a: Interpret interest rates as required rates of return, discount rates, or opportunity costs.
b: Explain an interest rate as the sum of a real risk-free rate and premiums that compensate investors for bearing distinct types of risk.
c: Calculate and interpret the future value (FV) and present value (PV) of a single sum of money, an ordinary annuity, an annuity due, a perpetuity (PV only), and a series of unequal cash flows.
d: Demonstrate the use of a time line in modeling and solving time value of money problems.
e: Calculate the solution for time value of money problems with different frequencies of compounding.
f: Calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding.
a: Identify and compare data types.
b: Describe how data are organized for quantitative analysis.
c: Interpret frequency and related distributions.
d: Interpret a contingency table.
e: Describe ways that data may be visualized and evaluate uses of specific visualizations.
f: Describe how to select among visualization types.
g: Calculate and interpret measures of central tendency.
h: Evaluate alternative definitions of mean to address an investment problem.
i: Calculate quantiles and interpret related visualizations.
j: Calculate and interpret measures of dispersion.
k: Calculate and interpret target downside deviation.
l: Interpret skewness.
m: Interpret kurtosis.
n: Interpret correlation between two variable.
a: Define a random a variable, an outcome, and an event.
b: Identify the two defining properties of probability, including mutually exclusive and exhaustive events, and compare and contrast empirical, subjective, and a priori probabilities.
c: Describe the probability of an event in terms of odds for and against the event.
d: Calculate and interpret conditional probabilities.
e: Demonstrate the application of the multiplication and addition rules for probability.
f: Compare and contrast dependent and independent events.
g: Calculate and interpret an unconditional probability using the total probability rule.
h: Calculate and interpret the expected value, variance, and standard deviation of random variables.
i: Explain the use of conditional expectation in investment applications.
j: Interpret a probability tree and demonstrate its application to investment problems.
k: Calculate and interpret the expected value, variance, standard deviation, covariances, and correlations of portfolio returns.
l: Calculate and interpret the covariances of portfolio returns using the joint probability function.
m: Calculate and interpret an updated probability using Bayes’ formula.
n: Identify the most appropriate method to solve a particular counting problem and analyze counting problems using factorial, combination, and permutation concepts.
a: Define a probability distribution and compare and contrast discrete and continuous random variables and their probability functions.
b: Calculate and interpret probabilities for a random variable given its cumulative distribution function.
c: Describe the properties of a discrete uniform random variable, and calculate and interpret probabilities given the discrete uniform distribution function.
d: Describe the properties of the continuous uniform distribution, and calculate and interpret probabilities given a continuous uniform distribution.
e: Describe the properties of a Bernoulli random variable and a binomial random variable, and calculate and interpret probabilities given the binomial distribution function.
f: Explain the key properties of the normal distribution.
g: Contrast a multivariate distribution and a univariate distribution, and explain the role of correlation in the multivariate normal distribution.
h: Calculate the probability that a normally distributed random variable lies inside a given interval.
i: Explain how to standardize a random variable.
j: Calculate and interpret probabilities using the standard normal distribution.
k: Define shortfall risk, calculate the safety-first ratio, and identify an optimal portfolio using Roy’s safety-first criterion.
l: Explain the relationship between normal and lognormal distributions and why the lognormal distribution is used to model asset prices.
m: Calculate and interpret a continuously compounded rate of return, given a specific holding period return.
n: Describe the properties of the Student’s t-distribution, and calculate and interpret its degrees of freedom.
o: Describe the properties of the chi-square distribution and the Distribution, and calculate and interpret their degrees of freedom.
p: Describe Monte Carlo simulation.
a: Compare and contrast probability samples with non-probability samples and discuss applications of each to an investment problem.
b: Explain sampling error.
c: Compare and contrast simple random, stratified random, cluster, convenience, and judgmental sampling.
d: Explain the central limit theorem and its importance.
e: Calculate and interpret the standard error of the sample mean.
f: Identify and describe desirable properties of an estimator.
g: Contrast a point estimate and a confidence interval estimate of a population parameter.
h: Calculate and interpret a confidence interval for a population mean, given a normal distribution with 1) a known population variance, 2) an unknown population variance, or 3) an unknown population variance and a large sample size.
i: Describe the use of resampling (bootstrap, jackknife) to estimate the sampling distribution of a statistic.
j: Describe the issues regarding selection of the appropriate sample size, data snooping bias, sample selection bias, survivorship bias, look-ahead bias, and time-period bias.
a: Define a hypothesis, describe the steps of hypothesis testing, and describe and interpret the choice of the null and alternative hypotheses.
b: Compare and contrast one-tailed and two-tailed tests of hypotheses.
c: Explain a test statistic, Type I and Type II errors, a significance level, how significance levels are used in hypothesis testing, levels are used in hypothesis testing, and the power of a test.
d: Explain a decision rule and the relation between confidence intervals and hypothesis tests, and determine whether a statistically significant result is also economically meaningful.
e: Explain and interpret the p-value as it relates to hypothesis testing.
f: Describe how to interpret the significance of a test in the context of multiple tests.
g: Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the population mean of both large and small samples when the population is normally or approximately normally distributed and the variance is 1) known or 2) unknown.
h: Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the equality of the population means of two at least approximately normally distributed populations based on independent random samples with equal assumed variances.
i: Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the mean difference of two normally distributed populations.
j: Identify the appropriate test statistic and interpret the results for a hypothesis test concerning (1) the variance of a normally distributed population and (2) the equality of the variances of two normally distributed populations based on two independent random samples.
k: Compare and contrast parametric and nonparametric tests, and describe situations where each is the more appropriate type of test.
l: Explain parametric and nonparametric tests of the hypothesis that the population correlation coefficient equals zero, and determine whether the hypothesis is rejected at a given level of significance.
m: Explain tests of independence based on contingency table data.
a: Describe a simple linear regression model and the roles of the dependent and independent variables in the model.
b: Describe the least squares criterion, how it is used to estimate regression coefficients, and their interpretation.
c: Explain the assumptions underlying the simple linear regression model, and describe how residuals and residual plots indicate if these assumptions may have been violated.
d: Calculate and interpret the coefficient of determination and the F-statistic in a simple linear regression.
e: Describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and
interpret the standard error of estimate in a simple linear regression.
f: Formulate a null and an alternative hypothesis about a population value of a regression coefficient, and determine whether the null hypothesis is rejected at a given level of significance.
g: Calculate and interpret the predicted value for the dependent variable, and a prediction interval for it, given an estimated linear regression model and a value for the independent variable.
h: Describe different functional forms of simple linear regressions.
a: Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure.
b: Compare substitution and income effects.
c: Contrast normal goods with inferior goods.
d: Describe the phenomenon of diminishing marginal returns.
e: Determine and interpret breakeven and shutdown points of production.
f: Describe how economies of scale and diseconomies of scale affect costs.
a: Describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly.
b: Explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure.
c: Describe a firm’s supply function under each market structure.
d: Describe and determine the optimal price and output for firms under each market structure.
e: Explain factors affecting long-run equilibrium under each market structure.
f: Describe pricing strategy under each market structure.
g: Describe the use and limitations of concentration measures in identifying market structure.
h: Identify the type of market structure within which a firm operates.
a: Explain how the aggregate demand curve is generated.
b: Explain the aggregate supply curve in the short run and long run.
c: Explain causes of movements along and shifts in aggregate demand and supply curves.
d: Describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle.
e: Distinguish among the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation.
f: Explain how a short-run macroeconomic equilibrium may occur at a level above or below full employment.
g: Analyze the effect of combined changes in aggregate supply and demand on the economy.
h: Describe sources, measurement, and sustainability of economic growth.
i: Describe the production function approach to analyzing the sources of economic growth.
j: Define and contrast input growth with growth of total factor productivity as components of economic growth.
k: Calculate and explain gross domestic product (GDP) using expenditure and income approaches.
l: Compare the sum-of-value-added and value-of-final-output methods of calculating GDP.
m: Compare nominal and real GDP and calculate and interpret the GDP deflator.
n: Compare GDP, national income, personal income, and personal disposable income.
o: Explain the fundamental relationship among saving, investment, the fiscal, balance, and the trade balance.
a: Describe the business cycle and its phases.
b: Describe credit cycles.
c: Describe how resource use, consumer and business activity, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle.
d: Describe theories of the business cycle.
e: Interpret a set of economic indicators and describe their uses and limitations.
f: Describe types of unemployment and compare measures of unemployment.
g: Explain inflation, hyperinflation, disinflation, deflation.
h: Explain the construction of indexes used to measure inflation.
i: Compare inflation measures, including their uses and limitations.
j: Contrast cost-push and demand-pull inflation.
a: Compare monetary and fiscal policy.
b: Describe functions and definitions of money.
c: Explain the money creation process.
d: Describe theories of the demand for and supply of money.
e: Describe the Fisher effect.
f: Describe roles and objectives of central banks.
g: Contrast the costs of expected and unexpected inflation.
h: Describe tools used to implement monetary policy.
i: Describe the monetary transmission mechanism.
j: Describe qualities of effective central banks.
k: Explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates.
l: Contrast the use of inflation, interest rate, and exchange rate targeting by central banks.
m: Determine whether a monetary policy is expansionary or contractionary.
n: Describe limitations of monetary policy.
o: Describe roles and objectives of fiscal policy.
p: Describe tools of fiscal policy, including their advantages and disadvantages.
q: Describe the arguments about whether the size of a national debt relative to GDP matters.
r: Explain the implementation of implementation.
s: Determine whether a fiscal policy is expansionary or contractionary.
t: Explain the interaction of monetary and fiscal policy.
a: Describe geopolitics from a cooperation versus competition perspective.
b: Describe geopolitics and its relationship with globalization.
c: Describe tools of geopolitics and their impact on regions and economies.
d: Describe geopolitical risk and its impact on investments.
a: Compare gross domestic product and gross national product.
b: Describe benefits and costs of international trade.
c: Contrast comparative advantage and absolute advantage.
d: Compare the Ricardian and Heckscher–Ohlin models of trade and the source(s) of comparative advantage in each model.
e: Compare types of trade and capital restrictions and their economic implications.
f: Explain motivations for and advantages of trading blocs, common markets, and economic unions.
g: Describe common objectives of capital restrictions imposed by governments.
h: Describe the balance of payments accounts including their components.
i: Explain how decisions by consumers, firms, and governments affect the balance of payments.
j: Describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary Fund, and the World Trade Organization.
a: Define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates.
b: Describe functions of and participants in the foreign exchange market.
c: Calculate and interpret the percentage change in a currency relative to another currency.
d: Calculate and interpret currency cross-rates.
e: Calculate an outright forward quotation from forward quotations expressed on a points basis or in percentage terms.
f: Explain the arbitrage relationship between spot rates, forward rates, and interest rates.
g: Calculate and interpret a forward discount or premium.
h: Calculate and interpret the forward rate consistent with the spot rate and the interest rate in each currency.
i: Describe exchange rate regimes.
j: Explain the effects of exchange rates on countries’ international trade and capital flows.
a: Describe the roles of financial reporting and statement analysis.
b: Describe the roles of the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position.
c: Describe the importance of financial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates—and management’s commentary.
d: Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.
e: Identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information.
f: Describe the steps in the financial statement analysis framework.
a: Describe the objective of importance of financial reporting standards in security analysis and valuation.
b: Describe the roles of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards.
c: Describe the International Accounting Standards Board’s conceptual framework, including qualitative characteristics of financial reports, constraints on financial reports, and required reporting elements.
d: Describe general requirements for financial statements under International Financial Reporting Standards (IFRS).
e: Describe implications for financial analysis of alternative financial reporting systems and the importance of monitoring developments in financial reporting standards.
a: Describe the components of the income statement and alternative presentation formats of that statement.
b: Describe general principles of revenue recognition and accounting standards for revenue recognition.
c: Calculate revenue given information that might in the choice of revenue recognition method.
d: Describe general principles of expense recognition, specific expense recognition applications, and implications of expense recognition choices for financial analysis.
e: Describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, unusual or infrequent items) and changes in accounting policies.
f: Contrast the operating and non-operating components of the income statement.
g: Describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures.
h: Contrast dilutive and antidilutive securities and describe the implications of each for the earnings per share calculation.
i: Formulate income statements into common-size income statements.
j: Evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement.
k: Describe, calculate, and interpret comprehensive income.
l: Describe other comprehensive income and identify major types of items included in it.
a: Describe the elements of the balance sheet: assets, liabilities, and equity.
b: Describe uses and limitations of the balance sheet in financial analysis.
c: Describe alternative formats of balance sheet presentation.
d: Contrast current and non-current assets and current and non-current liabilities.
e: Describe different types of assets and liabilities and the measurement bases of each.
f: Describe the components of shareholders’ equity
g: Demonstrate the conversion of balance sheets to common-size balance sheets and interpret common-size balance sheets.
h: Calculate and interpret liquidity and solvency ratios.
a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.
b: Describe how non-cash investing and financing activities are reported.
c: Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP).
d: Compare and contrast the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method.
e: Describe how the cash flow statement is linked to the income statement and the balance sheet.
f: Describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data.
g: Demonstrate the conversion of cash flows from the indirect to direct method.
h: Analyze and interpret both reported and common-size cash flow statements.
i: Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.
a: Describe tools and techniques used in financial analysis, including their uses and limitations.
b: Identify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios.
c: Describe relationships among ratios and evaluate a company using ratio analysis.
d: Demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects of changes in its components.
e: Calculate and interpret ratios used in equity analysis and credit analysis.
f: Explain the requirements for segment reporting and calculate and interpret segment ratios.
g: Describe how ratio analysis and other techniques can be used to model and forecast earnings.
a: Contrast costs included in inventories and costs recognised as expenses in the period in which they are incurred.
b: Describe different inventory valuation methods (cost formulas).
c: Calculate and compare cost of sales, gross profit, and ending inventory using different inventory valuation methods and using perpetual and periodic inventory systems.
d: Calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods.
e: Explain LIFO reserve and LIFO liquidation and their effects on financial statements and ratios.
f: Demonstrate the conversion of a company’s reported financial statements from LIFO to FIFO for purposes of comparison.
g: Describe the measurement of inventory at the lower of cost and net realisable value.
h: Describe implications of valuing inventory at net realisable value for financial statements and ratios.
i: Describe the financial statement presentation of and disclosures relating to inventories.
j: Explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information.
k: Calculate and compare ratios of companies, including companies that use different inventory methods.
l: Analyze and compare the financial statements of companies, including companies that use different inventory methods.
a: Compare the financial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination.
b: Explain and evaluate how capitalising versus expensing costs in the period in which they are incurred affects financial statements and ratios.
c: Describe the different depreciation methods for property, plant, and equipment and calculate depreciation expense.
d: Describe how the choice of depreciation method and assumptions concerning useful life and residual value affect depreciation expense, financial statements, and ratios.
e: Explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets affect financial statements and ratios.
f: Describe the different amortisation methods for intangible assets with finite lives and calculate amortisation expense.
g: Describe how the choice of amortisation method and assumptions concerning useful life and residual value affect amortisation expense, financial statements, and ratios.
h: Describe the revaluation model.
i: Explain the impairment of property, plant, and equipment and intangible assets.
j: Explain the derecognition of property, plant, and equipment and intangible assets.
k: Describe the financial statement presentation of and disclosures relating to property, plant, and equipment and intangible assets.
l: Analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets.
m: Compare the financial reporting of investment property with that of property, plant, and equipment.
n: Identify and contrast costs that are capitalised and costs that are expensed in the period in which they are incurred.
a: Describe the differences between accounting profit and taxable income and define key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense.
b: Explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of financial analysis.
c: Calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate.
d: Calculate the tax base of a company’s assets and liabilities.
e: Evaluate the effect of tax rate changes on a company’s financial statements and ratios.
f: Identify and contrast temporary versus permanent differences in pre-tax accounting income and taxable income.
g: Explain recognition and measurement of current and deferred tax items.
h: Describe the valuation allowance for deferred tax assets—when it is required and what effect it has on financial statements.
i: Analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain how information included in these disclosures affects a company’s financial statements and financial ratios.
j: Identify the key provisions of and differences between income tax accounting under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP).
a: Determine the initial recognition, initial measurement and subsequent measurement of bonds.
b: Describe the effective interest method and calculate interest expense, amortisation of bond discounts/premiums, and interest payments.
c: Explain the derecognition of debt.
d: Describe the role of debt covenants in protecting creditors.
e: Describe the financial statement presentation of and disclosures relating to debt.
f: Explain motivations for leasing assets instead of purchasing them.
g: Explain the financial reporting of leases from a lessee’s perspective.
h: Explain the financial reporting of leases from a lessor’s perspective.
i: Compare the presentation and disclosure of defined contribution and defined benefit pension plans.
j: Calculate and interpret leverage and coverage ratios.
a: Compare and contrast financial reporting quality with the quality of reported results (including quality of earnings, cash flow, and balance sheet items).
b: Describe a spectrum for assessing financial reporting quality.
c: Explain the difference between conservative and aggressive accounting.
d: Describe motivations that might cause management to issue financial reports that are not high quality.
e: Describe conditions that are conducive to issuing low-quality, or even fraudulent, financial reports.
f: Describe mechanisms that discipline financial reporting quality and the potential limitations of those mechanisms.
g: Describe presentation choices, including non-GAAP measures, that could be used to influence an analyst’s opinion.
h: Describe accounting methods (choices and estimates) that could be used to manage earnings, cash flow, and balance sheet items.
i: Describe accounting warning signs and methods for detecting manipulation of information in financial reports.
a: Evaluate a company’s past financial performance and explain how a company’s strategy is reflected in past financial performance.
b: Demonstrate how to forecast a company’s future net income and cash flow.
c: Describe the role of financial statement analysis in assessing the credit quality of a potential debt investment.
d: Describe the use of financial statement analysis in screening for potential equity investments.
e: Explain appropriate analyst adjustments to a company’s financial statements to facilitate comparison with another company.
a: Compare business structures and describe key features of corporate issuers.
b: Compare public and private companies.
c: Compare the financial claims and motivations of lenders and owners.
a: Describe a company’s stakeholder groups, and compare their interests.
b: Describe the principal-agent relationship and conflicts that may arise between stakeholder groups.
c: Describe corporate governance and mechanisms to manage stakeholder relationships and mitigate associated risks.
d: Describe both the potential risks of poor corporate governance and stakeholder management and the benefits from effective corporate governance and stakeholder management.
e: Describe environmental and social, and governance considerations in investment analysis.
f: Describe environmental, social, and governance investment approaches.
a: Describe key features and types of business models.
b: Describe expected relations between a company’s external environment, business model, and financing needs.
c: Explain and classify types of business and financial risks for a company.
a: Describe types of capital investments made by companies.
b: Describe the capital allocation process and basic principles of capital allocation.
c: Demonstrate the use of net present value (NPV) and internal rate of return (IRR) in allocating capital and describe the advantages and disadvantages of each method.
d: Describe common capital allocation pitfalls.
e: Describe expected relations among a company’s investments, company value, and share price.
f: Describe types of real options relevant to capital investment.
a: Compare methods to finance working capital
b: Explain expected relations between working capital, liquidity, and short-term funding needs.
c: Describe sources of primary and secondary liquidity and factors affecting a company’s liquidity position.
d: Compare a company’s liquidity position with that of peers.
e: Evaluate short-term funding choices available to a company.
a: Calculate and interpret the weighted average cost of capital (WACC) of a company.
b: Describe how taxes affect the cost of capital from different capital sources.
c: Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach.
d: Calculate and interpret the cost of noncallable, nonconvertible preferred stock.
e: Calculate and interpret the cost of equity capital using the capital asset pricing model approach and the bond yield plus risk premium approach.
f: Explain and demonstrate beta estimation for public companies, thinly traded public companies, and nonpublic companies.
g: Explain and demonstrate the correct treatment of flotation costs.
a: Explain factors affecting capital structure.
b: Describe how a company’s capital structure may change over time.
c: Explain the Modigliani–Miller propositions regarding capital structure.
d: Describe the use of target capital structure in estimating WACC, and calculate and interpret target capital structure weights.
e: Describe competing stakeholder interests in capital structure decisions.
a: Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk.
b: Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage.
c: Analyze the effect of financial leverage on a company’s net income and return on equity.
d: Calculate the breakeven quantity of sales and determine the company’s net income at various sales levels.
e: Calculate and interpret the operating breakeven quantity of sales.
a: Explain the main functions of the financial system.
b: Describe classifications of assets and markets.
c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.
d: Describe types of financial intermediaries and services that they provide.
e: Compare positions an investor can take in an asset.
f: Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call.
g: Compare execution, validity, and clearing instructions.
h: Compare market orders with limit orders.
i: Define primary and secondary markets and explain how secondary markets support primary markets.
j: Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets.
k: Describe characteristics of a well-functioning financial system.
l: Describe objectives of market regulation.
a: Describe a security market index.
b: Calculate and interpret the value, price return, and total return of an index.
c: Describe the choices and issues in index construction and management.
d: Compare the different weighting methods used in index construction.
e: Calculate and analyze the value and return of an index given its weighting method.
f: Describe rebalancing and reconstitution of an index.
g: Describe uses of security market indexes.
h: Describe types of equity indexes.
i: Compare types of security market indexes.
j: Describe types of fixed-income indexes.
k: Describe indexes representing alternative investments.
a: Describe market efficiency and related concepts, including their importance to investment practitioners.
b: Contrast market value and intrinsic value.
c: Explain factors that affect a market’s efficiency.
d: Contrast weak-form, semi-strong-form, and strong-form market efficiency.
e: Explain the implications of each form of market efficiency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management.
f: Describe market anomalies.
g: Describe behavioral finance and its potential relevance to understanding market anomalies.
a: Describe characteristics of types of equity securities.
b: Describe differences in voting rights and other ownership characteristics among different equity classes.
c: Compare and contrast public and private equity securities.
d: Describe methods for investing in non-domestic equity securities.
e: Compare the risk and return characteristics of different types of equity securities.
f: Explain the role of equity securities in the financing of a company’s assets.
g: Contrast the market value and book value of equity securities.
h: Compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.
a: Explain uses of industry analysis and the relation of industry analysis to company analysis.
b: Compare methods by which companies can be grouped.
c: Explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as “growth,” “defensive,” and “cyclical.”
d: Describe current industry classification systems, and identify how a company should be classified , given a description of its activities and the classification system.
e: Explain how a company’s industry classification can be used to identify a potential “peer group” for equity valuation.
f: Describe the elements that need to be covered in a thorough industry analysis.
g: Describe the principles of strategic analysis of an industry.
h: Explain the effects of barriers to entry, industry concentration, industry capacity, and market share stability on pricing power and price competition.
i: Describe industry life-cycle models, classify an industry as to life-cycle stage, and describe limitations of the life-cycle concept in forecasting industry performance.
j: Describe macroeconomic, technological, demographic, governmental, social, and environmental influences on industry growth, profitability, and risk.
k: Compare characteristics of representative industries from the various economic sectors.
l: Describe the elements that should be covered in a thorough company analysis.
a: Evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market.
b: Describe major categories of equity valuation models.
c: Describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases.
d: Describe dividend payment chronology.
e: Explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models.
f: Explain advantages and disadvantages of each category of valuation model.
g: Calculate the intrinsic value of a non-callable, non-convertible preferred stock.
h: Calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate.
i: Identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate.
j: Explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables.
k: Calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value.
l: Describe enterprise value multiples and their use in estimating equity value.
m: Describe asset-based valuation models and their use in estimating equity value.
a: Describe basic features of a fixed-income security.
b: Describe content of a bond indenture.
c: Compare affirmative and negative covenants and identify examples of each.
d: Describe how legal, regulatory, and tax considerations affect the issuance and trading of fixed-income securities.
e: Describe how cash flows of fixed-income securities are structured.
f: Describe contingency provisions affecting the timing and/or nature of cash flows of fixed-income securities and whether such provisions benefit the borrower or the lender.
a: Describe classifications of global fixed-income markets.
b: Describe the use of interbank offered rates as reference rates in floating-rate debt.
c: Describe mechanisms available for issuing bonds in primary markets.
d: Describe secondary markets for bonds.
e: Describe securities issued by sovereign governments.
f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.
g: Describe types of debt issued by corporations.
h: Describe structured financial instruments.
i: Describe short-term funding alternatives available to banks.
j: Describe repurchase agreements (repos) and the risks associated with them.
a: Calculate a bond’s price given a market discount rate.
b: Identify the relationships among a bond’s price, coupon rate, maturity and market discount rate (yield-to-maturity).
c: Define spot rates and calculate the price of a bond using spot rates.
d: Describe and calculate the flat price, accrued interest, and the full price of a bond.
e: Describe matrix pricing.
f: Calculate annual yield on a bond for varying compounding periods in a year.
g: Calculate and interpret yield measures for fixed-rate bonds and floating-rate notes.
h: Calculate and interpret yield measures for money market instruments.
i: Define and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve.
j: Define forward rates and calculate spot rates from forward rates, forward rates from spot rates, and the price of a bond using forward rates.
k: Compare, calculate, and interpret yield spread measures.
a: Explain benefits of securitization for economies and financial markets.
b: Describe securitization, including the parties involved in the process and the roles they play.
c: Describe typical structures of securitizations, including credit tranching and time tranching.
d: Describe types and characteristics of residential mortgage loans that are typically securitized.
e: Describe types and characteristics of residential mortgage-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, and explain the cash flows and risks for each type.
f: Define prepayment risk and describe the prepayment risk of mortgage-backed securities.
g: Describe characteristics and risks of commercial mortgage-backed securities.
h: Describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type.
i: Describe collateralized debt obligations, including their cash flows and risks.
j: Describe characteristics and risks of covered bonds and how they differ from other asset-backed securities.
a: Calculate and interpret the sources of return from investing in a fixed-rate bond.
b: Define, calculate, and interpret Macaulay, modified, and effective durations.
c: Explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options.
d: Define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the benchmark yield curve.
e: Explain how a bond’s maturity, coupon, and yield level affect its interest rate risk.
f: Calculate the duration of a portfolio and explain the limitations of portfolio duration.
g: Calculate and interpret the money duration of a bond and price value of a basis point (PVBP).
h: Calculate and interpret approximate convexity and compare approximate and effective convexity.
i: Calculate the percentage price change of a bond for a specified change in yield, given the bond’s approximate duration and convexity.
j: Describe how the term structure of yield volatility affects the interest rate risk of a bond.
k: Describe the relationships among a bond’s holding period return, its duration, and the investment horizon.
l: Explain how changes in credit spread and liquidity affect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes.
m: Describe the difference between empirical duration and analytical duration.
a: Describe credit risk and credit-related risks affecting corporate bonds.
b: Describe default probability and loss severity as components of credit risk.
c: Describe seniority rankings of corporate debt and explain the potential violation of the priority of claims in a bankruptcy proceeding.
d: Compare and contrast corporate issuer credit ratings and issue credit ratings and describe the rating agency practice of “notching.”
e: Explain risks in relying on ratings from credit rating agencies.
f: Explain the four Cs (Capacity, Collateral, Covenants, and Character) of traditional credit analysis.
g: Calculate and interpret financial ratios used in credit analysis.
h: Evaluate the credit quality of a corporate bond issuer and a bond of that issuer, given key financial ratios of the issuer and the industry.
i: Describe macroeconomic, market, and issuer-specific factors that influence the level and volatility of yield spreads.
j: Explain special considerations when evaluating the credit of high-yield, sovereign, and non-sovereign government debt issuers and issues.
a: Define a derivative and describe basic features of a derivative instrument.
b: Describe the basic features of derivative markets, and contrast over-the-counter and exchange-traded derivative markets.
c: Define forward contracts, futures contracts, swaps, options (calls and puts), and credit derivatives and compare their basic characteristics.
d: Determine the value at expiration and profit from a long or a short position in a call or put option.
e: Contrast forward commitments with contingent claims.
f: Describe benefits and risks of derivative instruments.
g: Compare the use of derivatives among issuers and investors.
h: Explain how the concepts of arbitrage and replication are used in pricing derivatives.
i: Explain the difference between the spot and expected future price of an underlying and the cost of carry associated with holding the underlying asset.
j: Explain how the value and price of a forward contract are determined at initiation, during the life of the contract, and at expiration.
k: Explain how forward rates are determined for an underlying with a term structure and describe their uses.
l: Compare the value and price of forward and futures contracts.
m: Explain why forward and futures prices differ.
n: Describe how swap contracts are similar to but different from a series of forward contracts.
o: Contrast the value and price of swaps.
p: Explain the exercise value, moneyness, and time value of an option.
q: Contrast the use of arbitrage and replication concepts in pricing forward commitments and contingent claims.
r: Identify the factors that determine the value of an option and describe how each factor affects the value of an option.
s: Explain put–call parity for European options
t: Explain put–call forward parity for European option.
u: Explain how to value a derivative using a one-period binomial model.
v: Describe the concept of risk neutrality in derivatives pricing.
a: Describe types and categories of alternative investments.
b: Describe characteristics of direct investment, co-investment, and fund investment methods for alternative investments.
c: Describe investment and compensation structures commonly used in alternative investments.
d: Describe issues in performance appraisal of alternative investments.
e: Calculate and interpret returns of alternative investments both before and after fees.
f: Explain investment characteristics of private equity.
g: Explain investment characteristics of private debt.
h: Explain investment characteristics of real estate.
i: Explain investment characteristics of infrastructure.
j: Explain investment characteristics of natural resources.
k: Explain investment characteristics of hedge funds.
a: Describe the portfolio approach to investing.
b: Describe the steps in the portfolio management process.
c: Describe types of investors and distinctive characteristics and needs of each.
d: Describe defined contribution and defined benefit pension plans.
e: Describe aspects of the asset management industry.
f: Describe mutual funds and compare them with other pooled investment products.
a: Calculate and interpret major return measures and describe their appropriate uses.
b: Compare the money-weighted and time-weighted rates of return and evaluate the performance of portfolios based on these measures.
c: Describe characteristics of the major asset classes that investors consider in forming portfolios.
d: Explain risk aversion and its implications for portfolio selection.
e: Explain the selection of an optimal portfolio, given an investor’s utility (or risk aversion) and the capital allocation line.
f: Calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data.
g: Calculate and interpret portfolio standard deviation.
h: Describe the effect on a portfolio’s risk of investing in assets that are less than perfectly correlated.
i: Describe and interpret the minimum-variance and efficient frontiers of risky assets and the global minimum-variance portfolio.
a: Describe the implications of combining a risk-free asset with a portfolio of risky assets.
b: Explain the capital allocation line (CAL) and the capital market line (CML).
c: Explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk.
d: Explain return generating models (including the market model) and their uses.
e: Calculate and interpret beta.
f: Explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML).
g: Calculate and interpret the expected return of an asset using the CAPM.
h: Describe and demonstrate applications of the CAPM and the SML.
i: Calculate and interpret the Sharpe ratio, Treynor ratio, M2, and Jensen’s alpha.
a: Describe the reasons for a written investment policy statement (IPS).
b: Describe the major components of an IPS.
c: Describe risk and return objectives and how they may be developed for a client.
d: Explain the difference between the willingness and the ability (capacity) to take risk in analyzing an investor’s financial risk tolerance.
e: Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets.
f: Explain the specification of asset classes in relation to asset allocation.
g: Describe the principles of portfolio construction and the role of asset allocation in relation to the IPS.
h: Describe how environmental, social, and governance (ESG) considerations may be integrated into portfolio planning and construction.
a: Compare and contrast cognitive errors and emotional biases.
b: Discuss commonly recognized behavioral biases and their implications for financial decision making.
c: Describe how behavioral biases of investors can lead to market characteristics that may not be explained by traditional finance.
a: Define risk management.
b: Describe features of a risk management framework.
c: Define risk governance and describe elements of effective risk governance.
d: Explain how risk tolerance affects risk management.
e: Describe risk budgeting and its role in risk governance.
f: Identify financial and non-financial sources of risk and describe how they may interact.
g: Describe methods for measuring and modifying risk exposures and factors to consider in choosing among the methods.
a: Explain principles and assumptions of technical analysis.
b: Describe potential links between technical analysis and behavioral finance.
c: Compare principles of technical analysis and fundamental analysis.
d: Describe and interpret different types of technical analysis charts.
e: Explain uses of trend, support, and resistance lines.
f: Explain common chart patterns.
g: Explain common technical indicators.
h: Describe principles of intermarket analysis.
i: Explain technical analysis applications to portfolio management.
a: Describe “Fintech.”
b: Describe Big Data, artificial intelligence, and machine learning.
c: Describe fintech applications to investment management.
d: Describe financial applications of distributed ledger technology.
a: Explain ethics.
b: Describe the role of a code of ethics in defining a profession.
c: Describe professions and how they establish trust.
d: Describe the need for high ethical standards in investment management.
e: Explain professionalism in investment management.
f: Identify challenges to ethical behavior.
g: Compare and contrast ethical standards with legal standards.
h: Describe and apply a framework for ethical decision making.
a: Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards.
b: Identify the six components of the Code of Ethics and the seven Standards of Professional Conduct.
c: Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each Standard.
a: Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity.
b: Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
c: Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
a: Explain why the GIPS standards were created, who can claim compliance, and who benefits from compliance.
b: Describe the key concepts of the GIPS standards for firms.
c: Explain the purpose of composites in performance reporting.
d: Describe the fundamentals of compliance, including the recommendations of the GIPS standards with respect to the definition of the firm and the firm’s definition of discretion.
e: Describe the concept of independent verification.
a: Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
a: Interpret interest rates as required rates of return, discount rates, or opportunity costs and explain an interest rate as the sum of a real risk-free rate and premiums that compensate investors for bearing distinct types of risk.
b: Calculate and interpret different approaches to return measurement over time and describe their appropriate uses.
c: Compare the money-weighted and time-weighted rates of return and evaluate the performance of portfolios based on these measures.
d: Calculate and interpret annualized return measures and continuously compounded returns, and describe their appropriate uses.
e: Calculate and interpret major return measures and describe their appropriate uses.
a: Calculate and interpret the present value (PV) of fixed-income and equity instruments based on expected future cash flows.
b: Calculate and interpret the implied return of fixed-income instruments and required return and implied growth of equity instruments given the present value (PV) and cash flows.
c: Explain the cash flow additivity principle, its importance for the no-arbitrage condition, and its use in calculating implied forward interest rates, forward exchange rates, and option values.
a: Calculate, interpret, and evaluate measures of central tendency and location to address an investment problem.
b: Calculate, interpret, and evaluate measures of dispersion to address an investment problem.
c: Interpret and evaluate measures of skewness and kurtosis to address an investment problem.
d: Interpret correlation between two variables to address an investment problem.
a: Calculate expected values, variances, and standard deviations and demonstrate their application to investment problems.
b: Formulate an investment problem as a probability tree and explain the use of conditional expectations in investment application.
c: Calculate and interpret an updated probability in an investment setting using
Bayes’ formula.
a: Calculate and interpret the expected value, variance, standard deviation, covariances, and correlations of portfolio returns.
b: Calculate and interpret the covariance and correlation of portfolio returns using a joint probability function for returns.
c: Define shortfall risk, calculate the safety-first ratio, and identify an optimal portfolio using Roy’s safety-first criterion.
a: Explain the relationship between normal and lognormal distributions and why the lognormal distribution is used to model asset prices when using continuously compounded asset returns.
b: describe Monte Carlo simulation and explain how it can be used in investment applications.
c: Describe the use of bootstrap resampling in conducting a simulation based on observed data in investment applications.
a: Compare and contrast simple random, stratified random, cluster, convenience, and judgmental sampling and their implications for sampling error in an investment problem.
b: Explain the central limit theorem and its importance for the distribution and standard error of the sample mean.
c: Describe the use of resampling (bootstrap, jackknife) to estimate the sampling distribution of a statistic.
a: Explain hypothesis testing and its components, including statistical significance, Type I and Type II errors, and the power of a test.
b: Construct hypothesis tests and determine their statistical significance, the associated Type I and Type II errors, and power of the test given a significance level.
c: Compare and contrast parametric and nonparametric tests, and describe situations where each is the more appropriate type of test.
a: Explain parametric and nonparametric tests of the hypothesis that the population correlation coefficient equals zero, and determine whether the hypothesis is rejected at a given level of significance.
b: Explain tests of independence based on contingency table data.
a: Describe a simple linear regression model, how the least squares criterion is used to estimate regression coefficients, and the interpretation of these coefficients.
b: Explain the assumptions underlying the simple linear regression model, and describe how residuals and residual plots indicate if these assumptions may have been violated.
c: Calculate and interpret measures of fit and formulate and evaluate tests of fit and of regression coefficients in a simple linear regression.
d: Describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and interpret the standard error of estimate in a simple linear regression.
e: Calculate and interpret the predicted value for the dependent variable, and a prediction interval for it, given an estimated linear regression model and a value for the independent variable.
f: Describe different functional forms of simple linear regressions.
a: Describe aspects of “fintech” that are directly relevant for the gathering and analyzing of financial data.
b: Describe Big Data, artificial intelligence, and machine learning.
c: Describe applications of Big Data and Data Science to investment management.
a: Determine and interpret breakeven and shutdown points of production, as well as how economies and diseconomies of scale affect costs under perfect and imperfect competition.
b: Describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly.
c: Explain supply and demand relationships under monopolistic competition, including the optimal price and output for firms as well as pricing strategy.
d: Explain supply and demand relationships under oligopoly, including the optimal price and output for firms as well as pricing strategy.
e: Identify the type of market structure within which a firm operates and describe the use and limitations of concentration measures.
a: Describe the business cycle and its phases.
b: Describe credit cycles.
c: Describe how resource use, consumer and business activity, housing sector activity, and external trade sector activity vary over the business cycle and describe their measurement using economic indicators.
a: Compare monetary and fiscal policy.
b: Describe roles and objectives of fiscal policy as well as arguments as to whether the size of a national debt relative to GDP matters.
c: Describe tools of fiscal policy, including their advantages and disadvantages.
d: Explain the implementation of fiscal policy and difficulties of implementation as well as whether a fiscal policy is expansionary or contractionary.
a: Describe the roles and objectives of central banks.
b: Describe tools used to implement monetary policy tools and the monetary transmission mechanism, and explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates.
c: Describe qualities of effective central banks; contrast their use of inflation, interest rate, and exchange rate targeting in expansionary or contractionary monetary policy; and describe the limitations of monetary policy.
d: Explain the interaction of monetary and fiscal policy.
a: Describe geopolitics from a cooperation versus competition perspective.
b: Describe geopolitics and its relationship with globalization.
c: Describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary Fund, and the World Trade Organization.
d: Describe geopolitical risk.
e: Describe tools of geopolitics and their impact on regions and economies.
f: Describe the impact of geopolitical risk on investments.
a: Describe the benefits and costs of international trade.
b: Compare types of trade restrictions, such as tariffs, quotas, and export subsidies, and their economic implications.
c: Explain motivations for and advantages of trading blocs, common markets, and economic unions.
a: Describe the foreign exchange market, including its functions and participants, distinguish between nominal and real exchange rates, and calculate and interpret the percentage change in a currency relative to another currency.
b: Describe exchange rate regimes and explain the effects of exchange rates on countries’ international trade and capital flows.
c: Describe common objectives of capital restrictions imposed by governments.
a: Calculate and interpret currency cross-rates.
b: Explain the arbitrage relationship between spot and forward exchange rates and interest rates, calculate a forward rate using points or in percentage terms, and interpret a forward discount or premium.
a: Describe characteristics of the major asset classes that investors consider in forming portfolios.
b: Explain risk aversion and its implications for portfolio selection.
c: explain the selection of an optimal portfolio, given an investor’s utility (or risk aversion) and the capital allocation line.
d: Calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data.
e: Calculate and interpret portfolio standard deviation.
f: Describe the effect on a portfolio’s risk of investing in assets that are less than perfectly correlated.
g: Describe and interpret the minimum-variance and efficient frontiers of risky assets and the global minimum-variance portfolio.
a: Describe the implications of combining a risk-free asset with a portfolio of risky assets.
b: Explain the capital allocation line (CAL) and the capital market line (CML).
c: Explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk.
d: Explain return generating models (including the market model) and their uses.
e: Calculate and interpret beta.
f: Explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML).
g: Calculate and interpret the expected return of an asset using the CAPM.
h: Describe and demonstrate applications of the CAPM and the SML.
i: Calculate and interpret the Sharpe ratio, Treynor ratio, M^2, and Jensen’s alpha.
a: Describe the portfolio approach to investing.
b: Describe the steps in the portfolio management process.
c: Describe types of investors and distinctive characteristics and needs of each.
d: Describe defined contribution and defined benefit pension plans.
e: Describe aspects of the asset management industry.
f: Describe mutual funds and compare them with other pooled investment products.
a: Describe the reasons for a written investment policy statement (IPS).
b: Describe the major components of an IPS.
c: Describe risk and return objectives and how they may be developed for a client.
d: Explain the difference between the willingness and the ability (capacity) to take risk in analyzing an investor’s financial risk tolerance.
e: Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets.
f: Explain the specification of asset classes in relation to asset allocation.
g: Describe the principles of portfolio construction and the role of asset allocation in relation to the IPS.
h: Describe how environmental, social, and governance (ESG) considerations may be integrated into portfolio planning and construction.
a: Compare and contrast cognitive errors and emotional biases.
b: Discuss commonly recognized behavioral biases and their implications for financial decision making.
c: Describe how behavioral biases of investors can lead to market characteristics that may not be explained by traditional finance.
a: Define risk management.
b: Describe features of a risk management framework.
c: Define risk governance and describe elements of effective risk governance.
d: Explain how risk tolerance affects risk management.
e: Describe risk budgeting and its role in risk governance.
f: Identify financial and non-financial sources of risk and describe how they may interact.
g: Describe methods for measuring and modifying risk exposures and factors to consider in choosing among the methods.
a: Compare the organizational forms of businesses.
b: Describe key features of corporate issuers.
c: Compare publicly and privately owned corporate issuers.
a: Compare the financial claims and motivations of lenders and shareholders.
b: Describe a company’s stakeholder groups and compare their interests.
c: Describe environmental, social, and governance factors of corporate issuers considered by investors.
a: Describe the principal-agent relationship and conflicts that may arise between stakeholder groups.
b: Describe corporate governance and mechanisms to manage stakeholder
relationships and mitigate associated risks.
c: Describe potential risks of poor corporate governance and stakeholder management and benefits of effective corporate governance and stakeholder management.
a: Explain the cash conversion cycle and compare issuers’ cash conversion cycles.
b: Explain liquidity and compare issuers’ liquidity levels.
c: Describe issuers’ objectives and compare methods for managing working capital and liquidity.
a: Describe types of capital investments
b: Describe the capital allocation process, calculate net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC), and contrast their use in capital allocation.
c: Describe principles of capital allocation and common capital allocation pitfalls.
d: Describe types of real options relevant to capital investments.
a: Calculate and interpret the weighted-average cost of capital for a company.
b: Explain factors affecting capital structure and the weighted-average cost of capital.
c: Explain the Modigliani–Miller propositions regarding capital structure.
d: Describe optimal and target capital structures.
a: Describe key features of business models.
b: Describe various types of business models.
a: Describe the steps in the financial statement analysis framework.
b: Describe the roles of financial statement analysis.
c: Describe the importance of regulatory filings, financial statement notes and supplementary information, management’s commentary, and audit reports.
d: Describe implications for financial analysis of alternative financial reporting systems and the importance of monitoring developments in financial reporting standards.
e: Describe information sources that analysts use in financial statement analysis besides annual and interim financial reports.
a: Describe general principles of revenue recognition, specific revenue recognition applications, and implications of revenue recognition choices for financial analysis.
b: Describe general principles of expense recognition, specific expense recognition applications, implications of expense recognition choices for financial analysis and contrast costs that are capitalized versus those that are expensed in the period in which they are incurred.
c: Describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, unusual or infrequent items) and changes in accounting policies.
d: Describe how earnings per share is calculated and calculate and interpret a company’s basic and diluted earnings per share for companies with simple and complex capital structures including those with antidilutive securities.
e: Evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement.
a: Explain the financial reporting and disclosures related to intangible assets.
b: Explain the financial reporting and disclosures related to goodwill.
c: Explain the financial reporting and disclosures related to financial instruments.
d: Explain the financial reporting and disclosures related to non-current liabilities.
e: Calculate and interpret common-size balance sheets and related financial ratios.
a: Describe how the cash flow statement is linked to the income statement and the balance sheet.
b: Describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data.
c: Demonstrate the conversion of cash flows from the indirect to direct method.
d: Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP).
a: Analyze and interpret both reported and common-size cash flow statements.
b: Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.
a: Describe the measurement of inventory at the lower of cost and net realisable value and its implications for financial statements and ratios.
b: Calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods.
c: Describe the presentation and disclosures relating to inventories and explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information.
a: Compare the financial reporting of the following types of intangible assets: purchased, internally developed, and acquired in a business combination.
b: Explain and evaluate how impairment and derecognition of property, plant, and equipment and intangible assets affect the financial statements and ratios.
c: Analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets.
a: Explain the financial reporting of leases from the perspectives of lessors and lessees.
b: Explain the financial reporting of defined contribution, defined benefit, and stock-based compensation plans.
c: Describe the financial statement presentation of and disclosures relating to long-term liabilities and share-based compensation.
a: Contrast accounting profit, taxable income, taxes payable, and income tax expense and temporary versus permanent differences between accounting profit and taxable income.
b: Explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of financial analysis.
c: Calculate, interpret, and contrast an issuer’s effective tax rate, statutory tax rate, and cash tax rate.
d: Analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain how information included in these disclosures affects a company’s financial statements and financial ratios.
a: Compare financial reporting quality with the quality of reported results (including quality of earnings, cash flow, and balance sheet items).
b: Describe a spectrum for assessing financial reporting quality.
c: Explain the difference between conservative and aggressive accounting.
d: Describe motivations that might cause management to issue financial reports that are not high quality and conditions that are conducive to issuing low-quality, or even fraudulent, financial reports.
e:Describe mechanisms that discipline financial reporting quality and the potential limitations of those mechanisms.
f: Describe presentation choices, including non-GAAP measures, that could be used to influence an analyst’s opinion.
g: Describe accounting methods (choices and estimates) that could be used to manage earnings, cash flow, and balance sheet items.
h: Describe accounting warning signs and methods for detecting manipulation of information in financial reports.
a: Describe tools and techniques used in financial analysis, including their uses and limitations.
b: Calculate and interpret activity, liquidity, solvency, and profitability ratios.
c: Describe relationships among ratios and evaluate a company using ratio analysis.
d: Demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects of changes in its components.
e: Describe the uses of industry-specific ratios used in financial analysis.
f: Describe how ratio analysis and other techniques can be used to model and forecast earnings.
a: Demonstrate the development of a sales-based pro forma company model.
b: Explain how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases.
c: Explain how the competitive position of a company based on a Porter’s five forces analysis affects prices and costs.
d: Explain how to forecast industry and company sales and costs when they are subject to price inflation or deflation.
e: Explain considerations in the choice of an explicit forecast horizon and an analyst’s choices in developing projections beyond the short-term forecast horizon.
a: Explain the main functions of the financial system.
b: Describe classifications of assets and markets.
c: Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.
d: Describe types of financial intermediaries and services that they provide.
e: Compare positions an investor can take in an asset.
f: Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call.
g: Compare execution, validity, and clearing instructions.
h: Compare market orders with limit orders.
i: Define primary and secondary markets and explain how secondary markets support primary markets.
j: Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets.
k: Describe characteristics of a well-functioning financial system.
l: Describe objectives of market regulation.
a: Describe a security market index.
b: Calculate and interpret the value, price return, and total return of an index.
c: Describe the choices and issues in index construction and management.
d: Compare the different weighting methods used in index construction.
e: Calculate and analyze the value and return of an index given its weighting method.
f: Describe rebalancing and reconstitution of an index.
g: Describe uses of security market indexes.
h: Describe types of equity indexes.
i: Compare types of security market indexes.
j: Describe types of fixed-income indexes.
k: Describe indexes representing alternative investments.
a: Describe market efficiency and related concepts, including their importance to investment practitioners.
b: Contrast market value and intrinsic value.
c: Explain factors that affect a market’s efficiency.
d: Contrast weak-form, semi-strong-form, and strong-form market efficiency.
e: Explain the implications of each form of market efficiency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management.
f: Describe market anomalies.
g: Describe behavioral finance and its potential relevance to understanding market anomalies.
a: Describe characteristics of types of equity securities.
b: Describe differences in voting rights and other ownership characteristics among different equity classes.
c: Compare and contrast public and private equity securities.
d: Describe methods for investing in non-domestic equity securities.
e: Compare the risk and return characteristics of different types of equity securities.
f: Explain the role of equity securities in the financing of a company’s assets.
g: Contrast the market value and book value of equity securities.
h: Compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.
a: Describe the elements that should be covered in a thorough company research report.
b: Determine a company’s business model.
c: Evaluate a company’s revenue and revenue drivers, including pricing power.
d: Evaluate a company’s operating profitability and working capital using key measures.
e: Evaluate a company’s capital investments and capital structure.
a: Describe the purposes of, and steps involved in, industry and competitive analysis.
b: Describe industry classification methods and compare methods by which companies can be grouped.
c: Determine an industry’s size, growth characteristics, profitability, and market share trends.
d: Analyze an industry’s structure and external influences using Porter’s Five Forces and PESTLE frameworks.
e: Evaluate the competitive strategy and position of a company.
a: Explain principles and approaches to forecasting a company’s financial results and position.
b: Explain approaches to forecasting a company’s revenues.
c: Explain approaches to forecasting a company’s operating expenses and working capital.
d: Explain approaches to forecasting a company’s capital investments and capital structure.
e: Describe the use of scenario analysis in forecasting.
f: Evaluate the competitive strategy and position of a company.
a: Evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market.
b: Describe major categories of equity valuation models.
c: Describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases.
d: Describe dividend payment chronology.
e: Explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models.
f: Explain advantages and disadvantages of each category of valuation model.
g: Calculate the intrinsic value of a non-callable, non-convertible preferred stock.
h: Calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate.
i: Identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate.
j: Explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables.
k: Calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value.
l: Describe enterprise value multiples and their use in estimating equity value.
m: Describe asset-based valuation models and their use in estimating equity value.
a: Describe the features of a fixed-income security.
b: Describe the contents of a bond indenture and contrast affirmative and negative covenants.
a: Describe common cash flow structures of fixed-income instruments and contrast cash flow contingency provisions that benefit issuers and investors.
b: Describe how legal, regulatory, and tax considerations affect the issuance and trading of fixed-income securities.
a: Describe fixed-income market segments and their issuer and investor participants.
b: Describe types of fixed-income indexes.
c: Compare primary and secondary fixed-income markets to equity markets.
a: Compare short-term funding alternatives available to corporations and financial institutions.
b: Describe repurchase agreements (repos), their uses, and their benefits and risks.
c: Contrast the long-term funding of investment-grade versus high-yield corporate issuers.
a: Describe funding choices by sovereign and non-sovereign governments, quasi-government entities, and supranational agencies.
b: Contrast the issuance and trading of government and corporate fixed-income instruments.
a: Calculate a bond’s price given a yield-to-maturity on or between coupon dates.
b: Identify the relationships among a bond’s price, coupon rate, maturity, and yield-to-maturity.
c: Describe matrix pricing.
a: Calculate annual yield on a bond for varying compounding periods in a year.
b: Compare, calculate, and interpret yield and yield spread measures for fixed-rate bonds.
a: Calculate and interpret yield spread measures for floating-rate instruments.
b: Calculate and interpret yield measures for money market instruments.
a: Define spot rates and the spot curve, and calculate the price of a bond using spot rates.
b: Define par and forward rates, and calculate par rates, forward rates from spot rates, spot rates from forward rates, and the price of a bond using forward rates.
c: Compare the spot curve, par curve, and forward curve.
a: Calculate and interpret the sources of return from investing in a fixed-rate bond.
b: Describe the relationships among a bond’s holding period return, its Macaulay duration, and the investment horizon.
c: Define, calculate, and interpret Macaulay duration.
a: Define, calculate, and interpret modified duration, money duration, and the price value of a basis point (PVBP).
b: Explain how a bond’s maturity, coupon, and yield level affect its interest rate risk.
a: Calculate and interpret convexity and describe the convexity adjustment.
b: Calculate the percentage price change of a bond for a specified change in yield, given the bond’s duration and convexity.
c: Calculate portfolio duration and convexity and explain the limitations of these measures.
a: Explain why effective duration and effective convexity are the most appropriate measures of interest rate risk for bonds with embedded options.
b: Calculate the percentage price change of a bond for a specified change in benchmark yield, given the bond’s effective duration and convexity.
c: Define key rate duration and describe its use to measure price sensitivity of fixed-income instruments to benchmark yield curve changes.
d: Describe the difference between empirical duration and analytical duration.
a: Describe credit risk and its components, probability of default and loss given default.
b: Describe the uses of ratings from credit rating agencies and their limitations.
c: Describe macroeconomic, market, and issuer-specific factors that influence the level and volatility of yield spreads.
a: Explain special considerations when evaluating the credit of sovereign and non-sovereign government debt issuers and issues.
a: Describe the qualitative and quantitative factors used to evaluate a corporate borrower’s creditworthiness.
b: Calculate and interpret financial ratios used in credit analysis.
c: Describe the seniority rankings of debt, secured versus unsecured debt and the priority of claims in bankruptcy, and their impact on credit ratings.
a: Explain benefits of securitization for issuers, investors, economies, and financial markets.
b: Describe securitization, including the parties and the roles they play.
a: Describe characteristics and risks of covered bonds and how they differ from other asset-backed securities.
b: Describe typical credit enhancement structures used in securitizations.
c: Describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type.
d: Describe collateralized debt obligations, including their cash flows and risks.
a: Define prepayment risk and describe time tranching structures in securitizations and their purpose.
b: Describe fundamental features of residential mortgage loans that are securitized.
c: Describe types and characteristics of residential mortgage-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, and explain the cash flows and risks for each type.
d: Describe characteristics and risks of commercial mortgage-backed securities.
a: Define a derivative and describe basic features of a derivative instrument.
b: Describe the basic features of derivative markets, and contrast over-the-counter and exchange-traded derivative markets.
a: Define forward contracts, futures contracts, swaps, options (calls and puts), and credit derivatives and compare their basic characteristics.
b: Determine the value at expiration and profit from a long or a short position in a call or put option.
c: Contrast forward commitments with contingent claims.
a: Describe benefits and risks of derivative instruments.
b: Compare the use of derivatives among issuers and investors.
a: Explain how the concepts of arbitrage and replication are used in pricing derivatives.
b: Explain the difference between the spot and expected future price of an underlying and the cost of carry associated with holding the underlying asset.
a: Explain how the value and price of a forward contract are determined at initiation, during the life of the contract, and at expiration.
b: Explain how forward rates are determined for interest rate forward contracts and describe the uses of these forward rates.
a: Compare the value and price of forward and futures contracts.
b: Explain why forward and futures prices differ.
a: Describe how swap contracts are similar to but different from a series of forward contracts.
b: Contrast the value and price of swaps.
a: Explain the exercise value, moneyness, and time value of an option.
b: Contrast the use of arbitrage and replication concepts in pricing forward commitments and contingent claims.
c: Identify the factors that determine the value of an option and describe how each factor affects the value of an option.
a: Explain put–call parity for European options.
b: Explain put–call forward parity for European options.
a: Explain how to value a derivative using a one-period binomial model.
b: Describe the concept of risk neutrality in derivatives pricing.
a: Describe features and categories of alternative investments.
b: Compare direct investment, co-investment, and fund investment methods for alternative investments.
c: Describe investment ownership and compensation structures commonly used in alternative investments.
a: Describe the performance appraisal of alternative investments.
b: Calculate and interpret alternative investment returns both before and after fees.
a: Explain features of private equity and its investment characteristics.
b: Explain features of private debt and its investment characteristics.
c:Describe the diversification benefits that private capital can provide.
a: Explain features and characteristics of real estate.
b: Explain the investment characteristics of real estate investments.
c: Explain features and characteristics of infrastructure.
d: Explain the investment characteristics of infrastructure investments.
a: Explain features of raw land, timberland, and farmland and their investment characteristics.
b: Describe features of commodities and their investment characteristics.
c: Analyze sources of risk, return, and diversification among natural resource investments.
a: Explain investment features of hedge funds and contrast them with other asset classes.
b: Describe investment forms and vehicles used in hedge fund investments.
c: Analyze sources of risk, return, and diversification among hedge fund investments.
a: Describe financial applications of distributed ledger technology.
b: Explain investment features of digital assets and contrast them with other asset classes.
c: Describe investment forms and vehicles used in digital asset investments.
d: Analyze sources of risk, return, and diversification among digital asset investments.
a: Explain ethics.
b: Describe the role of a code of ethics in defining a profession.
c: Describe professions and how they establish trust.
d: Describe the need for high ethical standards in investment management.
e: Explain professionalism in investment management.
f: Identify challenges to ethical behavior.
g: Compare and contrast ethical standards with legal standards.
h: Describe a framework for ethical decision making.
a: Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards.
b: Identify the six components of the Code of Ethics and the seven Standards of Professional Conduct.
c: Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each Standard.
a: Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity.
b: Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
c: Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
a: Explain why the GIPS standards were created, who can claim compliance, and who benefits from compliance.
b: Describe the key concepts of the GIPS Standards for Firms.
c: Explain the purpose of composites in performance reporting.
d: Describe the fundamentals of compliance, including the recommendations of the GIPS standards with respect to the definition of the firm and the firm’s definition of discretion.
e: Describe the concept of independent verification.
a: Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
a: Describe the types of investment problems addressed by multiple linear regression and the regression process.
b: Formulate a multiple linear regression model, describe the relation between the dependent variable and several independent variables, and interpret estimated regression coefficients.
c: Explain the assumptions underlying a multiple linear regression model and interpret residual plots indicating potential violations of these assumptions.
d: Evaluate how well a multiple regression model explains the dependent variable by analyzing ANOVA table results and measures of goodness of fit.
e: Formulate hypotheses on the significance of two or more coefficients in a multiple regression model and interpret the results of the joint hypothesis tests.
f: Calculate and interpret a predicted value for the dependent variable, given the estimated regression model and assumed values for the independent variables.
g: Describe how model misspecification affects the results of a regression analysis and how to avoid common forms of misspecification.
h: Explain the types of heteroskedasticity and how it affects statistical inference.
i: Explain serial correlation and how it affects statistical inference.
j: Explain multicollinearity and how it affects regression analysis.
k: Describe influence analysis and methods of detecting influential data points.
l: Formulate and interpret a multiple regression model that includes qualitative independent variables.
m: Formulate and interpret a logistic regression model.
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.
b: Describe factors that determine whether a linear or a log-linear trend should be used with a particular time series and evaluate limitations of trend models.
c: Explain the requirement for a time series to be covariance stationary and describe the significance of a series that is not stationary.
d: Describe the structure of an autoregressive (AR) model of order p and calculate one- and two-period-ahead forecasts given the estimated coefficients.
e: Explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series.
f: Explain mean reversion and calculate a mean-reverting level.
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.
h: Explain the instability of coefficients of time-series models.
i: Describe characteristics of random walk processes and contrast them to covariance stationary processes.
j: Describe 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.
k: Describe the steps of the unit root test for nonstationarity and explain the relation of the test to autoregressive time-series models.
l: Explain 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.
m: Explain autoregressive conditional heteroskedasticity (ARCH) and describe how ARCH models can be applied to predict the variance of a time series.
n: Explain how time-series variables should be analyzed for non stationarity and/or cointegration before use in a linear regression.
o: Determine an appropriate time-series model to analyze a given investment problem and justify that choice.
a: Describe supervised machine learning, unsupervised machine learning, and deep learning.
b: Describe overfitting and identify methods of addressing it.
c: Describe supervised machine learning algorithms—including penalized regression, support vector machine, k-nearest neighbor, classification and regression tree, ensemble learning, and random forest—and determine the problems for which they are best suited.
d: Describe unsupervised machine learning algorithms—including principal components analysis, k-means clustering, and hierarchical clustering—and determine the problems for which they are best suited.
e: Describe neural networks, deep learning nets, and reinforcement learning.
a: Identify and explain steps in a data analysis project.
b: Describe objectives, steps, and examples of preparing and wrangling data.
c: Evaluate the fit of a machine learning algorithm.
d: Describe objectives, methods, and examples of data exploration.
e: Describe methods for extracting, selecting and engineering features from textual data.
f: Describe objectives, steps, and techniques in model training.
g: Describe preparing, wrangling, and exploring text-based data for financial forecasting.
a: Calculate and interpret the bid–offer spread on a spot or forward currency quotation and describe the factors that affect the bid–offer spread.
b: Identify a triangular arbitrage opportunity and calculate its profit, given the bid–offer quotations for three currencies.
c: Explain spot and forward rates and calculate the forward premium/discount for a given currency.
d: Calculate the mark-to-market value of a forward contract.
e: Explain international parity conditions (covered and uncovered interest rate parity, forward rate parity, purchasing power parity, and the international Fisher effect).
f: Describe relations among the international parity conditions.
g: Evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates.
h: Explain approaches to assessing the long-run fair value of an exchange rate.
i: Describe the carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade.
j: Explain how flows in the balance of payment accounts affect currency exchange rates.
k: Describe objectives of central bank or government intervention and capital controls and describe the effectiveness of intervention and capital controls.
l: Describe warning signs of a currency crisis.
a: Compare factors favoring and limiting economic growth in developed and developing economies.
b: Describe the relation between the long-run rate of stock market appreciation and the sustainable growth rate of the economy.
c: Explain why potential GDP and its growth rate matter for equity and fixed income investors.
d: Contrast capital deepening investment and technological progress and explain how each affects economic growth and labor productivity.
e: Demonstrate forecasting potential GDP based on growth accounting relations.
f: Explain how natural resources affect economic growth and evaluate the argument that limited availability of natural resources constrains economic growth.
g: Explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth.
h: Explain how investment in physical capital, human capital, and technological development affects economic growth.
i: Compare classical growth theory, neoclassical growth theory, and endogenous growth theory.
j: Explain and evaluate convergence hypotheses.
k: Describe the economic rationale for governments to provide incentives to private investment in technology and knowledge.
l: Describe the expected impact of removing trade barriers on capital investment and profits, employment and wages, and growth in the economies involved.
a: Describe the economic rationale for regulatory intervention.
b: Explain the purposes of regulating commerce and financial markets.
c: Describe anticompetitive behaviors targeted by antitrust laws globally and evaluate the antitrust risk associated with a given business strategy.
d: Describe classifications of regulations and regulators.
e: Describe uses of self-regulation in financial markets.
f: Describe regulatory interdependencies and their effects.
g: Describe tools of regulatory intervention in markets.
h: Describe benefits and costs of regulation.
i: Describe the considerations when evaluating the effects of regulation on an industry.
a: Describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities.
b: Compare and contrast IFRS and US GAAP in their classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities.
c: Analyze how different methods used to account for intercorporate investments affect financial statements and ratios.
a: Describe the types of post-employment benefit plans and implications for financial reports.
b: Explain and calculate measures of a defined benefit pension obligation (i.e., present value of the defined benefit obligation and projected benefit obligation) and net pension liability (or asset).
c: Describe the components of a company’s defined benefit pension costs.
d: Explain and calculate the effect of a defined benefit plan’s assumptions on the defined benefit obligation and periodic pension cost.
e: Explain and calculate how adjusting for items of pension and other post-employment benefits that are reported in the notes to the financial statements affects financial statements and ratios.
f: Interpret pension plan note disclosures including cash flow related information.
g: Explain issues associated with accounting for share-based compensation.
h: Explain how accounting for stock grants and stock options affects financial statements, and the importance of companies’ assumptions in valuing these grants and options.
a: Compare and contrast presentation in (reporting) currency, functional currency, and local currency.
b: Describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses.
c: Analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company.
d: Compare the current rate method and the temporal method, evaluate how each affects the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios.
e: Calculate the translation effects and evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s presentation currency.
f: Analyze how the current rate method and the temporal method affect financial statements and ratios.
g: Analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios.
h: Describe how multinational operations affect a company’s effective tax rate.
i: Explain how changes in the components of sales affect the sustainability of sales growth.
j: Analyze how currency fluctuations potentially affect financial results, given a company’s countries of operation.
a: Describe how financial institutions differ from other companies.
b: Describe key aspects of financial regulations of financial institutions.
c: Explain the CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) approach to analyzing a bank, including key ratios and its limitations.
d: Analyze a bank based on financial statements and other factors.
e: Describe other factors to consider in analyzing a bank.
f: Describe key ratios and other factors to consider in analyzing an insurance company.
a: Demonstrate the use of a conceptual framework for assessing the quality of a company’s financial reports.
b: Explain potential problems that affect the quality of financial reports.
c: Describe how to evaluate the quality of a company’s financial reports.
d: Evaluate the quality of a company’s financial reports.
e: Describe indicators of earnings quality.
f: Describe the concept of sustainable (persistent) earnings.
g: Explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion.
h: Evaluate the earnings quality of a company.
i: Evaluate the cash flow quality of a company.
j: Describe indicators of balance sheet quality.
k: Evaluate the balance sheet quality of a company.
l: Describe indicators of cash flow quality.
m: Describe sources of information about risk.
a: Demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management’s discussion of financial results).
b: Identify financial reporting choices and biases that affect the quality and comparability of companies’ financial statements and explain how such biases may affect financial decisions.
c: Evaluate the quality of a company’s financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions.
d: Evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios.
e: Analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company’s financial statements, financial ratios, and overall financial condition.
a: Compare top-down, bottom-up, and hybrid approaches for developing inputs to equity valuation models.
b: Compare “growth relative to GDP growth” and “market growth and market share” approaches to forecasting revenue.
c: Evaluate whether economies of scale are present in an industry by analyzing operating margins and sales levels.
d: Demonstrate methods to forecast cost of goods sold and operating expenses.
e: Demonstrate methods to forecast non-operating items, financing costs, and income taxes.
f: Describe approaches to balance sheet modeling.
g: Demonstrate the development of a sales-based pro forma company model.
h: Explain how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases.
i: Explain how competitive factors affect prices and costs.
j: Evaluate the competitive position of a company based on a Porter’s five forces analysis.
k: Explain how to forecast industry and company sales and costs when they are subject to price inflation or deflation.
l: Evaluate the effects of technological developments on demand, selling prices, costs, and margins.
m: Explain considerations in the choice of an explicit forecast horizon.
n: Explain an analyst’s choices in developing projections beyond the short-term forecast horizon.
a: Describe the expected effect of regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders’ wealth and a company’s financial ratios.
b: Compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action.
c: Describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey.
d: Explain how agency costs may affect a company’s payout policy.
e: Explain factors that affect dividend policy in practice.
f: Calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems.
g: Compare stable dividend with constant dividend payout ratio, and calculate the dividend under each policy.
h: Describe broad trends in corporate payout policies.
i: Compare share repurchase methods.
j: Calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s surplus cash and 2) the company uses debt to finance the repurchase.
k: Calculate the effect of a share repurchase on book value per share.
l: Explain the choice between paying cash dividends and repurchasing shares.
m: Calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow.
n: Identify characteristics of companies that may not be able to sustain their cash dividend.
a: Describe global variations in ownership structures and the possible effects of these variations on corporate governance policies and practices.
b: Evaluate the effectiveness of a company’s corporate governance policies and practices.
c: Describe how ESG-related risk exposures and investment opportunities may be identified and evaluated.
d: Evaluate ESG risk exposures and investment opportunities related to a company.
a: Explain top-down and bottom-up factors that impact the cost of capital.
b: Compare methods used to estimate the cost of debt.
c: Explain historical and forward-looking approaches to estimating an equity risk premium.
d: Compare methods used to estimate the required return on equity.
e: Estimate the cost of debt or required return on equity for a public company and a private company.
f: Evaluate a company’s capital structure and cost of capital relative to peers.
a: Explain types of corporate restructurings and issuers’ motivations for pursuing them.
b: Explain the initial evaluation of a corporate restructuring.
c: Demonstrate valuation methods for, and interpret valuations of, companies involved in corporate restructurings.
d: Demonstrate how corporate restructurings affect an issuer’s EPS, net debt to EBITDA ratio, and weighted average cost of capital.
e: Evaluate corporate investment actions, including equity investments, joint ventures, and acquisitions.
f: Evaluate corporate divestment actions, including sales and spin offs.
g:Evaluate cost and balance sheet restructurings.
a: Define valuation and intrinsic value and explain sources of perceived mispricing.
b: Explain the going concern assumption and contrast a going concern value to a liquidation value.
c: Describe definitions of value and justify which definition of value is most relevant to public company valuation.
d: Describe applications of equity valuation.
e: Describe questions that should be addressed in conducting an industry and competitive analysis.
f: Contrast absolute and relative valuation models and describe examples of each type of model.
g: Describe sum-of-the-parts valuation and conglomerate discounts.
h: Explain broad criteria for choosing an appropriate approach for valuing a given company.
a: Compare dividends, free cash flow, and residual income as inputs to discounted cash flow models and identify investment situations for which each measure is suitable.
b: Calculate and interpret the value of a common stock using the dividend discount model (DDM) for single and multiple holding periods.
c: Calculate the value of a common stock using the Gordon growth model and explain the model’s underlying assumptions.
d: Calculate the value of non-callable fixed-rate perpetual preferred stock.
e: Describe strengths and limitations of the Gordon growth model and justify its selection to value a company’s common shares.
f: Calculate and interpret the implied growth rate of dividends using the Gordon growth model and current stock price.
g: Calculate and interpret the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings ratio (P/E) related to PVGO.
h: Calculate and interpret the justified leading and trailing P/Es using the Gordon growth model.
i: Estimate a required return based on any DDM, including the Gordon growth model and the H-model.
j: Evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
k: Explain the growth phase, transition phase, and maturity phase of a business.
l: Explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company’s common shares.
m: Describe terminal value and explain alternative approaches to determining the terminal value in a DDM.
n: Calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM.
o: Explain the use of spreadsheet modeling to forecast dividends and to value common shares.
p: Calculate and interpret the sustainable growth rate of a company and demonstrate the use of DuPont analysis to estimate a company’s sustainable growth rate.
a: Compare the free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) approaches to valuation.
b: Explain the ownership perspective implicit in the FCFE approach.
c: Explain the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and cash flow from operations (CFO) to calculate FCFF and FCFE.
d: Calculate FCFF and FCFE.
e: Describe approaches for forecasting FCFF and FCFE.
f: Explain how dividends, share repurchases, share issues, and changes in leverage may affect future FCFF and FCFE.
g: Compare the FCFE model and dividend discount models.
h: Evaluate the use of net income and EBITDA as proxies for cash flow in valuation.
i: Explain the use of sensitivity analysis in FCFF and FCFE valuations.
j: Explain the single-stage (stable-growth), two-stage, and three-stage FCFF and FCFE models and justify the selection of the appropriate model given a company’s characteristics.
k: Estimate a company’s value using the appropriate free cash flow model(s).
l: Describe approaches for calculating the terminal value in a multistage valuation model.
m: Evaluate whether a stock is overvalued, fairly valued, or undervalued based on a free cash flow valuation model.
a: Contrast the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation and explain economic rationales for each approach.
b: Calculate and interpret a justified price multiple.
c: Describe rationales for and possible drawbacks to using alternative price multiples and dividend yield in valuation.
d: Calculate and interpret alternative price multiples and dividend yield.
e: Calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS.
f: Explain and justify the use of earnings yield (E/P).
g: Describe fundamental factors that influence alternative price multiples and dividend yield.
h: Calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology.
i: Calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals.
j: Calculate and interpret the P/E-to-growth (PEG) ratio and explain its use in relative valuation.
k: Calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model.
l: Evaluate whether a stock is overvalued, fairly valued, or undervalued based on comparisons of multiples.
m: Evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables.
n: Explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition.
o: Calculate and interpret EV multiples and evaluate the use of EV/EBITDA.
p: Explain sources of differences in cross-border valuation comparisons.
q: Describe momentum indicators and their use in valuation.
r: Explain the use of the arithmetic mean, the harmonic mean, the weighted harmonic mean, and the median to describe the central tendency of a group of multiples.
a: Calculate and interpret residual income, economic value added, and market value added.
b: Describe the uses of residual income models.
c: Calculate the intrinsic value of a common stock using the residual income model and compare value recognition in residual income and other present value models.
d: Explain fundamental determinants of residual income.
e: Explain the relation between residual income valuation and the justified price-to-book ratio based on forecasted fundamentals.
f: Calculate and interpret the intrinsic value of a common stock using single-stage (constant-growth) and multistage residual income models.
g: Calculate the implied growth rate in residual income, given the market price-to-book ratio and an estimate of the required rate of return on equity.
h: Explain continuing residual income and justify an estimate of continuing residual income at the forecast horizon, given company and industry prospects.
i: Compare residual income models to dividend discount and free cash flow models.
j: Explain strengths and weaknesses of residual income models and justify the selection of a residual income model to value a company’s common stock.
k: Describe accounting issues in applying residual income models.
a: Compare public and private company valuation.
b: Describe uses of private business valuation and explain applications of greatest concern to financial analysts.
c: Explain cash flow estimation issues related to private companies and adjustments required to estimate normalized earnings.
d: Explain the income, market, and asset-based approaches to private company valuation and factors relevant to the selection of each approach.
e: Explain factors that require adjustment when estimating the discount rate for private companies.
f: Compare models used to estimate the required rate of return to private company equity (for example, the CAPM, the expanded CAPM, and the build-up approach).
g: Calculate the value of a private company using free cash flow, capitalized cash flow, and/or excess earnings methods.
h: Calculate the value of a private company based on market approach methods and describe advantages and disadvantages of each method.
i: Describe the asset-based approach to private company valuation.
j: Explain and evaluate the effects on private company valuations of discounts and premiums based on control and marketability.
a: Describe relationships among spot rates, forward rates, yield-tomaturity, expected and realized returns on bonds, and the shape of the yield curve.
b: Describe how zero-coupon rates (spot rates) may be obtained from the par curve by bootstrapping.
c: Describe the assumptions concerning the evolution of spot rates in relation to forward rates implicit in active bond portfolio management.
d: Describe the strategy of rolling down the yield curve.
e: Explain the swap rate curve and why and how market participants use it in valuation.
f: Calculate and interpret the swap spread for a given maturity.
g: Describe short-term interest rate spreads used to gauge economy-wide credit risk and liquidity risk.
h: Explain traditional theories of the term structure of interest rates and describe the implications of each theory for forward rates and the shape of the yield curve.
i: Explain how a bond’s exposure to each of the factors driving the yield curve can be measured and how these exposures
can be used to manage yield curve risks.
j: Explain the maturity structure of yield volatilities and their effect on price volatility.
k: Explain how key economic factors are used to establish a view on benchmark rates, spreads, and yield curve changes.
a: Explain what is meant by arbitrage-free valuation of a fixed-income instrument.
b: Calculate the arbitrage-free value of an option-free, fixed-rate coupon bond.
c: Describe a binomial interest rate tree framework.
d: Describe the process of calibrating a binomial interest rate tree to match a specific term structure.
e: Describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node.
f: Compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice.
g: Describe pathwise valuation in a binomial interest rate framework and calculate the value of a fixed-income instrument given its cash flows along each path.
h: Describe a Monte Carlo forward-rate simulation and its application.
i: Describe term structure models and how they are used.
a: Describe fixed-income securities with embedded options.
