CFA - Chartered Financial Analyst Audio Crash Course

1

Contents Introduction .................................................................................................................................................. 5 Welcome to the chapter one -- Ethical and Professional Standards .......................................................... 13 Welcome to the section one-point-one on ethics and trust in the investment profession ................... 13 Sub-section one-point-one d: -- Need for high ethical standards in the Investment Industry ............... 15 Welcome to the section one-point-two on code of ethics and standards of professional conduct ...... 17 Welcome to the section one-point-three on guidance for standards one to seven. ............................. 21 Welcome to the section one-point-four on introduction to the global investment performance standards (G-I-P-S). ................................................................................................................................. 23 Welcome to the section one-point-five on global investment performance standards (G-I-P-S). ......... 24 Welcome to the chapter two -- Quantitative Methods .............................................................................. 35 Welcome to the section two-point-one on the time value of money. ................................................... 35 Welcome to the section two-point-two on discounted cash flow applications. .................................... 38 Welcome to the section two-point-three on statistical concepts and market....................................... 40 Welcome to the section two-point-four on probability and variance. ................................................... 43 Welcome to the section three-point-one on common probability distributions ................................... 54 Welcome to the section three-point-two on sampling and estimation. ................................................ 59 Welcome to the section three-point-three on hypothesis testing. ........................................................ 62 Welcome to the section three-point-four on technical analysis. ........................................................... 67 Welcome to the chapter four -- Microeconomics and Macroeconomics................................................... 80 Welcome to the section four-point-two on firm and market structures. .............................................. 82 Welcome to the section four-point-three on aggregate output, prices, and economic growth. ........... 84 Welcome to the section four-point-four on business cycles. ................................................................. 88 Welcome to the chapter five -- monetary and fiscal policy, international trade, and currency exchange rates ............................................................................................................................................................ 99 Welcome to the section five-point-one on monetary and fiscal policy.................................................. 99 Welcome to the section five-point-two on international trade and capital flows. .............................. 103 Welcome to the section five-point-three on currency exchange rates. ............................................... 107 Welcome to the chapter six -- Financial Reporting and Analysis .............................................................. 118 Welcome to the section six-point-two on Financial Reporting Mechanics. ......................................... 121 Welcome to the section six-point-three on Financial Reporting Standards. ........................................ 124 Welcome to the chapter Seven -- Income Statements, Balance Sheets, and Cash Flow Statements ...... 136 2

Welcome to the section seven-point-one on understanding income statements. .............................. 136 Welcome to the section seven-point-two on understanding balance sheets. ..................................... 141 Welcome to the section seven-point-three on understanding cash flow statements. ........................ 145 Welcome to the section seven-point-four on financial analysis techniques. ....................................... 149 Welcome to the chapter eight -- Inventories, long lived assets, income taxes, and noncurrent liabilities .................................................................................................................................................................. 160 Welcome to the section eight-point-one on inventories. .................................................................... 160 Welcome to the section eight-point-two on long lived assets. ............................................................ 164 Welcome to the section eight-point-three on income taxes................................................................ 169 Welcome to the section eight-point-four on noncurrent liabilities. .................................................... 173 Welcome to the chapter nine -- Financial reporting quality and financial statement analysis ............ 187 Welcome to the section nine-point-one on financial reporting quality. .............................................. 187 Welcome to the section nine-point-two on financial statement analysis. ........................................... 192 Welcome to the chapter ten -- Corporate governance, capital budgeting, and cost of capital ............... 202 Welcome to the section ten-point-one on corporate governance, and environmental, social & governance factors. .............................................................................................................................. 202 Welcome to the section ten-point-two on capital budgeting. ............................................................. 204 Welcome to the section ten-point-three on cost of capital. ................................................................ 207 Welcome to the chapter eleven -- Leverage and Working Capital Management .................................... 217 Welcome to the section eleven-point-one on measures of leverage. ................................................. 217 Welcome to the section eleven-point-two on working capital management. ..................................... 219 Welcome to the chapter twelve -- Portfolio management ...................................................................... 228 Welcome to the section twelve-point-one on portfolio management overview. ................................ 228 Welcome to the section twelve-point-two on introduction to risk management. .............................. 231 Welcome to the section twelve-point-three on introduction to portfolio risk and return. ................. 233 Welcome to the section twelve-point-four on advance topics in portfolio risk and return. ............... 235 Welcome to the section twelve-point-five on basics of portfolio planning and construction. ............ 237 Welcome to the chapter thirteen -- Equity market organization, market indices, and market efficiency .................................................................................................................................................................. 249 Welcome to the section thirteen-point-one on market organization and structure. .......................... 249 Welcome to the section thirteen-point-two on security market indexes. ........................................... 254 Welcome to the section thirteen-point-three on market efficiency. ................................................... 257 3

