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 (1) 3Reading 1 Code of Ethics and Standards of Professional Conduct 5Preface 5Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 6Standards of Practice Handbook 6Summary of Changes in the Eleventh Edition 7CFA Institute Professional Conduct Program 9Adoption of the Code and Standards 10Acknowledgments 10Ethics and the Investment Industry 11Why Ethics Matters 11CFA Institute Code of Ethics and Standards of Professional Conduct 15Preamble 15The Code of Ethics 15Standards of Professional Conduct 16Reading 2 Guidance for Standards I–VII 21Standard I: Professionalism 21Standard I(A) Knowledge of the Law 21Guidance 21Recommended Procedures for Compliance 26Application of the Standard 27Standard I(B) Independence and Objectivity 30Guidance 30Recommended Procedures for Compliance 35Application of the Standard 36Standard I(C) Misrepresentation 43Guidance 43Recommended Procedures for Compliance 46Application of the Standard 48Standard I(D) Misconduct 53Guidance 53Recommended Procedures for Compliance 54Application of the Standard 54Standard II: Integrity of Capital Markets 56Standard II(A) Material Nonpublic Information 56Guidance 56Recommended Procedures for Compliance 60Application of the Standard 63Standard II(B) Market Manipulation 68Guidance 68Application of the Standard 69Standard III: Duties to Clients 73Standard III(A) Loyalty, Prudence, and Care 73Guidance 73Recommended Procedures for Compliance 77Application of the Standard 78Standard III(B) Fair Dealing 82Guidance 82Recommended Procedures for Compliance 84Application of the Standard 86Standard III(C) Suitability 90Guidance 90Recommended Procedures for Compliance 93Application of the Standard 94Standard III(D) Performance Presentation 97Guidance 97Recommended Procedures for Compliance 98Application of the Standard 98Standard III(E) Preservation of Confidentiality 101Guidance 101Recommended Procedures for Compliance 103Application of the Standard 103Standard IV: Duties to Employers 105Standard IV(A) Loyalty 105Guidance 105Recommended Procedures for Compliance 109Application of the Standard 109Standard IV(B) Additional Compensation Arrangements 116Guidance 116Recommended Procedures for Compliance 116Application of the Standard 116Standard IV(C) Responsibilities of Supervisors 118Guidance 118Recommended Procedures for Compliance 120Application of the Standard 122Standard V: Investment Analysis, Recommendations, and Actions 126Standard V(A) Diligence and Reasonable Basis 126Guidance 126Recommended Procedures for Compliance 130Application of the Standard 130Standard V(B) Communication with Clients and Prospective Clients 137Guidance 138Recommended Procedures for Compliance 140Application of the Standard 141Standard V(C) Record Retention 146Guidance 146Recommended Procedures for Compliance 147Application of the Standard 148Standard VI: Conflicts of Interest 149Standard VI(A) Disclosure of Conflicts 149Guidance 149Recommended Procedures for Compliance 152Application of the Standard 152Standard VI(B) Priority of Transactions 157Guidance 157Recommended Procedures for Compliance 158Application of the Standard 160Standard VI(C) Referral Fees 162Guidance 162Recommended Procedures for Compliance 162Application of the Standard 162Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 165Standard VII(A) Conduct as Participants in CFA Institute Programs 165Guidance 165Application of the Standard 167Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program 170Guidance 170Recommended Procedures for Compliance 172Application of the Standard 173Practice Problems 175Solutions 193Study Session 2 Ethical and Professional Standards (2) 205Reading 3 Application of the Code and Standards 207Introduction 207Edvard Stark 208Duties to Clients 209Duties to Employers 210Investment Analysis, Recommendations, and Actions 211Conflicts of Interest 211Subath Agarway 212Professionalism 214Conflicts of Interest 215Peter Sherman 216Loyalty to One’s Employer 217Solicitation of Clients and Prospects 218Misappropriation of Employer Property 218Disclosure