BDF-RESTREINT
CFA level I
1 – Ethics and professional standards
- Ethical behavior = a set of rules and moral principles based on shared belief about what
behavior is (un)acceptable
- Professional code of conduct= way for a profession to communicate to the public → serve
clients in honest and ethical way → public confidence ↑
- Challenges to ethical behavior: overestimating, near-temr focus, situational influences
(peer pressure)
CFA code of ethics
1) Act with integrity, competence, respect with parties in global capital markets
2) Place integrity of investment profession above own personal interests
3) Use reasonable care and independent judgement when analysis
4) Practice and encourage ethical
5) Promote integrity and viability of global capital markets → ultimate benefit of society
6) Maintain and improve professional competence.
Standards of professional conduct
1) Professionalism
a. Knowledge of law
b. Independence and objectivity:
i. pay own travel, enclose gifts
c. Misrepresentation:
i. Not presenting 3rd party research as own. But cite source.
ii. Keep copies of reports for preparation. Review documents
d. Misconduct (fraud)
e. Competence
2) Integrity of capital markets
a. Material non public information
i. Mosai theory = not a violation. Investetn conclusion via public an non
public info
b. Market manipulation
i. Don’t engage in practices that distort prices
3) Duties to clients
a. Loyalty, prudence and care
i. Place clients interest over employers interest. Diversify
b. Fair dealing
i. Disclose (different) service levels
c. Suitability
i. Reasonable inquiry of client investment experience, return objectives etc.
d. Performance presentation
e. Preservation of confidentiality
i. Disclose if required by law and info is illegal.
4) Duties to employer
a. Loyalty
i. Self-dealing. Records on personal computers.
b. Additional compensation arrangements
, BDF-RESTREINT
i. Obtain written consent from all parties involved
c. Responsibility of supervisors
5) Investment analysis, recommendations and actions
a. Diligence and reasonable basis
b. Communication with clients and prospective clients
i. Give information about the nature of services provided
c. Record retention
i. To support investment analysis. Recommended holding period: 7 years
6) Conflict of interest
a. Avoid or disclose conflicts
i. Disclosure in plain language. Avoid or make full or fair disclosure of all
matters that could reasonably be expected to impair the independence of
objectivity (prospective) clients or employer
b. Priority of transactions
i. Investment transactions of clients and employers have priority over
yourself or beneficial owner
c. Referral fees
i. Disclose to employer, client and prospective client any compensation,
consideration or benefit received from or paid to others for the
recommendation of product or services.
7) Responsibility as a CFA institute member or CFA candidate
a. Conduct as participant in CFA institute programs
b. Reference to CFA institute, designation and program.
i. Don’t overpromise individual competence or future results
Global investment performance standards
GIPS= principles that investment firms can voluntarily follow. Avoid misrepresentation of historical
investment results to clienst and prospects. Allow clients to compare performance more easily.
Sections:
1) Fundamentals of compliance
2) Input data and calculation methodology
3) Composite and pooled fund maintenance → asset-weighted average
4) Composite time-weighted return report
5) Composite money-weighted return report
6) Pooled fund time-weighted return report
7) Pooled fund money-weighted return report
8) GIPS advertising guidelines
Composite = a grooping of individual discretionalry portfolios representing a similar investment
strategy, objective or mandate. (e.g. IG domestic bonds, large capitalizaiton stocks, international
equities). All Fee paying discretionary portfolios managed by the furm.
Must include all portfolios (current and past) the firm manages with that strategy. GIPS
compliance must be firm-wide and a firm must establish criteria to dertimen which of the porflios
(Non)discretionary).
Firms are ewncourgaged to perform independent verificaiotn of GIPS compliance by a 3rd party →
must attest the firm:
- Has complied with all GIPS requirement for composite structure firm-wide
, BDF-RESTREINT
- Has processes and procedure → present performance with calculation methodology,
format and data requiredments of GIPS.