b: Explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option.
c: Describe how the arbitrage-free framework can be used to value a bond with embedded options.
d: Explain how interest rate volatility affects the value of a callable or putable bond.
e: Explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond.
f: Calculate the value of a callable or putable bond from an interest rate tree.
g: Explain the calculation and use of option-adjusted spreads.
h: Explain how interest rate volatility affects option-adjusted spreads.
i: Calculate and interpret effective duration of a callable or putable bond.
j: Compare effective durations of callable, putable, and straight bonds.
l: Describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options.
m: Compare effective convexities of callable, putable, and straight bonds.
n: Calculate the value of a capped or floored floating-rate bond.
o: Describe defining features of a convertible bond.
p: Calculate and interpret the components of a convertible bond’s value.
q: Describe how a convertible bond is valued in an arbitrage-free framework.
r: Compare the risk–return characteristics of a convertible bond with the risk– return characteristics of a straight bond and of the underlying common stock.
a: Explain expected exposure, the loss given default, the probability of default, and the credit valuation adjustment.
b: Explain credit scores and credit ratings.
c: Calculate the expected return on a bond given transition in its credit rating.
d: Explain structural and reduced-form models of corporate credit risk, including assumptions, strengths, and weaknesses.
e: Calculate the value of a bond and its credit spread, given assumptions about the credit risk parameters.
f: Interpret changes in a credit spread.
g: Explain the determinants of the term structure of credit spreads and interpret a term structure of credit spreads.
h: Compare the credit analysis required for securitized debt to the credit analysis of corporate debt.
a: Describe credit default swaps (CDS), single-name and index CDS, and the parameters that define a given CDS product.
b: Describe credit events and settlement protocols with respect to CDS.
c: Explain the principles underlying and factors that influence the market’s pricing of CDS.
d: Describe the use of CDS to manage credit exposures and to express views regarding changes in the shape and/or level of the credit curve.
e: Describe the use of CDS to take advantage of valuation disparities among separate markets, such as bonds, loans, equities, and equity-linked instruments.
a: Describe how equity forwards and futures are priced, and calculate and interpret their no-arbitrage value.
b: Describe the carry arbitrage model without underlying cashflows and with underlying cashflows.
c: Describe how interest rate forwards and futures are priced, and calculate and interpret their no-arbitrage value.
d: Describe how fixed-income forwards and futures are priced, and calculate and interpret their no-arbitrage value.
e: Describe how interest rate swaps are priced, and calculate and interpret their no-arbitrage value.
f: Describe how currency swaps are priced, and calculate and interpret their no-arbitrage value.
g: Describe how equity swaps are priced, and calculate and interpret their no-arbitrage value.
a: Describe and interpret the binomial option valuation model and its component terms.
b: Describe how the value of a European option can be analyzed as the present value of the option’s expected payoff at expiration.
c: Identify an arbitrage opportunity involving options and describe the related arbitrage.
d: Calculate the no-arbitrage values of European and American options using a two-period binomial model.
e: Calculate and interpret the value of an interest rate option using a two-period binomial model.
f: Identify assumptions of the Black–Scholes–Merton option valuation model.
g: Interpret the components of the Black–Scholes–Merton model as applied to call options in terms of a leveraged position in the underlying.
h: Describe how the Black–Scholes–Merton model is used to value European options on equities and currencies.
i: Describe how the Black model is used to value European options on futures.
j: Describe how the Black model is used to value European interest rate options and European swaptions.
k: Interpret each of the option Greeks.
l: Describe how a delta hedge is executed.
m: Describe the role of gamma risk in options trading.
n: Define implied volatility and explain how it is used in options trading.
a: Compare the characteristics, classifications, principal risks, and basic forms of public and private real estate investments.
b: Explain portfolio roles and economic value determinants of real estate investments.
c: Discuss commercial property types, including their distinctive investment characteristics.
d: Explain the due diligence process for both private and public equity real estate investments.
e: Discuss real estate investment indexes, including their construction and potential biases.
a: Explain sources of value creation in private equity.
b: Explain how private equity firms align their interests with those of the managers of portfolio companies.
c: Compare and contrast characteristics of buyout and venture capital investments.
d: Interpret LBO model and VC method output.
e: Explain alternative exit routes in private equity and their impact on value.
f: Explain risks and costs of investing in private equity.
g: Explain private equity fund structures, terms, due diligence, and valuation in the context of an analysis of private equity fund returns.
h: Interpret and compare financial performance of private equity funds from the perspective of an investor.
i: Calculate management fees, carried interest, net asset value, distributed to paid in (DPI), residual value to paid in (RVPI), and total value to paid in (TVPI) of a private equity fund.
a: Compare characteristics of commodity sectors.
b: Compare the life cycle of commodity sectors from production through trading or consumption.
c: Contrast the valuation of commodities with the valuation of equities and bonds.
d: Describe types of participants in commodity futures markets.
e: Analyze the relationship between spot prices and futures prices in markets in contango and markets in backwardation.
f: Compare theories of commodity futures returns.
g: Describe, calculate, and interpret the components of total return for a fully collateralized commodity futures contract.
h: Contrast roll return in markets in contango and markets in backwardation.
i: Describe how commodity swaps are used to obtain or modify exposure to commodities.
j: Describe how the construction of commodity indexes affects index returns.
a: Explain the creation/redemption process of ETFs and the function of authorized participants.
b: Describe how ETFs are traded in secondary markets.
c: Describe sources of tracking error for ETFs.
d: Describe factors affecting ETF bid–ask spreads.
e: Describe sources of ETF premiums and discounts to NAV.
f: Describe costs of owning an ETF.
g: Describe types of ETF risk.
h: Identify and describe portfolio uses of ETFs.
a: Describe arbitrage pricing theory (APT), including its underlying assumptions and its relation to multifactor models.
b: Define arbitrage opportunity and determine whether an arbitrage opportunity exists.
c: Calculate the expected return on an asset given an asset’s factor sensitivities and the factor risk premiums.
d: Describe and compare macroeconomic factor models, fundamental factor models, and statistical factor models.
e: Describe uses of multifactor models and interpret the output of analyses based on multifactor models.
f: Describe the potential benefits for investors in considering multiple risk dimensions when modeling asset returns.
g: Explain sources of active risk and interpret tracking risk and the information ratio.
a: Explain the use of value at risk (VaR) in measuring portfolio risk.
b: Compare the parametric (variance–covariance), historical simulation, and Monte Carlo simulation methods for estimating VaR.
c: Estimate and interpret VaR under the parametric, historical simulation, and Monte Carlo simulation methods.
d: Describe advantages and limitations of VaR.
e: Describe extensions of VaR.
f: Describe sensitivity risk measures and scenario risk measures and compare these measures to VaR.
g: Demonstrate how equity, fixed-income, and options exposure measures may be used in measuring and managing market risk and volatility risk.
h: Describe the use of sensitivity risk measures and scenario risk measures.
i: Describe advantages and limitations of sensitivity risk measures and scenario risk measures.
j: Explain constraints used in managing market risks, including risk budgeting, position limits, scenario limits, and stoploss limits.
k: Explain how risk measures may be used in capital allocation decisions.
l: Describe risk measures used by banks, asset managers, pension funds, and insurers.
a: Describe objectives in backtesting an investment strategy.
b: Describe and contrast steps and procedures in backtesting an investment strategy.
c: Interpret metrics and visuals reported in a backtest of an investment strategy.
d: Identify problems in a backtest of an investment strategy.
e: Evaluate and interpret a historical scenario analysis.
f: Contrast Monte Carlo and historical simulation approaches.
g: Explain inputs and decisions in simulation and interpret a simulation.
h: Demonstrate the use of sensitivity analysis.
a: Explain the notion that to affect market values, economic factors must affect one or more of the following: 1) default-free interest rates across maturities, 2) the timing and/or magnitude of expected cash flows, and 3) risk premiums.
b: Explain the role of expectations and changes in expectations in market valuation.
c: Explain the relationship between the long-term growth rate of the economy, the volatility of the growth rate, and the average level of real short-term interest rates.
d: Explain how the phase of the business cycle affects policy and short-term interest rates, the slope of the term structure of interest rates, and the relative performance of bonds of differing maturities.
e: Describe the factors that affect yield spreads between non-inflation adjusted and inflation-indexed bonds.
f: Explain how the phase of the business cycle affects credit spreads and the performance of credit-sensitive fixed-income instruments.
g: Explain how the characteristics of the markets for a company’s products affect the company’s credit quality.
h: Explain how the phase of the business cycle affects short-term and long-term earnings growth expectations.
i: Explain the relationship between the consumption-hedging properties of equity and the equity risk premium.
j: Describe cyclical effects on valuation multiples.
k: Describe the economic factors affecting investment in commercial real estate.
a: Describe how value added by active management is measured.
b: Calculate and interpret the information ratio (ex post and ex ante) and contrast it to the Sharpe ratio.
c: Describe and interpret the fundamental law of active portfolio management, including its component terms—transfer coefficient, information coefficient, breadth, and active risk (aggressiveness).
d: Explain how the information ratio may be useful in investment manager selection and choosing the level of active portfolio risk.
e: Compare active management strategies, including market timing and security selection, and evaluate strategy changes in terms of the fundamental law of active management.
f: Describe the practical strengths and limitations of the fundamental law of active management.
a: Explain the components of execution costs, including explicit and implicit costs.
b: Calculate and interpret effective spreads and VWAP transaction cost estimates.
c: Describe the implementation shortfall approach to transaction cost measurement.
d: Describe factors driving the development of electronic trading systems.
e: Describe market fragmentation.
f: Identify and contrast the types of electronic traders.
g: Describe characteristics and uses of electronic trading systems.
h: Describe comparative advantages of low-latency traders.
i: Describe the risks associated with electronic trading and how regulators mitigate them.
j: Describe abusive trading practices that real-time surveillance of markets may detect.
a: Describe the six components of the Code of Ethics and the seven Standards of Professional Conduct.
b: Explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards.
a: Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations.
b: Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
a: Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
a: Describe the types of investment problems addressed by multiple linear regression and the regression process.
b: Formulate a multiple linear regression model, describe the relation between the dependent variable and several independent variables, and interpret estimated regression coefficients.
c: Explain the assumptions underlying a multiple linear regression model and interpret residual plots indicating potential violations of these assumptions.
a: Evaluate how well a multiple regression model explains the dependent variable by analyzing ANOVA table results and measures of goodness of fit.
b: Formulate hypotheses on the significance of two or more coefficients in a multiple regression model and interpret the results of the joint hypothesis tests.
c: Calculate and interpret a predicted value for the dependent variable, given the estimated regression model and assumed values for the independent variable.
a: Describe how model misspecification affects the results of a regression analysis and how to avoid common forms of misspecification.
b: Explain the types of heteroskedasticity and how it affects statistical inference.
c: Explain serial correlation and how it affects statistical inference.
d: Explain multicollinearity and how it affects regression analysis.
a: Describe influence analysis and methods of detecting influential data points.
b: Formulate and interpret a multiple regression model that includes qualitative independent variables.
c: Formulate and interpret a logistic regression model.
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.
b: Describe factors that determine whether a linear or a log-linear trend should be used with a particular time series and evaluate limitations of trend models.
c: Explain the requirement for a time series to be covariance stationary and describe the significance of a series that is not stationary.
d: Describe the structure of an autoregressive (AR) model of order p and calculate one- and two-period-ahead forecasts given the estimated coefficients.
e: Explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series.
f: Explain mean reversion and calculate a mean-reverting level.
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.
h: Explain the instability of coefficients of time-series models.
i: Describe characteristics of random walk processes and contrast them to covariance stationary processes.
j: Describe 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.
k: Describe the steps of the unit root test for nonstationarity and explain the relation of the test to autoregressive time-series models.
l: Explain 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.
m: Explain autoregressive conditional heteroskedasticity (ARCH) and describe how ARCH models can be applied to predict the variance of a time series.
n: Explain how time-series variables should be analyzed for non stationarity and/or cointegration before use in a linear regression.
o: Determine an appropriate time-series model to analyze a given investment problem and justify that choice.
a: Describe supervised machine learning, unsupervised machine learning, and deep learning.
b: Describe overfitting and identify methods of addressing it.
c: Describe supervised machine learning algorithms—including penalized regression, support vector machine, k-nearest neighbor, classification and regression tree, ensemble learning, and random forest—and determine the problems for which they are best suited.
d: Describe unsupervised machine learning algorithms—including principal components analysis, k-means clustering, and hierarchical clustering—and determine the problems for which they are best suited.
e: Describe neural networks, deep learning nets, and reinforcement learning.
a: Identify and explain steps in a data analysis project.
b: Describe objectives, steps, and examples of preparing and wrangling data.
c: Evaluate the fit of a machine learning algorithm.
d: Describe objectives, methods, and examples of data exploration.
e: Describe methods for extracting, selecting and engineering features from textual data.
f: Describe objectives, steps, and techniques in model training.
g: Describe preparing, wrangling, and exploring text-based data for financial forecasting.
a: Calculate and interpret the bid–offer spread on a spot or forward currency quotation and describe the factors that affect the bid–offer spread.
b: Identify a triangular arbitrage opportunity and calculate its profit, given the bid– offer quotations for three currencies.
c: Explain spot and forward rates and calculate the forward premium/discount for a given currency.
d: Calculate the mark-to-market value of a forward contract.
e: Explain international parity conditions (covered and uncovered interest rate parity, forward rate parity, purchasing power parity, and the international Fisher effect).
f: Describe relations among the international parity conditions.
g: Evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates.
h: Explain approaches to assessing the long-run fair value of an exchange rate.
i: Describe the carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade.
j: Explain how flows in the balance of payment accounts affect currency exchange rates.
k: Explain the potential effects of monetary and fiscal policy on exchange rates.
l: Describe objectives of central bank or government intervention and capital controls and describe the effectiveness of intervention and capital controls.
m: Describe warning signs of a currency crisis.
a: Compare factors favoring and limiting economic growth in developed and developing economies.
b: Describe the relation between the long-run rate of stock market appreciation and the sustainable growth rate of the economy.
c: Explain why potential GDP and its growth rate matter for equity and fixed income investors.
d: Contrast capital deepening investment and technological progress and explain how each affects economic growth and labor productivity.
e: Demonstrate forecasting potential GDP based on growth accounting relations.
f: Explain how natural resources affect economic growth and evaluate the argument that limited availability of natural resources constrains economic growth.
g: Explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth.
h: Explain how investment in physical capital, human capital, and technological development affects economic growth.
i: Compare classical growth theory, neoclassical growth theory, and endogenous growth theory.
j: Explain and evaluate convergence hypotheses.
k: Describe the economic rationale for governments to provide incentives to private investment in technology and knowledge.
l: Describe the expected impact of removing trade barriers on capital investment and profits, employment and wages, and growth in the economies involved.
a: Describe the economic rationale for regulatory intervention.
b: Explain the purposes of regulating commerce and financial markets.
c: Describe anticompetitive behaviors targeted by antitrust laws globally and evaluate the antitrust risk associated with a given business strategy.
d: Describe classifications of regulations and regulators.
e: Describe uses of self-regulation in financial markets.
f: Describe regulatory interdependencies and their effects.
g: Describe tools of regulatory intervention in markets.
h: Describe benefits and costs of regulation.
i: Describe the considerations when evaluating the effects of regulation on an industry.
a: Describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities.
b: Compare and contrast IFRS and US GAAP in their classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities.
c: Analyze how different methods used to account for intercorporate investments affect financial statements and ratios.
a: Contrast types of employee compensation.
b: Explain how share-based compensation affects the financial statements.
c: Explain how to forecast share-based compensation expense and shares outstanding in a financial statement model and their use in valuation.
d: Explain how post-employment benefits affect the financial statements.
e: Explain financial modeling and valuation considerations for post-employment benefits.
a: Compare and contrast presentation in (reporting) currency, functional currency, and local currency.
b: Describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses.
c: Analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company.
d: Compare the current rate method and the temporal method, evaluate how each affects the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios.
e: Calculate the translation effects and evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s presentation currency.
f: Analyze how the current rate method and the temporal method affect financial statements and ratios.
g: Analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios.
h: Describe how multinational operations affect a company’s effective tax rate.
i: Explain how changes in the components of sales affect the sustainability of sales growth.
j: Analyze how currency fluctuations potentially affect financial results, given a company’s countries of operation.
a: Describe how financial institutions differ from other companies.
b: Describe key aspects of financial regulations of financial institutions.
c: Explain the CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) approach to analyzing a bank, including key ratios and its limitations.
d: Analyze a bank based on financial statements and other factors.
e: Describe other factors to consider in analyzing a bank.
f: Describe key ratios and other factors to consider in analyzing an insurance company.
a: Demonstrate the use of a conceptual framework for assessing the quality of a company’s financial reports.
b: Explain potential problems that affect the quality of financial reports.
c: Describe how to evaluate the quality of a company’s financial reports.
d: Evaluate the quality of a company’s financial reports.
e: Describe indicators of earnings quality.
f: Describe the concept of sustainable (persistent) earnings.
g: Explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion.
h: Evaluate the earnings quality of a company.
i: Evaluate the cash flow quality of a company.
j: Describe indicators of balance sheet quality.
k: Evaluate the balance sheet quality of a company.
l: Describe indicators of cash flow quality.
m: Describe sources of information about risk.
a: Demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management’s discussion of financial results).
b: Identify financial reporting choices and biases that affect the quality and comparability of companies’ financial statements and explain how such biases may affect financial decisions.
c: Evaluate the quality of a company’s financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions.
d: Evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios.
e: Analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company’s financial statements, financial ratios, and overall financial condition.
a: Compare top-down, bottom-up, and hybrid approaches for developing inputs to equity valuation models.
b: Compare “growth relative to GDP growth” and “market growth and market share” approaches to forecasting revenue.
c: Evaluate whether economies of scale are present in an industry by analyzing operating margins and sales levels.
d: Demonstrate methods to forecast cost of goods sold and operating expenses.
e: Demonstrate methods to forecast non-operating items, financing costs, and income taxes.
f: demonstrate methods to forecast non-operating items, financing costs, and income taxes.
g: Demonstrate the development of a sales-based pro forma company model.
h: Explain how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases.
i: Explain how competitive factors affect prices and costs.
j: Evaluate the competitive position of a company based on a Porter’s five forces analysis.
k: Explain how to forecast industry and company sales and costs when they are subject to price inflation or deflation.
l: Evaluate the effects of technological developments on demand, selling prices, costs, and margins.
m: Explain considerations in the choice of an explicit forecast horizon.
n: Explain an analyst’s choices in developing projections beyond the short-term forecast horizon.
a: Describe the expected effect of regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders’ wealth and a company’s financial ratios.
b: Compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action.
c: Describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey.
d: Explain how agency costs may affect a company’s payout policy.
e: Explain factors that affect dividend policy in practice.
f: Calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems.
g: Compare stable dividend with constant dividend payout ratio, and calculate the dividend under each policy.
h: Describe broad trends in corporate payout policies.
i: compare share repurchase methods.
j: Calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s surplus cash and 2) the company uses debt to finance the repurchase.
k: Calculate the effect of a share repurchase on book value per share.
l: Explain the choice between paying cash dividends and repurchasing shares.
m: Calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow.
n: Identify characteristics of companies that may not be able to sustain their cash dividend.
a: Describe global variations in ownership structures and the possible effects of these variations on corporate governance policies and practices.
b: Evaluate the effectiveness of a company’s corporate governance policies and practices.
c: Describe how ESG-related risk exposures and investment opportunities may be identified and evaluated.
d: Evaluate ESG risk exposures and investment opportunities related to a company.
a: Explain top-down and bottom-up factors that impact the cost of capital.
b: Compare methods used to estimate the cost of debt.
c: Explain historical and forward-looking approaches to estimating an equity risk premium.
d: Compare methods used to estimate the required return on equity.
e: Estimate the cost of debt or required return on equity for a public company and a private company.
f: Evaluate a company’s capital structure and cost of capital relative to peers.
a: Explain types of corporate restructurings and issuers’ motivations for pursuing them.
b: Explain the initial evaluation of a corporate restructuring.
c: Demonstrate valuation methods for, and interpret valuations of, companies involved in corporate restructurings.
d: Demonstrate how corporate restructurings affect an issuer’s EPS, net debt to EBITDA ratio, and weighted average cost of capital.
e: Evaluate corporate investment actions, including equity investments, joint ventures, and acquisitions.
f: Evaluate corporate divestment actions, including sales and spin offs.
g: Evaluate cost and balance sheet restructurings.
a: Define valuation and intrinsic value and explain sources of perceived mispricing.
b: Explain the going concern assumption and contrast a going concern value to a liquidation value.
c: Describe definitions of value and justify which definition of value is most relevant to public company valuation.
d: Describe applications of equity valuation.
e: Describe questions that should be addressed in conducting an industry and competitive analysis.
f: Contrast absolute and relative valuation models and describe examples of each type of model.
g: Describe sum-of-the-parts valuation and conglomerate discounts.
h: Explain broad criteria for choosing an appropriate approach for valuing a given company.
a: Compare dividends, free cash flow, and residual income as inputs to discounted cash flow models and identify investment situations for which each measure is suitable.
b: Calculate and interpret the value of a common stock using the dividend discount model (DDM) for single and multiple holding periods.
c: Calculate the value of a common stock using the Gordon growth model and explain the model’s underlying assumptions.
d: Calculate the value of non-callable fixed-rate perpetual preferred stock.
e: Describe strengths and limitations of the Gordon growth model and justify its selection to value a company’s common shares.
f: Calculate and interpret the implied growth rate of dividends using the Gordon growth model and current stock price.
g: Calculate and interpret the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings ratio (P/E) related to PVGO.
h: Calculate and interpret the justified leading and trailing P/Es using the Gordon growth model.
i: Estimate a required return based on any DDM, including the Gordon growth model and the H-model.
j: Evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
k: Explain the growth phase, transition phase, and maturity phase of a business.
l: Explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company’s common shares.
m: Describe terminal value and explain alternative approaches to determining the terminal value in a DDM.
n: Calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM.
o: Explain the use of spreadsheet modeling to forecast dividends and to value common shares.
p: Calculate and interpret the sustainable growth rate of a company and demonstrate the use of DuPont analysis to estimate a company’s sustainable growth rate.
a: Compare the free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) approaches to valuation.
b: Explain the ownership perspective implicit in the FCFE approach.
c: Explain the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and cash flow from operations (CFO) to calculate FCFF and FCFE.
d: Calculate FCFF and FCFE.
e: Describe approaches for forecasting FCFF and FCFE.
f: Explain how dividends, share repurchases, share issues, and changes in leverage may affect future FCFF and FCFE.
g: Compare the FCFE model and dividend discount models.
h: Evaluate the use of net income and EBITDA as proxies for cash flow in valuation.
i: Explain the use of sensitivity analysis in FCFF and FCFE valuations.
j: Explain the single-stage (stable-growth), two-stage, and three-stage FCFF and FCFE models and justify the selection of the appropriate model given a company’s characteristics.
k: Estimate a company’s value using the appropriate free cash flow model(s).
l: Describe approaches for calculating the terminal value in a multistage valuation model.
m: Evaluate whether a stock is overvalued, fairly valued, or undervalued based on a free cash flow valuation model.
a: Contrast the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation and explain economic rationales for each approach.
b: Calculate and interpret a justified price multiple.
c: Describe rationales for and possible drawbacks to using alternative price multiples and dividend yield in valuation.
d: Calculate and interpret alternative price multiples and dividend yield.
e: Calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS.
f: Explain and justify the use of earnings yield (E/P).
g: Describe fundamental factors that influence alternative price multiples and dividend yield.
h: Calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology.
i: Calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals.
j: Calculate and interpret the P/E-to-growth (PEG) ratio and explain its use in relative valuation.
k: Calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model.
l: Evaluate whether a stock is overvalued, fairly valued, or undervalued based on comparisons of multiples.
m: Evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables.
n: Explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition.
o: Calculate and interpret EV multiples and evaluate the use of EV/EBITDA.
p: Explain sources of differences in cross-border valuation comparisons.
q: Describe momentum indicators and their use in valuation.
r: Explain the use of the arithmetic mean, the harmonic mean, the weighted harmonic mean, and the median to describe the central tendency of a group of multiples.
a: Calculate and interpret residual income, economic value added, and market value added.
b: Describe the uses of residual income models.
c: Calculate the intrinsic value of a common stock using the residual income model and compare value recognition in residual income and other present value models.
d: Explain fundamental determinants of residual income.
e: Explain the relation between residual income valuation and the justified price-to-book ratio based on forecasted fundamentals.
f: Calculate and interpret the intrinsic value of a common stock using single-stage (constant-growth) and multistage residual income models.
g: Calculate the implied growth rate in residual income, given the market price-to-book ratio and an estimate of the required rate of return on equity.
h: Explain continuing residual income and justify an estimate of continuing residual income at the forecast horizon, given company and industry prospects.
i: Compare residual income models to dividend discount and free cash flow models.
j: Explain strengths and weaknesses of residual income models and justify the selection of a residual income model to value a company’s common stock.
k: Describe accounting issues in applying residual income models.
a: Contrast important public and private company features for valuation purposes.
b: Describe uses of private business valuation and explain key areas of focus for financial analysts.
c: Explain cash flow estimation issues related to private companies and adjustments required to estimate normalized earnings.
d: Explain factors that require adjustment when estimating the discount rate for private companies.
e: Compare models used to estimate the required rate of return to private company equity (for example, the CAPM, the expanded CAPM, and the build-up approach).
f: Explain and evaluate the effects on private company valuations of discounts and premiums based on control and marketability.
g: Explain the income, market, and asset-based approaches to private company valuation and factors relevant to the selection of each approach.
h: Calculate the value of a private company using income-based methods.
i: Calculate the value of a private company using market-based methods and describe the advantages and disadvantages of each method.
a: Describe relationships among spot rates, forward rates, yield to maturity, expected and realized returns on bonds, and the shape of the yield curve.
b: Describe how zero-coupon rates (spot rates) may be obtained from the par curve by bootstrapping.
c: Describe the assumptions concerning the evolution of spot rates in relation to forward rates implicit in active bond portfolio management.
d: Describe the strategy of rolling down the yield curve.
e: Explain the swap rate curve and why and how market participants use it in valuation.
f: Calculate and interpret the swap spread for a given maturity.
g: Describe short-term interest rate spreads used to gauge economy-wide credit risk and liquidity risk.
h: Explain traditional theories of the term structure of interest rates and describe the implications of each theory for forward rates and the shape of the yield curve.
i: Explain how a bond’s exposure to each of the factors driving the yield curve can be measured and how these exposures can be used to manage yield curve risks.
j: Explain the maturity structure of yield volatilities and their effect on price volatility.
k: Explain how key economic factors are used to establish a view on benchmark rates, spreads, and yield curve changes.
a: Explain what is meant by arbitrage-free valuation of a fixed-income instrument.
b: Calculate the arbitrage-free value of an option-free, fixed-rate coupon bond.
c: Describe a binomial interest rate tree framework.
d: Describe the process of calibrating a binomial interest rate tree to match a specific term structure.
e: Describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node.
f: Compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice.
g: Describe pathwise valuation in a binomial interest rate framework and calculate the value of a fixed-income instrument given its cash flows along each path.
h: Describe a Monte Carlo forward-rate simulation and its application.
i: Describe term structure models and how they are used.
a: Describe fixed-income securities with embedded options.
b: Explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option.
c: Describe how the arbitrage-free framework can be used to value a bond with embedded options.
d: Explain how interest rate volatility affects the value of a callable or putable bond.
e: Explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond.
f: Calculate the value of a callable or putable bond from an interest rate tree.
g: Explain the calculation and use of option-adjusted spreads.
h: Explain how interest rate volatility affects option-adjusted spreads
i: Calculate and interpret effective duration of a callable or putable bond.
j: Compare effective durations of callable, putable, and straight bonds.
k: Describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options.
l: Compare effective convexities of callable, putable, and straight bonds.
m: Calculate the value of a capped or floored floating-rate bond.
n: Describe defining features of a convertible bond.
o: Calculate and interpret the components of a convertible bond’s value.
p: Describe how a convertible bond is valued in an arbitrage-free framework.
q: Compare the risk–return characteristics of a convertible bond with the risk– return characteristics of a straight bond and of the underlying common stock.
a: Explain expected exposure, the loss given default, the probability of default, and the credit valuation adjustment.
b: Explain credit scores and credit ratings.
c: Calculate the expected return on a bond given transition in its credit rating.
d: Explain structural and reduced-form models of corporate credit risk, including assumptions, strengths, and weaknesses.
e: Calculate the value of a bond and its credit spread, given assumptions about the credit risk parameters.
f: Interpret changes in a credit spread.
g: Explain the determinants of the term structure of credit spreads and interpret a term structure of credit spreads.
h: Compare the credit analysis required for securitized debt to the credit analysis of corporate debt.
a: Describe credit default swaps (CDS), single-name and index CDS, and the parameters that define a given CDS product.
b: Describe credit events and settlement protocols with respect to CDS.
c: Explain the principles underlying and factors that influence the market’s pricing of CDS.
d: Describe the use of CDS to manage credit exposures and to express views regarding changes in the shape and/or level of the credit curve.
e: Describe the use of CDS to take advantage of valuation disparities among separate markets, such as bonds, loans, equities, and equity-linked instruments.
a: Describe how equity forwards and futures are priced, and calculate and interpret their no-arbitrage value.
b: Describe the carry arbitrage model without underlying cashflows and with underlying cashflows.
c: Describe how interest rate forwards and futures are priced, and calculate and interpret their no-arbitrage value.
d:Describe how fixed-income forwards and futures are priced, and calculate and interpret their no-arbitrage value.
e: Describe how interest rate swaps are priced, and calculate and interpret their no-arbitrage value.
f: Describe how currency swaps are priced, and calculate and interpret their no-arbitrage value.
g: Describe how equity swaps are priced, and calculate and interpret their no-arbitrage value.
a: Describe and interpret the binomial option valuation model and its component terms.
b: Describe how the value of a European option can be analyzed as the present value of the option’s expected payoff at expiration.
c: Identify an arbitrage opportunity involving options and describe the related arbitrage.
d: Calculate the no-arbitrage values of European and American options using a two-period binomial model.
e: Calculate and interpret the value of an interest rate option using a two-period binomial model.
f: Identify assumptions of the Black–Scholes–Merton option valuation model.
g: Interpret the components of the Black–Scholes–Merton model as applied to call options in terms of a leveraged position in the underlying.
h: Describe how the Black–Scholes–Merton model is used to value European options on equities and currencies.
i: Describe how the Black model is used to value European options on futures.
j: Describe how the Black model is used to value European interest rate options and European swaptions.
k: Interpret each of the option Greeks.
l: Describe how a delta hedge is executed.
m: Describe the role of gamma risk in options trading.
n: Define implied volatility and explain how it is used in options trading.
a: Compare characteristics of commodity sectors.
b: Compare the life cycle of commodity sectors from production through trading or consumption.
c: Contrast the valuation of commodities with the valuation of equities and bonds.
d: Describe types of participants in commodity futures markets.
e: Analyze the relationship between spot prices and futures prices in markets in contango and markets in backwardation.
f: Compare theories of commodity futures returns.
g: Describe, calculate, and interpret the components of total return for a fully collateralized commodity futures contract.
h: Contrast roll return in markets in contango and markets in backwardation.
i: Describe how commodity swaps are used to obtain or modify exposure to commodities.
j: Describe how the construction of commodity indexes affects index returns.
a: Compare the characteristics, classifications, principal risks, and basic forms of public and private real estate investments.
b: Explain portfolio roles and economic value determinants of real estate investments.
c: Discuss commercial property types, including their distinctive investment characteristics.
d: Explain the due diligence process for both private and public equity real estate investment.
e: Discuss real estate investment indexes, including their construction and potential biases.
a: Discuss types of publicly traded real estate securities.
b: Justify the use of net asset value per share (NAVPS) in valuation of publicly traded real estate securities and estimate NAVPS based on forecasted cash net operating income.
c: Describe the use of funds from operations (FFO) and adjusted funds from operations (AFFO) in REIT valuation.
d: Calculate and interpret the value of a REIT share using the net asset value, relative value (price-to-FFO and price-to-AFFO), and discounted cash flow approaches.
e: Explain advantages and disadvantages of investing in real estate through publicly traded securities compared to private vehicles.
a: Discuss how hedge fund strategies may be classified.
b: Discuss investment characteristics, strategy implementation, and role in a portfolio of equity-related hedge fund strategies.
c: Discuss investment characteristics, strategy implementation, and role in a portfolio of event-driven hedge fund strategies.
d: Discuss investment characteristics, strategy implementation, and role in a portfolio of relative value hedge fund strategies.
e: Discuss investment characteristics, strategy implementation, and role in a portfolio of opportunistic hedge fund strategies.
f: Discuss investment characteristics, strategy implementation, and role in a portfolio of specialist hedge fund strategies.
g: Discuss investment characteristics, strategy implementation, and role in a portfolio of multi-manager hedge fund strategies.
h: Describe how factor models may be used to understand hedge fund risk exposures.
i: Evaluate the impact of an allocation to a hedge fund strategy in a traditional investment portfolio.
a: Explain the creation/redemption process of ETFs and the function of authorized participants.
b: Describe how ETFs are traded in secondary markets.
c: Describe sources of tracking error for ETFs.
d: Describe factors affecting ETF bid–ask spreads.
e: Describe sources of ETF premiums and discounts to NAV.
f: Describe costs of owning an ETF.
g: Describe types of ETF risk.
h: Identify and describe portfolio uses of ETFs.
a: Describe arbitrage pricing theory (APT), including its underlying assumptions and its relation to multifactor models.
b: Define arbitrage opportunity and determine whether an arbitrage opportunity exists.
c: Calculate the expected return on an asset given an asset’s factor sensitivities and the factor risk premiums.
d: Describe and compare macroeconomic factor models, fundamental factor models, and statistical factor models.
e: Describe uses of multifactor models and interpret the output of analyses based on multifactor models.
f: Describe the potential benefits for investors in considering multiple risk dimensions when modeling asset returns.
g: Explain sources of active risk and interpret tracking risk and the information ratio.
a: Explain the use of value at risk (VaR) in measuring portfolio risk.
b: Compare the parametric (variance–covariance), historical simulation, and Monte Carlo simulation methods for estimating VaR.
c: Estimate and interpret VaR under the parametric, historical simulation, and Monte Carlo simulation methods.
d: Describe advantages and limitations of VaR.
e: Describe extensions of VaR.
f: Describe sensitivity risk measures and scenario risk measures and compare these measures to VaR.
g: Demonstrate how equity, fixed-income, and options exposure measures may be used in measuring and managing market risk and volatility risk.
h: Describe the use of sensitivity risk measures and scenario risk measures.
i: Describe advantages and limitations of sensitivity risk measures and scenario risk measures.
j: Explain constraints used in managing market risks, including risk budgeting, position limits, scenario limits, and stop-loss limits.
k: Explain how risk measures may be used in capital allocation decisions.
l: Describe risk measures used by banks, asset managers, pension funds, and insurers.
a: Describe objectives in backtesting an investment strategy.
b: Describe and contrast steps and procedures in backtesting an investment strategy.
c: Interpret metrics and visuals reported in a backtest of an investment strategy.
d: Identify problems in a backtest of an investment strategy.
e: Evaluate and interpret a historical scenario analysis.
f: Contrast Monte Carlo and historical simulation approaches.
g: Explain inputs and decisions in simulation and interpret a simulation.
h: Demonstrate the use of sensitivity analysis.
a: Explain the notion that to affect market values, economic factors must affect one or more of the following: 1) default-free interest rates across maturities, 2) the timing and/or magnitude of expected cash flows, and 3) risk premiums.
b: Explain the role of expectations and changes in expectations in market valuation.
c: Explain the relationship between the long-term growth rate of the economy, the volatility of the growth rate, and the average level of real short-term interest rates.
d: Explain how the phase of the business cycle affects policy and short-term interest rates, the slope of the term structure of interest rates, and the relative performance of bonds of differing maturities.
e: Describe the factors that affect yield spreads between non-inflation-adjusted and inflation-indexed bonds.
f: Explain how the phase of the business cycle affects credit spreads and the performance of credit-sensitive fixed-income instruments.
g: Explain how the characteristics of the markets for a company’s products affect the company’s credit quality.
h: Explain the relationship between the consumption hedging properties of equity and the equity risk premium.
i: Explain how the phase of the business cycle affects short-term and long-term earnings growth expectations.
j: Describe cyclical effects on valuation multiples.
k: Describe the economic factors affecting investment in commercial real estate.
a: Describe how value added by active management is measured.
b: Calculate and interpret the information ratio (ex post and ex ante) and contrast it to the Sharpe ratio.
c: Describe and interpret the fundamental law of active portfolio management, including its component terms—transfer coefficient, information coefficient, breadth, and active risk (aggressiveness).
d: Explain how the information ratio may be useful in investment manager selection and choosing the level of active portfolio risk.
e: Compare active management strategies, including market timing and security selection, and evaluate strategy changes in terms of the fundamental law of active management.
f: Describe the practical strengths and limitations of the fundamental law of active management.
a: Describe the six components of the Code of Ethics and the seven Standards of Professional Conduct.
b: Explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards.
a: Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations.
b: Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
a: Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
a: Compare and contrast cognitive errors and emotional biases.
b: Discuss commonly recognized behavioral biases and their implications for financial decision making.
c: Identify and evaluate an individual’s behavioral biases.
a: Explain the uses and limitations of classifying investors into personality types.
b: Discuss how behavioral factors affect adviser–client interactions.
c: Discuss how behavioral factors influence portfolio construction.
d: Explain how behavioral finance can be applied to the process of portfolio construction.
e: Discuss how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases.
f Discuss how behavioral factors affect investment committee decision making and recommend techniques for mitigating their effects.
