## CFA Program Curriculum 2020 Level I Volumes 1-6

The same official curricula that CFA Program candidates receive with program registration are now publicly available for purchase. CFA Program Curriculum 2020 Level I, Volumes 1-6 provides the complete Level I Curriculum for the 2020 exam, delivering the Candidate Body of Knowledge (CBOK) with expert instruction on all 10 topic areas of the CFA Program. Fundamental concepts are explained in-depth with a heavily visual style, while cases and examples demonstrate how concepts apply in real-world scenarios.

Coverage includes ethical and professional standards, quantitative analysis, economics, financial reporting and analysis, corporate finance, equities, fixed income, derivatives, alternative investments, and portfolio management, all organized into individual sessions with clearly defined Learning Outcome Statements. Charts, graphs, figures, diagrams, and financial statements illustrate concepts to facilitate retention, and practice questions provide the opportunity to gauge your understanding while reinforcing important concepts.

Get effective and efficient instruction on all CFA Level I competencies for the 2020 exam The CFA Program Curriculum 2020 Level I Volumes 1-6 Box Set provides readers with the official curricula received by all CFA program candidates. The Box Set includes the Candidate Body of Knowledge (CBOK) with concise instruction on all 10 topic areas covered by the CFA Program. The Box Set explains fundamental concepts with a heavily visual style and includes cases and examples to illustrate the ideas found within and show how they apply in real-world scenarios.

## About the author:

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 155,000 members in 165 countries and territories, including 150,000 CFA® charterholders, and 148 member societies.

