Tài liệu Schwesernotes cfa level 2 book 1

Book 1 – Ethical and Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements .......................................................... 6 Study Session 1 – Ethical and Professional Standards ............................................ 14 Study Session 2 – Ethical and Professional Standards: Application....................... 110 Self-Test – Ethical and Professional Standards..................................................... 128 Study Session 3 – Quantitative Methods for Valuation ........................................ 138 Self-Test – Quantitative Methods for Valuation................................................... 254 Study Session 4 – Economics for Valuation ......................................................... 260 Self-Test – Economics for Valuation .................................................................... 354 Formulas ............................................................................................................ 357 Appendices ........................................................................................................ 361 Index ................................................................................................................. 370 Level 2 Book 1.indb 1 8/11/2010 4:17:57 PM SCHWESERNOTES™ 2011 CFA LEVEL 2 BOOK 1: ETHICAL AND PROFESSIONAL STANDARDS, QUANTITATIVE METHODS, AND ECONOMICS ©2010 Kaplan, Inc. All rights reserved. Published in 2010 by Kaplan Schweser. Printed in the United States of America. ISBN: 978-1-4277-2747-3 / 1-4277-2747-3 PPN: 3200-0068 If this book does not have the hologram with the Kaplan Schweser logo on the back cover, it was distributed without permission of Kaplan Schweser, a Division of Kaplan, Inc., and is in direct violation of global copyright laws. Your assistance in pursuing potential violators of this law is greatly appreciated. Required CFA Institute® disclaimer: “CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. CFA Institute (formerly the Association for Investment Management and Research) does not endorse, promote, review, or warrant the accuracy of the products or services offered by Kaplan Schweser.” Certain materials contained within this text are the copyrighted property of CFA Institute. The following is the copyright disclosure for these materials: “Copyright, 2011, CFA Institute. Reproduced and republished from 2011 Learning Outcome Statements, Level 1, 2, and 3 questions from CFA® Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global Investment Performance Standards with permission from CFA Institute. All Rights Reserved.” These materials may not be copied without written permission from the author. The unauthorized duplication of these notes is a violation of global copyright laws and the CFA Institute Code of Ethics. Your assistance in pursuing potential violators of this law is greatly appreciated. Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CFA Institute in their 2011 CFA Level 2 Study Guide. The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be accurate. However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success. The authors of the referenced readings have not endorsed or sponsored these Notes. Level 2 Book 1.indb 2 8/11/2010 4:17:57 PM Welcome to the 2011 Level 2 SchweserNotes™ Thank you for trusting Kaplan Schweser to help you reach your goals. We are all very pleased to be able to help you prepare for the Level 2 CFA Exam. In this introduction, I want to explain the resources included with the SchweserNotes, suggest how you can best use Schweser materials to prepare for the exam, and direct you toward other educational resources you will find helpful as you study for the exam. Besides the SchweserNotes themselves, there are many educational resources available at Schweser.com. Just log in using the individual username and password that you received when you purchased the SchweserNotes. SchweserNotes T M These consist of five volumes that include complete coverage of all 18 Study Sessions and all Learning Outcome Statements (LOS) with examples, Concept Checkers (multiple-choice questions for every topic review), and Challenge Problems for many topic reviews to help you master the material and check your progress. At the end of each major topic area, we include a Self-test. Self-test questions are created to be examlike in format and difficulty in order for you to evaluate how well your study of each topic has prepared you for the actual exam. The Level 2 SchweserNotes Package also includes a sixth volume, the Level 1 Refresher, a review of important Level 1 material. Practice Questions To retain what you learn, it is important that you quiz yourself often. We offer CD, download, and online versions of the SchweserPro™ QBank, which contains thousands of Level 2 practice questions, item sets, and explanations. Quizzes are available for each LOS, topic, or Study Session. Build your own exams by specifying the topics and the number of questions you choose. Practice Exams Schweser offers six full 6-hour practice exams. Practice Exams Volume 1 and Volume 2 each contain three full 120-question exams. These are important tools for gaining the speed and skills you will need to pass