CFA Program Curriculum: A Comprehensive Overview

Posted on Nov 1, 2024 in Economy

CFA Code of Ethics & Standards

I. Professionalism

  • A. Knowledge of the Law

  • B. Independence and Objectivity

  • C. Misrepresentation

  • D. Misconduct

  • E. Competence

II. Integrity of Capital Markets

  • A. Material Nonpublic Information

  • B. Market Manipulation

III. Duties to Clients

  • A. Loyalty, Prudence, and Care

  • B. Fair Dealing

  • C. Suitability

  • D. Performance Presentation

  • E. Preservation of Confidentiality

IV. Duties to Employers

  • A. Loyalty

  • B. Additional Compensation Arrangements

  • C. Responsibilities of Supervisors

V. Investment Analysis & Recommendations

  • A. Diligence and Reasonable Basis

  • B. Communication with Clients and Prospective Clients

  • C. Record Retention

VI. Conflicts of Interest

  • A. Avoid or Disclose Conflicts

  • B. Priority of Transactions

  • C. Referral Fees

VII. CFA Institute Member/Candidate Responsibilities

  • A. Conduct as Participants in CFA Institute Programs

  • B. Reference to CFA Institute, Designation, and Program

Global Investment Performance Standards (GIPS)

Key Definitions

  • Firm: Corporation, subsidiary, or division presented to clients as a business entity

  • Portfolio Requirements: All fee-paying discretionary portfolios must be in at least one composite

GIPS Standards for Firms

  1. Fundamentals of Compliance

  2. Input Data and Calculation Methodology

  3. Composite and Pooled Fund Maintenance

  4. Composite Time-Weighted Return Report

  5. Composite Money-Weighted Return Report

  6. Pooled Fund Time-Weighted Return Report

  7. Pooled Fund Money-Weighted Return

Quantitative Methods

Return Calculations

Holding Period Return (HPR)

R = (Pt + Dt – Pt-1) / Pt-1

or

R = (Pt + Dt) / Pt-1 – 1

Other Return Measures

  • Annualized Return: (1 + HPR)^(365/days) – 1

  • Continuously Compounded Return: RCC = ln(1 + HPR)

Statistical Measures

Types of Means

  1. Arithmetic Mean: Sum of observations / Number of observations

  2. Geometric Mean: ([(1 + R1) × … × (1 + RN)]^(1/N)) – 1

  3. Harmonic Mean: N / Σ(1/Xi)

Modified Means

    • Trimmed Mean: Excludes x/2% from each tail

    • Winsorized Mean: Replaces x/2% in each tail

Dispersion Measures

  • Sample Variance: s² = Σ(xi – x̅)² / (n-1)

  • Standard Deviation: √ variance

  • Target Downside Deviation: √[Σ(Xi – target)² / (n-1)] for Xi < target

  • Coefficient of Variation: CV = s/X̅

Probability & Distributions

Bayes’ Formula

P(A|B) = [P(B|A) × P(A)] / P(B)

Expected Return & Risk

  • Expected Return: E(X) = ΣP(xi)xi

  • Portfolio Variance:

var(Rp) = wA²σA² + wB²σB² + 2wAwBσAσBρAB

Normal Distribution Properties

  • ±1σ: 68%

  • ±1.65σ: 90%

  • ±1.96σ: 95%

  • ±2.58σ: 99%

Statistical Testing

Hypothesis Testing

  • Null Hypothesis (H₀): Contains =, ≤, ≥

  • Alternative Hypothesis (Ha): Opposite of H₀

Error Types

  • Type I: False rejection of H₀

  • Type II: False acceptance of H₀

Regression Analysis

Linear Regression Model

Yi = b₀ + b₁Xi + εi

Where:

  • Y: Dependent variable

  • X: Independent variable

  • b₀: Intercept

  • b₁: Slope

  • εi: Error term

Model Evaluation

  • R²: SSR/SST (Coefficient of Determination)

  • ANOVA Components:

    • SST: Total Sum of Squares

    • SSR: Regression Sum of Squares

    • SSE: Error Sum of Squares

Economics

Market Operations

Breakeven Analysis

  • Breakeven Point: Total Revenue = Total Cost

  • Short-run Operations: Continue if TR > TVC (Total Variable Cost)

  • Shutdown Point: When TR < TVC

Market Structures

  1. Perfect Competition

    • Many firms, no pricing power

    • No/low entry barriers

    • Homogeneous products

  2. Monopolistic Competition

    • Many firms, some pricing power

    • Low entry barriers

    • Differentiated products

    • High advertising costs

  3. Oligopoly

    • Few firms, significant pricing power

    • High entry barriers

    • Products may vary

  4. Monopoly

    • Single firm, significant pricing power

    • High entry barriers

    • Competes with substitutes

Economic Indicators & Cycles

Business Cycle Phases

  1. Expansion

  2. Peak

  3. Contraction

  4. Trough

Economic Indicators

  • Leading: Precede peaks/troughs

  • Coincident: Align with peaks/troughs

  • Lagging: Follow peaks/troughs

Policy & Balance

Economic Policy

Monetary Policy:

