Information about CFA level 3 exams & modules & Changes in CFA level 3 curriculum 2012 Bài thi CFA level 3 gồm 2 phần:
phần essay buổi sáng: viết 3 tiếng, số lượng câu hỏi và số điểm 1 câu hỏi không cố định, không phải viết “văn” mà chủ yếu quan trọng là gạch ra các ý, tập trung vào key words, và tính toán
phần problem sets buổi chiều (giống level 2): 10 sets, mỗi set có 6 câu hỏi.
Không giống như level 1 và 2 được chia thành 10 môn học, level 3 được chia thành 14 môn học như sau: 1. Ethics: ngoài việc ôn tập lại các standards đã học giống như level 1 và 2, môn này ở level 3 thêm một số nội dung mới đặc biệt như Code of Asset Management. Môn Ethics chỉ có trong bài thi buổi chiều (problem sets) chứ không xuất hiện trong bài essay buổi sáng. 2. Behavioral finance: nghiên cứu tâm lý trong đầu tư tài chính. Môn này chiếm tỉ trọng nhỏ, và có thể xuất hiện dưới dạng 1 bài essay ngắn tách biệt hoặc là 1 câu ẩn trong bài essay thuộc phần private wealth management, hoặc cũng có thể xuất hiện trong problem set buổi chiều. 3. Private Wealth Management: cung cấp kỹ năng cũng như framework cho công việc quản lý tài sản cá nhân. Phân tích nhà đầu tư cá nhân, gồm cả phân tích định tính và định lượng, từ đó lên IPS (Investment Policy Statements) cho họ. Môn này chủ yếu xuất hiện trong bài essay buổi sáng chứ hiếm khi xuất hiện trong problem set buổi chiều. Trong bài essay buổi sáng, nó có thể chiếm tới ¼ cho tới 1/3 số điểm (chiếm 45 cho tới 60 phút làm bài), nên cùng với Institutional investors, môn này chiếm tỉ trọng lớn nhất ở level 3. 4. Institutional Investors: tương tự như Private wealth management, nhưng là cho các nhà đầu tư tổ chức, cụ thể là các quỹ lương hưu (DB, DC), ngân hàng, công ty bảo hiểm (nhân thọ, phi nhân thọ), các quỹ từ thiện (foundation, endowment…)… Mục đích cũng là lên được IPS. Tỉ trọng và cách ra câu hỏi tương tự như Private wealth management. 5. Capital Market Expectations: Phân tích kinh tế vĩ mô và các phương pháp đưa ra dự đoán vĩ mô. Có thể trong bài buổi sáng hoặc chiều. 6. Economics: Lý thuyết sản xuất vĩ mô và định giá thị trường cổ phiếu vĩ mô. Có thể trong bài buổi sáng hoặc chiều. 7. Asset Allocation: Sử dụng một số phương pháp như Markowitz efficient frontier, Black Litterman, resampled efficient frontier… để phân bố khoản đầu tư vào các loại hình đầu tư khác nhau hoặc vào các đồng tiền khác nhau. 8. Fixed Income: nếu level 1 học về các khái niệm cơ bản, level 2 học về định giá là chủ yếu, thì level 3 thiên về chiến lược cụ thể: đầu tư với tỉ lệ bao nhiêu, mua bán bao nhiêu, dùng công cụ nào… Có thể trong bài buổi sáng hoặc chiều. 9. Equity: phạm vi focus và hình thức thi tương tự như Fixed Income 10. Alternative investments: phạm vi focus và hình thức thi tương tự như Fixed Income
11. Risk Management: phạm vi focus và hình thức thi tương tự như Fixed Income 12. Execution, Monitoring & Rebalancing: Thực hiện mua bán, đặt lệnh trên thị trường thế nào để tiết kiệm chi phí. Giám sát danh mục và xử lý mua bán lại khi tỉ lệ trong danh mục đi chệch khỏi mục tiêu ban đầu như thế nào. Có thể trong bài buổi sáng hoặc chiều. 13. Performance evaluation and attribution: Phương pháp đánh giá performance của danh mục, đồng thời “gán công trạng, trách nhiệm” cho từng khâu, từng người phụ trách trong toàn bộ quá trình đầu tư. Có thể trong bài buổi sáng hoặc chiều. 14. GIPS: các nguyên tắc đo lường và báo cáo performance. Có thể trong bài buổi sáng hoặc chiều. So với năm 2011, thì năm 2012, số lượng readings của level 3 giảm 5 readings còn 43 readings. Nhưng thực ra điều này không đồng nghĩa với lượng kiến thức bị loại bớt, mà do môn Behavioral finance được viết lại hoàn toàn với 3 readings mới, dài hơn, thay thế cho 7 readings ngắn ngày trước. Reading duy nhất thực sự bị loại bỏ là reading 18 cũ (Goal‐ based investing: integrating traditional and behavioral finance) nằm trong môn Private wealth management, có lẽ là do bị overlap với môn behavioral finance đã được viết lại. Phần viết lại này đọc hấp dẫn hơn, logic chặt chẽ hơn năm cũ nhiều lần. Các môn còn lại không thay đổi gì hoặc chỉ thêm, bớt 1‐3 LOS, hoặc đổi thứ tự các LOS. Người tổng hợp: Phạm Thiên Quang & Nguyễn Hoài Phương, AFTC.
CFA LEVEL 3 STUDY SESSION 1&2
CODE OF ETHICS & STANDARDS OF PROFESSIONAL CONDUCT
All CFA Institute members and candidates are required to comply with the Code and Standards
The CFA Institute Bylaws
Structure of the CFA Institute Professional Conduct Program
Basic structure for enforcing the Code and Standards
Professional Conduct program (PCP)
Rules of Procedure
The CFA Institute Board of Governors
The CFA Designated Officer
Fair process to member and candidate
Based on two primary principles
Confidentiality of proceedings
Maintains oversight and responsibility Is responsible for the enforcement of the Code and Standards
Through the Disciplinary Review Committee (DRC) Directs Professional Conduct Staff
Conducts professional conduct inquiries
An inquiry can be prompted by several circumstances
a. Requesting a written explanation from the member or candidate
1. Code Of Ethics And Standards Of Professional Conduct
The Professional Conduct staff conducts an investigation that may include Process for the enforcement of the Code and Standards
Six components of the Code of Ethics
b.