the exam. Each book contains answers with full explanations for self-grading and evaluation. By entering your answers at Schweser.com, you can use our Performance Tracker to find out how you have performed compared to other Schweser Level 2 candidates. Schweser Library We have created reference videos, some of which are available to all SchweserNotes purchasers. Schweser Library volumes range from 20 to 60 minutes in length and cover such topics as: “Introduction to Item Sets,” “Hypothesis Testing,” “Foreign Exchange Basics,” “Ratio Analysis,” and “Forward Contracts.” The full Schweser Library is included with our 16-week live or online classes and with our video instruction (online or CDs). ©2010 Kaplan, Inc. Level 2 Book 1.indb 3 Page 3 8/11/2010 4:17:57 PM Welcome to the 2011 Level 2 SchweserNotes ™ Online Schweser Study Planner Use your Online Access to tell us when you will start and what days of the week you can study. The online Schweser Study Planner will create a study plan just for you, breaking each study session into daily and weekly tasks to keep you on track and help you monitor your progress through the curriculum. Additional Resources Purchasers of the Essential Self-Study or Premium Instruction Packages also receive access to our Instructor-led Office Hours. Office Hours allow you to get your questions about the curriculum answered in real time and to see others’ questions (and instructor answers) as well. Office Hours is a text-based live interactive online chat with our team of Level 2 experts. Archives of previous Office Hours sessions can be sorted by topic or date and are posted shortly after each session. The Level 2 CFA exam is a formidable challenge (70 topic reviews and 475+ Learning Outcome Statements), and you must devote considerable time and effort to be properly prepared. There is no shortcut! You must learn the material, know the terminology and techniques, understand the concepts, and be able to answer 120 questions quickly and (at least 70%) correctly. Fifteen to 20 hours per week for 20 weeks is a good estimate of the study time required on average, but some candidates will need more or less time, depending on their individual backgrounds and experience. To help you master this material and be well prepared for the CFA Exam, we offer several other educational resources, including: Live Weekly Classroom Programs We offer weekly classroom programs around the world. Please check Schweser.com for locations, dates, and availability. 16-Week Online Classes Our 16-Week Online Classes are available at New York time (6:30–9:30 pm) or London time (6:00–9:00 pm) beginning in January. The approximate schedule for the 16-Week Online Classes (3-hour sessions) is as follows: Class # 1) Exam Intro/Ethical Standards SS 1, 2 2) Quantitative Methods SS 3 3) Economics for Valuation SS 4 4) Financial Reporting & Analysis SS 5 5) Financial Reporting & Analysis SS 6 6) Financial Reporting & Analysis SS 7 7) Corporate Finance SS 8 8) Corporate Finance & Equity SS 9, 10 Class # 9) Equity SS 11, 12 10) Equity SS 12 11) Alternative Asset Valuation SS 13 12) Fixed Income SS 14 13) Fixed Income SS 15 14) Derivatives SS 16 15) Derivatives & Portfolio Management SS 17 16) Portfolio Management SS 18 Archived classes are available for viewing at any time throughout the season. Candidates enrolled in the 16-Week Online Classes also have full access to supplemental on-demand video instruction in the Schweser Library and an e-mail address to use to send questions to the instructor at any time. Page 4 Level 2 Book 1.indb 4 ©2010 Kaplan, Inc. 8/11/2010 4:17:57 PM Welcome to the 2011 Level 2 SchweserNotes ™ Late Season Review Whether you use self-study or in-class, online, or video instruction to learn the CFA curriculum, a late-season review and exam practice can make all the difference. Our most complete late-season review courses are our residence programs in Windsor, Ontario (WindsorWeek) and Dallas/Fort Worth, Texas (DFW 5-day program). Each covers the entire curriculum at all three levels. We also offer 3-day Exam Workshops in many cities (and online) that combine curriculum review with an equal component of hands-on practice with hundreds of questions and problem-solving techniques. Please visit us at Schweser.com for complete listings and course descriptions for all our lateseason review offerings. Mock Exam and Multimedia Tutorial On May 21, 2011, the Schweser Mock Exam will be offered live in many cities around the world and as an online exam as well. The optional Multimedia Tutorial provides extended explanation and topic tutorials to get you exam-ready in areas where you miss questions on the Mock Exam. Please visit Schweser.com for a listing of cities and locations. How to Succeed There are no shortcuts; depend on the fact that CFA Institute will test you in a way that will reveal how well you know the Level 2 curriculum. You should begin early and stick to your study plan. You should first read the SchweserNotes and complete the Concept Checkers and Challenge Problems for each topic review. You should prepare for and attend a live class, an online class, or a study group each week. You should take quizzes often using SchweserPro Qbank and go back to