  • Expansionary: Policy rate < Neutral rate

  • Contractionary: Policy rate > Neutral rate

Fiscal Policy:

  • Expansionary: Increasing deficit/decreasing surplus

  • Contractionary: Decreasing deficit/increasing surplus

Balance of Payments

  1. Current Account

    • Merchandise/services

    • Income receipts

    • Unilateral transfers

  2. Capital Account

    • Capital transfers

    • Nonfinancial asset transactions

  3. Financial Account

    • Government foreign assets

    • Foreign-owned domestic assets

International Trade & FX

Trading Agreements

  1. Free Trade Area

  2. Customs Union

  3. Common Market

  4. Economic Union

  5. Monetary Union

Foreign Exchange

  • Rate Expression: Price currency/Base currency

  • Real Exchange Rate:

Nominal rate × (Base currency CPI/Price currency CPI)

  • Forward Rate (No-Arbitrage):

Forward = Spot × (1 + Price currency rate)/(1 + Base currency rate)

Exchange Rate Regimes

  1. Formal Dollarization

  2. Monetary Union

  3. Fixed Peg (±1%)

  4. Target Zone

  5. Crawling Peg

  6. Crawling Bands

  7. Managed Floating

  8. Independently Floating

Corporate Issuers

Corporate Governance

Key Stakeholder Groups

  1. Shareholders

  2. Board of Directors

  3. Senior Managers

  4. Employees

  5. Creditors

  6. Suppliers

Critical Board Committees

  • Audit

  • Nominating/Governance

  • Compensation/Remuneration

Capital Investment

Project Types

  1. Going Concern

    • Business maintenance

    • Cost reduction

  2. Regulatory/Compliance

    • Safety requirements

    • Environmental compliance

  3. Expansion

    • Existing business growth

  4. Other

    • Non-core business projects

Capital Management

Capital Allocation Process

  1. Idea Generation

  2. Project Proposal Analysis

  3. Capital Budget Creation

  4. Decision Monitoring & Post-audit

Financial Metrics

Net Present Value (NPV)

NPV = CF₀ + CF₁/(1+k)¹ + CF₂/(1+k)² + … + CFₙ/(1+k)ₙ

Return on Invested Capital (ROIC)

ROIC = Net Operating Profit After Tax / Average Book Value of Invested Capital

Weighted Average Cost of Capital (WACC)

WACC = wd(kd)(1-t) + wps(kps) + wce(ks)

Real Options Types

  1. Timing (Investment delay)

  2. Abandonment (Project exit)

  3. Expansion (Follow-on investment)

  4. Flexibility (Price/input adjustment)

  5. Fundamental (Underlying asset dependency)

Capital Structure Theories

  1. Modigliani-Miller (No Taxes)

    1. Capital structure irrelevant

  2. MM with Taxes

    1. 100% debt maximizes value

    2. No financial distress costs

  3. Static Tradeoff Theory

    1. Initial value increase with debt

    2. Decreases when distress costs exceed tax benefits

  4. Pecking Order Theory Financing preference hierarchy:

    1. Internal capital

    2. Debt

    3. External equity

Portfolio Management

Investment Policy Statement (IPS)

Investment Objectives

  • Return Objectives

  • Risk Tolerance

Investment Constraints

  1. Liquidity Needs

  2. Time Horizon

  3. Tax Concerns

  4. Legal/Regulatory Factors

  5. Unique Circumstances

Portfolio Theory

Efficient Frontier

  • Markowitz efficient frontier represents portfolios with:

    • Highest return for given risk level

    • Lowest risk for given return level

Risk Tolerant Investor    │    E(Rp)

            │

            │         Efficient

Risk Averse │         Frontier

Investor    │

            │

            └──────────────

                   σp

Asset Pricing Models

Capital Asset Pricing Model (CAPM)

E(Ri) = RFR + βi[E(Rmkt) – RFR]

Security Market Line (SML)

  • Represents CAPM equilibrium

  • Only systematic risk is compensated

  • Risk Components:

