CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 155,000 members in 165 countries and territories, including 150,000 CFA® charterholders, and 148 member societies. For more information, visit www.cfainstitute.org.

• How to Use the CFA Program Curriculum ixCurriculum Development Process ixOrganization of the Curriculum xFeatures of the Curriculum xDesigning Your Personal Study Program xiFeedback xiiiEthical and Professional StandardsStudy Session 1 Ethical and Professional Standards 3Reading 1 Ethics and Trust in the Investment Profession 5Introduction 5Ethics 6Ethics and Professionalism 9Challenges to Ethical Conduct 11The Importance of Ethical Conduct in the Investment Industry 15Ethical vs. Legal Standards 17Ethical Decision-Making Frameworks 20Applying the Framework 22Conclusion 27Summary 28Practice Problems 29Solutions 30Reading 2 Code of Ethics and Standards of Professional Conduct 33Preface 33Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 34Standards of Practice Handbook 34Summary of Changes in the Eleventh Edition 35CFA Institute Professional Conduct Program 37Adoption of the Code and Standards 38Acknowledgments 38Ethics and the Investment Industry 39Why Ethics Matters 39CFA Institute Code of Ethics and Standards of Professional Conduct 43Preamble 43The Code of Ethics 44Standards of Professional Conduct 44Reading 3 Guidance for Standards I–VII 49Standard I: Professionalism 49Standard I(A) Knowledge of the Law 49Guidance 49Recommended Procedures for Compliance 54Application of the Standard 55Standard I(B) Independence and Objectivity 58Guidance 58Recommended Procedures for Compliance 63Application of the Standard 64Standard I(C) Misrepresentation 71Guidance 71Recommended Procedures for Compliance 74Application of the Standard 76Standard I(D) Misconduct 81Guidance 81Recommended Procedures for Compliance 82Application of the Standard 82Standard II: Integrity of Capital Markets 84Standard II(A) Material Nonpublic Information 84Guidance 84Recommended Procedures for Compliance 88Application of the Standard 91Standard II(B) Market Manipulation 96Guidance 96Application of the Standard 97Standard III: Duties to Clients 101Standard III(A) Loyalty, Prudence, and Care 101Guidance 101Recommended Procedures for Compliance 105Application of the Standard 106Standard III(B) Fair Dealing 110Guidance 110Recommended Procedures for Compliance 112Application of the Standard 114Standard III(C) Suitability 118Guidance 118Recommended Procedures for Compliance 121Application of the Standard 122Standard III(D) Performance Presentation 125Guidance 125Recommended Procedures for Compliance 126Application of the Standard 126Standard III(E) Preservation of Confidentiality 129Guidance 129Recommended Procedures for Compliance 131Application of the Standard 131Standard IV: Duties to Employers 133Standard IV(A) Loyalty 133Guidance 133Recommended Procedures for Compliance 137Application of the Standard 137Standard IV(B) Additional Compensation Arrangements 144Guidance 144Recommended Procedures for Compliance 144Application of the Standard 144Standard IV(C) Responsibilities of Supervisors 146Guidance 146Recommended Procedures for Compliance 148Application of the Standard 150Standard V: Investment Analysis, Recommendations, and Actions 154Standard V(A) Diligence and Reasonable Basis 154Guidance 154Recommended Procedures for Compliance 158Application of the Standard 158Standard V(B) Communication with Clients and Prospective Clients 165Guidance 166Recommended Procedures for Compliance 168Application of the Standard 169Standard V(C) Record Retention 174Guidance 174Recommended Procedures for Compliance 175Application of the Standard 176Standard VI: Conflicts of Interest 177Standard VI(A) Disclosure of Conflicts 177Guidance 177Recommended Procedures for Compliance 180Application of the Standard 180Standard VI(B) Priority of Transactions 185Guidance 185Recommended Procedures for Compliance 186Application of the Standard 188Standard VI(C) Referral Fees 190Guidance 190Recommended Procedures for Compliance 190Application of the Standard 190Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 193Standard VII(A) Conduct as Participants in CFA Institute Programs 193Guidance 193Application of the Standard 195Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program 198Guidance 198Recommended Procedures for Compliance 200Application of the Standard 201Practice Problems 203Solutions 213Reading 4 Introduction to the Global Investment Performance Standards (GIPS) 221Why Were the GIPS Standards Created? 221Who Can Claim Compliance? 222Who Benefits from Compliance? 222Composites 223Verification 223The Structure of the GIPS Standards 224Reading 5 Global Investment Performance Standards (GIPS) 225Preface 225History 226Introduction 227Preamble—Why Is a Global Investment Performance Standard Needed? 