Welcome to the chapter fourteen -- Equity analysis and valuation ......................................................... 266 Welcome to the section fourteen-point-one on overview of equity securities. .................................. 266 Welcome to the section fourteen-point-two on introduction to industry and company analysis. ..... 268 Welcome to the section fourteen-point-three on equity valuation concepts and basic tools. ........... 272 Welcome to the chapter fifteen -- Fixed Income Basic Concepts ............................................................. 283 Welcome to the section fifteen-point-one on the defining elements of fixed income securities. ...... 283 Welcome to the section fifteen-point-two on fixed income markets issuance, trading, and funding. 285 Welcome to the section fifteen-point-three on introduction to fixed income valuation. ................... 287 Welcome to the section fifteen-point-four on introduction to asset backed securities. ..................... 290 Welcome to the chapter sixteen -- Fixed income risk analysis ................................................................. 300 Welcome to the section sixteen-point-one on understanding fixed income risk and return. ............. 300 Welcome to the section sixteen-point-two on fundamentals of credit analysis. ................................. 302 Welcome to the chapter seventeen -- Derivatives ................................................................................... 312 Welcome to the section seventeen-point-one on derivative markets and instruments. .................... 312 Welcome to the section seventeen-point-two on basics of derivative pricing and valuation. ............ 314 Welcome to the chapter eighteen -- Alternative Investments ................................................................. 323 Welcome to the section eighteen-point-one on introduction to alternative investments. ................. 323 Conclusion ................................................................................................................................................. 337

4

Introduction This CFA exam level one prep book material would be a valuable addition to the study tools for the Chartered Financial Analyst or CFA exam. It will serve the CFA exam candidates very well. It provides a concise and lucid explanation of the major theories and topics of the CFA level one curriculum.

CFA level one curriculum is very vast and covers numerous concepts, techniques and topics. Therefore, to cover all of them in their entirety; you need to study the various textbook volumes of the CFA level one curriculum published by CFA Institute along with other material of CFA Institute.

Our material covers the key concepts related to the CFA level one curriculum in an easy to remember format. It is very handy material. It can be used anytime and anywhere.

You can use it during your commute and utilize your time in the best possible manner.

This CFA Exam level one prep book has been organized in eighteen chapters. This curriculum is completed with a conclusion and a final multiple choice test comprising of one hundred new questions and their answers.

Each chapter is divided into major sections that cover the different theories and topics related to the chapter. Each major section is further divided into sub-sections that explain the various aspects and concepts related to the section.

In the end of the chapter, we have a section on the key takeaways from the chapter. We finish each chapter with a Q&A section having ten multiple choice questions and their answers.

We have also developed a “follow-along” PDF to cover the complex topics and concepts related to various chapters. This “follow-along” PDF is provided to each CFA exam candidate along with this CFA exam level one prep book.

This CFA exam level one prep book is easy to carry with you and will allow you to study the key topics and concepts over and over, which is essential to master the CFA material.

5

We wish you the best of luck for your arduous CFA exam level one preparation.

The various chapters and their major sections in this CFA exam level one prep book are as follows:

Chapter 1 - Ethical and Professional Standards 1.1 Ethics and Trust in the Investment Profession 1.2 Code of Ethics and Standards of Professional Conduct 1.3 Guidance for Standards I–VII 1.4 Introduction to the Global Investment Performance Standards 1.5 Global Investment Performance Standards 1.6 Key Takeaways 1.7 Multiple Choice Quiz (10 Questions) and Answers

Chapter 2 - Quantitative Methods 2.1 Time Value of Money 2.2 Discounted Cash Flow Applications 2.3 Statistical Concepts and Market Returns 2.4 Probability Concepts 2.5 Key Takeaways