Seven Standards of Professional Conduct
The member or candidate Interviewing
Complaining parties Third parties
Collecting documents and records in support of its investigation When an inquiry is initiated
Conclude the inquiry with no disciplinary sanction Issue a cautionary letter Upon reviewing the material obtained during the investigation, the Designated Officer may
Continue proceedings to discipline the member or candidate
If finding that a violation of the Code and Standards occurred, the Designated Officer proposes a disciplinary sanction
Accepted by member Rejected by member
The matter is referred to a hearing by a panel of CFA Institute members
Understand and comply with applicable laws and regulations Follow stricter law and regulation
Code and Standards vs. Local law
Responsible for violations in which they
knowingly participate or assist ->Leave employers (in extreme cases)
Dissociate from illegal, unethical activities Guidance
Attempt to stop the behavior by bringing it to the attention of employer through a supervisor or compliance department
Participation or association with violations by others
Intermediate steps
May consider directly confronting the involved individuals If not successful,-> step away and dissociate from the activity by
Removing their name from written reports Asking for a different assignment
Inaction with continued association may be construed as knowing participation
A. Knowledge of the law
Not require reporting violations to govt, CFAI, but... Investment products and applicable laws Stay informed Review procedures Recommended procedures for compliance (RPC)
Maintain current files
Members and candidates
When in doubt,->seek advice of compliance personnel or legal counsel When dissociating from violations,-> Document any violations and urge firms to stop them Develop and/or adopt a code of ethics Firms
Make available to employees info that highlights applicable laws and regulations Establish written procedures for reporting suspected violation of laws,...
Application
Maintain independence and objectivity in professional activities Gifts Invitations to lavish functions Tickets Favors
By benefits
Job referrals Allocation of shares in oversubscribed IPOs to investment managers
External pressures
.... From Buy-side clients
May try to pressure sell-side analysts
From public companies How to cope with external and internal pressures
To issue favorable reports
Fund managers relationships e.g. to issue favorable research reports/recommendations for certain companies From their own firms
Internal pressures
Guidance
Investment-banking relationships
to issue favorable research on current or prospective investment-banking clients Conflicts of interest
Credit rating agency opinions -->Modest gifts and entertainment are acceptable but special care must be taken
B. Independence and objectivity
-->must disclose to employers
-->Best practice: reject any offer of gift,..threatening independence and objectivity -->
convey true opinions -->Recommendations must
free of bias from pressures be stated in clear and unambiguous language
-->Portfolio managers must respect and foster honesty of sell-side research Is fraught with conflicts
2.1 Standard I PROFESSIONALISM
Must engage in thorough, independent, and unbiased analysis Issuer-paid research
Must fully disclose potential conflicts, including the nature of compensation -->Analysts
Must strictly limit the type of compensation they accept for conducting research Best practice
Accept only flat fee for their work prior to writing the report W/O regard to conclusions or recommendations
Protect integrity of opinions Create a restricted list Restrict special cost arrangements RPC
Limit gifts Restrict employee investments
Equity IPOs Private placements
Review procedures Written policies on independence and objectivity of research
any untrue statement or omission of a fact
Definition of "Misrepresentation"
or any false or misleading statement oral representations, advertising
Must not knowingly make misrepresentation or give false impression in
electronic communications written materials
qualifications or credentials, services
Guidance
Must not misrepresent any aspect of practice, including
performance record characteristics of an investment any misrepresentation relating to member's professional activities
Must not guarantee clients specific return on investments that are inherently volatile employers associates
C. Misrepresentation
Standard I(C) prohibits plagiarism in preparation of material for distribution to
Plagiarism
clients prospects general public
Work completed for employer Written list of available services, description of firm's qualification
Factual presentation
Designate employees to speak on behalf of firm Prepare summary of qualifications and experience, list of services capable of performing
Qualification summary RPC
Verify outside info Maintain webpages Maintain copies To avoid plagiarism
Attribute quotations Attribute summaries
professional integrity Address all conduct
reflects poorly on
good reputation competence of members and candidates
Any act involving lying, cheating, stealing, other dishonest conduct that reflects adversely on member's professional activities would be violation
Guidance
Conduct damaging trustworthiness or competence
D. Misconduct
Violations
Absence of appropriate conduct Lack of sufficient effort Abuse of the CFA Institute Professional Conduct Program
Develop and/or adopt a code of ethics RPC
Disseminate to all employee a list of potential violations Check references of potential employees
a
Definition of "Material nonpublic information" Must be particularly aware of info selectively disclosed by corporations Analysis of Public info + nonmaterial nonpublic info --> Investment conclusion
Guidance Mosaic Theory
Analysts are free to act on this collection of info w/o risking violation Analysts should save and document all their research
Make reasonable efforts to achieve public dissemination of material info Achieve public dissemination
If public dissemination is not possible,
Must communicate the info only to the designated supervisory and compliance personnel within the firm Must not take investment action on the basis of the info
Must not knowingly engage in conduct inducing insiders to privately disclose MNI
adopt compliance procedures preventing misuse of MNI
A. Material nonpublic information (MNI)
Adopt compliance procedures
Encourage firms to
develop & follow disclosure policies to ensure proper dissemination use "firewall"
Firewall elements
Adopt disclosure procedures
2.2 Standard II INTEGRITY OF CAPITAL MARKET
Issue press releases RPC
Appropriate interdepartmental communications Physical separation of departments Prevention of personnel overlap A reporting system Personal trading limitations Record maintenance Proprietary trading procedures
Prohibition of all proprietary trading while firm is in possession of MNI may be inappropriate
Communication to all employees
Definition Info-based manipulations
dissemination of false or misleading info
can be related to Transaction-based manipulations
B. Market manipulation
Standard II(B) not meant to
transactions that deceive market participants
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
duty to exercise reasonable care
Prudence require cautions and discretion
Understand & adhere to fiduciary duties
act with care, skill, and diligence follow the investment parameters set forth by clients & balancing risk & return
Must be aware of whether they have "custody" or effective control of client assets
Manage pool of assets in accordance with terms of governing documents Responsibility to a client includes
Put their obligation to client first in all dealings
duty of loyalty
Avoid all real or potential conflicts of interest
Guidance
Forgo using opportunities for their own benefit at the expense of client Identifying the actual investment client
A. Loyalty, prudence, and care
Developing the client's portfolio
Follow any guidelines set out by client for the management of assets Judge investment decisions in context of total portfolio
"Soft dollars"
Soft commission policies Proxy voting policies
Submit to clients at least quarterly itemized statements Separate assets Review investments periodically
RPC
Establish policies & procedures with respect to proxy voting and the use of client brokerage Encourage firms to address some topics Do not discriminate against any clients "Fairly" vs "equally" Standard III(B) addresses the manner of disseminating investment recommendations or changes in prior recommendations to clients Ensure fair opportunity to act on Encourage firms to design equitable system to prevent selective, discriminatory disclosure
Investment recommendations
Material changes should be communicated to all current clients Guidance Clients who don't know changes and therefore place orders contrary to a current recommendation
