
Top-down
Bottom-up
f,g. Relative valuation models
-
20. DreamingWith BRICs:The Path To
2050
BRICs = Brazil, Russia, India & China
a. Economicpotential ofthe BRICs
Potential economicsize & growth
Demographics &Per capita income
Growth inGlobal spending
Trends in realexchange rates
b. Economicgrowth
Potential returns oncapital & productivity
Appreciatingcurrencies
c. Elements ofeconomic growth
Technologicalprogress
Growth incapital stock
Employmentgrowth
d. The conditionsfor sustainedeconomic growth
Macroeconomicstability
Institutionalefficiency
Open trade
Worker education
e. Emergingmarkets in aportfolio
-
CFALEVEL3
STUDYSESSION8
ASSETALLOCATION
-
21.1. AssetAllocation
a,b. Compare
Strategic asset allocation
Tactical asset allocation
c. Importance of assetallocation for portfolioperformance
d. Approaches toasset allocation
Asset-only approach
ALM approach
e. Dynamicassetallocation
Advantages overStatic asset allocation
Trade-offs ofcomplexity and cost
f. Assetallocationpolicyinfluencedby
Lossaversion
Mentalaccounting
Fear ofregret
g. Risk & Returnobjectives in strategicasset allocation
h. Specifyingasset classes
j. Theoretical &practical effectsof including
Inflationadjustedsecurities
Globalsecurities
Alternativeinvestments
k. Steps inassetallocation
-
21.2. AssetAllocation
(Cont.)
l. Approachesto assetallocation
Mean- variance
Efficient frontier
m. Constraintagainst short sales
Resampledefficient frontier
Black- Litterman
Monte Carlosimulation
ALM
Experiencebased
i,n. Formulate &justify a strategicasset allocation
o. Strategicassetallocationissues
Institutionalinvestors
Individuals
Defined benefitpension plans
Endowments
Foundations
Insurancecompanies
Banks
p. Tactical AssetAllocation (TAA)
-
22. The CaseFor
InternationalDiversification
a. Internationaldiversification
Global portfolio risk and return
International equitymarket correlations
International bondmarket correlations
d. Internationalefficient frontier
e. Benefits ofadding bonds
b. Currency return
c. Currency risk
f. Currency riskand volatility
g. Internationaldiversificationshould not work
h. Barriers tointernationalinvesting
Transactions costs
Regulations
Taxes
Currency risk
Political risk
Market efficiency
Lack of familiarity
i. Global vsInternationalinvesting
j. Emergingmarkets
Investability
Segmentation & Integrationof emerging markets
-
CFALEVEL3
STUDYSESSION9,10
FIXEDINCOMEPORTFOLIO
MANAGEMENT
-
23. FixedIncome PM-
Part 1
a. Bond portfoliobenchmarks
Bond Index
Liabilities
b. Bondindexingstrategies
Pure Bond indexing
Enhanced indexing
Active investing
c. Criteria for selecting abenchmark bond index
d. Aligning riskexposures
e. Contrast
Total return analysis
Scenario analysis
Warm-up: Duration as ameasure of bond portfolio risk
g. Adjusting dollarduration
h. Spread duration
m. Immunizationstrategies
f. Classical immunizationDesign a bond immunization strategyEvaluate the strategy undervarious interest rate scenarios
i. Extensions to classicalimmunization
j. Immunization risksInterest rate riskContingent claim riskCap risk
k. Contrast immunizationstrategies for
A single liabilityMultiple liabilitiesGeneral cash flows
l. Risk minimization vs. return maximization
m. Cash flow matching
-
24.Relative-valueMethodologies
For GlobalCredit Bond
PM
a. Relative valueanalysis
b. Cyclical and secular changes
c. Influence of liquidityneeds on PM decisions
d. Rationales forsecondary bond trades
Yield-spread pickup trades
Credit-upside trades
Credit-defense trades
New issue swaps
Sector-rotation trades
Yield curve-adjustment trades
Structure trades
CF reinvestment
e. Assessing relativevalue methodologies