6

2.6 Multiple Choice Quiz (10 Questions) and Answers

Chapter 3 - Quantitative Methods Application 3.1 Common Probability Distributions 3.2 Sampling and Estimation 3.3 Hypothesis Testing 3.4 Technical Analysis 3.5 Key Takeaways 3.6 Multiple Choice Quiz (10 Questions) and Answers

Chapter 4 - Microeconomics and Macroeconomics 4.1 Demand and Supply Analysis 4.2 Firm and Market Structures 4.3 Aggregate Output, Prices, and Economic Growth 4.4 Understanding Business Cycles 4.5 Key Takeaways 4.6 Multiple Choice Quiz (10 Questions) and Answers

Chapter 5 - Monetary and Fiscal Policy, International Trade, and Currency Exchange Rates

7

5.1 Monetary and Fiscal Policy 5.2 International Trade and Capital Flows 5.3 Currency Exchange Rates 5.4 Key Takeaways 5.5 Multiple Choice Quiz (10 Questions) and Answers

Chapter 6 - Financial Reporting and Analysis 6.1 Introduction to Financial Statement Analysis 6.2 Financial Reporting Mechanics 6.3 Financial Reporting Standards 6.4 Key Takeaways 6.5 Multiple Choice Quiz (10 Questions) and Answers

Chapter 7 - Income Statements, Balance Sheets, and Cash Flow Statements 7.1 Understanding Income Statements 7.2 Understanding Balance Sheets 7.3 Understanding Cash Flow Statements 7.4 Financial Analysis Techniques 7.5 Key Takeaways 7.6 Multiple Choice Quiz (10 Questions) and Answers 8

Chapter 8 - Inventories, Long Lived Assets, Income Taxes, and Noncurrent Liabilities 8.1 Inventories 8.2 Long Lived Assets 8.3 Income Taxes 8.4 Noncurrent Liabilities 8.5 Key Takeaways 8.6 Multiple Choice Quiz (10 Questions) and Answers

Chapter 9 - Financial Reporting Quality and Financial Statement Analysis 9.1 Financial Reporting Quality 9.2 Financial Statement Analysis Applications 9.3 Key Takeaways 9.4 Multiple Choice Quiz (10 Questions) and Answers

Chapter 10 - Corporate Governance, Capital Budgeting, and Cost of Capital 10.1 Corporate Governance, and Environmental, Social & Governance factors 10.2 Capital Budgeting 10.3 Cost of Capital 10.4 Key Takeaways

9

10.5 Multiple Choice Quiz (10 Questions) and Answers

Chapter 11 - Leverage, Dividends and Share Repurchases, and Working Capital Management 11.1 Measures of Leverage 11.2 Working Capital Management 11.3 Key Takeaways 11.4 Multiple Choice Quiz (10 Questions) and Answers

Chapter 12 - Portfolio Management 12.1 Portfolio Management Overview 12.2 Introduction to Risk Management 12.3 Introduction to Portfolio Risk and Return 12.4 Advance Topics in Portfolio Risk and Return 12.5 Basics of Portfolio Planning and Construction 12.6 Key Takeaways 12.7 Multiple Choice Quiz (10 Questions) and Answers

Chapter 13 - Equity Market Organization, Market Indices, and Market Efficiency 13.1 Market Organization and Structure

10

13.2 Security Market Indexes 13.3 Market Efficiency 13.4 Key Takeaways 13.5 Multiple Choice Quiz (10 Questions) and Answers

Chapter 14 - Equity Analysis and Valuation 14.1 Overview of Equity Securities 14.2 Introduction to Industry and Company Analysis 14.3 Equity Valuation Concepts and Basic Tools 14.4 Key Takeaways 14.5 Multiple Choice Quiz (10 Questions) and Answers

Chapter 15 - Fixed Income Basic Concepts 15.1 Defining Elements of Fixed Income Securities 15.2 Fixed Income Markets Issuance, Trading, and Funding 15.3 Introduction to Fixed Income Valuation 15.4 Introduction to Asset Backed Securities 15.5 Key Takeaways 15.6 Multiple Choice Quiz (10 Questions) and Answers