B. Fair dealing
particularly clients may have acted on or been affected by earlier advise should be advised of the changed recommendation before the order is accepted
Treat all clients fairly in light of their investment objectives & circumstances
2.3 Standard III DUTIES TO CLIENTS
Investment actions
duty of fairness and loyalty to clients can never be overriden by client consent to patently unfair allocation procedures
Disclose to clients & prospects written allocation procedures
Should not take advantage of their position in the industry to the detriment of clients Must NOT disadvantage or negatively affect clients Different levels of services
Disclosed to clients/prospective client Available to everyone
RPC
Inquiry should be repeated at least annually/ In investment advisory relationships
If clients withhold info
Be sure investments are consistent with the stated mandate
Fund managers In case of unsolicited trade requests unsuitable for client
Guidance
-->refrain from making trade or seek affirmative statement from client that suitability is not a consideration Be sure to gather client info in the form of an IPS and make suitability analysis prior to making recommendation/taking investment action
Developing an Investment policy
C. Suitability
-->suitability analysis must be done based on info provided
Risk analysis
Understanding the Client's risk profile Updating an investment policy
at least annually/prior to material changes
The need for diversification Managing to an index/mandate Written IPS
RPC
Investors' objectives and constraints should be maintained and reviewed periodically to reflect any changes in clients' circumstances
Standard III(D) prohibits misrepresentations of past performance or reasonably expected performance --> Provide credible performance info Guidance
D. Performance presentation
-->Should not state or imply that clients will obtain or benefit from rate of return generated in the past Research analysts promoting the success of accuracy of their recommendations
--> ensure that their claims are fair, accurate, and complete
If the presentation is brief, must make available to clients and prospects the detailed info upon request RPC
GIPS
Standard III(E) is applicable when members receive info Status of client Guidance
Comply with applicable laws
When in doubt
-->consult with compliance department/outside counsel before disclosing
E. Preservation of confidentiality Electronic info and security Professional conduct investigations by CFAI RPC
Standard III(E) does NOT prevent cooperating with an investigation by CFAI PCP
a
In matters related to their employment, members and candidates must not engage in conduct that harms the interests of the employer -->Comply with policies and procedures established by employers that govern employer-employee relationship
Employer-employee relationship
Standard IV(A) does not require to place employer interests ahead of personal interests in all matters The relationship imposes duties and responsibilities on both parties
Abstain from independent competitive activity that could conflict with employer's interests
Independent practice
Provide notification to employer, obtain consent from employer in advance Guidance
A. Loyalty
Planning to leave, must continue to act in employer's best interest Must
Firm records or work performed on behalf of firm stored on a home computer should be erased or returned to employer engage in activities conflicting with duty until resignation effective
Leaving an employer
Must not
contact existing clients/potential clients prior to leaving for soliciting take 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
2.4 Standard IV DUTIES TO EMPLOYERS
Obtain written consent from employer before accepting compensation or other benefits from third parties...
Guidance
B. Additional compensation arrangements
RPC
Should make an immediate written report to their employers
Must have in-depth knowledge of the Code & Standards Apply knowledge in discharging supervisory responsibilities Delegation of supervisory duties does not relieve members of supervisory responsibility
-->Instruct subordinates methods to prevent and detect violations
Make reasonable efforts to detect violation of laws, rules, regulations, and Code & Standards Make reasonable efforts to detect violation of laws, rules, regulations, and Code & Standards Must understand what constitutes an adequate compliance system Guidance
-->Establish and implementing Compliance procedures
Make reasonable efforts to see that appropriate compliance procedures are established, documented, communicated to covered personnel and followed In case of employee's violation,
Detection procedures
C. Responsibilities of supervisors
promptly initiate investigation take steps to ensure no repetition
Bring an inadequate compliance system to senior managers's attention & recommend corrective action Inadequate procedures
If clearly cannot discharge responsibilities 'cos of absence of compliance system,
Enforcement of non-investment-related policies
Recommend employer to adopt a code of ethics Respond promptly RPC
If there is a violation
Conduct a thorough investigation Increase supervision or place appropriate limitations on the wrongdoer pending the outcome of the investigation
-->decline in writing to accept responsibilities
investment philosophy followed role of member in the investment decision-making process
The application of Standard V(A) depends on
support and resources provided 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 making recommendations/changing recommendations Guidance Using secondary or third-party research
A. Diligence and reasonable basis
-->must make reasonable &diligent efforts to determine whether 2nd/3rd party research is sound
If member does not agree with the independent and objective view of the group
Group research and decision making
-->Not necessarily have to decline to be identified if believing consensus opinion has reasonable & adequate basis -->Should document member's difference of opinion with group
RPC
Standard V(B) addresses conduct with respect to communicating with clients Developing and maintaining clear, frequent, and thorough communication practices is critical present basic characteristics of the analyzed security in preparing research report Informing clients of the investment process
2.5 Standard V INVESTMENT ANALYSIS, RECOMMENDATIONS & ACTIONS
adequately illustrate to clients & prospective clients the manner of conducting investment decision-making process keep them informed with respect to changes to the chosen investment process Communication is NOT confined to written form but via any means of communication -->must be supported by background report or data on request
Guidance
B. Communication with clients and prospective clients
Different forms of communication
Brief communications
Capsule form recommendations
Identifying limitations of analysis
-->should notify clients that additional info and analyses are available from the producer of the report
Investment advice based on quantitative research and analysis
-->must be supported by readily available reference material -->in a manner consistent with previously applied methodology or with changes highlighted
Should outline known limitations, consider principal risks in investment analysis, report Distinction between facts and opinions in reports RPC
In hard copy or electric form
Guidance
C. Record retention
Fulfilling regulatory requirements may satisfy the requirements of this Standard Absence of regulatory guidance,
RPC
Must explicitly determine whether it does
CFAI recommends maintaining records for at least 7 yrs
is a critical part of working in investment industry Managing conflicts can take many forms
Best practice is to avoid conflicts of interest when possible If not, disclosure is necessary
prominent Disclosures must be
made in plain language in a manner to effectively communicate the info to clients between member or their firm and issuer investment banking
Relationships
underwriting and financial relationships Broker/dealer market-making activities -->Sell-side members
should disclose material beneficial ownership interest in securities/investment recommended
-->Buy-side members
should disclose procedures for reporting requirements for personal transactions
Material beneficial ownership of stock Disclosure to clients
Guidance
All matters may impair objectivity between duties to clients and to shareholders of the company poses conflicts of interest
A. Disclosure of conflicts
Investment personnel also serves as a director
may receive option to purchase securities of the company as compensation MNI
-->members providing investment services also serving as directors should be isolated from those making investment decisions
Same circumstances with clients
What? Disclosure of conflicts to employers
How?
