2016 Level III CFA Program Curriculum CFA Institute.Code of
Ethics and Standards of Professional ConductThe readings in this
study session establish a framework for ethical conduct in the
investmentprofession.TeprinciplesandguidancepresentedintheCFAInstitute
Standards of Practice Handbook (Handbook) form the basis for the
CFA Institute self- regulatory program to maintain the highest
professional standards among investment practitioners. A clear
understanding of the CFA Institute Code of Ethics and Standards of
Professional Conduct (both found in the Handbook) should allow
practitioners to identify and appropriately resolve ethical
conficts, leading to a reputation for integrity that benefts both
the individual and the profession. Material under Guidance in the
Handbook addresses the practical application of the Code and
Standards. Te guidance for each standard reviews its purpose and
scope, presents recommended procedures for compliance, and provides
examples of the standardin practice.READING ASSIGNMENTSReading 1
Code of Ethics and Standards of Professional Conduct Standards of
Practice Handbook, Eleventh EditionReading 2 Guidance for Standards
IVII Standards of Practice Handbook, Eleventh Edition S T U DY S E
S S I ON12016 Level III CFA Program Curriculum CFA Institute.Study
Session 1 2LEARNING OUTCOMESREADING 1. CODE OF ETHICS AND STANDARDS
OF PROFESSIONAL CONDUCTTe candidate should be able to:adescribe the
structure of the CFA Institute Professional Conduct Program and the
disciplinary review process for the enforcement of the Code of
Ethics and Standards of Professional Conduct;bexplain the ethical
responsibilities required by the Code of Ethics and the Standards
of Professional Conduct, including the sub- sections of each
standard.READING 2. GUIDANCE FOR STANDARDS IVIITe candidate should
be able to:ademonstrate a thorough knowledge of the Code of Ethics
and Standards of Professional Conduct by interpreting the Code and
Standards in various situa-tions involving issues of professional
integrity;brecommend practices and procedures designed to prevent
violations of the Code of Ethics and Standards of Professional
Conduct.2016 Level III CFA Program Curriculum CFA Institute.Ethical
and Professional Standards in
PracticeUsingexamplesandcasestudies,thereadingsinthisstudysessiondemonstrate
the use of the CFA Institute Code of Ethics and Standards of
Professional Conduct as a body of principles for ethical reasoning
and decision making. Te readings serve as efective aids in
understanding and internalizing the values and standards presented
intheCFAInstituteStandardsofPracticeHandbook.ByapplyingtheCodeand
Standardstocasestudyconficts,thecandidatewillgainexperienceinidentifying
and explaining fundamental principles of conduct that serve as the
basis for dealing with real world challenges.Te Asset Manager Code
of Professional Conduct uses the basic tenets of the CFA
InstituteCodeofEthicsandStandardsofProfessionalConducttoestablishethical
and professional standards for frms managing client assets. Te
Asset Manager Code of Professional Conduct also extends the Code
and Standards to address investment management frm practices
regarding trading, compliance, risk management, security pricing,
and disclosure.READING ASSIGNMENTSReading 3 Application of the Code
and Standards Ethics CasesReading 4 Asset Manager Code of
Professional Conduct by Kurt Schacht, JD, CFA, Jonathan J. Stokes,
JD, and Glenn Doggett, CFA S T U DY S E S S I ON22016 Level III CFA
Program Curriculum CFA Institute.Study Session 2 2LEARNING
OUTCOMESREADING 3. APPLICATION OF THE CODE AND STANDARDSTe
candidate should be able to: aevaluate professional conduct and
formulate an appropriate response to actions that violate the Code
of Ethics and Standards of Professional Conduct;bformulate
appropriate policy and procedural changes needed to assure
compli-ance with the Code of Ethics and Standards of Professional
Conduct.READING 4. ASSET MANAGER CODE OF PROFESSIONAL CONDUCTTe
candidate should be able toaexplain the purpose of the Asset
Manager Code and the benefts that may accrue to a frm that adopts
the Code;bexplain the ethical and professional responsibilities
required by the six General Principles of Conduct of the Asset
Manager Code;cdetermine whether an asset managers practices and
procedures are consistent with the Asset Manager Code;drecommend
practices and procedures designed to prevent violations of the
Asset Manager Code.2016 Level III CFA Program Curriculum CFA
Institute.Behavioral FinanceBehavioral Finance is introduced in the
frst study session on portfolio management because all market
participants, regardless of expertise, may be subject to behavioral
biases. An understanding of emotional and cognitive behavioral
biases provides insight
intohowthesebiasesmayinfuenceindividualsperceptionsandinvestmentdeci-sions.
As a consequence, knowledge of behavioral biases may help in
understanding client goals, in constructing investment portfolios,
and in identifying inconsistencies in investment decision making.
Behavioral fnance also provides insights into issues such as market
anomalies. Te readings argue that integration of behavioral and
tra-ditional fnance may lead to a better outcome than either
approach used in isolation. READING ASSIGNMENTSReading 5 Te
Behavioral Finance Perspective by Michael M. Pompian, CFAReading 6
Te Behavioral Biases of Individuals by Michael M. Pompian,
CFAReading 7 Behavioral Finance and Investment Processes by Michael
M. Pompian, CFA, Colin McLean, FSIP, and Alistair Byrne, PhD, CFA
LEARNING OUTCOMESREADING 5. THE BEHAVIORAL FINANCE PERSPECTIVETe
candidate should be able to:acontrast traditional and behavioral
fnance perspectives on investor decision making; S T U DY S E S S I
ON3Note:Thereadingsinthisstudy sessionusewidelyrecognized
terminology.Nevertheless, readersshouldbeaware
thatwritersonbehavioral financevaryintheirchoiceof terminology.
2016 Level III CFA Program Curriculum CFA Institute.Study Session 3
2bcontrast expected utility and prospect theories of investment
decision making;cdiscuss the efect that cognitive limitations and
bounded rationality may have on investment decision making;dcompare
traditional and behavioral fnance perspectives on portfolio
construc-tion and the behavior of capital markets.READING 6. THE
BEHAVIORAL BIASES OF INDIVIDUALSTe candidate should be able
to:adistinguish between cognitive errors and emotional
biases;bdiscuss commonly recognized behavioral biases and their
implications for fnancial decision making;cidentify and evaluate an
individuals behavioral biases;devaluate how behavioral biases afect
investment policy and asset allocation decisions and recommend
approaches to mitigate their efects.READING 7. BEHAVIORAL FINANCE
AND INVESTMENT PROCESSESTe candidate should be able to:aexplain the
uses and limitations of classifying investors into personality
types;bdiscuss how behavioral factors afect adviserclient
interactions;cdiscuss how behavioral factors infuence portfolio
construction;dexplain how behavioral fnance can be applied to the
process of portfolio construction;ediscuss how behavioral factors
afect analyst forecasts and recommend remedial actions for analyst
biases;fdiscuss how behavioral factors afect investment committee
decision making and recommend techniques for mitigating their
efects; gdescribe how behavioral biases of investors can lead to
market characteristics that may not be explained by traditional
fnance. 2016 Level III CFA Program Curriculum CFA Institute.Private
Wealth Management
(1)Thisstudysessionaddressestheprocessofprivatewealthmanagementandthe
construction of an investment policy statement for the individual
investor. Te invest-ment policy statement (IPS) is a blueprint for
investing client assets. Te IPS identifes the needs, goals, and
risk tolerance of the investor, as well as constraints under which
theinvestmentportfoliomustoperate.Teadviserthenformulatesaninvestment
strategy to tax-efciently reconcile these potentially conficting
requirements. Because taxes and regulations vary from locality to
locality, tax-efcient strategies for portfolio construction and
wealth transfer are necessarily specifc to the locality
inwhichtheinvestoristaxed.Testudysessionfocusesoninvestmentstrategies
applicable across a wide range of localities. Although
illustrations of such strategies maybepresentedfromacountry-
specifcperspective,candidatesshouldfocuson the underlying
investment principles and be able to apply them to other tax
settings. READING ASSIGNMENTSReading 8 Managing Individual Investor
Portfolios by James W. Bronson, CFA, Matthew H. Scanlan, CFA, and
Jan R. Squires, DBA, CFAReading 9 Taxes and Private Wealth
Management in a Global Contextby Stephen M. Horan, PhD, CFA, CIPM,
and Tomas R. Robinson, PhD, CFAReading 10 Estate Planning in a
Global Contextby Stephen M. Horan, PhD, CFA, CIPM, and Tomas R.