review previous topics and Study Sessions as well. At the end of each topic area, you should take the Self-test to check your progress. You should finish the overall curriculum at least four weeks (preferably five weeks) before the Level 2 exam so that you have sufficient time for Practice Exams and for further review of those topics that you have not yet mastered. I would like to thank Kevin Rygg, CFA Content Specialist; Stephanie Downey, Director of Print Production; and Jeff Faas, Lead Editor, for their contributions to the 2011 Level 2 SchweserNotes for the CFA Exam. Best regards, Bijesh Tolia Dr. Bijesh Tolia, CFA VP and CFA Level 2 Manager Kaplan Schweser ©2010 Kaplan, Inc. Level 2 Book 1.indb 5 Page 5 8/11/2010 4:17:57 PM Readings and Learning Outcome Statements Readings The following material is a review of the Ethical and Professional Standards, Quantitative Methods, and Economics principles designed to address the learning outcome statements set forth by CFA Institute. STUDY SESSION 1 Reading Assignments Ethical and Professional Standards, CFA Program Curriculum, Volume 1, Level 2 (CFA Institute, 2011) 1. 2. 3. 4. Code of Ethics and Standards of Professional Conduct Guidance for Standards I–VII CFA Institute Soft Dollar Standards CFA Institute Research Objectivity Standards page 14 page 14 page 92 page 101 STUDY SESSION 2 Reading Assignments Ethical and Professional Standards, CFA Program Curriculum, Volume 1, Level 2 (CFA Institute, 2011) 5. 6. 7. 8. 9. 10. The Glenarm Company Preston Partners Super Selection Trade Allocation: Fair Dealing and Disclosure Changing Investment Objectives Prudence in Perspective page 110 page 112 page 115 page 118 page 120 page 121 STUDY SESSION 3 Reading Assignments Quantitative Methods for Valuation, CFA Program Curriculum, Volume 1, Level 2 (CFA Institute, 2011) 11. 12. 13. Page 6 Level 2 Book 1.indb 6 Correlation and Regression Multiple Regression and Issues in Regression Analysis Time-Series Analysis page 138 page 172 page 218 ©2010 Kaplan, Inc. 8/11/2010 4:17:57 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements STUDY SESSION 4 Reading Assignments Economics for Valuation, CFA Program Curriculum, Volume 1, Level 2 (CFA Institute, 2011) 14. 15. 16. 17. 18. 19. 20. Economic Growth Regulation and Antitrust Policy in a Globalized Economy Trading with the World The Exchange Rate and the Balance of Payments Currency Exchange Rates Foreign Exchange Parity Relations Measuring Economic Activity page 260 page 278 page 285 page 296 page 307 page 327 page 348 Learning Outcome Statements (LOS) The CFA Institute Learning Outcome Statements are listed below. These are repeated in each topic review; however, the order may have been changed in order to get a better fit with the flow of the review. STUDY SESSION 1 The topical coverage corresponds with the following CFA Institute assigned reading: 1. Code of Ethics and Standards of Professional Conduct The candidate should be able to: a. state the six components of the Code of Ethics and the seven Standards of Professional Conduct. (page 14) b. explain the ethical responsibilities required by the Code and Standards. (page 15) The topical coverage corresponds with the following CFA Institute assigned reading: 2. Guidance for Standards I–VII The candidate should be able to: a. demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations. (page 18) b. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct. (page 18) The topical coverage corresponds with the following CFA Institute assigned reading: 3. C FA Institute Soft Dollar Standards The candidate should be able to: a. define soft-dollar arrangements and state the general principles of the Soft Dollar Standards. (page 92) b. critique company soft-dollar practices and policies. (page 93) c. determine whether a product or service qualifies as “permissible research” that can be purchased with client brokerage. (page 96) ©2010 Kaplan, Inc. Level 2 Book 1.indb 7 Page 7 8/11/2010 4:17:57 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements The topical coverage corresponds with the following CFA Institute assigned reading: 4. C FA Institute Research Objectivity Standards The candidate should be able to: a. explain the objectives of the Research Objectivity Standards. (page 101) b. critique company policies and practices related to research objectivity, and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards. (page 101) STUDY SESSION 2 The topical coverage corresponds with the following CFA Institute assigned reading: 5. The Glenarm Company 6. Preston Partners 7. Super Selection For each of these cases, the candidate should be able to: a. critique the practices and policies presented. (pages 110, 112, 115) b. explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct. (pages 110, 112, 115) The topical coverage corresponds with the following CFA Institute assigned reading: 8. Trade Allocation: Fair Dealing and D isclosure The candidate should be able to: a. critique trade allocation practices, and determine whether compliance exists with the CFA Institute Standards of Professional Conduct addressing fair dealing and client loyalty. (page 118) b. discuss appropriate actions to take in response to trade allocation practices that do not adequately respect client interests. (page 119) The topical coverage corresponds with the following CFA Institute assigned reading: 9. Changing Investment Objectives The candidate should be able to: a. critique the disclosure of investment objectives and basic policies and determine whether they comply with the CFA Institute Standards of Professional Conduct. (page 120) b. discuss appropriate actions needed to ensure adequate disclosure of the investment process. (page 120) The topical coverage corresponds with the following CFA Institute assigned reading: 10. Prudence in Perspective The candidate should be able to: a. explain the basic principles of the new Prudent Investor Rule. (page 121) b. explain the general fiduciary standards to which a trustee must adhere. (page 122) c. differentiate between the old Prudent Man Rule and the new Prudent Investor Rule. (page 123) d. explain the key factors that a trustee should consider when investing and managing trust assets. (page 123) Page 8 Level 2 Book 1.indb 8 ©2010 Kaplan, Inc. 8/11/2010 4:17:57 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements STUDY SESSION 3 The topical coverage corresponds with the following CFA Institute assigned reading: 11. Correlation and Regression The candidate should be able to: a. calculate and interpret a sample covariance and a sample correlation coefficient, and interpret a scatter plot. (page 138) b. explain the limitations to correlation analysis, including outliers and spurious correlation. (page 142) c. formulate a test of the hypothesis that the population correlation coefficient equals zero, and determine whether the hypothesis is rejected at a given level of significance. (page 143) d. distinguish between the dependent and independent variables in a linear regression. (page 144) e. explain the assumptions underlying linear regression, and interpret the regression coefficients. (page 146) f. calculate and interpret the standard error of estimate, the coefficient of determination, and a confidence interval for a regression coefficient. (page 150) g. formulate a null and alternative hypothesis about a population value of a regression coefficient, select the appropriate test statistic, and determine whether the null hypothesis is rejected at a given level of significance. (page 152) h. calculate a predicted value for the dependent variable, given an estimated regression model and a value for the independent variable, and calculate and interpret a confidence interval for the predicted value of a dependent variable. (page 153) i. describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and interpret an F-statistic. (page 154) j. discuss the limitations of regression analysis. (page 159) The topical coverage corresponds with the following CFA Institute assigned reading: 12. Multiple Regression and Issues in Regression Analysis The candidate should be able to: a. formulate a multiple regression equation to describe the relation between a dependent variable and several independent variables, determine the statistical significance of each independent variable, and interpret the estimated coefficients and their p-values. (page 173) b. formulate a null and an alternative hypothesis about the population value of a regression coefficient, calculate the value of the test statistic, determine whether to reject the null hypothesis at a given level of significance by using a one-tailed or two-tailed test, and interpret the results of the test. (page 175) c. calculate and interpret 1) a confidence interval for the population value of a regression coefficient and 2) a predicted value for the dependent variable, given an estimated regression model and assumed values for the independent variables. (page 179) d. explain the assumptions of a multiple regression model. (page 181) e. calculate and interpret the F-statistic, and discuss how it is used in regression analysis. (page 181) f. distinguish between and interpret the R2 and adjusted R2 in multiple regression. (page 183) ©2010 Kaplan, Inc. Level 2 Book 1.indb 9 Page 9 8/11/2010 4:17:57 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements g. infer how well a regression model explains the dependent variable by analyzing the output of the regression equation and an ANOVA table. (page 185) h. formulate a multiple regression equation by using dummy variables to represent qualitative factors, and interpret the coefficients and regression results. (page 189) i. discuss the types of heteroskedasticity and the effects of heteroskedasticity and serial correlation on statistical inference. (page 193) j. describe multicollinearity, and discuss its causes and effects in regression analysis. (page 199) k. discuss the effects of model misspecification on the results of a regression analysis, and explain how to avoid the common forms of misspecification. (page 202) l. discuss models with qualitative dependent variables. (page 206) m. interpret the economic meaning of the results of multiple regression analysis and critique a regression model and its results. (page 206) The topical coverage corresponds with the following CFA Institute assigned reading: 13. Time-Series Analysis The candidate should be able to: a. calculate and evaluate the predicted trend value for a time series, modeled as either a linear trend or a log-linear trend, given the estimated trend coefficients. (page 218) b. discuss the factors that determine whether a linear or a log-linear trend should be used with a particular time series, and evaluate the limitations of trend models. (page 224) c. explain the requirement for a time series to be covariance stationary, and discuss the significance of a series that is not stationary. (page 225) d. discuss the structure of an autoregressive (AR) model of order p, and calculate one- and two-period-ahead forecasts given the estimated coefficients. (page 226) e. explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series. (page 227) f. explain mean reversion, and calculate a mean-reverting level. (page 228) g. contrast in-sample and out-of-sample forecasts, and compare the forecasting accuracy of different time-series models based on the root mean squared error criterion. (page 229) h. discuss the instability of coefficients of time-series models. (page 230) i. describe the characteristics of random walk processes, and contrast them to covariance stationary processes. (page 231) j. discuss the implications of unit roots for time-series analysis, explain when unit roots are likely to occur and how to test for them, and demonstrate how a time series with a unit root can be transformed so it can be analyzed with an AR model. (page 232) k. discuss the steps of the unit root test for nonstationarity, and explain the relation of the test to autoregressive time-series models. (page 232) l. discuss how to test and correct for seasonality in a time-series model, and calculate and interpret a forecasted value using an AR model with a seasonal lag. (page 235) m. explain autoregressive conditional heteroskedasticity (ARCH), and discuss how ARCH models can be applied to predict the variance of a time series. (page 239) n. explain how time-series variables should be analyzed for nonstationarity and/or cointegration before use in a linear regression. (page 240) Page 10 Level 2 Book 1.indb 10 ©2010 Kaplan, Inc. 8/11/2010 4:17:57 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements o. select and justify the choice of a particular time-series model from a group of models. (page 242) STUDY SESSION 4 The topical coverage corresponds with the following CFA Institute assigned reading: 14. Economic Growth The candidate should be able to: a. define the sources of economic growth, and discuss the preconditions for economic growth. (page 261) b. discuss how the one-third rule can be used to explain the contributions of labor and technological change to growth in labor productivity. (page 262) c. discuss how faster economic growth can be achieved by increasing the growth of physical capital, technological advances, and investment in human capital. (page 265) d. compare and contrast classical growth theory, neoclassical growth theory, and new growth theory. (page 265) The topical coverage corresponds with the following CFA Institute assigned reading: 15. Regulation and Antitrust Policy in a Globalized Economy The candidate should be able to: a. explain the rationale for government regulation in the form of 1) economic regulation of natural monopolies and 2) social regulation of nonmonopolistic industries. (page 278) b. discuss the potential benefits and possible negative side effects of social regulation. (page 280) c. differentiate between the capture hypothesis and the share-the-gains, share-thepains theory of regulator behavior. (page 280) The topical coverage corresponds with the following CFA Institute assigned reading: 16. Trading with the World The candidate should be able to: a. explain comparative advantage and how countries can gain from international trade. (page 285) b. compare and contrast tariffs, nontariff barriers, quotas, and voluntary export restraints. (page 288) c. critique the arguments for trade restrictions. (page 290) The topical coverage corresponds with the following CFA Institute assigned reading: 17. The Exchange Rate and the Balance of Payments The candidate should be able to: a. define an exchange rate, and differentiate between the nominal exchange rate and the real exchange rate. (page 296) b. explain the factors that influence supply and demand in the foreign exchange market. (page 297) c. discuss how the supply and demand for a currency changes the exchange rate. (page 299) d. differentiate between interest rate parity and purchasing power parity. (page 300) e. describe the balance of payments accounts. (page 301) ©2010 Kaplan, Inc. Level 2 Book 1.indb 11 Page 11 8/11/2010 4:17:58 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements f. describe the following exchange rate policies: flexible exchange rates, fixed exchange rates, and crawling pegs. (page 302) The topical coverage corresponds with the following CFA Institute assigned reading: 18. Currency Exchange Rates The candidate should be able to: a. define direct and indirect methods of foreign exchange quotations, and convert direct (indirect) foreign exchange quotations into indirect (direct) foreign exchange quotations. (page 307) b. calculate and interpret the spread on a foreign currency quotation, and