of Additional Compensation and Conflicts 219Preston Partners 220Responsibilities to Clients and Interactions with Clients 221Allocation of Trades 222Responsibilities of Supervisors 223Super Selection 224Responsibilities of Supervisors 225Employees and the Employer/Supervisor 226Reasonable Basis 227Duties to Clients 227Investment Recommendations and Actions 227Priority of Transactions 228Reading 4 Trade Allocation: Fair Dealing and Disclosure 229Reading 5 Changing Investment Objectives 233Quantitative MethodsStudy Session 3 Quantitative Methods 237Reading 6 Fintech in Investment Management 239Introduction 239What Is Fintech? 240Big Data 241Sources of Big Data 242Big Data Challenges 244Advanced Analytical Tools: Artificial Intelligence and Machine Learning 244Types of Machine Learning 245Data Science: Extracting Information from Big Data 247Data Processing Methods 247Data Visualization 247Selected Applications of Fintech to Investment Management 249Text Analytics and Natural Language Processing 249Robo-Advisory Services 250Risk Analysis 252Algorithmic Trading 253Distributed Ledger Technology 253Permissioned and Permissionless Networks 255Applications of Distributed Ledger Technology to Investment Management 256Summary 257Practice Problems 259Solutions 261Reading 7 Correlation and Regression 263Introduction 264Correlation Analysis 264Scatter Plots 264Correlation Analysis 265Calculating and Interpreting the Correlation Coefficient 268Limitations of Correlation Analysis 270Uses of Correlation Analysis 273Testing the Significance of the Correlation Coefficient 282Linear Regression 285Linear Regression with One Independent Variable 286Assumptions of the Linear Regression Model 289The Standard Error of Estimate 292The Coefficient of Determination 295Hypothesis Testing 297Analysis of Variance in a Regression with One Independent Variable 305Prediction Intervals 308Limitations of Regression Analysis 311Summary 311Practice Problems 314Solutions 323Reading 8 Multiple Regression and Machine Learning 327Introduction 328Multiple Linear Regression 328Assumptions of the Multiple Linear Regression Model 334Predicting the Dependent Variable in a Multiple Regression Model 339Testing whether All Population Regression Coefficients Equal Zero 341Adjusted R2 343Using Dummy Variables in Regressions 344Violations of Regression Assumptions 348Heteroskedasticity 349Serial Correlation 355Multicollinearity 359Heteroskedasticity, Serial Correlation, Multicollinearity: Summarizing the Issues 362Model Specification and Errors in Specification 363Principles of Model Specification 363Misspecified Functional Form 364Time-Series Misspecification (Independent Variables Correlated with Errors) 372Other Types of Time-Series Misspecification 376Models with Qualitative Dependent Variables 376Machine Learning 378Major Focuses of Data Analytics 379What Is Machine Learning? 380Types of Machine Learning 381Machine Learning Algorithms 383Supervised Machine Learning: Training 390Summary 391Practice Problems 396Solutions 421Reading 9 Time-Series Analysis 433Introduction to Time-Series Analysis 434Challenges of Working with Time Series 436Trend Models 437Linear Trend Models 437Log-Linear Trend Models 440Trend Models and Testing for Correlated Errors 446Autoregressive (AR) Time-Series Models 447Covariance-Stationary Series 448Detecting Serially Correlated Errors in an Autoregressive Model 449Mean Reversion 452Multiperiod Forecasts and the Chain Rule of Forecasting 453Comparing Forecast Model Performance 456Instability of Regression Coefficients 458Random Walks and Unit Roots 461Random Walks 461The Unit Root Test of Nonstationarity 465Moving-Average Time-Series Models 469Smoothing Past Values with an n-Period Moving Average 470Moving-Average Time-Series Models for Forecasting 472Seasonality in Time-Series Models 474Autoregressive Moving-Average Models 480Autoregressive Conditional Heteroskedasticity Models 481Regressions with More than One Time Series 484Other Issues in Time Series 488Suggested Steps in Time-Series Forecasting 489Summary 490Practice Problems 