Robinson, PhD, CFA S T U DY S E S S I ON42016 Level III CFA Program
Curriculum CFA Institute.Study Session 4 2LEARNING OUTCOMESREADING
8. MANAGING INDIVIDUAL INVESTOR PORTFOLIOSTe candidate should be
able to:adiscuss how source of wealth, measure of wealth, and stage
of life afect an indi-vidual investors risk tolerance;bexplain the
role of situational and psychological profling in understanding an
individual investors attitude toward risk;cexplain the infuence of
investor psychology on risk tolerance and investment
choices;dexplain potential benefts, for both clients and investment
advisers, of having a formal investment policy statement;eexplain
the process involved in creating an investment policy
statement;fdistinguish between required return and desired return
and explain how these afect the individual investors investment
policy;gexplain how to set risk and return objectives for
individual investor portfolios and discuss the impact that ability
and willingness to take risk have on risk tolerance;hdiscuss the
major constraint categories included in an individual investors
investment policy statement;iprepare and justify an investment
policy statement for an individual investor;jdetermine the
strategic asset allocation that is most appropriate for an
individ-ual investors specifc investment objectives and
constraints;kcompare Monte Carlo and traditional deterministic
approaches to retirement planning and explain the advantages of a
Monte Carlo approach.READING 9. TAXES AND PRIVATE WEALTH MANAGEMENT
IN A GLOBAL CONTEXTTe candidate should be able to:acompare basic
global taxation regimes as they relate to the taxation of dividend
income, interest income, realized capital gains, and unrealized
capital gains;bdetermine the efects of diferent types of taxes and
tax regimes on future wealth accumulation;ccalculate accrual
equivalent tax rates and after- tax returns;dexplain how investment
return and investment horizon afect the tax impact associated with
an investment;ediscuss the tax profles of diferent types of
investment accounts and explain their impact on after- tax returns
and future accumulations;fexplain how taxes afect investment
risk;gdiscuss the relation between after- tax returns and diferent
types of investor trading behavior;hexplain the benefts of tax loss
harvesting and highest-in/frst-out (HIFO) tax lot
accounting;idemonstrate how taxes and asset location relate to
meanvariance optimization.2016 Level III CFA Program Curriculum CFA
Institute.Study Session 4 3READING 10. ESTATE PLANNING IN A GLOBAL
CONTEXTTe candidate should be able to:adiscuss the purpose of
estate planning and explain the basic concepts of domes-tic estate
planning, including estates, wills, and probate;bexplain the two
principal forms of wealth transfer taxes and discuss efects of
important non- tax issues, such as legal system, forced heirship,
and marital property regime;cdetermine a familys core capital and
excess capital, based on mortality proba-bilities and Monte Carlo
analysis;devaluate the relative after- tax value of lifetime gifts
and testamentary bequests;eexplain the estate planning beneft of
making lifetime gifts when gift taxes are paid by the donor, rather
than the recipient;fevaluate the after- tax benefts of basic estate
planning strategies, including gen-eration skipping, spousal
exemptions, valuation discounts, and charitable gifts;gexplain the
basic structure of a trust and discuss the diferences between
revo-cable and irrevocable trusts;hexplain how life insurance can
be a tax-efcient means of wealth transfer;idiscuss the two
principal systems (source jurisdiction and residence jurisdic-tion)
for establishing a countrys tax jurisdiction;jdiscuss the possible
income and estate tax consequences of foreign situated assets and
foreign- sourced income;kevaluate a clients tax liability under
each of three basic methods (credit, exemption, and deduction) that
a country may use to provide relief from double taxation;ldiscuss
how increasing international transparency and information exchange
among tax authorities afect international estate planning.2016
Level III CFA Program Curriculum CFA Institute.Private Wealth
Management
(2)Thewealthofmanyindividualsandfamiliesisoftenconcentratedinalimited
number of fnancial securities, business holdings, or real estate
properties. Te sale of such holdings to allow diversifcation may
create a substantial tax liability. Dealing with concentrated
single asset positions is the subject of the frst reading in this
study
session.Tesecondreadingexaminesthedynamicmixofhumanandfnancialcapital
during an investors lifetime and the challenge of meeting fnancial
goals throughout
thatlifetime.Itspecifcallyaddressesmortalityandlongevityrisksbyintegrating
insurance products into the asset allocation solution.READING
ASSIGNMENTSReading 11 Concentrated Single Asset Positions by Tomas
J. Boczar, Esq., LL.M., CFA, and Nischal R. Pai, CFAReading 12
Lifetime Financial Advice: Human Capital, Asset Allocation, and
Insuranceby Roger G. Ibbotson, PhD, Moshe A. Milevsky, PhD, Peng
Chen, PhD, CFA, and Kevin X. Zhu, PhDLEARNING OUTCOMESREADING 11.
CONCENTRATED SINGLE- ASSET POSITIONSTe candidate should be able
to:aexplain investment risks associated with a concentrated
position in a single asset and discuss the appropriateness of
reducing such risks; S T U DY S E S S I ON52016 Level III CFA
Program Curriculum CFA Institute.Study Session 5 2bdescribe typical
objectives in managing concentrated positions;cdiscuss tax
consequences and illiquidity as considerations afecting the
man-agement of concentrated positions in publicly traded common
shares, privately held businesses, and real estate;ddiscuss capital
market and institutional constraints on an investors ability to
reduce a concentrated position;ediscuss psychological
considerations that may make an investor reluctant to reduce his or
her exposure to a concentrated position;fdescribe advisers use of
goal-based planning in managing concentrated positions;gexplain
uses of asset location and wealth transfers in managing
concentrated positions;hdescribe strategies for managing
concentrated positions in publicly traded com-mon shares;idiscuss
tax considerations in the choice of hedging strategy;jdescribe
strategies for managing concentrated positions in privately held
businesses;kdescribe strategies for managing concentrated positions
in real estate;levaluate and recommend techniques for tax efciently
managing the risks of concentrated positions in publicly traded
common stock, privately held busi-nesses, and real estate.READING
12. LIFETIME FINANCIAL ADVICE: HUMAN CAPITAL, ASSET ALLOCATION, AND
INSURANCETe candidate should be able to:aexplain the concept and
discuss the characteristics of human capital as a com-ponent of an
investors total wealth;bdiscuss the earnings risk, mortality risk,
and longevity risk associated with human capital and explain how
these risks can be reduced by appropriate port-folio
diversifcation, life insurance, and annuity products;cexplain how
asset allocation policy is infuenced by the risk characteristics of
human capital and the relative relationships of human capital,
fnancial capital, and total wealth;ddiscuss how asset allocation
and the appropriate level of life insurance are infuenced by the
joint consideration of human capital, fnancial capital, bequest
preferences, risk tolerance, and fnancial wealth;ediscuss the
fnancial market risk, longevity risk, and savings risk faced by
inves-tors in retirement and explain how these risks can be reduced
by appropriate portfolio diversifcation, insurance products, and
savings discipline;fdiscuss the relative advantages of fxed and
variable annuities as hedges against longevity risk;grecommend
basic strategies for asset allocation and risk reduction when given
an investor profle of key inputs, including human capital, fnancial
capital, stage of life cycle, bequest preferences, risk tolerance,
and fnancial wealth.2016 Level III CFA Program Curriculum CFA
Institute.Portfolio Management for Institutional Investors
Broadlydefned,institutionalinvestorsincludedefned-
beneftpensionplans, defned-contribution plans, foundations,
endowments, insurance companies, banks, and investment
intermediaries. Tese institutions typically have a well- defned
purpose or business model in which their investment portfolio plays
a role. Each group faces a unique set of investment objectives and
constraints. Te study session begins with an introduction of the
concepts and practices
import-anttodeterminingtheinvestmentpolicystatementforaninstitutionalinvestment
managementclient.Tesecondreadingthenexaminesthespecifcissueofasset/liability
management in the context of defned- beneft pension plans. Te
implications for asset allocation and risk management are relevant,
however, for a wide range of institutions that manage assets to
fund anticipated liabilities. READING ASSIGNMENTSReading 13
Managing Institutional Investor Portfolios by R. Charles
Tschampion, CFA, Laurence B. Siegel, Dean J. Takahashi, and John L.
Maginn, CFAReading 14 Linking Pension Liabilities to Assets by
Aaron Meder, FSA, CFA, and Renato Staub, PhD S T U DY S E S S I
ON6Note:Theconceptsandpractices importanttoinstitutional
investmentmanagementappear inmanyreadingsthroughoutthe
LevelIIIstudysessions. 2016 Level III CFA Program Curriculum CFA
Institute.Study Session 6 2LEARNING OUTCOMESREADING 13. MANAGING
INSTITUTIONAL INVESTOR PORTFOLIOSTe candidate should be able
to:acontrast a defned-beneft plan to a defned-contribution plan and
discuss the advantages and disadvantages of each from the
perspectives of the employee and the employer;bdiscuss investment
objectives and constraints for defned-beneft plans;cevaluate
pension fund risk tolerance when risk is considered from the
per-spective of the 1) plan surplus, 2) sponsor fnancial status and
proftability, 3) sponsor and pension fund common risk exposures, 4)
plan features, and 5) workforce characteristics;dprepare an
investment policy statement for a defned-beneft plan;eevaluate the
risk management considerations in investing pension plan
assets;fprepare an investment policy statement for a participant
directed defned- contribution plan;gdiscuss hybrid pension plans
(e.g., cash balance plans) and employee stock own-ership
plans;hdistinguish among various types of foundations, with respect
to their descrip-tion, purpose, and source of funds;icompare the
investment objectives and constraints of foundations, endow-ments,
insurance companies, and banks;jdiscuss the factors that determine
investment policy for pension funds, founda-tion endowments, life
and non-life insurance companies, and banks;kprepare an investment
policy statement for a foundation, an endowment, an insurance
company, and a bank;lcontrast investment companies, commodity
pools, and hedge funds to other types of institutional
investors;mcompare the asset/liability management needs of pension
funds, foundations, endowments, insurance companies, and
banks;ncompare the investment objectives and constraints of
institutional investors given relevant data, such as descriptions
of their fnancial circumstances and attitudes toward risk.READING
14. LINKING PENSION LIABILITIES TO ASSETSTe candidate should be
able to:acontrast the assumptions concerning pension liability risk
in asset-only and liability-relative approaches to asset
allocation;bdiscuss the fundamental and economic exposures of
pension liabilities and identify asset types that mimic these
liability exposures;ccompare pension portfolios built from a
traditional asset-only perspective to portfolios designed relative
to liabilities and discuss why corporations may choose not to
implement fully the liability mimicking portfolio.2016 Level III
CFA Program Curriculum CFA Institute.Applications of Economic
Analysis to Portfolio
ManagementAnecessarytaskintheinvestmentmanagementprocessistoformulatecapital
marketexpectations.Teseforecastsofriskandreturncharacteristicsforvarious
asset classes form the basis for constructing portfolios that
maximize expected return for given levels of risk. Te frst reading
in this study session examines the process of setting capital
market expectations and covers the major tools of economic
analysis. Te second reading demonstrates the application of
neo-classical growth theory to develop economic forecasts. It then
illustrates how such forecasts can be integrated with equity
valuation techniques to value an equity market.READING
ASSIGNMENTReading 15 Capital Market Expectations by John P.
Calverley, Alan M. Meder, CPA, CFA, Brian D. Singer, CFA, and
Renato Staub, PhDReading 16 Equity Market Valuation by Peter C.