## Table of Contents:

### CFA® Program Curriculum 2020 • LEVEL I • VOLUME 1

How to Use the CFA Program Curriculum

Background on the CBOK

Organization of the Curriculum

Features of the Curriculum

Designing Your Personal Study Program

Feedback

Ethical and Professional Standards

Study Session 1 Ethical and Professional Standards

Reading 1 Ethics and Trust in the Investment Profession

Introduction

Ethics

Ethics and Professionalism

How Professions Establish Trust

Professions Are Evolving

Professionalism in Investment Management

Trust in Investment Management

CFA Institute as an Investment Management Professional Body

Challenges to Ethical Conduct

Ethical vs. Legal Standards

Ethical Decision-Making Frameworks

The Framework for Ethical Decision-Making

Applying the Framework

Conclusion

Summary

Practice Problems

Solutions

Reading 2 Code of Ethics and Standards of Professional Conduct

Preface

Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct

Standards of Practice Handbook

Summary of Changes in the Eleventh Edition

CFA Institute Professional Conduct Program

Adoption of the Code and Standards

Acknowledgments

Ethics and the Investment Industry

Why Ethics Matters

CFA Institute Code of Ethics and Standards of Professional Conduct

Preamble

The Code of Ethics

Standards of Professional Conduct

Practice Problems

Solutions

Reading 3 Guidance for Standards I–VII

Standard I: Professionalism

Standard I(A) Knowledge of Law

Guidance

Recommended Procedures for Compliance

Application of the Standard

Standard I(B) Independence and Objectivity

Guidance

Recommended Procedures for Compliance

Application of the Standard

Standard I(C) Misrepresentation

Guidance

Recommended Procedures for Compliance

Application of the Standard

Standard, I(D) Misconduct

Guidance

Recommended Procedures for Compliance

Application of the Standard

Standard II: Integrity of Capital Markets

Standard II(A) Material Nonpublic Information

Guidance

Recommended Procedures for Compliance

Application of the Standard

Standard II(B) Market Manipulation

Guidance

Application of the Standard

Standard III: Duties to Clients 107

Standard III(A) Loyalty, Prudence, and Care 107

Guidance 107

Recommended Procedures for Compliance 111

Application of the Standard 112

Standard III(B) Fair Dealing 116

Guidance 116

Recommended Procedures for Compliance 118

Application of the Standard 120

Standard III(C) Suitability 124

Guidance 124

Recommended Procedures for Compliance 127

Application of the Standard 128

Standard III(D) Performance Presentation 131

Guidance 131

Recommended Procedures for Compliance 132

Application of the Standard 132

Standard III(E) Preservation of Confidentiality 135

Guidance 135

Recommended Procedures for Compliance

Application of the Standard 137

Standard IV: Duties to Employers 139

Standard IV(A) Loyalty 139

Guidance 139

Recommended Procedures for Compliance 143

Application of the Standard 143

Standard IV(B) Additional Compensation Arrangements 150

Guidance 150

Recommended Procedures for Compliance 150

Application of the Standard 150

Standard IV(C) Responsibilities of Supervisors 152

Guidance 152

Recommended Procedures for Compliance 154

Application of the Standard 156

Standard V: Investment Analysis, Recommendations, and Actions 160

Standard V(A) Diligence and Reasonable Basis 160

Guidance 160

Recommended Procedures for Compliance 164

Application of the Standard 164

Standard V(B) Communication with Clients and Prospective Clients 171

Guidance 172

Recommended Procedures for Compliance 174

Application of the Standard 175

Standard V(C) Record Retention 180

Guidance 180

Recommended Procedures for Compliance 181

Application of the Standard 182

Standard VI: Conflicts of Interest 183

Standard VI(A) Disclosure of Conflicts 183

Guidance 183

Recommended Procedures for Compliance 186

Application of the Standard 186

Standard VI(B) Priority of Transactions 191

Guidance 191

Recommended Procedures for Compliance 192

Application of the Standard 194

Standard VI(C) Referral Fees 196

Guidance 196

Recommended Procedures for Compliance 196

Application of the Standard 196

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 199

Standard VII(A) Conduct as Participants in CFA Institute Programs 199

Guidance 199

Application of the Standard 201

Standard VII(B) Reference to CFA Institute, the CFA Designation, and

the CFA Program 204

Guidance 204

Recommended Procedures for Compliance 206

Application of the Standard

Practice Problems 209

Solutions 219

Reading 4 Introduction to the Global Investment Performance Standards (GIPS) 227

Why Were the GIPS Standards Created? 227

Who Can Claim Compliance? 228

Who Benefits from Compliance? 228

Composites 229

Verification 229

The Structure of the GIPS Standards 230

Practice Problems 231

Solutions 232

Reading 5 Global Investment Performance Standards (GIPS) 233

Preface 233

History 234

Introduction 235

Preamble—Why Is a Global Investment Performance Standard Needed? 235

Objectives 235

Overview 236

Historical Performance Record 236

Compliance 237

Effective Date 237

Implementing a Global Standard 237

Sponsors 238

Provisions of the Global Investment Performance Standards 239

Fundamentals of Compliance 241

Input Data 243

Calculation Methodology 243

Composite Construction 244

Disclosure 245

Presentation and Reporting 248

Real Estate 250

Private Equity 255

Wrap Fee/Separately Managed Account (SMA) Portfolios 258

GIPS Valuation Principles 260

Fair Value Definition 260

Valuation Requirements 261

Valuation Recommendations 262

GIPS Advertising Guidelines 264

Purpose of the GIPS Advertising Guidelines 264

Requirements of the GIPS Advertising Guidelines 264

Verification 266

Scope and Purpose of Verification 266

Required Verification Procedures 267

Performance Examinations 270

GIPS Glossary 270

Appendix A: Sample Compliant Presentations

Appendix B: Sample Advertisements 297

Appendix C: Sample List of Composite Descriptions 300

Practice Problems 304

Solutions 306

Quantitative Methods

Study Session 2 Quantitative Methods (1) 311

Reading 6 The Time Value of Money 313

Introduction 313

Interest Rates: Interpretation 314

The Future Value of a Single Cash Flow 316

The Frequency of Compounding 321

Continuous Compounding 323

Stated and Effective Rates 324

The Future Value of a Series of Cash Flows 325

Equal Cash Flows—Ordinary Annuity 325

Unequal Cash Flows 327

The Present Value of a Single Cash Flow 327

Finding the Present Value of a Single Cash Flow 327

The Frequency of Compounding 330

The Present Value of a Series of Cash Flows 331

The Present Value of a Series of Equal Cash Flows 331

The Present Value of an Infinite Series of Equal Cash Flows Perpetuity 336

Present Values Indexed at Times Other than t = 0 337

The Present Value of a Series of Unequal Cash Flows 339

Solving for Rates, Number of Periods, or Size of Annuity Payments 339

Solving for Interest Rates and Growth Rates 340

Solving for the Number of Periods 342

Solving for the Size of Annuity Payments 343

Review of Present and Future Value Equivalence 347

The Cash Flow Additivity Principle 349

Summary 350

Practice Problems 351

Solutions 356

Reading 7 Statistical Concepts and Market Returns 369

Introduction 370

Some Fundamental Concepts 370

The Nature of Statistics 371

Populations and Samples 371

Measurement Scales 372

Summarizing Data Using Frequency Distributions 373

The Graphic Presentation of Data 381

The Histogram 382

The Frequency Polygon and the Cumulative Frequency Distribution

Measures of Central Tendency 386

The Arithmetic Mean 386

The Median 391

The Mode 393

Other Concepts of Mean 394

Other Measures of Location: Quantiles 403

Quartiles, Quintiles, Deciles, and Percentiles 403

Quantiles in Investment Practice 408

Measures of Dispersion 410

The Range 411

The Mean Absolute Deviation 411

Population Variance and Population Standard Deviation 413

Sample Variance and Sample Standard Deviation 416

Semivariance, Semideviation, and Related Concepts 419

Chebyshev’s Inequality 420

Coefficient of Variation 422

Symmetry and Skewness in Return Distributions 424

Kurtosis in Return Distributions 430

Using Geometric and Arithmetic Means 434

Summary 436

Practice Problems 439

Solutions 449

Reading 8 Probability Concepts 457

Introduction 458

Probability, Expected Value, and Variance 458

Portfolio Expected Return and Variance of Return 480

Topics in Probability 491

Bayes’ Formula 491

Principles of Counting 495

Summary 499

Practice Problems 502

Solutions 506

Study Session 3 Quantitative Methods (2) 511

Reading 9 Common Probability Distributions 513

Introduction to Common Probability Distributions 514

Discrete Random Variables 515

The Discrete Uniform Distribution 516

The Binomial Distribution 518

Continuous Random Variables 527

Continuous Uniform Distribution 528

The Normal Distribution 531

Applications of the Normal Distribution 537

The Lognormal Distribution 539

Monte Carlo Simulation

Summary 551

Practice Problems 554

Solutions 561

Reading 10 Sampling and Estimation 569

Introduction 570

Sampling 570

Simple Random Sampling 570

Stratified Random Sampling 572

Time-Series and Cross-Sectional Data 573

Distribution of the Sample Mean 576

The Central Limit Theorem 576

Point and Interval Estimates of the Population Mean 579

Point Estimators 579

Confidence Intervals for the Population Mean.

Selection of Sample Size.

More on Sampling.

Data-Mining Bias.

Sample Selection Bias.

Look-Ahead Bias.

Time-Period Bias.

Summary.

Practice Problems.

Solutions.

Reading 11 Hypothesis Testing.

Introduction.

Hypothesis Testing.

Hypothesis Tests Concerning the Mean.

Tests Concerning a Single Mean.

Tests Concerning Differences between Means.

Tests Concerning Mean Differences.

Hypothesis Tests Concerning Variance and Correlation.

Tests Concerning a Single Variance.

Tests Concerning the Equality (Inequality) of Two Variances.

Tests Concerning Correlation.

Other Issues: Nonparametric Inference.

Nonparametric Tests Concerning Correlation: The Spearman Rank Correlation Coefficient.

Nonparametric Inference: Summary

Summary

Practice Problems

Solutions

Appendices

Glossary

### CFA® Program Curriculum 2020 • LEVEL I • VOLUME 2

How to Use the CFA Program Curriculum v

Background on the CBOK v

Organization of the Curriculum vi

Features of the Curriculum vi

Designing Your Personal Study Program viii

Feedback ix

Economics

Study Session 4 Economics (1) 3

Reading 12 Topics in Demand and Supply Analysis 5

Introduction 5

Demand Analysis: The Consumer 6

Demand Concepts 6

Own-Price

The elasticity of Demand 9

Income Elasticity of Demand 14

Cross-Price

The elasticity of Demand 15

Substitution and Income Effects 18

Normal and Inferior Goods 19

Supply Analysis: The Firm 22

Marginal Returns and Productivity 23

Breakeven and Shutdown Analysis 27

Understanding Economies and Diseconomies of Scale 42

Summary 47

Practice Problems 50

Solutions 57

Reading 13 The Firm and Market Structures 61

Introduction 61

Analysis of Market Structures 62

Economists’ Four Types of Structure 62

Factors That Determine Market Structure 64

Perfect Competition 66

Demand Analysis in Perfectly Competitive Markets 67

Supply Analysis in Perfectly Competitive Markets 75

Optimal Price and Output in Perfectly Competitive Markets 76

Factors Affecting Long-Run

Equilibrium in Perfectly Competitive

Markets 79

Monopolistic Competition 81

Demand Analysis in Monopolistically Competitive Markets 82

Supply Analysis in Monopolistically Competitive Markets 83

Optimal Price and Output in Monopolistically Competitive Markets 83

Factors Affecting Long-Run Equilibrium in Monopolistically Competitive Markets 84

Oligopoly 85

Demand Analysis and Pricing Strategies in Oligopoly Markets 86

Supply Analysis in Oligopoly Markets 92

Optimal Price and Output in Oligopoly Markets 93

Factors Affecting Long-Run

Equilibrium in Oligopoly Markets 94

Monopoly 95

Demand Analysis in Monopoly Markets 96

Supply Analysis in Monopoly Markets 97

Optimal Price and Output in Monopoly Markets 99

Price Discrimination and Consumer Surplus 100

Factors Affecting Long-Run

Equilibrium in Monopoly Markets 102

Identification of Market Structure 103

Econometric Approaches 104

Simpler Measures 104

Summary 106

Practice Problems 108

Solutions 112

Reading 14 Aggregate Output, Prices, and Economic Growth 115

Introduction 116

Aggregate Output and Income 117

Gross Domestic Product 118

The Components of GDP 125

GDP, National Income, Personal Income, and Personal Disposable

Income 129

Aggregate Demand, Aggregate Supply, and Equilibrium 135

Aggregate Demand 135

Aggregate Supply 147

Shifts in Aggregate Demand and Supply 148

Equilibrium GDP and Prices 161

Economic Growth and Sustainability 172

The Production Function and Potential GDP 172

Sources of Economic Growth 175

Measures of Sustainable Growth 178

Summary 183

Practice Problems 188

Solutions 193

Reading 15 Understanding Business Cycles 197

Introduction 197

Overview of the Business Cycle 198

Phases of the Business Cycle 198

Resource Use through the Business Cycle 202

Housing Sector Behavior 208

External Trade Sector Behavior 209

Theories of the Business Cycle 211

Neoclassical and Austrian Schools 211

Keynesian and Monetarist Schools 212

The New Classical School 215

Unemployment and Inflation 219

Unemployment 219

Inflation 223

Economic Indicators 237

Popular Economic Indicators 237

Other Variables Used as Economic Indicators 242

Summary 245

Practice Problems 247

Solutions 253

Study Session 5 Economics (2) 257

Reading 16 Monetary and Fiscal Policy 259

Introduction 260

Monetary Policy 262

Money 262

The Roles of Central Banks 275

The Objectives of Monetary Policy 278

Contractionary and Expansionary Monetary Policies and the Neutral

Rate 294

Limitations of Monetary Policy 295

Fiscal Policy 300

Roles and Objectives of Fiscal Policy 301

Fiscal Policy Tools and the Macroeconomy 309

Fiscal Policy Implementation: Active and Discretionary Fiscal Policy 315

The Relationship between Monetary and Fiscal Policy 319

Factors Influencing the Mix of Fiscal and Monetary Policy 320

Quantitative Easing and Policy Interaction 321

The Importance of Credibility and Commitment 321

Summary 323

Practice Problems 325

Solutions 330

Reading 17 International Trade and Capital Flows 333

Introduction 333

International Trade 334

Basic Terminology 334

Patterns and Trends in International Trade and Capital Flows 337

Benefits and Costs of International Trade 341

Comparative Advantage and the Gains from Trade 343

Trade and Capital Flows: Restrictions and Agreements 352

Tariffs 352

Quotas 355

Export Subsidies 355

Trading Blocs, Common Markets, and Economic Unions 358

Capital Restrictions 362

The Balance of Payments 365

Balance of Payments Accounts 365

Balance of Payment Components 367

Paired Transactions in the BOP Bookkeeping System 369

National Economic Accounts and the Balance of Payments 372

Trade Organizations 377

International Monetary Fund 378

World Bank Group 380

World Trade Organization 381

Summary 383

Practice Problems 387

Solutions 391

Reading 18 Currency Exchange Rates 395

Introduction 395

The Foreign Exchange Market 397

Market Functions 402

Market Participants 408

Market Size and Composition 411

Currency Exchange Rate Calculations 414

Exchange Rate Quotations 414

Cross-Rate

Calculations 417

Forward Calculations 421

Exchange Rate Regimes 428

The Ideal Currency Regime 429

Historical Perspective on Currency Regimes 430

A Taxonomy of Currency Regimes 432

Exchange Rates, International Trade, and Capital Flows 440

Exchange Rates and the Trade Balance: The Elasticities Approach 441

Exchange Rates and the Trade Balance: The Absorption Approach 446

Summary 450

Practice Problems 453

Solutions 456

Glossary G-1

### CFA® Program Curriculum 2020 • LEVEL I • VOLUME 3

How to Use the CFA Program Curriculum ix

Background on the CBOK ix

Organization of the Curriculum x

Features of the Curriculum x

Designing Your Personal Study Program xii

Feedback xiii

Financial Reporting and Analysis

Study Session 6 Financial Reporting and Analysis (1) 3

Reading 19 Introduction to Financial Statement Analysis 5

Introduction 6

Roles of Financial Reporting and Financial Statement Analysis 6

Primary Financial Statements and Other Information Sources 13

Financial Statements and Supplementary Information 13

Other Sources of Information 31

Financial Statement Analysis Framework 32

Articulate the Purpose and Context of Analysis 33

Collect Data 34

Process Data 35

Analyze/Interpret the Processed Data 35

Develop and Communicate Conclusions/Recommendations 35

Follow-Up

36

Summary 36

Practice Problems 39

Solutions 42

Reading 20 Financial Reporting Standards 45

Introduction 46

The Objective of Financial Reporting 46

Standard-Setting

Bodies and Regulatory Authorities 47

Accounting Standards Boards 48

Regulatory Authorities 49

The International Financial Reporting Standards Framework 54

Qualitative Characteristics of Financial Reports 54

Constraints on Financial Reports 55

The Elements of Financial Statements 56

General Requirements for Financial Statements 58

Comparison of IFRS with Alternative Reporting Systems 61

Monitoring Developments in Financial Reporting Standards 62

New Products or Types of Transactions 63

Evolving Standards and the Role of CFA Institute 63

Summary 64

Practice Problems 66

Solutions 68

Study Session 7 Financial Reporting and Analysis (2) 69

Reading 21 Understanding Income Statements 71

Introduction 72

Components and Format of the Income Statement 72

Revenue Recognition 78

General Principles 79

Accounting Standards for Revenue Recognition 80

Expense Recognition 84

General Principles 84

Issues in Expense Recognition 88

Implications for Financial Analysis 93

Non-Recurring

Items and Non-Operating

Items 93

Discontinued Operations 94

Unusual or Infrequent Items 94

Changes in Accounting Policies 96

Non-Operating

Items 98

Earnings per Share 99

Simple versus Complex Capital Structure 100

Basic EPS 101

Diluted EPS 102

Changes in EPS 109

Analysis of the Income Statement 109

Common-Size

Analysis of the Income Statement 109

Income Statement Ratios 111

Comprehensive Income 113

Summary 116

Practice Problems 119

Solutions 124

Reading 22 Understanding Balance Sheets 127

Introduction 128

Components and Format of the Balance Sheet 128

Balance Sheet Components 129

Current and Non-Current

Classification 131

Liquidity-Based

Presentation 132

Current Assets and Current Liabilities 133

Current Assets 133

Current Liabilities 138

Non-Current

Assets 142

Property, Plant, and Equipment 143

Investment Property 144

Intangible Assets 145

Goodwill 148

Financial Assets 150

Deferred Tax Assets 154

Non-Current

Liabilities 154

Long-term

Financial Liabilities 156

Deferred Tax Liabilities 156

Equity 157

Components of Equity 157

Statement of Changes in Equity 160

Analysis of the Balance Sheet 161

Common-Size

Analysis of the Balance Sheet 161

Balance Sheet Ratios 169

Summary 171

Practice Problems 174

Solutions 179

Reading 23 Understanding Cash Flow Statements 183

Introduction 184

Components and Format of the Cash Flow Statement 185

Classification of Cash Flows and Non-Cash

Activities 185

A Summary of Differences between IFRS and US GAAP 187

Direct and Indirect Methods for Reporting Cash Flow from

Operating Activities 188

The Cash Flow Statement: Linkages and Preparation 198

Linkages of the Cash Flow Statement with the Income Statement

and Balance Sheet 198

Steps in Preparing the Cash Flow Statement 199

Conversion of Cash Flows from the Indirect to the Direct Method 211

Cash Flow Statement Analysis 212

Evaluation of the Sources and Uses of Cash 212

Common-Size

Analysis of the Statement of Cash Flows 216

Free Cash Flow to the Firm and Free Cash Flow to Equity 222

Cash Flow Ratios 223

Summary 225

Practice Problems 226

Solutions 232

Reading 24 Financial Analysis Techniques 235

Introduction 236

The Financial Analysis Process 237

The Objectives of the Financial Analysis Process 237

Distinguishing between Computations and Analysis 238

Analytical Tools and Techniques 241

Ratios 243

Common-Size

Analysis 248

The Use of Graphs as an Analytical Tool 254

Regression Analysis 256

Common Ratios Used in Financial Analysis 256

Interpretation and Context 257

Activity Ratios 258

Liquidity Ratios 264

Solvency Ratios 269

Profitability Ratios 273

Integrated Financial Ratio Analysis 276

Equity Analysis 284

Valuation Ratios 284

Industry-Specific

Ratios 287

Historical Research on Ratios in Equity Analysis 289

Credit Analysis 290

The Credit Rating Process 290

Historical Research on Ratios in Credit Analysis 291

Business and Geographic Segments 292

Segment Reporting Requirements 292

Segment Ratios 293

Model Building and Forecasting 296

Summary 297

Practice Problems 299

Solutions 305

Study Session 8 Financial Reporting and Analysis (3) 309

Reading 25 Inventories 311

Introduction 312

Cost of Inventories 313

Inventory Valuation Methods 314

Specific Identification 315

First-In,

First-Out

(FIFO) 315

Weighted Average Cost 315

Last-In,

First-Out

(LIFO) 316

Calculation of Cost of Sales, Gross Profit, and Ending Inventory 316

Periodic versus Perpetual Inventory Systems 318

Comparison of Inventory Valuation Methods 320

The LIFO Method 323

LIFO Reserve 323

LIFO Liquidations 324

Inventory Method Changes 331

Inventory Adjustments 332

Evaluation of Inventory Management 339

Presentation and Disclosure 339

Inventory Ratios 340

Financial Analysis Illustrations 341

Summary 350

Practice Problems 353

Solutions 369

Reading 26 Long-Lived

Assets 377

Introduction 378

Acquisition of Long-Lived

Assets 379

Property, Plant, and Equipment 379

Intangible Assets 382

Capitalising versus Expensing: Impact on Financial Statements and

Ratios 386

Capitalisation of Interest Costs 391

Capitalisation of Internal Development Costs 394

Depreciation and Amortisation of Long-Lived

Assets 398

Depreciation Methods and Calculation of Depreciation Expense 398

Amortisation Methods and Calculation of Amortisation Expense 406

The Revaluation Model 407

Impairment of Assets 411

Impairment of Property, Plant, and Equipment 412

Impairment of Intangible Assets with a Finite Life 414

Impairment of Intangibles with Indefinite Lives 414

Impairment of Long-Lived

Assets Held for Sale 414

Reversals of Impairments of Long-Lived

Assets 414

Derecognition 415

Sale of Long-Lived

Assets 415

Long-Lived

Assets Disposed of Other Than by a Sale 416

Presentation and Disclosures 417

Investment Property 428

Summary 432

Practice Problems 434

Solutions 446

Reading 27 Income Taxes 451

Introduction 452

Differences between Accounting Profit and Taxable Income 452

Current Tax Assets and Liabilities 453

Deferred Tax Assets and Liabilities 454

Determining the Tax Base of Assets and Liabilities 457

Determining the Tax Base of an Asset 457

Determining the Tax Base of a Liability 459

Changes in Income Tax Rates 461

Temporary and Permanent Differences Between Taxable and Accounting

Profit 462

Taxable Temporary Differences 463

Deductible Temporary Differences 463

Examples of Taxable and Deductible Temporary Differences 464

Temporary Differences at Initial Recognition of Assets and Liabilities 466

Business Combinations and Deferred Taxes 466

Investments in Subsidiaries, Branches, Associates and Interests in

Joint Ventures 467

Unused Tax Losses and Tax Credits 467

Recognition and Measurement of Current and Deferred Tax 468

Recognition of a Valuation Allowance 469

Recognition of Current and Deferred Tax Charged Directly to Equity 469

Presentation and Disclosure 471

Comparison of IFRS and US GAAP 477

Summary 479

Practice Problems 481

Solutions 486

Reading 28 Non-Current

(Long-Term)

Liabilities 489

Introduction 490

Bonds Payable 490

Accounting for Bond Issuance 490

Accounting for Bond Amortisation, Interest Expense, and Interest

Payments 494

Current Market Rates and Fair Value Reporting Option 498

Derecognition of Debt 502

Debt Covenants 504

Presentation and Disclosure of Long-Term

Debt 506

Leases 509

Lessee accounting 510

Lessor accounting 511

Introduction to Pensions and Other Post-Employment

Benefits 513

Evaluating Solvency: Leverage and Coverage Ratios 516

Summary 520

Practice Problems 523

Solutions 529

Study Session 9 Financial Reporting and Analysis (4) 537

Reading 29 Financial Reporting Quality 539

Introduction 540

Conceptual Overview 540

GAAP, Decision-Useful,

Sustainable, and Adequate Returns 542

GAAP, Decision-Useful,

but Sustainable? 542

Biased Accounting Choices 543

Departures from GAAP 552

Differentiate between Conservative and Aggressive Accounting 554

Context for Assessing Financial Reporting Quality 557

Motivations 557

Conditions Conducive to Issuing Low-Quality

Financial Reports 558

Mechanisms That Discipline Financial Reporting Quality 559

Detection of Financial Reporting Quality Issues 566

Presentation Choices 567

Accounting Choices and Estimates 573

Warning Signs 591

Summary 596

Practice Problems 599

Solutions 603

Reading 30 Applications of Financial Statement Analysis 607

Introduction 608

Application: Evaluating Past Financial Performance 609

Application: Projecting Future Financial Performance 612

Projecting Performance: An Input to Market-Based

Valuation 613

Projecting Multiple-Period

Performance 618

Application: Assessing Credit Risk 622

Application: Screening for Potential Equity Investments 624

Analyst Adjustments to Reported Financials 627

A Framework for Analyst Adjustments 627

Analyst Adjustments Related to Investments 628

Analyst Adjustments Related to Inventory 628

Analyst Adjustments Related to Property, Plant, and Equipment 632

Analyst Adjustments Related to Goodwill 634

Summary 636

Practice Problems 638

Solutions 640

Glossary G-1

### CFA® Program Curriculum 2020 • LEVEL I • VOLUME 4

How to Use the CFA Program Curriculum ix

Background on the CBOK ix

Organization of the Curriculum x

Features of the Curriculum x

Designing Your Personal Study Program xii

Feedback xiii

Corporate Finance

Study Session 10 Corporate Finance (1) 3

Reading 31 Introduction to Corporate Governance and Other ESG Considerations 5

Introduction 6

Corporate Governance Overview 6

Company Stakeholders 8

Stakeholder Groups 8

Principal–Agent and Other Relationships in Corporate Governance 11

Stakeholder Management 14

Overview of Stakeholder Management 14

Mechanisms of Stakeholder Management 15

Board of Directors and Committees 21

Composition of the Board of Directors 21

Functions and Responsibilities of the Board 22

Board of Directors Committees 23

Factors Affecting Stakeholder Relationships and Corporate Governance 25

Market Factors 25

Non-market

Factors 27

Corporate Governance and Stakeholder Management Risks and Benefits 28

Risks of Poor Governance and Stakeholder Management 28

Benefits of Effective Governance and Stakeholder Management 30

Analyst Considerations in Corporate Governance and Stakeholder

Management 31

Economic Ownership and Voting Control 32

Board of Directors Representation 32

Remuneration and Company Performance 33

Investors in the Company 34

Strength of Shareholders’ Rights 34

Managing Long-Term

Risks 35

Summary of Analyst Considerations 35

ESG Considerations for Investors 36

ESG Terminology 37

ESG Implementation Approaches 37

Catalysts for ESG Growth 39

ESG Market Overview 39

ESG Factors in Investment Analysis 40

Summary 41

Practice Problems 44

Solutions 46

Reading 32 Capital Budgeting 47

Introduction 47

The Capital Budgeting Process 48

Basic Principles of Capital Budgeting 50

Investment Decision Criteria 52

Net Present Value 52

Internal Rate of Return 53

Payback Period 54

Discounted Payback Period 56

Average Accounting Rate of Return 57

Profitability Index 58

NPV Profile 58

Ranking Conflicts between NPV and IRR 60

The Multiple IRR Problem and the No IRR Problem 63

Corporate Usage of Various Capital Budgeting Methods 66

Summary 67

Practice Problems 69

Solutions 73

Reading 33 Cost of Capital 77

Introduction 78

Cost of Capital 78

Taxes and the Cost of Capital 79

Weights of the Weighted Average 80

Applying the Cost of Capital to Capital Budgeting and Security

Valuation 82

Costs of the Different Sources of Capital 84

Cost of Debt 84

Cost of Preferred Stock 86

Cost of Common Equity 88

Topics in Cost of Capital Estimation 93

Estimating Beta and Determining a Project Beta 94

Country Risk 100

Marginal Cost of Capital Schedule 102

Flotation Costs 105

What Do CFOs Do? 107

Summary 108

Practice Problems 111

Solutions 118

Study Session 11 Corporate Finance (2) 123

Reading 34 Measures of Leverage 125

Introduction 125

Leverage 126

Business Risk and Financial Risk 128

Business Risk and Its Components 128

Sales Risk 129

Operating Risk 130

Financial Risk 137

Total Leverage 140

Breakeven Points and Operating Breakeven Points 143

The Risks of Creditors and Owners 145

Summary 147

Practice Problems 149

Solutions 153

Reading 35 Working Capital Management 155

Introduction 155

Managing and Measuring Liquidity 156

Defining Liquidity Management 157

Measuring Liquidity 159

Managing the Cash Position 164

Forecasting Short-Term

Cash Flows 165

Monitoring Cash Uses and Levels 166

Investing Short-Term

Funds 167

Short-Term

Investment Instruments 168

Strategies 171

Evaluating Short-Term

Funds Management 174

Managing Accounts Receivable 175

Key Elements of the Trade Credit Granting Process 176

Managing Customers’ Receipts 177

Evaluating Accounts Receivable Management 180

Managing Inventory 182

Approaches to Managing Levels of Inventory 183

Inventory Costs 184

Evaluating Inventory Management 184

Managing Accounts Payable 185

The Economics of Taking a Trade Discount 187

Managing Cash Disbursements 188

Evaluating Accounts Payable Management 188

Managing Short-Term

Financing 189

Sources of Short-Term

Financing 189

Short-Term

Borrowing Approaches 191

Asset-Based

Loans 192

Computing the Costs of Borrowing 193

Summary 194

Practice Problems 196