explain how spreads on foreign currency quotations can differ as a result of market conditions, bank/dealer positions, and trading volume. (page 309) c. calculate and interpret currency cross rates, given two spot exchange quotations involving three currencies. (page 310) d. calculate the profit on a triangular arbitrage opportunity, given the bid-ask quotations for the currencies of three countries involved in the arbitrage. (page 312) e. distinguish between the spot and forward markets for foreign exchange. (page 313) f. calculate and interpret the spread on a forward foreign currency quotation, and explain how spreads on forward foreign currency quotations can differ as a result of market conditions, bank/dealer positions, trading volume, and maturity/ length of contract. (page 314) g. calculate and interpret a forward discount or premium and express it as an annualized rate. (page 315) h. explain interest rate parity, and illustrate covered interest arbitrage. (page 316) i. distinguish between spot and forward transactions, calculate the annualized forward premium/discount for a given currency, and infer whether the currency is “strong” or “weak.” (page 318) The topical coverage corresponds with the following CFA Institute assigned reading: 19. Foreign Exchange Parity Relations The candidate should be able to: a. explain how exchange rates are determined in a flexible (or floating) exchange rate system. (page 327) b. explain the role of each component of the balance of payments accounts. (page 327) c. explain how current account deficits or surpluses and financial account deficits or surpluses affect an economy. (page 328) d. describe the factors that cause a nation’s currency to appreciate or depreciate. (page 328) e. explain how monetary and fiscal policies affect the exchange rate and balance of payments components. (page 329) f. describe a fixed exchange rate and a pegged exchange rate system. (page 330) g. discuss absolute purchasing power parity and relative purchasing power parity. (page 331) h. calculate the end-of-period exchange rate implied by purchasing power parity, given the beginning-of-period exchange rate and the inflation rates. (page 331) i. discuss the international Fisher relation. (page 333) Page 12 Level 2 Book 1.indb 12 ©2010 Kaplan, Inc. 8/11/2010 4:17:58 PM Book 1 – Ethical & Professional Standards, Quantitative Methods, and Economics Readings and Learning Outcome Statements j. calculate the real interest rate, given nominal interest rates and expected inflation rates, using the international Fisher relation and its linear approximation. (page 333) k. discuss the theory of uncovered interest rate parity, and explain the theory’s relation to other exchange rate parity theories. (page 335) l. calculate the expected change in the exchange rate, given interest rates and the assumption that uncovered interest rate parity holds. (page 335) m. discuss the foreign exchange expectation relation between the forward exchange rate and the expected exchange rate. (page 337) The topical coverage corresponds with the following CFA Institute assigned reading: 20. Measuring Economic Activity The candidate should be able to: a. distinguish between the measures of economic activity (i.e., gross domestic product, gross national income, and net national income), including their components. (page 348) b. differentiate between GDP at market prices and GDP at factor cost. (page 349) c. differentiate between current and constant prices, and describe the GDP deflator. (page 350) ©2010 Kaplan, Inc. Level 2 Book 1.indb 13 Page 13 8/11/2010 4:17:58 PM The following is a review of the Ethical and Professional Standards principles designed to address the learning outcome statements set forth by CFA Institute®. This topic is also covered in: CFA Institute Code of Ethics and Standards of Professional Conduct Guidance for Standards I–VII Study Session 1 Exam Focus In addition to reading this review of the ethics material, we strongly recommend that all candidates for the CFA® examination read the Standards of Practice Handbook 10th Edition (2010) multiple times. As a Level 2 CFA candidate, it is your responsibility to comply with the Code and Standards. The complete Code and Standards are reprinted in Volume 1 of the CFA Program Curriculum. LOS 1.a: State the six components of the Code of Ethics and the seven Standards of Professional Conduct. Code of Ethics Members of CFA Institute [including Chartered Financial Analyst® (CFA®) charterholders] and candidates for the CFA designation (“Members and Candidates”) must:1 s s s s s s Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. Place the integrity of the investment profession and the interests of clients above their own personal interests. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. Promote the integrity of, and uphold the rules governing, capital markets. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals. The Standards of Professional Conduct I: II: III: 1. Page 14 Level 2 Book 1.indb 14 Professionalism Integrity of Capital Markets Duties to Clients Copyright 2010, CFA Institute. Reproduced and republished from “The Code of Ethics,” from Standards of Practice Handbook, 10th Ed., 2010, with permission from CFA Institute. All rights reserved. ©2010 Kaplan, Inc. 8/11/2010 4:17:58 PM Study Session 1 Cross-Reference to CFA Institute Assigned Readings #1 & 2 – Standards of Practice Handbook IV: V: VI: VII: Duties to Employers Investment Analysis, Recommendations, and Actions Conflicts of Interest Responsibilities as a CFA Institute Member or CFA Candidate LOS 1.b: Explain the ethical responsibilities required by the Code and Standards. Standards of Professional Conduct2 I. PRO FESSI O N ALISM A. Knowledge of the Law. Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in any violation of laws, rules, or regulations and must disassociate themselves from any such violation. B. Independence and Objectivity. Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity. C. Misrepresentation. Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. D. Misconduct. Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. II. I N T E GRI T Y O F C API TAL M ARK E TS A. Material Nonpublic Information. Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information. B. Market Manipulation. Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. 2. Ibid. ©2010 Kaplan, Inc. Level 2 Book 1.indb 15 Page 15 8/11/2010 4:17:58 PM Study Session 1 Cross-Reference to CFA Institute Assigned Readings #1 & 2 – Standards of Practice Handbook Study Session 1 III. D U T IES T O C LIE N TS A. Loyalty, Prudence, and Care. Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests. B. Fair Dealing. Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities. C. Suitability. 1. When Members and Candidates are in an advisory relationship with a client, they must: a. Make a reasonable inquiry into a client’s or prospective clients’ investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. b. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action. c. Judge the suitability of investments in the context of the client’s total portfolio. 2. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio. D. Performance Presentation. When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete. E. Preservation of Confidentiality. Members and Candidates must keep information about current, former, and prospective clients confidential unless: 1. The information concerns illegal activities on the part of the client or prospective client, 2. Disclosure is required by law, or 3. The client or prospective client permits disclosure of the information. Page 16 Level 2 Book 1.indb 16 ©2010 Kaplan, Inc. 8/11/2010 4:17:58 PM Study Session 1 Cross-Reference to CFA Institute Assigned Readings #1 & 2 – Standards of Practice Handbook IV. D U T IES T O E MPL OYERS A. Loyalty. In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. B. Additional Compensation Arrangements. Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer’s interest unless they obtain written consent from all parties involved. C. Responsibilities of Supervisors. Members and Candidates must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority. V. I N VES T M E N T A N ALYSIS, RE C O M M E N D AT I O N S, A N D AC T I O N S A. D iligence and Reasonable Basis. Members and Candidates must: 1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions. 2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action. B. Communication with Clients and Prospective Clients. Members and Candidates must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. 2. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. 3. Distinguish between fact and opinion in the presentation of investment analysis and recommendations. C. Record Retention. Members and Candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients. ©2010 Kaplan, Inc. Level 2 Book 1.indb 17 Page 17 8/11/2010 4:17:58 PM Study Session 1 Cross-Reference to CFA Institute Assigned Readings #1 & 2 – Standards of Practice Handbook VI. C O N FLI C TS O F I N T ERES T Study Session 1 A. D isclosure of Conflicts. Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively. B. Priority of Transactions. Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner. C. Referral Fees. Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received by, or paid to, others for the recommendation of products or services. VII. RESP O N SIBILI T IES AS A C FA I N S T I T U T E M E M BER O R C FA C A N D I D AT E A. Conduct as Members and Candidates in the C FA Program. Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of the CFA examinations. B. Reference to C FA Institute, the C FA Designation, and the C FA Program. When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program. LOS 2.a: Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations. LOS 2.b: Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct. I Professionalism I(A) Knowledge of the Law. Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations. Page 18 Level 2 Book 1.indb 18 ©2010 Kaplan, Inc. 8/11/2010 4:17:58 PM Study Session 1 Cross-Reference to CFA Institute Assigned Readings #1 & 2 – Standards of Practice Handbook Professor’s Note: While we use the term “members” in the following, note that all of the Standards apply to candidates as well. Guidance—Code and Standards vs. Local Law Members must know the laws and regulations relating to their professional activities in all countries in which they conduct business. Members must comply with applicable laws and regulations relating to their professional activity. Do not violate Code or Standards even if the activity is otherwise legal. Always adhere to the most strict rules and requirements (law or CFA Institute Standards) that apply. Guidance—Participation or Association with Violations by Others Members should dissociate, or separate themselves, from any ongoing client or employee activity that is illegal or unethical, even if it involves leaving an employer (an extreme case). While a member may confront the involved individual first, he must approach his supervisor or compliance department. Inaction with continued association may be construed as knowing participation. Recommended Procedures for Compliance—Members s s s s s s s Members should have procedures to keep up with changes in applicable laws, rules, and regulations. Compliance procedures should be reviewed on an ongoing basis to assure that they address current law, CFAI Standards, and regulations. Members should maintain current reference materials for employees to access in order to keep up to date on laws, rules, and regulations. Members should seek advice of counsel or their compliance department when in doubt. Members should document any violations when they disassociate themselves from prohibited activity and encourage their employers to bring an end to such activity. There is no requirement under the Standards to report violations to governmental authorities, but this may be advisable in some circumstances and required by law in others. Members are strongly encouraged to report other members’ violations of the Code and Standards. Recommended Procedures for Compliance—Firms Members should encourage their firms to: s s s Develop and/or adopt a code of ethics. Make available to employees information that highlights applicable laws and regulations. Establish written procedures for reporting suspected violation of laws, regulations, or company policies. Members who supervise the creation and maintenance of investment services and products should be aware of and comply with the regulations and laws regarding such services and products both in their country of origin and the countries where they will be sold. ©2010 Kaplan, Inc. Level 2 Book 1.indb 19 Page 19 8/11/2010 4:17:58 PM Study Session 1 Cross-Reference to CFA Institute Assigned Readings #1 & 2 – Standards of Practice Handbook Study Session 1 Application of Standard I(A) Knowledge of the Law3 Example 1: Michael Allen works for a brokerage firm and is responsible for an underwriting of securities. A company official gives Allen information indicating that the financial statements Allen filed with the regulator overstate the issuer’s earnings. Allen seeks the advice of the brokerage firm’s general counsel, who states that it would be difficult for the regulator to prove that Allen has been involved in any wrongdoing. Comment: Although it is recommended that members and candidates seek the advice of legal counsel, the reliance on such advice does not absolve a member or candidate from the requirement to comply with the law or regulation. Allen should report this situation to his supervisor, seek an independent legal opinion, and determine whether the regulator should be notified of the error. Example 2: Kamisha Washington’s firm advertises its past performance record by showing the 10year return of a composite of its client accounts. However, Washington discovers that the composite omits the performance of accounts that have left the firm during the 10-year period and that this omission has led to an inflated performance figure. Washington is asked to use promotional material that includes the erroneous performance number when soliciting business for the firm. Comment: Misrepresenting performance is a violation of the Code and Standards. Although she did not calculate the performance herself, Washington would be assisting in violating this standard if she were to use the inflated performance number when soliciting clients. She must dissociate herself from the activity. She can bring the misleading number to the attention of the person responsible for calculating performance, her supervisor, or the compliance department at her firm. If her firm is unwilling to recalculate performance, she must refrain from using the misleading promotional material and should notify the firm of her reasons. If the firm insists that she use the material, she should consider whether her obligation to dissociate from the activity would require her to seek other employment. Example 3: An employee of an investment bank is working on an underwriting and finds out the issuer has altered their financial statements to hide operating losses in one division. These misstated data are included in a preliminary prospectus that has already been released. Comment: The employee should report the problem to his supervisors. If the firm doesn’t get the misstatement fixed, the employee should dissociate from the underwriting and, further, seek legal advice about whether he should undertake additional reporting or other actions. 3. Page 20 Level 2 Book 1.indb 20 Ibid. ©2010 Kaplan, Inc. 8/11/2010 4:17:58 PM