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CFAI Mission
To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.
Code of Ethics
Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
IV.(C)Duties to Employers -Responsibilities of Supervisors
Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, regulations, and the Code and Standards.
V.(B)Investment Analysis, Reccomendations, and Actions -Communication with Clients and Prospective Clients
Members and Candidates must:<br></br><ol><li>Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.</li><li>Disclose to clients and prospective clients significant limitations and risks associated with the investment process.</li><li>Use reasonable judgement in identifying which factors are important to their investment analyses, reccomendations, or actions and include those factors in communications with clients and prospective clients.</li><li>Distinguish between fact and opinion in the presentation of investment analysis and reccomendations.</li></ol>
V.(A) Investment Analysis, Reccomendations, and Actions - Diligence and Reasonable Basis
Members and Candidates must:<br></br><ol><li>Exercise diligence, independence, and thoroughness in analyzing investments, making investment reccomendations, and taking investment actions.</li><li>Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, reccomendation, or action.</li></ol>
V.(C)Investment Analysis, Reccomendations, and Actions -Record Retention
Members and Candidates must develop and maintain appropriate records to support their investment analysis and reccomendations.
I.(A) Professionalism - Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, and regulations.
I.(B) Professionalism - Independence and Objectivity
“Members and Candidates must use reasonable care and judgement to achive and maintain independence and objectivy in their professional activites. Members and Candidates must not offer, solicit, or accept any gift, beneift, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.”
I.(C)Professionalism - Misrepresentation
Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, reccomendations, actions, or other professional activities.<br></br><ul><li><b>Firm canissue</b> future reports without providing attribution to prior analysts</li><li><b>Member / candidate cannot</b> reissue previously released report solely under his or her name</li><li><b>Member / candidate cannot</b> cite quotations without specifically referencing name of analyst</li><li><b>Member / candidatecannot</b> copy computerized spreadsheets / algorithms without cooperation / authorization of creators</li><li><b>Member / candidate </b>must disclose use of third-party reports (not necessary to disclose use of third-party brokerage)</li></ul>
I.(D)Professionalism - Misconduct
Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or comitt any act that reflect adversly on their professional reputation, integrity, or competence.
II.(A) Integrity of the Capital Markets -Material Nonpublic Information
Members and Candidates who posses material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.
II.(B) Integrity of the Capital Markets - Market Manipulation
Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
III.(A) Duties to Clients - Integrity of the Capital Markets -Loyalty, Prudence, and Care
“Members and Candidate have a duty of loyalty to their clients and must act with reasonable care and excercise prudent judgement. Members and Candidates must act for the benefit of their clients and place their clients’ interest before their employer’s of their own interests.<br></br><ul><li>Member / candidate with control of client’s assest must 1) submit to client <b>quarterly </b>itemized statement showing funds, securities, debits, credits, and transactions, 2) disclose where assets are maintained, 3) seperate client’s assets from other party’s assets (including member / candidate’s)</li><li>Investments judged in context of <b>entire portofolio</b>(not by individual investments in portfolio)</li><li>"”Soft dollars”” / ““soft commissions”” <b>OK if provides value to client </b>(not OK if no value provided to client)</li><li>Member / candidate doesn’t need to participate in proxy voting if <b>no benefit provided to client</b> (must disclose proxy-voting policies)</li><li>Members / candidate must seek ““best execution”” unless client <b>explicity writes</b> not to seek ““best execution””</li></ul><br></br>”
III.(B)Duties to Clients -Fair Dealing
Members and Candidates must deal farily and objectively with all clients when providing investment analysis, making investment reccomendations, taking investment action, or engaging in other professional activities.
III.(C)Duties to Clients -Suitability
“<ol><li>When Members and Candidates are in an advisory relationship with a client, they must:</li></ol><ul><li>Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment reccomendation or taking investment action and must reasses and update this information regularly.</li><li>Determine an investment is suitable to the client’s financial situtation and consistent with the client’s written objectives, mandates, and constraints before making an investment reccomendation or taking investment action.</li></ul><li>When Members and Candidates are responsibile for managing a portfolio to a specific mandate, strategy, or style, they must make only investment reccomendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.</li>”
III.(D)Duties to Clients -Performance Presentation
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.<br></br><ul><li>Member / candidate <b>not required to attribute source</b> of data from recognizd financial / statistical reporting sources (<b>government websites</b>)</li></ul>
III.(E)Duties to Clients -Preservation of Confidentiality
Members and Candidates must keep information about current, former, and prospective clients confidential unless:<br></br><ol><li>The information concerns illegal activities on the part of the client or prospective client,</li><li>Disclosure is required by law, or</li><li>The client or prospective client permits disclosure of the information.</li></ol>
IV.(A) Duties to Employers - Loyalty
In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employee.