227Objectives 227Overview 228Historical Performance Record 228Compliance 229Effective Date 229Implementing a Global Standard 229Sponsors 230Provisions of the Global Investment Performance Standards 231Fundamentals of Compliance 233Input Data 235Calculation Methodology 235Composite Construction 236Disclosure 237Presentation and Reporting 240Real Estate 242Private Equity 247Wrap Fee/Separately Managed Account (SMA) Portfolios 250GIPS Valuation Principles 252Fair Value Definition 252Valuation Requirements 253Valuation Recommendations 254GIPS Advertising Guidelines 256Purpose of the GIPS Advertising Guidelines 256Requirements of the GIPS Advertising Guidelines 256Verification 258Scope and Purpose of Verification 258Required Verification Procedures 259Performance Examinations 262GIPS Glossary 262Appendix A: Sample Compliant Presentations 272Appendix B: Sample Advertisements 289Appendix C: Sample List of Composite Descriptions 292Practice Problems 296Solutions 297Quantitative MethodsStudy Session 2 Quantitative Methods (1) 301Reading 6 The Time Value of Money 303Introduction 303Interest Rates: Interpretation 304The Future Value of a Single Cash Flow 306The Frequency of Compounding 310Continuous Compounding 312Stated and Effective Rates 313The Future Value of a Series of Cash Flows 314Equal Cash Flows—Ordinary Annuity 315Unequal Cash Flows 316The Present Value of a Single Cash Flow 317Finding the Present Value of a Single Cash Flow 317The Frequency of Compounding 319The Present Value of a Series of Cash Flows 320The Present Value of a Series of Equal Cash Flows 320The Present Value of an Infinite Series of Equal Cash Flows—Perpetuity 325Present Values Indexed at Times Other than t = 0 326The Present Value of a Series of Unequal Cash Flows 328Solving for Rates, Number of Periods, or Size of Annuity Payments 328Solving for Interest Rates and Growth Rates 329Solving for the Number of Periods 331Solving for the Size of Annuity Payments 332Review of Present and Future Value Equivalence 336The Cash Flow Additivity Principle 338Summary 339Practice Problems 340Solutions 345Reading 7 Discounted Cash Flow Applications 359Introduction 359Net Present Value and Internal Rate of Return 360Net Present Value and the Net Present Value Rule 360The Internal Rate of Return and the Internal Rate of Return Rule 362Problems with the IRR Rule 365Portfolio Return Measurement 367Money-Weighted Rate of Return 368Time-Weighted Rate of Return 369Money Market Yields 374Summary 379Practice Problems 381Solutions 384Reading 8 Statistical Concepts and Market Returns 387Introduction 388Some Fundamental Concepts 388The Nature of Statistics 389Populations and Samples 389Measurement Scales 390Summarizing Data Using Frequency Distributions 391The Graphic Presentation of Data 399The Histogram 400The Frequency Polygon and the Cumulative Frequency Distribution 401Measures of Central Tendency 404The Arithmetic Mean 404The Median 408The Mode 411Other Concepts of Mean 411Other Measures of Location: Quantiles 421Quartiles, Quintiles, Deciles, and Percentiles 421Quantiles in Investment Practice 425Measures of Dispersion 427The Range 428The Mean Absolute Deviation 428Population Variance and Population Standard Deviation 430Sample Variance and Sample Standard Deviation 433Semivariance, Semideviation, and Related Concepts 437Chebyshev’s Inequality 438Coefficient of Variation 440The Sharpe Ratio 442Symmetry and Skewness in Return Distributions 445Kurtosis in Return Distributions 451Using Geometric and Arithmetic Means 455Summary 457Practice Problems 460Solutions 467Reading 9 Probability Concepts 471Introduction 472Probability, Expected Value, and Variance 472Portfolio Expected Return and Variance of Return 494Topics in Probability 502Bayes’ Formula 502Principles of Counting 506Summary 510Practice Problems 513Solutions 517Study Session 3 Quantitative Methods (2) 521Reading 10 Common Probability Distributions 523Introduction to Common Probability Distributions 524Discrete Random Variables 525The Discrete Uniform Distribution 526The Binomial Distribution 528Continuous Random Variables 537Continuous Uniform Distribution 538The Normal Distribution 541Applications of the Normal Distribution 547The Lognormal Distribution 549Monte Carlo Simulation 555Summary 561Practice Problems 564Solutions 571Reading 11 Sampling and Estimation 579Introduction 580Sampling 580Simple Random Sampling 580Stratified Random Sampling 582Time-Series and Cross-Sectional Data 583Distribution of the Sample Mean 586The Central Limit Theorem 586Point and Interval Estimates of the Population Mean 589Point Estimators 589Confidence Intervals for the Population Mean 591Selection of Sample Size 597More on Sampling 599Data-Mining Bias 599Sample Selection Bias 602Look-Ahead Bias 603Time-Period Bias 603Summary 605Practice Problems 608Solutions 613Reading 12 Hypothesis Testing 619Introduction 620Hypothesis Testing 621Hypothesis Tests Concerning the Mean 630Tests Concerning a Single Mean 630Tests Concerning Differences between Means 638Tests Concerning Mean Differences 642Hypothesis Tests Concerning Variance 646Tests Concerning a Single Variance 646Tests Concerning the Equality (Inequality) of Two Variances 648Other Issues: Nonparametric Inference 652Tests Concerning Correlation: The Spearman Rank Correlation Coefficient 653Nonparametric Inference: Summary 656Summary 656Practice Problems 660Solutions 668Reading 13 Technical Analysis 675Introduction 675Technical Analysis: Definition and Scope 676Principles and Assumptions 676Technical and Fundamental Analysis 678Technical Analysis Tools 680Charts 680Trend 689Chart Patterns 692Technical Indicators 703Cycles 720Elliott Wave Theory 721Intermarket Analysis 724Summary 726Practice Problems 729Solutions 734Appendices 737Glossary G-1Index I-1