Stimes, CFA, and Stephen E. Wilcox, PhD, CFALEARNING
OUTCOMESREADING 15. CAPITAL MARKET EXPECTATIONSTe candidate should
be able to:adiscuss the role of, and a framework for, capital
market expectations in the portfolio management process;bdiscuss
challenges in developing capital market forecasts; S T U DY S E S S
I ON72016 Level III CFA Program Curriculum CFA Institute.Study
Session 7 2cdemonstrate the application of formal tools for setting
capital market expecta-tions, including statistical tools,
discounted cash fow models, the risk premium approach, and fnancial
equilibrium models;dexplain the use of survey and panel methods and
judgment in setting capital market expectations;ediscuss the
inventory and business cycles, the impact of consumer and business
spending, and monetary and fscal policy on the business
cycle;fdiscuss the impact that the phases of the business cycle
have on short- term/long- term capital market returns;gexplain the
relationship of infation to the business cycle and the implications
of infation for cash, bonds, equity, and real estate
returns;hdemonstrate the use of the Taylor rule to predict central
bank behavior;ievaluate 1) the shape of the yield curve as an
economic predictor and 2) the relationship between the yield curve
and fscal and monetary policy;jidentify and interpret the
components of economic growth trends and demon-strate the
application of economic growth trend analysis to the formulation of
capital market expectations;kexplain how exogenous shocks may afect
economic growth trends;lidentify and interpret macroeconomic,
interest rate, and exchange rate linkages between
economies;mdiscuss the risks faced by investors in emerging-market
securities and the coun-try risk analysis techniques used to
evaluate emerging market economies;ncompare the major approaches to
economic forecasting;odemonstrate the use of economic information
in forecasting asset class returns;pexplain how economic and
competitive factors can afect investment markets, sectors, and
specifc securities;qdiscuss the relative advantages and limitations
of the major approaches to fore-casting exchange rates;rrecommend
and justify changes in the component weights of a global
invest-ment portfolio based on trends and expected changes in
macroeconomic factors.READING 16. EQUITY MARKET VALUATIONTe
candidate should be able to:aexplain the terms of the Cobb-Douglas
production function and demon-strate how the function can be used
to model growth in real output under the assumption of constant
returns to scale;bevaluate the relative importance of growth in
total factor productivity, in capital stock, and in labor input
given relevant historical data;cdemonstrate the use of the
Cobb-Douglas production function in obtaining a discounted dividend
model estimate of the intrinsic value of an equity market;dcritique
the use of discounted dividend models and macroeconomic forecasts
to estimate the intrinsic value of an equity market;econtrast
top-down and bottom- up approaches to forecasting the earnings per
share of an equity market index;2016 Level III CFA Program
Curriculum CFA Institute.Study Session 7 3fdiscuss the strengths
and limitations of relative valuation models;gjudge whether an
equity market is under-, fairly, or over- valued using a relative
equity valuation model.2016 Level III CFA Program Curriculum CFA
Institute.Asset Allocation and Related Decisions in Portfolio
Management (1)The strategic asset allocation follows the
development of capital market expectations. Te investment manager
combines the investment policy statement with capital
mar-ketexpectationstodeterminetargetassetclassweights.Maximumandminimum
permissible asset class weights are often specifed as a
risk-control mechanism. Te manager may consider both single- period
and multi- period perspectives when evalu-ating the return and risk
characteristics of potential asset allocations. A single- period
perspective has the advantage of simplicity. A multi- period
perspective can address
liquidityandtaxconsiderationsthatarisefromrebalancingportfoliosandcanalso
address serial correlation (long- and short- term dependencies) in
returns. However, a multi- period perspective is more costly to
implement than a single- period one.READING ASSIGNMENTSReading 17
Asset Allocation by William F. Sharpe, Peng Chen, PhD, CFA, Jerald
E. Pinto, PhD, CFA, and Dennis W. McLeavey, CFALEARNING
OUTCOMESREADING 17. ASSET ALLOCATIONTe candidate should be able
to:aexplain the function of strategic asset allocation in portfolio
management and discuss its role in relation to specifying and
controlling the investors exposures to systematic risk;bcompare
strategic and tactical asset allocation;cdiscuss the importance of
asset allocation for portfolio performance; S T U DY S E S S I
ON82016 Level III CFA Program Curriculum CFA Institute.Study
Session 8 2dcontrast the asset-only and asset/liability management
(ALM) approaches to asset allocation and discuss the investor
circumstances in which they are com-monly used;eexplain the
advantage of dynamic over static asset allocation and discuss the
trade-ofs of complexity and cost;fexplain how loss aversion, mental
accounting, and fear of regret may infuence asset allocation
policy;gevaluate return and risk objectives in relation to
strategic asset allocation;hevaluate whether an asset class or set
of asset classes has been appropriately specifed;iselect and
justify an appropriate set of asset classes for an
investor;jevaluate the theoretical and practical efects of
including additional asset classes in an asset
allocation;kdemonstrate the application of meanvariance analysis to
decide whether to include an additional asset class in an existing
portfolio;ldescribe risk, cost, and opportunities associated with
nondomestic equities and bonds;mexplain the importance of
conditional return correlations in evaluating the diversifcation
benefts of nondomestic investments;nexplain expected efects on
share prices, expected returns, and return volatility as a
segmented market becomes integrated with global markets;oexplain
the major steps involved in establishing an appropriate asset
allocation;pdiscuss the strengths and limitations of the following
approaches to asset allo-cation: meanvariance, resampled efcient
frontier, BlackLitterman, Monte Carlo simulation, ALM, and
experience based;qdiscuss the structure of the minimum- variance
frontier with a constraint against short sales;rformulate and
justify a strategic asset allocation, given an investment policy
statement and capital market expectations;scompare the
considerations that afect asset allocation for individual investors
versus institutional investors and critique a proposed asset
allocation in light of those considerations;tformulate and justify
tactical asset allocation (TAA) adjustments to strategic asset
class weights, given a TAA strategy and expectational data.2016
Level III CFA Program Curriculum CFA Institute.Asset Allocation and
Related Decisions in Portfolio Management
(2)Whenthestrategicassetallocationincludesexposuretoglobalmarkets,non-
domestic currencies create an additional source of portfolio
volatility. Te investment
managermaychoosetohedgetheportfolioscurrencyexposures,atacost,orto
actively manage currencies as an additional source of portfolio
returns. Te frst read-ing addresses how currency exposures can be
managed to refect a clients investment objectives and
constraints.When a strategic asset allocation is determined,
benchmarks are specifed to rep-resent the performance of each
allocation. Te second reading introduces the topic
ofbenchmarks,focusingontheuseofmarketindexes.Laterstudysessionsonthe
portfolio management of fxed-income securities, equities, and
alternative investments will address additional, asset class
specifc issues, while the study session on perfor-mance evaluation
will explore the theory and practice of performance benchmarking.
READING ASSIGNMENTSReading 18 Currency Management: An Introduction
by William A. Barker, CFAReading 19 Market Indexes and Benchmarks
by C. Mitchell Conover, PhD, CFA, CIPMLEARNING OUTCOMESREADING 18.