by firewalls
Any potential conflict situation Enough info Must comply with employer's restrictions regarding conflict of interest
Other requirements
2.6 Standard VI CONFLICTS OF INTEREST
Must take reasonable steps to avoid conflicts If conflicts occur inadvertently, must report them promptly
Should disclose special compensation arrangements with employer that might conflict with client interest RPC
Document request & may consider dissociating from the activity if firm does 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 have outstanding agent options to buy stocks as a part of compensation package
may occur client is not disadvantaged by the trade
Avoiding potential conflicts
Conflicts of interests
-->make sure
investment professional does not benefit personally from trades undertaken for clients investment professional complies with applicable regulatory requirements
Clients & employers' transactions have priority May undertake personal transactions after clients & employers have had adequate opportunity to act on recommendation
Guidance
B. Priority of transactions
Co-investment Personal trading secondary to trading for clients
-->personal investment positions or transactions should never adversely affect client investments should be treated like other accounts
Family accounts (that are client accounts)
Standards for nonpublic info
employer client prospective client compensation Inform
C. Referral fees
what
consideration benefit received from, or paid to, others
how
-->may still be subject to preclearance or reporting requirements
Having knowledge of pending transactions, assess to info during normal preparation of research recommendations
RPC
whom
if member has beneficial ownership
before entry into any formal agreement nature of the consideration or benefit
-->Must not convey such info
Cheating on CFA exam or any exam
Prohibiting any conduct that undermines the integrity of the CFA charter
A. Conduct as members and candidates in the CFA program
2.7 Standard VII RESPONSIBILITIES AS CFA MEMBER / CANDIDATE
Not following rules and policies of the CFA program Giving confidential info on the CFA Program to candidates or the public .....
Not precluded from expressing opinion regarding the CFA Program or CFAI
Preventing promotional efforts that make promises or guarantees tied to the CFA designation
Over-promise the competence of an individual Over-promise future investment results
Applies to any form of communication
B. Reference to CFA Institute, the CFA Designation and the CFA program
To maintain CFAI membership
Remit annually to CFAI a completed Professional Conduct Statement Pay applicable CFAI membership dues on an annual basis
Using the CFA designation
Referencing candidacy in the CFA program
Proper using of the CFA marks
a
a. Explain the ethical responsibilities required by Codes and Standards
CS1: ARGENT CAPITAL MANAGEMENT
CS2: RIVER CITY PENSION FUND
3.4.5 Ethics In Practice
CS3: MACROECONOMIC ASSET MANAGEMENT
CS4: BOB EHRLICH
b. Case study CS5: ALEX KAYE
4. THE CONSULTANT
5. PEARL INVESTMENT MANAGEMENT
a. Explain the ethical responsibilities required by AMC
6. Asset Manager Code Of Professional Conduct b. Interpret AMC in situations
c. Preventing violations
CFA LEVEL 3 STUDY SESSION 3
BEHAVIORAL FINANCE
Traditional finance
a. Contrast
Behavioral finance
Expected utility
b. Contrast Prospect theory
7. The Behavioral Finance Perspective Cognitive
c. Effects of
Knowledge capacity limitations
Capital markets
d. Traditional vs. Behavioral finance on
Portfolio construction
Cognitive errors
a. Distinguish Emotional biases
Conservatism bias Confirmation bias I.1 Belief Perseverance biases
Representativeness Illusion of control
I. Cognitive errors
Hindsight Anchoring and adjustment I.2 Information-processing biases
8. The Behavioral Biases Of Individual
II.1 Loss-aversion II.2 Overconfidence II. Emotional biases
II.3 Self-control II.4 Status quo II.5 Endowment II.6 Regret-aversion
d1. Behaviorally modified asset allocation
d2. Case studies
Framing Availability
b,c. Commonly recognized behavioral biases
d. Impact of biases on Investment policy and asset allocation
Mental accounting
Uses
a. Classifying investors
Limitations
b. Adviser-client interactions
9. Behavioral Finance And Investment Processes
Behavioral factors affect
d. Analyst forecasts e. Investment committee decision making
c. Applying behavioral finance for portfolio construction
market anomalies
f. Investors' behavior--->
observed market characteristics
CFA LEVEL 3 STUDY SESSION 4
PRIVATE WEALTH MANAGEMENT
Active wealth creation (by entrepreneurial activity)
Sources of wealth
Through inheritance Passive wealth creation, acquired
One-time windfalls Accumulated over long periods of secure employment
a. Risk tolerance affected by
Measures of wealth
Positive correlation between risk tolerance &
Stage of life
perceived portfolio size
Foundation phase, Accumulation phase, Maintenance phase, Distribution phase
Risk aversion
Warm-up: Traditional assumptions
Rational expectations Asset integration
Source of wealth, Measure of wealth, Stage of life
Situational profiling
Situational profiling vs Psychological profiling
Decision-making styles: Feeling vs Thinking
Psychological profiling
Risk attitudes: More risk averse vs Less risk averse
b,c. Behavioral finance vs Traditional finance
Loss aversion vs Risk aversion Biased expectations vs Rational expectations Asset segregation vs Asset integration
Risk tolerance
d. Psychology affects
10.1 Managing Individual Investor Portfolios
Investment choice
Risk attitudes
2 dimensions
Decision-making style Cautious
e,f. Personality types
Personality types
Methodical Individualistic Spontaneous
Optimal decisions, Dynamic process, long-term objectives, usable by new advisers
For client
g. Benefits Suitability clarification, Dispute Resolution, Problem Identification
For advisers
Objectives
Risk Return Time horizon(s) Taxes
Planning
IPS
Constraints
Liquidity Legal & regulatory needs Unique circumstances
h. Steps
IPS Capital Market Expectation Strategic Asset Allocation
Execution
Feedback
Portfolio selection Portfolio implementation Monitoring & Rebalancing Evaluation
Return objective
Required Desired Short-term & Long-term goals
i,j. Objectives
Risk objective
Ability to take risk
Primary & Secondary goals Max Volatility
Willingness to take risk
Time horizon
Short-term vs. long-term Pre-retirement, Retirement, Post-retirement New time horizon Classification: Income tax, Capital gain tax, Transfer tax, Wealth tax or personal property tax
Tax concerns
Tax deferral Reduce adverse impact of tax
Tax avoidance Tax reduction Wealth transfer taxes
k. Constraints
Normal expenses Needs
Sufficient surplus Major planned events
Liquidity
10.2 Managing Individual Investor Portfolios (Cont.)
Liquidity characteristics of portfolio assets
Transaction costs Volatility Illiquid holdings
Legal & regulatory factors Unique circumstances
l. Formulate & justify an IPS for an individual investor
After-tax return requirements Liquidity requirements
m. Strategic asset allocation
Risk tolerance: Safety first rule Unique circumstances: no disallowed assets Minimize cash Maximize Sharpe ratio
Traditional deterministic techniques
n. Retirement planning
Monte Carlo simulation techniques --> advantages
Use single estimates of inputs and yield point estimate of outcome
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
Taxes on Income (What you make) Taxes on Wealth (What you have and transfer)
a. Global taxation regimes
Taxes on consumption (What you spend) 7 Global tax regimes
Future value interest factor
b. Tax regimes
Tax drag/Gain lost to taxes
Accrual Taxes Deferred Capital Gains Taxes
With cost basis Only market value
d. Return, Investment horizon & tax impact
Wealth-based Taxes Realized tax rate & Effective capital gain taxes
Accrual equivalent tax rates
c. Accrual equivalent after-tax returns
11. Taxes & Private Wealth Management In A Global Context
After-tax returns
Tax-deferred account (TDA)
e. Account tax profiles
Tax advantaged account (CGBT) Tax-Exempt account (TEA)
Reduction in investment risk
f. Taxes & investment risk
Traders Active Investors
g. The tax effects of trading behavior
Passive Investors Exempt Investors
Tax-loss harvesting
h. Tax loss harvesting & HIFO tax lot accounting
i. Taxes & Mean-Variance optimization
HIFO tax lot accounting
Accrual equivalent after-tax returns After-tax risk
Estates Wills
a. Estate planning
Probate
Gifts
Forms of transferring assets
Bequests Law systems
Civil law system Common law system
b. Wealth transfer taxes
Forced heirship
Is... If avoided --> claw-back
Marital property regime
community property rights separate property rights
12.1 Estate Planning In A Global Context
d. Relative after-tax values
Mortality probabilities
c. Core capital
Monte Carlo analysis
Tax-free gift Taxable gift
Recipient pays gift taxes
e. Gift taxes
Donor pays gift taxes
Generation skipping Spousal exemptions
f. Estate planning strategies
Valuation discounts Charitable gifts (charitable gratuitous transfers)
Grantor/Settlor --> Beneficiaries outside of probate process Trustee
Distinguish
Revocable trusts Irrevocable trusts
g. Trusts Fixed trust Concepts
Discretionary trust Spendthrift trust
h. Life insurance
12.2 Estate Planning In A Global Context (Cont.)
Income taxes
i,j. Tax jurisdiction (Source jurisdiction vs Residence jurisdiction)
Wealth transfer taxes Exit taxes
Residence-residence Conflicts
Source-source Residence-source
k. Relief from double taxation
Credit Relief methods
Exemption Deduction
Tax avoidance vs Tax evasion
l. International transparency
Global treaties and agreement
Source of wealth
Psychological Issues
Entrepreneurs a,b,c.
Executives Investors
Equity holding life
Outright sales
13. Low Basic Stock
Exchange funds
Public exchange funds
Private exchange funds
d. Diversification techniques
Completion portfolios
Hedging
Sell calls and Buy puts
Equity collars
Short identical securities No constructive sale
Swap of the same notional amount Forward contract of same/idential assets
Variable pre-paid forwards
Risk Considerations
Formulation Human Capital vs Financial Capital
a. Human capital
Equity-like vs Debt-like
Savings rate Earning risk
Correlation of human and financial capital Relative risk
b. Mortality risk Longevity risk
c. Asset allocation policy
14. Lifetime Financial Advice: Human Capital, Asset Allocation & Life Insurance
Total return perspective Risk allocation
Formula: Probability of death Bequest desire
d. Life insurance
LIPO (Life Insurance Payout)
Financial wealth & demand for life insurance Human capital volatility & demand for life insurance Risk aversion & demand for life insurance Probability of death & demand for life insurance
Financial market risk
e. Risk in retirement
Longevity risk Savings risk
Fixed annuities
f. Longevity hedges
g. Exam review
Variable annuities
CFA LEVEL 3 STUDY SESSION 5
PM FOR INSTITUTIONAL INVESTORS
General pension definitions Types of pension plans
Defined-benefit plan Cash balance plan Defined-contribution plan Funded status
Pension plan funding
Fully funded
Warm-up: Pension plans
Underfunded Surplus ABO Pension plan liabilities
PBO Total future liability Retired lives Active lives
Advantages
Disadvantages
Defined-benefit plans
a. Contrast
Defined-contribution plans
Objectives
DB plan constraints
Return
Liquidity Time horizon Legal & regulatory factors Unique circumstances
b,c. Definedbenefit plan objectives
15.1 Managing Institutional Investor Portfolios
Plan surplus Risk tolerance
Sponsor financial status & profitability Sponsor & pension fund common risk exposure Plan features Workforce characteristics
e. Risk Management in Investing pension plan assets
Plan Assets & Firm operations Plan Assets & Plan Liabilities
Hybrid plans
g.
ESOPs
Description
Independent
h. Foundations
Company sponsored
Operating
Community
d. IPS for DB plan f. IPS for DC plan
IPS j. IPS for foundation, endowment, insurance company & bank
Purpose
Source of funds
Annual spending requirement
Are...
Endowments
Simple spending rule Spending rules
Rolling 3-year average spending rule Geometric spending rule
Traditional policies
Life Insurance companies New policies
WARM-UP
Whole life Term life
Universal life Variable life
Asset/Liability management
Nonlife insurance companies
Bank security portfolios
Banks
Duration, Credit risk, Income & Liquidity Bank risk measures
OBJECTIVES Return
Endowments
15.2 Managing Institutional Investor Portfolios (Cont.)
Life Insurance companies
i.
Nonlife Insurance companies
Banks
DB pension funds
DC pension funds
Foundations
m. Asset/Liability management needs of
Endowments
Insurance companies
Banks
Investment companies
k.
Commodity pools Hedge funds
l,n. Investment policies of institutional investors
Risk
CONSTRAINTS Liq.
