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

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.

CFALEVEL3

STUDYSESSION1&2

CODEOFETHICS&STANDARDSOFPROFESSIONAL

CONDUCT

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

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

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

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

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

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

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

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

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

6. AssetManagerCode Of

ProfessionalConduct

a. Explain the ethicalresponsibilities requiredby AMC

b. Interpret AMC insituations

c. Preventing violations

CFALEVEL3

STUDYSESSION3

BEHAVIORALFINANCE

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

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

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

CFALEVEL3

STUDYSESSION4

PRIVATEWEALTHMANAGEMENT

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

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

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

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)

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

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