How to Use the CFA Program Curriculum ix

Curriculum Development Process ix

Organization of the Curriculum x

Features of the Curriculum x

Designing Your Personal Study Program xi

Feedback xiii

Ethical and Professional Standards

Study Session 1 Ethical and Professional Standards (1) 3

Reading 1 Code of Ethics and Standards of Professional Conduct 5

Preface 5

Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 6

Standards of Practice Handbook 6

Summary of Changes in the Eleventh Edition 7

CFA Institute Professional Conduct Program 9

Adoption of the Code and Standards 10

Acknowledgments 10

Ethics and the Investment Industry 11

Why Ethics Matters 11

CFA Institute Code of Ethics and Standards of Professional Conduct 15

Preamble 15

The Code of Ethics 15

Standards of Professional Conduct 16

Reading 2 Guidance for Standards I-VII 21

Standard I: Professionalism 21

Standard I(A) Knowledge of the Law 21

Guidance 21

Recommended Procedures for Compliance 26

Application of the Standard 27

Standard I(B) Independence and Objectivity 30

Guidance 30

Recommended Procedures for Compliance 35

Application of the Standard 36

Standard I(C) Misrepresentation 43

Guidance 43

Recommended Procedures for Compliance 46

Application of the Standard 48

Standard I(D) Misconduct 53

Guidance 53

Recommended Procedures for Compliance 54

Application of the Standard 54

Standard II: Integrity of Capital Markets 56

Standard II(A) Material Nonpublic Information 56

Guidance 56

Recommended Procedures for Compliance 60

Application of the Standard 63

Standard II(B) Market Manipulation 68

Guidance 68

Application of the Standard 69

Standard III: Duties to Clients 73

Standard III(A) Loyalty, Prudence, and Care 73

Guidance 73

Recommended Procedures for Compliance 77

Application of the Standard 78

Standard III(B) Fair Dealing 82

Guidance 82

Recommended Procedures for Compliance 84

Application of the Standard 86

Standard III(C) Suitability 90

Guidance 90

Recommended Procedures for Compliance 93

Application of the Standard 94

Standard III(D) Performance Presentation 97

Guidance 97

Recommended Procedures for Compliance 98

Application of the Standard 98

Standard III(E) Preservation of Confidentiality 101

Guidance 101

Recommended Procedures for Compliance 103

Application of the Standard 103

Standard IV: Duties to Employers 105

Standard IV(A) Loyalty 105

Guidance 105

Recommended Procedures for Compliance 109

Application of the Standard 109

Standard IV(B) Additional Compensation Arrangements 116

Guidance 116

Recommended Procedures for Compliance 116

Application of the Standard 116

Standard IV(C) Responsibilities of Supervisors 118

Guidance 118

Recommended Procedures for Compliance 120

Application of the Standard 122

Standard V: Investment Analysis, Recommendations, and Actions 126

Standard V(A) Diligence and Reasonable Basis 126

Guidance 126

Recommended Procedures for Compliance 130

Application of the Standard 130

Standard V(B) Communication with Clients and Prospective Clients 137

Guidance 138

Recommended Procedures for Compliance 140

Application of the Standard 141

Standard V(C) Record Retention 146

Guidance 146

Recommended Procedures for Compliance 147

Application of the Standard 148

Standard VI: Conflicts of Interest 149

Standard VI(A) Disclosure of Conflicts 149

Guidance 149

Recommended Procedures for Compliance 152

Application of the Standard 152

Standard VI(B) Priority of Transactions 157

Guidance 157

Recommended Procedures for Compliance 158

Application of the Standard 160

Standard VI(C) Referral Fees 162

Guidance 162

Recommended Procedures for Compliance 162

Application of the Standard 162

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 165

Standard VII(A) Conduct as Participants in CFA Institute Programs 165

Guidance 165

Application of the Standard 167

Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program 170

Guidance 170

Recommended Procedures for Compliance 172

Application of the Standard 173

Practice Problems 175

Solutions 193

Study Session 2 Ethical and Professional Standards (2) 205

Reading 3 Application of the Code and Standards 207

