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ISBN 978-1-950157-62-4 (paper) ISBN 978-1-119705-10-9 (ebk) Please visit our website at www. TABLE OF CONTENTS Cover Copyright Page Table of Contents 2022 CFA Program Level III Volume 1: Behavioral Finance, Capital Market Expectations, and Asset Allocation Title Page Table of Contents How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum End of Reading Questions/Solutions Glossary LOS Self-Check Source Material Errata Designing Your Personal Study Program Create a Schedule CFA Institute Learning Ecosystem (LES) Structured and Adaptive Study Plans Flashcards and Game Center Discussion Board Practice Question Bank Mock Exams Prep Providers Feedback Portfolio Management Study Sessions Topic Level Learning Outcome Study Session 1. Behavioral Finance Reading Assignments Reading 1. The Behavioral Biases of Individuals Learning Outcomes 1.
Introduction and Categorizations of Behavioral Biases 1. Categorizations of Behavioral Biases 1. Differences between Cognitive Errors and Emotional Biases 2. Cognitive Errors: Belief Perseverance Biases: Conservation Bias and Confirmation Bias 2.
Belief Perseverance Biases 2. Conservatism Bias Consequences of Conservatism Bias Detection of and Guidance for Overcoming Conservatism Bias 2. Confirmation Bias Consequences of Confirmation Bias Detection of and Guidance for Overcoming Confirmation Bias 3. Cognitive Errors: Belief Perseverance Biases – Representativeness 3.
Base-Rate Neglect 3. Sample-Size Neglect 3. Consequences of Representativeness Bias 3. Detection of and Guidance on Overcoming Representativeness Bias 4.
Cognitive Errors: Belief Perseverance Biases - Illusion of Control Bias and Hindsight Bias 4. Illusion of control bias Consequences of Illusion of Control Detection of and Guidelines for Overcoming Illusion of Control Bias 4. Hindsight Bias Consequences of Hindsight Bias Detection of and Guidelines for Overcoming Hindsight Bias 5. Cognitive Errors: Information Processing Biases 5.
Anchoring and Adjustment Bias Consequences of Anchoring and Adjustment Bias Detection of and Guidelines for Overcoming Anchoring and Adjustment Bias 5. Mental Accounting Bias Consequences of Mental Accounting Bias Detection of and Guidelines for Overcoming Mental Accounting Bias 5. Framing Bias Consequences of Framing Bias Detection of and Guidelines for Overcoming Framing Bias 5. Availability Bias Retrievability Categorization Narrow Range of Experience Resonance Consequences of Availability Bias Detection of and Guidelines for Overcoming Availability Bias 5.
Cognitive Errors: Conclusion 6. Emotional Biases: Loss Aversion 6. Loss-Aversion Bias Consequences of Loss Aversion Special Application: Myopic Loss Aversion Detection of and Guidelines for Overcoming Loss Aversion 7. Emotional Biases: Overconfidence & Self Control 7.
Overconfidence Bias Consequences of Overconfidence Bias Detection of and Guidelines for Overcoming Overconfidence Bias 7. Self-Control Bias Consequences of Self-Control Bias Detection of and Guidelines for Overcoming Self-Control Bias 8. Emotional Biases: Status Quo, Endowment, and Regret- Aversion 8. Status Quo Bias Consequences of Status Quo Bias Detection of and Guidelines for Overcoming Status Quo Bias 8.
Endowment Bias Consequences of Endowment Bias Detection of and Guidelines for Overcoming Endowment Bias 8. Regret-Aversion Bias Consequences of Regret-Aversion Bias Detection of and Guidelines for Overcoming Regret- Aversion Bias 8. Emotional Biases: Conclusion Summary References Practice Problems Solutions Reading 2. Behavioral Finance and Investment Processes Learning Outcomes 1.
Introduction and General Discussion of Investor Types 1. General Discussion of Investor Types 1. Barnewall Two-Way Model 1. Bailard, Biehl, and Kaiser Five-Way Model 2.
New Developments in Psychographic Modeling: Behavioral Investor Types 2. The Behavioral Alpha Process: A Top-Down Approach Step 1: Interview the client and identify active or passive traits and risk tolerance. Step 2: Plot the investor on the active/passive and risk tolerance scale. Step 3: Test for behavioral biases.
Step 4: Classify investor into a behavioral investor type. Advising Passive Preservers: Advising Friendly Followers: Advising Independent Individualists: Advising Active Accumulators: 2. Limitations of Classifying Investors into Various Types 3. How Behavioral Factors Affect Adviser-Client Relations 3.