CURRENCY MANAGEMENT: AN INTRODUCTIONTe candidate should be able
to:aanalyze the efects of currency movements on portfolio risk and
return;bdiscuss strategic choices in currency management; S T U DY
S E S S I ON92016 Level III CFA Program Curriculum CFA
Institute.Study Session 9 2cformulate an appropriate currency
management program given fnancial market conditions and portfolio
objectives and constraints;dcompare active currency trading
strategies based on economic fundamentals, technical analysis,
carry- trade, and volatility trading;edescribe how changes in
factors underlying active trading strategies afect tacti-cal
trading decisions;fdescribe how forward contracts and FX (foreign
exchange) swaps are used to adjust hedge ratios;gdescribe trading
strategies used to reduce hedging costs and modify the riskreturn
characteristics of a foreign-currency portfolio;hdescribe the use
of cross-hedges, macro-hedges, and minimum- variance-hedge ratios
in portfolios exposed to multiple foreign currencies;idiscuss
challenges for managing emerging market currency exposures.READING
19. MARKET INDEXES AND BENCHMARKSTe candidate should be able
to:adistinguish between benchmarks and market indexes;bdescribe
investment uses of benchmarks;ccompare types of
benchmarks;dcontrast liability-based benchmarks with asset-based
benchmarks;edescribe investment uses of market indexes;fdiscuss
tradeofs in constructing market indexes;gdiscuss advantages and
disadvantages of index weighting schemes;hevaluate the selection of
a benchmark for a particular investment strategy.2016 Level III CFA
Program Curriculum CFA Institute.Fixed- Income Portfolio Management
(1)The elements of the investment management process, such as the
consideration of risk, return, and investment constraints, are the
same for a fxed-income portfolio as for any other type of
portfolio. As part of the process, an appropriate benchmark is
selected to serve as a reference for portfolio construction and
performance evalua-tion. For investors taking an asset-only
approach, the benchmark is typically a bond market index. For
investors with a liability- based approach, performance is measured
in terms of the portfolios ability to meet a set of investor-
specifc liabilities. Te frst reading addresses these primary
elements of managing fxed-income portfolios and
introducesspecifcportfoliomanagementstrategies.Tesecondreadingdiscusses
additional relative- value methodologies.READING ASSIGNMENTSReading
20 Fixed-Income Portfolio ManagementPart I by H. Giford Fong and
Larry D. Guin, DBA, CFAReading 21 Relative- Value Methodologies for
Global Credit Bond Portfolio Management by Jack Malvey, CFALEARNING
OUTCOMESREADING 20. FIXED- INCOME PORTFOLIO MANAGEMENTPART ITe
candidate should be able to:acompare, with respect to investment
objectives, the use of liabilities as a bench-mark and the use of a
bond index as a benchmark; S T U DY S E S S I ON102016 Level III
CFA Program Curriculum CFA Institute.Study Session 10 2bcompare
pure bond indexing, enhanced indexing, and active investing with
respect to the objectives, advantages, disadvantages, and
management of each;cdiscuss the criteria for selecting a benchmark
bond index and justify the selec-tion of a specifc index when given
a description of an investors risk aversion, income needs, and
liabilities;dcritique the use of bond market indexes as
benchmarks;edescribe and evaluate techniques, such as duration
matching and the use of key rate durations, by which an enhanced
indexer may seek to align the risk expo-sures of the portfolio with
those of the benchmark bond index;fcontrast and demonstrate the use
of total return analysis and scenario analysis to assess the risk
and return characteristics of a proposed trade;gformulate a bond
immunization strategy to ensure funding of a predetermined
liability and evaluate the strategy under various interest rate
scenarios;hdemonstrate the process of rebalancing a portfolio to
reestablish a desired dol-lar duration;iexplain the importance of
spread duration;jdiscuss the extensions that have been made to
classical immunization theory, including the introduction of
contingent immunization;kexplain the risks associated with managing
a portfolio against a liability struc-ture, including interest rate
risk, contingent claim risk, and cap risk;lcompare immunization
strategies for a single liability, multiple liabilities, and
general cash fows;mcompare risk minimization with return
maximization in immunized portfolios;ndemonstrate the use of cash
fow matching to fund a fxed set of future liabil-ities and compare
the advantages and disadvantages of cash fow matching to those of
immunization strategies.READING 21. RELATIVE- VALUE METHODOLOGIES
FOR GLOBAL CREDIT BOND PORTFOLIO MANAGEMENTTe candidate should be
able to:aexplain classic relative- value analysis, based on
top-down and bottom- up approaches to credit bond portfolio
management;bdiscuss the implications of cyclical supply and demand
changes in the primary corporate bond market and the impact of
secular changes in the markets domi-nant product
structures;cexplain the infuence of investors short- and long- term
liquidity needs on port-folio management decisions;ddiscuss common
rationales for secondary market trading;ediscuss corporate bond
portfolio strategies that are based on relative value.2016 Level
III CFA Program Curriculum CFA Institute.Fixed- Income Portfolio
Management (2)Study Session 11 builds on the fundamentals of fxed-
income portfolio management to address international and emerging
market strategies and the use of derivatives to manage interest
rate and credit risks. READING ASSIGNMENTSReading 22 Fixed-Income
Portfolio ManagementPart II by H. Giford Fong and Larry D. Guin,
DBA, CFALEARNING OUTCOMESREADING 22. FIXED- INCOME PORTFOLIO
MANAGEMENTPART IITe candidate should be able to:aevaluate the efect
of leverage on portfolio duration and investment returns;bdiscuss
the use of repurchase agreements (repos) to fnance bond purchases
and the factors that afect the repo rate;ccritique the use of
standard deviation, target semivariance, shortfall risk, and value
at risk as measures of fxed-income portfolio risk;ddemonstrate the
advantages of using futures instead of cash market instruments to
alter portfolio risk;eformulate and evaluate an immunization
strategy based on interest rate futures;fexplain the use of
interest rate swaps and options to alter portfolio cash fows and
exposure to interest rate risk; S T U DY S E S S I ON112016 Level
III CFA Program Curriculum CFA Institute.Study Session 11 2gcompare
default risk, credit spread risk, and downgrade risk and
demonstrate the use of credit derivative instruments to address
each risk in the context of a fxed- income portfolio;hexplain the
potential sources of excess return for an international bond
portfolio;ievaluate 1) the change in value for a foreign bond when
domestic interest rates change and 2) the bonds contribution to
duration in a domestic portfolio, given the duration of the foreign
bond and the country beta;jrecommend and justify whether to hedge
or not hedge currency risk in an international bond
investment;kdescribe how breakeven spread analysis can be used to
evaluate the risk in seek-ing yield advantages across international
bond markets;ldiscuss the advantages and risks of investing in
emerging market debt;mdiscuss the criteria for selecting a
fxed-income manager.2016 Level III CFA Program Curriculum CFA
Institute.Equity Portfolio ManagementBecause equity securities
represent a signifcant portion of many investment
port-folios,equityportfoliomanagementisoftenanimportantcomponentofoverall
investment success. Tis study session focuses on the role of
equities in an investment portfolio, three major approaches used to
manage equity portfolios, and the evaluation of equity
managers.READING ASSIGNMENTReading 23 Equity Portfolio Management
by Gary L. Gastineau, Andrew R. Olma, CFA, and Robert G. Zielinski,
CFALEARNING OUTCOMESREADING 23. EQUITY PORTFOLIO MANAGEMENTTe
candidate should be able to:adiscuss the role of equities in the
overall portfolio;bdiscuss the rationales for passive, active, and
semiactive (enhanced index) equity investment approaches and
distinguish among those approaches with respect to expected active
return and tracking risk;crecommend an equity investment approach
when given an investors investment policy statement and beliefs
concerning market efciency;ddistinguish among the predominant
weighting schemes used in the construc-tion of major equity market
indices and evaluate the biases of each; S T U DY S E S S I
ON122016 Level III CFA Program Curriculum CFA Institute.Study
Session 12 2ecompare alternative methods for establishing passive
exposure to an equity market, including indexed separate or pooled
accounts, index mutual funds, exchange- traded funds, equity index
futures, and equity total return swaps;fcompare full replication,
stratifed sampling, and optimization as approaches to constructing
an indexed portfolio and recommend an approach when given a
description of the investment vehicle and the index to be
tracked;gexplain and justify the use of equity investmentstyle
classifcations and discuss the difculties in applying style
defnitions consistently;hexplain the rationales and primary
concerns of value investors and growth investors and discuss the
key risks of each investment style;icompare techniques for
identifying investment styles and characterize the style of an
investor when given a description of the investors security
selection method, details on the investors security holdings, or
the results of a returns- based style analysis;jcompare the
methodologies used to construct equity style indices;kinterpret the
results of an equity style box analysis and discuss the
conse-quences of style drift;ldistinguish between positive and
negative screens involving socially respon-sible investing criteria
and discuss their potential efects on a portfolios style
characteristics;mcompare longshort and long-only investment
strategies, including their risks and potential alphas, and explain
why greater pricing inefciency may exist on the short side of the
market;nexplain how a market-neutral portfolio can be equitized to
gain equity market exposure and compare equitized market-neutral
and short-extension portfolios;ocompare the sell disciplines of
active investors;pcontrast derivatives-based and stock-based
enhanced indexing strategies and justify enhanced indexing on the
basis of risk control and the information ratio;qrecommend and
justify, in a risk-return framework, the optimal portfolio
allo-cations to a group of investment managers;rexplain the core-
satellite approach to portfolio construction and discuss the
advantages and disadvantages of adding a completeness fund to
control overall risk exposures;sdistinguish among the components of
total active return (true active return and misft active return)
and their associated risk measures and explain their relevance for
evaluating a portfolio of managers;texplain alpha and beta
separation as an approach to active management and demonstrate the
use of portable alpha;udescribe the process of identifying,
selecting, and contracting with equity managers;vcontrast the
top-down and bottom- up approaches to equity research.2016 Level
III CFA Program Curriculum CFA Institute.Alternative Investments
for Portfolio ManagementAlternative investments comprise groups of
investments with risk and return char-acteristics that difer
markedly from those of traditional stock and bond investments.
Common features of alternative investments include: relative
illiquidity, which tends to be associated with a return premium as
compensation; diversifying potential relative to a portfolio of
stocks and bonds; high due diligence costs; and performance
appraisal that is unusually difcult, due in part to the complexity
of establishing valid benchmarks.Many institutional and high-net-
worth individuals make portfolio allocations to alternative
investments that are comparable in size to those they make to the
tradi-tional asset classes of stocks and bonds. In doing so, such
investors may be seeking risk diversifcation and/or greater
opportunities to apply active management skills and capture alpha.
Portfolio managers who take advantage of the opportunities
presented by alternative investments may have a substantial
advantage over those who do not.READING ASSIGNMENTSReading 24
Alternative Investments Portfolio Management by Jot K. Yau, PhD,
CFA, Tomas Schneeweis, PhD, Tomas R. Robinson, PhD, CFA, and Lisa
R. Weiss, CFA S T U DY S E S S I ON132016 Level III CFA Program
Curriculum CFA Institute.Study Session 13 2LEARNING OUTCOMESREADING
24. ALTERNATIVE INVESTMENTS PORTFOLIO MANAGEMENTTe candidate should
be able to:adescribe common features of alternative investments and
their markets and how alternative investments may be grouped by the
role they typically play in a portfolio;bexplain and justify the
major due diligence checkpoints involved in selecting active
managers of alternative investments;cexplain distinctive issues
that alternative investments raise for investment advis-ers of
private wealth clients;ddistinguish among the principal classes of
alternative investments, including real estate, private equity,
commodity investments, hedge funds, managed futures, buyout funds,
infrastructure funds, and distressed securities;ediscuss the
construction and interpretation of benchmarks and the problem of
benchmark bias in alternative investment groups;fevaluate the
return enhancement and/or risk diversifcation efects of adding an
alternative investment to a reference portfolio (for example, a
portfolio invested solely in common equity and bonds);gdescribe
advantages and disadvantages of direct equity investments in real
estate;hdiscuss the major issuers and suppliers of venture capital,
the stages through which private companies pass (seed stage through
exit), the characteristic sources of fnancing at each stage, and
the purpose of such fnancing;icompare venture capital funds and
buyout funds;jdiscuss the use of convertible preferred stock in
direct venture capital investment;kexplain the typical structure of
a private equity fund, including the compensa-tion to the funds
sponsor (general partner) and typical timelines;ldiscuss issues
that must be addressed in formulating a private equity investment
strategy;mcompare indirect and direct commodity investment;nexplain
the three components of return for a commodity futures contract and
the efect that an upward- or downward- sloping term structure of
futures prices will have on roll yield;odescribe the principal
roles suggested for commodities in a portfolio and explain why some
commodity classes may provide a better hedge against infa-tion than
others;pidentify and explain the style classifcation of a hedge
fund, given a description of its investment strategy;qdiscuss the
typical structure of a hedge fund, including the fee structure, and
explain the rationale for high- water mark provisions;rdescribe the
purpose and characteristics of fund-of-funds hedge funds;sdiscuss
concerns involved in hedge fund performance evaluation;tdescribe
trading strategies of managed futures programs and the role of
man-aged futures in a portfolio;2016 Level III CFA Program
Curriculum CFA Institute.Study Session 13 3udescribe strategies and
risks associated with investing in distressed securities;vexplain
event risk, market liquidity risk, market risk, and J-factor risk
in rela-tion to investing in distressed securities.2016 Level III
CFA Program Curriculum CFA Institute.Risk
ManagementEfectiveriskmanagementidentifes,assesses,andcontrolsnumeroussourcesof
risk,bothfnancialandnonmarketrelated,inaneforttoachievethehighestpos-sible
level of reward for the risks incurred. With the increasingly
complex nature of investment management frms and investment
portfolios, sophisticated risk manage-ment techniques have been
developed to provide analysts with the necessary tools to properly
measure the varying facets of risk.
Tereadinginthisstudysessiondescribesaframeworkforriskmanagement,
focusingontheconceptsandtoolsformeasuringandmanagingmarketriskand
credit risk. READING ASSIGNMENTSReading 25 Risk Management by Don
M. Chance, PhD, CFA, Kenneth Grant, and John Marsland, CFALEARNING
OUTCOMESREADING 25. RISK MANAGEMENTTe candidate should be able
to:adiscuss features of the risk management process, risk
governance, risk reduc-tion, and an enterprise risk management
system;bevaluate strengths and weaknesses of a companys risk
management process;cdescribe steps in an efective enterprise risk
management system;devaluate a companys or a portfolios exposures to
fnancial and nonfnancial risk factors; S T U DY S E S S I ON142016
Level III CFA Program Curriculum CFA Institute.Study Session 14
2ecalculate and interpret value at risk (VaR) and explain its role
in measuring overall and individual position market risk;fcompare
the analytical (variancecovariance), historical, and Monte Carlo
methods for estimating VaR and discuss the advantages and
disadvantages of each;gdiscuss advantages and limitations of VaR
and its extensions, including cash fow at risk, earnings at risk,
and tail value at risk;hcompare alternative types of stress testing
and discuss advantages and disadvan-tages of each;ievaluate the
credit risk of an investment position, including forward contract,
swap, and option positions;jdemonstrate the use of risk budgeting,
position limits, and other methods for managing market
risk;kdemonstrate the use of exposure limits, marking to market,
collateral, netting arrangements, credit standards, and credit
derivatives to manage credit risk;ldiscuss the Sharpe ratio,
risk-adjusted return on capital, return over maximum drawdown, and
the Sortino ratio as measures of risk-adjusted
performance;mdemonstrate the use of VaR and stress testing in
setting capital requirements.2016 Level III CFA Program Curriculum
CFA Institute.Risk Management Applications of DerivativesThis study
session addresses risk management strategies using forwards and
futures,
optionstrategies,foorsandcaps,andswaps.Tesederivativescanbeusedfora
varietyofriskmanagementpurposes,includingmodifcationofportfolioduration
and beta, implementation of changes in asset allocation, and
creation of cash market
instruments.Agrowingnumberofsecuritytypesnowhaveembeddedderivatives,
andportfoliomanagersmustbeabletoaccountfortheirefectonthereturn/risk
profle of the security. After completing this study session, the
candidate will better understand advantages and disadvantages of
derivative strategies, including the dif-fculties in creating and
maintaining a dynamic hedge.READING ASSIGNMENTSReading 26 Risk
Management Applications of Forward and Futures Strategies by Don M.
