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Cfa1 All Chapters Notes

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CFA Level 1

CFA Level 1
Full Revision Package
Table of Contents

1. Ethical and Professional Standards...................1

2. Quantitative Methods....................................7

3. Economics...................................................20

4. Financial Reporting and Analysis................44

5. Corporate Finance........................................63

6. Equity Investments......................................72

7. Fixed Income...............................................79

8. Derivatives...................................................92

9. Alternative Investments...............................99

10. Portfolio Management and Wealth Planning. 105
Chapter 1
Ethical and Professional Standards
Professionalism
Knowledge of the Law
 Comply with all applicable laws, rules, and regulations, codes and standards
 Comply with the more strict ones in case of conflict
 Not participate in any violation
 Dissociate from any violation
 Presumed to have knowledge of all applicable laws
Duties of Analysts
 Stay Informed of changes in applicable laws
 Review compliance procedures regularly
 Maintain up-to-date reference copies of applicable laws and cases
 Seek further legal advice when in doubt
 Report violations to appropriate organization(s) or CFA Institute

Duties of Firms
 Develop / adopt / adhere to a code of ethics
 Keep staff informed of relevant laws
 Establish written protocols for reporting suspected violations
Independence and Objectivity (IO)
 Use reasonable care and judgment to achieve and maintain IO
 Not offer, solicit or accept any benefit at the expense of IO
 Avoid potential conflict of interest
 Can accept modest gifts and entertainment
 Disclose any benefits received and potential conflicts of interest
 Give investment opinions free of bias
 Use clear and unambiguous language to give investment opinions
 Anticipate / Interpret / Assess a company in a factual manner
Duties of Firms
 Maintain a culture supporting IO
1 CFA Level 1

 Separate clearly authority and responsibility
Due Diligence
 Gather info from a wide variety of sources
 Disclose necessary info
Sources of Pressure threatening IO
 Investment Banking Clients
 Public Companies
 Buy-side Clients (e.g. Portfolio managers)
 Issuer-Paid Research
Buy-side Analysts
 Hired by an entity, such as a mutual fund,
that invests on firm capital
 Identify investment opportunities for their firm
 Research usually unavailable to external parties
Sell-side Analyst
 Hired by an entity, such as a brokerage firm,
that manages clients' money
 Identify investment opportunities for their clients
 Research usually available to external parties
Underwriter
 An intermediary between an issuer of a security and the investor
Duties of Analysts
 Adhere to strict standards of conduct
 Engage in thorough, independent and unbiased analysis
 Disclose potential conflicts
 Analyze audited financial statements thoroughly
 Provide thorough benchmarking and industry analysis

 Conduct research in an objective manner
 Distinguish facts and opinions in reports
 Give reasonable conclusions supported by appropriate research
 Accept only a flat fee prior to writing a report
Duties of Firms
 Establish policies to protect integrity of opinions
 Created a restricted list to exclude controversial companies
 Limit special cost arrangements (e.g. air travel) from clients
 Limit gifts received from clients
 Restrict personal investments (e.g. equity related IPOs)
 Implement effective supervisory and review procedures
 Establish a formal written policy on IO
Misrepresentation
 Untrue statement or omission of facts
 Omission of any statement that is otherwise false and misleading
Duties of Analysts
 Not knowingly make any misrepresentations relating to investment
 Not misrepresent any aspect of their practice,
including qualifications
 Not guarantee clients specific return on volatile investments
 Can provide clients with info on return of investments with built-in guarantee
 Not commit plagiarism when preparing investment materials
 Acknowledge and identify the source of ideas from other parties
 Can revise outsourced research 2 CFA Level 1

 Disclose any outsourced research
 Not commit plagiarism in oral communications
 Not use undocumented info
 Reveal sources to bring responsibility back to the author
Duties of Firms
 Limit capabilities of individual staff
 Provide guidance for employees who make presentations to (potential) clients
 Designate which employees can speak on behalf of the firm
 Require staff to prepare a summary of their qualifications / experience
 Monitor materials published on the web pages regularly
 Maintain copies of all research reports /
articles
Misconduct
 Not engage in any professional conduct involving dishonesty / fraud / deceit
 Not commit any act that adversely affects professional reputation / competence
Duties of Analysts
 Not commit any sort of unethical behaviour related to professional activities
 Not commit any act that negative affects their ability to perform responsibilities
 Not abuse CFA Conduct by actively seeking enforcement of CFA Conduct
Duties of Firms
Develop / Adopt a code of ethics
 Disseminate to staff a list of potential violations and associated punishments
 Check reference of potential staff