IV.(B)Duties to Employers -Additional Compensation Arrangements
“Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.”
VI.(A) Conflicts of Interest - Disclosure of Conflicts
Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate relevent information correctly.
VI.(B)Conflicts of Interest -Priority of Transactions
Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
VI.(C)Conflicts of Interest - Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the reccomendation of products or services.
VII.(A) Responsibilities as a CFA Institute Member or CFA Candidate - Conduct as Participants in CFA Institute Program
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.
VII.(B)Responsibilities as a CFA Institute Member or CFA Candidate -Reference to CFA Institute, the CFA Designation, and the CFA Program
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exagerrate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
ETF Bid-Ask Spread Calculation
“<b>(±)</b>Creation or redemption fees and other trading costs (brokerage and exchange fees)<br></br><b>(+)</b>Bid-ask spreads of the underlying securities held in the ETF<br></br><b>(+)</b>Compensation (to market maker or liquidity provider) for the risk of hedging or carrying positions for the remainder of the trading day<br></br><b>(-)</b>Market maker’s desired profit spread (subject to competitive forces)<br></br><b>(-)</b>Discount related to the likelihood of receiving an offsetting ETF order in a short time frame”
ETF Trading costs
“<img></img>”
ETF Holding Period Cost
“<img></img>”
ETF EOD NAV premium/discount
“<img></img><br></br>EOD NAV → Preferred NAV used to calculate returns”
Intraday ETF premium/discount (%)
“<img></img>”
ETF Sources of Tracking Error
<ol><li>Fees and expenses</li><li>Representative sampling/optimization → Funds hold only a subset of index securities (median value becomes unpredictive of future median values; overperformance and underperformance in certain market regimes)</li><li>Depositary receipts and other ETFs</li><li>Index changes</li><li>Fund accounting practices</li><li>Regulatory and tax requirements</li><li>Asset manager operations → ETF issuers offset costs via security lending (enhances performance) or foreign dividend recapture</li></ol>
ETF iNAV premium/discount
“<img></img><br></br>iNav → ‘Indicated NAV’ used to value an ETF during trading hours; based on the creation basket of the day”
Arbitrage Pricing Theory (APT)
“Assumptions:<br></br><ol><li>A factor model describes asset returns</li><li>With many assests to choose from, investors can form well-diversified portfolios that eliminate asset-specific risk</li><li>No arbitrage opportunities exist among well-diversified portfolios</li></ol>Formula:<br></br><img></img><br></br>”
Factor Risk Premium (Factor Price)
“Represents the expected reward for bearing the risk of a portfolio with a sensitivity of 1 to a factor <i>j</i>and a sensitivity of 0 to all other factors<br></br><ul><li>‘Expected reward’ is defined differently across models (Carhatt 4-factor vs. Economic)</li></ul>”
Statistical Factor Model
<ul><li>Factors → portfolios of securities defined by portfolio weight</li><li>Model types → 1) Factor analysis: factors defined as portfolio of securities that best explain <i>return covariances; </i>2) Principal components: factors are portfolios of securities that best explain <i>return variances</i></li><li>Advantage: Minimal assumptions</li><li>Disdavantage: Difficult interpretation</li></ul>
Fundemental Factor Models
“<ul><li>Factors → stated as <i>returns; </i>intercept equates expected asset-specific risk as zero</li><li>Factor sensitivities → attributes of a security expressed using <b>standardized beta</b><img></img></li><li>Uses: <i>Performance attribution, return attribution, and risk attribution</i></li></ul>”
Fixed Income Fundemetal Multifactor Model
“<img></img><img></img>”
Macroeconomic Factor Model
“<img></img><img></img>”
Active Risk (Tracking Error / Tracking Risk)
“<img></img><br></br><ul><li>Annualizing <b>daily </b>tracking error based on daily returns → Multiply TE by (250 days)½</li><li>Annualizing <b>monthly </b>tracking error based on monthly returns → Multiply TE by (12 months)<span>½</span><br></br></li></ul>”
Information Ratio (IR)
“<img></img><br></br><ul><li><i>s → </i>sample standard deviation</li></ul>”
Active Risk Squared
“<img></img><br></br><ul><li>Expressed as a variance for due to additive properties</li></ul>”
Active Specific Risk (Security Selection Risk)
“<img></img><br></br><ul><li><i>wa</i><i>i = </i>active weighting</li></ul>”
VaR - Sentence structure
Example: <i>The 5% VaR of a portfolio is $2.2 million over a one-day period.</i><br></br><ul><li>$2.2 million is the minimum expected loss 5% of the time</li><li>5% of the time, a loss of would be at least $2.2 million is expected</li><li>95% of the time, a loss of no more than $2.2 million is expected</li></ul>