Solutions 199

Equity Investments

Study Session 12 Equity Investments (1) 205

Reading 36 Market Organization and Structure 207

Introduction 208

The Functions of the Financial System 208

Helping People Achieve Their Purposes in Using the Financial System 209

Determining Rates of Return 214

Capital Allocation Efficiency 215

Assets and Contracts 216

Classifications of Assets and Markets 216

Securities 218

Currencies 221

Contracts 222

Commodities 227

Real Assets 228

Financial Intermediaries 230

Brokers, Exchanges, and Alternative Trading Systems 230

Dealers 232

Securitizers 233

Depository Institutions and Other Financial Corporations 234

Insurance Companies 235

Arbitrageurs 236

Settlement and Custodial Services 238

Summary 240

Positions 240

Short Positions 242

Leveraged Positions 243

Orders 246

Execution Instructions 246

Validity Instructions 250

Clearing Instructions 251

Primary Security Markets 252

Public Offerings 252

Private Placements and Other Primary Market Transactions 254

Importance of Secondary Markets to Primary Markets 255

Secondary Security Market and Contract Market Structures 255

Trading Sessions 256

Execution Mechanisms 256

Market Information Systems 260

Well-Functioning

Financial Systems 260

Market Regulation 262

Summary 265

Practice Problems 268

Solutions 275

Reading 37 Security Market Indexes 279

Introduction 279

Index Definition and Calculations of Value and Returns 280

Calculation of Single-Period

Returns 281

Calculation of Index Values over Multiple Time Periods 283

Index Construction and Management 284

Target Market and Security Selection 284

Index Weighting 285

Index Management: Rebalancing and Reconstitution 293

Uses of Market Indexes 295

Gauges of Market Sentiment 295

Proxies for Measuring and Modeling Returns, Systematic Risk, and

Risk-Adjusted

Performance 296

Proxies for Asset Classes in Asset Allocation Models 296

Benchmarks for Actively Managed Portfolios 296

Model Portfolios for Investment Products 296

Equity Indexes 297

Broad Market Indexes 297

Multi-Market

Indexes 297

Sector Indexes 299

Style Indexes 299

Fixed-Income

Indexes 300

Construction 300

Types of Fixed-Income

Indexes 300

Indexes for Alternative Investments 303

Commodity Indexes 303

Real Estate Investment Trust Indexes 303

Hedge Fund Indexes 304

Summary 306

Practice Problems 308

Solutions 314

Reading 38 Market Efficiency 317

Introduction 317

The Concept of Market Efficiency 319

The Description of Efficient Markets 319

Market Value versus Intrinsic Value 321

Factors Contributing to and Impeding a Market’s Efficiency 322

Transaction Costs and Information-Acquisition

Costs 325

Forms of Market Efficiency 326

Weak Form 327

Semi-Strong

Form 327

Strong Form 330

Implications of the Efficient Market Hypothesis 330

Market Pricing Anomalies 332

Time-Series

Anomalies 333

Cross-Sectional

Anomalies 335

Other Anomalies 335

Implications for Investment Strategies 338

Behavioral Finance 338

Loss Aversion 339

Herding 339

Overconfidence 339

Information Cascades 340

Other Behavioral Biases 340

Behavioral Finance and Investors 341

Behavioral Finance and Efficient Markets 341

Summary 341

Practice Problems 344

Solutions 347

Study Session 13 Equity Investments (2) 349

Reading 39 Overview of Equity Securities 351

Introduction 351

Equity Securities in Global Financial Markets 352

Types and Characteristics of Equity Securities 357

Common Shares 358

Preference Shares 360

Private versus Public Equity Securities 362

Investing in Non-Domestic

Equity Securities 365

Direct Investing 366

Depository Receipts 367

Risk and Return Characteristics of Equity Securities 370

Return Characteristics of Equity Securities 370

Risk of Equity Securities 371

Equity Securities and Company Value 373

Accounting Return on Equity 373

The Cost of Equity and Investors’ Required Rates of Return 378

Summary 379

Practice Problems 381

Solutions 385

Reading 40 Introduction to Industry and Company Analysis 387

Introduction 388

Uses of Industry Analysis 388

Approaches to Identifying Similar Companies 389

Products and/or Services Supplied 389

Business-Cycle

Sensitivities 390

Statistical Similarities 391

Industry Classification Systems 392

Commercial Industry Classification Systems 392

Governmental Industry Classification Systems 396

Strengths and Weaknesses of Current Systems 397

Constructing a Peer Group 398

Describing and Analyzing an Industry 402

Principles of Strategic Analysis 404

External Influences on Industry Growth, Profitability, and Risk 422

Company Analysis 429

Elements That Should be Covered in a Company Analysis 430

Spreadsheet Modeling 433

Summary 434

Practice Problems 438

Solutions 442

Reading 41 Equity Valuation: Concepts and Basic Tools 445

Introduction 446

Estimated Value and Market Price 447

Major Categories of Equity Valuation Models 448

Present Value Models: The Dividend Discount Model 450

Dividends: Background for the Dividend Discount Model 450

The Dividend Discount Model: Description 453

Preferred Stock Valuation 456

The Gordon Growth Model 459

Multistage Dividend Discount Models 463

Multiplier Models 468

Relationships among Price Multiples, Present Value Models, and

Fundamentals 469

The Method of Comparables 472

Illustration of a Valuation Based on Price Multiples 475

Enterprise Value 477

Asset-Based

Valuation 479

Summary 483

Practice Problems 486

Solutions 492

Glossary G-1

### CFA® Program Curriculum 2020 • LEVEL I • VOLUME 5

How to Use the CFA Program Curriculum vii

Background on the CBOK vii

Organization of the Curriculum viii

Features of the Curriculum viii

Designing Your Personal Study Program x

Feedback xi

Fixed Income

Study Session 14 Fixed Income (1) 3

Reading 42 Fixed-Income

Securities: Defining Elements 5

Introduction 5

Overview of a Fixed-Income

Security 6

Basic Features of a Bond 7

Yield Measures 12

Legal, Regulatory, and Tax Considerations 12

Bond Indenture 13

Legal and Regulatory Considerations 21

Tax Considerations 24

Structure of a Bond’s Cash Flows 26

Principal Repayment Structures 26

Coupon Payment Structures 30

Bonds with Contingency Provisions 37

Callable Bonds 37

Putable Bonds 39

Convertible Bonds 40

Summary 43

Practice Problems 46

Solutions 50

Reading 43 Fixed-Income