2- Quantitative methods (15-20%)
Value of money
(𝑒𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
HPR = − 1
𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑)
(𝑛𝑖𝑒𝑢𝑤 / 𝑜𝑢𝑑) − 1
365
An𝑛𝑢𝑎𝑙𝑖𝑧𝑒𝑑 = (1 + 𝐻𝑃𝑅)𝑑𝑎𝑦𝑠 − 1
𝑖𝑓 10$ 𝑏𝑢𝑦, 11$ 𝑠𝑒𝑙𝑙, 0.75$ 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑. 𝐻𝑃𝑅 = (11,75 − 10)/10 = 7,5%
365
( )
𝑎𝑓𝑡𝑒𝑟 90 𝑑𝑎𝑦𝑠 = (1,075) 90 = 22,5%
Mean
𝒊𝒇 𝒚𝒐𝒖 𝒉𝒂𝒗𝒆 𝟏, 𝟑, 𝟓
𝑅𝑛 1+3+5
- Arithmetic: not compounding, incl. outliers 𝑛
→ 3
1 1
- Geometric: compounding. (1 + 𝑅𝑛)𝑛 ) → (1𝑥3𝑥5)3
3
- Harmonic: n/(1/xn) →1 1 1
+ +
1 3 5
A>G>H
- Trimmed mean: remove bottom and top x/2% observations
- Winzored mean: substitute values for highest and lowest x/2% of observations
Returns
Time weighted returns Money-weighted returns
𝟏 (−𝐶𝐹0 + 𝐶𝐹𝑚)
𝟏 + 𝑯𝑷𝑹𝒚𝒆𝒂𝒓𝒔 −𝟏
(1 − 𝑀𝑊𝑅)^𝑛
Doesn’t reflect size Reflects size
Good for comparing benchmarks TWR > MWR
Real return = Risk free rate + risk premium / inflation premium .
Nominal return adjusted for inflation
Variance of standard deviation
= average of squared deviations from the mean
Sample variance = s2= (x-mean )2 / n-1
Standard deviation= √ (x-mean)2 / n-1
Target downside deviation= √(x-target)2 / n-1
Coefficient of variation (CV)
, BDF-RESTREINT
= how much dispersion relative to the mean. Allows for direct comparison of dispersion across
different data sets. A lower CV is better because you take less risk per unit expected return.
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑉 =
𝑚𝑒𝑎𝑛 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑟𝑜𝑢𝑝 (𝑓𝑜𝑟 𝑖𝑛𝑠𝑡𝑎𝑛𝑐𝑒 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛)
Portfolio Expected Return Std Dev CV
A 10% 15% 1.50 0,15/0,10
B 15% 18% 1.20 0,18/0,15 → Kies deze
Bayes formula
P(A│B) = P (B│A) / P(B) x P(A)
Suppose:
• P(Default)=0.02 → 2%
• P(Downgrade ∣ Default)=0.80
• P(Downgrade)=0.10
Then: P(Default ∣ Downgrade)= ((0.80×0.02) / 0,10)=0.16. → 16%
So after observing a downgrade, the probability of default rises from 2% (prior) to 16%
(posterior).
Expected return
E(X) = sum P(xi)xn → probability x return
Return Probability
-10% 0.20
5% 0.50
20% 0.30
E(R)=(−10%)(0.20)+(5%)(0.50)+(20%)(0.30) = 6,5%
Probabilistic variance
Voor een probability distribution is de variance:
σ 2 = sum P(xi) [xi – E(X)]2 → probability x (return – expected mean return)2 together
E(X) = expected value or expected mean
Return Probability Expected mean return
10% 0.3 0,1x 0,3
20% 0.5 0,2 x 0,5
30% 0.2 0,3 x 0,2 = total 19%
Variance =0.3(10−19)2+0.5(20−19)2+0.2(30−19)2
=0.3(81)+0.5(1)+0.2(121) = 49%
Standard deviation = σ=√49=7%
- The expected return is the probability-weighted average of all possible returns.
- Variance measures the dispersion of return (risk) around the expected return. It is the
probability-weighted average of the squared deviations from the expected return.
CFA level I
1 – Ethics and professional standards
- Ethical behavior = a set of rules and moral principles based on shared belief about what
behavior is (un)acceptable
- Professional code of conduct= way for a profession to communicate to the public → serve
clients in honest and ethical way → public confidence ↑
- Challenges to ethical behavior: overestimating, near-temr focus, situational influences
(peer pressure)
CFA code of ethics
1) Act with integrity, competence, respect with parties in global capital markets
2) Place integrity of investment profession above own personal interests
3) Use reasonable care and independent judgement when analysis
4) Practice and encourage ethical
5) Promote integrity and viability of global capital markets → ultimate benefit of society
6) Maintain and improve professional competence.
Standards of professional conduct
1) Professionalism
a. Knowledge of law
b. Independence and objectivity:
i. pay own travel, enclose gifts
c. Misrepresentation:
i. Not presenting 3rd party research as own. But cite source.
ii. Keep copies of reports for preparation. Review documents
d. Misconduct (fraud)
e. Competence
2) Integrity of capital markets
a. Material non public information
i. Mosai theory = not a violation. Investetn conclusion via public an non
public info
b. Market manipulation
i. Don’t engage in practices that distort prices
3) Duties to clients
a. Loyalty, prudence and care
i. Place clients interest over employers interest. Diversify
b. Fair dealing
i. Disclose (different) service levels
c. Suitability
i. Reasonable inquiry of client investment experience, return objectives etc.
d. Performance presentation
e. Preservation of confidentiality
i. Disclose if required by law and info is illegal.