Formulating Financial Goals 3. Maintaining a Consistent Approach 3. Investing as the Client Expects 3. Ensuring Mutual Benefits 3.
Limitations of Traditional Risk Tolerance Questionnaires 4. How Behavioral Factors Affect Portfolio Construction 4. Inertia and Default 4. Company Stock: Investing in the Familiar 4.
Behavioral Portfolio Theory 5. Behavioral Finance and Analyst Forecasts and Overconfidence in Forecasting Skills 5. Overconfidence in Forecasting Skills 5. Remedial Actions for Overconfidence and Related Biases 6.
Influence of Company’s Management on Analysis and Analyst Biases in Conducting Research 6. Remedial Actions for Influence of Company’s Management on Analysis 6. Analyst Biases in Conducting Research 6. Remedial Actions for Analyst Biases in Conducting Research 7.
How Behavioral Factors Affect Committee Decision Making 7. Investment Committee Dynamics 7. Techniques for Structuring and Operating Committees to Address Behavioral Factors 8. How Behavioral Finance Influences Market Behavior 8.
Defining Market Anomalies 8. Bubbles and Crashes 8. Value and Growth Summary References Practice Problems Solutions Study Session 2. Capital Market Expectations Reading Assignments Reading 3.
Capital Market Expectations, Part 1: Framework and Macro Considerations Learning Outcomes 1. Introduction & Framework for Developing Capital Market Expectations 1. Framework and Challenges 1. A Framework for Developing Capital Market Expectations 2.
Challenges in Forecasting 2. Limitations of Economic Data 2. Data Measurement Errors and Biases 2. The Limitations of Historical Estimates 2.
Ex Post Risk Can Be a Biased Measure of Ex Ante Risk 2. Biases in Analysts’ Methods 2. The Failure to Account for Conditioning Information 2. Misinterpretation of Correlations 2.
Economic and Market Analysis: The Role of Economic Analysis and Analysis of Economic Growth: Exogenous Shocks to Growth 3. The Role of Economic Analysis 3. Analysis of Economic Growth 3. Exogenous Shocks to Growth 4.
Applying Growth Analysis to Capital Market Expectations 4. A Decomposition of GDP Growth and Its Use in Forecasting 4. Anchoring Asset Returns to Trend Growth 5. Approaches to Economic Forecasting 5.
Economic Forecasting Approaches: Summary of Strengths and Weaknesses 6. Business Cycle Analysis, Phases of the Business Cycle and Market Expectations and the Business Cycle 6. Phases of The Business Cycle 6. Market Expectations and the Business Cycle 7.
Inflation and Deflation: Trends and Relations to the Business Cycle 8. Analysis of Monetary and Fiscal Policies 8. What Happens When Interest Rates Are Zero or Negative? And Implications of Negative Rates for Capital Market Expectations 9. Implications of Negative Interest Rates for Capital Market Expectations 10.
The Monetary and Fiscal Policy Mix and the Shape of the Yield Curve and the Business Cycle 10. The Shape of the Yield Curve and the Business Cycle 11. Interest Rate/Exchange Rate Linkages Summary References Practice Problems Solutions Reading 4. Capital Market Expectations, Part 2: Forecasting Asset Class Returns Learning Outcomes 1.
Overview of Tools and Approaches 2. The Nature of the Problem 2. Approaches to Forecasting 2. Discounted Cash Flow 2.
Risk Premium Models 3. Forecasting Fixed Income Returns 3. Applying DCF to Fixed Income 3. The Building Block Approach to Fixed-Income Returns 3.
The Short-term Default-free Rate 3. The Term Premium 3. The Credit Premium 3. The Liquidity Premium 4.
Risks in Emerging Market Bonds 4. Economic Risks/Ability to Pay 4. Political and Legal Risks/Willingness to Pay 5. Forecasting Equity Returns 5.
Historical Statistics Approach to Equity Returns 5. DCF Approach to Equity Returns 5. Risk Premium Approaches to Equity Returns 5. Defining and Forecasting the Equity Premium 5.
An Equilibrium Approach 5. Risks in Emerging Market Equities 6. Forecasting Real Estate Returns 6. Historical Real Estate Returns 6.
Real Estate Cycles 6. The Risk Premium Perspective on Real Estate Expected Return 6. Real Estate in Equilibrium 6. Private Real Estate 6.
Long-Term Housing Returns 7. Forecasting Exchange Rates 7. Focus on Goods and Services, Trade, and the Current Account 7. Purchasing Power Parity 7.