Markets: Issuance, Trading, and Funding 55

Introduction 55

Overview of Global Fixed-Income

Markets 56

Classification of Fixed-Income

Markets 56

Fixed-Income

Indexes 63

Investors in Fixed-Income

Securities 64

Primary and Secondary Bond Markets 65

Primary Bond Markets 66

Secondary Bond Markets 70

Sovereign Bonds 73

Characteristics of Sovereign Bonds 73

Credit Quality of Sovereign Bonds 74

Types of Sovereign Bonds 75

Non-Sovereign

Government, Quasi-Government,

and Supranational Bonds 77

Non-Sovereign

Bonds 77

Quasi-Government

Bonds 77

Supranational Bonds 78

Corporate Debt 79

Bank Loans and Syndicated Loans 79

Commercial Paper 80

Corporate Notes and Bonds 83

Structured Financial Instruments 87

Capital Protected Instruments 88

Yield Enhancement Instruments 88

Participation Instruments 88

Leveraged Instruments 89

Short-Term

Funding Alternatives Available to Banks 90

Retail Deposits 90

Short-Term

Wholesale Funds 91

Repurchase and Reverse Repurchase Agreements 92

Summary 96

Practice Problems 99

Solutions 103

Reading 44 Introduction to Fixed-Income

Valuation 107

Introduction 107

Bond Prices and the Time Value of Money 108

Bond Pricing with a Market Discount Rate 108

Yield-to-Maturity 112

Relationships between the Bond Price and Bond Characteristics 113

Pricing Bonds with Spot Rates 117

Prices and Yields: Conventions for Quotes and Calculations 119

Flat Price, Accrued Interest, and the Full Price 119

Matrix Pricing 123

Annual Yields for Varying Compounding Periods in the Year 126

Yield Measures for Fixed-Rate

Bonds 129

Yield Measures for Floating-Rate

Notes 132

Yield Measures for Money Market Instruments 135

The Maturity Structure of Interest Rates 140

Yield Spreads 147

Yield Spreads over Benchmark Rates 147

Yield Spreads over the Benchmark Yield Curve 149

Summary 152

Practice Problems 155

Solutions 164

Reading 45 Introduction to Asset-Backed

Securities 179

Introduction 179

Benefits of Securitization for Economies and Financial Markets 180

How Securitization Works 181

An Example of a Securitization 182

Parties to a Securitization and Their Roles 183

Structure of a Securitization 185

Key Role of the Special Purpose Entity 187

Residential Mortgage Loans 190

Maturity 191

Interest Rate Determination 191

Amortization Schedule 192

Prepayment Options and Prepayment Penalties 192

Rights of the Lender in a Foreclosure 193

Residential Mortgage-Backed

Securities 194

Mortgage Pass-Through

Securities 195

Collateralized Mortgage Obligations 201

Non-agency

Residential Mortgage-Backed

Securities 208

Commercial Mortgage-Backed

Securities 208

Credit Risk 209

CMBS Structure 209

Non-Mortgage

Asset-Backed

Securities 213

Auto Loan ABS 213

Credit Card Receivable ABS 216

Collateralized Debt Obligations 217

CDO Structure 217

An Example of a CDO Transaction 218

Summary 220

Practice Problems 224

Solutions 229

Study Session 15 Fixed Income (2) 237

Reading 46 Understanding Fixed‑Income Risk and Return 239

Introduction 240

Sources of Return 240

Interest Rate Risk on Fixed-Rate

Bonds 247

Macaulay, Modified, and Approximate Duration 248

Effective Duration 255

Key Rate Duration 259

Properties of Bond Duration 259

Duration of a Bond Portfolio 265

Money Duration of a Bond and the Price Value of a Basis Point 267

Bond Convexity 269

Interest Rate Risk and the Investment Horizon 277

Yield Volatility 278

Investment Horizon, Macaulay Duration, and Interest Rate Risk 279

Credit and Liquidity Risk 284

Summary 285

Practice Problems 289

Solutions 294

Reading 47 Fundamentals of Credit Analysis 301

Introduction 302

Credit Risk 302

Capital Structure, Seniority Ranking, and Recovery Rates 305

Capital Structure 305

Seniority Ranking 305

Recovery Rates 307

Ratings Agencies, Credit Ratings, and Their Role in the Debt Markets 311

Credit Ratings 312

Issuer vs. Issue Ratings 313

Risks in Relying on Agency Ratings 315

Traditional Credit Analysis: Corporate Debt Securities 320

Credit Analysis vs. Equity Analysis: Similarities and Differences 320

The Four Cs of Credit Analysis: A Useful Framework 321

Credit Risk vs. Return: Yields and Spreads 338

Special Considerations of High-Yield,

Sovereign, and Non-Sovereign

Credit Analysis 347

High Yield 347

Sovereign Debt 355

Non-Sovereign

Government Debt 359

Summary 361

Practice Problems 365

Solutions 375

Derivatives

Study Session 16 Derivatives 383

Reading 48 Derivative Markets and Instruments 385

Introduction 385

Derivatives: Definitions and Uses 386

The Structure of Derivative Markets 389

Exchange-Traded

Derivatives Markets 390

Over-the- Counter Derivatives Markets 391

Types of Derivatives 394

Forward Commitments 394

Contingent Claims 406

Hybrids 418

Derivatives Underlyings 419

The Purposes and Benefits of Derivatives 422

Risk Allocation, Transfer, and Management 423

Information Discovery 424

Operational Advantages 425

Market Efficiency 425

Criticisms and Misuses of Derivatives 426

Speculation and Gambling 426

Destabilization and Systemic Risk 427

Elementary Principles of Derivative Pricing 429

Storage 429

Arbitrage 430

Summary 435

Practice Problems 438

Solutions 445

Reading 49 Basics of Derivative Pricing and Valuation 455

Introduction 456

Fundamental Concepts of Derivative Pricing 456

Basic Derivative Concepts 456

Pricing the Underlying 458

The Principle of Arbitrage 462

The Concept of Pricing vs. Valuation 468

Pricing and Valuation of Forward Commitments 469

Pricing and Valuation of Forward Contracts 469

Pricing and Valuation of Futures Contracts 476

Pricing and Valuation of Swap Contracts 478

Pricing and Valuation of Options 481

European Option Pricing 482

Binomial Valuation of Options 496

American Option Pricing 500

Summary

Practice Problems

Solutions

Glossary

### CFA® Program Curriculum 2020 • LEVEL I • VOLUME 6

How to Use the CFA Program Curriculum vii

Background on the CBOK vii

Organization of the Curriculum viii

Features of the Curriculum viii

Designing Your Personal Study Program x

Feedback xi

Alternative Investments

Study Session 17 Alternative Investments 3

Reading 50 Introduction to Alternative Investments 5

Introduction 5

Alternative Investments 6

Categories of Alternative Investments 10

Returns to Alternative Investments 12

Portfolio Context: Integration of Alternative Investments with