4) Duties to employer
a. Loyalty
i. Self-dealing. Records on personal computers.
b. Additional compensation arrangements
, BDF-RESTREINT
i. Obtain written consent from all parties involved
c. Responsibility of supervisors
5) Investment analysis, recommendations and actions
a. Diligence and reasonable basis
b. Communication with clients and prospective clients
i. Give information about the nature of services provided
c. Record retention
i. To support investment analysis. Recommended holding period: 7 years
6) Conflict of interest
a. Avoid or disclose conflicts
i. Disclosure in plain language. Avoid or make full or fair disclosure of all
matters that could reasonably be expected to impair the independence of
objectivity (prospective) clients or employer
b. Priority of transactions
i. Investment transactions of clients and employers have priority over
yourself or beneficial owner
c. Referral fees
i. Disclose to employer, client and prospective client any compensation,
consideration or benefit received from or paid to others for the
recommendation of product or services.
7) Responsibility as a CFA institute member or CFA candidate
a. Conduct as participant in CFA institute programs
b. Reference to CFA institute, designation and program.
i. Don’t overpromise individual competence or future results
Global investment performance standards
GIPS= principles that investment firms can voluntarily follow. Avoid misrepresentation of historical
investment results to clienst and prospects. Allow clients to compare performance more easily.
Sections:
1) Fundamentals of compliance
2) Input data and calculation methodology
3) Composite and pooled fund maintenance → asset-weighted average
4) Composite time-weighted return report
5) Composite money-weighted return report
6) Pooled fund time-weighted return report
7) Pooled fund money-weighted return report
8) GIPS advertising guidelines
Composite = a grooping of individual discretionalry portfolios representing a similar investment
strategy, objective or mandate. (e.g. IG domestic bonds, large capitalizaiton stocks, international
equities). All Fee paying discretionary portfolios managed by the furm.
Must include all portfolios (current and past) the firm manages with that strategy. GIPS
compliance must be firm-wide and a firm must establish criteria to dertimen which of the porflios
(Non)discretionary).
Firms are ewncourgaged to perform independent verificaiotn of GIPS compliance by a 3rd party →
must attest the firm:
- Has complied with all GIPS requirement for composite structure firm-wide
, BDF-RESTREINT
- Has processes and procedure → present performance with calculation methodology,
format and data requiredments of GIPS.
2- Quantitative methods (15-20%)
Value of money
(𝑒𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
HPR = − 1
𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑)
(𝑛𝑖𝑒𝑢𝑤 / 𝑜𝑢𝑑) − 1
365
An𝑛𝑢𝑎𝑙𝑖𝑧𝑒𝑑 = (1 + 𝐻𝑃𝑅)𝑑𝑎𝑦𝑠 − 1
𝑖𝑓 10$ 𝑏𝑢𝑦, 11$ 𝑠𝑒𝑙𝑙, 0.75$ 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑. 𝐻𝑃𝑅 = (11,75 − 10)/10 = 7,5%
365
( )
𝑎𝑓𝑡𝑒𝑟 90 𝑑𝑎𝑦𝑠 = (1,075) 90 = 22,5%
Mean
𝒊𝒇 𝒚𝒐𝒖 𝒉𝒂𝒗𝒆 𝟏, 𝟑, 𝟓
𝑅𝑛 1+3+5
- Arithmetic: not compounding, incl. outliers 𝑛
→ 3
1 1
- Geometric: compounding. (1 + 𝑅𝑛)𝑛 ) → (1𝑥3𝑥5)3
3
- Harmonic: n/(1/xn) →1 1 1
+ +
1 3 5
A>G>H
- Trimmed mean: remove bottom and top x/2% observations
- Winzored mean: substitute values for highest and lowest x/2% of observations
Returns
Time weighted returns Money-weighted returns
𝟏 (−𝐶𝐹0 + 𝐶𝐹𝑚)
𝟏 + 𝑯𝑷𝑹𝒚𝒆𝒂𝒓𝒔 −𝟏
(1 − 𝑀𝑊𝑅)^𝑛
Doesn’t reflect size Reflects size
Good for comparing benchmarks TWR > MWR
Real return = Risk free rate + risk premium / inflation premium .
Nominal return adjusted for inflation
Variance of standard deviation
= average of squared deviations from the mean
Sample variance = s2= (x-mean )2 / n-1
Standard deviation= √ (x-mean)2 / n-1
Target downside deviation= √(x-target)2 / n-1
Coefficient of variation (CV)
, BDF-RESTREINT
= how much dispersion relative to the mean. Allows for direct comparison of dispersion across
different data sets. A lower CV is better because you take less risk per unit expected return.
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑉 =
𝑚𝑒𝑎𝑛 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑟𝑜