CFA Level III - LOS Changes 2016-2017 Ethics Ethics Ethics Ethics Ethics Ethics Ethics Ethics Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 1.1.a 1.1.b 1.2.a 1.2.b 2.3.a 2.3.b 2.4.a 2.4.b describe 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 explain the ethical responsibilities required by the Code of Ethics and the Standards of Professional Conduct, including the sub-sections of each standard demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct evaluate professional conduct and formulate an appropriate response to actions that violate the Code of Ethics and Standards of Professional Conduct formulate appropriate policy and procedural changes needed to assure compliance with the Code of Ethics and Standards of Professional Conduct explain the purpose of the Manager Code and the benefits that may accrue to a firm that adopts the Code explain the ethical and professional responsibilities required by the six General Principles of Conduct of the Manager Code 1.1.a 1.1.b 1.2.a 1.2.b 2.3.a 2.3.b 2.4.a 2.4.b describe 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 explain the ethical responsibilities required by the Code of Ethics and the Standards of Professional Conduct, including the sub-sections of each standard demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct evaluate professional conduct and formulate an appropriate response to actions that violate the Code of Ethics and Standards of Professional Conduct formulate appropriate policy and procedural changes needed to assure compliance with the Code of Ethics and Standards of Professional Conduct explain the purpose of the Manager Code and the benefits that may accrue to a firm that adopts the Code explain the ethical and professional responsibilities required by the six General Principles of Conduct of the Manager Code Financing or Accounting Questions? Go to passingscoreforum.com 1
Ethics Ethics Behavioral Finance Behavioral Finance 2.4.c 2.4.d 3.5.a 3.5.b determine whether an asset manager s practices and procedures are consistent with the Manager Code recommend practices and procedures designed to prevent violations of the Manager Code contrast traditional and behavioral finance perspectives on investor decision making contrast expected utility and prospect theories of investment decision making 2.4.c 2.4.d 3.5.a 3.5.b determine whether an asset manager s practices and procedures are consistent with the Manager Code recommend practices and procedures designed to prevent violations of the Manager Code contrast traditional and behavioral finance perspectives on investor decision making contrast expected utility and prospect theories of investment decision making Behavioral Finance Behavioral Finance Behavioral Finance 3.5.c 3.5.d 3.6.a discuss the effect that cognitive limitations and bounded rationality may have on investment decision making compare traditional and behavioral finance perspectives on portfolio construction and the behavior of capital markets distinguish between cognitive errors and emotional biases 3.5.c 3.5.d 3.6.a discuss the effect that cognitive limitations and bounded rationality may have on investment decision making compare traditional and behavioral finance perspectives on portfolio construction and the behavior of capital markets distinguish between cognitive errors and emotional biases Behavioral Finance Behavioral Finance Behavioral Finance Behavioral Finance Behavioral Finance Behavioral Finance Behavioral Finance 3.6.b 3.6.c 3.6.d 3.7.a 3.7.b 3.7.c 3.7.d discuss commonly recognized behavioral biases and their implications for financial decision making identify and evaluate an individual s behavioral biases evaluate how behavioral biases affect investment policy and asset allocation decisions and recommend approaches to mitigate their effects explain the uses and limitations of classifying investors into personality types discuss how behavioral factors affect adviser client interactions discuss how behavioral factors influence portfolio construction explain how behavioral finance can be applied to the process of portfolio construction 3.6.b 3.6.c 3.6.d 3.7.a 3.7.b 3.7.c discuss commonly recognized behavioral biases and their implications for financial decision making identify and evaluate an individual s behavioral biases evaluate how behavioral biases affect investment policy and asset allocation decisions and recommend approaches to mitigate their effects explain the uses and limitations of classifying investors into personality types discuss how behavioral factors affect adviser client interactions discuss how behavioral factors influence portfolio construction explain how behavioral finance can be applied to the process of portfolio 3.7.d construction Financing or Accounting Questions? Go to passingscoreforum.com 2
Behavioral Finance Behavioral Finance Behavioral Finance 3.7.e 3.7.f 3.7.g 4.8.a 4.8.b 4.8.c 4.8.d 4.8.e 4.8.f 4.8.g 4.8.h discuss how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases discuss how behavioral factors affect investment committee decision making and recommend techniques for mitigating their effects describe how behavioral biases of investors can lead to market characteristics that may not be explained by traditional finance discuss how source of wealth, measure of wealth, and stage of life affect an individual investors risk tolerance explain the role of situational and psychological profiling in understanding an individual investor s attitude toward risk explain the influence of investor psychology on risk tolerance and investment choices explain potential benefits, for both clients and investment advisers, of having a formal investment policy statement explain the process involved in creating an investment policy statement distinguish between required return and desired return and explain how these affect the individual investor s investment policy explain 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 discuss the major constraint categories included in an individual investor s investment policy statement 3.7.e 3.7.f 3.7.g 4.8.a 4.8.b 4.8.c 4.8.d 4.8.e 4.8.f 4.8.g 4.8.h discuss how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases discuss how behavioral factors affect