Traditional Investments 13

Investment Structures 14

Hedge Funds 15

Hedge Fund Strategies 16

Hedge Funds and Diversification Benefits 20

Hedge Fund Fees and Other Considerations 20

Hedge Fund Valuation Issues 27

Due Diligence for Investing in Hedge Funds 28

Private Equity 30

Private Equity Structure and Fees 31

Private Equity Strategies 32

Private Equity: Diversification Benefits, Performance, and Risk 36

Portfolio Company Valuation 38

Private Equity: Investment Considerations and Due Diligence 39

Real Estate 40

Forms of Real Estate Investment 41

Real Estate Investment Categories 42

Real Estate Performance and Diversification Benefits 45

Real Estate Valuation 46

Real Estate Investment Risks 48

Commodities 48

Commodity Derivatives and Indexes 50

Other Commodity Investment Vehicles 50

Commodity Performance and Diversification Benefits 51

Commodity Prices and Investments 52

Infrastructure 55

Categories of Infrastructure Investments 55

Forms of Infrastructure Investments 56

Risk and Return Overview 56

Other Alternative Investments 57

Risk Management Overview 57

Investment and Risk Management Process 57

Risk–Return Measures 59

Due Diligence Overview 60

Summary 62

Practice Problems 65

Solutions 70

Portfolio Management

Study Session 18 Portfolio Management (1) 77

Reading 51 Portfolio Management: An Overview 79

Introduction 79

A Portfolio Approach to Investing 80

Historical Example of Portfolio Diversification: Avoiding Disaster 80

Portfolios: Reduce Risk 82

Portfolios: Composition Matters for the Risk–Return Trade-off

85

Historical Portfolio Example: Not Necessarily Downside Protection 85

Portfolios: Modern Portfolio Theory 88

Steps in the Portfolio Management Process 89

Step One: The Planning Step 89

Step Two: The Execution Step 90

Step Three: The Feedback Step 92

Types of Investors 93

Individual Investors 93

Institutional Investors 94

The Asset Management Industry 99

Active versus Passive Management 100

Traditional versus Alternative Asset Managers 101

Ownership Structure 101

Asset Management Industry Trends 101

Mutual Funds and Pooled Investment Products 104

Mutual Funds 104

Types of Mutual Funds 106

Separately Managed Accounts 107

Exchange-Traded

Funds 108

Hedge Funds 108

Private Equity and Venture Capital Funds 109

Summary 110

Practice Problems 112

Solutions 114

Reading 52 Portfolio Risk and Return: Part I 115

Introduction 115

Investment Characteristics of Assets 116

Return 116

Other Major Return Measures and their Applications 130

Historical Return and Risk 133

Other Investment Characteristics 137

Risk Aversion and Portfolio Selection 140

The Concept of Risk Aversion 140

Utility Theory and Indifference Curves 141

Application of Utility Theory to Portfolio Selection 146

Portfolio Risk 149

Portfolio of Two Risky Assets 149

Portfolio of Many Risky Assets 157

The Power of Diversification 158

Efficient Frontier and Investor’s Optimal Portfolio 163

Investment Opportunity Set 164

Minimum-Variance

Portfolios 165

A Risk-Free

Asset and Many Risky Assets 166

Optimal Investor Portfolio 169

Summary 175

Practice Problems 177

Solutions 185

Reading 53 Portfolio Risk and Return: Part II 191

Introduction 191

Capital Market Theory 192

Portfolio of Risk-Free

and Risky Assets 192

The Capital Market Line 196

Pricing of Risk and Computation of Expected Return 204

Systematic Risk and Nonsystematic Risk 204

Calculation and Interpretation of Beta 206

The Capital Asset Pricing Model 213

Assumptions of the CAPM 213

The Security Market Line 215

Applications of the CAPM 217

Beyond the Capital Asset Pricing Model 219

Limitations of the CAPM 219

Extensions to the CAPM 220

Portfolio Performance Appraisal Measures 222

The Sharpe Ratio 222

The Treynor Ratio 223

M2: Risk-Adjusted

Performance (RAP) 224

Jensen’s Alpha 225

Applications of the CAPM in Portfolio Construction 228

Security Characteristic Line 228

Security Selection 229

Implications of the CAPM for Portfolio Construction 230

Summary 233

Practice Problems 235

Solutions 241

Study Session 19 Portfolio Management (2) 245

Reading 54 Basics of Portfolio Planning and Construction 247

Introduction 247

Portfolio Planning 248

The Investment Policy Statement 248

Major Components of an IPS 249

Gathering Client Information 262

Portfolio Construction 265

Capital Market Expectations 266

The Strategic Asset Allocation 266

Steps Toward an Actual Portfolio 274

ESG Considerations in Portfolio Planning and Construction 278

Alternative Portfolio Organizing Principles 279

Conclusion and Summary 280

Practice Problems 283

Solutions 287

Reading 55 Introduction to Risk Management 289

Introduction 289

The Risk Management Process 291

Risk Governance 299

An Enterprise View of Risk Governance 299

Risk Tolerance 301

Risk Budgeting 303

Identification of Risks 306

Financial Risks 307

Non-Financial

Risks 308

Interactions between Risks 312

Measuring and Modifying Risks 315

Drivers 316

Metrics 317

Methods of Risk Modification 321

Summary 329

Practice Problems 332

Solutions 335

Reading 56 Technical Analysis 337

Introduction 337

Technical Analysis: Definition and Scope 338

Principles and Assumptions 338

Technical and Fundamental Analysis 340

Technical Analysis Tools 342

Charts 342

Trend 353

Chart Patterns 355

Technical Indicators 366

Cycles 384

Elliott Wave Theory 385

Intermarket Analysis 388

Summary 390

Practice Problems 393

Solutions 398

Reading 57 Fintech in Investment Management 401

Introduction 401

What Is Fintech? 402

Big Data 403

Sources of Big Data 404

Big Data Challenges 406

Advanced Analytical Tools: Artificial Intelligence and Machine Learning 406

Types of Machine Learning 408

Data Science: Extracting Information from Big Data 409

Data Processing Methods 409

Data Visualization 410

Selected Applications of Fintech to Investment Management 411

Text Analytics and Natural Language Processing 411

Robo-Advisory

Services 413

Risk Analysis 415

Algorithmic Trading 415

Distributed Ledger Technology 416

Permissioned and Permissionless Networks 418

Applications of Distributed Ledger Technology to Investment

Management 418

Summary 420

Practice Problems 422

Solutions 424

Glossary G-1

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