Integrity
Material Nonpublic Info
 Not act or cause others to act on material nonpublic investment info (inside info)
Material Info
 Info that has an impact on the price of a security or affects investment decisions
Nonmaterial info
 Low Reliability
 Ambiguity of Effect
 Available to General Investors
Examples of Material Info
 Earnings
 Mergers / Acquisition / Tender Offers / Joint
Ventures
 Change in Assets
 New Licenses / Patents / Trademarks
 Development of Business
 Changes in Management
 Change in Auditor Notification
 Events regarding the issuer's securities
 Bankruptcies
 Significant Legal Disputes
 Gov Reports of Economic Trends
 Orders for Large Trades before Execution
Mosaic Theory
 Collect public / non-public / nonmaterial info for forming recommendations
 Recognized by CFA Institute as a valid method of analysis
Duties of Analysts
 Collect info from sources other than the company in question

3 CFA Level 1

 Document all research
 Disclose the details of the info and methodology used
 Not take investment action on the basis of material info
 Make reasonable efforts to disseminate material info
 Not induce company insiders to provide private info
 Not share info with colleagues of other departments
 Consult a designated compliance officer in case of doubt

 Not disseminate false / misleading info
 Not have the intent to deceive

Duties of Firms
 Adopt and document compliance procedures
 Develop and follow disclosure policies
 Review employee and proprietary trading
(trading on firm capital for profit)
 Require staff to make periodic trading reports
 Supervise and control interdepartmental communications
 Not discriminate among analysts in the provision of info
 Issue press releases prior to analyst meeting
 Restrict the flow of confidential info
 Separate physically incompatible departments (sell-side vs buy-side)
 Limit staff exposure to incompatible jobs
 Authorize compliance officers to handle conflicts
 Circulate compliance policies and guidelines to all staff
 Provide training programmes to staff
 Can conduct proprietary trading even when possessing nonpublic info

Duties of Analysts
 Follow investment guidelines set forth by clients and the firm
 Adhere to any legally imposed fiduciary responsibility
 Avoid all real / potential conflicts of interest
 Ensure appropriate risks clients are exposed to
 Ensure clients' objective and expectations are realistic
 Establish and follow investment objectives of clients
 Disclose investment methods / policies to clients
 Disclose compensation arrangements
 Disclose proxy-voting policies
 Keep clients informed of any transactions
 Diversify investment to reduce the risk of loss
 Deal fairly with all clients with respect to investment actions
 Maintain confidentiality
 Seek best execution for clients

Market Manipulation
 Not engage in practices that distort prices
 Not artificially inflate trading volume

Duties to Clients
Loyalty, Prudence, and Care
 Be loyal to clients
 Act with reasonable care
 Exercise prudent judgment
 Act for the benefit of clients
 Place clients' interest first
 Determine and comply with applicable fiduciary duty

Fair Dealing

4 CFA Level 1

 Deal fairly and objectively with all clients
 Not discriminate against any clients

 Financial Circumstances
 Personal Data

Duties of Analysts
 Not take advantages of their positions
 Give investment recommendations to all clients simultaneously
 Take investment actions fairly to all clients

Performance Presentation
 Make efforts to ensure the fairness / accuracy
/ completeness of performance info

Duties of Firms
 Design an equitable system to prevent selective/ discriminatory disclosure
 Limit the no of people involved
 Shorten the time frame between decision and dissemination
 Publish personnel guidelines for predissemination
 Maintain a list of clients and their holdings
 Develop written trade allocation procedures
 Disclose trade allocation procedures
 Review clients' accounts on a regular basis
 Disclose levels of service
Suitability
 Make appropriate investment recommendations
 Take appropriate investment actions
Duties of Analysts
 Gather / Update clients' info
 Assessing suitability based on info provided by clients
Info for Analyzing Clients' Suitability
 Investment Experience
 Risk and Return Objectives
 Financial Constraints
 Investment Objectives / Constraints /
Mandates
 Complete Financial Portfolio