investment committee decision making and recommend techniques for mitigating their effects describe how behavioral biases of investors can lead to market characteristics that may not be explained by traditional finance discuss how source of wealth, measure of wealth, and stage of life affect an individual investors risk tolerance explain the role of situational and psychological profiling in understanding an individual investor s attitude toward risk explain the influence of investor psychology on risk tolerance and investment choices explain potential benefits, for both clients and investment advisers, of having a formal investment policy statement explain the process involved in creating an investment policy statement distinguish between required return and desired return and explain how these affect the individual investor s investment policy explain 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 discuss the major constraint categories included in an individual investor s investment policy statement Financing or Accounting Questions? Go to passingscoreforum.com 3
Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 4.8.i 4.8.j 4.8.k 4.9.a 4.9.b 4.9.c 4.9.d 4.9.e 4.9.f 4.9.g 4.9.h 4.9.i prepare and justify an investment policy statement for an individual investor determine the strategic asset allocation that is most appropriate for an individual investor s specific investment objectives and constraints compare Monte Carlo and traditional deterministic approaches to retirement planning and explain the advantages of a Monte Carlo approach compare basic global taxation regimes as they relate to the taxation of dividend income, interest income, realized capital gains, and unrealized capital gains determine the effects of different types of taxes and tax regimes on future wealth accumulation calculate accrual equivalent tax rates and after-tax returns explain how investment return and investment horizon affect the tax impact associated with an investment discuss the tax profiles of different types of investment accounts and explain their impact on after-tax returns and future accumulations explain how taxes affect investment risk discuss the relation between after-tax returns and different types of investor trading behavior explain the benefits of tax loss harvesting and highest-in/first-out (HIFO) tax lot accounting demonstrate how taxes and asset location relate to mean variance optimization 4.8.i 4.8.j 4.8.k 4.9.a 4.9.b 4.9.c 4.9.d 4.9.e 4.9.f 4.9.g 4.9.h 4.9.i prepare and justify an investment policy statement for an individual investor determine the strategic asset allocation that is most appropriate for an individual investor s specific investment objectives and constraints compare Monte Carlo and traditional deterministic approaches to retirement planning and explain the advantages of a Monte Carlo approach compare basic global taxation regimes as they relate to the taxation of dividend income, interest income, realized capital gains, and unrealized capital gains determine the effects of different types of taxes and tax regimes on future wealth accumulation calculate accrual equivalent tax rates and after-tax returns explain how investment return and investment horizon affect the tax impact associated with an investment discuss the tax profiles of different types of investment accounts and explain their impact on after-tax returns and future accumulations explain how taxes affect investment risk discuss the relation between after-tax returns and different types of investor trading behavior explain the benefits of tax loss harvesting and highest-in/first-out (HIFO) tax lot accounting demonstrate how taxes and asset location relate to mean variance optimization Financing or Accounting Questions? Go to passingscoreforum.com 4
Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 4.10.a 4.10.b 4.10.c 4.10.d 4.10.e 4.10.f 4.10.g 4.10.h 4.10.i 4.10.j 4.10.k discuss the purpose of estate planning and explain the basic concepts of domestic estate planning, including estates, wills, and probate explain the two principal forms of wealth transfer taxes and discuss effects of important non-tax issues, such as legal system, forced heirship, and marital property regime determine a family s core capital and excess capital, based on mortality probabilities and Monte Carlo analysis evaluate the relative after-tax value of lifetime gifts and testamentary bequests explain the estate planning benefit of making lifetime gifts when gift taxes are paid by the donor, rather than the recipient evaluate the after-tax benefits of basic estate planning strategies, including generation skipping, spousal exemptions, valuation discounts, and charitable gifts explain the basic structure of a trust and discuss the differences between revocable and irrevocable trusts explain how life insurance can be a taxefficient means of wealth transfer discuss the two principal systems (source jurisdiction and residence jurisdiction) for establishing a country s tax jurisdiction discuss the possible income and estate tax consequences of foreign situated assets and foreign-sourced income evaluate a client s tax liability under each of three basic methods (credit, exemption, and deduction) that a country may use to provide relief from double taxation 4.10.a 4.10.b 4.10.c 4.10.d 4.10.e 4.10.f 4.10.g 4.10.h 4.10.i 4.10.j 4.10.k discuss the purpose of estate planning and explain the basic concepts of domestic estate planning, including estates, wills, and probate explain the two principal forms of wealth transfer taxes and discuss effects of important non-tax issues, such as legal system, forced heirship, and marital property regime determine a family s core capital and excess capital, based on mortality probabilities and Monte Carlo analysis evaluate the relative after-tax value of lifetime gifts and testamentary bequests explain the estate planning benefit of making lifetime gifts when gift taxes are paid by the donor, rather than the recipient evaluate the after-tax benefits of basic estate planning strategies, including generation skipping, spousal exemptions, valuation discounts, and charitable gifts explain the basic structure of a trust and discuss the differences between revocable and irrevocable trusts explain how life insurance can be a taxefficient means of wealth transfer discuss the two principal systems (source jurisdiction and residence jurisdiction) for establishing a country s tax jurisdiction discuss the possible income and estate tax consequences of foreign situated assets and foreign-sourced income evaluate a client s tax liability under each of three basic methods (credit, exemption, and deduction) that a country may use to provide relief from double taxation Financing or Accounting Questions? Go to passingscoreforum.com 5
Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 4.10.l 5.11.a 5.11.b 5.11.c 5.11.d 5.11.e 5.11.f 5.11.g 5.11.h 5.11.i 5.11.j 5.11.k discuss how increasing international transparency and information exchange among tax authorities affect international estate planning explain investment risks associated with a concentrated position in a single asset and discuss the appropriateness of reducing such risks describe typical objectives in managing concentrated positions discuss tax consequences and illiquidity as considerations affecting the management of concentrated positions in publicly traded common shares, privately held businesses, and real estate discuss capital market and institutional constraints on an investor s ability to reduce a concentrated position discuss psychological considerations that may make an investor reluctant to reduce his or her exposure to a concentrated position describe advisers use of goal-based planning in managing concentrated positions explain uses of asset location and wealth transfers in managing concentrated positions describe strategies for managing concentrated positions in publicly traded common shares discuss tax considerations in the choice of hedging strategy describe strategies for managing concentrated positions in privately held businesses describe strategies for managing concentrated positions in real estate 4.10.l 5.11.a 5.11.b 5.11.c 5.11.d 5.11.e 5.11.f 5.11.g 5.11.h 5.11.i 5.11.j 5.11.k discuss how increasing international transparency and information exchange among tax authorities affect international estate planning explain investment risks associated with a concentrated position in a single asset and discuss the appropriateness of reducing such risks describe typical objectives in managing concentrated positions discuss tax consequences and illiquidity as considerations affecting the management of concentrated positions in publicly traded common shares, privately held businesses, and real estate discuss capital market and institutional constraints on an investor s ability to reduce a concentrated position discuss psychological considerations that may make an investor reluctant to reduce his or her exposure to a concentrated position describe advisers use of goal-based planning in managing concentrated positions explain uses of asset location and wealth transfers in managing concentrated positions describe strategies for managing concentrated positions in publicly traded common shares discuss tax considerations in the choice of hedging strategy describe strategies for managing concentrated positions in privately held businesses describe strategies for managing concentrated positions in real estate Financing or Accounting Questions? Go to passingscoreforum.com 6
Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 5.11.l 5.12.a evaluate and recommend techniques for tax efficiently managing the risks of concentrated positions in publicly traded common stock, privately held businesses, and real estate explain the concept and discuss the characteristics of human capital as a component of an investor s total wealth 5.11.l 5.12.a 5.12.b 5.12.c 5.12.d 5.12.e 5.12.f 5.12.g 5.12.h 5.12.i 5.12.j 5.12.k 5.12.l evaluate and recommend techniques for tax efficiently managing the risks of concentrated positions in publicly traded common stock, privately held businesses, and real estate compare the characteristics of human capital and financial capital as components of an individual s total wealth discuss the relationships among human capital, financial capital, and net wealth discuss the financial stages of life for an individual describe an economic (holistic) balance sheet discuss risks (earnings, premature death, longevity, property, liability, and health risks) in relation to human and financial capital describe types of insurance relevant to personal financial planning describe the basic elements of a life insurance policy and how insurers price a life insurance policy discuss the use of annuities in personal financial planning discuss the relative advantages and disadvantages of fixed and variable annuities analyze and critique an insurance program discuss how asset allocation policy may be influenced by the risk characteristics of human capital recommend and justify appropriate strategies for asset allocation and risk reduction when given an investor profile of key inputs Wording Change New New New New New New New New New New New Financing or Accounting Questions? Go to passingscoreforum.com 7
Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 5.12.b 5.12.c 5.12.d 5.12.e 5.12.f 5.12.g 6.13.a discuss the earnings risk, mortality risk, and longevity risk associated with human capital and explain how these risks can be reduced by appropriate portfolio diversification, life insurance, and annuity products explain how asset allocation policy is influenced by the risk characteristics of human capital and the relative relationships of human capital, financial capital, and total wealth discuss how asset allocation and the appropriate level of life insurance are influenced by the joint consideration of human capital, financial capital, bequest preferences, risk tolerance, and financial wealth discuss the financial market risk, longevity risk, and savings risk faced by investors in retirement and explain how these risks can be reduced by appropriate portfolio diversification, insurance products, and savings discipline discuss the relative advantages of fixed and variable annuities as hedges against longevity risk recommend basic strategies for asset allocation and risk reduction when given an investor profile of key inputs, including human capital, financial capital, stage of life cycle, bequest preferences, risk tolerance, and financial wealth contrast a defined-benefit plan to a defined-contribution plan and discuss the advantages and disadvantages of each from the perspectives of the employee and the employer 6.13.b discuss investment objectives and constraints for defined-benefit plans 6.13.a 6.13.b contrast a defined-benefit plan to a defined-contribution plan and discuss the advantages and disadvantages of each from the perspectives of the employee and the employer discuss investment objectives and constraints for defined-benefit plans Removed Removed Removed Removed Removed Removed Financing or Accounting Questions? Go to passingscoreforum.com 8
6.13.c evaluate pension fund risk tolerance when risk is considered from the perspective of the 1) plan surplus, 2) sponsor financial status and profitability, 3) sponsor and pension fund common risk exposures, 4) plan features, and 5) workforce characteristics 6.13.d prepare an investment policy statement for a defined-benefit plan evaluate the risk management 6.13.e considerations in investing pension plan assets prepare an investment policy 6.13.f statement for a participant directed defined-contribution plan discuss hybrid pension plans (e.g., cash 6.13.g balance plans) and employee stock ownership plans 6.13.h 6.13.i 6.13.j 6.13.k distinguish among various types of foundations, with respect to their description, purpose, and source of funds compare the investment objectives and constraints of foundations, endowments, insurance companies, and banks discuss the factors that determine investment policy for pension funds, foundation endowments, life and nonlife insurance companies, and banks prepare an investment policy statement for a foundation, an endowment, an insurance company, and a bank 6.13.c 6.13.d 6.13.e 6.13.f 6.13.g 6.13.h 6.13.i 6.13.j 6.13.k evaluate pension fund risk tolerance when risk is considered from the perspective of the 1) plan surplus, 2) sponsor financial status and profitability, 3) sponsor and pension fund common risk exposures, 4) plan features, and 5) workforce characteristics prepare an investment policy statement for a defined-benefit plan evaluate the risk management considerations in investing pension plan assets prepare an investment policy statement for a participant directed defined-contribution plan discuss hybrid pension plans (e.g., cash balance plans) and employee stock ownership plans distinguish among various types of foundations, with respect to their description, purpose, and source of funds compare the investment objectives and constraints of foundations, endowments, insurance companies, and banks discuss the factors that determine investment policy for pension funds, foundation endowments, life and nonlife insurance companies, and banks prepare an investment policy statement for a foundation, an endowment, an insurance company, and a bank contrast investment companies, commodity pools, and hedge funds to other types of institutional investors compare the asset/liability management needs of pension funds, foundations, endowments, insurance contrast investment companies, 6.13.l commodity pools, and hedge funds to other types of institutional investors 6.13.l compare the asset/liability 6.13.m management needs of pension funds, foundations, endowments, insurance companies, and banks 6.13.m companies, and banks Financing or Accounting Questions? Go to passingscoreforum.com 9
6.13.n 6.14.a 6.14.b 6.14.c 7.15.a 7.15.b 7.15.c 7.15.d 7.15.e 7.15.f compare the investment objectives and constraints of institutional investors given relevant data, such as descriptions of their financial circumstances and attitudes toward risk contrast the assumptions concerning pension liability risk in asset-only and liability-relative approaches to asset allocation discuss the fundamental and economic exposures of pension liabilities and identify asset types that mimic these liability exposures compare 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 discuss the role of, and a framework for, capital market expectations in the portfolio management process discuss challenges in developing capital market forecasts demonstrate the application of formal tools for setting capital market expectations, including statistical tools, discounted cash flow models, the risk premium approach, and financial equilibrium models explain the use of survey and panel methods and judgment in setting capital market expectations discuss the inventory and business cycles, the impact of consumer and business spending, and monetary and fiscal policy on the business cycle discuss the impact that the phases of the business cycle have on shortterm/long-term capital market returns 6.13.n 6.14.a 6.14.b 6.14.c 7.15.a 7.15.b 7.15.c 7.15.d 7.15.e 7.15.f compare the investment objectives and constraints of institutional investors given relevant data, such as descriptions of their financial circumstances and attitudes toward risk contrast the assumptions concerning pension liability risk in asset-only and liability-relative approaches to asset allocation discuss the fundamental and economic exposures of pension liabilities and identify asset types that mimic these liability exposures compare 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 discuss the role of, and a framework for, capital market expectations in the portfolio management process discuss challenges in developing capital market forecasts demonstrate the application of formal tools for setting capital market expectations, including statistical tools, discounted cash flow models, the risk premium approach, and financial equilibrium models explain the use of survey and panel methods and judgment in setting capital market expectations discuss the inventory and business cycles, the impact of consumer and business spending, and monetary and fiscal policy on the business cycle discuss the impact that the phases of the business cycle have on shortterm/long-term capital market returns Financing or Accounting Questions? Go to passingscoreforum.com 10