494Solutions 510Reading 10 Excerpt from “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations” 519Introduction 519Simulations 520Steps in Simulation 520An Example of a Simulation 523Use in Decision Making 526Simulations with Constraints 527Issues 528Risk-Adjusted Value and Simulations 529An Overall Assessment of Probabilistic Risk Assessment Approaches 530Comparing the Approaches 530Complement or Replacement for Risk-Adjusted Value 531In Practice 532Conclusion 533EconomicsStudy Session 4 Economics 537Reading 11 Currency Exchange Rates: Understanding Equilibrium Value 539Introduction 540Foreign Exchange Market Concepts 540Arbitrage Constraints on Spot Exchange Rate Quotes 544Forward Markets 548The Mark-to-Market Value of a Forward Contract 552A Long-Term Framework for Exchange Rates 556International Parity Conditions 557The Carry Trade 572The Impact of Balance of Payments Flows 575Current Account Imbalances and the Determination of Exchange Rates 576Capital Flows and the Determination of Exchange Rates 579Monetary and Fiscal Policies 585The Mundell–Fleming Model 585Monetary Models of Exchange Rate Determination 587The Portfolio Balance Approach 590Exchange Rate Management: Intervention and Controls 593Warning Signs of a Currency Crisis 596Summary 600Appendix 605Practice Problems 606Solutions 614Reading 12 Economic Growth and the Investment Decision 619Introduction 620Growth in the Global Economy: Developed vs. Developing Economies 620Savings and Investment 623Financial Markets and Intermediaries 623Political Stability, Rule of Law, and Property Rights 624Education and Health Care Systems 624Tax and Regulatory Systems 625Free Trade and Unrestricted Capital Flows 625Summary of Factors Limiting Growth in Developing Countries 626Why Potential Growth Matters to Investors 628Determinants of Economic Growth 633Production Function 633Capital Deepening vs. Technological Progress 635Growth Accounting 637Extending the Production Function 639Natural Resources 639Labor Supply 641Labor Quality: Human Capital 646Capital: ICT and Non-ICT 647Technology 649Public Infrastructure 653Summary 653Theories of Growth 658Classical Model 659Neoclassical Model 659Endogenous Growth Theory 671Convergence Debate 674Growth in an Open Economy 678Summary 686Practice Problems 690Solutions 697Reading 13 Economics of Regulation 701Introduction 701Overview of Regulation 702Classification of Regulations and Regulators 702Economic Rationale for Regulation 705Regulatory Tools 708Regulation of Commerce 713Regulation of Financial Markets 717Cost–Benefit Analysis of Regulation 718Analysis of Regulation 720Effects of Regulations 722Summary 725Practice Problems 728Solutions 732Appendices 734Glossary G-1Index I-1

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 (1) 3Reading 1 Code of Ethics and Standards of Professional Conduct 5Preface 5Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 6Standards of Practice Handbook 6Summary of Changes in the Eleventh Edition 7CFA Institute Professional Conduct Program 9Adoption of the Code and Standards 10Acknowledgments 10Ethics and the Investment Industry 11Why Ethics Matters 11CFA Institute Code of Ethics and Standards of Professional Conduct 15Preamble 15The Code of Ethics 15Standards of Professional Conduct 16Reading 2 Guidance for Standards I–VII 21Standard I: Professionalism 21Standard I(A) Knowledge of the Law 21Guidance 21Recommended Procedures for Compliance 26Application of the Standard 27Standard I(B) Independence and Objectivity 30Guidance 30Recommended Procedures for Compliance 35Application of the Standard 36Standard I(C) Misrepresentation 43Guidance 43Recommended Procedures for Compliance 46Application of the Standard 48Standard I(D) Misconduct 53Guidance 53Recommended Procedures for Compliance 54Application of the Standard 54Standard II: Integrity of Capital Markets 56Standard II(A) Material Nonpublic Information 56Guidance 56Recommended Procedures for Compliance 60Application of the Standard 63Standard II(B) Market Manipulation 68Guidance 68Application of the Standard 69Standard III: Duties to Clients 73Standard III(A) Loyalty, Prudence, and Care 73Guidance 73Recommended Procedures for Compliance 77Application of the Standard 78Standard III(B) Fair Dealing 82Guidance 82Recommended Procedures for Compliance 84Application of the Standard 86Standard III(C) Suitability 90Guidance 90Recommended Procedures for Compliance 93Application of the Standard 94Standard III(D) Performance Presentation 97Guidance 97Recommended Procedures for Compliance 98Application of the Standard 98Standard III(E) Preservation of Confidentiality 101Guidance 101Recommended Procedures for Compliance 103Application of the Standard 103Standard IV: Duties to Employers 105Standard IV(A) Loyalty 105Guidance 105Recommended Procedures for Compliance 109Application of the Standard 109Standard IV(B) Additional Compensation Arrangements 116Guidance 116Recommended Procedures for Compliance 116Application of the Standard 116Standard IV(C) Responsibilities of Supervisors 118Guidance 118Recommended Procedures for Compliance 120Application of the Standard 122Standard V: Investment Analysis, Recommendations, and Actions 126Standard V(A) Diligence and Reasonable Basis 126Guidance 126Recommended Procedures for Compliance 130Application of the Standard 130Standard V(B) Communication with Clients and Prospective Clients 137Guidance 138Recommended Procedures for Compliance 140Application of the Standard 141Standard V(C) Record Retention 146Guidance 146Recommended Procedures for Compliance 147Application of the Standard 148Standard VI: Conflicts of Interest 149Standard VI(A) Disclosure of Conflicts 149Guidance 149Recommended Procedures for Compliance 152Application of the Standard 152Standard VI(B) Priority of Transactions 157Guidance 157Recommended Procedures for Compliance 158Application of the Standard 160Standard VI(C) Referral Fees 162Guidance 162Recommended Procedures for Compliance 162Application of the Standard 162Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 165Standard VII(A) Conduct as Participants in CFA Institute Programs 165Guidance 165Application of the Standard 167Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program 170Guidance 170Recommended Procedures for Compliance 172Application of the Standard 173Practice Problems 175Solutions 193Study Session 2 Ethical and Professional Standards (2) 205Reading 3 Application of the Code and Standards 207Introduction 207Edvard Stark 208Duties to Clients 209Duties to Employers 210Investment Analysis, Recommendations, and Actions 211Conflicts of Interest 211Subath Agarway 212Professionalism 214Conflicts of Interest 215Peter Sherman 216Loyalty to One’s Employer 217Solicitation of Clients and Prospects 218Misappropriation of Employer Property 218Disclosure of Additional Compensation and Conflicts 219Preston Partners 220Responsibilities to Clients and Interactions with Clients 221Allocation of Trades 222Responsibilities of Supervisors 223Super Selection 224Responsibilities of Supervisors 225Employees and the Employer/Supervisor 226Reasonable Basis 227Duties to Clients 227Investment Recommendations and Actions 227Priority of Transactions 228Reading 4 Trade Allocation: Fair Dealing and Disclosure 229Reading 5 Changing Investment Objectives 233Quantitative MethodsStudy Session 3 Quantitative Methods 237Reading 6 Fintech in Investment Management 239Introduction 239What Is Fintech? 240Big Data 241Sources of Big Data 242Big Data Challenges 244Advanced Analytical Tools: Artificial Intelligence and Machine Learning 244Types of Machine Learning 245Data Science: Extracting Information from Big Data 247Data Processing Methods 247Data Visualization 247Selected Applications of Fintech to Investment Management 249Text Analytics and Natural Language Processing 249Robo-Advisory Services 250Risk Analysis 252Algorithmic Trading 253Distributed Ledger Technology 253Permissioned and Permissionless Networks 255Applications of Distributed Ledger Technology to Investment Management 256Summary 257Practice Problems 259Solutions 261Reading 7 Correlation and Regression 263Introduction 264Correlation Analysis 264Scatter Plots 264Correlation Analysis 265Calculating and Interpreting the Correlation Coefficient 268Limitations of Correlation Analysis 270Uses of Correlation Analysis 273Testing the Significance of the Correlation Coefficient 282Linear Regression 285Linear Regression with One Independent Variable 286Assumptions of the Linear Regression Model 289The Standard Error of Estimate 292The Coefficient of Determination 295Hypothesis Testing 297Analysis of Variance in a Regression with One Independent Variable 305Prediction Intervals 308Limitations of Regression Analysis 311Summary 311Practice Problems 314Solutions 323Reading 8 Multiple Regression and Machine Learning 327Introduction 328Multiple Linear Regression 328Assumptions of the Multiple Linear Regression Model 334Predicting the Dependent Variable in a Multiple Regression Model 339Testing whether All Population Regression Coefficients Equal Zero 341Adjusted R2 343Using Dummy Variables in Regressions 344Violations of Regression Assumptions 348Heteroskedasticity 349Serial Correlation 355Multicollinearity 359Heteroskedasticity, Serial Correlation, Multicollinearity: Summarizing the Issues 362Model Specification and Errors in Specification 363Principles of Model Specification 363Misspecified Functional Form 364Time-Series Misspecification (Independent Variables Correlated with Errors) 372Other Types of Time-Series Misspecification 376Models with Qualitative Dependent Variables 376Machine Learning 378Major Focuses of Data Analytics 379What Is Machine Learning? 380Types of Machine Learning 381Machine Learning Algorithms 383Supervised Machine Learning: Training 390Summary 391Practice Problems 396Solutions 421Reading 9 Time-Series Analysis 433Introduction to Time-Series Analysis 434Challenges of Working with Time Series 436Trend Models 437Linear Trend Models 437Log-Linear Trend Models 440Trend Models and Testing for Correlated Errors 446Autoregressive (AR) Time-Series Models 447Covariance-Stationary Series 448Detecting Serially Correlated Errors in an Autoregressive Model 449Mean Reversion 452Multiperiod Forecasts and the Chain Rule of Forecasting 453Comparing Forecast Model Performance 456Instability of Regression Coefficients 458Random Walks and Unit Roots 461Random Walks 461The Unit Root Test of Nonstationarity 465Moving-Average Time-Series Models 469Smoothing Past Values with an n-Period Moving Average 470Moving-Average Time-Series Models for Forecasting 472Seasonality in Time-Series Models 474Autoregressive Moving-Average Models 480Autoregressive Conditional Heteroskedasticity Models 481Regressions with More than One Time Series 484Other Issues in Time Series 488Suggested Steps in Time-Series Forecasting 489Summary 490Practice Problems 494Solutions 510Reading 10 Excerpt from “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations” 519Introduction 519Simulations 520Steps in Simulation 520An Example of a Simulation 523Use in Decision Making 526Simulations with Constraints 527Issues 528Risk-Adjusted Value and Simulations 529An Overall Assessment of Probabilistic Risk Assessment Approaches 530Comparing the Approaches 530Complement or Replacement for Risk-Adjusted Value 531In Practice 532Conclusion 533EconomicsStudy Session 4 Economics 537Reading 11 Currency Exchange Rates: Understanding Equilibrium Value 539Introduction 540Foreign Exchange Market Concepts 540Arbitrage Constraints on Spot Exchange Rate Quotes 544Forward Markets 548The Mark-to-Market Value of a Forward Contract 552A Long-Term Framework for Exchange Rates 556International Parity Conditions 557The Carry Trade 572The Impact of Balance of Payments Flows 575Current Account Imbalances and the Determination of Exchange Rates 576Capital Flows and the Determination of Exchange Rates 579Monetary and Fiscal Policies 585The Mundell–Fleming Model 585Monetary Models of Exchange Rate Determination 587The Portfolio Balance Approach 590Exchange Rate Management: Intervention and Controls 593Warning Signs of a Currency Crisis 596Summary 600Appendix 605Practice Problems 606Solutions 614Reading 12 Economic Growth and the Investment Decision 