11

Chapter 16 - Fixed Income Risk Analysis 16.1 Understanding Fixed Income Risk and Return 16.2 Fundamentals of Credit Analysis 16.3 Key Takeaways 16.4 Multiple Choice Quiz (10 Questions) and Answers

Chapter 17 - Derivatives 17.1 Derivative Markets and Instruments 17.2 Basics of Derivative Pricing and Valuation 17.3 Key Takeaways 17.4 Multiple Choice Quiz (10 Questions) and Answers

Chapter 18 - Alternative Investments 18.1 Introduction to Alternative Investments 18.2 Key Takeaways 18.3 Multiple Choice Quiz (10 Questions) and Answers

Conclusion

Final Multiple Choice Test of One Hundred New Questions and Answers 12

Welcome to the chapter one -- Ethical and Professional Standards In this chapter, we have five major sections that cover the different theories and topics related to the ethical and professional standards. These five major sections are -One-point-one -- Ethics and trust in the investment profession One-point-two -- Code of ethics and standards of professional conduct One-point-three -- Guidance for standards from one to seven One-point-four -- Introduction to the global investment performance standards One-point-five -- Global investment performance standards Thereafter, we have a section on the key takeaways from the chapter. We finish this chapter with a Q&A section having ten multiple choice questions and their answers.

The ethical and professional standards chapter contains many abstract and conceptual issues, related to the subtle differences or nuances of professional conduct.

You need to be aware of the thin line differentiating between the good and the bad professional conduct. This will help you in correctly answering CFA exam questions on ethical and professional standards.

Welcome to the section one-point-one on ethics and trust in the investment profession In this section, we have six sub-sections that explain the various aspects and concepts related to ethics and trust in the investment profession. The sub-sections are -a. -- Ethics. b. -- Role of a code of ethics in defining a profession. c.

-- Challenges to ethical behavior.

13

d. -- Need for high ethical standards in the investment industry. e. -- Difference between ethical and legal standards. f.

-- Framework for ethical decision making.

Sub-section one-point-one a: -- Ethics -Ethics is the study and practice of the moral principles to make good and acceptable choices. It provides guidance for our behavior and the right way of doing things. Ethical principles refer to the set of beliefs to distinguish between the good behavior and bad behavior. Ethical conduct is the type of behavior that follows the moral principles and conforms to the various ethical expectations of stakeholders.

Sub-section one-point-one b: -- Role of a code of ethics in defining a profession -A profession is an occupation or work that is based on the specialized knowledge and skills. It usually involves paid services rendered to others. It is practiced by the members who adhere to a shared and common code of ethics.

The code of ethics of a profession establishes the guiding principles and specifies the expected behavior from the practicing members. It provides confidence to the members as well as to the clients and the general public.

The standards of conduct of a profession are the detailed instructions to guide the professional behavior and conduct of the members. The standards of conduct enhance and clarify the code of ethics.

Sub-section one-point-one c: -- Challenges to ethical behavior --

14



Financial rewards can motivate people to act in an unethical manner for the short-term gains without recognizing the long-term consequences or risks.



The loyalty to employers and colleagues may hinder people from behaving in a fully ethical manner.



Prestige issues may restrict some people from behaving in a perfectly ethical manner and making corrections.



Overconfidence of the people in their abilities and ethical behavior may result into overlooking the code of ethics and committing unethical mistakes.

Sub-section one-point-one d: -- Need for high ethical standards in the Investment Industry -High ethical standards are needed for the investment industry due to the following reasons: 

Investment industry is built on trust mainly.



The fiduciary nature of the relationship between the investment professionals and the clients.



Differences between the investment professionals and the clients in the investment knowledge and information access



Dependence of the clients on investment professionals to use their specialized skills to protect and grow the assets.

Sub-section one-point-one e: -- Difference between ethical and legal standards --

15

The numerous laws codify the ethical actions or the prescribed behavior for the people or the society. Legal and ethical conduct usually coincides, yet they are not the same always. A legal behavior may not break the law; yet it is not considered ethical. On the other hand, an ethical behavior may not be legal in a country.

Legal standards are not the best mechanism to eradicate unethical behavior. Legal standards often address the past ethical issues. The new laws may affect the markets adversely or may create new opportunities for different type of unethical conduct.