    • Total Risk = Systematic + Unsystematic Risk

E(Ri)│

     │        SML

     │    ↗

     │  ↗

RFR  │↗

     └─────────────

           β

Performance Measurement

Risk-Adjusted Metrics

  1. Total Risk Measures

    • Sharpe Ratio

    • M-squared

  2. Systematic Risk Measures

    • Treynor Measure

    • Jensen’s Alpha

E(R)│

    │     SML

    │   ↗

    │ ↗   P

Rp  │  •

Rf  │•

    └─────────────

        βp    β

Behavioral Finance

Cognitive Errors

  1. Belief Perseverance

    • Conservatism

    • Confirmation

    • Representativeness

    • Control

    • Hindsight

  2. Information Processing

    • Anchoring/Adjustment

    • Mental Accounting

    • Framing

    • Availability

Emotional Biases

  • Loss Aversion

  • Overconfidence

  • Self-Control

  • Status Quo

  • Endowment

  • Regret Aversion

Equity Investments

Security Market Efficiency

Key Components

  1. Operational Efficiency

    • Minimized transaction costs

    • Smooth execution

  2. Informational Efficiency

    • Rapid price adjustments

    • New information integration

Margin Trading

Basic Calculations

  • Leverage Factor = 1/Margin Percentage

  • Levered Return = HPR × Leverage Factor

Margin Call Price Formula

Margin Call Price = P₀(1 – Initial Margin %)/(1 – Maintenance Margin %)

Market Indices

Index Calculation Methods

  1. Price-Weighted Index

Index = Σ(Stock Prices)/Adjusted Divisor

  1. Value-Weighted Index

Index = Σ(Current Prices × Shares)/Σ(Base Year Prices × Base Year Shares)

Note: Value-weighted indices better reflect total market value changes as they account for both price and number of shares.

Trading Orders

Order Types

  1. Execution Instructions

    • Market orders

    • Limit orders

  2. Validity Instructions

    • Stop orders

    • Day orders

    • Fill-or-kill orders

  3. Clearing Instructions

    • Short sale specification

    • Owned security sale

Market Structures

  1. Quote-Driven

    • Investor-dealer trading

  2. Order-Driven

    • Rule-based matching

  3. Brokered

    • Broker-facilitated matching

Efficient Market Hypothesis (EMH)

Forms of Market Efficiency

  1. Weak Form

    • Reflects market information

    • Technical analysis ineffective

    • Past prices don’t predict future

  2. Semi-Strong Form

    • Instant public info adjustment

    • Fundamental analysis ineffective

  3. Strong Form

    • Reflects all information

    • Inside information ineffective

    • Perfect market assumption

Industry Analysis

Analysis Framework

  1. Industry Definition

  2. Market Assessment

    • Size

    • Growth

    • Profitability

  3. Structure Analysis (Porter)

  4. External Analysis (PESTLE)

  5. Strategy Evaluation

Porter’s Five Forces

  1. Existing Competitor Rivalry

  2. Entry Threat

  3. Substitute Threat

  4. Buyer Power

  5. Supplier Power

PESTLE Framework

  • Political

  • Economic

  • Social

  • Technological

  • Legal

  • Environmental

Competitive Strategies

  1. Cost Leadership

  2. Product Differentiation

  3. Focus/Niche

Valuation Models

One-Period Model

V₀ = (D₁ + P₁)/(1 + ke)

Note: Use expected dividend (D₁)

Dividend Discount Models (DDM)

Supernormal Growth (Multi-stage)

V₀ = D₁/(1+ke) + … + Dn/(1+ke)ⁿ + Pn/(1+ke)ⁿ

Where: Pn = Dn+1/(ke – gc)

Constant Growth

V₀ = D₁/(ke – g)

Fixed Income

Basic Bond Relationships

Price-Yield-Coupon

  • Price and yield inversely related

  • Discount: Coupon < Yield

  • Premium: Coupon > Yield

  • Price Trajectory: Approaches par at maturity

Bond Characteristics

Core Features

  1. Issuer Types

    • Sovereign governments

    • Corporations

    • Local governments

    • Agencies

    • Supranationals

    • Special purpose entities

  2. Maturity Categories

    • Money market (≤1 year)

    • Capital market (>1 year)

  3. Key Terms

    • Par value (Principal)

    • Coupon (Fixed/Floating)

    • Seniority ranking

    • Contingency provisions

Cash Flow Structures

  1. Bullet

    • Single principal payment at maturity

  2. Amortizing

    • Full: Equal periodic payments

    • Partial: Balloon payment at end

  3. Special Structures

    • Sinking fund

    • Floating-rate

    • Index-linked

Embedded Options

  1. Callable Bonds

    • Issuer early repayment right

    • Higher yield, lower duration

  2. Putable Bonds

    • Holder early sale right

    • Lower yield, lower duration

  3. Convertible Bonds

    • Exchange for issuer’s stock

  4. Warrants

    • Stock purchase rights

    • Usually detachable

Bond Markets

Market Types

  • Domestic: Local issuer/currency

  • Foreign: Foreign issuer/local currency

  • Eurobond: International market

  • Global: Multiple market trading

Bond Math

Pricing Formula

Full Price = PV × [1 + (YTM/n)^(days since coupon/days in period)]

Accrued Interest = Coupon × (days since last coupon/days in period)