619Introduction 620Growth in the Global Economy: Developed vs. Developing Economies 620Savings and Investment 623Financial Markets and Intermediaries 623Political Stability, Rule of Law, and Property Rights 624Education and Health Care Systems 624Tax and Regulatory Systems 625Free Trade and Unrestricted Capital Flows 625Summary of Factors Limiting Growth in Developing Countries 626Why Potential Growth Matters to Investors 628Determinants of Economic Growth 633Production Function 633Capital Deepening vs. Technological Progress 635Growth Accounting 637Extending the Production Function 639Natural Resources 639Labor Supply 641Labor Quality: Human Capital 646Capital: ICT and Non-ICT 647Technology 649Public Infrastructure 653Summary 653Theories of Growth 658Classical Model 659Neoclassical Model 659Endogenous Growth Theory 671Convergence Debate 674Growth in an Open Economy 678Summary 686Practice Problems 690Solutions 697Reading 13 Economics of Regulation 701Introduction 701Overview of Regulation 702Classification of Regulations and Regulators 702Economic Rationale for Regulation 705Regulatory Tools 708Regulation of Commerce 713Regulation of Financial Markets 717Cost–Benefit Analysis of Regulation 718Analysis of Regulation 720Effects of Regulations 722Summary 725Practice Problems 728Solutions 732Appendices 734Glossary G-1Index I-1

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 (1) 3Reading 1 Code of Ethics and Standards of Professional Conduct 5Preface 5Evolution of the CFA Institute Code of Ethics and Standards of Professional Conduct 6Standards of Practice Handbook 6Summary of Changes in the Eleventh Edition 7CFA Institute Professional Conduct Program 9Adoption of the Code and Standards 10Acknowledgments 10Ethics and the Investment Industry 11Why Ethics Matters 11CFA Institute Code of Ethics and Standards of Professional Conduct 15Preamble 15The Code of Ethics 15Standards of Professional Conduct 16Reading 2 Guidance for Standards I–VII 21Standard I: Professionalism 21Standard I(A) Knowledge of the Law 21Guidance 21Recommended Procedures for Compliance 26Application of the Standard 27Standard I(B) Independence and Objectivity 30Guidance 30Recommended Procedures for Compliance 35Application of the Standard 36Standard I(C) Misrepresentation 43Guidance 43Recommended Procedures for Compliance 46Application of the Standard 48Standard I(D) Misconduct 53Guidance 53Recommended Procedures for Compliance 54Application of the Standard 54Standard II: Integrity of Capital Markets 56Standard II(A) Material Nonpublic Information 56Guidance 56Recommended Procedures for Compliance 60Application of the Standard 63Standard II(B) Market Manipulation 68Guidance 68Application of the Standard 69Standard III: Duties to Clients 73Standard III(A) Loyalty, Prudence, and Care 73Guidance 73Recommended Procedures for Compliance 77Application of the Standard 78Standard III(B) Fair Dealing 82Guidance 82Recommended Procedures for Compliance 84Application of the Standard 86Standard III(C) Suitability 90Guidance 90Recommended Procedures for Compliance 93Application of the Standard 94Standard III(D) Performance Presentation 97Guidance 97Recommended Procedures for Compliance 98Application of the Standard 98Standard III(E) Preservation of Confidentiality 101Guidance 101Recommended Procedures for Compliance 103Application of the Standard 103Standard IV: Duties to Employers 105Standard IV(A) Loyalty 105Guidance 105Recommended Procedures for Compliance 109Application of the Standard 109Standard IV(B) Additional Compensation Arrangements 116Guidance 116Recommended Procedures for Compliance 116Application of the Standard 116Standard IV(C) Responsibilities of Supervisors 118Guidance 118Recommended Procedures for Compliance 120Application of the Standard 122Standard V: Investment Analysis, Recommendations, and Actions 126Standard V(A) Diligence and Reasonable Basis 126Guidance 126Recommended Procedures for Compliance 130Application of the Standard 130Standard V(B) Communication with Clients and Prospective Clients 137Guidance 138Recommended Procedures for Compliance 