Competitiveness and Sustainability of the Current Account 7. Focus on Capital Flows 7. Implications of Capital Mobility 7. Uncovered Interest Rate Parity and Hot Money Flows 7.
Portfolio Balance, Portfolio Composition, and Sustainability Issues 8. Estimating a Constant VCV Matrix with Sample Statistics 8. VCV Matrices from Multi-Factor Models 8. Shrinkage Estimation of VCV Matrices 8.
Estimating Volatility from Smoothed Returns 8. Time-Varying Volatility: ARCH Models 9. Adjusting a Global Portfolio 9. Macro-Based Recommendations Trend Growth Global Integration Phases of the Business Cycle Monetary and Fiscal Policies Current Account Balances Capital Accounts and Currencies 9.
Quantifying the Views Summary References Practice Problems Solutions Study Session 3. Asset Allocation and Related Decisions in Portfolio Management Reading Assignments Reading 5. Overview of Asset Allocation Learning Outcomes 1. Introduction and Asset Allocation: Importance in Investment Management 1.
Asset Allocation: Importance in Investment Management 2. The Investment Governance Background to Asset Allocation 2. Articulating Investment Objectives 2. Allocation of Rights and Responsibilities 2.
Investment Policy Statement 2. Asset Allocation and Rebalancing Policy 2. The Governance Audit 3. The Economic Balance Sheet and Asset Allocation 4.
Approaches to Asset Allocation, Relevant Objectives and Relevant Risk Concepts 4. Relevant Risk Concepts 5. Modeling Asset Class Risk 6. Strategic Asset Allocation 7.
Strategic Asset Allocation: Asset Only 8. Strategic Asset Allocation: Liability Relative 9. Strategic Asset Allocation: Goals Based 10. Passive/Active Management of Asset Class Weights 10.
Passive/Active Management of Allocations to Asset Classes 10. Risk Budgeting Perspectives in Asset Allocation and Implementation 11. Rebalancing: Strategic considerations 11. A Framework for Rebalancing 11.
Strategic Considerations in Rebalancing Summary References Practice Problems Solutions Reading 6. Principles of Asset Allocation Learning Outcomes 1. Developing Asset-Only Asset Allocations; and Mean-Variance Optimization: Overview 2. Mean–Variance Optimization: Overview 3.
Monte Carlo Simulation 4. Criticisms of Mean-Variance Optimization 5. Addressing the Criticisms of Mean-Variance Optimization; Reverse Optimization and Black Litterman Model 5. Black–Litterman Model 6.
Addressing the Criticisms of Mean-Variance Optimization; Adding Constraints beyond Budget Constraints, Resampled Mean- Variance Optimizations and Other Non-Normal Optimization Approaches 6. Resampled Mean–Variance Optimization 6. Other Non-Normal Optimization Approaches 7. Allocating to Less Liquid Asset Classes 8.
Factor-Based Asset Allocation 10. Developing Liability-Relative Asset Allocations; and Characterizing the Liabilities 10. Characterizing the Liabilities 11. Approaches to Liability-Relative Asset Allocation; and Surplus Optimization 11.
Approaches to Liability-Relative Asset Allocation 12. Hedging/Return-Seeking Portfolio Approach Forming the Hedging Portfolio Limitations 12. Integrated Asset–Liability Approach 12. Comparing the Approaches 13.
Examining the Robustness of Asset Allocation Alternatives 14. Factor Modeling in Liability-Relative Approaches 15. Developing Goals-Based Asset Allocations. The Goals-Based Asset Allocation Process and Describing Client Goals.
The Goals-Based Asset Allocation Process 15. Describing Client Goals 16. Constructing Sub-Portfolios and the Overall Portfolio 16. The Overall Portfolio 17.
Revisiting the Module Process in Detail 18. Periodically Revisiting the Overall Asset Allocation and Issues Related to Goals-Based Asset Allocation 18. Issues Related to Goals-Based Asset Allocation 19. Heuristics and Other Approaches to Asset Allocation 19.
The “120 minus your age” rule 19. The 60/40 stock/bond heuristic 19. The endowment model 19. Portfolio Rebalancing in Practice Summary References Practice Problems Solutions Reading 7.
Asset Allocation with Real-World Constraints Learning Outcomes 1. Constraints in Asset Allocation and Asset Size 2. Changing Human Capital 4. Changing Character of Liabilities 5.
Regulatory and Other External Constraints 5. Endowments and Foundations 5. Sovereign Wealth Funds 6.