Rationales for not trading
Trading constraintsStory disagreementBuy and holdSeasonality
Yield spreadsNominal spreadSwap spreadsOAS
Spread analysisMean-reversion analysisQuality-spread analysisPercentage yield spread analysis
Bond structuresBullet structuresEarly retirement provisionsCredit analysis
-
25.Fixed-Income
PM - Part II
a. Effect of leverage onportfolio returns and duration
b. Repurchaseagreements
c. Bond riskmeasures
Standard deviation
Semivariance
Shortfall risk
Value at risk
Futures contracts
d. Advantages ofinterest rate futures
e. Immunizationstrategy based oninterest rate futures
f. Use of i/r swapsand options
g. Managing riskswith derivatives
Internationalbond
h. Sources of excess return foran international bond portfolio
i. International bond durations
j. Hedging decision
k. Breakeven spread analysis
l. Investing inemerging market debt
Advantages
Risks
m. Selecting afixed-income manager
-
26. HedgingMortgage
Securities ToCaptureRelative
Value
Negative convexity andmortgage securities
a. How a mortgage security's negativeconvexity affects performance of a hedge
b. Mortgage security risks
c. Importance ofYield curve risk
Individual mortgage security
Treasury security
d. Hedgingmortgagesecurities
Duration-based approach
Interest rate sensitivity approach
-
CFALEVEL3
STUDYSESSION11,12
EQUITYPORTFOLIOMANAGEMENT
-
27.1. EquityPortfolio
Management
a. Role of equities in theoverall portfolio
b. Equity investmentapproaches
Passive
Active
Semi-active
c. Recommend an equityinvestment approach
d1. Equity indexweighting schemes
d2. Composition ofGlobal Equity Indices
e. Methodsof passiveinvesting
Index Mutual Fund and ETF
Separate or Pooled Accounts
Equity Futures
Equity Total Return Swap
f1. Approaches toconstructing anindexed portfolio
Full replications
Stratified Sampling
Optimization
f2. Recommend an approach
Equitystyle
g1. Equityinvestment-styleclassifications
g2. Difficulties in applyingstyle definitions consistently
h.
Valueinvestors
rationalesprimary concernsrisk
Growthinvestors
rationalesprimary concernsrisk
i. Styleidentification
Compare and contrast techniquesfor identifying investment styles
Characterize the styleof an investor given
security selection methodsecurity holdingsreturns-based style analysis
-
27.2. EquityPortfolio
Management(cont.)
j. Equity style indices
k1. Equity style box analysis
k2. Consequences of style drift
l. Socially responsibleinvesting (SRI)
Use of stock screensbased on SRI
Potential effect on portfolio'sstyle characteristics
m1. Contrast investment strategies
long-short
long-only
m2. Why greater pricing ineffeciency may exist on the short side of the market
n1. How a market-neutral portfolio can be equitized
n2. Contrast
equitized market-neutral portfolios
short-extension portfolios
o. Sell disciplines of active investors
Enhanced indexing
p1. Contrast enhancedindexing strategies Derivative-based
Stock-based
p2. Justify enhanced indexingon the basis of risk control
IR
q. Allocatingto managers
r.
Core-satelliteapproach
Completeness fund
s. Components of totalactive return
True active return
Misfit active return
t. Alpha and betaseparation approach
u. Selecting equitymanagers
v. Equityresearch
Top-down approach
Bottom-up approach
-
28.CorporateGovernance
a. Moral hazard
The ways management acts not inthe best interest of shareholders
How dysfunctionalCG can lead to MH
b. Managerialperformanceincentives
Explicitmanagerialincentives
Implicitmanagerialincentives
c.BOD
Shortcomingsof BOD
Improving boardoversight
d. Activemonitoring
Why active monitoring byinvestors requires control?