140Application of the Standard 141Standard V(C) Record Retention 146Guidance 146Recommended Procedures for Compliance 147Application of the Standard 148Standard VI: Conflicts of Interest 149Standard VI(A) Disclosure of Conflicts 149Guidance 149Recommended Procedures for Compliance 152Application of the Standard 152Standard VI(B) Priority of Transactions 157Guidance 157Recommended Procedures for Compliance 158Application of the Standard 160Standard VI(C) Referral Fees 162Guidance 162Recommended Procedures for Compliance 162Application of the Standard 162Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate 165Standard VII(A) Conduct as Participants in CFA Institute Programs 165Guidance 165Application of the Standard 167Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program 170Guidance 170Recommended Procedures for Compliance 172Application of the Standard 173Practice Problems 175Solutions 193Study Session 2 Ethical and Professional Standards (2) 205Reading 3 Application of the Code and Standards 207Introduction 207Edvard Stark 208Duties to Clients 209Duties to Employers 210Investment Analysis, Recommendations, and Actions 211Conflicts of Interest 211Subath Agarway 212Professionalism 214Conflicts of Interest 215Peter Sherman 216Loyalty to One’s Employer 217Solicitation of Clients and Prospects 218Misappropriation of Employer Property 218Disclosure of Additional Compensation and Conflicts 219Preston Partners 220Responsibilities to Clients and Interactions with Clients 221Allocation of Trades 222Responsibilities of Supervisors 223Super Selection 224Responsibilities of Supervisors 225Employees and the Employer/Supervisor 226Reasonable Basis 227Duties to Clients 227Investment Recommendations and Actions 227Priority of Transactions 228Reading 4 Trade Allocation: Fair Dealing and Disclosure 229Reading 5 Changing Investment Objectives 233Quantitative MethodsStudy Session 3 Quantitative Methods 237Reading 6 Fintech in Investment Management 239Introduction 239What Is Fintech? 240Big Data 241Sources of Big Data 242Big Data Challenges 244Advanced Analytical Tools: Artificial Intelligence and Machine Learning 244Types of Machine Learning 245Data Science: Extracting Information from Big Data 247Data Processing Methods 247Data Visualization 247Selected Applications of Fintech to Investment Management 249Text Analytics and Natural Language Processing 249Robo-Advisory Services 250Risk Analysis 252Algorithmic Trading 253Distributed Ledger Technology 253Permissioned and Permissionless Networks 255Applications of Distributed Ledger Technology to Investment Management 256Summary 257Practice Problems 259Solutions 261Reading 7 Correlation and Regression 263Introduction 264Correlation Analysis 264Scatter Plots 264Correlation Analysis 265Calculating and Interpreting the Correlation Coefficient 268Limitations of Correlation Analysis 270Uses of Correlation Analysis 273Testing the Significance of the Correlation Coefficient 282Linear Regression 285Linear Regression with One Independent Variable 286Assumptions of the Linear Regression Model 289The Standard Error of Estimate 292The Coefficient of Determination 295Hypothesis Testing 297Analysis of Variance in a Regression with One Independent Variable 305Prediction Intervals 308Limitations of Regression Analysis 311Summary 311Practice Problems 314Solutions 323Reading 8 Multiple Regression and Machine Learning 327Introduction 328Multiple Linear Regression 328Assumptions of the Multiple Linear Regression Model 334Predicting the Dependent Variable in a Multiple Regression Model 339Testing whether All Population Regression Coefficients Equal Zero 341Adjusted R2 343Using Dummy Variables in Regressions 344Violations of Regression Assumptions 348Heteroskedasticity 349Serial Correlation 355Multicollinearity 359Heteroskedasticity, Serial Correlation, Multicollinearity: Summarizing the Issues 362Model Specification and Errors in Specification 363Principles of Model Specification 363Misspecified Functional Form 364Time-Series Misspecification (Independent Variables Correlated with Errors) 372Other Types of Time-Series Misspecification 376Models with Qualitative Dependent Variables 376Machine Learning 378Major Focuses of Data Analytics 379What Is Machine Learning? 