Sub-section one-point-one f: -- Framework for ethical decision making -A framework for ethical decision making serves as a tool for analysis and evaluation of the different aspects of the ethical conduct in the investment profession.

The framework to identify, consider, act, and reflect provides an excellent mechanism for ethical decision making in ambiguous situations. The framework gives a summary view of ethical decision making and its key elements, which are: -Identify: It involves identifying the ethical principles involved, duties to clients or others, conflicts of interest, etc.

Consider: It involves considering and evaluating various situational influences and the alternative courses of action.

Act: It involves making a decision, escalating the bigger issues to the higher authorities, etc.

Reflect: It involves reflecting on the learning and experiences gained from handling various situations and making ethical decisions. This helps in ethical decision making in the future.

16

Welcome to the section one-point-two on code of ethics and standards of professional conduct In this section, we have three sub-sections that explain the various aspects and concepts related to code of ethics and standards of professional conduct. The subsections are -a. -- Structure of CFA Institute professional conduct program and the process for the enforcement of the code and standards. b. -- Six components of the code of ethics and the seven standards of professional conduct. c.

-- Ethical responsibilities required by the code and standards, including the subsections of each standard.

Sub-section one-point-two a: -- Structure of CFA Institute professional conduct program and the process for the enforcement of the code and standards -All CFA Institute members as well as CFA candidates need to comply with the code of ethics and standards of professional conduct. The CFA Institute rules of procedure for professional conduct and bylaws are the basic structure for the enforcement of the code of ethics and standards of professional conduct.

The CFA Institute Board of Governors and Disciplinary Review Committee have the responsibility for the enforcement of the Code and Standards. The CFA Institute Professional Conduct staff undertakes inquiries related to professional conduct. An inquiry may be based on self-disclosure, complaints, misconduct, reports, etc. The staff may interview, collect document and records. The staff may decide on no sanctions or issue a cautionary letter or discipline the member in case of violations.

If the member rejects sanctions, matter is referred to Disciplinary Review Committee, which gives the final decision on violations and sanctions.

17

Sub-section one-point-two b: -- Six components of the code of ethics and the seven standards of professional conduct -The Code of Ethics CFA Institute members and candidates need to follow the six components of the code of ethics prescribed by CFA Institute, which are -

Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.



Place the integrity of the investment profession and the interests of clients above their own personal interests.



Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.



Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.



Promote the integrity and viability of the global capital markets for the ultimate benefit of society.



Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

The seven standards of professional conduct prescribed by CFA Institute are -

Professionalism



Integrity of Capital Markets

18



Duties to Clients



Duties to Employers



Investment Analysis, Recommendations and Actions



Conflicts of Interest



Responsibilities as a CFA Institute Member or CFA Candidate

Sub-section one-point-two c: -- Ethical responsibilities required by the code and standards -High ethical standards are very critical to maintain the trust in financial markets and in the investment profession. All members and candidates of CFA Institute have the personal responsibility to uphold the code of ethics and standards. They need to act in the best interest of the clients and in a very fair and transparent manner. CFA Institute members should follow the standards prescribed by CFA Institute in all respects as explained hereunder -

CFA Institute members should observe professionalism. They should have knowledge of the law and must comply with all applicable laws and rules. They must comply with more strict laws and rules in the event of conflict. Members must maintain independence and objectivity and avoid misrepresentation or misconduct.



CFA Institute members should preserve integrity of capital markets. They should not act or cause others to act on material nonpublic information that could affect value of an investment. They should not engage in market manipulations that distort prices or artificially inflate trading volume.



CFA Institute members should properly carry out the duties to clients. Members should act with loyalty, prudence, and care for the benefit of the clients. Members 19

should have fair dealing with all clients. Members should determine suitability of an investment with respect to investment experience, risk and return objectives, and financial constraints of clients with total portfolio perspective. Members must give a fair, accurate, and complete investment performance information or presentation. Members should ensure preservation of confidentiality of client information unless information concerns illegal activities; or disclosure is required by law or permitted by client. 

CFA Institute members should properly carry out the duties to employers. They should observe loyalty and disclose additional compensation arrangements like gifts and obtain written consent. Members should properly discharge the responsibilities of supervisors and ensure that the subordinates comply with applicable laws and rules.