TimeH
Taxes
Legal
Unique
a. Assumptions concerning pension liability risk in
Asset-only approach Liability-relative approach
Market exposures due to accrued benefits
Active part Inactive part
16. Linking Pension Liabilities To Assets
b. Pension liability exposures
Market exposures due to future benefits
Future wage growth Future services rendered Future entrants
Non-market exposures
Plan demographic Model uncertainty
c. The liability-relative approach in practice
Funding shortfall
a. Funding shortfall & asset/liability mismatch
17. Allocating Shareholder Capital To Pension Plans
Asset/Liability mismatch
b. The weighted average cost of capital
Formulas Implications
Total assets betas
c. Changing pension asset allocations
Debt-to-equity ratio Equity capital needed to maintain equity beta
CFA LEVEL 3 STUDY SESSION 6
CAPITAL MARKET EXPECTATIONS
Macro expectations
CME
Micro expectations
1. Determine CME needed 2. Investigate asset's historical performance & determinants
a. Formulating CME (beta research # alpha research)
3. Identify valuation model and its requirements 7 steps
4. Collect best data possible 5. Interpret current investment conditions 6. Formulate CMEs 7. Monitor performance and refine the process
1. Limitations to using economic data 2. Data measurement errors and biases
Transcription errors Survivorship bias Appraisal data (smoothed)
3. Limitations of historical estimates
Regime changes --> nonstationary data. Span of data
4. Using ex post data 5. Non-repeating data patterns
b. Problems in forecasting
Data mining Time period bias
6. Failing to account for conditioning information 7. Misinterpretation of correlations Anchoring Status quo trap Confirming evidence
8. Psychological traps
18.1. Capital Market Expectations
Overconfidence trap Prudence trap (fear of regret) Recallability trap 9. Model & input uncertainty
Projecting historical data
Statistical tools
Shrinkage estimators Time series analysis Multifactor models
c. Forecasting tools DCF models
Gordon growth model Grinold & Kroner
Risk premium approach Financial equilibrium models
Surveys
d. Using
Panel method Judgment
The inventory and business cycle Inflation
e. Cyclical analysis
Consumer & business spending Monetary policy Fiscal policy
Initial recovery Business cycle & Asset returns
Early expansion Late expansion Slowdown Recession
f,g. Inflation & Asset returns
h. The Taylor rule
i. The yield curve
J.
Economic growth trends
Components of econ growth trends Application to formulation of CME
k. Exogenous shocks
l. Linkages between economies
Risks
18.2. Capital Market Expectations (Cont.)
m. Emerging markets
Country risk analysis
Econometric analysis
n. Economic forecasting
Economic indicators Checklist approach
Cash instruments Credit risk-free bonds Credit risky bonds
o.p. Economic conditions & asset class returns
Emerging market government bonds Inflation indexed bonds Common stock Emerging market stocks Real estate