Flat Price = Full Price – Accrued Interest

Yield Measures

  • YTM: Effective annual yield

  • Current Yield: Annual coupon/price

  • Simple Yield: Current yield ± amortization

  • YTC: Yield to call

  • YTW: Yield to worst

Risk Measures

Duration

Modified Duration ≈ -ΔV/(V₀×Δy)

Price Change Estimation

%∆Price = -Duration(Δy) + Convexity(Δy)²/2

Credit Analysis

Bottom-up Factors

  1. Capacity

  2. Capital

  3. Collateral

  4. Covenants

  5. Character

Top-down Factors

  1. Conditions

  2. Country

  3. Currency

Credit Risk

Expected Loss = Default Probability × Loss Given Default

Derivatives

Fundamental Concepts

Arbitrage & Replication

  • Law of One Price: Identical cash flows = Identical prices

  • Risk-Neutral Pricing: Certain payoff portfolios yield risk-free rate

Value vs. Price

  • Contract price set at initiation (zero value)

  • Value changes create opposite gains/losses for long/short positions

Contract Types

Forward Contract Value

Vt(T) = [St + PVt(costs) – PVt(benefits)] – F₀(T)(1 + Rf)^-(T-t)

Futures vs. Forwards

  • Futures: Standardized, exchange-traded

  • Daily mark-to-market settlement

  • Forward: Customized, OTC

Interest Rate Contracts

  • FRA: Forward contract for future borrowing/lending

  • Swaps: Series of FRAs with zero initial value

Options

Basic Positions

Position

Asset Exposure

Call Buyer

Long

Call Seller

Short

Put Buyer

Short

Put Seller

Long

Intrinsic Value

Call = Max[0, S – X]

Put = Max[0, X – S]

Exercise Rights

  • American: Any time until expiration

  • European: Only at expiration

Value Factors

Factor Increase

Call

Put

Asset Price

↑

↓

Exercise Price

↓

↑

Risk-free Rate

↑

↓

Volatility

↑

↑

Time to Expiration

↑

↑*

Holding Costs

↑

↓

Holding Benefits

↓

↑

*Except some deep ITM European puts

Put-Call Parity

Basic Relationship

c + X(1 + Rf)^-T = S + p

Component Expressions

S = c – p + X(1 + Rf)^-T

p = c – S + X(1 + Rf)^-T

c = S + p – X(1 + Rf)^-T

X(1 + Rf)^-T = S + p – c

Forward Parity

  • Replace S with F₀(T)(1 + Rf)^-T in parity relationships

Alternative Investments

Investment Life Cycle

  1. Capital Commitment

    • Manager identification

    • Capital call initiation

  2. Capital Deployment

    • Project funding

    • Management involvement

  3. Capital Distribution

    • Income generation

    • Cash flow returns

Valuation & Access

Fair Value Hierarchy

  1. Level 1

    • Active markets

    • Quoted prices

  2. Level 2

    • Observable inputs

    • Model-based valuation

  3. Level 3

    • Unobservable inputs

    • Limited market data

Redemption Restrictions

  • Lockup Period: Initial redemption restriction

  • Notice Period: 30-90 day fulfillment window

  • Gate: Temporary redemption limits

Fee Structures

Basic Components

  • Management Fee (% of AUM/committed capital)

  • Performance Fee (“2 and 20” structure)

Performance Conditions

  • Hard Hurdle: Fee only above rate

  • Soft Hurdle: Full fee if above rate

  • High Water Mark: Previous peak requirement

  • Clawback: Recovery provision


Distribution Waterfalls

  • American: Per-deal distribution

  • European: Return of capital priority

Investment Types

Hedge Fund Strategies

  1. Event-Driven

    • Merger arbitrage

    • Distressed/Restructuring

    • Activist

    • Special situations

  2. Relative Value

    • Convertible arbitrage

    • Fixed income strategies

    • Multi-strategy

  3. Equity Strategies

    • Market neutral

    • Fundamental approaches

    • Short bias

  4. Opportunistic

    • Macro

    • Managed futures


Private Capital

  1. Leveraged Buyouts

    • Management buyouts

    • Management buy-ins

  2. Venture Capital Stages

    • Formative

    • Later stage

    • Mezzanine

  3. Exit Strategies

    • Trade sale

    • IPO

    • Recapitalization

    • Secondary sale

    • Write-off

Real Estate

  • Residential

  • Commercial

  • REITs

  • Loans (Whole/Construction)


Commodities

Futures Price ≈ Spot Price(1 + Rf) + Storage – Convenience Yield

  • Contango: Futures > Spot

  • Backwardation: Futures

Infrastructure

  1. Greenfield: New assets

  2. Brownfield: Existing assets

  3. Second-stage: Mature assets

Types:

  • Transportation

  • Utility

  • Communications

  • Social