g: Describe how behavioral biases of investors can lead to market characteristics that may not be explained by traditional finance.
a: Discuss the role of, and a framework for, capital market expectations in the portfolio management process.
b: Discuss challenges in developing capital market forecasts.
c: Explain how exogenous shocks may affect economic growth trends.
d: Discuss the application of economic growth trend analysis to the formulation of capital market expectations.
e: Compare major approaches to economic forecasting.
f: Discuss how business cycles affect short- and long-term expectations.
g: Explain the relationship of inflation to the business cycle and the implications of inflation for cash, bonds, equity, and real estate returns.
h: Discuss the effects of monetary and fiscal policy on business cycles.
i: Interpret the shape of the yield curve as an economic predictor and discuss the relationship between the yield curve and fiscal and monetary policy.
j: Identify and interpret macroeconomic, interest rate, and exchange rate linkages between economies.
a: Discuss approaches to setting expectations for fixed-income returns.
b: Discuss risks faced by investors in emerging market fixed-income securities and the country risk analysis techniques used to evaluate emerging market economies.
c: Discuss approaches to setting expectations for equity investment market returns.
d: Discuss risks faced by investors in emerging market equity securities.
e: Explain how economic and competitive factors can affect expectations for real estate investment markets and sector returns.
f: Discuss major approaches to forecasting exchange rates.
g: Discuss methods of forecasting volatility.
h: Recommend and justify changes in the component weights of a global investment portfolio based on trends and expected changes in macroeconomic factors.
a: Describe elements of effective investment governance and investment governance considerations in asset allocation.
b: Formulate an economic balance sheet for a client and interpret its implications for asset allocation.
c: Compare the investment objectives of asset-only, liability-relative, and goals-based asset allocation approaches.
d: Contrast concepts of risk relevant to asset-only, liability-relative, and goals-based asset allocation approaches.
e: Explain how asset classes are used to represent exposures to systematic risk and discuss criteria for asset class specification.
f: Explain the use of risk factors in asset allocation and their relation to traditional asset class–based approaches.
g: Recommend and justify an asset allocation based on an investor’s objectives and constraints.
h: Describe the use of the global market portfolio as a baseline portfolio in asset allocation.
i: Discuss strategic implementation choices in asset allocation, including passive/active choices and vehicles for implementing passive and active mandates.
j: Discuss strategic considerations in rebalancing asset allocations.
a: Describe and evaluate the use of mean–variance optimization in asset allocation.
b: Recommend and justify an asset allocation using mean–variance optimization.
c: Interpret and evaluate an asset allocation in relation to an investor’s economic balance sheet.
d: Discuss asset class liquidity considerations in asset allocation.
e: Explain absolute and relative risk budgets and their use in determining and implementing an asset allocation.
f: Describe how client needs and preferences regarding investment risks can be incorporated into asset allocation.
g: Discuss the use of Monte Carlo simulation and scenario analysis to evaluate the robustness of an asset allocation.
h: Describe the use of investment factors in constructing and analyzing an asset allocation.
i: Recommend and justify an asset allocation based on the global market portfolio.
j: Describe and evaluate characteristics of liabilities that are relevant to asset allocation.
k: Discuss approaches to liability-relative asset allocation.
l: Recommend and justify a liability-relative asset allocation.
m: Recommend and justify an asset allocation using a goals-based approach.
n: Describe and evaluate heuristic and other approaches to asset allocation.
o: Discuss factors affecting rebalancing policy.
a: Discuss asset size, liquidity needs, time horizon, and regulatory or other considerations as constraints on asset allocation.
b: Discuss tax considerations in asset allocation and rebalancing.
c: Recommend and justify revisions to an asset allocation given change(s) in investment objectives and/or constraints.
d: Discuss the use of short-term shifts in asset allocation.
e: Identify behavioral biases that arise in asset allocation and recommend methods to overcome them.
a: Demonstrate how an asset’s returns may be replicated by using options.
b: Discuss the investment objective(s), structure, payoff, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price at expiration of a covered call position.
c: Discuss the investment objective(s), structure, payoff, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price at expiration of a protective put position.
d: Compare the delta of covered call and protective put positions with the position of being long an asset and short a forward on the underlying asset.
e: Compare the effect of buying a call on a short underlying position with the effect of selling a put on a short underlying position.
f: Discuss the investment objective(s), structure, payoffs, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price at expiration of the following option strategies: bull spread, bear spread, straddle, and collar.
g: Describe uses of calendar spreads.
h: Discuss volatility skew and smile.
i: Identify and evaluate appropriate option strategies consistent with given investment objectives.
j: Demonstrate the use of options to achieve targeted equity risk exposures.
a: Demonstrate how interest rate swaps, forwards, and futures can be used to modify a portfolio’s risk and return.
b: Demonstrate how currency swaps, forwards, and futures can be used to modify a portfolio’s risk and return.
c: Demonstrate how equity swaps, forwards, and futures can be used to modify a portfolio’s risk and return.
d: Demonstrate the use of volatility derivatives and variance swaps.
e: Demonstrate the use of derivatives to achieve targeted equity and interest rate risk exposures.
f: Demonstrate the use of derivatives in asset allocation, rebalancing, and inferring market expectations.
a: Analyze the effects of currency movements on portfolio risk and return.
b: Discuss strategic choices in currency management.
c: Formulate an appropriate currency management program given financial market conditions and portfolio objectives and constraints.
d: Compare active currency trading strategies based on economic fundamentals, technical analysis, carry-trade, and volatility trading.
e: Describe how changes in factors underlying active trading strategies affect tactical trading decisions.
f: Describe how forward contracts and FX (foreign exchange) swaps are used to adjust hedge ratios.
g: Describe trading strategies used to reduce hedging costs and modify the risk–return characteristics of a foreign-currency portfolio.
h: Describe the use of cross-hedges, macro-hedges, and minimum-variance-hedge ratios in portfolios exposed to multiple foreign currencies.
i: Discuss challenges for managing emerging market currency exposures.
a: Discuss roles of fixed-income securities in portfolios and how fixed-income mandates may be classified.
b: Describe fixed-income portfolio measures of risk and return as well as correlation characteristics.
c: Describe bond market liquidity, including the differences among market sub-sectors, and discuss the effect of liquidity on fixed-income portfolio management.
d: Describe and interpret a model for fixed-income returns.
e: Discuss the use of leverage, alternative methods for leveraging, and risks that leverage creates in fixed-income portfolios.
f: Discuss differences in managing fixed-income portfolios for taxable and tax-exempt investors.
a: Describe liability-driven investing.
b: Evaluate strategies for managing a single liability.
c: Compare strategies for a single liability and for multiple liabilities, including alternative means of implementation.
d: Describe construction, benefits, limitations, and risk–return characteristics of a laddered bond portfolio.
e: Evaluate liability-based strategies under various interest rate scenarios and select a strategy to achieve a portfolio’s objectives.
f: Explain risks associated with managing a portfolio against a liability structure.
g: Discuss bond indexes and the challenges of managing a fixed-income portfolio to mimic the characteristics of a bond index.
h: Compare alternative methods for establishing bond market exposure passively.
i: Discuss criteria for selecting a benchmark and justify the selection of a benchmark.
a: Describe the factors affecting fixed-income portfolio returns due to a change in benchmark yields.
b: Formulate a portfolio positioning strategy given forward interest rates and an interest rate view that coincides with the market view.
c: Formulate a portfolio positioning strategy given forward interest rates and an interest rate view that diverges from the market view in terms of rate level, slope, and shape.
d: Formulate a portfolio positioning strategy based upon expected changes in interest rate volatility.
e: Evaluate a portfolio’s sensitivity using key rate durations of the portfolio and its benchmark.
f: Discuss yield curve strategies across currencies.
g: Evaluate the expected return and risks of a yield curve strategy.
a: Describe risk considerations for spread-based fixed-income portfolios.
b: Discuss the advantages and disadvantages of credit spread measures for spread-based fixed-income portfolios, and explain why option-adjusted spread is considered the most appropriate measure.
c: Discuss bottom-up approaches to credit strategies.
d: Discuss top-down approaches to credit strategies.
e: Discuss liquidity risk in credit markets and how liquidity risk can be managed in a credit portfolio.
f: Discuss liquidity risk in credit markets and how liquidity risk can be managed in a credit portfolio.
g: Discuss the use of credit default swap strategies in active fixed-income portfolio management.
h: Discuss various portfolio positioning strategies that managers can use to implement a specific credit spread view.
i: Discuss considerations in constructing and managing portfolios across international credit markets.
j: Describe the use of structured financial instruments as an alternative to corporate bonds in credit portfolios.
k: Describe key inputs, outputs, and considerations in using analytical tools to manage fixed-income portfolios.
a: Describe the roles of equities in the overall portfolio.
b: Describe how an equity manager’s investment universe can be segmented.
c: Describe the types of income and costs associated with owning and managing an equity portfolio and their potential effects on portfolio performance.
d: Describe the potential benefits of shareholder engagement and the role an equity manager might play in shareholder engagement.
e: Describe rationales for equity investment across the passive–active spectrum.
a: Discuss considerations in choosing a benchmark for a passively managed equity portfolio.
b: Compare passive factor-based strategies to market-capitalization-weighted indexing.
c: Compare different approaches to passive equity investing.
d: Compare the full replication, stratified sampling, and optimization approaches for the construction of passively managed equity portfolios.
e: Discuss potential causes of tracking error and methods to control tracking error for passively managed equity portfolios.
f: Explain sources of return and risk to a passively managed equity portfolio.
a: Compare fundamental and quantitative approaches to active management.
b: Analyze bottom-up active strategies, including their rationale and associated processes.
c: Analyze top-down active strategies, including their rationale and associated processes.
d: Analyze factor-based active strategies, including their rationale and associated processes.
e: Analyze activist strategies, including their rationale and associated processes.
f: Describe active strategies based on statistical arbitrage and market microstructure.
g: Describe how fundamental active investment strategies are created.
h: Describe how quantitative active investment strategies are created.
i: Discuss equity investment style classifications.
a: Describe elements of a manager’s investment philosophy that influence the portfolio construction process.
b: Discuss approaches for constructing actively managed equity portfolios.
c: Distinguish between Active Share and active risk and discuss how each measure relates to a manager’s investment strategy.
d: Discuss the application of risk budgeting concepts in portfolio construction.
e: Discuss risk measures that are incorporated in equity portfolio construction and describe how limits set on these measures affect portfolio construction.
f: Discuss how assets under management, position size, market liquidity, and portfolio turnover affect equity portfolio construction decisions.
g: Evaluate the efficiency of a portfolio structure given its investment mandate.
h: Discuss the long-only, long extension, long/short, and equitized market-neutral approaches to equity portfolio construction, including their risks, costs, and effects on potential alphas.
a: Discuss how hedge fund strategies may be classified.
b: Discuss investment characteristics, strategy implementation, and role in a portfolio of equity-related hedge fund strategies.
c: Discuss investment characteristics, strategy implementation, and role in a portfolio of event-driven hedge fund strategies.
d: Discuss investment characteristics, strategy implementation, and role in a portfolio of relative value hedge fund strategies.
e: Discuss investment characteristics, strategy implementation, and role in a portfolio of opportunistic hedge fund strategies.
f: Discuss investment characteristics, strategy implementation, and role in a portfolio of specialist hedge fund strategies.
g: Discuss investment characteristics, strategy implementation, and role in a portfolio of multi-manager hedge fund strategies.
h: Describe how factor models may be used to understand hedge fund risk exposures.
i: Evaluate the impact of an allocation to a hedge fund strategy in a traditional investment portfolio.
a: Explain the roles that alternative investments play in multi-asset portfolios.
b: Compare alternative investments and bonds as risk mitigators in relation to a long equity position.
c: Compare traditional and risk-based approaches to defining the investment opportunity set, including alternative investments.
d: Discuss investment considerations that are important in allocating to different types of alternative investments.
e: Discuss suitability considerations in allocating to alternative investments.
f: Discuss approaches to asset allocation to alternative investments.
g: Discuss the importance of liquidity planning in allocating to alternative investments.
h: Discuss considerations in monitoring alternative investment programs.
a: Contrast private client and institutional client investment concerns.
b: Discuss information needed in advising private clients.
c: Identify tax considerations affecting a private client’s investments.
d: Identify and formulate client goals based on client information.
e: Evaluate a private client’s risk tolerance.
f: Describe technical and soft skills needed in advising private clients.
g: Evaluate capital sufficiency in relation to client goals.
h: Discuss the principles of retirement planning.
i: Discuss the parts of an investment policy statement (IPS) for a private client.
j: Prepare the investment objectives section of an IPS for a private client.
k: Evaluate and recommend improvements to an IPS for a private client.
l: Recommend and justify portfolio allocations and investments for a private client.
m: Describe effective practices in portfolio reporting and review.
n: Evaluate the success of an investment program for a private client.
o: Discuss ethical and compliance considerations in advising private clients.
p: Discuss how levels of service and range of solutions are related to different private clients.
a: Compare taxation of income, wealth, and wealth transfers.
b: Describe global considerations of jurisdiction that are relevant to taxation.
c: Discuss and analyze the tax efficiency of investments.
d: Analyze the impact of taxes on capital accumulation and decumulation in taxable, tax-exempt, and tax-deferred accounts.
e: Explain portfolio tax management strategies and their application.
f: Discuss risk and tax objectives in managing concentrated single-asset positions.
g: Describe strategies for managing concentrated positions in public equities.
h: Describe strategies for managing concentrated positions in privately owned businesses and real estate.
i: Discuss objectives—tax and non-tax—in planning the transfer of wealth.
j: Discuss strategies for achieving estate, bequest, and lifetime gift objectives in common law and civil law regimes.
k: Describe considerations related to managing wealth across multiple generations.
a: Compare the characteristics of human capital and financial capital as components of an individual’s total wealth.
b: Discuss the relationships among human capital, financial capital, and economic net worth.
c: Discuss the financial stages of life for an individual.
d: Describe an economic (holistic) balance sheet.
e: Discuss risks (earnings, premature death, longevity, property, liability, and health risks) in relation to human and financial capital.
f: Describe types of insurance relevant to personal financial planning.
g: Describe the basic elements of a life insurance policy and how insurers price a life insurance policy.
h: Discuss the use of annuities in personal financial planning.
i: Discuss the relative advantages and disadvantages of fixed and variable annuities.
j: Analyze and evaluate an insurance program.
k: Discuss how asset allocation policy may be influenced by the risk characteristics of human capital.
l: Recommend and justify appropriate strategies for asset allocation and risk reduction when given an investor profile of key inputs.
a: Discuss common characteristics of institutional investors as a group.
b: Discuss investment policy of institutional investors.
c: Discuss the stakeholders in the portfolio, the liabilities, the investment time horizons, and the liquidity needs of different types of institutional investors.
d: Describe the focus of legal, regulatory, and tax constraints affecting different types of institutional investors.
e: Evaluate risk considerations of private defined benefit (DB) pension plans in relation to 1) plan funded status, 2) sponsor financial strength, 3) interactions between the sponsor’s business and the fund’s investments, 4) plan design, and 5) workforce characteristics.
f: Prepare the investment objectives section of an institutional investor’s investment policy statement.
g: Evaluate the investment policy statement of an institutional investor.
h: Evaluate the investment portfolio of a private DB plan, sovereign wealth fund, university endowment, and private foundation.
i: Describe considerations affecting the balance sheet management of banks and insurers.
a: Discuss motivations to trade and how they relate to trading strategy.
b: Discuss inputs to the selection of a trading strategy.
c: Compare benchmarks for trade execution.
d: Recommend and justify a trading strategy (given relevant facts).
e: Describe factors that typically determine the selection of a trading algorithm class.
f: Contrast key characteristics of the following markets in relation to trade implementation: equity, fixed income, options and futures, OTC derivatives, and spot currency.
g: Explain how trade costs are measured and determine the cost of a trade.
h: Evaluate the execution of a trade.
i: Evaluate a firm’s trading procedures, including processes, disclosures, and record keeping with respect to good governance.
a: Explain the following components of portfolio evaluation and their interrelationships: performance measurement, performance attribution, and performance appraisal.
b: Describe attributes of an effective attribution process.
c: Contrast return attribution and risk attribution; contrast macro and micro return attribution.
d: Describe returns-based, holdings-based, and transactions-based performance attribution, including advantages and disadvantages of each.
e: Interpret the sources of portfolio returns using a specified attribution approach.
f: Interpret the output from fixed-income attribution analyses.
g: Discuss considerations in selecting a risk attribution approach.
h: Identify and interpret investment results attributable to the asset owner versus those attributable to the investment manager.
i: Discuss uses of liability-based benchmarks.
j: Describe types of asset-based benchmarks.
k: Discuss tests of benchmark quality.
l: Describe problems that arise in benchmarking alternative investments.
m: Describe the impact of benchmark misspecification on attribution and appraisal analysis.
n: Calculate and interpret the Sorting ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration.
o: Describe limitations of appraisal measures and related metrics.
p: Evaluate the skill of an investment manager.
a: Describe the components of a manager selection process, including due diligence.
b: Contrast Type I and Type II errors in manager hiring and continuation decisions.
c: Describe uses of returns-based and holdings-based style analysis in investment manager selection.
d: Describe uses of the upside capture ratio, downside capture ratio, maximum drawdown, drawdown duration, and up/down capture in evaluating managers.
e: Evaluate a manager’s investment philosophy and investment decision-making process.
f: Evaluate the costs and benefits of pooled investment vehicles and separate accounts.
g: Compare types of investment manager contracts, including their major provisions and advantages and disadvantages.
h: Describe the three basic forms of performance-based fees.
i: Analyze and interpret a sample performance-based fee schedule.
a: Discuss tools for managing portfolio liquidity risk.
b: Discuss capture of the illiquidity premium as an investment objective.
c: Analyze asset allocation and portfolio construction in relation to liquidity needs and risk and return requirements and recommend actions to address identified needs.
d: Analyze actions in asset manager selection with respect to the Code of Ethics and Standards of Professional Conduct.
e: Analyze the costs and benefits of derivatives versus cash market techniques for establishing or modifying asset class or risk exposures.
f: Demonstrate the use of derivatives overlays in tactical asset allocation and rebalancing.
a: Identify and analyze a family’s risk exposures during the early career stage.
b: Recommend and justify methods to manage a family’s risk exposures during the early career stage.
c: Identify and analyze a family’s risk exposures during the career development stage.
d: Recommend and justify methods to manage a family’s risk exposures during the career development stage.
e: Identify and analyze a family’s risk exposures during the peak accumulation stage.
f: Recommend and justify methods to manage a family’s risk exposures during the peak accumulation stage.
g: Identify and analyze a family’s risk exposures during the early retirement stage.
h: Recommend and justify a plan to manage risks to an individual’s retirement lifestyle goals.
a: Discuss financial risks associated with the portfolio strategy of an institutional investor.
b: Discuss environmental and social risks associated with the portfolio strategy of an institutional investor.
c: Analyze and evaluate the financial and non-financial risk exposures in the portfolio strategy of an institutional investor.
d: Discuss various methods to manage the risks that arise on long-term direct investments of an institutional investor.
e: Evaluate strengths and weaknesses of an enterprise risk management system and recommend improvements.
a: Describe the structure of the CFA Institute Professional Conduct Program and the disciplinary review process for the enforcement of the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each standard.
a: Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity.
b: Recommend practices and procedures designed to prevent violations of the Code and Standards.
a: Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain how the practices, policies, or conduct does or does not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
a: Explain the purpose of the Asset Manager Code and the benefits that may accrue to a firm that adopts the Code.
b: Explain the ethical and professional responsibilities required by the six General Principles of Conduct of the Asset Manager Code.
c: Determine whether an asset manager’s practices and procedures are consistent with the Asset Manager Code.
d: Recommend practices and procedures designed to prevent violations of the Asset Manager Code.
a: Discuss the objectives and scope of the GIPS standards and their benefits to prospective clients and investors, as well as investment managers.
b: Explain the fundamentals of compliance with the GIPS standards, including the definition of the firm and the firm’s definition of discretion.
c:Discuss requirements of the GIPS standards with respect to return calculation methodologies, including the treatment of external cash flows, cash and cash equivalents, and expenses and fees.
d: Explain requirements of the GIPS standards with respect to composite return calculations, including methods for asset-weighting portfolio returns.
e: Explain the meaning of “discretionary” in the context of composite construction and, given a description of the relevant facts, determine whether a portfolio is likely to be considered discretionary.
f: Explain the role of investment mandates, objectives, or strategies in the construction of composites
g: Explain requirements of the GIPS standards with respect to composite construction, including switching portfolios among composites, the timing of the inclusion of new portfolios in composites, and the timing of the exclusion of terminated portfolios from composites.
h: Explain requirements of the GIPS standards with respect to presentation and reporting.
i: Explain the conditions under which the performance of a past firm or affiliation may be linked to or used to represent the historical performance of a new or acquiring firm.
j: Explain the recommended valuation hierarchy of the GIPS standards.
k: Discuss the purpose, scope, and process of verification.
a: Discuss the role of, and a framework for, capital market expectations in the portfolio management process.
b: Discuss challenges in developing capital market forecasts.
c: Explain how exogenous shocks may affect economic growth trends.
d: Discuss the application of economic growth trend analysis to the formulation of capital market expectations.
e: Compare major approaches to economic forecasting.
f: Discuss how business cycles affect short- and long-term expectations.
g: Explain the relationship of inflation to the business cycle and the implications of inflation for cash, bonds, equity, and real estate returns.
h: Discuss the effects of monetary and fiscal policy on business cycles.
i: Interpret the shape of the yield curve as an economic predictor and discuss the relationship between the yield curve and fiscal and monetary policy.
j: Identify and interpret macroeconomic, interest rate, and exchange rate linkages between economies.
a: Discuss approaches to setting expectations for fixed-income returns.
b: Discuss risks faced by investors in emerging market fixed-income securities and the country risk analysis techniques used to evaluate emerging market economies.
c: Discuss approaches to setting expectations for equity investment market returns.
d: Discuss risks faced by investors in emerging market equity securities.
e: Explain how economic and competitive factors can affect expectations for real estate investment markets and sector returns.
f: Discuss major approaches to forecasting exchange rates.
g: Discuss methods of forecasting volatility.
h: Recommend and justify changes in the component weights of a global investment portfolio based on trends and expected changes in macroeconomic factors.
a: Describe elements of effective investment governance and investment governance considerations in asset allocation.
b: formulate an economic balance sheet for a client and interpret its implications for asset allocation.
c: compare the investment objectives of asset-only, liability-relative, and goals-based asset allocation approaches.
d: contrast concepts of risk relevant to asset-only, liability-relative, and goals-based asset allocation approaches.
e: explain how asset classes are used to represent exposures to systematic risk and discuss criteria for asset class specification.
f: explain the use of risk factors in asset allocation and their relation to traditional asset class–based approaches.
g: recommend and justify an asset allocation based on an investor’s objectives and constraints.
h: describe the use of the global market portfolio as a baseline portfolio in asset allocation.
i: discuss strategic implementation choices in asset allocation, including passive/active choices and vehicles for implementing passive and active mandates.
j: discuss strategic considerations in rebalancing asset allocations.
a: Describe and evaluate the use of mean–variance optimization in asset allocation.
b: Recommend and justify an asset allocation using mean–variance optimization.
c: Interpret and evaluate an asset allocation in relation to an investor’s economic balance sheet.
d: Recommend and justify an asset allocation based on the global market portfolio.
e: Discuss the use of Monte Carlo simulation and scenario analysis to evaluate the robustness of an asset allocation.
f: Discuss asset class liquidity considerations in asset allocation.
g: Explain absolute and relative risk budgets and their use in determining and implementing an asset allocation.
h: Describe how client needs and preferences regarding investment risks can be incorporated into asset allocation.
i: Describe the use of investment factors in constructing and analyzing an asset allocation.
j: Describe and evaluate characteristics of liabilities that are relevant to asset allocation.
k: Discuss approaches to liability-relative asset allocation.
l: Recommend and justify a liability-relative asset allocation.
m: Recommend and justify an asset allocation using a goals-based approach.
n: Describe and evaluate heuristic and other approaches to asset allocation.
o: Discuss factors affecting rebalancing policy.
a: Discuss asset size, liquidity needs, time horizon, and regulatory or other considerations as constraints on asset allocation.
b: Discuss tax considerations in asset allocation and rebalancing.
c: Recommend and justify revisions to an asset allocation given change(s) in investment objectives and/or constraints.
d: Discuss the use of short-term shifts in asset allocation.
e: Identify behavioral biases that arise in asset allocation and recommend methods to overcome them.
a: Demonstrate how an asset’s returns may be replicated by using options.
b: Discuss the investment objective(s), structure, payoff, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price at expiration of a covered call position.
c: Discuss the investment objective(s), structure, payoff, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price at expiration of a protective put position.
d: Compare the delta of covered call and protective put positions with the position of being long an asset and short a forward on the underlying asset.
e: Compare the effect of buying a call on a short underlying position with the effect of selling a put on a short underlying position.
f: Discuss the investment objective(s), structure, payoffs, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price at expiration of the following option strategies: bull spread, bear spread, straddle, and collar.
g: Describe uses of calendar spreads.
h: Discuss volatility skew and smile.
i: Identify and evaluate appropriate option strategies consistent with given investment objectives.
j: Demonstrate the use of options to achieve targeted equity risk exposures.
a: Demonstrate how interest rate swaps, forwards, and futures can be used to modify a portfolio’s risk and return.
b: Demonstrate how currency swaps, forwards, and futures can be used to modify a portfolio’s risk and return.
c: Demonstrate how equity swaps, forwards, and futures can be used to modify a portfolio’s risk and return.
d: Demonstrate the use of volatility derivatives and variance swaps.
e: Demonstrate the use of derivatives to achieve targeted equity and interest rate risk exposures.
f: Demonstrate the use of derivatives in asset allocation, rebalancing, and inferring market expectations.
a: Analyze the effects of currency movements on portfolio risk and return.
b: Discuss strategic choices in currency management.
c: Formulate an appropriate currency management program given financial market conditions and portfolio objectives and constraints.
d: Compare active currency trading strategies based on economic fundamentals, technical analysis, carry-trade, and volatility trading.
e: Describe how changes in factors underlying active trading strategies affect tactical trading decisions.
f: Describe how forward contracts and FX (foreign exchange) swaps are used to adjust hedge ratios.
g: Describe trading strategies used to reduce hedging costs and modify the risk–return characteristics of a foreign-currency portfolio.
h: Describe the use of cross-hedges, macro-hedges, and minimum-variance-hedge ratios in portfolios exposed to multiple foreign currencies.
i: Discuss challenges for managing emerging market currency exposures.
a: Discuss roles of fixed-income securities in portfolios and how fixed-income mandates may be classified.
b: Describe fixed-income portfolio measures of risk and return as well as correlation characteristics.
c: Describe bond market liquidity, including the differences among market sub-sectors, and discuss the effect of liquidity on fixed-income portfolio management.
d: Describe and interpret a model for fixed-income returns.
e: Discuss the use of leverage, alternative methods for leveraging, and risks that leverage creates in fixed-income portfolios.
f: Discuss differences in managing fixed-income portfolios for taxable and tax-exempt investors.
a: Describe liability-driven investing.
b: Evaluate strategies for managing a single liability.
c: Compare strategies for a single liability and for multiple liabilities, including alternative means of implementation.
d: Describe construction, benefits, limitations, and risk–return characteristics of a laddered bond portfolio.
e: Evaluate liability-based strategies under various interest rate scenarios and select a strategy to achieve a portfolio’s objectives.
f: Explain risks associated with managing a portfolio against a liability structure.
g: Discuss bond indexes and the challenges of managing a fixed-income portfolio to mimic the characteristics of a bond index.
h: Compare alternative methods for establishing bond market exposure passively.
i: Discuss criteria for selecting a benchmark and justify the selection of a benchmark.
a: Describe the factors affecting fixed-income portfolio returns due to a change in benchmark yields.
b: Formulate a portfolio positioning strategy given forward interest rates and an interest rate view that coincides with the market view.
c: Formulate a portfolio positioning strategy given forward interest rates and an interest rate view that diverges from the market view in terms of rate level, slope, and shape.
d: Formulate a portfolio positioning strategy based upon expected changes in interest rate volatility.
e: Evaluate a portfolio’s sensitivity using key rate durations of the portfolio and its benchmark.
f: Discuss yield curve strategies across currencies.
g: Evaluate the expected return and risks of a yield curve strategy.
a: Describe risk considerations for spread-based fixed-income portfolios.
b: Discuss the advantages and disadvantages of credit spread measures for spread-based fixed-income portfolios, and explain why option-adjusted spread is considered the most appropriate measure.
c: Discuss bottom-up approaches to credit strategies.
d: Discuss top-down approaches to credit strategies.
e: Discuss liquidity risk in credit markets and how liquidity risk can be managed in a credit portfolio.
f: Describe how to assess and manage tail risk in credit portfolios.
g: Discuss the use of credit default swap strategies in active fixed-income portfolio management.
h: Discuss various portfolio positioning strategies that managers can use to implement a specific credit spread view.
i: Discuss considerations in constructing and managing portfolios across international credit markets.
j: Describe the use of structured financial instruments as an alternative to corporate bonds in credit portfolios.
k: Describe key inputs, outputs, and considerations in using analytical tools to manage fixed-income portfolios.
a: Describe the roles of equities in the overall portfolio.
b: Describe how an equity manager’s investment universe can be segmented.
c: Describe the types of income and costs associated with owning and managing an equity portfolio and their potential effects on portfolio performance.
d: Describe the potential benefits of shareholder engagement and the role an equity manager might play in shareholder engagement.
e: Describe rationales for equity investment across the passive–active spectrum.
a: Discuss considerations in choosing a benchmark for a passively managed equity portfolio.
b: Compare passive factor-based strategies to market-capitalization-weighted indexing.
c: Compare different approaches to passive equity investing.
d: Compare the full replication, stratified sampling, and optimization approaches for the construction of passively managed equity portfolios.
e: Discuss potential causes of tracking error and methods to control tracking error for passively managed equity portfolios.
f: Explain sources of return and risk to a passively managed equity portfolio.
a: Compare fundamental and quantitative approaches to active management.
b: Analyze bottom-up active strategies, including their rationale and associated processes.
c: Analyze top-down active strategies, including their rationale and associated processes.
d: Analyze factor-based active strategies, including their rationale and associated processes.
e: Analyze activist strategies, including their rationale and associated processes.
f: Describe active strategies based on statistical arbitrage and market microstructure.
g: Describe how fundamental active investment strategies are created.
h: Describe how quantitative active investment strategies are created.
i: Discuss equity investment style classifications.
a: Describe elements of a manager’s investment philosophy that influence the portfolio construction process.
b: Discuss approaches for constructing actively managed equity portfolios.
c: Distinguish between Active Share and active risk and discuss how each measure relates to a manager’s investment strategy.
d: Discuss the application of risk budgeting concepts in portfolio construction.
e: Discuss risk measures that are incorporated in equity portfolio construction and describe how limits set on these measures affect portfolio construction.
f: discuss how assets under management, position size, market liquidity, and portfolio turnover affect equity portfolio construction decisions.
g: evaluate the efficiency of a portfolio structure given its investment mandate.
h: discuss the long-only, long extension, long/short, and equitized market-neutral approaches to equity portfolio construction, including their risks, costs, and effects on potential alphas.
a: Discuss how hedge fund strategies may be classified.
b: Discuss investment characteristics, strategy implementation, and role in a portfolio of equity-related hedge fund strategies.
c: Discuss investment characteristics, strategy implementation, and role in a portfolio of event-driven hedge fund strategies.
d: Discuss investment characteristics, strategy implementation, and role in a portfolio of relative value hedge fund strategies.
e: Discuss investment characteristics, strategy implementation, and role in a portfolio of opportunistic hedge fund strategie.
f: Discuss investment characteristics, strategy implementation, and role in a portfolio of specialist hedge fund strategies.
g: Discuss investment characteristics, strategy implementation, and role in a portfolio of multi-manager hedge fund strategies.
h: Evaluate the impact of an allocation to a hedge fund strategy in a traditional investment portfolio.
a: Explain the roles that alternative investments play in multi-asset portfolios.
b: Compare alternative investments and bonds as risk mitigators in relation to a long equity position.
c: Compare traditional and risk-based approaches to defining the investment opportunity set, including alternative investments.
d: Discuss investment considerations that are important in allocating to different types of alternative investments.
e: Discuss suitability considerations in allocating to alternative investments.
f: Discuss approaches to asset allocation to alternative investments.
g: Discuss the importance of liquidity planning in allocating to alternative investments.
h: Discuss considerations in monitoring alternative investment programs.
a: Contrast private client and institutional client investment concerns.
b: Discuss information needed in advising private clients
C: Identify tax considerations affecting a private client’s investments.
d: Identify and formulate client goals based on client information.
e: Evaluate a private client’s risk tolerance.
f: Describe technical and soft skills needed in advising private clients.
g: Evaluate capital sufficiency in relation to client goals.
h: Discuss the principles of retirement planning.
i: Discuss the parts of an investment policy statement (IPS) for a private client.
j: Prepare the investment objectives section of an IPS for a private client.
k: Evaluate and recommend improvements to an IPS for a private client.
l: Recommend and justify portfolio allocations and investments for a private client.
m: Describe effective practices in portfolio reporting and review.
n: Evaluate the success of an investment program for a private client.
o: Discuss ethical and compliance considerations in advising private clients
p: Discuss how levels of service and range of solutions are related to different private clients.
a: Compare taxation of income, wealth, and wealth transfers.
b: Describe global considerations of jurisdiction that are relevant to taxation
c: Discuss and analyze the tax efficiency of investments.
d: Analyze the impact of taxes on capital accumulation and decumulation in taxable, tax-exempt, and tax-deferred accounts.
e: Explain portfolio tax management strategies and their application.
f: Discuss risk and tax objectives in managing concentrated single-asset positions.
g: Describe strategies for managing concentrated positions in public equities.
h: Describe strategies for managing concentrated positions in privately owned businesses and real estate.
i: Discuss objectives—tax and non-tax—in planning the transfer of wealth.
j: Discuss strategies for achieving estate, bequest, and lifetime gift objectives in common law and civil law regimes.
K: Describe considerations related to managing wealth across multiple generations.
a: Compare the characteristics of human capital and financial capital as components of an individual’s total wealth.
b: Discuss the relationships among human capital, financial capital, and economic net worth.
c: Describe an economic (holistic) balance sheet.
d: Discuss risks (earnings, premature death, longevity, property, liability, and health risks) in relation to human and financial capital.
e: Describe types of insurance relevant to personal financial planning.
f: Describe the basic elements of a life insurance policy and how insurers price a life insurance policy.
g: Discuss the use of annuities in personal financial planning.
h: Discuss the relative advantages and disadvantages of fixed and variable annuities.
i: Discuss how asset allocation policy may be influenced by the risk characteristics of human capital.
j: Recommend and justify appropriate strategies for asset allocation and risk reduction when given an investor profile of key inputs.
a: Discuss common characteristics of institutional investors as a group.
b: Discuss investment policy of institutional investors.
c: Discuss the stakeholders in the portfolio, the liabilities, the investment time horizons, and the liquidity needs of different types of institutional investors.
d: Describe the focus of legal, regulatory, and tax constraints affecting different types of institutional investors.
e: Evaluate risk considerations of private defined benefit (DB) pension plans in relation to 1) plan funded status, 2) sponsor financial strength, 3) interactions between the sponsor’s business and the fund’s investments, 4) plan design, and 5) workforce characteristics.
f: Evaluate the investment policy statement of an institutional investor.
g: Evaluate the investment portfolio of a private DB plan, sovereign wealth fund, university endowment, and private foundation.
h: Describe considerations affecting the balance sheet management of banks and insurers.
a: Discuss motivations to trade and how they relate to trading strategy.
b: Discuss inputs to the selection of a trading strategy.
c: Compare benchmarks for trade execution.
d: Recommend and justify a trading strategy (given relevant facts).
e: Describe factors that typically determine the selection of a trading algorithm class.
f: Contrast key characteristics of the following markets in relation to trade implementation: equity, fixed income, options and futures, OTC derivatives, and spot currency.
g: Explain how trade costs are measured and determine the cost of a trade.
h: Evaluate the execution of a trade.
i: Evaluate a firm’s trading procedures, including processes, disclosures, and record keeping with respect to good governance.
a: Explain the following components of portfolio evaluation and their interrelationships: performance measurement, performance attribution, and performance appraisal.
b: Describe attributes of an effective attribution process.
C: Contrast return attribution and risk attribution; contrast macro and micro return attribution.
d: Describe returns-based, holdings-based, and transactions-based performance attribution, including advantages and disadvantages of each.
e: Interpret the sources of portfolio returns using a specified attribution approach.
f: Interpret the output from fixed-income attribution analyses.
g: Discuss considerations in selecting a risk attribution approach.
h: Identify and interpret investment results attributable to the asset owner versus those attributable to the investment manager.
i: Discuss uses of liability-based benchmarks.
j: Describe types of asset-based benchmarks.
k: Discuss tests of benchmark quality.
l: Describe the impact of benchmark misspecification on attribution and appraisal analysis.
m: Describe problems that arise in benchmarking alternative investments.
n: Calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration.