CFA Institute members should properly carry out the investment analysis, recommendations, and actions. They should strive for diligence and reasonable basis for investment recommendations, and actions. They must have proper communication with clients and prospective clients about the investment processes, portfolios, limitations and risks, etc. They must use reasonable judgment, distinguish between fact and opinion in the investment analysis, and ensure record retention.



CFA Institute members should avoid conflicts of interest. Members must make full and fair disclosure in plain language. Members should maintain the priority of transactions of clients and employers. Members should disclose the referral fees to their employer and clients.



CFA Institute members should understand the responsibilities as a CFA institute member or CFA candidate. Members should not engage in any conduct that compromises the reputation or the integrity of CFA Institute or CFA designation.

They must not misrepresent or exaggerate the implications of CFA Institute membership or CFA designation.

20

We would like to refer CFA candidates to study the Standard of Practice Handbook (eleventh edition) published by CFA Institute in 2014.

Welcome to the section one-point-three on guidance for standards one to seven.

In this section, we have three sub-sections that explain the various aspects and concepts related to guidance for standards one to seven. The sub-sections are -a. -- Application of the code of ethics and standards of professional conduct to situations involving issues of professional integrity. b. -- Difference between conduct that conforms to the code and standards and conduct that violates the code and standards. c. -- Practices and procedures designed to prevent violations of the code of ethics and standards of professional conduct.

Sub-section one-point-three a: -- Application of the code of ethics and standards of professional conduct to situations involving issues of professional integrity -CFA Institute members must ensure that they properly apply the code and standards to various situations. They should act in a fair manner and avoid any misconduct or irresponsible behavior. For example -

Know the relevant laws.



Comply with the more strict laws or rules.



Maintain objectivity and independence.



Dissociation with the people who are violating laws or rules.



Don’t guarantee the investment results.



Do not act or cause others to act on material nonpublic information.

21



Do not manipulate the market price or trading volumes.



Act for the client benefit.



Take suitable investment actions or make recommendations in a portfolio context.



Do not try to mislead with wrong performance presentation.



Act for the benefit of the employers.



Do not harm the interest of your employers.



Get written permission to accept gift or additional compensation.



Supervisors need to prevent and detect the violations.



Thoroughly analyze the investments.



Review the quality of the third party research.



Disclose any potential conflict of interest.



Treat the client from your family like any other client.



Don’t imply that the CFA Charter holders give better investment results.

Please refer to the examples in the CFA Institute Standard of Practice Handbook for further reading and understanding the application of the code and standards in different situations.

Sub-section one-point-three b: -- Conduct that conforms to the code and standards and conduct that violates the code and standards -CFA Institute members must follow the conduct that conforms to the code and standards, when dealing with clients, such as fair and transparent dealings, loyalty to clients, serving interest of clients, loyalty to employers, etc. Any conduct that violates 22

the code and standards should be avoided like acting on nonpublic material information, taking up shares personally in oversubscribed initial public offering, conflict of interest, etc.

Sub-section one-point-three c: -- Practices and procedures designed to prevent violations of the code of ethics and standards of professional conduct -CFA Institute members must adopt practices and procedures designed to prevent violations of the code and standards such as maintaining objectivity and independence in investments, using reasonable care in investment actions, simultaneous dissemination of investment information and recommendations, not using work of others without attribution, etc.

Welcome to the section one-point-four on introduction to the global investment performance standards (G-I-P-S).

In this section, we have three sub-sections that explain the various aspects and concepts related to introduction to the global investment performance standards. The sub-sections are -a. -- Why the G-I-P-S standards were created, what parties the G-I-P-S standards apply to, and who is served by the standards. b. -- Construction and purpose of composites in performance reporting. c.

-- Requirements for verification.

Sub-section one-point-four a: -- Why the G-I-P-S standards were created, what parties the G-I-P-S standards apply to, and who is served by the standards -G-I-P-S standards were created with an aim to provide the uniform framework for the presentation of the historical performance results and avoiding misrepresentation. G-I23

P-S standards apply to the investment management firms. G-I-P-S standards serve the existing as well as the prospective clients.

Sub-section one-point-four b: -- Construction and purpose of composites in performance reporting -Performance is presented for the composites, which include discretionary account portfolios with a similar investment strategy, mandate, or objective. The performance reporting for the composites gives clients information about the success in managing the client funds by an investment firm.