Topic LOS Level III - 2016 (332 LOS) LOS Level III - 2017 (337 LOS) Compared 7.15.g 7.15.h 7.15.i 7.15.j 7.15.k 7.15.l 7.15.m 7.15.n 7.15.o 7.15.p 7.15.q 7.15.r explain the relationship of inflation to the business cycle and the implications of inflation for cash, bonds, equity, and real estate returns demonstrate the use of the Taylor rule to predict central bank behavior evaluate 1) the shape of the yield curve as an economic predictor and 2) the relationship between the yield curve and fiscal and monetary policy identify and interpret the components of economic growth trends and demonstrate the application of economic growth trend analysis to the formulation of capital market expectations explain how exogenous shocks may affect economic growth trends identify and interpret macroeconomic, interest rate, and exchange rate linkages between economies discuss the risks faced by investors in emerging-market securities and the country risk analysis techniques used to evaluate emerging market economies compare the major approaches to economic forecasting demonstrate the use of economic information in forecasting asset class returns explain how economic and competitive factors can affect investment markets, sectors, and specific securities discuss the relative advantages and limitations of the major approaches to forecasting exchange rates recommend and justify changes in the component weights of a global investment portfolio based on trends and expected changes in 7.15.g 7.15.h 7.15.i 7.15.j 7.15.k 7.15.l 7.15.m 7.15.n 7.15.o 7.15.p 7.15.q explain the relationship of inflation to the business cycle and the implications of inflation for cash, bonds, equity, and real estate returns demonstrate the use of the Taylor rule to predict central bank behavior evaluate 1) the shape of the yield curve as an economic predictor and 2) the relationship between the yield curve and fiscal and monetary policy identify and interpret the components of economic growth trends and demonstrate the application of economic growth trend analysis to the formulation of capital market expectations explain how exogenous shocks may affect economic growth trends identify and interpret macroeconomic, interest rate, and exchange rate linkages between economies discuss the risks faced by investors in emerging-market securities and the country risk analysis techniques used to evaluate emerging market economies compare the major approaches to economic forecasting demonstrate the use of economic information in forecasting asset class returns explain how economic and competitive factors can affect investment markets, sectors, and specific securities discuss the relative advantages and limitations of the major approaches to forecasting exchange rates recommend and justify changes in the component weights of a global investment portfolio based on trends and expected changes in macroeconomic factors 7.15.r macroeconomic factors Financing or Accounting Questions? Go to passingscoreforum.com 11
7.16.a 7.16.b 7.16.c 7.16.d 7.16.e 7.16.f 7.16.g 8.17.a 8.17.b 8.17.c 8.17.d explain the terms of the Cobb-Douglas production function and demonstrate how the function can be used to model growth in real output under the assumption of constant returns to scale evaluate the relative importance of growth in total factor productivity, in capital stock, and in labor input given relevant historical data demonstrate the use of the Cobb- Douglas production function in obtaining a discounted dividend model estimate of the intrinsic value of an equity market critique the use of discounted dividend models and macroeconomic forecasts to estimate the intrinsic value of an equity market contrast top-down and bottom-up approaches to forecasting the earnings per share of an equity market index discuss the strengths and limitations of relative valuation models judge whether an equity market is under-, fairly, or over-valued using a relative equity valuation model explain the function of strategic asset allocation in portfolio management and discuss its role in relation to specifying and controlling the investor s exposures to systematic risk compare strategic and tactical asset allocation 7.16.a 7.16.b 7.16.c 7.16.d 7.16.e 7.16.f 7.16.g 8.17.a 8.17.b discuss the importance of asset allocation for 8.17.c contrast the asset-only and asset/liability management (ALM) approaches to asset allocation and discuss the investor circumstances in which they are commonly used 8.17.d explain the terms of the Cobb-Douglas production function and demonstrate how the function can be used to model growth in real output under the assumption of constant returns to scale evaluate the relative importance of growth in total factor productivity, in capital stock, and in labor input given relevant historical data demonstrate the use of the Cobb- Douglas production function in obtaining a discounted dividend model estimate of the intrinsic value of an equity market critique the use of discounted dividend models and macroeconomic forecasts to estimate the intrinsic value of an equity market contrast top-down and bottom-up approaches to forecasting the earnings per share of an equity market index discuss the strengths and limitations of relative valuation models judge whether an equity market is under-, fairly, or over-valued using a relative equity valuation model explain the function of strategic asset allocation in portfolio management and discuss its role in relation to specifying and controlling the investor s exposures to systematic risk compare strategic and tactical asset allocation discuss the importance of asset allocation for portfolio performance contrast the asset-only and asset/liability management (ALM) approaches to asset allocation and discuss the investor circumstances in which they are commonly used Financing or Accounting Questions? Go to passingscoreforum.com 12
8.17.e 8.17.f 8.17.g 8.17.h 8.17.i 8.17.j 8.17.k 8.17.l 8.17.m 8.17.n 8.17.o 8.17.p explain the advantage of dynamic over static asset allocation and discuss the trade-offs of complexity and cost explain how loss aversion, mental accounting, and fear of regret may influence asset allocation policy evaluate return and risk objectives in relation to strategic asset allocation evaluate whether an asset class or set of asset classes has been appropriately specified select and justify an appropriate set of asset classes for an investor evaluate the theoretical and practical effects of including additional asset classes in an asset allocation demonstrate the application of mean variance analysis to decide whether to include an additional asset class in an existing portfolio describe risk, cost, and opportunities associated with nondomestic equities and bonds explain the importance of conditional return correlations in evaluating the diversification benefits of nondomestic investments explain expected effects on share prices, expected returns, and return volatility as a segmented market becomes integrated with global markets explain the major steps involved in establishing an appropriate asset allocation discuss the strengths and limitations of the following approaches to asset allocation: mean variance, resampled efficient frontier, Black Litterman, Monte Carlo simulation, ALM, and experience based 8.17.e 8.17.f 8.17.g 8.17.h 8.17.i 8.17.j 8.17.k 8.17.l 8.17.m 8.17.n 8.17.o 8.17.p explain the advantage of dynamic over static asset allocation and discuss the trade-offs of complexity and cost explain how loss aversion, mental accounting, and fear of regret may influence asset allocation policy evaluate return and risk objectives in relation to strategic asset allocation evaluate whether an asset class or set of asset classes has been appropriately specified select and justify an appropriate set of asset classes for an investor evaluate the theoretical and practical effects of including additional asset classes in an asset allocation demonstrate the application of mean variance analysis to decide whether to include an additional asset class in an existing portfolio describe risk, cost, and opportunities associated with nondomestic equities and bonds explain the importance of conditional return correlations in evaluating the diversification benefits of nondomestic investments explain expected effects on share prices, expected returns, and return volatility as a segmented market becomes integrated with global markets explain the major steps involved in establishing an appropriate asset allocation discuss the strengths and limitations of the following approaches to asset allocation: mean variance, resampled efficient frontier, Black Litterman, Monte Carlo simulation, ALM, and experience based Financing or Accounting Questions? Go to passingscoreforum.com 13
8.17.q 8.17.r 8.17.s 8.17.t 9.18.a 9.18.b 9.18.c 9.18.d 9.18.e 9.18.f 9.18.g 9.18.h discuss the structure of the minimumvariance frontier with a constraint against short sales formulate and justify a strategic asset allocation, given an investment policy statement and capital market expectations compare the considerations that affect asset allocation for individual investors versus institutional investors and critique a proposed asset allocation in light of those considerations formulate and justify tactical asset allocation (TAA) adjustments to strategic asset class weights, given a TAA strategy and expectational data analyze the effects of currency movements on portfolio risk and return discuss strategic choices in currency management formulate an appropriate currency management program given financial market conditions and portfolio objectives and constraints compare active currency trading strategies based on economic fundamentals, technical analysis, carrytrade, and volatility trading describe how changes in factors underlying active trading strategies affect tactical trading decisions describe how forward contracts and FX (foreign exchange) swaps are used to adjust hedge ratios describe trading strategies used to reduce hedging costs and modify the risk return characteristics of a foreigncurrency portfolio describe the use of cross-hedges, macro-hedges, and minimum-variancehedge ratios in portfolios exposed to 8.17.q 8.17.r 8.17.s 8.17.t 9.18.a 9.18.b 9.18.c 9.18.d 9.18.e 9.18.f 9.18.g discuss the structure of the minimumvariance frontier with a constraint against short sales formulate and justify a strategic asset allocation, given an investment policy statement and capital market expectations compare the considerations that affect asset allocation for individual investors versus institutional investors and critique a proposed asset allocation in light of those considerations formulate and justify tactical asset allocation (TAA) adjustments to strategic asset class weights, given a TAA strategy and expectational data analyze the effects of currency movements on portfolio risk and return discuss strategic choices in currency management formulate an appropriate currency management program given financial market conditions and portfolio objectives and constraints compare active currency trading strategies based on economic fundamentals, technical analysis, carrytrade, and volatility trading describe how changes in factors underlying active trading strategies affect tactical trading decisions describe how forward contracts and FX (foreign exchange) swaps are used to adjust hedge ratios describe trading strategies used to reduce hedging costs and modify the risk return characteristics of a foreigncurrency portfolio describe the use of cross-hedges, macro-hedges, and minimum-variancehedge ratios in portfolios exposed to multiple foreign currencies 9.18.h multiple foreign currencies Financing or Accounting Questions? Go to passingscoreforum.com 14