O: Describe limitations of appraisal measures and related metrics.
p: Evaluate the skill of an investment manager.
a: Describe the components of a manager selection process, including due diligence.
b: Contrast Type I and Type II errors in manager hiring and continuation decisions.
c: Describe uses of returns-based and holdings-based style analysis in investment manager selection.
d: Describe uses of the upside capture ratio, downside capture ratio, maximum drawdown, drawdown duration, and up/down capture in evaluating managers.
e: Evaluate a manager’s investment philosophy and investment decision-making process.
f: Evaluate the costs and benefits of pooled investment vehicles and separate accounts.
g: Compare types of investment manager contracts, including their major provisions and advantages and disadvantages.
h: Describe the three basic forms of performance-based fees.
i: Analyze and interpret a sample performance-based fee schedule.
a: Discuss tools for managing portfolio liquidity risk.
b: Discuss capture of the illiquidity premium as a long-term investment strategy.
c: Analyze asset allocation and portfolio construction in relation to liquidity needs and risk and return requirements and recommend actions to address identified needs.
d:Demonstrate the application of the Code of Ethics and Standards of Professional Conduct regarding the actions of individuals involved in manager selection.
e: Analyze the costs and benefits of derivatives versus cash market techniques for establishing or modifying asset class or risk exposures.
f: Demonstrate the use of derivatives overlays in tactical asset allocation and rebalancing.
g: Discuss ESG considerations in managing long-term institutional portfolios.
a: Identify and analyze a family’s risk exposures during the early career stage.
b: Recommend and justify methods to manage a family’s risk exposures during the early career stage.
c: Identify and analyze a family’s risk exposures during the career development stage.
d: Recommend and justify methods to manage a family’s risk exposures during the career development stage.
e: Identify and analyze a family’s risk exposures during the peak accumulation stage.
f:Recommend and justify methods to manage a family’s risk exposures during the peak accumulation stage.
g: Identify and analyze a family’s risk exposures during the early retirement stage.
h: Recommend and justify a plan to manage risks associated with an individual’s retirement lifestyle goals.
a: Discuss financial risks associated with the portfolio strategy of an institutional investor.
b: Discuss environmental and social risks associated with the portfolio strategy of an institutional investor.
c: Analyze and evaluate the financial and non-financial risk exposures in the portfolio strategy of an institutional investor.
d: Discuss various methods to manage the risks that arise on long-term direct investments of an institutional investor.
e: Evaluate strengths and weaknesses of an enterprise risk management system and recommend improvements.
a: Describe the structure of the CFA Institute Professional Conduct Program and the disciplinary review process for the enforcement of the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each standard.
a: Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity.
b: Recommend practices and procedures designed to prevent violations of the Code and Standards.
a: Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.
b: Explain how the practices, policies, or conduct does or does not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.
a: Explain the purpose of the Asset Manager Code and the benefits that may accrue to a firm that adopts the Code.
b: Explain the ethical and professional responsibilities required by the six General Principles of Conduct of the Asset Manager Code.
c: Determine whether an asset manager’s practices and procedures are consistent with the Asset Manager Code.
d: Recommend practices and procedures designed to prevent violations of the Asset Manager Code.
a: Discuss the objectives and scope of the GIPS standards and their benefits to prospective clients and investors, as well as investment managers.
b: Discuss requirements of the GIPS standards with respect to return calculation methodologies, including the treatment of external cash flows, cash and cash equivalents, and expenses and fees.
c: Explain the recommended valuation hierarchy of the GIPS standards.
d: Explain requirements of the GIPS standards with respect to composite return calculations, including methods for asset-weighting portfolio returns.
e: Explain the meaning of “discretionary” in the context of composite construction and, given a description of the relevant facts, determine whether a portfolio is likely to be considered discretionary.
f: Explain the role of investment mandates, objectives, or strategies in the construction of composites.
g: Explain requirements of the GIPS standards with respect to composite construction, including switching portfolios among composites, the timing of the inclusion of new portfolios in composites, and the timing of the exclusion of terminated portfolios from composites.
h: Explain requirements of the GIPS standards with respect to presentation and reporting.
i: Explain the conditions under which the performance of a past firm or affiliation may be linked to or used to represent the historical performance of a new or acquiring firm.
j: Discuss the purpose, scope, and process of verification.
a. Distinguish between expected loss and unexpected loss and provide examples of each.
b. Evaluate, compare and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative risk assessment techniques, and enterprise risk management.
c. Distinguish between expected loss and unexpected loss and provide examples of each.
d. Interpret the relationship between risk and reward, and explain how conflicts of interest can impact risk management.
e. Describe and differentiate between the key classes of risks, explain how each type of risk can arise, and assess the potential impact of each type of risk on an organization.
f. Explain how risk factors can interact with each other and describe challenges in aggregating risk exposures.
a. Compare different strategies a firm can use to manage its risk exposures and explain situations in which a firm would want to use each strategy.
b. Explain the relationship between risk appetite and a firm’s risk management decisions.
c. Evaluate some advantages and disadvantages of hedging risk exposures, and explain challenges that can arise when implementing a hedging strategy.
d. Apply appropriate methods to hedge operational and financial risks, including pricing, foreign currency, and interest rate risk.
e. Assess the impact of risk management tools and instruments, including risk limits and derivatives.
a. Explain changes in regulations and corporate risk governance that occurred as a result of the 2007-2009 financial crisis.
b. Describe best practices for the governance of a firm’s risk management processes.
c. Explain the risk management roles and responsibilities of a firm’s board of directors.
d. Evaluate the relationship between a firm’s risk appetite and its business strategy, including the role of incentives.
e. Illustrate the interdependence of functional units within a firm as it relates to risk management.
f. Assess the role and responsibilities of a firm’s audit committee.
a. Compare different types of credit derivatives, explain their applications, and describe their advantages.
b. Explain different traditional approaches or mechanisms that firms can use to help mitigate credit risk.
c. Evaluate the role of credit derivatives in the 2007-2009 financial crisis and explain changes in the credit derivative market that occurred as a result of the crisis.
d. Explain the process of securitization, describe a special purpose vehicle (SPV), and assess the risk of different business models that banks can use for securitized products.
a. Explain MPT and interpret the Markowitz efficient frontier.
b. Understand the derivation and components of the CAPM.
c. Describe the assumptions underlying the CAPM.
d. Interpret and compare the capital market line and the security market line.
e. Apply the CAPM in calculating the expected return on an asset.
f. Interpret beta and calculate the beta of a single asset or portfolio.
g. Calculate, compare, and interpret the following performance measures: the Sharpe performance index, the Treynor performance index, the Jensen performance index, the tracking error, information ratio, and Sorting ratio.
a. Explain the Arbitrage Pricing Theory (APT), describe its assumptions, and compare the APT to the CAPM.
b. Describe the inputs (including factor betas) to a multifactor model and explain the challenges of using multifactor models in hedging.
c. Calculate the expected return of an asset using a single-factor and a multifactor model.
d. Explain how to construct a portfolio to hedge exposure to multiple factors.
e. Describe and apply the Fama-French three-factor model in estimating asset returns.
a. Explain the potential benefits of having effective risk data aggregation and reporting.
b. Explain challenges to the implementation of a strong risk data aggregation and reporting process and the potential impacts of using poor quality data.
c. Describe key governance principles related to risk data aggregation and risk reporting.
d. Describe characteristics of effective data architecture, IT infrastructure, and risk-reporting practices.
a. Describe ERM and compare an ERM program with a traditional silo-based risk management program.
b. Describe the motivations for a firm to adopt an ERM initiative.
c. Explain best practices for the governance and implementation of an ERM program.
d. Describe risk culture, explain the characteristics of a strong corporate risk culture, and describe
challenges to the establishment of a strong risk culture at a firm.
e. Explain the role of scenario analysis in the implementation of an ERM program and describe its
advantages and disadvantages.
f. Explain the use of scenario analysis in stress testing programs and capital planning.
a. Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors.
b. Interest rate risk, including the 1980s savings and loan crisis in the U.S.
c. Funding liquidity risk, including Lehman Brothers, Continental Illinois, and Northern Rock.
d. Implementing hedging strategies, including the Metallgesellschaft case.
e. Model risk, including the Niederhoffer case, Long Term Capital Management, and the London Whale case.
f. Rogue trading and misleading reporting, including the Barings case.
g. Financial engineering and complex derivatives, including Bankers Trust, the Orange County case, and Sachsen Landesbank.
h. Reputational risk, including the Volkswagen case.
i. Corporate governance, including the Enron case.
j. Cyber risk, including the SWIFT case.
a. Describe the historical background and provide an overview of the 2007-2009 financial crisis.
b. Describe the build-up to the financial crisis and the factors that played an important role.
c. Explain the role of subprime mortgages and collateralized debt obligations (CDOs) in the crisis.
d. Compare the roles of different types of institutions in the financial crisis, including banks, financial
intermediaries, mortgage brokers and lenders, and rating agencies.
e. Describe trends in the short-term wholesale funding markets that contributed to the financial crisis, including their impact on systemic risk.
f. Describe responses made by central banks in response to the crisis.
a. Describe the responsibility of each GARP Member with respect to professional integrity, ethical conduct, conflicts of interest, confidentiality of information, and adherence to generally accepted practices in risk management.
b. Describe the potential consequences of violating the GARP Code of Conduct.
a. Describe an event and an event space.
b. Describe independent events and mutually exclusive events.
c. Explain the difference between independent events and conditionally independent events.
d. Calculate the probability of an event for a discrete probability function.
e. Define and calculate a conditional probability.
f. Distinguish between conditional and unconditional probabilities.
g. Explain and apply Bayes’ rule.
a. Describe and distinguish a probability mass function from a cumulative distribution function, and explain the relationship between these two.
b. Understand and apply the concept of a mathematical expectation of a random variable.
c. Describe the four common population moments.
d. Explain the differences between a probability mass function and a probability density function.
e. Characterize the quantile function and quantile-based estimators.
f. Explain the effect of a linear transformation of a random variable on the mean, variance, standard deviation, skewness, kurtosis, median and interquartile range.
a. Distinguish the key properties and identify the common occurrences of the following distributions: uniform distribution, Bernoulli distribution, binomial distribution, Poisson distribution, normal distribution, lognormal distribution, Chi-squared distribution, Student’s t and F-distributions.
b. Describe a mixture distribution and explain the creation and characteristics of mixture distributions.
a. Explain how a probability matrix can be used to express a probability mass function.
b. Compute the marginal and conditional distributions of a discrete bivariate random variable.
c. Explain how the expectation of a function is computed for a bivariate discrete random variable.
d. Define covariance and explain what it measures.
e. Explain the relationship between the covariance and correlation of two random variables, and how these are related to the independence of the two variables.
f. Explain the effects of applying linear transformations on the covariance and correlation between two random variables.
g. Compute the variance of a weighted sum of two random variables.
h. Compute the conditional expectation of a component of a bivariate random variable.
i. Describe the features of an independent and identically distributed (iid) sequence of random variables.
j. Explain how the iid property is helpful in computing the mean and variance of a sum of iid random variables.
a. Estimate the mean, variance, and standard deviation using sample data.
b. Explain the difference between a population moment and a sample moment.
c. Distinguish between an estimator and an estimate.
d. Describe the bias of an estimator and explain what the bias measures.
e. Explain what is meant by the statement that the mean estimator is BLUE.
f. Describe the consistency of an estimator and explain the usefulness of this concept.
g. Explain how the Law of Large Numbers (LLN) and Central Limit Theorem (CLT) apply to the sample mean.
h. Estimate and interpret the skewness and kurtosis of a random variable.
i. Use sample data to estimate quantiles, including the median.
j. Estimate the mean of two variables and apply the CLT.
k. Estimate the covariance and correlation between two random variables.
l. Explain how coskewness and cokurtosis are related to skewness and kurtosis.
a. Construct an appropriate null hypothesis and alternative hypothesis, and distinguish between the two.
b. Differentiate between a one-sided and a two-sided test and identify when to use each test.
c. Explain the difference between Type I and Type II errors and how these relate to the size and power of a test.
d. Understand how a hypothesis test and a confidence interval are related.
e. Explain what the p-value of a hypothesis test measures.
f. Construct and apply confidence intervals for one-sided and two-sided hypothesis tests, and interpret the results of hypothesis tests with a specific confidence level.
g. Identify the steps to test a hypothesis about the difference between two population means.
h. Explain the problem of multiple testing and how it can lead to biased results.
a. Describe the models which can be estimated using linear regression and differentiate them from those which cannot.
b. Interpret the results of an ordinary least squares (OLS) regression with a single explanatory variable.
c. Describe the key assumptions of OLS parameter estimation.
d. Characterize the properties of OLS estimators and their sampling distributions.
e. Construct, apply, and interpret hypothesis tests and confidence intervals for a single regression coefficient in a regression.
f. Explain the steps needed to perform a hypothesis test in a linear regression.
g. Describe the relationship among a t-statistic, its p-value, and a confidence interval.
a. Distinguish between the relative assumptions of single and multiple regression.
b. Interpret regression coefficients in a multiple regression.
c. Interpret goodness-of-fit measures for single and multiple regressions, including R2 and adjusted-R2.
d. Construct, apply, and interpret joint hypothesis tests and confidence intervals for multiple coefficients in a regression.
a. Explain how to test whether a regression is affected by heteroskedasticity.
b. Describe approaches to using heteroskedastic data.
c. Characterize multicollinearity and its consequences; distinguish between multicollinearity and perfect collinearity.
d. Describe the consequences of excluding a relevant explanatory variable from a model and contrast those with the consequences of including an irrelevant regressor.
e. Explain two model selection procedures and how these relate to the bias-variance trade off.
f. Describe the various methods of visualizing residuals and their relative strengths.
g. Describe methods for identifying outliers and their impact.
h. Determine the conditions under which OLS is the best linear unbiased estimator.
a. Describe the requirements for a series to be covariance stationary.
b. Define the autocovariance function and the autocorrelation function.
c. Define white noise, and describe independent white noise and normal (Gaussian) white noise.
d. Define and describe the properties of autoregressive (AR) processes.
e. Define and describe the properties of moving average (MA) processes.
f. Explain how a lag operator works.
g. Explain mean reversion and calculate a mean-reverting level.
h. Define and describe the properties of autoregressive moving average (ARMA) processes.
i. Describe the application of AR, MA, and ARMA processes.
j. Describe sample autocorrelation and partial autocorrelation.
k. Describe the Box-Pierce Q statistic and the Ljung-Box Q statistic.
l. Explain how forecasts are generated from ARMA models.
m. Describe the role of mean reversion in long-horizon forecasts.
n. Explain how seasonality is modeled in a covariance-stationary ARMA.
a. Describe linear and nonlinear time trends.
b. Explain how to use regression analysis to model seasonality.
c. Describe a random walk and a unit root.
d. Explain the challenges of modeling time series containing unit roots.
e. Describe how to test if a time series contains a unit root.
f. Explain how to construct an h-step-ahead point forecast for a time series with seasonality.
g. Calculate the estimated trend value and form an interval forecast for a time series.
a. Calculate, distinguish, and convert between simple and continuously compounded returns.
b. Define and distinguish between volatility, variance rate, and implied volatility.
c. Describe how the first two moments may be insufficient to describe non-normal distributions.
d. Explain how the Jarque-Bera test is used to determine whether returns are normally distributed.
e. Describe the power law and its use for non-normal distributions.
f. Define correlation and covariance and differentiate between correlation and dependence.
g. Describe properties of correlations between normally distributed variables when using a one-factor model.
a. Describe the basic steps to conduct a Monte Carlo simulation.
b. Describe ways to reduce Monte Carlo sampling error.
c. Explain the use of antithetic and control variates in reducing Monte Carlo sampling error.
d. Describe the bootstrapping method and its advantage over Monte Carlo simulation.
e. Describe pseudo-random number generation.
f. Describe situations where the bootstrapping method is ineffective.
g. Describe the disadvantages of the simulation approach to financial problem-solving.
a. Identify the major risks faced by banks and explain ways in which these risks can arise.
b. Distinguish between economic capital and regulatory capital.
c. Summarize the Basel Committee regulations for regulatory capital and their motivations.
d. Explain how deposit insurance gives rise to a moral hazard problem.
e. Describe investment banking financing arrangements including private placement, public offering, best efforts, firm commitment, and Dutch auction approaches.
f. Describe the potential conflicts of interest among commercial banking, securities services, and investment banking divisions of a bank, and recommend solutions to these conflict of interest problems.
g. Describe the distinctions between the banking book and the trading book of a bank.
h. Explain the originate-to-distribute banking model and discuss its benefits and drawbacks.
a. Describe the key features of the various categories of insurance companies and identify the risks facing insurance companies.
b. Describe the use of mortality tables and calculate the premium payment for a policy holder.
c. Distinguish between mortality risk and longevity risk and describe how to hedge these risks.
d. Describe defined benefit plans and defined contribution plans and explain the differences between them.
e. Compare the various types of life insurance policies.
f. Calculate and interpret loss ratio, expense ratio, combined ratio, and operating ratio for a property-casualty insurance company.
g. Describe moral hazard and adverse selection risks facing insurance companies, provide examples of each, and describe how to overcome these problems.
h. Evaluate the capital requirements for life insurance and property-casualty insurance companies.
i. Compare the guaranty system and the regulatory requirements for insurance companies with those for banks.
a. Differentiate among open-end mutual funds, closed-end mutual funds, and exchange-traded funds (ETFs).
b. Identify and describe potential undesirable trading behaviors at mutual funds.
c. Explain the concept of net asset value (NAV) of an open-end mutual fund and how it relates to share price.
d. Explain the key differences between hedge funds and mutual funds.
e. Calculate the return on a hedge fund investment and explain the incentive fee structure of a hedge fund, including the terms hurdle rate, high-water mark, and clawback.
f. Describe various hedge fund strategies including long/short equity, dedicated short, distressed securities, merger arbitrage, convertible arbitrage, fixed-income arbitrage, emerging markets, global macro, and managed futures, and identify the risks faced by hedge funds.
g. Describe characteristics of mutual fund and hedge fund performance and explain the effect of measurement biases on performance measurement.
a. Define derivatives, describe the features and uses of derivatives, and compare linear and nonlinear derivatives.
b. Describe the specifics of exchange-traded and over-the-counter markets, and evaluate the advantages and disadvantages of each.
c. Differentiate between options, forwards, and futures contracts.
d. Identify and calculate option and forward contract payoffs.
e. Differentiate among the broad categories of traders: hedgers, speculators, and arbitrageurs.
f. Calculate and compare the payoffs from hedging strategies involving forward contracts and options.
g. Calculate and compare the payoffs from speculative strategies involving futures and options.
h. Describe arbitrageurs’ strategy and calculate an arbitrage payoff.
i. Describe some of the risks that can arise from the use of derivatives.
a. Describe how exchanges can be used to alleviate counterparty risk.
b. Explain the developments in clearing that reduce risk.
c. Define netting and describe a netting process.
d. Describe the implementation of a margining process; by central counterparty (CCP); explain the determinants of and calculate initial and variation margin requirements.
e. Describe process of buying stock on margin without using CCP and calculate margin requirements.
f. Compare exchange-traded and OTC markets and describe their uses.
g. Identify risks associated with OTC markets and explain how these risks can be mitigated.
h. Describe the role of collateralization in the OTC market and compare it to the margining system.
i. Explain the use of special purpose vehicles (SPVs) in the OTC derivatives market.
a. Provide examples of the mechanics of a CCP.
b. Describe the role of CCPs and distinguish between bilateral and centralized clearing.
c. Describe advantages and disadvantages of central clearing of OTC derivatives.
d. Explain regulatory initiatives for the OTC derivatives market and their impact on central clearing.
e. Compare margin requirements in centrally cleared and bilateral markets, and explain how margin can mitigate risk.
f. Compare netting in bilateral markets vs centrally cleared.
g. Assess the impact of central clearing on the broader financial markets.
h. Identify and explain the types of risks faced by CCPs.
i. Identify and distinguish between the risks to clearing members and to non-members.
a. Define and describe the key features and specifications of a futures contract, including the underlying asset, the contract price and size, trading volume, open interest, delivery, and limits.
b. Explain the convergence of futures and spot prices.
c. Describe the role of an exchange in futures transactions.
d. Explain the differences between a normal and inverted futures market.
e. Describe the mechanics of the delivery process and contrast it with cash settlement.
f. Describe and compare different trading order types.
g. Describe the application of marking to market and hedge accounting for futures.
h. Compare and contrast forward and futures contracts.
a. Define and differentiate between short and long hedges and identify their appropriate uses.
b. Describe the arguments for and against hedging and the potential impact of hedging on firm profitability.
c. Define and calculate the basis, discuss various sources of basis risk, and explain how basis risks arise when hedging with futures.
d. Define cross hedging and compute and interpret hedge ratio and hedge effectiveness.
e. Calculate the profit and loss on a short or long hedge.
f. Compute the optimal number of futures contracts needed to hedge an exposure and explain, and calculate the “tailing the hedge” adjustment.
g. Explain how to use stock index futures contracts to change a stock portfolio’s beta.
h. Explain how to create a long-term hedge using a stack and roll strategy and describe some of the risks that arise from this strategy.
a. Explain and describe the mechanics of spot quotes, forward quotes, and futures quotes in the foreign exchange markets; distinguish between bid and ask exchange rates.
b. Calculate a bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the bid-ask spread for forward quotes.
c. Compare outright (forward) and swap transactions.
d. Define, compare, and contrast transaction risk, translation risk, and economic risk.
e. Describe examples of transaction, translation, and economic risks and explain how to hedge these risks.
f. Describe the rationale for multi-currency hedging using options.
g. Identify and explain the factors that determine exchange rates.
h. Calculate and explain the effect of an appreciation/depreciation of one currency relative to another.
i. Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.
j. Describe the relationship between nominal and real interest rates.
k. Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem and use this theorem to calculate forward foreign exchange rates.
l. Distinguish between covered and uncovered interest rate parity conditions.
a. Define and describe financial assets.
b. Define short-selling and calculate the net profit of a short sale of a dividend-paying stock.
c. Describe the differences between forward and futures contracts and explain the relationship between forward and spot prices.
d. Calculate the forward price given the underlying asset’s spot price and describe an arbitrage argument between spot and forward prices.
e. Distinguish between the forward price and the value of a forward contract.
f. Calculate the value of a forward contract on a financial asset that does or does not provide income or yield.
g. Explain the relationship between forward and futures prices.
h. Calculate the value of a stock index futures contract and explain the concept of index arbitrage.
a. Explain the key differences between commodities and financial assets.
b. Define and apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield.
c. Identify factors that impact prices on agricultural commodities, metals, energy, and weather derivatives.
d. Explain the formula for pricing commodity forwards.
e. Describe an arbitrage transaction in commodity forwards and compute the potential arbitrage profit.
f. Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.
g. Describe the cost of carry model and determine the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds.
h. Compute the forward price of a commodity with storage costs.
i. Explain how to create a synthetic commodity position and use it to explain the relationship between the forward price and the expected future spot price.
j. Explain the impact of systematic and nonsystematic risk on current futures prices and expected future spot prices.
k. Define and interpret normal backwardation and contango.
a. Describe the various types and uses of options; define moneyness.
b. Explain the payoff function and calculate the profit and loss from an options position.
c. Explain the specification of exchange-traded stock option contracts, including that of nonstandard products.
d. Explain how dividends and stock splits can impact the terms of a stock option.
e. Describe the application of commissions, margin requirements, and exercise procedures to exchange-traded options and explain the trading characteristics of these options.
f. Define and describe warrants, convertible bonds, and employee stock options.
a. Identify the six factors that affect an option’s price.
b. Identify and compute upper and lower bounds for option prices on non-dividend and dividend paying stocks.
c. Explain put-call parity and apply it to the valuation of European and American stock options, with dividends and without dividends, and express it in terms of forward prices.
d. Explain and assess potential rationales for using the early exercise features of American call and put options.
a. Explain the motivation to initiate a covered call or a protective put strategy.
b. Describe principal protected notes (PPNs) and explain necessary conditions to create a PPN.
c. Describe the use and calculate the payoffs of various spread strategies.
d. Describe the use and explain the payoff functions of combination strategies.
a. Define and contrast exotic derivatives and plain vanilla derivatives.
b. Describe some of the reasons that drive the development of exotic derivative products.
c. Explain how any derivative can be converted into a zero-cost product.
Describe how standard American options can be transformed into nonstandard American options.
e. Identify and describe the characteristics and payoff structures of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, Asian, exchange, and basket options.
f. Describe and contrast volatility and variance swaps.
g. Explain the basic premise of static option replication and how it can be applied to hedging exotic options.
a. Describe Treasury rates, LIBOR, Secured Overnight Financing Rate (SOFR), and repo rates, and explain what is meant by the “risk-free” rate.
b. Calculate the value of an investment using different compounding frequencies.
c. Convert interest rates based on different compounding frequencies.
d. Calculate the theoretical price of a bond using spot rates.
e. Calculate the Macaulay duration, modified duration, and dollar duration of a bond.
f. Evaluate the limitations of duration and explain how convexity addresses some of them.
g. Calculate the change in a bond’s price given its duration, its convexity, and a change in interest rates.
h. Derive forward interest rates from a set of spot rates.
i. Derive the value of the cash flows from a forward rate agreement (FRA).
j. Calculate zero-coupon rates using the bootstrap method.
k. Compare and contrast the major theories of the term structure of interest rates.
a. Describe features of bond trading and explain the behavior of bond yield.
b. Describe a bond indenture and explain the role of the corporate trustee in a bond indenture.
c. Define high-yield bonds and describe types of high-yield bond issuers and some of the payment features unique to high-yield bonds.
d. Differentiate between credit default risk and credit spread risk.
e. Describe event risk and explain what may cause it to manifest in corporate bonds.
f. Describe different characteristics of bonds such as issuer, maturity, interest rate, and collateral.
g. Describe the mechanisms by which corporate bonds can be retired before maturity.
h. Define recovery rate and default rate, and differentiate between an issue default rate and a dollar default rate.
i. Evaluate the expected return from a bond investment and identify the components of the bond’s expected return.
a. Describe the various types of residential mortgage products.
b. Calculate a fixed-rate mortgage payment and its principal and interest components.
c. Summarize the securitization process of mortgage-backed securities (MBS), particularly the formation of mortgage pools, including specific pools and to-be-announceds (TBAs).
d. Calculate the weighted average coupon, weighted average maturity, single monthly mortality rate (SMM), and conditional prepayment rate (CPR) for a mortgage pool.
e. Describe the process of trading pass-through agency MBS.
f. Explain the mechanics of different types of agency MBS products, including collateralized mortgage obligations (CMOs), interest-only securities (IOs), and principal-only securities (POs).
g. Describe a dollar roll transaction and how to value a dollar roll.
h. Describe the mortgage prepayment option and factors that affect it; explain prepayment modeling and its four components: refinancing, turnover, defaults, and curtailments.
i. Describe the steps in valuing an MBS using Monte Carlo simulation.
j. Define Option-Adjusted Spread (OAS) and explain its challenges and its uses.
a. Identify the most commonly used day count conventions, describe the markets that each one is typically used in, and apply each to an interest calculation.
b. Calculate the conversion of a discount rate to a price for a U.S. Treasury bill.
c. Differentiate between the clean and dirty price for a U.S. Treasury bond; calculate the accrued interest and dirty price on a US Treasury bond.
d. Explain and calculate a US Treasury bond futures contract conversion factor.
e. Calculate the cost of delivering a bond into a Treasury bond futures contract.
f. Describe the impact of the level and shape of the yield curve on the cheapest-to-deliver Treasury bond decision.
g. Calculate the theoretical futures price for a Treasury bond futures contract.
h. Calculate the final contract price on a Eurodollar futures contract and compare Eurodollar futures to FRAs.
i. Describe and compute the Eurodollar futures contract convexity adjustment.
j. Calculate the duration-based hedge ratio and create a duration-based hedging strategy using interest rate futures.
k. Explain the limitations of using a duration-based hedging strategy.
a. Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows.
b. Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows.
c. Explain the role of financial intermediaries in the swaps market.
d. Describe the role of the confirmation in a swap transaction.
e. Describe the comparative advantage argument for the existence of interest rate swaps and evaluate some of the criticisms of this argument.
f. Explain how the discount rates in a plain vanilla interest rate swap are computed.
g. Calculate the value of a plain vanilla interest rate swap based on two simultaneous bond positions.
h. Calculate the value of a plain vanilla interest rate swap from a sequence of FRAs.
i. Explain the mechanics of a currency swap and compute its cash flows.
j. Explain how a currency swap can be used to transform an asset or liability and calculate the resulting cash flows.
k. Calculate the value of a currency swap based on two simultaneous bond positions.
l. Calculate the value of a currency swap based on a sequence of forward exchange rates.
m. Identify and describe other types of swaps, including commodity, volatility, credit default, and exotic swaps.
n. Describe the credit risk exposure in a swap position.
a. Describe the mean-variance framework and the efficient frontier.
b. Compare the normal distribution with the typical distribution of returns of risky financial assets such as equities.
c. Define the VaR measure of risk, describe assumptions about return distributions and holding periods, and explain the limitations of VaR.
d. Explain and calculate ES and compare and contrast VaR and ES.
e. Define the properties of a coherent risk measure and explain the meaning of each property.
f. Explain why VaR is not a coherent risk measure.
a. Explain and give examples of linear and non-linear portfolios.
b. Describe and explain the historical simulation approach for computing VaR and ES.
c. Describe the delta-normal approach and use it to calculate VaR for non-linear derivatives.
d. Describe and calculate VaR for linear derivatives.
e. Describe the limitations of the delta-normal method.
f. Explain the structured Monte Carlo method for computing VaR and identify its strengths and weaknesses.
g. Describe the implications of correlation breakdown for scenario analysis.
h. Describe worst-case scenario (WCS) analysis and compare WCS to VaR.
a. Explain how asset return distributions tend to deviate from the normal distribution.
b. Explain reasons for fat tails in a return distribution and describe their implications.
c. Distinguish between conditional and unconditional distributions, and describe the implications of regime switching on quantifying volatility.
d. Compare and contrast different approaches for estimating conditional volatility.
e. Apply the exponentially weighted moving average (EWMA) approach and the GARCH (1,1) model to estimate volatility, and describe alternative approaches to weighting historical return data.
f. Apply the GARCH (1,1) model to estimate volatility.
g. Explain and apply approaches to estimate long horizon volatility/VaR and describe the process of mean reversion according to a GARCH (1,1) model.
h. Evaluate implied volatility as a predictor of future volatility and its shortcomings.
i. Describe an example of updating correlation estimates.
a. Describe external rating scales, the rating process, and the link between ratings and default.
b. Define conditional and unconditional default probabilities and explain the distinction between the two.
c. Define and use the hazard rate to calculate the unconditional default probability of a credit asset.
d. Define recovery rate and calculate the expected loss from a loan.
e. Explain and compare the through-the-cycle and point-in-time internal ratings approaches.
f. Describe alternative methods to credit ratings produced by rating agencies.
g. Compare external and internal ratings approaches.
h. Describe and interpret a ratings transition matrix and explain its uses.
i. Describe the relationships between changes in credit ratings and changes in stock prices, bond prices, and credit default swap spreads.
j. Explain historical failures and potential challenges to the use of credit ratings in making investment decisions.
a. Explain how a country’s position in the economic growth life cycle, political risk, legal risk, and economic structure affects its risk exposure.
b. Evaluate composite measures of risk that incorporate all major types of country risk.
c. Compare instances of sovereign default in both foreign currency debt and local currency debt and explain common causes of sovereign defaults.
d. Describe the consequences of sovereign default.
e. Describe factors that influence the level of sovereign default risk; explain and assess how rating agencies measure sovereign default risks.
f. Describe the characteristics of sovereign credit spreads and sovereign credit default swaps (CDS) and compare the use of sovereign spreads to credit ratings.
a. Explain the distinctions between economic capital and regulatory capital and describe how economic capital is derived.
b. Describe the degree of dependence typically observed among the loan defaults in a bank’s loan portfolio, and explain the implications for the portfolio’s default rate.
c. Define and calculate expected loss (EL).
d. Define and explain unexpected loss (UL).
e. Estimate the mean and standard deviation of credit losses assuming a binomial distribution.
f. Describe the Gaussian copula model and its application.
g. Describe and apply the Vasicek model to estimate default rate and credit risk capital for a bank.
h. Describe the CreditMetrics model and explain how it is applied in estimating economic capital.
i. Describe and use Euler’s theorem to determine the contribution of a loan to the overall risk of a portfolio.
j. Explain why it is more difficult to calculate credit risk capital for derivatives than for loans.
k. Describe challenges to quantifying credit risk.
a. Describe the different categories of operational risk and explain how each type of risk can arise.
b. Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk regulatory capital.
c. Describe the standardized measurement approach and explain the reasons for its introduction by the Basel Committee.
d. Explain how a loss distribution is derived from an appropriate loss frequency distribution and loss severity distribution using Monte Carlo simulation.
e. Describe the common data issues that can introduce inaccuracies and biases in the estimation of loss frequency and severity distributions.
f. Describe how to use scenario analysis in instances when data are scarce.
g. Describe how to identify causal relationships and how to use Risk and Control Self-assessment (RCSA), Key Risk Indicators (KRIs), and education to understand and manage operational risks.
h. Describe the allocation of operational risk capital to business units.
i. Explain how to use the power law to measure operational risk.
j. Explain how the moral hazard and adverse selection problems faced by insurance companies relate to insurance against operational risk.
a. Describe the rationale for the use of stress testing as a risk management tool.
b. Explain key considerations and challenges related to stress testing, including choice of scenarios, regulatory specifications, model building, and reverse stress testing.
c. Describe the relationship between stress testing and other risk measures, particularly in
enterprise-wide stress testing.
d. Describe stressed VaR and stressed ES, including their advantages and disadvantages, and compare the process of determining stressed VaR and ES to that of traditional VaR and ES.
e. Describe the responsibilities of the board of directors, senior management, and the internal audit function in stress testing governance.
f. Describe the role of policies and procedures, validation, and independent review in stress testing governance.
g. Describe the Basel stress testing principles for banks regarding the implementation of stress testing.
a. Define discount factor and use a discount function to compute present and future values.
b. Define the “law of one price,” explain it using an arbitrage argument, and describe how it can be applied to bond pricing.
c. Identify arbitrage opportunities for fixed-income securities with certain cash flows.
d. Identify the components of a US Treasury coupon bond and compare the structure to Treasury STRIPS, including the difference between P-STRIPS and C-STRIPS.
e. Construct a replicating portfolio using multiple fixed income securities to match the cash flows of a given fixed-income security.
f. Differentiate between “clean” and “dirty” bond pricing and explain the implications of accrued interest with respect to bond pricing.
g. Describe the common day-count conventions used in bond pricing.
a. Calculate and interpret the impact of different compounding frequencies on a bond’s value.
b. Define spot rate and compute discount factors given spot rates.
c. Interpret the forward rate and compute forward rates given spot rates.
d. Define par rate and describe the equation for the par rate of a bond.
e. Interpret the relationship between spot, forward, and par rates.
f. Assess the impact of maturity on the price of a bond and the returns generated by bonds.
g. Define the “flattening” and “steepening” of rate curves and describe a trade to reflect expectations that a curve will flatten or steepen.
h. Describe a swap transaction and explain how a swap market defines par rates.
i. Describe overnight indexed swaps (OIS) and distinguish OIS rates from LIBOR swap rates.
a. Distinguish between gross and net realized returns and calculate the realized return for a bond over a holding period including reinvestments.
b. Define and interpret the spread of a bond and explain how a spread is derived from a bond price and a term structure of rates.
c. Define, interpret, and apply a bond’s yield-to-maturity (YTM) to bond pricing.
d. Compute a bond’s YTM given a bond structure and price.
e. Calculate the price of an annuity and a perpetuity.
f. Explain the relationship between spot rates and YTM.
g. Define the coupon effect and explain the relationship between coupon rate, YTM, and bond prices.
h. Explain the decomposition of the profit and loss (P/L) for a bond position or portfolio into separate factors including carry roll-down, rate change, and spread change effects.
i. Explain the following four common assumptions in carry roll-down scenarios: realized forwards, unchanged term structure, unchanged yields, and realized expectations of short-term rates; and calculate carry roll down under these assumptions.
a. Describe a one-factor interest rate model and identify common examples of interest rate factors.
b. Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.
c. Calculate the face amount of bonds required to hedge an option position given the DV01 of each.
d. Define, compute, and interpret the effective duration of a fixed income security given a change in yield and the resulting change in price.
e. Compare and contrast DV01 and effective duration as measures of price sensitivity.
f. Define, compute, and interpret the convexity of a fixed income security given a change in yield and the resulting change in price.
g. Explain the process of calculating the effective duration and convexity of a portfolio of fixed income securities.
h. Describe an example of hedging based on effective duration and convexity.
i. Construct a barbell portfolio to match the cost and duration of a given bullet investment and explain the advantages and disadvantages of bullet versus barbell portfolios.
a. Describe principal components analysis and explain its use in understanding term structure movements.
b. Define key rate exposures and know the characteristics of key rate exposure factors, including partial 01s and forward bucket 01s.
c. Describe key-rate shift analysis.
d. Define, calculate, and interpret key rate 01 and key rate duration.
e. Compute the positions in hedging instruments necessary to hedge the key rate risks of a portfolio.
f. Relate key rates, partial 01s, and forward-bucket 01s and calculate the forward-bucket 01 for a shift in rates in one or more buckets.
g. Apply key rate and multi-factor analysis to estimating portfolio volatility.
a. Calculate the value of an American and a European call or put option using a one-step and two-step binomial model.
b. Describe how volatility is captured in the binomial model.
c. Describe how the value calculated using a binomial model converges as time periods are added.
d. Define and calculate delta of a stock option.
e. Explain how the binomial model can be altered to price options on stocks with dividends, stock indices, currencies, and futures.
a. Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return.
b. Compute the realized return and historical volatility of a stock.
c. Describe the assumptions underlying the Black-Scholes-Merton option pricing model.
d. Compute the value of a European option on a non-dividend-paying stock using the Black-Scholes-Merton model.
e. Define implied volatilities and describe how to compute implied volatilities from market prices of options using the Black-Scholes-Merton model.
f. Explain how dividends affect the decision to exercise early for American call and put options.
g. Compute the value of a European option using the Black-Scholes-Merton model on a dividend-paying stock, futures, and exchange rates.
h. Describe warrants, calculate the value of a warrant, and calculate the dilution cost of the warrant to existing shareholders. FRM.
a. Describe and assess the risks associated with naked and covered option positions.
b. Describe the use of a stop loss hedging strategy, including its advantages and disadvantages, and explain how this strategy can generate naked and covered option positions.
