For candidate use only. Not for distribution. PORTFOLIO MANAGEMENT, ETHICAL AND PROFESSIONAL STANDARDS CFA® Program Curriculum 2023 • LEVEL 1 • VOLUME 6 © CFA Institute. For candidate use only.
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CONTENTS How to Use the CFA Program Curriculum xv Errata xv Designing Your Personal Study Program xv CFA Institute Learning Ecosystem (LES) xvi Feedback xvi Portfolio Management Learning Module 1 Basics of Portfolio Planning and Construction 3 Introduction 3 The Investment Policy Statement 4 The Investment Policy Statement 4 Major Components of an IPS 5 IPS Risk and Return Objectives 6 Return Objectives 12 IPS Constraints 14 Liquidity Requirements 14 Time Horizon 15 Tax Concerns 15 Legal and Regulatory Factors 16 Unique Circumstances and ESG Considerations 16 Gathering Client Information 18 Portfolio Construction and Capital Market Expectations 21 Capital Market Expectations 22 Strategic Asset Allocation 22 Portfolio Construction Principles 30 New Developments in Portfolio Management 34 ESG Considerations in Portfolio Planning and Construction 34 Summary 38 Practice Problems 40 Solutions 44 Learning Module 2 The Behavioral Biases of Individuals 47 Introduction 47 Behavioral Bias Categories 48 Cognitive Errors 48 Belief Perseverance Biases 49 Processing Errors 54 Emotional Biases 61 Loss-Aversion Bias 61 Overconfidence Bias 63 Self-Control Bias 64 Status Quo Bias 65 Endowment Bias 65 Regret-Aversion Bias 67 indicates an optional segment © CFA Institute. For candidate use only. Not for distribution. iv Contents Behavioral Finance and Market Behavior 70 Defining Market Anomalies 70 Momentum 71 Bubbles and Crashes 72 Value 73 Summary 74 References 76 Practice Problems 77 Solutions 80 Learning Module 3 Introduction to Risk Management 83 Introduction 83 Risk Management Process 85 Risk Management Framework 87 Risk Governance - An Enterprise View 93 An Enterprise View of Risk Governance 93 Risk Tolerance 96 Risk Budgeting 98 Identification of Risk - Financial Vs.
Non-Financial Risk 101 Financial Risks 101 Non-Financial Risks 103 Interactions Between Risks 107 Measuring and Modifying Risk: Drivers and Metrics 110 Drivers 111 Metrics 112 Risk Modification: Prevention, Avoidance, and Acceptance 116 Risk Prevention and Avoidance 116 Risk Acceptance: Self-Insurance and Diversification 117 Risk Modification: Transferring, Shifting, and How To Choose 118 Risk Shifting 120 How to Choose Which Method for Modifying Risk 124 Summary 126 Practice Problems 129 Solutions 132 Learning Module 4 Technical Analysis 135 Introduction 135 Principles, Assumptions, and links to Investment Analysis 136 Principles and Assumptions 138 Technical Analysis and Behavioral Finance 138 Technical Analysis and Fundamental Analysis 140 The Differences in Conducting/Interpreting Technical Analysis in Various Types of Markets 142 Chart Types 144 Types of Technical Analysis Charts 145 Trend, Support, and Resistance 156 Common Chart Patterns 159 Reversal Patterns 159 Continuation Patterns 169 indicates an optional segment © CFA Institute. For candidate use only. Not for distribution. Contents v Technical Indicators: Moving Averages and Bollinger Bands 179 Technical Indicators 181 Technical Indicators: Oscillators, Relative Strength, and Sentiment 186 Rate of Change Oscillator 187 Relative Strength Index 189 Stochastic Oscillator 191 Moving-Average Convergence/Divergence Oscillator (MACD) 193 Sentiment Indicators 194 Intermarket Analysis 200 Principles of Intermarket Analysis 201 Technical Analysis Applications to Portfolio Management 204 The Role of the Technical Analyst in Fundamental Portfolio Management 215 Summary 217 Practice Problems 220 Solutions 227 Learning Module 5 Fintech in Investment Management 233 Introduction 233 What Is Fintech? 234 Big Data 237 Sources of Big Data 239 Big Data Challenges 240 Advanced Analytical Tools: AI and Machine Learning 240 Types of ML 242 Data Science: Extracting Information from Big Data 243 Data Processing Methods 243 Data Visualization 244 Applying Fintech to Investment Management 246 Text Analytics and Natural Language Processing 246 Robo-Advisory Services 247 Risk Analysis 249 Algorithmic Trading 250 DLT and Permissioned and Permissionless Networks 251 Permissioned and Permissionless Networks 253 Applications of DLT to Investment Management 253 Cryptocurrencies 253 Tokenization 254 Post-Trade Clearing and Settlement 254 Compliance 254 Summary 255 Practice Problems 257 Solutions 259 Ethical and Professional Standards Learning Module 1 Ethics and Trust in the Investment Profession 263 Introduction 263 Ethics 265 indicates an optional segment © CFA Institute.
For candidate use only. Not for distribution. vi Contents Ethics and Professionalism 267 How Professions Establish Trust 268 Professions Are Evolving 270 Professionalism in Investment Management 270 Trust in Investment Management 271 CFA Institute as an Investment Management Professional Body 271 Challenges to Ethical Conduct 273 Ethical vs. Legal Standards 276 Ethical Decision-Making Frameworks 278 The Framework for Ethical Decision-Making 279 Applying the Framework 281 Conclusion 287 Summary 287 Practice Problems 289 Solutions 291 Learning Module 2 Code of Ethics and Standards of Professional Conduct 293 Preface 293 Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 294 Standards of Practice Handbook 294 Summary of Changes in the Eleventh Edition 295 CFA Institute Professional Conduct Program 297 Adoption of the Code and Standards 298 Acknowledgments 298 Ethics and the Investment Industry 299 Why Ethics Matters 299 CFA Institute Code of Ethics and Standards of Professional Conduct 303 Preamble 303 The Code of Ethics 304 Standards of Professional Conduct 304 Practice Problems 308 Solutions 311 Learning Module 3 Guidance for Standards I–VII 315 Standard I(A): Professionalism - Knowledge of the Law 315 Standard I(A) Knowledge of the Law 315 Guidance 316 Standard I(A): Recommended Procedures 320 Members and Candidates 320 Distribution Area Laws 320 Legal Counsel 320 Dissociation 320 Firms 321 Standard I(A): Application of the Standard 321 Example 1 (Notification of Known Violations): 321 Example 2 (Dissociating from a Violation): 322 Example 3 (Dissociating from a Violation): 322 Example 4 (Following the Highest Requirements): 322 indicates an optional segment © CFA Institute.
For candidate use only. Not for distribution. Contents vii Example 5 (Following the Highest Requirements): 323 Example 6 (Laws and Regulations Based on Religious Tenets): 323 Example 7 (Reporting Potential Unethical Actions): 323 Example 8 (Failure to Maintain Knowledge of the Law): 324 Standard I(B): Professionalism - Independence and Objectivity 324 Guidance 324 Standard I(B): Recommended Procedures 330 Standard I(B): Application of the Standard 331 Example 1 (Travel Expenses): 331 Example 2 (Research Independence): 332 Example 3 (Research Independence and Intrafirm Pressure): 332 Example 4 (Research Independence and Issuer Relationship Pressure): 332 Example 5 (Research Independence and Sales Pressure): 333 Example 6 (Research Independence and Prior Coverage): 333 Example 7 (Gifts and Entertainment from Related Party): 333 Example 8 (Gifts and Entertainment from Client): 334 Example 9 (Travel Expenses from External Manager): 334 Example 10 (Research Independence and Compensation Arrangements): 335 Example 11 (Recommendation Objectivity and Service Fees): 335 Example 12 (Recommendation Objectivity): 336 Example 13 (Influencing Manager Selection Decisions): 336 Example 14 (Influencing Manager Selection Decisions): 337 Example 15 (Fund Manager Relationships): 337 Example 16 (Intrafirm Pressure): 337 Standard I(C): Professionalism – Misrepresentation 338 Guidance 338 Standard I(C): Recommended Procedures 342 Factual Presentations 342 Qualification Summary 342 Verify Outside Information 342 Maintain Webpages 343 Plagiarism Policy 343 Standard I(C): Application of the Standard 343 Example 1 (Disclosure of Issuer-Paid Research): 343 Example 2 (Correction of Unintentional Errors): 344 Example 3 (Noncorrection of Known Errors): 344 Example 4 (Plagiarism): 344 Example 5 (Misrepresentation of Information): 345 Example 6 (Potential Information Misrepresentation): 345 Example 7 (Plagiarism): 345 Example 8 (Plagiarism): 346 Example 9 (Plagiarism): 346 Example 10 (Plagiarism): 346 Example 11 (Misrepresentation of Information): 347 Example 12 (Misrepresentation of Information): 347 Example 13 (Avoiding a Misrepresentation): 348 Example 14 (Misrepresenting Composite Construction): 348 Example 15 (Presenting Out-of-Date Information): 348 indicates an optional segment © CFA Institute. For candidate use only.
Not for distribution. viii Contents Example 16 (Overemphasis of Firm Results): 349 Standard I(D): Professionalism – Misconduct 349 Guidance 349 Standard I(D): Recommended Procedures 350 Standard I(D): Application of the Standard 351 Example 1 (Professionalism and Competence): 351 Example 2 (Fraud and Deceit): 351 Example 3 (Fraud and Deceit): 351 Example 4 (Personal Actions and Integrity): 352 Example 5 (Professional Misconduct): 352 Standard II(A): Integrity of Capital Markets - Material Nonpublic Information 352 Standard II(A) Material Nonpublic Information 353 Guidance 353 Standard II(A): Recommended Procedures 357 Achieve Public Dissemination 357 Adopt Compliance Procedures 357 Adopt Disclosure Procedures 357 Issue Press Releases 358 Firewall Elements 358 Appropriate Interdepartmental Communications 358 Physical Separation of Departments 358 Prevention of Personnel Overlap 359 A Reporting System 359 Personal Trading Limitations 359 Record Maintenance 360 Proprietary Trading Procedures 360 Communication to All Employees 360 Standard II(A): Application of the Standard 361 Example 1 (Acting on Nonpublic Information): 361 Example 2 (Controlling Nonpublic Information): 361 Example 3 (Selective Disclosure of Material Information): 361 Example 4 (Determining Materiality): 362 Example 5 (Applying the Mosaic Theory): 362 Example 6 (Applying the Mosaic Theory): 363 Example 7 (Analyst Recommendations as Material Nonpublic Information): 363 Example 8 (Acting on Nonpublic Information): 363 Example 9 (Mosaic Theory): 364 Example 10 (Materiality Determination): 364 Example 11 (Using an Expert Network): 365 Example 12 (Using an Expert Network): 365 Standard II(B): Integrity of Capital Markets - Market Manipulation 365 Guidance 366 Standard II(B): Application of the Standard 367 Example 1 (Independent Analysis and Company Promotion): 367 Example 2 (Personal Trading Practices and Price): 367 Example 3 (Creating Artificial Price Volatility): 368 Example 4 (Personal Trading and Volume): 368 Example 5 (“Pump-Priming” Strategy): 368 indicates an optional segment © CFA Institute. For candidate use only. Not for distribution.