9.18.i 9.19.a 9.19.b 9.19.c 9.19.d 9.19.e 9.19.f 9.19.g 9.19.h Fixed Income 10.20.a Fixed Income 10.20.b Fixed Income 10.20.c Fixed Income 10.20.d Fixed Income 10.20.e discuss challenges for managing emerging market currency exposures distinguish between benchmarks and market indexes describe investment uses of benchmarks 9.18.i 9.19.a 9.19.b discuss challenges for managing emerging market currency exposures distinguish between benchmarks and market indexes describe investment uses of benchmarks compare types of benchmarks 9.19.c compare types of benchmarks contrast liability-based benchmarks contrast liability-based benchmarks with asset-based benchmarks 9.19.d with asset-based benchmarks describe investment uses of market describe investment uses of market indexes 9.19.e indexes discuss tradeoffs in constructing discuss tradeoffs in constructing market indexes 9.19.f market indexes discuss advantages and disadvantages discuss advantages and disadvantages of index weighting schemes 9.19.g of index weighting schemes evaluate the selection of a benchmark evaluate the selection of a benchmark for a particular investment strategy 9.19.h for a particular investment strategy compare, with respect to investment compare, with respect to investment objectives, the use of liabilities as a objectives, the use of liabilities as a benchmark and the use of a bond index benchmark and the use of a bond index as a benchmark 10.20.a as a benchmark compare pure bond indexing, enhanced indexing, and active investing with respect to the objectives, advantages, disadvantages, and management of each discuss the criteria for selecting a benchmark bond index and justify the selection of a specific index when given a description of an investor s risk aversion, income needs, and liabilities critique the use of bond market indexes as benchmarks describe 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 exposures of the portfolio with those of the benchmark bond index 10.20.b 10.20.c 10.20.d 10.20.e compare pure bond indexing, enhanced indexing, and active investing with respect to the objectives, advantages, disadvantages, and management of each discuss the criteria for selecting a benchmark bond index and justify the selection of a specific index when given a description of an investor s risk aversion, income needs, and liabilities critique the use of bond market indexes as benchmarks describe 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 exposures of the portfolio with those of the benchmark bond index Financing or Accounting Questions? Go to passingscoreforum.com 15
Fixed Income 10.20.f Fixed Income 10.20.g Fixed Income 10.20.h Fixed Income 10.20.i Fixed Income 10.20.j Fixed Income 10.20.k Fixed Income 10.20.l Fixed Income 10.20.m Fixed Income 10.20.n Fixed Income 10.21.a Fixed Income 10.21.b contrast and demonstrate the use of total return analysis and scenario analysis to assess the risk and return characteristics of a proposed trade formulate a bond immunization strategy to ensure funding of a predetermined liability and evaluate the strategy under various interest rate scenarios demonstrate the process of rebalancing a portfolio to reestablish a desired dollar duration explain the importance of spread duration discuss the extensions that have been made to classical immunization theory, including the introduction of contingent immunization explain the risks associated with managing a portfolio against a liability structure, including interest rate risk, contingent claim risk, and cap risk compare immunization strategies for a single liability, multiple liabilities, and general cash flows compare risk minimization with return maximization in immunized portfolios demonstrate the use of cash flow matching to fund a fixed set of future liabilities and compare the advantages and disadvantages of cash flow matching to those of immunization strategies explain classic relative-value analysis, based on top-down and bottom-up approaches to credit bond portfolio management discuss the implications of cyclical supply and demand changes in the primary corporate bond market and the impact of secular changes in the 10.20.f 10.20.g 10.20.h 10.20.i 10.20.j 10.20.k 10.20.l 10.20.m 10.20.n 10.21.a contrast and demonstrate the use of total return analysis and scenario analysis to assess the risk and return characteristics of a proposed trade formulate a bond immunization strategy to ensure funding of a predetermined liability and evaluate the strategy under various interest rate scenarios demonstrate the process of rebalancing a portfolio to reestablish a desired dollar duration explain the importance of spread duration discuss the extensions that have been made to classical immunization theory, including the introduction of contingent immunization explain the risks associated with managing a portfolio against a liability structure, including interest rate risk, contingent claim risk, and cap risk compare immunization strategies for a single liability, multiple liabilities, and general cash flows compare risk minimization with return maximization in immunized portfolios demonstrate the use of cash flow matching to fund a fixed set of future liabilities and compare the advantages and disadvantages of cash flow matching to those of immunization strategies explain classic relative-value analysis, based on top-down and bottom-up approaches to credit bond portfolio management discuss the implications of cyclical supply and demand changes in the primary corporate bond market and the impact of secular changes in the market s dominant product structures 10.21.b market s dominant product structures Financing or Accounting Questions? Go to passingscoreforum.com 16
Fixed Income 10.21.c Fixed Income 10.21.d Fixed Income 10.21.e Fixed Income 11.22.a Fixed Income 11.22.b Fixed Income 11.22.c Fixed Income 11.22.d Fixed Income 11.22.e Fixed Income 11.22.f Fixed Income 11.22.g Fixed Income 11.22.h explain the influence of investors shortand long-term liquidity needs on portfolio management decisions discuss common rationales for secondary market trading discuss corporate bond portfolio strategies that are based on relative value evaluate the effect of leverage on portfolio duration and investment returns discuss the use of repurchase agreements (repos) to finance bond purchases and the factors that affect the repo rate critique the use of standard deviation, target semivariance, shortfall risk, and value at risk as measures of fixedincome portfolio risk demonstrate the advantages of using futures instead of cash market instruments to alter portfolio risk formulate and evaluate an immunization strategy based on interest rate futures explain the use of interest rate swaps and options to alter portfolio cash flows and exposure to interest rate risk compare 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 fixed-income portfolio explain the potential sources of excess return for an international bond portfolio 10.21.c 10.21.d 10.21.e 11.22.a 11.22.b 11.22.c 11.22.d 11.22.e 11.22.f 11.22.g 11.22.h