Mechanisms to control
Limitations of investor activism
e.Debtand CG
Debt as management motivator
Limitations of debt
f. Stakeholders vs.Stockholders
g.The Cadbury Report
-
29.International
EquityBenchmarks
a. Float adjustment
b. Internationalindices:trade-offs
Breadth vs.Investability
Liquidity and crossing opportunitiesvs. reconstitution effects
Precise float adjustment vs.Transactions costs from rebalancing
Objectivity and transparencyvs. Judgment
c. Country classification:Emerging vs. Developed
---> impact onMarket indices
Investment in thecountry's capital market
-
30. EmergingMarketsFinance
a. Marketintegration
Financial and economicmarket integration
Changes resulting frommarket integration
b. Marketliberalization
Market liberalization Vs.market integration
Financial effects ofliberalization
Economic effects ofliberalization
c. Issues foremergingmarketinvestors
Contagion
Non-normal returndistributions
Market efficiency andmarket microstructure
Market efficiencyand price discovery
Privatizations andthe costs of capital
Corporategovernance
Other issues for emergingmarket investors
-
CFALEVEL3
STUDYSESSION13
ALTERNATIVEINVESTMENTSPORTFOLIO
MANAGEMENT
-
31.1.Alternative
InvestmentsPortfolio
Management
General
a. Alternativeinvestment features
b. Due diligencecheckpoints
c. Issues for privatewealth clients
e. Alternativeinvestment benchmarks
f. Return enhancementand diversification
d. Alternativeinvestmentgroups
Realestate
PrivateEquity
Commodities
Hedgefunds
Managedfutures
Buyoutfunds
Infrastructurefunds
Distressedsecurities
g. Real estateequity investing
VentureCapitalinvesting
h. Someissues
Major issuersBuyersStages
i. Contrast VC fundsBuyout funds
j. Convertiblepreferred stock
-
31.2.AlternativeInvestmentsPortfolio
Management
PEinvesting
k. Structureof PE funds
l. PEinvestmentstrategy
Commodityinvesting
m. Commodityinvestment Direct
Indirect
n. The term structureof future prices
o. Commoditiesand inflation
Hedgefund
p. Classifications
q. Hedge fund structures
r. Fund of funds
s. Hedge fundperformanceevaluation
t. Managedfutures
Trading strategies
Role in a portfolio
Distressedsecuritiesinvesting
u. Discuss
Sources ofdistressedsecuritiesMajorinvestmentstrategies
v. Importance of
Event riskMarket liquidity riskMarket riskJ-factor risk
-
32. Swaps
Hedgingstrategies
Inherent riskexposures
-
33. CommodityForwards &
Futures
a. Pricingfactors
Storability
Storage costs
Production
Demand
b. Commodityarbitrage
Fromconvenienceyield
Fromcommodityspreads
c. Basis risk ofcommodity futures
-
CFALEVEL3
STUDYSESSION14,15
RISKMANAGEMENT
-
34.1. RiskManagement
a. Managing risk
RM process
Riskgovernance Decentralized system
Centralized system (ERM)
b. Evaluateriskmanagementsystem
c. Characteristics of aneffective riskmanagement system
d. Exposures to
Financial risks
Non-financial risks
VAR
e. Interpret and compute
f. MethodsAnalytical VARHistorical VARMonte Carlo
g.
AdvantagesLimitations
ExtensionsIVARCFARTVAR
VAR and liquidity risk
h. Stresstesting
Forms Scenario analysisStressing models
Evaluatingstress testresults
-
34.2. RiskManagement
(cont.)
i. Evaluatingcredit risk
Credit VAR
Credit risk ofForward contractSwapOption
j. Managingmarket risk
Risk budgeting
Position limits
Liquidity limits
Performance stopouts
Risk factor limits
Scenario analysis limits
Leverage limits
k. Managingcredit risk
Limiting exposures
Marking to market
Collateral
Netting arrangements
Credit standards
Credit derivatives
l. Measuringrisk-adjustedperformance
Sharpe ratio
Risk-adjusted return on capital (RAROC)
Return over maximum drawdown (RoMAD)
Sortino ratio
m. Setting capitalrequirements
Nominal position limits
VAR-based position limits
Maximum loss limit
Internal capital requirements and regulatory capital requirements
Behavioral conflicts
-
35. CurrencyRisk
Management
a. Hedgingthe principal
b. MinimumVariance Hedge
c. Basisrisk
d. Contractterms
e. Hedgingmultiplecurrencies
f. Currencyoptions
g. Currencydelta hedging
h. Indirectcurrencyhedging
i. Currencymanagement
Balancemandate
Currencyoverlay
Separateassetallocation
-
36. RMApplicationsOf Forward& FuturesStrategies
Warm-up: Futures & Forwards
Futurescontract
Duration
Yield
a. Adjustingthe portfoliobeta
The hedgeisn't perfect
Index multipliers &synthetic positions
b. Syntheticstock index fund
c. Synthetic cash
d. Adjusting theportfolio allocation
Targetduration
Non-zerotarget duration
e. Adjusting theequity allocation
Changing equityallocations
Pre-investing
f. Exchangerate risk
g. Hedginglimitations
Hedgingmarket risk
Hedgingcurrency risk
-
37. RMApplications
Of OptionStrategies
Warm-up: Basics of putoptions & call options
a.