c. Describe delta hedging for options as well as for forward and futures contracts.
d. Compute the delta of an option.
e. Describe the dynamic aspects of delta hedging and distinguish between dynamic hedging and hedge-and-forget strategies.
f. Define and calculate the delta of a portfolio.
g. Define and describe theta, gamma, vega, and rho for option positions and calculate the gamma and vega for a portfolio.
h. Explain how to implement and maintain a delta-neutral and a gamma-neutral position.
i. Describe the relationship between delta, theta, gamma, and vega.
j. Describe how to implement portfolio insurance and how this strategy compares with delta hedging.
a. Explain the concept of risk and compare risk management with risk taking.
b. Evaluate, compare, and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative risk assessment techniques, and enterprise risk management.
c. Distinguish between expected loss and unexpected loss and provide examples of each.
d. Interpret the relationship between risk and reward and explain how conflicts of interest can impact risk management.
e. Describe and differentiate between the key classes of risks, explain how each type of risk can arise, and assess the potential impact of each type of risk on an organization.
f. Explain how risk factors can interact with each other and describe challenges in aggregating risk exposures.
a. Compare different strategies a firm can use to manage its risk exposures and explain situations in which a firm would want to use each strategy.
b. Explain the relationship between risk appetite and a firm’s risk management decisions.
c. Evaluate some advantages and disadvantages of hedging risk exposures, and explain challenges that can arise when implementing a hedging strategy.
d. Apply appropriate methods to hedge operational and financial risks, including pricing, foreign currency, and interest rate risk.
e. Assess the impact of risk management tools and instruments, including risk limits and derivatives.
a. Explain changes in regulations and corporate risk governance that occurred as a result of the 2007-2009 financial crisis.
b. Describe best practices for the governance of a firm’s risk management processes.
c. Explain the risk management roles and responsibilities of a firm’s board of directors.
d. Evaluate the relationship between a firm’s risk appetite and its business strategy, including the role of incentives.
e. Illustrate the interdependence of functional units within a firm as it relates to risk management.
f. Assess the role and responsibilities of a firm’s audit committee.
a. Compare different types of credit derivatives, explain their applications, and describe their advantages.
b. Explain different traditional approaches or mechanisms that firms can use to help mitigate credit risk.
c. Evaluate the role of credit derivatives in the 2007-2009 financial crisis and explain changes in the credit derivative market that occurred as a result of the crisis.
d. Explain the process of securitization, describe a special purpose vehicle (SPV), and assess the risk of different business models that banks can use for securitized products.
a. Explain Modern Portfolio Theory and interpret the Markowitz efficient frontier.
b. Understand the derivation and components of the CAPM.
c. Describe the assumptions underlying the CAPM.
d. Interpret and compare the capital market line and the security market line.
e. Apply the CAPM in calculating the expected return on an asset.
f. Interpret beta and calculate the beta of a single asset or portfolio.
g. Calculate, compare, and interpret the following performance measures: the Sharpe performance index, the Treynor performance index, the Jensen performance index, the tracking error, information ratio, and Sorting ratio.
a. Explain the Arbitrage Pricing Theory (APT), describe its assumptions, and compare the APT to the CAPM.
b. Describe the inputs (including factor betas) to a multifactor model and explain the challenges of using multifactor models in hedging.
c. Calculate the expected return of an asset using a single-factor and a multifactor model.
d. Explain how to construct a portfolio to hedge exposure to multiple factors.
e. Describe and apply the Fama-French three-factor model in estimating asset returns.
a. Explain the potential benefits of having effective risk data aggregation and reporting.
b. Explain challenges to the implementation of a strong risk data aggregation and reporting process and the potential impacts of using poor quality data.
c. Describe key governance principles related to risk data aggregation and risk reporting.
d. Describe characteristics of effective data architecture, IT infrastructure, and risk-reporting practices.
a. Describe ERM and compare an ERM program with a traditional silo-based risk management program.
b. Describe the motivations for a firm to adopt an ERM initiative.
c. Explain best practices for the governance and implementation of an ERM program.
d. Describe risk culture, explain the characteristics of a strong corporate risk culture, and describe challenges to the establishment of a strong risk culture at a firm.
e. Explain the role of scenario analysis in the implementation of an ERM program and describe its advantages and disadvantages.
f. Explain the use of scenario analysis in stress testing programs and capital planning.
a. Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors.
b. Interest rate risk, including the 1980s savings and loan crisis in the U.S.
c. Funding liquidity risk, including Lehman Brothers, Continental Illinois, and Northern Rock.
d. Implementing hedging strategies, including the Metallgesellschaft case.
e. Model risk, including the Niederhoffer case, Long Term Capital Management, and the London Whale case.
f. Rogue trading and misleading reporting, including the Barings case.
g. Financial engineering and complex derivatives, including Bankers Trust, the Orange County case, and Sachsen Landesbank.
h. Reputational risk, including the Volkswagen case.
i. Corporate governance, including the Enron case.
j. Cyber risk, including the SWIFT case.
a. Describe the historical background and provide an overview of the 2007-2009 financial crisis.
b. Describe the build-up to the financial crisis and the factors that played an important role.
c. Explain the role of subprime mortgages and collateralized debt obligations (CDOs) in the crisis.
d. Compare the roles of different types of institutions in the financial crisis, including banks, financial intermediaries, mortgage brokers and lenders, and rating agencies.
e. Describe trends in the short-term wholesale funding markets that contributed to the financial crisis, including their impact on systemic risk.
f. Describe responses made by central banks in response to the crisis.
a. Describe the responsibility of each GARP Member with respect to professional integrity, ethical conduct, conflicts of interest, confidentiality of information, and adherence to generally accepted practices in risk management.
b. Describe the potential consequences of violating the GARP Code of Conduct.
a. Describe an event and an event space.
b. Describe independent events and mutually exclusive events.
c. Explain the difference between independent events and conditionally independent events.
d. Calculate the probability of an event for a discrete probability function.
e. Define and calculate a conditional probability.
f. Distinguish between conditional and unconditional probabilities.
g. Explain and apply Bayes’ rule.
a. Describe and distinguish a probability mass function from a cumulative distribution function, and explain the relationship between these two.
b. Understand and apply the concept of a mathematical expectation of a random variable.
c. Describe the four common population moments.
d. Explain the differences between a probability mass function and a probability density function.
e. Characterize the quantile function and quantile-based estimators.
f. Explain the effect of a linear transformation of a random variable on the mean, variance, standard deviation, skewness, kurtosis, median and interquartile range.
a. Distinguish the key properties and identify the common occurrences of the following distributions: uniform distribution, Bernoulli distribution, binomial distribution, Poisson distribution, normal distribution, lognormal distribution, Chi-squared distribution, Student’s t and F-distributions.
b. Describe a mixture distribution and explain the creation and characteristics of mixture distributions.
a. Explain how a probability matrix can be used to express a probability mass function.
b. Compute the marginal and conditional distributions of a discrete bivariate random variable.
c. Explain how the expectation of a function is computed for a bivariate discrete random variable.
d. Define covariance and explain what it measures.
e. Explain the relationship between the covariance and correlation of two random variables, and how these are related to the independence of the two variables.
f. Explain the effects of applying linear transformations on the covariance and correlation between two random variables.
g. Compute the variance of a weighted sum of two random variables.
h. Compute the conditional expectation of a component of a bivariate random variable.
i. Describe the features of an independent and identically distributed (iid) sequence of random variables.
j. Explain how the iid property is helpful in computing the mean and variance of a sum of iid random variables.
a. Estimate the mean, variance, and standard deviation using sample data.
b. Explain the difference between a population moment and a sample moment.
c. Distinguish between an estimator and an estimate.
d. Describe the bias of an estimator and explain what the bias measures.
e. Explain what is meant by the statement that the mean estimator is BLUE.
f. Describe the consistency of an estimator and explain the usefulness of this concept.
g. Explain how the Law of Large Numbers (LLN) and Central Limit Theorem (CLT) apply to the sample mean.
h. Estimate and interpret the skewness and kurtosis of a random variable.
i. Use sample data to estimate quantiles, including the median.
j. Estimate the mean of two variables and apply the CLT.
k. Estimate the covariance and correlation between two random variables.
l. Explain how coskewness and cokurtosis are related to skewness and kurtosis.
a. Construct an appropriate null hypothesis and alternative hypothesis, and distinguish between the two.
b. Differentiate between a one-sided and a two-sided test and identify when to use each test.
c. Explain the difference between Type I and Type II errors and how these relate to the size and power of a test.
d. Understand how a hypothesis test and a confidence interval are related.
e. Explain what the p-value of a hypothesis test measures.
f. Construct and apply confidence intervals for one-sided and two-sided hypothesis tests, and interpret the results of hypothesis tests with a specific confidence level.
g. Identify the steps to test a hypothesis about the difference between two population means.
h. Explain the problem of multiple testing and how it can lead to biased results.
a. Describe the models which can be estimated using linear regression and differentiate them from those which cannot.
b. Interpret the results of an ordinary least squares (OLS) regression with a single explanatory variable.
c. Describe the key assumptions of OLS parameter estimation.
d. Characterize the properties of OLS estimators and their sampling distributions.
e. Construct, apply, and interpret hypothesis tests and confidence intervals for a single regression coefficient in a regression.
f. Explain the steps needed to perform a hypothesis test in a linear regression.
g. Describe the relationship among a t-statistic, its p-value, and a confidence interval.
h: Estimate the correlation coefficient from the R2 measure obtained in linear regressions with a single explanatory variable.
a. Distinguish between the relative assumptions of single and multiple regression.
b. Interpret regression coefficients in a multiple regression.
c. Interpret goodness-of-fit measures for single and multiple regressions, including R2 and adjusted-R2.
d. Construct, apply, and interpret joint hypothesis tests and confidence intervals for multiple coefficients in a regression.
e: Calculate the regression R2 using the three components of the decomposed variation of the dependent variable data: the explained sum of squares, the total sum of squares, and the residual sum of squares.
a. Explain how to test whether a regression is affected by heteroskedasticity.
b. Describe approaches to using heteroskedastic data.
c. Characterize multicollinearity and its consequences; distinguish between multicollinearity and perfect collinearity.
d. Describe the consequences of excluding a relevant explanatory variable from a model and contrast those with the consequences of including an irrelevant regressor.
e. Explain two model selection procedures and how these relate to the bias-variance trade off.
f. Describe the various methods of visualizing residuals and their relative strengths.
g. Describe methods for identifying outliers and their impact.
h. Determine the conditions under which OLS is the best linear unbiased estimator.
a. Describe the requirements for a series to be covariance stationary.
b. Define the autocovariance function and the autocorrelation function.
c. Define white noise, and describe independent white noise and normal (Gaussian) white noise.
d. Define and describe the properties of autoregressive (AR) processes.
e. Define and describe the properties of moving average (MA) processes.
f. Explain how a lag operator works.
g. Explain mean reversion and calculate a mean-reverting level.
h. Define and describe the properties of autoregressive moving average (ARMA) processes.
i. Describe the application of AR, MA, and ARMA processes.
j. Describe sample autocorrelation and partial autocorrelation.
k. Describe the Box-Pierce Q statistic and the Ljung-Box Q statistic.
l. Explain how forecasts are generated from ARMA models.
m. Describe the role of mean reversion in long-horizon forecasts.
n. Explain how seasonality is modeled in a covariance-stationary ARMA.
a. Describe linear and nonlinear time trends.
b. Explain how to use regression analysis to model seasonality.
c. Describe a random walk and a unit root.
d. Explain the challenges of modeling time series containing unit roots.
e. Describe how to test if a time series contains a unit root.
f. Explain how to construct an h-step-ahead point forecast for a time series with seasonality.
g. Calculate the estimated trend value and form an interval forecast for a time series.
a. Calculate, distinguish, and convert between simple and continuously compounded returns.
b. Define and distinguish between volatility, variance rate, and implied volatility.
c. Describe how the first two moments may be insufficient to describe non-normal distributions.
d. Explain how the Jarque-Bera test is used to determine whether returns are normally distributed.
e. Describe the power law and its use for non-normal distributions.
f. Define correlation and covariance and differentiate between correlation and dependence.
g. Describe properties of correlations between normally distributed variables when using a one-factor model.
h: Compare and contrast the different measures of correlation used to assess dependence.
a. Describe the basic steps to conduct a Monte Carlo simulation.
b. Describe ways to reduce Monte Carlo sampling error.
c. Explain the use of antithetic and control variates in reducing Monte Carlo sampling error.
d. Describe the bootstrapping method and its advantage over Monte Carlo simulation.
e. Describe pseudo-random number generation.
f. Describe situations where the bootstrapping method is ineffective.
g. Describe the disadvantages of the simulation approach to financial problem-solving.
a. Discuss the philosophical and practical differences between machine-learning techniques and classical econometrics.
b. Explain the differences among the training, validation, and test data sub-samples, and how each is used.
c. Understand the differences between and consequences of underfitting and overfitting, and propose potential remedies for each.
d. Use principal components analysis to reduce the dimensionality of a set of features.
e. Describe how the K-means algorithm separates a sample into clusters.
f. Be aware of natural language processing and how it is used.
g. Differentiate among unsupervised, supervised, and reinforcement learning models.
h. Explain how reinforcement learning operates and how it is used in decision-making.
a. Explain the role of linear regression and logistic regression in prediction.
b. Understand how to encode categorical variables.
c. Discuss why regularization is useful, and distinguish between the ridge regression and LASSO approaches.
d. Show how a decision tree is constructed and interpreted.
e. Describe how ensembles of learners are built.
f. Outline the intuition behind the K nearest neighbors and support vector machine methods for classification.
g. Understand how neural networks are constructed and how their weights are determined.
h. Evaluate the predictive performance of logistic regression models and neural network models using a confusion matrix.
a. Identify the major risks faced by banks and explain ways in which these risks can arise.
b. Distinguish between economic capital and regulatory capital.
c. Summarize the Basel Committee regulations for regulatory capital and their motivations.
d. Explain how deposit insurance gives rise to a moral hazard problem.
e. Describe investment banking financing arrangements including private placement, public offering, best efforts, firm commitment, and Dutch auction approaches.
f. Describe the potential conflicts of interest among commercial banking, securities services, and investment banking divisions of a bank, and recommend solutions to these conflict of interest problems.
g. Describe the distinctions between the banking book and the trading book of a bank.
h. Explain the originate-to-distribute banking model and discuss its benefits and drawbacks.
a. Describe the key features of the various categories of insurance companies and identify the risks facing insurance companies.
b. Describe the use of mortality tables and calculate the premium payment for a policy holder.
c. Distinguish between mortality risk and longevity risk and describe how to hedge these risks.
d. Describe defined benefit plans and defined contribution plans and explain the differences between them.
e. Compare the various types of life insurance policies.
f. Calculate and interpret loss ratio, expense ratio, combined ratio, and operating ratio for a property-casualty insurance company.
g. Describe moral hazard and adverse selection risks facing insurance companies, provide examples of each, and describe how to overcome these problems.
h. Evaluate the capital requirements for life insurance and property-casualty insurance companies.
i. Compare the guaranty system and the regulatory requirements for insurance companies with those for banks.
a. Differentiate among open-end mutual funds, closed-end mutual funds, and exchange-traded funds (ETFs).
b. Identify and describe potential undesirable trading behaviors at mutual funds.
c. Explain the concept of net asset value (NAV) of an open-end mutual fund and how it relates to share price.
d. Explain the key differences between hedge funds and mutual funds.
e. Calculate the return on a hedge fund investment and explain the incentive fee structure of a hedge fund, including the terms hurdle rate, high-water mark, and clawback.
f. Describe various hedge fund strategies including long/short equity, dedicated short, distressed securities, merger arbitrage, convertible arbitrage, fixed-income arbitrage, emerging markets, global macro, and managed futures, and identify the risks faced by hedge funds.
g. Describe characteristics of mutual fund and hedge fund performance and explain the effect of measurement biases on performance measurement.
a. Define derivatives, describe the features and uses of derivatives, and compare linear and nonlinear derivatives.
b. Describe the specifics of exchange-traded and over-the-counter markets, and evaluate the advantages and disadvantages of each.
c. Differentiate between options, forwards, and futures contracts.
d. Identify and calculate option and forward contract payoffs.
e. Differentiate among the broad categories of traders: hedgers, speculators, and arbitrageurs.
f. Calculate and compare the payoffs from hedging strategies involving forward contracts and options.
g. Calculate and compare the payoffs from speculative strategies involving futures and options.
h. Describe arbitrageurs’ strategy and calculate an arbitrage payoff.
i. Describe some of the risks that can arise from the use of derivatives.
a. Describe how exchanges can be used to alleviate counterparty risk.
b. Explain the developments in clearing that reduce risk.
c. Define netting and describe a netting process.
d. Describe the implementation of a margining process; by central counterparty (CCP); explain the determinants of and calculate initial and variation margin requirements.
e. Describe process of buying stock on margin without using CCP and calculate margin requirements.
f. Compare exchange-traded and OTC markets and describe their uses.
g. Identify risks associated with OTC markets and explain how these risks can be mitigated.
h. Describe the role of collateralization in the OTC market and compare it to the margining system.
i. Explain the use of special purpose vehicles (SPVs) in the OTC derivatives market.
a. Provide examples of the mechanics of a CCP.
b. Describe the role of CCPs and distinguish between bilateral and centralized clearing.
c. Describe advantages and disadvantages of central clearing of OTC derivatives.
d. Explain regulatory initiatives for the OTC derivatives market and their impact on central clearing.
e. Compare margin requirements in centrally cleared and bilateral markets, and explain how margin can mitigate risk.
f. Compare netting in bilateral markets vs centrally cleared.
g. Assess the impact of central clearing on the broader financial markets.
h. Identify and explain the types of risks faced by CCPs.
i. Identify and distinguish between the risks to clearing members and to non-members.
a. Define and describe the key features and specifications of a futures contract, including the underlying asset, the contract price and size, trading volume, open interest, delivery, and limits.
b. Explain the convergence of futures and spot prices.
c. Describe the role of an exchange in futures transactions.
d. Explain the differences between a normal and inverted futures market.
e. Describe the mechanics of the delivery process and contrast it with cash settlement.
f. Describe and compare different trading order types.
g. Describe the application of marking to market and hedge accounting for futures.
h. Compare and contrast forward and futures contracts.
a. Define and differentiate between short and long hedges and identify their appropriate uses.
b. Describe the arguments for and against hedging and the potential impact of hedging on firm profitability.
c. Define and calculate the basis, discuss various sources of basis risk, and explain how basis risks arise when hedging with futures.
d. Define cross hedging and compute and interpret hedge ratio and hedge effectiveness.
e. Calculate the profit and loss on a short or long hedge.
f. Compute the optimal number of futures contracts needed to hedge an exposure and explain, and calculate the “tailing the hedge” adjustment.
g. Explain how to use stock index futures contracts to change a stock portfolio’s beta.
h. Explain how to create a long-term hedge using a stack and roll strategy and describe some of the risks that arise from this strategy.
a. Explain and describe the mechanics of spot quotes, forward quotes, and futures quotes in the foreign exchange markets; distinguish between bid and ask exchange rates.
b. Calculate a bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the bid-ask spread for forward quotes.
c. Compare outright (forward) and swap transactions.
d. Define, compare, and contrast transaction risk, translation risk, and economic risk.
e. Describe examples of transaction, translation, and economic risks and explain how to hedge these risks.
f. Describe the rationale for multi-currency hedging using options.
g. Identify and explain the factors that determine exchange rates.
h. Calculate and explain the effect of an appreciation/depreciation of one currency relative to another.
i. Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.
j. Describe the relationship between nominal and real interest rates.
k. Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem and use this theorem to calculate forward foreign exchange rates.
l. Distinguish between covered and uncovered interest rate parity conditions.
a. Define and describe financial assets.
b. Define short-selling and calculate the net profit of a short sale of a dividend-paying stock.
c. Describe the differences between forward and futures contracts and explain the relationship between forward and spot prices.
d. Calculate the forward price given the underlying asset’s spot price and describe an arbitrage argument between spot and forward prices.
e. Distinguish between the forward price and the value of a forward contract.
f. Calculate the value of a forward contract on a financial asset that does or does not provide income or yield.
g. Explain the relationship between forward and futures prices.
h. Calculate the value of a stock index futures contract and explain the concept of index arbitrage.
a. Explain the key differences between commodities and financial assets.
b. Define and apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield.
c. Identify factors that impact prices on agricultural commodities, metals, energy, and weather derivatives.
d. Explain the formula for pricing commodity forwards.
e. Describe an arbitrage transaction in commodity forwards and compute the potential arbitrage profit.
f. Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.
g. Describe the cost of carry model and determine the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds.
h. Compute the forward price of a commodity with storage costs.
i. Explain how to create a synthetic commodity position and use it to explain the relationship between the forward price and the expected future spot price.
j. Explain the impact of systematic and nonsystematic risk on current futures prices and expected future spot prices.
k. Define and interpret normal backwardation and contango.
a. Describe the various types and uses of options; define moneyness.
b. Explain the payoff function and calculate the profit and loss from an options position.
c. Explain the specification of exchange-traded stock option contracts, including that of nonstandard products.
d. Explain how dividends and stock splits can impact the terms of a stock option.
e. Describe the application of commissions, margin requirements, and exercise procedures to exchange-traded options and explain the trading characteristics of these options.
f. Define and describe warrants, convertible bonds, and employee stock options.
a. Identify the six factors that affect an option’s price.
b. Identify and compute upper and lower bounds for option prices on non-dividend and dividend paying stocks.
c. Explain put-call parity and apply it to the valuation of European and American stock options, with dividends and without dividends, and express it in terms of forward prices.
d. Explain and assess potential rationales for using the early exercise features of American call and put options.
a. Explain the motivation to initiate a covered call or a protective put strategy.
b. Describe principal protected notes (PPNs) and explain necessary conditions to create a PPN.
c. Describe the use and calculate the payoffs of various spread strategies.
d. Describe the use and explain the payoff functions of combination strategies.
a. Define and contrast exotic derivatives and plain vanilla derivatives.
b. Describe some of the reasons that drive the development of exotic derivative products.
c. Explain how any derivative can be converted into a zero-cost product.
d: Describe how standard American options can be transformed into nonstandard American options.
e. Identify and describe the characteristics and payoff structures of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, Asian, exchange, and basket options.
f. Describe and contrast volatility and variance swaps.
g. Explain the basic premise of static option replication and how it can be applied to hedging exotic options.
a. Describe Treasury rates, LIBOR, Secured Overnight Financing Rate (SOFR), and repo rates, and explain what is meant by the “risk-free” rate.
b. Calculate the value of an investment using different compounding frequencies.
c. Convert interest rates based on different compounding frequencies.
d. Calculate the theoretical price of a bond using spot rates.
e. Calculate the Macaulay duration, modified duration, and dollar duration of a bond.
f. Evaluate the limitations of duration and explain how convexity addresses some of them.
g. Calculate the change in a bond’s price given its duration, its convexity, and a change in interest rates.
h. Derive forward interest rates from a set of spot rates.
i. Derive the value of the cash flows from a forward rate agreement (FRA).
j. Calculate zero-coupon rates using the bootstrap method.
k. Compare and contrast the major theories of the term structure of interest rates.
a. Describe features of bond trading and explain the behavior of bond yield.
b. Describe a bond indenture and explain the role of the corporate trustee in a bond indenture.
c. Define high-yield bonds and describe types of high-yield bond issuers and some of the payment features unique to high-yield bonds.
d. Differentiate between credit default risk and credit spread risk.
e. Describe event risk and explain what may cause it to manifest in corporate bonds.
f. Describe different characteristics of bonds such as issuer, maturity, interest rate, and collateral.
g. Describe the mechanisms by which corporate bonds can be retired before maturity.
h. Define recovery rate and default rate, and differentiate between an issue default rate and a dollar default rate.
i. Evaluate the expected return from a bond investment and identify the components of the bond’s expected return.
a. Describe the various types of residential mortgage products.
b. Calculate a fixed-rate mortgage payment and its principal and interest components.
c. Summarize the securitization process of mortgage-backed securities (MBS), particularly the formation of mortgage pools, including specific pools and to-be-announceds (TBAs).
d. Calculate the weighted average coupon, weighted average maturity, single monthly mortality rate (SMM), and conditional prepayment rate (CPR) for a mortgage pool.
e. Describe the process of trading pass-through agency MBS.
f. Explain the mechanics of different types of agency MBS products, including collateralized mortgage obligations (CMOs), interest-only securities (IOs), and principal-only securities (POs).
g. Describe a dollar roll transaction and how to value a dollar roll.
h. Describe the mortgage prepayment option and factors that affect it; explain prepayment modeling and its four components: refinancing, turnover, defaults, and curtailments.
i. Describe the steps in valuing an MBS using Monte Carlo simulation.
j. Define Option-Adjusted Spread (OAS) and explain its challenges and its uses.
a. Identify the most commonly used day count conventions, describe the markets that each one is typically used in, and apply each to an interest calculation.
b. Calculate the conversion of a discount rate to a price for a U.S. Treasury bill.
c. Differentiate between the clean and dirty price for a U.S. Treasury bond; calculate the accrued interest and dirty price on a US Treasury bond.
d. Explain and calculate a US Treasury bond futures contract conversion factor.
e. Calculate the cost of delivering a bond into a Treasury bond futures contract.
f. Describe the impact of the level and shape of the yield curve on the cheapest-to-deliver Treasury bond decision.
g. Calculate the theoretical futures price for a Treasury bond futures contract.
h. Calculate the final contract price on a Eurodollar futures contract and compare Eurodollar futures to FRAs.
i. Describe and compute the Eurodollar futures contract convexity adjustment.
j. Calculate the duration-based hedge ratio and create a duration-based hedging strategy using interest rate futures.
k. Explain the limitations of using a duration-based hedging strategy.
a. Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows.
b. Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows.
c. Explain the role of financial intermediaries in the swaps market.
d. Describe the role of the confirmation in a swap transaction.
e. Describe the comparative advantage argument for the existence of interest rate swaps and evaluate some of the criticisms of this argument.
f. Explain how the discount rates in a plain vanilla interest rate swap are computed.
g. Calculate the value of a plain vanilla interest rate swap based on two simultaneous bond positions.
h. Calculate the value of a plain vanilla interest rate swap from a sequence of FRAs.
i. Explain the mechanics of a currency swap and compute its cash flows.
j. Explain how a currency swap can be used to transform an asset or liability and calculate the resulting cash flows.
k. Calculate the value of a currency swap based on two simultaneous bond positions.
l. Calculate the value of a currency swap based on a sequence of forward exchange rates.
m. Identify and describe other types of swaps, including commodity, volatility, credit default, and exotic swaps.
n. Describe the credit risk exposure in a swap position.
a. Describe the mean-variance framework and the efficient frontier.
b. Compare the normal distribution with the typical distribution of returns of risky financial assets such as equities.
c. Define the VaR measure of risk, describe assumptions about return distributions and holding periods, and explain the limitations of VaR.
d. Explain and calculate ES and compare and contrast VaR and ES.
e. Define the properties of a coherent risk measure and explain the meaning of each property.
f. Explain why VaR is not a coherent risk measure.
a. Explain and give examples of linear and non-linear portfolios.
b. Describe and explain the historical simulation approach for computing VaR and ES.
c. Describe the delta-normal approach and use it to calculate VaR for non-linear derivatives.
d. Describe and calculate VaR for linear derivatives.
e. Describe the limitations of the delta-normal method.
f. Explain the structured Monte Carlo method for computing VaR and identify its strengths and weaknesses.
g. Describe the implications of correlation breakdown for scenario analysis.
h. Describe worst-case scenario (WCS) analysis and compare WCS to VaR.
a. Explain how asset return distributions tend to deviate from the normal distribution.
b. Explain reasons for fat tails in a return distribution and describe their implications.
c. Distinguish between conditional and unconditional distributions, and describe the implications of regime switching on quantifying volatility.
d. Compare and contrast different parametric and non-parametric approaches for estimating conditional volatility.
e. Apply the exponentially weighted moving average (EWMA) approach and the GARCH (1,1) model to estimate volatility, and describe alternative approaches to weighting historical return data.
f. Apply the GARCH (1,1) model to estimate volatility.
g. Explain and apply approaches to estimate long horizon volatility/VaR and describe the process of mean reversion according to a GARCH (1,1) model.
h. Evaluate implied volatility as a predictor of future volatility and its shortcomings.
i. Describe an example of updating correlation estimates.
a. Describe external rating scales, the rating process, and the link between ratings and default.
b. Define conditional and unconditional default probabilities and explain the distinction between the two.
c. Define and use the hazard rate to calculate the unconditional default probability of a credit asset.
d. Define recovery rate and calculate the expected loss from a loan.
e. Explain and compare the through-the-cycle and point-in-time internal ratings approaches.
f. Describe alternative methods to credit ratings produced by rating agencies.
g. Compare external and internal ratings approaches.
h. Describe and interpret a ratings transition matrix and explain its uses.
i. Describe the relationships between changes in credit ratings and changes in stock prices, bond prices, and credit default swap spreads.
j. Explain historical failures and potential challenges to the use of credit ratings in making investment decisions.
a. Explain how a country’s position in the economic growth life cycle, political risk, legal risk, and economic structure affects its risk exposure.
b. Evaluate composite measures of risk that incorporate all major types of country risk.
c. Compare instances of sovereign default in both foreign currency debt and local currency debt and explain common causes of sovereign defaults.
d. Describe the consequences of sovereign default.
e. Describe factors that influence the level of sovereign default risk; explain and assess how rating agencies measure sovereign default risks.
f. Describe the characteristics of sovereign credit spreads and sovereign credit default swaps (CDS) and compare the use of sovereign spreads to credit ratings.
a. Explain the distinctions between economic capital and regulatory capital and describe how economic capital is derived.
b. Describe the degree of dependence typically observed among the loan defaults in a bank’s loan portfolio, and explain the implications for the portfolio’s default rate.
c. Define and calculate expected loss (EL).
d. Define and explain unexpected loss (UL).
e. Estimate the mean and standard deviation of credit losses assuming a binomial distribution.
f. Describe the Gaussian copula model and its application.
g. Describe and apply the Vasicek model to estimate default rate and credit risk capital for a bank.
h. Describe the CreditMetrics model and explain how it is applied in estimating economic capital.
i. Describe and use Euler’s theorem to determine the contribution of a loan to the overall risk of a portfolio.
j. Explain why it is more difficult to calculate credit risk capital for derivatives than for loans.
k. Describe challenges to quantifying credit risk.
a. Describe the different categories of operational risk and explain how each type of risk can arise.
b. Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk regulatory capital.
c. Describe the standardized measurement approach and explain the reasons for its introduction by the Basel Committee.
d. Explain how a loss distribution is derived from an appropriate loss frequency distribution and loss severity distribution using Monte Carlo simulation.
e. Describe the common data issues that can introduce inaccuracies and biases in the estimation of loss frequency and severity distributions.
f. Describe how to use scenario analysis in instances when data are scarce.
g. Describe how to identify causal relationships and how to use Risk and Control Self-assessment (RCSA), Key Risk Indicators (KRIs), and education to understand and manage operational risks.
h. Describe the allocation of operational risk capital to business units.
i. Explain how to use the power law to measure operational risk.
j. Explain how the moral hazard and adverse selection problems faced by insurance companies relate to insurance against operational risk.
a. Describe the rationale for the use of stress testing as a risk management tool.
b. Explain key considerations and challenges related to stress testing, including choice of scenarios, regulatory specifications, model building, and reverse stress testing.
c. Describe the relationship between stress testing and other risk measures, particularly in enterprise-wide stress testing.
d. Describe stressed VaR and stressed ES, including their advantages and disadvantages, and compare the process of determining stressed VaR and ES to that of traditional VaR and ES.
e. Describe the responsibilities of the board of directors, senior management, and the internal audit function in stress testing governance.
f. Describe the role of policies and procedures, validation, and independent review in stress testing governance.
g. Describe the Basel stress testing principles for banks regarding the implementation of stress testing.
a. Define discount factor and use a discount function to compute present and future values.
b. Define the “law of one price,” explain it using an arbitrage argument, and describe how it can be applied to bond pricing.
c. Identify arbitrage opportunities for fixed-income securities with certain cash flows.
d. Identify the components of a US Treasury coupon bond and compare the structure to Treasury STRIPS, including the difference between P-STRIPS and C-STRIPS.
e. Construct a replicating portfolio using multiple fixed income securities to match the cash flows of a given fixed-income security.
f. Differentiate between “clean” and “dirty” bond pricing and explain the implications of accrued interest with respect to bond pricing.
g. Describe the common day-count conventions used in bond pricing.
a. Calculate and interpret the impact of different compounding frequencies on a bond’s value.
b. Define spot rate and compute discount factors given spot rates.
c. Interpret the forward rate and compute forward rates given spot rates.
d. Define par rate and describe the equation for the par rate of a bond.
e. Interpret the relationship between spot, forward, and par rates.
f. Assess the impact of maturity on the price of a bond and the returns generated by bonds.
g. Define the “flattening” and “steepening” of rate curves and describe a trade to reflect expectations that a curve will flatten or steepen.
h. Describe a swap transaction and explain how a swap market defines par rates.
i. Describe overnight indexed swaps (OIS) and distinguish OIS rates from LIBOR swap rates.
a. Distinguish between gross and net realized returns and calculate the realized return for a bond over a holding period including reinvestments.
b. Define and interpret the spread of a bond and explain how a spread is derived from a bond price and a term structure of rates.
c. Define, interpret, and apply a bond’s yield-to-maturity (YTM) to bond pricing.
d. Compute a bond’s YTM given a bond structure and price.
e. Calculate the price of an annuity and a perpetuity.
f. Explain the relationship between spot rates and YTM.
g. Define the coupon effect and explain the relationship between coupon rate, YTM, and bond prices.
h. Explain the decomposition of the profit and loss (P/L) for a bond position or portfolio into separate factors including carry roll-down, rate change, and spread change effects.
i. Explain the following four common assumptions in carry roll-down scenarios: realized forwards, unchanged term structure, unchanged yields, and realized expectations of short-term rates; and calculate carry roll down under these assumptions.
a. Describe a one-factor interest rate model and identify common examples of interest rate factors.
b. Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.
c. Calculate the face amount of bonds required to hedge an option position given the DV01 of each.
d. Define, compute, and interpret the effective duration of a fixed income security given a change in yield and the resulting change in price.
e. Compare and contrast DV01 and effective duration as measures of price sensitivity.
f. Define, compute, and interpret the convexity of a fixed income security given a change in yield and the resulting change in price.
g. Explain the process of calculating the effective duration and convexity of a portfolio of fixed income securities.
h. Describe an example of hedging based on effective duration and convexity.
i. Construct a barbell portfolio to match the cost and duration of a given bullet investment and explain the advantages and disadvantages of bullet versus barbell portfolios.
a. Describe principal components analysis and explain its use in understanding term structure movements.
b. Define key rate exposures and know the characteristics of key rate exposure factors, including partial 01s and forward bucket 01s.
c. Describe key-rate shift analysis.
d. Define, calculate, and interpret key rate 01 and key rate duration.
e. Compute the positions in hedging instruments necessary to hedge the key rate risks of a portfolio.
f. Relate key rates, partial 01s, and forward-bucket 01s and calculate the forward-bucket 01 for a shift in rates in one or more buckets.
g. Apply key rate and multi-factor analysis to estimating portfolio volatility.
a. Calculate the value of an American and a European call or put option using a one-step and two-step binomial model.
b. Describe how volatility is captured in the binomial model.
c. Describe how the value calculated using a binomial model converges as time periods are added.
d. Define and calculate delta of a stock option.
e. Explain how the binomial model can be altered to price options on stocks with dividends, stock indices, currencies, and futures.
a. Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return.
b. Compute the realized return and historical volatility of a stock.
c. Describe the assumptions underlying the Black-Scholes-Merton option pricing model.
d. Compute the value of a European option on a non-dividend-paying stock using the Black-Scholes-Merton model.
e. Define implied volatilities and describe how to compute implied volatilities from market prices of options using the Black-Scholes-Merton model.
f. Explain how dividends affect the decision to exercise early for American call and put options.
g. Compute the value of a European option using the Black-Scholes-Merton model on a dividend-paying stock, futures, and exchange rates.
h. Describe warrants, calculate the value of a warrant, and calculate the dilution cost of the warrant to existing shareholders. FRM.
a. Describe and assess the risks associated with naked and covered option positions.
b. Describe the use of a stop loss hedging strategy, including its advantages and disadvantages, and explain how this strategy can generate naked and covered option positions.
c. Describe delta hedging for an option.
d. Compute the delta of an option.
e. Describe the dynamic aspects of delta hedging and distinguish between dynamic hedging and hedge-and-forget strategies.
f. Define and calculate the delta of a portfolio.
g. Define and describe theta, gamma, vega, and rho for option positions and calculate the gamma and vega for a portfolio.
h. Explain how to implement and maintain a delta-neutral and a gamma-neutral position.
i. Describe the relationship between delta, theta, gamma, and vega.
j. Describe how to implement portfolio insurance and how this strategy compares with delta hedging.
a: Estimate VaR using a historical simulation approach.
b: Estimate VaR using a parametric approach for both normal and lognormal return distributions.
c: Estimate the expected shortfall given profit and loss (P/L) or return data.
d: Describe coherent risk measures.
e: Estimate risk measures by estimating quantiles.
f: Evaluate estimators of risk measures by estimating their standard errors.
g: Interpret quantile-quantile (QQ) plots to identify the characteristics of a distribution.
a: Apply the bootstrap historical simulation approach to estimate coherent risk measures.
b: Describe historical simulation using non-parametric density estimation.
c: Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical simulation approaches.
d: Identify advantages and disadvantages of non-parametric estimation methods.
a: Explain the importance and challenges of extreme values in risk management.
b: Describe Extreme Value Theory (EVT) and its use in risk management.
c: Describe the peaks-over-threshold (POT) approach.