q. Forecasting exchange rates
q. Reallocating a global portfolio
CFA LEVEL 3 STUDY SESSION 7
ECONOMIC CONCEPTS FOR ASSET VALUATION
Terms
a,c. Cobb-Douglas production function
Used to model growth in real output
c. Used in DDM
Total factor productivity
b. Growth in
Capital stock Labor input
19. Equity Market Valuation DDM
d. Estimating intrinsic value of an equity market by using
Top-down
e. Forecast EPS of index
Bottom-up
f,g. Relative valuation models
Macroeconomic forecasting
BRICs = Brazil, Russia, India & China
Potential economic size & growth Demographics & Per capita income
a. Economic potential of the BRICs
Growth in Global spending Trends in real exchange rates
Potential returns on capital & productivity
b. Economic growth
Appreciating currencies
20. Dreaming With BRICs: The Path To 2050 c. Elements of economic growth
Technological progress
Growth in capital stock
Employment growth
Macroeconomic stability
d. The conditions for sustained economic growth
Institutional efficiency
Open trade
Worker education
e. Emerging markets in a portfolio
CFA LEVEL 3 STUDY SESSION 8
ASSET ALLOCATION
Strategic asset allocation
a,b. Compare
Tactical asset allocation
c. Importance of asset allocation for portfolio performance
Asset-only approach
d. Approaches to asset allocation
ALM approach
Advantages over Static asset allocation
e. Dynamic asset allocation
Trade-offs of complexity and cost
Loss aversion
21.1. Asset Allocation
f. Asset allocation policy influenced by
Mental accounting Fear of regret
g. Risk & Return objectives in strategic asset allocation
h. Specifying asset classes
Inflation adjusted securities
j. Theoretical & practical effects of including
Global securities Alternative investments
k. Steps in asset allocation
Efficient frontier Mean- variance
m. Constraint against short sales Resampled efficient frontier
l. Approaches to asset allocation
Black- Litterman
Monte Carlo simulation
ALM
Experience based
21.2. Asset Allocation (Cont.)
i,n. Formulate & justify a strategic asset allocation
Institutional investors Individuals Defined benefit pension plans
o. Strategic asset allocation issues
Endowments Foundations Insurance companies Banks
p. Tactical Asset Allocation (TAA)
Global portfolio risk and return
a. International diversification
International equity market correlations International bond market correlations
d. International efficient frontier
e. Benefits of adding bonds
b. Currency return
c. Currency risk
f. Currency risk and volatility
22. The Case For International Diversification
g. International diversification should not work
Transactions costs Regulations Taxes
h. Barriers to international investing
Currency risk Political risk Market efficiency Lack of familiarity
i. Global vs International investing
j. Emerging markets
Investability Segmentation & Integration of emerging markets
CFA LEVEL 3 STUDY SESSION 9,10
FIXED‐INCOME PORTFOLIO MANAGEMENT
Bond Index
a. Bond portfolio benchmarks
Liabilities
Pure Bond indexing
b. Bond indexing strategies
Enhanced indexing Active investing
c. Criteria for selecting a benchmark bond index
d. Aligning risk exposures
Total return analysis
e. Contrast
23. Fixed Income PMPart 1
Scenario analysis
Warm-up: Duration as a measure of bond portfolio risk
g. Adjusting dollar duration
h. Spread duration
f. Classical immunization
Design a bond immunization strategy Evaluate the strategy under various interest rate scenarios
i. Extensions to classical immunization Interest rate risk j. Immunization risks
Contingent claim risk Cap risk
m. Immunization strategies k. Contrast immunization strategies for
A single liability Multiple liabilities General cash flows
l. Risk minimization vs. return maximization m. Cash flow matching
a. Relative value analysis
b. Cyclical and secular changes
c. Influence of liquidity needs on PM decisions
Yield-spread pickup trades Credit-upside trades Credit-defense trades New issue swaps
d. Rationales for secondary bond trades
24. Relative-value Methodologies For Global Credit Bond PM
Sector-rotation trades Yield curve-adjustment trades Structure trades CF reinvestment
Trading constraints Rationales for not trading
Story disagreement Buy and hold Seasonality
Nominal spread Yield spreads
Swap spreads OAS
e. Assessing relative value methodologies Mean-reversion analysis Spread analysis
Quality-spread analysis Percentage yield spread analysis
Bullet structures Bond structures
Early retirement provisions Credit analysis
a. Effect of leverage on portfolio returns and duration
b. Repurchase agreements
Standard deviation Semivariance
c. Bond risk measures
Shortfall risk Value at risk Futures contracts
d. Advantages of interest rate futures
25. Fixed-Income PM - Part II
e. Immunization strategy based on interest rate futures
f. Use of i/r swaps and options
g. Managing risks with derivatives
h. Sources of excess return for an international bond portfolio i. International bond durations
International bond
j. Hedging decision k. Breakeven spread analysis
Advantages
l. Investing in emerging market debt
m. Selecting a fixed-income manager
Risks
Negative convexity and mortgage securities
a. How a mortgage security's negative convexity affects performance of a hedge
26. Hedging Mortgage Securities To Capture Relative Value
b. Mortgage security risks
Individual mortgage security
c. Importance of Yield curve risk
Treasury security
Duration-based approach
d. Hedging mortgage securities
Interest rate sensitivity approach
CFA LEVEL 3 STUDY SESSION 11, 12
EQUITY PORTFOLIO MANAGEMENT
a. Role of equities in the overall portfolio
Passive
b. Equity investment approaches
Active Semi-active
c. Recommend an equity investment approach
d1. Equity index weighting schemes
d2. Composition of Global Equity Indices
Index Mutual Fund and ETF Separate or Pooled Accounts
e. Methods of passive investing
Equity Futures
27.1. Equity Portfolio Management
Equity Total Return Swap
Full replications
f1. Approaches to constructing an indexed portfolio
Stratified Sampling Optimization
f2. Recommend an approach
g1. Equity investment-style classifications g2. Difficulties in applying style definitions consistently rationales Value investors
Equity style
primary concerns risk
h.
rationales Growth investors
primary concerns risk
i. Style identification
Compare and contrast techniques for identifying investment styles security selection method Characterize the style of an investor given
security holdings returns-based style analysis
j. Equity style indices
k1. Equity style box analysis
k2. Consequences of style drift Use of stock screens based on SRI
l. Socially responsible investing (SRI)
Potential effect on portfolio's style characteristics
long-short
m1. Contrast investment strategies
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 equitized market-neutral portfolios
n2. Contrast
short-extension portfolios
o. Sell disciplines of active investors
27.2. Equity Portfolio Management (cont.)
p1. Contrast enhanced indexing strategies
Derivative-based Stock-based
Enhanced indexing p2. Justify enhanced indexing on the basis of
risk control IR
q. Allocating to managers Core-satellite approach
r.
Completeness fund
True active return
s. Components of total active return
Misfit active return
t. Alpha and beta separation approach
u. Selecting equity managers Top-down approach
v. Equity research
Bottom-up approach
The ways management acts not in the best interest of shareholders
a. Moral hazard
How dysfunctional CG can lead to MH
Explicit managerial incentives
b. Managerial performance incentives
Implicit managerial incentives
Shortcomings of BOD
c.BOD
Improving board oversight
28.Corporate Governance Why active monitoring by investors requires control?
d. Active monitoring
Mechanisms to control Limitations of investor activism
Debt as management motivator
e.Debt and CG
Limitations of debt
f. Stakeholders vs. Stockholders
g.The Cadbury Report
a. Float adjustment
Breadth vs. Investability
Liquidity and crossing opportunities vs. reconstitution effects
29. International Equity Benchmarks
b. International indices: trade-offs
Precise float adjustment vs. Transactions costs from rebalancing
Objectivity and transparency vs. Judgment
Market indices ---> impact on
c. Country classification: Emerging vs. Developed
Investment in the country's capital market
Financial and economic market integration
a. Market integration
Changes resulting from market integration
Market liberalization Vs. market integration
b. Market liberalization
Financial effects of liberalization Economic effects of liberalization
30. Emerging Markets Finance Contagion Non-normal return distributions Market efficiency and market microstructure
c. Issues for emerging market investors
Market efficiency and price discovery Privatizations and the costs of capital Corporate governance Other issues for emerging market investors
CFA LEVEL 3 STUDY SESSION 13
ALTERNATIVE INVESTMENTS PORTFOLIO MANAGEMENT
a. Alternative investment features b. Due diligence checkpoints
General
c. Issues for private wealth clients e. Alternative investment benchmarks f. Return enhancement and diversification
Real estate Private Equity Commodities
31.1. Alternative Investments Portfolio Management
Hedge funds
d. Alternative investment groups
Managed futures Buyout funds Infrastructure funds Distressed securities
g. Real estate equity investing
h. Some issues
Major issuers Buyers Stages
Venture Capital investing
i. Contrast
VC funds Buyout funds
j. Convertible preferred stock
k. Structure of PE funds
PE investing
l. PE investment strategy
m. Commodity investment
Direct Indirect
Commodity investing
n. The term structure of future prices o. Commodities and inflation
p. Classifications
31.2. Alternative Investments Portfolio Management
q. Hedge fund structures
Hedge fund
r. Fund of funds s. Hedge fund performance evaluation
Trading strategies
t. Managed futures
Role in a portfolio
u. Discuss
Sources of distressed securities Major investment strategies
Distressed securities investing
Event risk v. Importance of
Market liquidity risk Market risk J-factor risk
Hedging strategies
32. Swaps
Inherent risk exposures
Storability Storage costs
a. Pricing factors
Production Demand
33. Commodity Forwards & Futures b. Commodity arbitrage
c. Basis risk of commodity futures
From convenience yield From commodity spreads
CFA LEVEL 3 STUDY SESSION 14, 15
RISK MANAGEMENT
RM process Risk governance
a. Managing risk
Decentralized system Centralized system (ERM)
