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Wiley Study Guide for 2018 Level III CFA Exam Volume 1: Ethical and Professional Standards & Behavioral Finance Study Session 1: Code of Ethics and Standards of Professional Conduct Read

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Wiley Study Guide for 2018 Level III CFA Exam

Volume 1: Ethical and Professional Standards & Behavioral Finance

Study Session 1: Code of Ethics and Standards of Professional Conduct

Reading 1: Code of Ethics and Standards of Professional Conduct 3

Lesson 1: Code of Ethics and Standards of Professional Conduct 3

Reading 2: Guidance for Standards l-VII 9

Lesson 1: Standard I: Professionalism 9

Lesson 2: Standard II: Integrity of Capital Markets 36

Lesson 3: Standard III: Duties to Clients 46

Lesson 4: Standard IV: Duties to Employers 70

Lesson 5: Standard V: Investment Analysis, Recommendations, and Actions 84

Lesson 6: Standard VI: Conflicts of Interest 97

Lesson 7: Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 107

Study Session 2: Ethical and Professional Standards in Practice

Reading 3: Application of the Code and Standards 119

Lesson 1: Ethical and Professional Standards in Practice, Part 1: The Consultant 119

Lesson 2: Ethical and Professional Standards in Practice, Part 2: Pearl Investment

Reading 4: Asset Manager Code of Professional Conduct 121

Lesson 1: Asset Manager Code of Professional Conduct 121

Study Session 3: Behavioral Finance

Reading 5: The Behavioral Finance Perspective 131

Lesson 1: Behavioral versus Traditional Perspectives 131

Lesson 2: Decision Making 136

Lesson 3: Perspectives on Market Behavior and Portfolio Construction 140

Reading 6: The Behavioral Biases of Individuals 147

Lesson 1: Cognitive Biases 148

Lesson 2: Emotional Biases 154

Lesson 3: Investment Policy and Asset Allocation 159

Reading 7: Behavioral Finance and Investment Processes 165

Lesson 1:The Uses and Limitations of Classifying Investors into Types 165 Lesson 2: How Behavioral Factors Affect Advisor-Client Relations 168 Lesson 3: How Behavioral Factors Affect Portfolio Construction 169 Lesson 4: Behavioral Finance and Analyst Forecasts 172 Lesson 5: How Behavioral Factors Affect Committee Decision Making 178 Lesson 6: How Behavioral Finance Influences Market Behavior 179

Wiley Study Guide for 2018 Level III CFA Exam Volume 2: Private Wealth Management & Institutional Investors Study Session 4: Private Wealth Management (1)

Reading 8: Managing Individual Investor Portfolios 3

Lesson 1: Investor Characteristics: Situational and Psychological Profiling 3 Lesson 2: Individual IPS: Return Objective Calculation 6 Lesson 3: Individual IPS: Risk Objective 7 Lesson 4: Individual IPS: The Five Constraints 8 Lesson 5: A Complete Individual IPS 10 Lesson 6: Asset Allocation Concepts: The Process of Elimination 18 Lesson 7: Monte Carlo Simulation and Personal Retirement Planning 20 Reading 9: Taxes and Private Wealth Management in a Global Context 21

Lesson 1: Overview of Global Income Tax Structures 21 Lesson 2: After-Tax Accumulations and Returns forTaxable Accounts 23 Lesson 3: Types of Investment Accounts and Taxes and Investment Risk 31 Lesson 4: Implications for Wealth Management 34 Reading 10: Domestic Estate Planning: Some Basic Concepts 39

Lesson 1: Basic Estate Planning Concepts 39 Lesson 2: Core Capital and Excess Capital 42 Lesson 3: Transferring Excess Capital 46 Lesson 4: Estate Planning Tools 51 Lesson 5: Cross-Border Estate Planning 53

Study Session 5: Private Wealth Management (2)

Reading 11: Concentrated Single-Asset Positions 59

Lesson 1: Concentrated Single-Asset Positions: Overview and Investment Risks 59 Lesson 2: General Principles of Managing Concentrated Single-Asset Positions 60 Lesson 3: Managing the Risk of Concentrated Single-Stock Positions 66 Lesson 4: Managing the Risk of Private Business Equity 71 Lesson 5: Managing the Risk of Investment in Real Estate 74 Reading 12: Risk Management for Individuals 77

Lesson 1: Human Capital and Financial Capital 77 Lesson 2: Seven Financial Stages of Life 78 Lesson 3: A Framework for Individual Risk Management 80 Lesson 4: Life Insurance 83 Lesson 5: Other Types of Insurance 88 Lesson 6: Annuities 91 Lesson 7: Implementation of Risk Management for Individuals 95

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Study Session 6: Portfilio Management for Institutional Investors

Reading 13: Managing Institutional Investor Portfolios 103

Lesson 1: Institutional IPS: Defined Benefit (DB) Pension Plans 103

Lesson 2: Institutional IPS: Foundations 111

Lesson 3: Institutional IPS: Endowments 115

Lesson 4: Institutional IPS: Life Insurance and 117

Non-Life Insurance Companies (Property and Casualty)

Lesson 5: Institutional IPS: Banks 120

Wiley Study Guide for 2018 Level III CFA Exam

Volume 3: Economic Analysis, Asset Allocation, Equity & Fixed Income Portfolio Management

Study Session 7: Applications of Economic Analysis to Portfolio Management

Reading 14: Capital Market Expectations 3

Lesson 1: Organizing the Task: Framework and Challenges 3

Lesson 2: Tools for Formulating Capital Market Expectations, Part 1: Formal Tools 8

Lesson 3: Tools for Formulating Capital Market Expectations, Part 2: Survey and

Panel Methods and Judgment 13

Lesson 4: Economic Analysis, Part 1: Introduction and Business Cycle Analysis 19

Lesson 5: Economic Analysis, Part 2: Economic Growth Trends, Exogenous Shocks, and

International Interactions 27

Lesson 6: Economic Analysis, Part 3: Economic Forecasting 30

Lesson 7: Economic Analysis, Part 4: Asset Class Returns and Foreign Exchange Forecasting 33

Reading 15: Equity Market Valuation 39

Lesson 1: Estimating a Justified P/E Ratio and Top-Down and Bottom-Up Forecasting 39

Lesson 2: Relative Value Models 46

Study Session 8: Asset Allocation and Related Decisions in Portfolio Management (1)

Reading 16: Introduction to Asset Allocation 53

Lesson 1: Asset Allocation in the Portfolio Construction Process 53

Lesson 2: The Economic Balance Sheet and Asset Allocation 54

Lesson 3: Approaches to Asset Allocation 55

Lesson 4: Strategic Asset Allocation 57

Lesson 5: Implementation Choices 64

Lesson 6: Strategic Considerations for Rebalancing 65

Reading 17: Principles of Asset Allocation 67

Lesson 1: The Traditional Mean-Variance Optimization (MVO) Approach 67

Lesson 2: Monte Carlo Simulation and Risk Budgeting 70

Lesson 3: Factor-Based Asset Allocation 71

Lesson 4: Liability-Relative Asset Allocation 72

Lesson 5: Goal-Based Asset Allocation, Heuristics, Other Approaches to Asset Allocation,

and Portfolio Rebalancing 75

Study Session 9: Asset Allocation and Related Decisions in Portfolio Management (2)

Reading 18: Asset Allocation with Real-World Constraints 81

Lesson 1: Constraints in Asset Allocation 81

Lesson 2: Asset Allocation for the Taxable Investor 84

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Lesson 3: Altering or Deviating from the Policy Portfolio 85 Lesson 4: Behavioral Biases in Asset Allocation 87 Reading 19: Currency Management: An Introduction 89

Lesson 1: Review of Foreign Exchange Concepts 89 Lesson 2: Currency Risk and Portfolio Return and Risk 95 Lesson 3: Currency Management: Strategic Decisions 98 Lesson 4: Currency Management: Tactical Decisions 101 Lesson 5: Tools of Currency Management 104 Lesson 6: Currency Management for Emerging Market Currencies 112 Reading 20: Market Indexes and Benchmarks 113

Lesson 1: Distinguishing between a Benchmark and a Market Index and Benchmark Uses and Types 113 Lesson 2: Market Index Uses and Types 117 Lesson 3: Index Weighting Schemes: Advantages and Disadvantages 119

Study Session 10: Fixed-Income Portfolio Management (1)

Reading 21: Introduction to Fixed-Income Portfolio Management 127

Lesson 1: Roles of Fixed Income Securities in Portfolios 127 Lesson 2: Fixed Income Mandates 129 Lesson 3: Bond Market Liquidity 133 Lesson 4: Components of Fixed Income Return 135 Lesson 5: Leverage 137 Lesson 6: Fixed Income Portfolio Taxation 140 Reading 22: Liability-Driven and Index-Based Strategies 143

Lesson 1: Liability-driven Investing 143 Lesson 2: Managing Single and Multiple Liabilities 144 Lesson 3: Risks in Managing a Liability Structure 147 Lesson 4: Liability Bond Indexes 148 Lesson 5: Alternative Passive Bond Investing 148 Lesson 6: Liability Benchmarks 149 Lesson 7: Laddered Bond Portfolios 149

Study Session 11: Fixed-Income Portfolio Management (2)

Reading 23: Yield Curve Strategies 153

Lesson 1: Foundational Concepts for Yield Curve Management 153 Lesson 2: Yield Curve Strategies 155 Lesson 3: Formulating a Portfolio Postioning Strategy for a Given Market View 161 Lesson 4: A Framework for Evaluating Yield Curve Trades 167 Reading 24: Fixed-Income Active Management: Credit Strategies 169

Lesson 1: Investment-Grade and High-Yield Corporate Bond Portfolios 169 Lesson 2: Credit Spreads 172 Lesson 3: Credit Strategy Approaches 175 Lesson 4: Liquidity Risk and Tail Risk in Credit Portfolios 185 Lesson 5: International Credit Portfolios 189 Lesson 6: Structured Financial Instruments 191

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Study Session 12: Equity Portfolio Management

Reading 25: Equity Portfolio Management 197

Lesson 1:The Role of the Equity Portfoli and Approaches to Equity Investing 197

Lesson 2: Passive Equity Investing 198

Lesson 3: Active Equity Investing 204

Lesson 4: Semiactive Equity Investing 215

Lesson 5: Managing a Portfolio of Managers 218

Lesson 6: Identifying, Selecting, and Contracting with Equity Portfolio Managers 222

Lesson 7: Distressed Securities 223

Wiley Study Guide for 2018 Level III CFA Exam

Volume 4: Alternative Investments, Risk Management, & Derivatives

Study Session 13: Alternative Investments for Portfolio Management

Reading 26: Alternative Investments for Portfolio Management 3

Lesson 1: Alternative Investments: Definitions, Similarities, and Contrasts 3

Lesson 2: Real Estate 5

Lesson 3: Private Equity/Venture Capital 9

Lesson 4: Commodity Investments 16

Lesson 5: Hedge Funds 21

Lesson 6: Managed Futures 30

Lesson 7: Distressed Securities 32

Study Session 14: Risk Management

Reading 27: Risk Management 39

Lesson 1: Risk Management as a Process and Risk Governance 39

Lesson 2: Identifying Risk 40

Lesson 3: Measuring Risk: Value at Risk (VaR) 44

Lesson 4: Measuring Risk: VaR Extensions and Stress Testing 52

Lesson 5: Measuring Risk: Credit Risk 53

Lesson 6: Managing Risk 60

Study Session 15: Risk Management Applications of Derivatives

Reading 28: Risk Management Applications of Forward and Futures Strategies 65

Lesson 1: Strategies and Applications for Managing Equity Market Risk 65

Lesson 2: Asset Allocation with Futures 74

Lesson 3: Strategies and Applications for Managing Foreign Currency Risk 83

Reading 29: Risk Management Applications of Option Strategies 89

Lesson 1: Options Strategies for Equity Portfolios 89

Lesson 2: Interest Rate Option Strategies 103

Lesson 3: Option Portfolio Risk Management Strategies 116

Reading 30: Risk Management Applications of Swap Strategies 121

Lesson 1: Strategies and Applications for Managing Interest Rate Risk 121

Lesson 2: Strategies and Applications for Managing Exchange Rate Risk 137

Lesson 3: Strategies and Applications for Managing Equity Market Risk 148

Lesson 4: Strategies and Applications Using Swaptions 153

Wiley Study Guide for 2018 Level III CFA Exam Volume 5: Trading, Monitoring and Rebalancing, Performance Evaluation,

& Global Investment Performance Standards Study Session 16: Trading, Monitoring, and Rebalancing

Reading 31: Execution of Portfolio Decisions 3

Lesson 1: The Context of Trading: Market Microstructure 3 Lesson 2: The Costs of Trading 10 Lesson 3:Types ofTraders and Their Preferred OrderTypes 15 Lesson 4: Trade Execution Decisions and Tactics and Serving the Client's Interests 17 Reading 32: Monitoring and Rebalancing 25

Lesson 1: Monitoring for IPS Changes (Individual and Institutional) 25 Lesson 2: Rebalancing the Portfolio 32 Lesson 3: The Perold-Sharpe Analysis of Rebalancing Strategies 35

Study Session 17: Performance Evaluation

Reading 33: Evaluating Portfolio Performance 41

Lesson 1: Performance Measurement 41 Lesson 2: Benchmarks 49 Lesson 3: Performance Attribution (4 Models) 55 Lesson 4: Performance Appraisal 66 Lesson 5: The Practice of Performance Evaluation 71

Study Session 18: Global Investment Performance Standards

Reading 34: Overview of the Global Investment Performance Standards 75

Lesson 1: Background of the GIPS Standards 75 Lesson 2: Fundamentals of Compliance 76 Lesson 3: Input Data 78 Lesson 4: Return Calculation Methodologies 79 Lesson 5: Composite Construction Lesson 85 Lesson 6: Disclosure, Presentation, and Reporting 89 Lesson 7: Real Estate, Private Equity, and Wrap Fee/Separately Managed Accounts 96 Lesson 8: Valuation Principles and Advertising Guidelines 102 Lesson 9: Verification and Other Issues 104

ABOUTTHE AUTHORS

Wiley’s Study Guides are written by a team of highly qualified CFA charterholders

and leading CFA instructors from around the globe Our team of CFA experts work

collaboratively to produce the best study materials for CFA candidates available today

Wiley’s expert team of contributing authors and instmctors is led by Content Director Basit

Shajani, CFA Basit founded online education start-up Elan Guides in 2009 to help address

CFA candidates’ need for better study materials As lead writer, lecturer, and curriculum

developer, Basit’s unique ability to break down complex topics helped the company grow

organically to be a leading global provider of CFA Exam prep materials In January 2014,

Elan Guides was acquired by John Wiley & Sons, Inc., where Basit continues his work

as Director of CFA Content Basit graduated magna cum laude from the Wharton School

of Business at the University of Pennsylvania with majors in finance and legal studies

He went on to obtain his CFA charter in 2006, passing all three levels on the first attempt

Prior to Elan Guides, Basit ran his own private wealth management business He is a past

president of the Pakistani CFA Society

There are many more expert CFA charterholders who contribute to the creation of

Wiley materials We are thankful for their invaluable expertise and diligent work

To learn more about Wiley’s team of subject matter experts, please visit:

www efficientleaming com/cfa/why-wiley/

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S t u d y S essio n 7: A ppl ic a t io n s o f E c o n o mic

A n a l y sis t o P o r t f o l io M a n a g emen t

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CAPITAL MARKET EXPECTATIONS

R e a d i n g 1 4: C a p i t a l M a r k e t E x p e c t a t i o n s

Time to complete: 2 to 3 hours

Reading summary: This is one of the longest readings in the entire CFA Curriculum at

Level III, so plan your time accordingly The focus of the first portion of the reading is

on formal tools to determine long-term expectations, mainly for returns Then, short- and

long-term economic growth forecasting and analysis are explored The reading then

examines how various asset classes perform at different stages of the business and inflation

cycles

LESSON 1: ORGANIZING THE TASK: FRAMEWORK AND CHALLENGES

LOS I4a: Discuss the role of, and a framework for, capital market

expectations in the portfolio management process Vol 3, pp 6-13

LEARNING OBJECTIVES

The portfolio management process begins with understanding the client’s objectives and

constraints, which are documented in the investment policy statement (IPS) This client-

specific information is then combined with the portfolio manager’s expectations about the

long-term performance of asset classes to establish a unique strategic asset allocation But

how do managers form their capital market expectations? That is the question addressed by

this reading

After studying this material, the candidate should be able to:

1 Explain how capital market expectations fit within the portfolio management

process;

2 Describe analytical tools and models used to develop capital market expectations;

3 Discuss the implications of the business cycle and economic policy for capital

market expectations;

4 Explain how macroeconomic variables like inflation, interest rates, and exchange

rates are forecast and how they influence capital market expectations

A SYSTEMATIC APPROACH

The strategic asset allocation represents the base case, or normal state, partitioning of a

portfolio among the various asset classes available in the investment universe Each asset

class (e.g., stocks, bonds, real estate, etc.) has unique risk and return characteristics that

respond to changing economic conditions So in order to ascertain which asset classes

belong in a particular investor’s portfolio and in what proportion, the manager must have

some idea of what the prevailing economic environment might look like and how asset

classes might react under those conditions These insights are collectively referred to as the

manager’s capital market expectations

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