d: Compare and contrast the generalized extreme value and POT approaches to estimating extreme risks.
e: Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distribution.
f: Explain the multivariate EVT for risk management.
a: Describe backtesting and exceptions and explain the importance of backtesting VaR models.
b: Explain the significant diffculties in backtesting a VaR model.
c: Verify a model based on exceptions or failure rates.
d: Identify and describe Type I and Type II errors in the context of a backtesting process.
e: Explain the need to consider conditional coverage in the backtesting framework.
f: Describe the Basel rules for backtesting.
a: Explain the principles underlying VaR mapping and describe the mapping process.
b: Explain how the mapping process captures general and specific risks.
c: Differentiate among the three methods of mapping portfolios of fixed income securities.
d: Summarize how to map a fixed income portfolio into positions of standard instruments.
e: Describe how mapping of risk factors can support stress testing.
f: Explain how VaR can be computed and used relative to a performance benchmark.
g: Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.
a: Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varying volatility in VaR risk factors, and VaR backtesting.
b: Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models.
c: Compare VaR, ES, and other relevant risk measures.
d: Compare unified and compartmentalized risk measurement.
e: Compare the results of research on top-down and bottom-up risk aggregation methods.
f: Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management framework.
a: Describe financial correlation risk and the areas in which it appears in finance.
b: Explain how correlation contributed to the global financial crisis of 2007- 2009.
c: Describe the structure, uses, and payoffs of a correlation swap.
d: Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.
e: Explain the role of correlation risk in market risk and credit risk.
f: Relate correlation risk to systemic and concentration risk.
a: Describe how equity correlations and correlation volatilities behave throughout various economic states.
b: Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation.
c: Identify the best-fit distribution for equity, bond, and default correlations.
a: Explain the purpose of copula functions and the translation of the copula equation.
b: Describe the Gaussian copula and explain how to use it to derive the joint probability of default of two assets.
c: Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.
a: Explain the drawbacks to using a DV01-neutral hedge for a bond position.
b: Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge.
c: Calculate the regression hedge adjustment factor, beta.
d: Calculate the face value of an offsetting position needed to carry out a regression hedge.
e: Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge.
f: Compare and contrast level and change regressions.
g: Describe principal component analysis and explain how it is applied to constructing a hedging portfolio.
a: Calculate the expected discounted value of a zero-coupon security using a binomial tree.
b: Construct and apply an arbitrage argument to price a call option on a zerocoupon security using replicating portfolios.
c: Define risk-neutral pricing and apply it to option pricing.
d: Distinguish between true and risk-neutral probabilities and apply this difference to interest rate drift.
e: Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods.
f: Define Option-Adjusted Spread (OAS) and apply it to security pricing.
g: Describe the rationale behind the use of recombining trees in option pricing.
h: Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk-neutral probabilities.
i: Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed-income securities.
j: Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed-income securities.
a: Explain the role of interest rate expectations in determining the shape of the term structure.
b: Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of the term structure.
c: Estimate the convexity effect using Jensen’s inequality.
d: Evaluate the impact of changes in maturity, yield, and volatility on the convexity of a security.
e: Calculate the price and return of a zero-coupon bond incorporating a risk premium.
a: Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, both with and without drift.
b: Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates and no drift.
c: Describe methods for addressing the possibility of negative short-term rates in term structure models.
d: Construct a short-term rate tree under the Ho-Lee Model with time-dependent drift.
e: Describe uses and benefits of the arbitrage-free models and assess the issue of fitting models to market prices.
f: Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with mean reversion.
g: Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and half-life.
h: Describe the effectiveness of the Vasicek Model.
a: Describe the short-term rate process under a model with time-dependent volatility.
b: Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model with time-dependent volatility.
c: Assess the efficacy of time-dependent volatility models.
d: Describe the short-term rate process under the Cox-Ingersoll-Ross (CIR) and lognormal models.
e: Calculate the short-term rate change and describe the basis point volatility using the CIR and lognormal models.
f: Describe lognormal models with deterministic drift and mean reversion.
a: Define volatility smile and volatility skew.
b: Explain the implications of put-call parity on the implied volatility of call and put options.
c: Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on the underlying asset.
d: Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
e: Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.
f: Describe alternative ways of characterizing the volatility smile.
g: Describe volatility term structures and volatility surfaces and how they may be used to price options.
h: Explain the impact of the volatility smile on the calculation of an option’s Greek letter risk measures.
i: Explain the impact of a single asset price jump on a volatility smile.
a: Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of the Trading Book (FRTB) and the motivations for these changes.
b: Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can calculate its expected shortfall using the various horizons.
c: Explain the FRTB revisions to Basel regulations in the following areas:
a: Define credit risk and explain how it arises using examples.
b: Explain the components of credit risk evaluation.
c: Describe, compare, and contrast various credit risk mitigants and their role in credit analysis.
d: Compare and contrast quantitative and qualitative techniques of credit risk evaluation.
e: Compare the credit analysis of consumers, corporations, financial institutions, and sovereigns.
f: Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, exposure at default, expected loss, and time horizon.
g: Compare bank failure and bank insolvency.
a: Describe the quantitative, qualitative, and research skills a banking credit analyst is expected to have.
b: Assess the quality of various sources of information used by a credit analyst.
c: Explain the capital adequacy, asset quality, management, earnings, and liquidity (CAMEL) system used for evaluating the financial condition of a bank.
a: Evaluate a bank’s economic capital relative to its level of credit risk.
b: Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate.
c: Define and calculate expected loss (EL).
d: Defne and calculate unexpected loss (UL).
e: Estimate the variance of default probability assuming a binomial distribution.
f: Calculate UL for a portfolio and the UL contribution of each asset.
g: Describe how economic capital is derived.
h: Explain how the credit loss distribution is modeled.
i: Describe challenges to quantifying credit risk.
a: Explain the key features of a good rating system.
b: Describe the experts-based approaches, statistical-based models, and numerical approaches to predicting default.
c: Describe a rating migration matrix and calculate the probability of default, cumulative probability of default, marginal probability of default, and annualized default rate.
d: Describe rating agencies’ assignment methodologies for issue and issuer ratings.
e: Describe the relationship between borrower rating and probability of default.
f: Compare agencies’ ratings to internal experts-based rating systems.
g: Distinguish between the structural approaches and the reduced-form approaches to predicting default.
h: Apply the Merton model to calculate default probability and the distance to default and describe the limitations of using the Merton model.
i: Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms by credit quality.
j: Describe the application of a logistic regression model to estimate default probability.
k: Define and interpret cluster analysis and principal component analysis.
l: Describe the use of a cash flow simulation model in assigning ratings and default probabilities and explain the limitations of the model.
m: Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modeling default risk and define their strengths and weaknesses.
n: Describe the role and management of qualitative information in assessing probability of default.
a: Using the Merton model, calculate the value of a firm’s debt and equity and the volatility of firm value.
b: Explain the relationship between credit spreads, time to maturity, and interest rates and calculate credit spread.
c: Explain the differences between valuing senior and subordinated debt using a contingent claim approach.
d: Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity, and the risk of default.
e: Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditRisk+, CreditMetrics, and the KMV model.
f: Assess the credit risks of derivatives.
g: Describe a credit derivative, credit default swap, and total return swap.
h: Explain how to account for credit risk exposure in valuing a swap.
a: Compare the different ways of representing credit spreads.
b: Compute one credit spread given others when possible.
c: Define and compute the Spread ‘01.
d: Explain how default risk for a single company can be modeled as a Bernoulli trial.
e: Explain the relationship between exponential and Poisson distributions.
f: Define the hazard rate and use it to define probability functions for default time and conditional default probabilities.
g: Calculate the unconditional default probability and the conditional default probability given the hazard rate.
h: Distinguish between cumulative and marginal default probabilities.
i: Calculate risk-neutral default rates from spreads.
j: Describe advantages of using the CDS market to estimate hazard rates.
k: Explain how a CDS spread can be used to derive a hazard rate curve.
l: Explain how the default distribution is affected by the sloping of the spread curve.
m: Define spread risk and its measurement using the mark-to-market and spread volatility.
a: Define and calculate default correlation for credit portfolios.
b: Identify drawbacks in using the correlation-based credit portfolio framework.
c: Assess the impact of correlation on a credit portfolio and its Credit VaR.
d: Describe the use of the single-factor model to measure portfolio credit risk, including the impact of correlation.
e: Define and calculate Credit VaR.
f: Describe how Credit VaR can be calculated using a simulation of joint defaults.
g: Assess the effect of granularity on Credit VaR.
a: Describe common types of structured products.
b: Describe tranching and the distribution of credit losses in a securitization.
c: Describe a waterfall structure in a securitization.
d: Identify the key participants in the securitization process and describe conficts of interest that can arise in the process.
e: Compute and evaluate one or two iterations of interim cashflows in a threetiered securitization structure.
f: Describe a simulation approach to calculating credit losses for different tranches in a securitization.
g: Explain how the default probabilities and default correlations affect the credit risk in a securitization.
h: Explain how default sensitivities for tranches are measured.
i: Describe risk factors that impact structured products.
j: Define implied correlation and describe how it can be measured.
k: Identify the motivations for using structured credit products.
a: Describe counterparty risk and differentiate it from lending risk.
b: Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction.
c: Identify and describe institutions that take on significant counterparty risk.
d: Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default, and the recovery rate.
e: Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating counterparty risk.
f: Identify and describe the different ways institutions can quantify, manage, and mitigate counterparty risk.
g: Identify and explain the costs of an OTC derivative.
h: Explain the components of the X-Value Adjustment (xVA) term.
a: Explain the purpose of an International Swaps and Derivatives Association (ISDA) master agreement.
b: Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describe how they fit into the framework of the ISDA master agreement.
c: Describe the effectiveness of netting in reducing credit exposure under various scenarios.
d: Describe the mechanics of termination provisions and trade compressions and explain their advantages and disadvantages.
e: Identify and describe termination events and discuss their potential effects on parties to a transaction.
a: Describe the rationale for collateral management.
b: Describe the terms of a collateral agreement and features of a credit support annex (CSA) within the ISDA Master Agreement including threshold, initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.
c: Describe the role of a valuation agent.
d: Describe the mechanics of collateral and the types of collateral that are typically used.
e: Explain the process for the reconciliation of collateral disputes.
f: Explain the features of a collateralization agreement.
g: Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.
h: Explain aspects of collateral including funding, rehypothecation, and segregation.
i: Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
j: Describe the various regulatory capital requirements.
a: Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure.
b: Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of credit exposure.
c: Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure.
d: Identify typical credit exposure profiles for various derivative contracts and combination profiles.
e: Explain how payment frequencies and exercise dates affect the exposure profile of various securities.
f: Explain the general impact of aggregation on exposure, and the impact of aggregation on exposure when there is correlation between transaction values.
g: Describe the differences between funding exposure and credit exposure.
h: Explain the impact of collateralization on exposure and assess the risk associated with the remargining period, threshold, and minimum transfer amount.
i: Assess the impact of collateral on counterparty risk and funding, with and without segregation or rehypothecation.
a: Explain the motivation for and the challenges of pricing counterparty risk.
b: Describe credit value adjustment (CVA).
c: Calculate CVA and CVA as a spread with no wrong-way risk, netting, or collateralization.
d: Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.
e: Explain how netting can be incorporated into the CVA calculation.
f: Define and calculate incremental CVA and marginal CVA and explain how to convert CVA into a running spread.
g: Explain the impact of incorporating collateralization into the CVA calculation, including the impact of margin period of risk, thresholds, and initial margins.
h: Describe debt value adjustment (DVA) and bilateral CVA (BCVA).
i: Calculate DVA, BCVA, and BCVA as a spread.
j: Describe wrong-way risk and contrast it with right-way risk.
k: Identify examples of wrong-way risk and examples of right-way risk.
l: Discuss the impact of collateral on wrong-way risk.
m: Identify examples of wrong-way collateral.
n: Discuss the impact of wrong-way risk on central counterparties(CCPs).
o: Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric approaches, and jump approaches.
p: Explain the implications of central clearing on wrong-way risk.
a: Differentiate among current exposure, peak exposure, expected exposure, and expected positive exposure.
b: Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its implications for trading activities and risk management for a financial institution.
c: Describe a stress test that can be performed on a loan portfolio, and on a derivative portfolio.
d: Calculate the stressed expected loss, the stress loss for the loan portfolio, and the stress loss on a derivative portfolio.
e: Describe a stress test that can be performed on CVA.
f: Calculate the stressed CVA and the stress loss on CVA.
g: Calculate the DVA and explain how stressing DVA enters into aggregating stress tests of CCR.
h: Describe the common pitfalls in stress testing CCR.
a: Analyze the credit risks and other risks generated by retail banking.
b: Explain the differences between retail credit risk and corporate credit risk.
c: Discuss the “dark side” of retail credit risk and the measures that attempt to address the problem.
d: Define and describe credit risk scoring model types, key variables, and applications.
e: Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates, and loss rates in a credit scoring model.
f: Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP) and the accuracy ratio techniques.
g: Describe the customer relationship cycle and discuss the trade off between creditworthiness and profitability.
h: Discuss the benefits of risk-based pricing of financial services.
a: Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007–2009.
b: Identify and explain the different techniques used to mitigate credit risk and describe how some of these techniques are changing the bank credit function.
c: Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank credit portfolio.
d: Describe covered bonds, funding collateralized loan obligations (CLOs), and other securitization instruments for funding purposes.
e: Describe the different types and structures of credit derivatives including credit default swaps (CDS), first-to-default puts, total return swaps (TRS), assetbacked credit-linked notes (CLN), and their applications.
a: Define securitization, describe the securitization process, and explain the role of participants in the process.
b: Explain the terms over-collateralization, first-loss piece, equity piece, and cash waterfall within the securitization process.
c: Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose vehicle (SPV) and distinguish between the three main SPV structures: amortizing, revolving, and master trust.
d: Explain the reasons for and the benefits of undertaking securitization.
e: Describe and assess the various types of credit enhancements.
f: Explain the various performance analysis tools for securitized structures and identify the asset classes they are most applicable to.
g: Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), the weighted average coupon (WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized structures.
h: Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Public Securities Association (PSA) rate.
a: Explain the subprime mortgage credit securitization process in the United States.
b: Identify and describe key frictions in subprime mortgage securitization and assess the relative contribution of each factor to the subprime mortgage problems.
c: Compare predatory lending and borrowing.
a: Describe the three lines of defense in the Basel model for operational risk governance.
b: Summarize the fundamental principles of operational risk management as suggested by the Basel committee.
c: Explain guidelines for strong governance of operational risk and evaluate the role of the board of directors, senior management, and supervisors in implementing an effective operational risk framework.
d: Describe tools and processes that can be used to identify and assess operational risk.
e: Describe features of an effective control environment and identify specific controls that should be in place to address operational risk.
f: Explain the Basel Committee’s suggestions for managing technology risk and outsourcing risk.
a: Define enterprise risk management (ERM) and explain how implementing ERM practices and policies can create shareholder value, both at the macro and the micro level.
b: Explain how a company can determine its optimal amount of risk through the use of credit rating targets.
c: Describe the development and implementation of an ERM system, as well as challenges to the implementation of an ERM system.
d: Describe the role of and issues with correlation in risk aggregation and describe typical properties of a firm’s market risk, credit risk, and operational risk distributions.
e: Distinguish between regulatory and economic capital and explain the use of economic capital in the corporate decision-making process.
a: Describe Enterprise Risk Management (ERM) and compare and contrast differing definitions of ERM.
b: Compare the benefits and costs of ERM and describe the motivations for a firm to adopt an ERM initiative.
c: Describe the role and responsibilities of a chief risk officer (CRO) and assess how the CRO should interact with other senior management.
d: Describe the key components of an ERM program.
a: Describe best practices for the implementation and communication of a risk appetite framework (RAF) at a firm.
b: Explain key challenges to the implementation of an RAF and describe how a firm can overcome each challenge.
c: Assess the role of stress testing within an RAF and describe challenges in aggregating firm-wide risk exposures.
d: Explain lessons learned in the implementation of an RAF through the presented case studies.
a: Describe challenges faced by banks with respect to conduct and culture and explain motivations for banks to improve their conduct and culture.
b: Explain methods by which a bank can improve its corporate culture and assess the progress made by banks in this area.
c: Assess the role of regulators in encouraging strong conduct and culture at banks, and provide examples of regulatory initiatives in this area.
d: Describe best practices and lessons learned in managing a bank’s corporate culture.
a: Compare risk culture and corporate culture and explain how they interact.
b: Explain factors that influence a firm’s corporate culture and its risk culture.
c: Describe methods by which corporate culture and risk culture can be measured.
d: Describe characteristics of a strong risk culture and challenges to the implementation of an effective risk culture.
e: Assess the relationship between risk culture and business performance.
a: Describe the seven Basel II event risk categories and identify examples of operational risk events in each category.
b: Summarize the process of collecting and reporting internal operational loss data, including the selection of thresholds, the timeframe for recoveries, and reporting expected operational losses.
c: Explain the use of a risk control self-assessment (RCSA) and key risk indicators (KRIs) in identifying, controlling, and assessing operational risk exposures.
d: Describe and assess the use of scenario analysis in managing operational risk and identify the biases and challenges that can arise when using scenario analysis.
e: Compare the typical operational risk profiles of firms in different financial sectors.
f: Explain the role of operational risk governance and how a firm’s organizational structure can impact risk governance.
a: Describe model risk and explain how it can arise in the implementation of a model.
b: Describe elements of an effective model risk management process.
c: Explain best practices for the development and implementation of models.
d: Describe elements of a strong model validation process and challenges to an effective validation process.
a: Identify the most common issues that result in data errors.
b: Explain how a firm can set expectations for its data quality and describe some key dimensions of data quality used in this process.
c: Describe the operational data governance process, including the use of scorecards in managing information risk.
a: Explain the process of model validation and describe best practices for the roles of internal organizational units in the validation process.
b: Compare qualitative and quantitative processes for validating internal ratings and describe elements of each process.
c: Describe challenges related to data quality and explain steps that can be taken to validate a model’s data quality.
d: Explain how to validate the calibration and the discriminatory power of a rating model.
a: Describe ways that errors can be introduced into models.
b: Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to portfolio positions.
c: Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such modeling errors could have been avoided.
a: Define, compare, and contrast risk capital, economic capital, and regulatory capital, and explain methods and motivations for using economic capital approaches to allocate risk capital.
b: Describe the risk-adjusted return on capital (RAROC) methodology and its use in capital budgeting.
c: Compute and interpret the RAROC for a project, loan, or loan portfolio and use RAROC to compare business unit performance.
d: Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizon, measuring default probability, and choosing a confidence level.
e: Calculate the hurdle rate and apply this rate in making business decisions using RAROC.
f: Compute the adjusted RAROC for a project to determine its viability.
g: Explain challenges in modeling diversification benefits, including aggregating a firm’s risk capital and allocating economic capital to different business lines.
h: Explain best practices in implementing an approach that uses RAROC to allocate economic capital.
a: Within the economic capital implementation framework, describe the
challenges that appear in:
b: Describe the recommendations by the Bank of International Settlements (BIS) that supervisors should consider making effective use of internal risk measures, such as economic capital, that are not designed for regulatory purposes.
c: Explain benefits and impacts of using an economic capital framework within
the following areas:
d: Describe best practices and assess key concerns for the governance of an economic capital framework.
a: Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy process for bank holding companies (BHCs) subject to the Capital Plan Rule.
b: Describe practices that can result in a strong and effective capital adequacy process for a BHC in the following areas:
a: Describe the evolution of the stress testing process and compare the methodologies of historical European Banking Association (EBA), Comprehensive Capital Analysis and Review (CCAR), and Supervisory Capital Assessment Program (SCAP) stress tests.
b: Explain challenges in designing stress test scenarios, including the problem of coherence in modeling risk factors.
c: Explain challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period.
a: Explain how risks can arise through outsourcing activities to third-party service providers and describe elements of an effective program to manage outsourcing risk.
b: Explain how financial institutions should perform due diligence on third-party service providers.
c: Describe topics and provisions that should be addressed in a contract with a third-party service provider.
a: Explain best practices recommended for the assessment, management, mitigation, and monitoring of money laundering and financial terrorism (ML/FT) risks.
a: Summarize the clearing process in OTC derivatives markets.
b: Describe changes to the regulation of OTC derivatives which took place after the 2007-2009 financial crisis and explain the impact of these changes.
a: Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain the reasons for revisions to Basel regulations over time.
b: Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
c: Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit exposures and methods for calculating market risk capital for assets in the trading book.
d: Describe changes to the Basel regulations made as part of Basel II, including the three pillars.
e: Compare the standardized internal ratings-based (IRB) approach, the foundation IRB approach, and the advanced IRB approach for the calculation of credit risk capital under Basel II.
f: Calculate credit risk capital under Basel II utilizing the IRB approach.
g: Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for the calculation of operational risk capital under Basel II.
h: Summarize elements of the Solvency II capital framework for insurance companies.
a: Describe and calculate the stressed VaR introduced in Basel 2.5 and calculate the market risk capital charge.
b: Explain the process of calculating the incremental risk capital charge for positions held in a bank’s trading book.
c: Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlations between default risks.
d: Define in the context of Basel III and calculate where appropriate:
e: Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including special rules for globally systemically important banks (G-SIBs).
f: Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio, the liquidity coverage ratio, and the net stable funding ratio.
g: Describe the mechanics of contingent convertible bonds (CoCos) and explain the motivations for banks to issue them.
h: Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms that were introduced after the 2007-2009 financial crisis.
a: Explain the motivations for revising the Basel III framework and the goals and impacts of the December 2017 reforms to the Basel III framework.
b: Summarize the December 2017 revisions to the Basel III framework in the following areas:
c: Describe the revised output floor introduced as part of the Basel III reforms and approaches to be used when calculating the output floor.
a: Explain the elements of the new standardized approach to measure operational risk capital, including the business indicator, internal loss multiplier, and loss component, and calculate the operational risk capital requirement for a bank using this approach.
b: Compare the Standardized Measurement Approach (SMA) to earlier methods of calculating operational risk capital, including the Advanced Measurement Approaches (AMA).
c: Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and treatment of operational loss data.
a: Describe elements of an effective cyber-resilience framework and explain ways that an organization can become more cyber-resilient.
b: Explain resilient security approaches that can be used to increase a firm’s cyber resilience and describe challenges to their implementation.
c: Explain methods that can be used to assess the financial impact of a potential cyber attack and explain ways to increase a firm’s financial resilience.
a: Define cyber resilience and compare recent regulatory initiatives in the area of cyber resilience.
b: Describe current practices by banks and supervisors in the governance of a cyber-risk-management framework, including roles and responsibilities.
c: Explain methods for supervising cyber resilience, testing and incident response approaches, and cybersecurity and resilience metrics.
d: Explain and assess current practices for the sharing of cybersecurity information between different types of institutions.
e: Describe practices for the governance of risks of interconnected third-party service providers.
a: Describe an impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a business service.
b: Provide examples of important business services and explain criteria that firms should use to determine their important business services.
c: Explain tools and processes, including mapping and scenario testing, that financial institutions should use to improve their operational resilience and remain within their impact tolerance.
d: Describe the governance of an operational resilience policy, including the relationships between operational resilience and a firm’s risk appetite, impact tolerance, continuity planning, and outsourcing to third-party providers.
a: Define and describe operational resilience and explain essential elements of operational resilience.
b: Explain recommended principles that banks should follow to implement an effective operational resilience approach.
a: Describe elements of an effective operational resilience framework and its potential benefits.
a: Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).
b: Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, and Metallgesellschaft.
c: Evaluate Basel III liquidity risk ratios and BIS principles for sound liquidity risk management.
d: Explain liquidity black holes and identify the causes of positive feedback trading.
a: Differentiate between sources of liquidity risk and describe specific challenges faced by different types of financial institutions in managing liquidity risk.
b: Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transformation.
c: Compare transactions used in the collateral market and explain risks that can arise through collateral market transactions.
d: Describe the relationship between leverage and a firm’s return profile (including the leverage effect) and distinguish the impact of different types of transactions on a firm’s leverage and balance sheet.
e: Distinguish methods to measure and manage funding liquidity risk and transactions liquidity risk.
f: Calculate the expected transactions cost and the spread risk factor for a transaction and calculate the liquidity adjustment to VaR for a position to be liquidated over a number of trading days.
g: Discuss interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.
a: Evaluate the characteristics of sound Early Warning Indicators (EWI) measures.
b: Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve).
c: Discuss the applications of EWIs in the context of the liquidity risk management process.
a: Compare various money market and capital market instruments and discuss their advantages and disadvantages.
b: Identify and discuss various factors that affect the choice of investment securities by a bank.
c: Apply investment maturity strategies and maturity management tools based on the yield curve and duration.
a: Calculate a bank’s net liquidity position and explain factors that affect the supply and demand of liquidity at a bank.
b: Compare strategies that a bank can use to meet demands for additional liquidity.
c: Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indicators).
d: Summarize the process taken by a US bank to calculate its legal reserves.
e: Differentiate between factors that affect the choice among alternate sources of reserves.
a: Identify and explain the uses and sources of intraday liquidity.
b: Discuss the governance structure of intraday liquidity risk management.
c: Differentiate between methods for tracking intraday flows and monitoring risk levels.
a: Distinguish between deterministic and stochastic cash flows and provide examples of each.
b: Describe and provide examples of liquidity options and explain the impact of= liquidity options on a bank’s liquidity position and its liquidity management process.
c: Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, and cash flow at risk.
d: Interpret the term structure of expected cash flows and cumulative cash flows and cumulative cash flows.
e: Discuss the impact of available asset transactions on cash flows and liquidity generation capacity.
a: Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each line of business.
b: Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.
c: Assess policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.
a: Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity.
b: Estimate contingent liquidity via the liquid asset buffer.
c: Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, governance, and integration with other risk models.
a: Identify best practices for the reporting of a bank’s liquidity position.
b: Compare and interpret different types of liquidity risk reports.
c: Explain the process of reporting a liquidity stress test and interpret a liquidity stress test report.
a: Discuss the relationship between contingency funding planning and liquidity stress testing.
b: Evaluate the key design considerations of a sound contingency funding plan.
c: Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity gap analysis, contingent actions, monitoring and escalation, and data and reporting).
a: Differentiate between the various transaction and non-transaction deposit types.
b: Compare the different methods used to determine the pricing of deposits and calculate the price of a deposit account using cost-plus, marginal cost, and conditional pricing formulas.
c: Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraft protection, and basic (lifeline) banking.
a: Distinguish between the various sources of non-deposit liabilities at a bank.
b: Describe and calculate the available funds gap.
c: Discuss factors affecting the choice of non-deposit funding sources.
d: Calculate overall cost of funds using both the historical average cost approach and the pooled-funds approach.
a: Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction.
b: Discuss common motivations for entering into repos, including their use in cash management and liquidity management.
c: Discuss how counterparty risk and liquidity risk can arise through the use of repo transactions.
d: Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2009.
e: Compare the use of general and special collateral in repo transactions.
f: Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auction cycle.
g: Calculate the Financing advantage of a bond trading special when used in a repo transaction.
a: Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and implementation of an LTP process.
b: Discuss challenges that may arise for banks during the implementation of LTP.
c: Compare the various approaches to liquidity transfer pricing (zero cost, average cost, and matched-maturity marginal cost).
d: Describe the contingent liquidity risk pricing process and calculate the cost of contingent liquidity risk.
a: Identify the causes of the US dollar shortage during the financial crisis of 2007-2009.
b: Evaluate the importance of assessing maturity/currency mismatch across the balance sheets of consolidated entities.
c: Discuss how central bank swap agreements overcame challenges commonly associated with international lenders of last resort.
a: Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps.
b: Identify key factors that affect the cross-currency swap basis.
c: Assess the causes of covered interest rate parity violations after the financial crisis of 2007-2009.
a: Discuss how asset-liability management strategies can help a bank hedge against interest rate risk.
b: Describe interest-sensitive gap management and apply this strategy to maximize a bank’s net interest margin.
c: Describe duration gap management and apply this strategy to protect a bank’s net worth.
d: Discuss the limitations of interest-sensitive gap management and duration gap management.
a: Evaluate the characteristics of illiquid markets.
b: Examine the relationship between market imperfections and illiquidity.
c: Assess the impact of biases on reported returns for illiquid assets.
d: Explain the unsmoothing of returns and its properties.
e: Compare illiquidity risk premiums across and within asset categories.
f: Evaluate portfolio choice decisions on the inclusion of illiquid assets.
a: Provide examples of factors that impact asset prices and explain the theory of factor risk premiums.
b: Discuss the capital asset pricing model (CAPM) including its assumptions and explain how factor risk is addressed in the CAPM.
c: Explain the implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its treatment of diversification benefits, and shortcomings of the CAPM.
d: Describe multifactor models and compare and contrast multifactor models to the CAPM.
e: Explain how stochastic discount factors are created and apply them in the valuation of assets.
f: Describe efficient market theory and explain how markets can be inefficient.
a: Describe the process of value investing and explain why a value premium may exist.
b: Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility, affect asset returns and risk premiums.
c: Assess methods of mitigating volatility risk in a portfolio and describe challenges that arise when managing volatility risk.
d: Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama-French model as an example.
e: Compare value and momentum investment strategies, including their return and risk profiles.
a: Describe and evaluate the low-risk anomaly of asset returns.
b: Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio.
c: Explain the impact of benchmark choice on alpha and describe characteristics of an effective benchmark to measure alpha.
d: Describe Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the information ratio using this law.
e: Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors, and measure alpha against that benchmark.
f: Explain how to use style analysis to handle time-varying factor exposures.
g: Describe issues that arise when measuring alphas for nonlinear strategies.
h: Compare the volatility anomaly and the beta anomaly and analyze evidence of each anomaly.
i: Describe potential explanations for the risk anomaly.
a: Distinguish among the inputs to the portfolio construction process.
b: Evaluate the motivation for and the methods used for refining alphas in the implementation process.
c: Describe neutralization and the different approaches used for refining alphas to be neutral.
d: Describe the implications of transaction costs on portfolio construction.
e: Describe practical issues in portfolio construction, including the determination of an appropriate risk aversion, aversions to specific risks, and proper alpha coverage.
f: Describe portfolio revisions and rebalancing, and analyze the tradeoffs between alpha, risk, transaction costs, and time horizon.
g: Determine the optimal no-trade region for rebalancing with transaction costs.
h: Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear programming, and quadratic programming.
i: Describe dispersion, explain its causes, and describe methods for controlling forms of dispersion.
a: Define, calculate, and distinguish between the following portfolio VaR measures: diversified and undiversified portfolio VaR, individual VaR, incremental VaR, marginal VaR, and component VaR.
b: Explain the impact of correlation on portfolio risk.
c: Apply the concept of marginal VaR to guide decisions about portfolio VaR.
d: Explain the risk-minimizing position and the risk and return-optimizing position of a portfolio.
e: Explain the difference between risk management and portfolio management and describe how to use marginal VaR in portfolio management.
a: Define risk budgeting.
b: Describe the impact of horizon, turnover, and leverage on the risk management process in the investment management industry.
c: Describe the investment process of large investors such as pension funds.
d: Describe the risk management challenges associated with investments in hedge funds.
e: Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk, and sponsor risk.
f: Explain the use of VaR to check manager compliance and monitor risk.
g: Explain how VaR can be used in the development of investment guidelines and for improving the investment process.
h: Describe the risk budgeting process and calculate risk budgets across asset classes and active managers.
a: Describe the three fundamental dimensions behind risk management, and their relation to VaR and tracking error.
b: Describe risk planning, including its objectives, effects, and the participants in its development.
c: Describe risk budgeting and the role of quantitative methods in risk budgeting.
d: Describe risk monitoring and its role in an internal control environment.
e: Identify sources of risk consciousness within an organization.
f: Describe the objectives and actions of a risk management unit in an investment management firm.
g: Describe how risk monitoring can confirm that investment activities are consistent with expectations.
h: Describe the Liquidity Duration Statistic and how it can be used to measure liquidity.
i: Describe the objectives of performance measurement tools.
j: Describe the use of alpha, benchmarks, and peer groups as inputs in performance measurement tools.
a: Differentiate between the time-weighted and dollar-weighted returns of a portfolio and describe their appropriate uses.
b: Describe risk-adjusted performance measures, such as Sharpe’s measure, Treynor’s measure, Jensen’s measure (Jensen’s alpha), and the information ratio, and identify the circumstances under which the use of each measure is most relevant.
c: Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios and the graphical representation of these measures.
d: Determine the statistical significance of a performance measure using standard error and the t-statistic.
e: Describe style analysis.
f: Explain the difficulties in measuring the performance of actively managed portfolios.
g: Describe performance manipulation and the problems associated with using conventional performance measures.
h: Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model and compute return due to market timing.
i: Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection decision, and the aggregate contribution.
a: Describe the characteristics of hedge funds and the hedge fund industry and compare hedge funds with mutual funds.
b: Explain biases that are commonly found in databases of hedge funds.
c: Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in the development of the industry.
d: Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets under management (AUM) in the industry.
e: Explain the relationship between risk and alpha in hedge funds.
f: Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy.
g: Describe the historical portfolio construction and performance trends of hedge funds compared to those of equity indices.
h: Describe market events that resulted in a convergence of risk factors for different hedge fund strategies and explain the impact of such convergences on portfolio diversification strategies.
i: Describe the problem of risk sharing asymmetry between principals and agents in the hedge fund industry.
a: Identify reasons for the failures of hedge funds in the past.
b: Explain elements of the due diligence process used to assess investment managers.
c: Identify themes and questions investors can consider when evaluating a hedge fund manager.
d: Describe criteria that can be evaluated in assessing a hedge fund’s risk management process.
e: Explain how due diligence can be performed on a hedge fund’s operational environment.
f: Explain how a hedge fund’s business model risk and its fraud risk can be assessed.
g: Describe elements that can be included as part of a due diligence questionnaire.
a: Explain the use and efficacy of information disclosures made by investment advisors in predicting fraud.
b: Describe the barriers and the costs incurred in implementing fraud prediction methods.
c: Discuss ways to improve investors’ ability to use disclosed data to predict fraud.
a: Explain the distinctions between the two broad categories of machine learning and describe the techniques used within each category.
b: Analyze and discuss the application of AI and machine learning techniques in the following areas:
c: Describe the role and potential benefits of AI and machine learning techniques in risk management.
d: Identify and describe the limitations and challenges of using AI and machine learning techniques in risk management.
a: Identify and discuss the categories of potential risks associated with the use of AI by financial firms and describe the risks that are considered under each category.
b: Describe the four core components of AI governance and recommended practices related to each.
c: Explain how issues related to interpretability and discrimination can arise from the use of AI by financial firms.
d: Describe practices financial firms can adopt to mitigate AI risks.
a: Define cyber risk and describe the elements that constitute it.
b: Describe and compare causes of cyber risks and methods of enacting cyber attacks.
c: Identify and explain the effect COVID-19 has had on the level of cyber threat.
d: Assess how the financial sector in particular has been threatened by cyber risk during the pandemic.
e: Identify changes in cyber risk landscape and ways to mitigate risks to financial stability.
a: Identify the key market developments that took place during the March 2020 COVID-19 market turmoil, conditions that were prevalent, and their effects on the financial markets and its participants.
b: Describe how financial participants sought safety and the stages by which stress spread through the financial system as the pandemic unfolded.
c: Describe the origins and backdrop of the March 2020 COVID-19 market stress and the systemic weaknesses existing prior to the pandemic that contributed to systemic fragility.
d: Describe the role that non-bank financial institutions’ (NBFIs) reliance on U.S. dollar funding, and the demand for liquidity and credit risk held outside the banking sector had on the resilience of the global financial system during the pandemic.
e: Describe the impact of the pandemic and its propagation on the financial markets, including money market funds (MMFs), CCPs, margin, open-ended funds, ETFs, short-term funding markets, repos, and the government and corporate bond markets.
f: Describe the public sector policy responses to restore financial market functioning during the COVID-19 market turmoil.
g: Describe the lessons learned from the March 2020 COVID-19 market turmoil.
a: Discuss regulatory expectations on LIBOR transition and how these expectations can help market participants in their management of conduct risk arising from the transition.
b: Analyze the risks of LIBOR transition from both sell-side and buy-side perspectives and give examples of good practice observations.
a: Describe the features comprising an ideal benchmark.
b: Examine the issues that led to the replacement of LIBOR as the reference rate.
c: Examine the risks inherent in basing risk-free rates (RFRs) on transactions in the repo market.
a: Describe climate-related risk drivers and explain how those drivers give rise to different types of risks for banks.
b: Compare physical and transition risk drivers related to climate change.
c: Assess the potential impact of different microeconomic and macroeconomic drivers of climate risk.
d: Describe and assess factors that can amplify the impact of climate-related risks on banks as well as potential mitigants for these risks.
a: Describe and compare different attributes of means of payment.
b: Describe the risks faced by the banking sector as e-money adoption increases and identify means of mitigating those risks.
c: Explain reasons for and characteristics contributing to rapid global adoption of e-money.
d: Evaluate effects of different scenarios of e-money adoption on the banking sector.
e: Discuss regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-money.
a: Estimate VaR using a historical simulation approach.
b: Estimate VaR using a parametric approach for both normal and lognormal return distributions.
c: Estimate the expected shortfall given profit and loss (P/L) or return data.
d: Estimate risk measures by estimating quantiles.
e: Evaluate estimators of risk measures by estimating their standard errors.
f: Interpret quantile-quantile (QQ) plots to identify the characteristics of a distribution.
a: Apply the bootstrap historical simulation approach to estimate coherent risk measures.
b: Describe historical simulation using non-parametric density estimation.
c: Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical simulation approaches.
d: Identify advantages and disadvantages of non-parametric estimation methods.
a: Explain the importance and challenges of extreme values in risk management.
b: Describe extreme value theory (EVT) and its use in risk management.
c: Describe the peaks-over-threshold (POT) approach.
d: Compare and contrast the generalized extreme value and POT approaches to estimating extreme risks.
e: Discuss the application of the generalized Pareto (GP) distribution in the POT approach.
f: Explain the multivariate EVT for risk management.
a: Describe backtesting and exceptions and explain the importance of backtesting VaR models.
b: Explain the significant difficulties in backtesting a VaR model.
c: Verify a model based on exceptions or failure rates.
d: Identify and describe Type I and Type II errors in the context of a backtesting process.
e: Explain the need to consider conditional coverage in the backtesting framework.
f: Describe the Basel rules for backtesting.
a: Explain the principles underlying VaR mapping and describe the mapping process.
b: Explain and demonstrate how the mapping process captures general and specific risks.
c: Differentiate among the three methods of mapping portfolios of fixed income securities.
d: Summarize how to map a fixed income portfolio into positions of standard instruments.
e: Describe how mapping of risk factors can support stress testing.
f: Explain how VaR can be computed and used relative to a performance benchmark.
g: Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.
a: Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varying volatility in VaR risk factors, and VaR backtesting.
b: Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models.
c: Compare VaR, expected shortfall, and other relevant risk measures.
d: Compare unified and compartmentalized risk measurement.
e: Compare the results of research on top-down and bottom-up risk aggregation methods.
f: Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management framework.
a: Describe financial correlation risk and the areas in which it appears in finance.
b: Explain how correlation contributed to the global financial crisis of 2007-2009.
c: Describe the structure, uses, and payoffs of a correlation swap.
d: Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.
e: Explain the role of correlation risk in market risk and credit risk.
f: Relate correlation risk to systemic and concentration risk.
a: Describe how equity correlations and correlation volatilities behave throughout various economic states.
b: Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation.
c: Identify the best-fit distribution for equity, bond, and default correlations.
a: Explain the purpose of copula functions and how they are applied in finance.
b: Describe the Gaussian copula and explain how to use it to derive the joint probability of default of two assets.
c: Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.
a: Explain the drawbacks to using a DV01-neutral hedge for a bond position.
b: Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge.
c: Calculate the regression hedge adjustment factor, beta.
d: Calculate the face value of an offsetting position needed to carry out a regression hedge.
e: Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge.
f: Compare and contrast level and change regressions.
g: Describe principal component analysis and explain how it is applied to constructing a hedging portfolio.
a: Calculate the expected discounted value of a zero-coupon security using a binomial tree.
b: Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios.
c: Define risk-neutral pricing and apply it to option pricing.
d: Distinguish between true and risk-neutral probabilities and apply this difference to interest rate drift.
e: Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods.
f: Define option-adjusted spread (OAS) and apply it to security pricing.
g: Describe the rationale behind the use of recombining trees in option pricing.
h: Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk neutral probabilities.
i: Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed-income securities.
j: Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed income securities.
a: Explain the role of interest rate expectations in determining the shape of the term structure.
b: Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of the term structure.
c: Estimate the convexity effect using Jensen’s inequality.
d: Evaluate the impact of changes in maturity, yield, and volatility on the convexity of a security.
e: Calculate the price and return of a zero-coupon bond incorporating a risk premium.
a: Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, both with and without drift.
b: Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates and no drift.
c: Describe methods for addressing the possibility of negative short-term rates in term structure models.
d: Construct a short-term rate tree under the Ho-Lee Model with time-dependent drift.
e: Describe uses and benefits of the arbitrage-free models and assess the issue of fitting models to market prices.
f: Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with mean reversion.
g: Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and half-life.
h: Describe the effectiveness of the Vasicek Model.
a: Describe the short-term rate process under a model with time-dependent volatility.
b: Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model with time-dependent volatility.
c: Assess the efficacy of time-dependent volatility models.
d: Describe the short-term rate process under the Cox-Ingersoll-Ross (CIR) and lognormal models.
e: Calculate the short-term rate change and describe the basis point volatility using the CIR and lognormal models.
f: Describe lognormal models with deterministic drift and mean reversion.
a: Describe a volatility smile and volatility skew.
b: Explain the implications of put-call parity on the implied volatility of call and put options.
c: Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on the underlying asset.
d: Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
e: Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.
f: Describe alternative ways of characterizing the volatility smile.
g: Describe volatility term structures and volatility surfaces and how they may be used to price options.
h: Explain the impact of the volatility smile on the calculation of an option’s Greek letter risk measures.
i: Explain the impact of a single asset price jump on a volatility smile.
a: Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of the Trading Book (FRTB) and the motivations for these changes.
b: Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can calculate its expected shortfall using the various horizons.
c: Explain the FRTB revisions to Basel regulations in the following areas: – Classification of positions in the trading book compared to the banking book. – Backtesting, profit and loss attribution, credit risk, and securitizations.
a: Define credit risk and explain how it arises using examples.
b: Explain the components of credit risk evaluation.
c: Describe, compare, and contrast various credit risk mitigants and their role in credit analysis.
d: Compare and contrast quantitative and qualitative techniques of credit risk evaluation.
e: Compare the credit analysis of consumers, corporations, financial institutions, and sovereigns.
f: Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, exposure at default, expected loss, and time horizon.
g: Compare bank failure and bank insolvency.
a: Describe the quantitative, qualitative, and research skills a banking credit analyst is expected to have.
b: Assess the quality of various sources of information used by a credit analyst.
c: Explain the capital adequacy, asset quality, management, earnings, and liquidity (CAMEL) system used for evaluating the financial condition of a bank.
a: Evaluate a bank’s economic capital relative to its level of credit risk.
b: Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate.
c: Define and calculate expected loss (EL).
d: Define and calculate unexpected loss (UL).
e: Estimate the variance of default probability assuming a binomial distribution.
f: Calculate UL for a portfolio and the UL contribution of each asset.
g: Describe how economic capital is derived.
h: Explain how the credit loss distribution is modeled.
i: Describe challenges to quantifying credit risk.
a: Explain the key features of a good rating system.
b: Describe the experts-based approaches, statistical-based models, and numerical approaches to predicting default.
c: Describe a rating migration matrix and calculate the probability of default, cumulative probability of default, marginal probability of default, and annualized default rate.
d:Describe rating agencies’ assignment methodologies for issue and issuer ratings.
e:Describe the relationship between borrower rating and probability of default.
f: Compare agencies’ ratings to internal experts-based rating systems.
g:Distinguish between the structural approaches and the reduced-form approaches to predicting default.
h: Apply the Merton model to calculate default probability and the distance to default and describe the limitations of using the Merton model.
i:Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms by credit quality.
j: Describe the application of a logistic regression model to estimate default probability.
k: Define and interpret cluster analysis and principal component analysis.
l: Describe the use of a cash flow simulation model in assigning ratings and default probabilities and explain the limitations of the model.
m: Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modeling default risk and define their strengths and weaknesses.
n: Describe the role and management of qualitative information in assessing probability of default.
a: Using the Merton model, calculate the value of a firm’s debt and equity and the volatility of firm value.
b: Explain the relationship between credit spreads, time to maturity, and interest rates and calculate credit spread.
c: Explain the differences between valuing senior and subordinated debt using a contingent claim approach.
d: Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity, and the risk of default.
e: Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditRisk+, CreditMetrics, and the KMV model.
f: Assess the credit risks of derivatives.
g: Describe a credit derivative, credit default swap (CDS), and total return swap.
h: Explain how to account for credit risk exposure in valuing a swap.
a: Compare the different ways of representing credit spreads.
b: Compute one credit spread given others when possible.
c: Define and compute the Spread ‘01.
d: Explain how default risk for a single company can be modeled as a Bernoulli trial.
e: Explain the relationship between exponential and Poisson distributions.
f: Define the hazard rate and use it to define probability functions for default time and conditional default probabilities.
g: Calculate the unconditional default probability and the conditional default probability given the hazard rate.
h: Distinguish between cumulative and marginal default probabilities.
i: Calculate risk-neutral default rates from spreads.
j: Describe advantages of using the CDS market to estimate hazard rates.
k: Explain how a CDS spread can be used to derive a hazard rate curve.
l: Explain how the default distribution is affected by the sloping of the spread curve.
m: Define spread risk and its measurement using the mark-to market and spread volatility.
a: Define and calculate default correlation for credit portfolios.
b: Identify drawbacks in using the correlation-based credit portfolio framework.
c: Assess the impact of correlation on a credit portfolio and its Credit VaR.
d: Describe the use of the single-factor model to measure portfolio credit risk, including the impact of correlation.
e: Define and calculate Credit VaR.
f: Describe how Credit VaR can be calculated using a simulation of joint defaults.
g: Assess the effect of granularity on Credit VaR.
a: Describe common types of structured products.
b: Describe tranching and the distribution of credit losses in a securitization.
c: Describe a waterfall structure in a securitization.
d: Identify the key participants in the securitization process and describe conflicts of interest that can arise in the process.
e: Compute and evaluate one or two iterations of interim cashflows in a three-tiered securitization structure.
f: Describe the treatment of excess spread in a securitization structure and estimate the value of the overcollateralization account at the end of each year.
g: Describe a simulation approach to calculating credit losses for different tranches in a securitization.
h: Explain how the default probabilities and default correlations affect the credit risk in a securitization.
i: Explain how default sensitivities for tranches are measured.
j: Describe risk factors that impact structured products.
k: Define implied correlation and describe how it can be measured.
l: Identify the motivations for using structured credit products.
a: Describe counterparty risk and differentiate it from lending risk.
b: Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction.
c: Identify and describe institutions that take on significant counterparty risk.
d: Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default, and the recovery rate.
e: Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating counterparty risk.
f: Identify and describe the different ways institutions can quantify, manage, and mitigate counterparty risk.
g: Identify and explain the costs of an OTC derivative.
h: Explain the components of the X-Value Adjustment (xVA) term.
a: Explain the purpose of an International Swaps and Derivatives Association (ISDA) master agreement.
b: Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describe how they fit into the framework of the ISDA master agreement.
c: Describe the effectiveness of netting in reducing credit exposure under various scenarios.
d: Describe the mechanics of termination provisions and trade compressions and explain their advantages and disadvantages.
e: Provide examples of trade compression of derivative positions, calculate net notional exposure amount, and identify the party holding the net contract position in a trade compression.
f: Identify and describe termination events and discuss their potential effects on parties to a transaction.
a: Describe the rationale for collateral management.
b: Describe the terms of a collateral agreement and features of a credit support annex (CSA) within the ISDA Master Agreement including threshold, initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.
c: Calculate the credit support amount (margin) under various scenarios.
d: Describe the role of a valuation agent.
e: Describe the mechanics of collateral and the types of collateral that are typically used.
f: Explain the process for the reconciliation of collateral disputes.
g: Explain the features of a collateralization agreement.
h: Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.
i: Explain aspects of collateral including funding, rehypothecation, and segregation.
j: Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
k: Describe the various regulatory capital requirements.
a: Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure.
b: Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of credit exposure.
c: Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure.
d: Identify typical credit exposure profiles for various derivative contracts and combination profiles.
e: Explain how payment frequencies and exercise dates affect the exposure profile of various securities.
f: Explain the general impact of aggregation on exposure, and the impact of aggregation on exposure when there is correlation between transaction values.
g: Describe the differences between funding exposure and credit exposure.
h: Explain the impact of collateralization on exposure and assess the risk associated with the remargining period, threshold, and minimum transfer amount.
i: Assess the impact of collateral on counterparty risk and funding, with and without segregation or rehypothecation.
a: Explain the motivation for and the challenges of pricing counterparty risk.
b: Describe credit value adjustment (CVA).
c: Calculate CVA and CVA as a spread with no wrong-way risk, netting, or collateralization.
d: Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.
e: Describe debt value adjustment (DVA) and bilateral CVA (BCVA).
f: Explain the distinctions between unilateral CVA (UCVA) and BCVA, and between unilateral DVA (UDVA) and BCVA.
g: Calculate DVA, BCVA, and BCVA as a spread.
h: Explain how netting can be incorporated into the CVA calculation.
i: Define and calculate incremental CVA and marginal CVA and explain how to convert CVA into a running spread.
j: Explain the impact of incorporating collateralization into the CVA calculation, including the impact of margin period of risk, thresholds, and initial margins.
k: Describe wrong-way risk and contrast it with right-way risk.
l: Identify examples of wrong-way risk and examples of right-way risk.
m: Discuss the impact of collateral on wrong-way risk.
n: Identify examples of wrong-way collateral.
o: Discuss the impact of wrong-way risk on central counterparties (CCPs).
p: Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric approaches, and jump approaches.
q: Explain the implications of central clearing on wrong-way risk.
a: Differentiate among current exposure, peak exposure, expected exposure, and expected positive exposure.
b: Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its implications for trading activities and risk management for a financial institution.
c: Describe a stress test that can be performed on a loan portfolio, and on a derivative portfolio.
d: Calculate the stressed expected loss, the stress loss on a loan portfolio, and the stress loss on a derivative portfolio.
e: Describe a stress test that can be performed on CVA.
f: Calculate the stressed CVA and the stress loss on CVA.
g: Calculate the DVA and explain how stressing DVA enters into aggregating stress tests of CCR.
h: Describe the common pitfalls in stress testing CCR.
a: Analyze the credit risks and other risks generated by retail banking.
b: Explain the differences between retail credit risk and corporate credit risk.
c: Discuss the “dark side” of retail credit risk and the measures that attempt to address the problem.
d: Define and describe credit risk scoring model types, key variables, and applications.
e: Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates, and loss rates in a credit scoring model.
f: Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP) and the accuracy ratio (AR) techniques.
g: Describe the customer relationship cycle and discuss the trade off between creditworthiness and profitability.
h: Discuss the benefits of risk-based pricing of financial services.
a: Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007-2009.
b: Identify and explain the different techniques used to mitigate credit risk and describe how some of these techniques are changing the bank credit function.
c: Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank credit portfolio.
d: Describe covered bonds, funding collateralized loan obligations (CLOs), and other securitization instruments for funding purposes.
e: Describe the different types and structures of credit derivatives including credit default swaps (CDS), first-to default puts, total return swaps (TRS), asset-backed credit-linked notes (CLN), and their applications.
a: Define securitization, describe the securitization process, and explain the role of participants in the process.
b: Explain the terms over-collateralization, first-loss piece, equity piece, and cash waterfall within the securitization process.
c: Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose vehicle (SPV) and distinguish between the three main SPV structures: amortizing, revolving, and master trust.
d: Explain the reasons for and the benefits of undertaking securitization.
e: Describe and assess the various types of credit enhancements.
f: Explain the various performance analysis tools for securitized structures and identify the asset classes they are most applicable to.
g: Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), the weighted average coupon (WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized structures.
h: Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Public Securities Association (PSA) rate.
a: Explain the subprime mortgage credit securitization process in the United States.
b: Identify and describe key frictions in subprime mortgage securitization and assess the relative contribution of each factor to the subprime mortgage problems.
c: Compare predatory lending and borrowing.
d: Describe the various features of subprime MBS and explain how these features are designed to protect investors from losses on the underlying mortgage loans.
e: Distinguish between corporate credit ratings and asset-backed securities (ABS) credit ratings.
f: Explain how through-the-cycle ABS rating can amplify the housing cycle.
a: Describe an operational risk management framework and assess the types of risks that can fall within the scope of such a framework.
b: Describe the seven Basel II event risk categories and identify examples of operational risk events in each category.
c: Explain characteristics of operational risk exposures and operational loss events, and challenges that can arise in managing operational risk due to these characteristics.
d: Describe operational resilience, identify the elements of an operational resilience framework, and summarize regulatory expectations for operational resilience.
a: Explain the Basel regulatory expectations for the governance of an operational risk management framework.
b: Describe and compare the roles of different committees and the board of directors in operational risk governance.
c: Describe the “three lines of defense” model for operational risk governance and compare roles and responsibilities for each line of defense.
d: Explain best practices and regulatory expectations for the development of a risk appetite for operational risk and for a strong risk culture.
a: Compare different top-down and bottom-up approaches and tools for identifying operational risks.
b: Describe best practices in the process of scenario analysis for operational risk.
c: Describe and apply an operational risk taxonomy and give examples of different taxonomies of operational risks.
d: Describe and apply the Level 1, 2, and 3 categories in the Basel operational risk taxonomy.
a: Explain best practices for the collection of operational loss data and reporting of operational loss incidents, including regulatory expectations.
b: Explain operational risk-assessment processes and tools, including risk control self-assessments (RCSAs), likelihood assessment scales, and heatmaps.
c: Describe the differences among key risk indicators (KRIs), key performance indicators (KPIs), and key control indicators (KCIs).
d: Describe and distinguish between the different quantitative approaches and models used to analyze operational risk.
e: Estimate operational risk exposures based on the fault tree model given probability assumptions.
f: Describe approaches used to determine the level of operational risk capital for economic capital purposes, including their application and limitations.
g: Describe and explain the steps to ensure a strong level of operational resilience, and to test the operational resilience of important business services.
a: Explain different ways firms address their operational risk exposures.
b: Describe and provide examples of different types of internal controls, and explain the process of internal control design and control testing.
c: Describe methods to improve the quality of an operational process and reduce the potential for human error.
d: Explain how operational risk can arise with new products, new business initiatives, or mergers and acquisitions, and describe ways to mitigate these risks.
e: Identify and describe approaches firms should use to mitigate the impact of operational risk events.
f: Describe methods for the transfer of operational risks and the management of reputational risk, and assess their effectiveness in different situations.
a: Identify roles and responsibilities of different organizational committees, and explain how risk reports should be developed for each committee or business function.
b: Describe components of operational risk reports and explain best practices in operational risk reporting.
c: Describe challenges to reporting operational risks, including characteristics of operational loss data, and explain ways to overcome these challenges.
d: Explain best practices for reporting risk exposures to regulators and external stakeholders.
a: Describe the role of risk governance, risk appetite, and risk culture in the context of an enterprise risk management (ERM) framework.
b: Summarize the role of Basel regulatory capital and the process of determining internal economic capital.
c: Describe elements of a stress-testing framework for financial institutions and explain best practices for stress testing.
d: Explain challenges and considerations when developing and implementing models used in stress testing operational risk.
a: Define cyber resilience and compare recent regulatory initiatives in the area of cyber resilience.
b: Define cyber resilience and compare recent regulatory initiatives in the area of cyber resilience.
c: Describe current practices by banks and supervisors in the governance of a cyber-risk management framework, including roles and responsibilities.
d: Explain and assess current practices for the sharing of cybersecurity information between different types of institutions.
e: Describe practices for the governance of risks of interconnected third-party service providers.
a: Provide examples of cyber threats and information security risks, and describe frameworks and best practices for managing cyber risks.
b: Describe lessons learned from the Equifax case study.
a: Explain best practices recommended by the Basel committee for the assessment, management, mitigation, and monitoring of money laundering and financing of terrorism (ML/FT) risks.
b: Describe recommended practices for the acceptance, verification, and identification of customers at a bank.
c: Explain practices for managing ML/FT risks in a group-wide and cross-border context.
a: Describe elements of a control framework to manage financial fraud risk and money laundering risk.
b: Summarize the regulatory findings and describe the lessons learned from the USAA case study.
a: Explain how risks can arise through outsourcing activities to third-party service providers and describe elements of an effective program to manage outsourcing risk.
b: Explain how financial institutions should perform due diligence on third-party service providers.
c: Describe topics and provisions that should be addressed in a contract with a third-party service provider.
a: Explain how risks related to the use of third parties can arise and describe characteristics of an effective third-party risk management framework.
b: Describe the lessons learned from the case study involving a data breach caused by a third-party vendor employee.
a: Summarize important regulations designed to protect investors in financial instruments, including MiFiD, MiFiD II, and Dodd-Frank.
b: Describe and provide lessons learned from the case studies involving violations of investor protection or compliance regulations.
a: Describe model risk and explain how it can arise in the implementation of a model.
b: Describe elements of an effective model risk management process.
c: Explain best practices for the development and implementation of models.
d: Describe elements of a strong model validation process and challenges to an effective validation process.
a: Define a model and describe different ways that financial institutions can become exposed to model risk.
b: Describe the role of the model risk management function and explain best practices in the model risk management and validation processes.
c: Describe lessons learned from the three case studies involving model risk.
a: Describe the evolution of the stress testing process and compare the methodologies of historical European Banking Association (EBA), Comprehensive Capital Analysis and Review (CCAR), and Supervisory Capital Assessment Program (SCAP) stress tests.
b: Explain challenges in designing stress test scenarios, including the problem of coherence in modeling risk factors.
c: Explain challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period.
a: Define, compare, and contrast risk capital, economic capital, and regulatory capital, and explain methods and motivations for using economic capital approaches to allocate risk capital.
b: Describe the RAROC (risk-adjusted return on capital) methodology and its use in capital budgeting.
c: Compute and interpret the RAROC for a project, loan, or loan portfolio and use RAROC to compare business unit performance.
d: Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizon, measuring default probability, and choosing a confidence level.
e: Calculate the hurdle rate and apply this rate in making business decisions using RAROC.
f: Compute the adjusted RAROC for a project to determine its viability.
g: Explain challenges in modeling diversification benefits, including aggregating a firm’s risk capital and allocating economic capital to different business lines.
h: Explain best practices in implementing an approach that uses RAROC to allocate economic capital.
a: Within the economic capital implementation framework, describe the challenges that appear in:
– Defining and calculating risk measures
– Risk aggregation
– Validation of models
– Dependency modeling in credit risk
– Evaluating counterparty credit risk
– Assessing interest rate risk in the banking book
b: Describe the recommendations by the Bank for International Settlements (BIS) that supervisors should consider to make effective use of internal risk measures, such as economic capital, that are not designed for regulatory purposes.
c: Explain benefits and impacts of using an economic capital framework within the following areas:
– Credit portfolio management
– Risk-based pricing
– Customer profitability analysis
– Management incentives
d: Describe best practices and assess key concerns for the governance of an economic capital framework.
a: Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy process for bank holding companies (BHCs) subject to the Capital Plan Rule.
b: Describe practices that can result in a strong and effective capital adequacy process for a BHC in the following areas:
– Risk identification
– Internal controls, including model review and validation
– Corporate governance
– Capital policy, including setting of goals and targets and contingency planning
– Stress testing and stress scenario design
– Estimating losses, revenues, and expenses, including quantitative and qualitative methodologies
– Assessing the impact of capital adequacy, including risk weighted asset (RWA) and balance sheet projections
a: Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain the reasons for revisions to Basel regulations over time.
b: Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
c: Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit exposures and methods for calculating market risk capital for assets in the trading book.
d: Describe changes to the Basel regulations made as part of Basel II, including the three pillars.
e: Compare the standardized internal ratings-based (IRB) approach, the foundation IRB approach, and the advanced IRB approach for the calculation of credit risk capital under Basel II.
f: Calculate credit risk capital under Basel II utilizing the IRB approach.
g: Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for the calculation of operational risk capital under Basel II.
h: Summarize elements of the Solvency II capital framework for insurance companies.
a: Describe and calculate the stressed VaR introduced in Basel 2.5 and calculate the market risk capital charge.
b: Explain the process of calculating the incremental risk capital charge for positions held in a bank’s trading book.
c: Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlations between default risks.
d: Define in the context of Basel III and calculate where appropriate:
– Tier 1 capital and its components
– Tier 2 capital and its components
– Required Tier 1 equity capital, total Tier 1 capital, and total capital
e: Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including special rules for globally systemically important banks (G-SIBs).
f: Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio, the liquidity coverage ratio, and the net stable funding ratio.
g: Describe the mechanics of contingent convertible bonds (CoCos) and explain the motivations for banks to issue them.
h: Provide examples of legislative and regulatory reforms that were introduced after the 2007-2009 financial crisis.
a: Explain the motivations for revising the Basel III framework and the goals and impacts of the December 2017 reforms to the Basel III framework.
b: Summarize the December 2017 revisions to the Basel III framework in the following areas:
– The standardized approach to credit risk
– The internal ratings-based (IRB) approaches for credit risk
– The CVA risk framework
– The operational risk framework
c: Describe the revised output floor introduced as part of the Basel III reforms and approaches to be used when calculating the output floor.
a: Explain the elements of the new standardized approach to measure operational risk capital, including the business indicator, internal loss multiplier, and loss component, and calculate the operational risk capital requirement for a bank using this approach.
b: Compare the Standardized Measurement Approach (SMA) to earlier methods of calculating operational risk capital, including the Advanced Measurement Approaches (AMA).
c: Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and treatment of operational loss data.
a: Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).
b: Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, and Metallgesellschaft.
c: Evaluate Basel III liquidity risk ratios and BIS principles for sound liquidity risk management.
d: Explain liquidity black holes and identify the causes of positive feedback trading.
a: Differentiate between sources of liquidity risk and describe specific challenges faced by different types of financial institutions in managing liquidity risk.
b: Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transformation.
c: Compare transactions used in the collateral market and explain risks that can arise through collateral market transactions.
d: Describe the relationship between leverage and a firm’s return profile (including the leverage effect) and distinguish the impact of different types of transactions on a firm’s leverage and balance sheet.
e: Distinguish methods to measure and manage funding liquidity risk and transactions liquidity risk.
f: Calculate the expected transactions cost and the spread risk factor for a transaction and calculate the liquidity adjustment to VaR for a position to be liquidated over a number of trading days.
g: Discuss interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.
a: Evaluate the characteristics of sound Early Warning Indicators (EWI) measures.
b: Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve).
c: Discuss the applications of EWIs in the context of the liquidity risk management process.
a: Compare various money market and capital market instruments and discuss their advantages and disadvantages.
b: Identify and discuss various factors that affect the choice of investment securities by a bank.
c: Apply investment maturity strategies and maturity management tools based on the yield curve and duration.
a: Calculate a bank’s net liquidity position and explain factors that affect the supply and demand of liquidity at a bank.
b: Compare strategies that a bank can use to meet demands for additional liquidity.
c: Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indicators).
d: Summarize the process taken by a US bank to calculate its legal reserves.
e: Differentiate between factors that affect the choice among alternate sources of reserves.
a: Identify and explain the uses and sources of intraday liquidity.
b: Discuss the governance structure of intraday liquidity risk management.
c: Differentiate between methods for tracking intraday flows and monitoring risk levels.
a: Distinguish between deterministic and stochastic cash flows and provide examples of each.
b: Describe and provide examples of liquidity options and explain the impact of liquidity options on a bank’s liquidity position and its liquidity management process.
c: Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, and cash flow at risk.
d: Interpret the term structure of expected cash flows and cumulative cash flows.
e: Discuss the impact of available asset transactions on cash flows and liquidity generation capacity.
a: Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each line of business.
b: Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.
c: Assess policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.
a: Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity.
b: Estimate contingent liquidity via the liquid asset buffer.
c: Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, governance, and integration with other risk models.
a: Identify best practices for the reporting of a bank’s liquidity position.
b: Compare and interpret different types of liquidity risk reports.
c: Explain the process of reporting a liquidity stress test and interpret a liquidity stress test report.
a: Discuss the relationship between contingency funding planning and liquidity stress testing.
b: Evaluate the key design considerations of a sound contingency funding plan.
c: Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity gap analysis, contingent actions, monitoring and escalation, and data and reporting).
a: Differentiate between the various transaction and non-transaction deposit types.
b: Compare the different methods used to determine the pricing of deposits and calculate the price of a deposit account using cost-plus, marginal cost, and conditional pricing formulas.
c: Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraft protection, and basic (lifeline) banking.
a: Distinguish between the various sources of non-deposit liabilities at a bank.
b: Describe and calculate the available funds gap.
c: Discuss factors affecting the choice of non-deposit funding sources.
d: Calculate overall cost of funds using both the historical average cost approach and the pooled-funds approach.
a: Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction.
b: Discuss common motivations for entering into repos, including their use in cash management and liquidity management.
c: Discuss how counterparty risk and liquidity risk can arise through the use of repo transactions.
d: Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2009 financial crisis.
e: Compare the use of general and special collateral in repo transactions.
f: Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auction cycle.
g: Calculate the financing advantage of a bond trading special when used in a repo transaction.
a: Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and implementation of an LTP process.
b: Discuss challenges that may arise for banks during the implementation of LTP.
c: Compare the various approaches to liquidity transfer pricing (zero cost, average cost, and matched maturity marginal cost).
d: Describe the contingent liquidity risk pricing process and calculate the cost of contingent liquidity risk.
a: Identify the causes of the US dollar shortage during the Great Financial Crisis.
b: Evaluate the importance of assessing maturity/currency mismatch across the balance sheets of consolidated entities.
c: Discuss how central bank swap agreements overcame challenges commonly associated with international lenders of last resort.
a: Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps.
b: Identify key factors that affect the cross-currency swap basis.
c: Assess the causes of covered interest rate parity violations after the financial crisis of 2008.
a: Discuss how asset-liability management strategies can help a bank hedge against interest rate risk.
b: Describe interest-sensitive gap management and apply this strategy to maximize a bank’s net interest margin.
c: Describe duration gap management and apply this strategy to protect a bank’s net worth.
d: Discuss the limitations of interest-sensitive gap management and duration gap management.
a: Evaluate the characteristics of illiquid markets.
b: Examine the relationship between market imperfections and illiquidity.
c: Assess the impact of biases on reported returns for illiquid assets.
d: Explain the unsmoothing of returns and its properties.
e: Compare illiquidity risk premiums across and within asset categories.
f: Evaluate portfolio choice decisions on the inclusion of illiquid assets.
a: Provide examples of factors that impact asset prices and explain the theory of factor risk premiums.
b: Discuss the capital asset pricing model (CAPM) including its assumptions and explain how factor risk is addressed in the CAPM.
c: Explain the implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its treatment of diversification benefits, and shortcomings of the CAPM.
d: Describe multifactor models and compare and contrast multifactor models to the CAPM.
e: Explain how stochastic discount factors are created and apply them in the valuation of assets.
f: Describe efficient market theory and explain how markets can be inefficient.
a: Describe the process of value investing and explain why a value premium may exist.
b: Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility, affect asset returns and risk premiums.
c: Assess methods of mitigating volatility risk in a portfolio and describe challenges that arise when managing volatility risk.
d: Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama-French model as an example.
e: Compare value and momentum investment strategies, including their return and risk profiles.
a: Describe and evaluate the low-risk anomaly of asset returns.
b: Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio.
c: Explain the impact of benchmark choice on alpha and describe characteristics of an effective benchmark to measure alpha.
d: Describe Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the information ratio using this law.
e: Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors, and measure alpha against that benchmark.
f: Explain how to use style analysis to handle time-varying factor exposures.
g: Describe issues that arise when measuring alphas for nonlinear strategies.
h: Compare the volatility anomaly and the beta anomaly and analyze evidence of each anomaly.
i: Describe potential explanations for the risk anomaly.
a: Distinguish among the inputs to the portfolio construction process.
b: Evaluate the motivation for and the methods used for refining alphas in the implementation process.
c: Describe neutralization and the different approaches used for refining alphas to be neutral.
d: Describe the implications of transaction costs on portfolio construction.
e: Describe practical issues in portfolio construction, including the determination of an appropriate risk aversion, aversions to specific risks, and proper alpha coverage.
f: Describe portfolio revisions and rebalancing, and analyze the tradeoffs between alpha, risk, transaction costs, and time horizon.
g: Determine the optimal no-trade region for rebalancing with transaction costs.
h: Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear programming, and quadratic programming.
i: Describe dispersion, explain its causes, and describe methods for controlling forms of dispersion.
a: Define, calculate, and distinguish between the following portfolio VaR measures: diversified and undiversified portfolio VaR, individual VaR, incremental VaR, marginal VaR, and component VaR.
b: Explain the impact of correlation on portfolio risk.
c: Apply the concept of marginal VaR in making portfolio management decisions.
d: Explain the risk-minimizing position and the risk and return-optimizing position of a portfolio.
e: Explain the difference between risk management and portfolio management and describe how to use marginal VaR in portfolio management.
a: Define risk budgeting.
b: Describe the impact of horizon, turnover, and leverage on the risk management process in the investment management industry.
c: Describe the investment process of large investors such as pension funds.
d: Describe the risk management challenges associated with investments in hedge funds.
e: Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk, and sponsor risk.
f: Explain the use of VaR to check manager compliance and monitor risk.
g: Explain how VaR can be used in the development of investment guidelines and for improving the investment process.
h: Describe the risk budgeting process and calculate risk budgets across asset classes and active managers.
a: Describe the three fundamental dimensions behind risk management, and their relation to VaR and tracking error.
b: Describe risk planning, including its objectives, effects, and the participants in its development.
c: Describe risk budgeting and the role of quantitative methods in risk budgeting.
d: Describe risk monitoring and its role in an internal control environment.
e: Identify sources of risk consciousness within an organization.
f: Describe the objectives and actions of a risk management unit in an investment management firm.
g: Describe how risk monitoring can confirm that investment activities are consistent with expectations.
h: Describe the Liquidity Duration Statistic and how it can be used to measure liquidity.
i: Describe the objectives of performance measurement tools.
j: Describe the use of alpha, benchmarks, and peer groups as inputs in performance measurement tools.
a: Differentiate between the time-weighted and dollar-weighted returns of a portfolio and describe their appropriate uses.
b: Describe risk-adjusted performance measures, such as Sharpe’s measure, Treynor’s measure, Jensen’s measure (Jensen’s alpha), and the information ratio, and identify the circumstances under which the use of each measure is most relevant.
c: Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios and the graphical representation of these measures.
d: Determine the statistical significance of a performance measure using standard error and the t-statistic.
e: Describe style analysis.
f: Explain the difficulties in measuring the performance of actively managed portfolios.
g: Describe performance manipulation and the problems associated with using conventional performance measures.
h: Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model and compute return due to market timing.
i: Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection decision, and the aggregate contribution.
a: Describe the characteristics of hedge funds and the hedge fund industry and compare hedge funds with mutual funds.
b: Explain biases that are commonly found in databases of hedge funds.
c: Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in the development of the industry.
d: Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets under management (AUM) in the industry.
e: Explain the relationship between risk and alpha in hedge funds.
f: Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy.
g: Describe the historical portfolio construction and performance trends of hedge funds compared to those of equity indices.
h: Describe market events that resulted in a convergence of risk factors for different hedge fund strategies and explain the impact of such convergences on portfolio diversification strategies.
i: Describe the problem of risk sharing asymmetry between principals and agents in the hedge fund industry.
a: Identify reasons for the failures of hedge funds in the past.
b: Explain elements of the due diligence process used to assess investment managers.
c: Identify themes and questions investors can consider when evaluating a hedge fund manager.
d: Describe criteria that can be evaluated in assessing a hedge fund’s risk management process.
e: Explain how due diligence can be performed on a hedge fund’s operational environment.
f: Explain how a hedge fund’s business model risk and its fraud risk can be assessed.
g: Describe elements that can be included as part of a due diligence questionnaire.
a: Explain the use and efficacy of information disclosures made by investment advisors in predicting fraud.
b: Describe the barriers and the costs incurred in implementing fraud prediction methods.
c: Discuss ways to improve investors’ ability to use disclosed data to predict fraud.
a: Explain the distinctions between the two broad categories of machine learning and describe the techniques used within each category.
b: Analyze and discuss the application of AI and machine learning techniques in the following risk areas:
-Credit risk
-Market risk
-Operational risk
-Regulatory compliance
c: Describe the role and potential benefits of AI and machine learning techniques in risk management.
d: Identify and describe the limitations and challenges of using AI and machine learning techniques in risk management.
a: Identify and discuss the categories of potential risks associated with the use of AI by financial firms and describe the risks that are considered under each category.
b: Describe the four core components of AI governance and recommended practices related to each.
c: Explain how issues related to interpretability and discrimination can arise from the use of AI by financial firms.
d: Describe practices financial firms can adopt to mitigate AI risks.
a: Describe climate-related risk drivers and explain how those drivers give rise to different types of risks for banks.
b: Compare physical and transition risk drivers related to climate change.
c: Assess the potential impact of different microeconomic and macroeconomic drivers of climate risk.
d: Describe and assess factors that can amplify the impact of climate-related risks on banks as well as potential mitigants for these risks.
a: Describe main issues in identifying and measuring climate-related financial risks.
b: Identify unique data needs inherent in the climate-related risks and describe candidate methodologies that could be used to analyze these types of data.
c: Describe current and developing methodologies for measuring climate-related financial risks employed by banks and supervisors.
d: Compare and contrast climate-measuring methodologies utilized by banks, regulators, and third- party providers.
e: Identify strengths and weaknesses of the main types of measurement approaches.
f: Assess gaps and challenges in designing a modelling framework to capture climate-related financial risk.
a: Describe the principles for the management of climate-related financial risks related to corporate governance and internal control framework.
b: Describe the principles for the management of climate-related financial risks related to capital and liquidity adequacy and risk management process.
c: Describe the principles for the management of climate-related financial risks related to management monitoring and reporting, comprehensive management of credit risk and other risks, and scenario analysis.
d: Describe the principles for the supervision of climate-related financial risks related to prudential regulatory and supervisory requirements for banks and responsibilities, powers, and functions of supervisors.
a: Describe how the dynamics of inflation differ between a low-inflation regime and a high-inflation regime.
b: Explain the process of wage and price formation, the role inflation plays in this process, and vice versa.
c: Describe the various channels through which inflation expectations manifest in financial markets and discuss the inference of inflation expectations from financial markets.
d: Describe the operation of a central bank’s monetary policy in a low-inflation regime and evaluate indicators a central bank can use for timely detection of transitions to a high-inflation regime.
a: Explain how a blockchain-based cryptocurrency system works and compare cryptocurrencies to conventional money and payment systems.
b: Describe elements of a decentralized finance structure, including smart contracts, tokenized assets, decentralized autonomous organizations, and decentralized exchanges.
c: Define stablecoins and assess their advantages and disadvantages, including their potential contribution to systemic risk and regulatory considerations.
d: Explain the advantages, disadvantages, and potential applications of a central bank digital currency.
a: Identify and describe the benefits and limitations of crypto and decentralized finance (DeFi) innovations.
b: Describe the role of stablecoins in DeFi ecosystems and differentiate among the types of stablecoins.
c: Discuss possible advantages and disadvantages of a monetary system based on CBDCs.
d: Understand the risks posed by the centralization that occurs in DeFi ecosystems and crypto exchanges (CEX).
e: Outline the regulatory actions recommended by the BIS to manage risks in the crypto monetary system.
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