b. Evaluate risk management system
c. Characteristics of an effective risk management system
Financial risks
d. Exposures to
Non-financial risks
34.1. Risk Management
e. Interpret and compute Analytical VAR f. Methods
Historical VAR Monte Carlo
VAR
Advantages Limitations IVAR
g. Extensions
CFAR TVAR
VAR and liquidity risk
Forms
Scenario analysis Stressing models
h. Stress testing
Evaluating stress test results
Credit VAR
i. Evaluating credit risk
Forward contract Credit risk of
Swap Option
Risk budgeting Position limits Liquidity limits
j. Managing market risk
Performance stopouts Risk factor limits Scenario analysis limits Leverage limits
Limiting exposures Marking to market
34.2. Risk Management (cont.)
Collateral
k. Managing credit risk
Netting arrangements Credit standards Credit derivatives
Sharpe ratio
l. Measuring risk-adjusted performance
Risk-adjusted return on capital (RAROC) Return over maximum drawdown (RoMAD) Sortino ratio
Nominal position limits VAR-based position limits
m. Setting capital requirements
Maximum loss limit Internal capital requirements and regulatory capital requirements Behavioral conflicts
a. Hedging the principal
b. Minimum Variance Hedge
c. Basis risk
d. Contract terms
e. Hedging multiple currencies
35. Currency Risk Management f. Currency options
g. Currency delta hedging
h. Indirect currency hedging
Balance mandate
i. Currency management
Currency overlay Separate asset allocation
Warm-up: Futures & Forwards
Duration
Futures contract
Yield
The hedge isn't perfect
a. Adjusting the portfolio beta
Index multipliers & synthetic positions
b. Synthetic stock index fund
36. RM Applications Of Forward & Futures Strategies
c. Synthetic cash
Target duration
d. Adjusting the portfolio allocation
Non-zero target duration
Changing equity allocations
e. Adjusting the equity allocation
Pre-investing
f. Exchange rate risk
Hedging market risk
g. Hedging limitations
Hedging currency risk
Warm-up: Basics of put options & call options
Covered calls
a.
Protective puts
Bull call spread
Bear call spread
Butterfly spread with calls
Butterfly spread with puts
b. Option spread strategies
37. RM Applications Of Option Strategies
Put-call parity
Straddle
Collar
Box spread strategy
Interest call
c. I/R options
Interest put
Caps
d. I/R
Floors Collars
e. Delta hedging
f. The second-order gamma effect
a. Using swaps to convert loans from fixed to floating b. Duration of an i/r swap
Interest rate swap
c. Effect on cash flow risk d. Using swaps to change duration
38. RM Applications Of Swap Strategies
e. Issue loan/bond + currency swap
Currency swap
f. Converting foreign cash receipts
g. Equity swaps
Payer swaption
h. I/R swaptions
Receiver swaption
CFA LEVEL 3 STUDY SESSION 16
EXECUTION, MONITORING & REBALANCING
Warm-up: the investment process & market microstructure
a. Market & limit orders
b. The effective spread
Quote-driven markets
c. Market structures
Order-driven markets Brokered markets
39.1. Execution Of Portfolio Decisions
d. Brokers & dealers
e. Market quality
f. Execution costs
Explicit costs
g. Implementation shortfall
Realized profit/loss Delay costs Missed trade opportunity cost
h. VWAP vs. Implementation shortfall
i. Econometric models
j. Major trader types
k. Trading tactics
39.2. Execution Of Portfolio Decisions (cont.)
l. Algorithmic trading
m. Choosing an algorithmic trading strategy
n. Best execution
o. Evaluating trading procedures
p. Role of ethics in trading
a. Fiduciary responsibilities
Monitoring investor circumstances Monitoring market/economic conditions Monitoring the portfolio Change in wealth Changing time horizons Changing liquidity requirements Changing tax treatment
b. Monitoring
Laws & regulations New asset alternatives Changes in asset class risks Bull vs. Bear markets The stock market & central bank policy Changes in inflation Changes in asset class expected returns
Changes in wealth Time horizon
c. Changed investor circumstances
Liquidity requirements Tax concerns
40. Monitoring & Rebalancing
Legal & regulatory
d. Benefits & costs of rebalancing
Calendar rebalancing
e,g. Rebalancing
Percentage-of-portfolio rebalancing
Transactions costs
f. Optimal corridor width
Correlations Volatility
Buy-and-hold strategy Constant mix strategy Constant proportion strategy
h,i,j. Dynamic rebalancing strategies
Rebalancing in up & down markets Exposure diagrams of concave (constant mix) vs. convex (CPPI) strategies Convex strategies & concave strategies
CFA LEVEL 3 STUDY SESSION 17
PERFORMANCE EVALUATION & ATTRIBUTION
Fund sponsor's perspective
a. Performance evaluation
Investment manager's perspective
Performance measurement
b. Components of portfolio evaluation
Performance attribution Performance appraisal
Money weighted
c. Rates of returns
Time weighted
d. Data quality
Attributable to the market
41.1 Evaluating Portfolio Performance
e. Portfolio return components
f. Benchmark properties
g. Constructing custom security-based benchmarks
h. Validity of using manager universes as benchmarks
i. Tests of benchmark quality
j. Hedge fund benchmarks
Attributable to style Attributable to active management
Macro
k,l. Performance attribution
Micro
m. Fundamental factor models in micro attribution
Effects of i/r
n,o. Fixed income performance attribution
Effects of management
Alpha Information ratio
41.2 Evaluating Portfolio Performance (cont.)
p. Risk-adjusted performance measures
q. Alpha & beta in information ratio, Treynor measure & Sharpe ratio
r. Performance quality control charts
s. Manager continuation policy
t. Type I & type II errors
Treynor measure Sharpe ratio M2
a. Currency movements & portfolio returns
b,c. Global portfolio attribution
d. Active & passive currency management
42. Global Performance Evaluation
e. Multi-period performance attribution
f. Risk measures
g. Risk budgeting in global performance evaluation
h. Global & international benchmarks
CFA LEVEL 3 STUDY SESSION 18
GIPS
The creation and evolution of the GIPS Standards Reasons for the creation of GIPS Standards Standards' evolution
a. Discuss Benefits to prospective clients and investment managers
Objectives
b. Discuss
Key characteristics Scope
c. Explain GIPS compliance Requirements
d. Explain inputs data
Recommendations
Requirements
e. Return calculation methodology
Recommendations
f. Composite returns and asset-weighted returns g. Discretionary portfolios Composite Constructing composites
h. Mandates, objectives or strategies i. Adding portfolios and terminating portfolios
43. GIPS j. Asset class segments carved out of multi-class portfolios
k. Disclosure requirements and recommendations
l,m,n. GIPS presentation and reporting requirements
p. Real estate and private equity
o. GIPS for
Requirements Recommendations
q. Wrap fee/Separately Managed Account
r. Valuation hierarchy
Requirements Recommendations
Requirements Recommendations
s. GIPS advertising guidelines
t. GIPS verification
u. Challenges related to calculation of after-tax return Real estate
v. Errors and omissions in given performance presentations, including
Private equity Wrap fee/SMA