Introduction 207

Edvard Stark 208

Duties to Clients 209

Duties to Employers 210

Investment Analysis, Recommendations, and Actions 211

Conflicts of Interest 211

Subath Agarway 212

Professionalism 214

Conflicts of Interest 215

Peter Sherman 216

Loyalty to One's Employer 217

Solicitation of Clients and Prospects 218

Misappropriation of Employer Property 218

Disclosure of Additional Compensation and Conflicts 219

Preston Partners 220

Responsibilities to Clients and Interactions with Clients 221

Allocation of Trades 222

Responsibilities of Supervisors 223

Super Selection 224

Responsibilities of Supervisors 225

Employees and the Employer/Supervisor 226

Reasonable Basis 227

Duties to Clients 227

Investment Recommendations and Actions 227

Priority of Transactions 228

Reading 4 Trade Allocation: Fair Dealing and Disclosure 229

Reading 5 Changing Investment Objectives 233

Quantitative Methods

Study Session 3 Quantitative Methods 237

Reading 6 Fintech in Investment Management 239

Introduction 239

What Is Fintech? 240

Big Data 241

Sources of Big Data 242

Big Data Challenges 244

Advanced Analytical Tools: Artificial Intelligence and Machine Learning 244

Types of Machine Learning 245

Data Science: Extracting Information from Big Data 247

Data Processing Methods 247

Data Visualization 247

Selected Applications of Fintech to Investment Management 249

Text Analytics and Natural Language Processing 249

Robo-Advisory Services 250

Risk Analysis 252

Algorithmic Trading 253

Distributed Ledger Technology 253

Permissioned and Permissionless Networks 255

Applications of Distributed Ledger Technology to Investment Management 256

Summary 257

Practice Problems 259

Solutions 261

Reading 7 Correlation and Regression 263

Introduction 264

Correlation Analysis 264

Scatter Plots 264

Correlation Analysis 265

Calculating and Interpreting the Correlation Coefficient 268

Limitations of Correlation Analysis 270

Uses of Correlation Analysis 273

Testing the Significance of the Correlation Coefficient 282

Linear Regression 285

Linear Regression with One Independent Variable 286

Assumptions of the Linear Regression Model 289

The Standard Error of Estimate 292

The Coefficient of Determination 295

Hypothesis Testing 297

Analysis of Variance in a Regression with One Independent Variable 305

Prediction Intervals 308

Limitations of Regression Analysis 311

Summary 311

Practice Problems 314

Solutions 323

Reading 8 Multiple Regression and Machine Learning 327

Introduction 328

Multiple Linear Regression 328

Assumptions of the Multiple Linear Regression Model 334

Predicting the Dependent Variable in a Multiple Regression Model 339

Testing whether All Population Regression Coefficients Equal Zero 341

Adjusted R2 343

Using Dummy Variables in Regressions 344

Violations of Regression Assumptions 348

Heteroskedasticity 349

Serial Correlation 355

Multicollinearity 359

Heteroskedasticity, Serial Correlation, Multicollinearity: Summarizing the Issues 362

Model Specification and Errors in Specification 363

Principles of Model Specification 363

Misspecified Functional Form 364

Time-Series Misspecification (Independent Variables Correlated with Errors) 372

Other Types of Time-Series Misspecification 376

Models with Qualitative Dependent Variables 376

Machine Learning 378

Major Focuses of Data Analytics 379

What Is Machine Learning? 380

Types of Machine Learning 381

Machine Learning Algorithms 383

Supervised Machine Learning: Training 390

Summary 391

Practice Problems 396

Solutions 421

Reading 9 Time-Series Analysis 433

Introduction to Time-Series Analysis 434

Challenges of Working with Time Series 436

Trend Models 437

Linear Trend Models 437

Log-Linear Trend Models 440

Trend Models and Testing for Correlated Errors 446

Autoregressive (AR) Time-Series Models 447

Covariance-Stationary Series 448

Detecting Serially Correlated Errors in an Autoregressive Model 449

Mean Reversion 452

Multiperiod Forecasts and the Chain Rule of Forecasting 453

Comparing Forecast Model Performance 456

Instability of Regression Coefficients 458

Random Walks and Unit Roots 461

Random Walks 461

The...