Chance, PhD, CFAReading 27 Risk Management Applications of Option
Strategies by Don M. Chance, PhD, CFAReading 28 Risk Management
Applications of Swap Strategies by Don M. Chance, PhD, CFA S T U DY
S E S S I ON152016 Level III CFA Program Curriculum CFA
Institute.Study Session 15 2LEARNING OUTCOMESREADING 26. RISK
MANAGEMENT APPLICATIONS OF FORWARD AND FUTURES STRATEGIESTe
candidate should be able to:ademonstrate the use of equity futures
contracts to achieve a target beta for a stock portfolio and
calculate and interpret the number of futures contracts
required;bconstruct a synthetic stock index fund using cash and
stock index futures (equitizing cash);cexplain the use of stock
index futures to convert a long stock position into syn-thetic
cash;ddemonstrate the use of equity and bond futures to adjust the
allocation of a portfolio between equity and debt;edemonstrate the
use of futures to adjust the allocation of a portfolio across
equity sectors and to gain exposure to an asset class in advance of
actually com-mitting funds to the asset class;fexplain exchange
rate risk and demonstrate the use of forward contracts to reduce
the risk associated with a future receipt or payment in a foreign
currency;gexplain the limitations to hedging the exchange rate risk
of a foreign market portfolio and discuss feasible strategies for
managing such risk.READING 27. RISK MANAGEMENT APPLICATIONS OF
OPTION STRATEGIESTe candidate should be able to:acompare the use of
covered calls and protective puts to manage risk exposure to
individual securities;bcalculate and interpret the value at
expiration, proft, maximum proft, maxi-mum loss, breakeven
underlying price at expiration, and general shape of the graph for
the following option strategies: bull spread, bear spread, butterfy
spread, collar, straddle, box spread;ccalculate the efective annual
rate for a given interest rate outcome when a bor-rower (lender)
manages the risk of an anticipated loan using an interest rate call
(put) option;dcalculate the payofs for a series of interest rate
outcomes when a foating rate loan is combined with 1) an interest
rate cap, 2) an interest rate foor, or 3) an interest rate
collar;eexplain why and how a dealer delta hedges an option
position, why delta changes, and how the dealer adjusts to maintain
the delta hedge;finterpret the gamma of a delta-hedged portfolio
and explain how gamma changes as in- the-money and out-of-
the-money options move toward expiration.2016 Level III CFA Program
Curriculum CFA Institute.Study Session 15 3READING 28. RISK
MANAGEMENT APPLICATIONS OF SWAP STRATEGIESTe candidate should be
able to:ademonstrate how an interest rate swap can be used to
convert a foating-rate (fxed-rate) loan to a fxed-rate
(foating-rate) loan;bcalculate and interpret the duration of an
interest rate swap;cexplain the efect of an interest rate swap on
an entitys cash fow risk;ddetermine the notional principal value
needed on an interest rate swap to achieve a desired level of
duration in a fxed-income portfolio;eexplain how a company can
generate savings by issuing a loan or bond in its own currency and
using a currency swap to convert the obligation into another
currency;fdemonstrate how a frm can use a currency swap to convert
a series of foreign cash receipts into domestic cash
receipts;gexplain how equity swaps can be used to diversify a
concentrated equity port-folio, provide international
diversifcation to a domestic portfolio, and alter portfolio
allocations to stocks and bonds;hdemonstrate the use of an interest
rate swaption 1) to change the payment pat-tern of an anticipated
future loan and 2) to terminate a swap.2016 Level III CFA Program
Curriculum CFA Institute.Trading, Monitoring, and
RebalancingBecause the investment process is not complete until
securities are bought or sold, the quality of trade execution is an
important determinant of investment results. Te methods by which
managers and traders interact with markets, choose appropriate
trading strategies and tactics, and measure success in execution
are key topics in the frst reading.
Tesecondreadingdiscussestheongoingmonitoringandrebalancingofthe
investment portfolio, which are integral parts of the portfolio
management process.
Portfoliomanagersmustunderstandthereasonsformonitoringportfoliosandbe
able to formulate appropriate portfolio rebalancing policies.
READING ASSIGNMENTSReading 29 Execution of Portfolio Decisions by
Ananth Madhavan, Jack L. Treynor, and Wayne H. WagnerReading 30
Monitoring and Rebalancing by Robert D. Arnott, Terence E. Burns,
CFA, Lisa Plaxco, CFA, and Philip MooreLEARNING OUTCOMESREADING 29.
EXECUTION OF PORTFOLIO DECISIONSTe candidate should be able
to:acompare market orders with limit orders, including the price
and execution uncertainty of each;bcalculate and interpret the
efective spread of a market order and contrast it to the quoted
bidask spread as a measure of trading cost; S T U DY S E S S I
ON162016 Level III CFA Program Curriculum CFA Institute.Study
Session 16 2ccompare alternative market structures and their
relative advantages;dcompare the roles of brokers and
dealers;eexplain the criteria of market quality and evaluate the
quality of a market when given a description of its
characteristics;fexplain the components of execution costs,
including explicit and implicit costs, and evaluate a trade in
terms of these costs;gcalculate and discuss implementation
shortfall as a measure of transaction costs;hcontrast volume
weighted average price (VWAP) and implementation shortfall as
measures of transaction costs;iexplain the use of econometric
methods in pretrade analysis to estimate implicit transaction
costs;jdiscuss the major types of traders, based on their
motivation to trade, time versus price preferences, and preferred
order types;kdescribe the suitable uses of major trading tactics,
evaluate their relative costs, advantages, and weaknesses, and
recommend a trading tactic when given a description of the
investors motivation to trade, the size of the trade, and key
market characteristics;lexplain the motivation for algorithmic
trading and discuss the basic classes of algorithmic trading
strategies;mdiscuss the factors that typically determine the
selection of a specifc algorith-mic trading strategy, including
order size, average daily trading volume, bidask spread, and the
urgency of the order;nexplain the meaning and criteria of best
execution;oevaluate a frms investment and trading procedures,
including processes, dis-closures, and record keeping, with respect
to best execution;pdiscuss the role of ethics in trading.READING
30. MONITORING AND REBALANCINGTe candidate should be able
to:adiscuss a fduciarys responsibilities in monitoring an
investment portfolio;bdiscuss the monitoring of investor
circumstances, market/economic conditions, and portfolio holdings
and explain the efects that changes in each of these areas can have
on the investors portfolio;crecommend and justify revisions to an
investors investment policy statement and strategic asset
allocation, given a change in investor circumstances;ddiscuss the
benefts and costs of rebalancing a portfolio to the investors
strate-gic asset allocation;econtrast calendar rebalancing to
percentage-of- portfolio rebalancing;fdiscuss the key determinants
of the optimal corridor width of an asset class in a percentage-
of- portfolio rebalancing program;gcompare the benefts of
rebalancing an asset class to its target portfolio weight versus
rebalancing the asset class to stay within its allowed
range;hexplain the performance consequences in up, down, and fat
markets of 1) rebalancing to a constant mix of equities and bills,
2) buying and holding equi-ties, and 3) constant proportion
portfolio insurance (CPPI);2016 Level III CFA Program Curriculum
CFA Institute.Study Session 16 3idistinguish among linear, concave,
and convex rebalancing strategies;jjudge the appropriateness of
constant mix, buy-and-hold, and CPPI rebalancing strategies when
given an investors risk tolerance and asset return
expectations.2016 Level III CFA Program Curriculum CFA
Institute.Performance EvaluationPerformance evaluation addresses
three questions that are essential in evaluating the results of the
portfolio management process: What was the portfolios performance?