Covered calls
Protective puts
b. Optionspreadstrategies
Bull call spread
Bear call spread
Butterfly spread with calls
Butterfly spread with puts
Put-call parity
Straddle
Collar
Box spread strategy
c. I/Roptions
Interest call
Interest put
d. I/R
Caps
Floors
Collars
e. Delta hedging
f. The second-ordergamma effect
-
38. RMApplications
Of SwapStrategies
Interest rate swap
a. Using swaps to convert loansfrom fixed to floating
b. Duration of an i/r swap
c. Effect on cash flow risk
d. Using swaps to change duration
Currency swap
e. Issue loan/bond +currency swap
f. Converting foreigncash receipts
g. Equity swaps
h. I/R swaptions
Payer swaption
Receiver swaption
-
CFALEVEL3
STUDYSESSION16
EXECUTION, MONITORING & REBALANCING
-
39.1.Execution Of
PortfolioDecisions
Warm-up: the investment process& market microstructure
a. Market & limit orders
b. The effective spread
c. Marketstructures
Quote-driven markets
Order-driven markets
Brokered markets
d. Brokers & dealers
e. Market quality
f. Execution costs
g.Implementationshortfall
Explicit costs
Realized profit/loss
Delay costs
Missed trade opportunity cost
-
39.2.Execution
Of PortfolioDecisions
(cont.)
h. VWAP vs.Implementation shortfall
i. Econometric models
j. Major trader types
k. Trading tactics
l. Algorithmic trading
m. Choosing analgorithmictrading strategy
n. Best execution
o. Evaluating tradingprocedures
p. Role of ethics in trading
-
40.Monitoring
&Rebalancing
a. Fiduciaryresponsibilities
b. Monitoring
Monitoring investor circumstancesMonitoring market/economic conditionsMonitoring the portfolioChange in wealthChanging time horizonsChanging liquidity requirementsChanging tax treatmentLaws & regulationsNew asset alternativesChanges in asset class risksBull vs. Bear marketsThe stock market & central bank policyChanges in inflationChanges in asset class expected returns
c. Changedinvestorcircumstances
Changes in wealth
Time horizon
Liquidity requirements
Tax concerns
Legal & regulatory
d. Benefits & costsof rebalancing
e,g. Rebalancing
Calendar rebalancing
Percentage-of-portfolio rebalancing
f. Optimalcorridor width
Transactions costs
Correlations
Volatility
h,i,j. Dynamicrebalancingstrategies
Buy-and-hold strategy
Constant mix strategy
Constant proportion strategy
Rebalancing in up & down markets
Exposure diagrams of concave (constant mix)vs. convex (CPPI) strategies
Convex strategies & concave strategies
-
CFALEVEL3
STUDYSESSION17
PERFORMANCE EVALUATION & ATTRIBUTION
-
41.1EvaluatingPortfolio
Performance
a. Performanceevaluation
Fund sponsor's perspective
Investment manager's perspective
b. Componentsof portfolioevaluation
Performance measurement
Performance attribution
Performance appraisal
c. Ratesof returns
Money weighted
Time weighted
d. Dataquality
e. Portfolioreturncomponents
Attributable to the market
Attributable to style
Attributable to active management
f. Benchmarkproperties
g. Constructingcustomsecurity-basedbenchmarks
h. Validity of usingmanager universesas benchmarks
i. Tests ofbenchmarkquality
j. Hedge fundbenchmarks
-
41.2EvaluatingPortfolio
Performance(cont.)