Sub-section one-point-four c: -- Requirements for verification -Verification is voluntary. Independent verification by a third party gives the assurance that G-I-P-S standards have been appropriately applied. It has to be on the investment firm-wide basis and in conformance with the G-I-P-S calculation methodology and formats. The verified investment firms must also disclose the periods for which compliance verification was done.

Welcome to the section one-point-five on global investment performance standards (G-I-P-S).

In this section, we have four sub-sections that explain the various aspects and concepts related to global investment performance standards. The sub-sections are -a. -- Key features of the G-I-P-S standards and the fundamentals of compliance. b. -- Scope of the G-I-P-S standards with respect to an investment firm’s definition and historical performance record.

24

c.

-- How the G-I-P-S standards are implemented in countries with existing standards for performance reporting and describe the appropriate response when the G-I-P-S standards and local regulations conflict.

d. -- Nine major sections of the G-I-P-S standards.

Sub-section one-point-five a: -- Key features of the G-I-P-S standards and the fundamentals of compliance -Key features of the G-I-P-S standards are: -

Consistent and accurate performance presentation information.



G-I-P-S compliant performance results for minimum five years or since the firm inception.



Well defined firm as a distinct business entity.



Full compliance only.



Applied on a firm-wide basis.



Include all portfolios.



Accurate input data.



Five years of compliant data with addition of data each year to reach a minimum of the ten years.

The fundamentals of compliance include both the requirements and recommendations such as firm-wide basis, distinct business unit, full compliance, etc.

25

Sub-section one-point-five b: -- Scope of the G-I-P-S standards with respect to an investment firm’s definition and historical performance record -G-I-P-S standards are applied to a distinct business entity on the firm-wide basis and include all locations and total firm assets. The time period for performance presentation is the minimum five years or since the firm inception. After five years of compliant data for performance presentation, the firm must add data each year to have data of a minimum of the ten years.

Sub-section one-point-five c: -- How the G-I-P-S standards are implemented -In a case of conflict with the local or country specific laws or standards, the firm must follow the country specific laws with disclosure of the G-I-P-S conflict.

This guidance helps in the determination of the course of action or the path of implementation to be adopted by a firm in case of the G-I-P-S standards. It avoids the ambiguity and scope for misinterpretation.

Sub-section one-point-five d: -- Nine major sections of the G-I-P-S standards -There are nine major sections of the G-I-P-S which include: One -- fundamentals of compliance that include firm definition, appropriate documentation, compliance claim and verification, etc. must be adhered to.

Two -- input data must be consistent.

Three -- calculation methodology must be uniform.

Four -- composite construction must be asset weighted.

Five -- disclosures of the information about the presentation and policies must be made.

26

Six -- presentation and reporting must be G-I-P-S compliant.

Seven -- real estate provisions must be applied to all real estate investments.

Eight -- private equity must be valued as per G-I-P-S principles.

Nine -- Wrap Fee/Separately Managed Account (SMA) portfolios must be analyzed in accordance with the specific requirements.

27

Key Takeaways -

Ethics is the study and practice of the moral principles to make good and acceptable choices.



The code of ethics of a profession establishes the guiding principles and the expected behavior from the practicing members.



The standards of conduct of a profession are the detailed instructions to guide the day to day conduct of the members.



Financial rewards can motivate people to act in an unethical manner for the short term gains without recognizing the long term consequences or risks.



High ethical standards are needed for the investment industry as it is built on trust mainly.



All CFA Institute members as well as CFA candidates need to comply with the code of ethics and standards of professional conduct.



CFA Institute members and candidates need to follow the six components of the code of ethics and seven standards of professional conduct prescribed by CFA Institute.



CFA Institute members should have knowledge of the law and must comply with all applicable laws and rules.



CFA Institute members must follow the conduct that conforms to the code and standards when dealing with clients such as fair and transparent dealings, loyalty to clients, serving interest of clients, loyalty to employers, etc.



Any conduct that violates the code and standards should be avoided like acting on nonpublic material information, taking up shares personally in oversubscribed initial public offering, conflict of interest, etc.

28



G-I-P-S standards were created with an aim to provide the uniform framework for the presentation of the historical performance results and avoiding misrepresentation.

29