explain the influence of investors shortand long-term liquidity needs on portfolio management decisions discuss common rationales for secondary market trading discuss corporate bond portfolio strategies that are based on relative value evaluate the effect of leverage on portfolio duration and investment returns discuss the use of repurchase agreements (repos) to finance bond purchases and the factors that affect the repo rate critique the use of standard deviation, target semivariance, shortfall risk, and value at risk as measures of fixedincome portfolio risk demonstrate the advantages of using futures instead of cash market instruments to alter portfolio risk formulate and evaluate an immunization strategy based on interest rate futures explain the use of interest rate swaps and options to alter portfolio cash flows and exposure to interest rate risk compare 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 fixed-income portfolio explain the potential sources of excess return for an international bond portfolio Financing or Accounting Questions? Go to passingscoreforum.com 17
Fixed Income 11.22.i Fixed Income 11.22.j Fixed Income 11.22.k Fixed Income 11.22.l Fixed Income 11.22.m evaluate 1) the change in value for a foreign bond when domestic interest rates change and 2) the bond s contribution to duration in a domestic portfolio, given the duration of the foreign bond and the country beta recommend and justify whether to hedge or not hedge currency risk in an international bond investment describe how breakeven spread analysis can be used to evaluate the risk in seeking yield advantages across international bond markets discuss the advantages and risks of investing in emerging market debt discuss the criteria for selecting a fixedincome manager discuss the role of equities in the 12.23.a overall portfolio discuss the rationales for passive, active, and semiactive (enhanced 12.23.b index) equity investment approaches and distinguish among those approaches with respect to expected active return and tracking risk recommend an equity investment 12.23.c approach when given an investor s investment policy statement and beliefs concerning market efficiency distinguish among the predominant 12.23.d weighting schemes used in the construction of major equity market indices and evaluate the biases of each compare alternative methods for establishing passive exposure to an equity market, including indexed 12.23.e separate or pooled accounts, index mutual funds, exchange-traded funds, equity index futures, and equity total return swaps 11.22.i 11.22.j 11.22.k 11.22.l 11.22.m 12.23.a 12.23.b 12.23.c 12.23.d 12.23.e evaluate 1) the change in value for a foreign bond when domestic interest rates change and 2) the bond s contribution to duration in a domestic portfolio, given the duration of the foreign bond and the country beta recommend and justify whether to hedge or not hedge currency risk in an international bond investment describe how breakeven spread analysis can be used to evaluate the risk in seeking yield advantages across international bond markets discuss the advantages and risks of investing in emerging market debt discuss the criteria for selecting a fixedincome manager discuss the role of equities in the overall portfolio discuss 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 recommend an equity investment approach when given an investor s investment policy statement and beliefs concerning market efficiency distinguish among the predominant weighting schemes used in the construction of major equity market indices and evaluate the biases of each compare 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 Financing or Accounting Questions? Go to passingscoreforum.com 18
12.23.f 12.23.g 12.23.h 12.23.i compare full replication, stratified 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 explain and justify the use of equity investment style classifications and discuss the difficulties in applying style definitions consistently explain the rationales and primary concerns of value investors and growth investors and discuss the key risks of each investment style compare techniques for identifying investment styles and characterize the style of an investor when given a description of the investor s security selection method, details on the investor s security holdings, or the results of a returns-based style analysis 12.23.j compare the methodologies used to construct equity style indices interpret the results of an equity style 12.23.k box analysis and discuss the consequences of style drift 12.23.l 12.23.m distinguish between positive and negative screens involving socially responsible investing criteria and discuss their potential effects on a portfolio s style characteristics compare long short and long-only investment strategies, including their risks and potential alphas, and explain why greater pricing inefficiency may exist on the short side of the market 12.23.f 12.23.g 12.23.h 12.23.i 12.23.j 12.23.k 12.23.l 12.23.m compare full replication, stratified 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 explain and justify the use of equity investment style classifications and discuss the difficulties in applying style definitions consistently explain the rationales and primary concerns of value investors and growth investors and discuss the key risks of each investment style compare techniques for identifying investment styles and characterize the style of an investor when given a description of the investor s security selection method, details on the investor s security holdings, or the results of a returns-based style analysis compare the methodologies used to construct equity style indices interpret the results of an equity style box analysis and discuss the consequences of style drift distinguish between positive and negative screens involving socially responsible investing criteria and discuss their potential effects on a portfolio s style characteristics compare long short and long-only investment strategies, including their risks and potential alphas, and explain why greater pricing inefficiency may exist on the short side of the market Financing or Accounting Questions? Go to passingscoreforum.com 19