k,l. Performanceattribution
Macro
Micro
m. Fundamentalfactor models inmicro attribution
n,o. Fixedincomeperformanceattribution
Effects of i/r
Effects of management
p. Risk-adjustedperformancemeasures
Alpha
Information ratio
Treynor measure
Sharpe ratio
M2
q. Alpha & beta ininformation ratio,Treynor measure &Sharpe ratio
r. Performancequality controlcharts
s. Managercontinuationpolicy
t. Type I &type II errors
-
42. GlobalPerformance
Evaluation
a. Currencymovements &portfolio returns
b,c. Globalportfolioattribution
d. Active & passivecurrency management
e. Multi-periodperformanceattribution
f. Risk measures
g. Risk budgetingin globalperformanceevaluation
h. Global &internationalbenchmarks
-
CFALEVEL3
STUDYSESSION18
GIPS
-
43. GIPS
The creation andevolution of the GIPSStandards
a. Discuss
Reasons for the creationof GIPS Standards
Standards' evolution
Benefits to prospective clientsand investment managers
b. Discuss
Objectives
Key characteristics
Scope
c. Explain GIPScompliance
d. Explaininputs data
Requirements
Recommendations
e. Return calculationmethodology
Requirements
Recommendations
Composite
f. Composite returns andasset-weighted returns
g. Discretionaryportfolios
Constructingcomposites
h. Mandates, objectivesor strategies
i. Adding portfolios andterminating portfolios
j. Asset class segments carvedout of multi-class portfolios
k. Disclosure requirementsand recommendations
l,m,n. GIPS presentationand reporting requirements
o. GIPS for
p. Realestate andprivateequity
Requirements
Recommendations
q. Wrapfee/SeparatelyManagedAccount
Requirements
Recommendations
r. Valuationhierarchy
Requirements
Recommendations
s. GIPS advertising guidelines
t. GIPS verification
u. Challenges related tocalculation of after-tax return
v. Errors and omissionsin given performancepresentations, including
Real estate
Private equity
Wrap fee/SMA
2012 level 3 Intro and changes in curr2012 level 3 mindmaps (01. Ethics)SS01,02 Ethics01. Code of ethics and standards of professional conduct02.1 Guidance for standard I02.2 Guidance for standard II02.3 Guidance for standard III02.4 Guidance for standard IV02.5 Guidance for standard V02.6 Guidance for standard VI02.7 Guidance for standard VII03,4,5. Ethics in practice06. Asset Manager Code of Professional Conduct
2012 level 3 mindmaps (02. Behavioral Finance)SS03 Behavioral finance7. The Behavioral Finance Perspective8. The Behavioral Biases of Individuals
2012 level 3 mindmaps (03. Private Wealth Management)Cover SS0410.1 Managing Individual Investor Portfolios10.2 Managing Individual Investor Portfolios11. Taxes & Private wealth management in a global context12.1 Estate planning in a global context12.2 Estate planning in a global context13. Low Basic Stock14. Lifetime financial advice HC, CAA and LI
2012 level 3 mindmaps (04. Institutional investors)Cover SS0515.1 Managing Institutional Investor Portfolios15.2 Managing Institutional Investor Portfolios16. Linking Pension liabilities to assets17. Allocating Shareholder Capital To Pension Plans
2012 level 3 mindmaps (05. Capital Market Expectations)Cover SS0618.1. Capital Market Expectations (Part1)18.2. Capital Market Expectations (Part2)
2012 level 3 mindmaps (06. Economics)Cover SS0719. Equity Market Valuation20. Dreaming With BRICs. The Path To 2050
2012 level 3 mindmaps (07. Asset Allocation)Cover SS0821.1. Asset Allocation (Part1)21.2. Asset Allocation (Part2)22. The case for international diversification
2012 level 3 mindmaps (08. Fixed Income)Cover SS09,1023. Fixed income PM- Part 124. Relative-value methododlogies for global credit bond PM25. Fixed income PM- Part 226. Hedging mortgage securities to capture relative value
2012 level 3 mindmaps (09. Equity)Cover SS11,1227.1. Equity portfolio management27.2. Equity portfolio management28. Corporate governance29. International equity benchmarks30. Emerging markets finance
2012 level 3 mindmaps (10. Alternative)Cover SS1331.1. Alternative investments portfolio management31.2. Alternative investments portfolio management32. Swap33. Commodity forwards and Futures
2012 level 3 mindmaps (11. Risk Management)Cover SS14,1534.1. Risk Management34.2. Risk Management35. Currency Risk Management36. RM Applications Of Forward & Futures Strategies37. RM Applications Of Option Strategies38. RM Applications Of Swap Strategies
2012 level 3 mindmaps (12. Execution, Monitoring, Rebalancing)Cover SS1639.1. Execution Of Portfolio Decisions39.2. Execution Of Portfolio Decisions40. Monitoring & Rebalancing
2012 level 3 mindmaps (13. Performance evaluation and Attribution)Cover SS1741.1. Evaluating Portfolio Performance41.2. Evaluating Portfolio Performance42. Global Performance Evaluation
2012 level 3 mindmaps (14. GIPS)Cover SS01843. GIPS