380Types of Machine Learning 381Machine Learning Algorithms 383Supervised Machine Learning: Training 390Summary 391Practice Problems 396Solutions 421Reading 9 Time-Series Analysis 433Introduction to Time-Series Analysis 434Challenges of Working with Time Series 436Trend Models 437Linear Trend Models 437Log-Linear Trend Models 440Trend Models and Testing for Correlated Errors 446Autoregressive (AR) Time-Series Models 447Covariance-Stationary Series 448Detecting Serially Correlated Errors in an Autoregressive Model 449Mean Reversion 452Multiperiod Forecasts and the Chain Rule of Forecasting 453Comparing Forecast Model Performance 456Instability of Regression Coefficients 458Random Walks and Unit Roots 461Random Walks 461The Unit Root Test of Nonstationarity 465Moving-Average Time-Series Models 469Smoothing Past Values with an n-Period Moving Average 470Moving-Average Time-Series Models for Forecasting 472Seasonality in Time-Series Models 474Autoregressive Moving-Average Models 480Autoregressive Conditional Heteroskedasticity Models 481Regressions with More than One Time Series 484Other Issues in Time Series 488Suggested Steps in Time-Series Forecasting 489Summary 490Practice Problems 494Solutions 510Reading 10 Excerpt from “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations” 519Introduction 519Simulations 520Steps in Simulation 520An Example of a Simulation 523Use in Decision Making 526Simulations with Constraints 527Issues 528Risk-Adjusted Value and Simulations 529An Overall Assessment of Probabilistic Risk Assessment Approaches 530Comparing the Approaches 530Complement or Replacement for Risk-Adjusted Value 531In Practice 532Conclusion 533EconomicsStudy Session 4 Economics 537Reading 11 Currency Exchange Rates: Understanding Equilibrium Value 539Introduction 540Foreign Exchange Market Concepts 540Arbitrage Constraints on Spot Exchange Rate Quotes 544Forward Markets 548The Mark-to-Market Value of a Forward Contract 552A Long-Term Framework for Exchange Rates 556International Parity Conditions 557The Carry Trade 572The Impact of Balance of Payments Flows 575Current Account Imbalances and the Determination of Exchange Rates 576Capital Flows and the Determination of Exchange Rates 579Monetary and Fiscal Policies 585The Mundell–Fleming Model 585Monetary Models of Exchange Rate Determination 587The Portfolio Balance Approach 590Exchange Rate Management: Intervention and Controls 593Warning Signs of a Currency Crisis 596Summary 600Appendix 605Practice Problems 606Solutions 614Reading 12 Economic Growth and the Investment Decision 619Introduction 620Growth in the Global Economy: Developed vs. Developing Economies 620Savings and Investment 623Financial Markets and Intermediaries 623Political Stability, Rule of Law, and Property Rights 624Education and Health Care Systems 624Tax and Regulatory Systems 625Free Trade and Unrestricted Capital Flows 625Summary of Factors Limiting Growth in Developing Countries 626Why Potential Growth Matters to Investors 628Determinants of Economic Growth 633Production Function 633Capital Deepening vs. Technological Progress 635Growth Accounting 637Extending the Production Function 639Natural Resources 639Labor Supply 641Labor Quality: Human Capital 646Capital: ICT and Non-ICT 647Technology 649Public Infrastructure 653Summary 653Theories of Growth 658Classical Model 659Neoclassical Model 659Endogenous Growth Theory 671Convergence Debate 674Growth in an Open Economy 678Summary 686Practice Problems 690Solutions 697Reading 13 Economics of Regulation 701Introduction 701Overview of Regulation 702Classification of Regulations and Regulators 702Economic Rationale for Regulation 705Regulatory Tools 708Regulation of Commerce 713Regulation of Financial Markets 717Cost–Benefit Analysis of Regulation 718Analysis of Regulation 720Effects of Regulations 722Summary 725Practice Problems 728Solutions 732Appendices 734Glossary G-1Index I-1