Why did the portfolio produce the observed performance? Was the
portfolios performance due to luck or skill?Tese questions are
answered by performance measurement, performance attribution, and
performance appraisal, respectively. Te information developed in
performance
evaluationprovideskeyinputstoa)assessingcompliancewithinvestmentpolicy
andprogresstowardachievingclientgoals,b)determiningwhetheraninvestment
managersperformancehasbeenconsistentwiththemanagersstatedinvestment
discipline, and c) deciding whether to hire, retain, or dismiss an
investment manager.READING ASSIGNMENTSReading 31 Evaluating
Portfolio Performance by Jefery V. Bailey, CFA, Tomas M. Richards,
CFA, and David E. TierneyLEARNING OUTCOMESREADING 31. EVALUATING
PORTFOLIO PERFORMANCETe candidate should be able to:ademonstrate
the importance of performance evaluation from the perspective of
fund sponsors and the perspective of investment managers; S T U DY
S E S S I ON172016 Level III CFA Program Curriculum CFA
Institute.Study Session 17 2bexplain the following components of
portfolio evaluation: performance mea-surement, performance
attribution, and performance appraisal;ccalculate, interpret, and
contrast time- weighted and money- weighted rates of return and
discuss how each is afected by cash contributions and
withdrawals;didentify and explain potential data quality issues as
they relate to calculating rates of return;edemonstrate the
decomposition of portfolio returns into components attribut-able to
the market, to style, and to active management;fdiscuss the
properties of a valid performance benchmark and explain advan-tages
and disadvantages of alternative types of benchmarks;gexplain the
steps involved in constructing a custom security-based
benchmark;hdiscuss the validity of using manager universes as
benchmarks;ievaluate benchmark quality by applying tests of quality
to a variety of possible benchmarks;jdiscuss issues that arise when
assigning benchmarks to hedge funds;kdistinguish between macro and
micro performance attribution and discuss the inputs typically
required for each;ldemonstrate and contrast the use of macro and
micro performance attribution methodologies to identify the sources
of investment performance;mdiscuss the use of fundamental factor
models in micro performance attribution;nevaluate the efects of the
external interest rate environment and active man-agement on
fxed-income portfolio returns;oexplain the management factors that
contribute to a fxed-income portfolios total return and interpret
the results of a fxed-income performance attribution
analysis;pcalculate, interpret, and contrast alternative
risk-adjusted performance mea-sures, including (in their ex post
forms) alpha, information ratio, Treynor mea-sure, Sharpe ratio,
and M2;qexplain how a portfolios alpha and beta are incorporated
into the information ratio, Treynor measure, and Sharpe
ratio;rdemonstrate the use of performance quality control charts in
performance appraisal;sdiscuss the issues involved in manager
continuation policy decisions, including the costs of hiring and
fring investment managers;tcontrast Type I and Type II errors in
manager continuation decisions.2016 Level III CFA Program
Curriculum CFA Institute.Global Investment Performance StandardsThe
Global Investment Performance Standards (GIPS) contain ethical and
profes-sional standards for presenting investment performance to
prospective clients. Tese guidelines provide for standardized
performance calculation and presentation among
investmentmanagers,enablinginvestorstoobjectivelycomparemanagerreturn
historiesandclearlyevaluateperformance.Tisstudysessionconsistsofasingle
reading that provides grounding in the requirements and
recommendations of GIPS. READING ASSIGNMENTSReading 32
OverviewoftheGlobalInvestmentPerformanceStandards by Philip Lawton,
PhD, CFA, CIPMLEARNING OUTCOMESREADING 32. OVERVIEW OF THE GLOBAL
INVESTMENT PERFORMANCE STANDARDSTe candidate should be able
to:adiscuss the objectives, key characteristics, and scope of the
GIPS standards and their benefts to prospective clients and
investment managers;bexplain the fundamentals of compliance with
the GIPS standards, including the defnition of the frm and the frms
defnition of discretion;cexplain the requirements and
recommendations of the GIPS standards with respect to input data,
including accounting policies related to valuation and performance
measurement; S T U DY S E S S I ON182016 Level III CFA Program
Curriculum CFA Institute.Study Session 18 2ddiscuss the
requirements of the GIPS standards with respect to return
calcu-lation methodologies, including the treatment of external
cash fows, cash and cash equivalents, and expenses and
fees;eexplain the requirements and recommendations of the GIPS
standards with respect to composite return calculations, including
methods for asset- weighting portfolio returns;fexplain 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;gexplain the
role of investment mandates, objectives, or strategies in the
con-struction of composites;hexplain the requirements and
recommendations of the GIPS standards with respect to composite
construction, including switching portfolios among com-posites, the
timing of the inclusion of new portfolios in composites, and the
timing of the exclusion of terminated portfolios from
composites;iexplain the requirements of the GIPS standards for
asset class segments carved out of multi-class portfolios;jexplain
the requirements and recommendations of the GIPS standards with
respect to disclosure, including fees, the use of leverage and
derivatives, con-formity with laws and regulations that confict
with the GIPS standards, and noncompliant performance
periods;kexplain the requirements and recommendations of the GIPS
standards with respect to presentation and reporting, including the
required timeframe of compliant performance periods, annual
returns, composite assets, and benchmarks;lexplain the conditions
under which the performance of a past frm or afliation must be
linked to or used to represent the historical performance of a new
or acquiring frm;mevaluate the relative merits of high/low, range,
interquartile range, and equal- weighted or asset- weighted
standard deviation as measures of the internal dispersion of
portfolio returns within a composite for annual periods;nidentify
the types of investments that are subject to the GIPS standards for
real estate and private equity;oexplain the provisions of the GIPS
standards for real estate and private equity;pexplain the
provisions of the GIPS standards for Wrap fee/Separately Managed
Accounts;qexplain the requirements and recommended valuation
hierarchy of the GIPS Valuation Principles;rdetermine whether
advertisements comply with the GIPS Advertising Guidelines;sdiscuss
the purpose, scope, and process of verifcation;tdiscuss challenges
related to the calculation of after- tax returns;uidentify and
explain errors and omissions in given performance presentations and
recommend changes that would bring them into compliance with GIPS
standards.