Duties of Analysts
 Disclose investment performance data fully
Duties of Firms
 Comply with / Adhere to Global Investment
Performance Standards (GIPS)
 Maintain all data and records
Preservation of Confidentiality
 Keep info about current / former /
prospective clients confidential
Exceptions
 Info concerns illegal activities
 Disclosure is required by law
 Clients permit disclosure

Duties to Employers
Loyalty
 Act for the benefit of employer
 Not deprive employer of the advantage of their skills / abilities
 Not divulge confidential info
 Not cause harm to employer
Duties of Analysts
 Place clients' interests above employer's
 Comply with policies and procedures established by employer

5 CFA Level 1

Independent Practice
 Abstain from any activity that conflicts with the interests of employer
 Notify employer of personal independent undertakings
 Not undertake independent practice until receiving consent from employer
Leaving an Employer
 Continue to act in the interest of employer until resignation becomes effective
 Not misappropriate trade secrets
 Not misuse confidential info
 Not solicit employer's clients prior to cessation of employment
 Not misappropriate client lists
 Not commit self-dealing (acting in his own interest in a transaction)
Whistle-blowing
 Can report dishonest / illegal practices of employer to authority
Nature Employment
 Employee - Fully bound by the Duties to
Employer
 Independent Contractor - Depends on the terms of agreement
Additional Compensation Arrangements
 Not accept gifts / benefits / compensation expected to create a conflict of interest
Duties of Analyst
 Report to employer on any compensation to be received from other sources
 Obtain written consent from all parties involved before receipt

Responsibilities of Supervisors
 Detect and prevent violations by anyone under supervision
Duties of Supervisors
 Exercise reasonable supervision
 Establish and implement written compliance procedures
 Ensure the procedures are followed through periodic review
 Initiate an investigation into any violation detected
Flow of Compliance Procedures
 Draft the procedure in plain language
 Designate a compliance officer
 Define the responsibility of the compliance officer
 Implement a system of checks and balances
 Outline permissible conduct
 Outline reporting procedure in case of violation
 Disseminate the procedures to relevant staff
 Update the procedures regularly
 Educate staff regarding the compliance procedures
 Use periodic reminders
 Evaluate staff based on their professional conduct
 Review activities carried out by staff
 Enforce the procedures in case of violation
 Report violations promptly
 Conduct a thorough investigation
 Increase supervision
Investment analysis / Recommendations /
Actions
Diligence and Reasonable Basis

6 CFA Level 1

 Exercise diligence / independence /
thoroughness
 Have a reasonable / adequate basis supported by research / data
Duties of Analysts
 Cover all pertinent issues
 Provide supporting info to clients
 Refrain from relying on info that lacks a sound basis
 Document differing opinion with the research team
 Can request to remove their names from the report due to differing opinions
Secondary Research
 Research done by someone else inside the firm
Third Party Research
 Research done by someone else outside the firm
Evaluation of Secondary Info
 Review of the assumptions used
 Rigor of analysis performed
 Date / Timeless of research
 Evaluation of the objectivity
 Evaluation of the independence of recommendations
Duties of Firms
 Require all reports and recommendations to have a reasonable / adequate basis
 Research / Approve research reports /
recommendations
 Establish due-diligence procedures
 Develop measurable criteria for assessing the quality of research

Clients
 Disclose the basic format and general principles of investment
 Inform clients of any material changes
 Use reasonable judgment in identifying investment factors
 Distinguish between fact and opinion
 Can be any form of communication
Duties of Analysts
 Develop / Maintain clear / frequent /
thorough communication practices
 Inform clients of factors taken into account for forming investment decisions
 Inform clients of the investment decision making process
 Outline known limitations of the analysis and conclusions
Duties of Firms
 Maintain records indicating the nature of the research
Record Retention
 Develop / Maintain appropriate records to support investment analysis
Duties of Analyst
 Comply with the firm's requirement of record keeping
Duties of Firms
 Require staff to maintain records that support investment decisions
Conflicts of Interest
Disclosure of Conflicts
 Make full and fair disclosure of all matters

Communication with Clients and Prospective 7

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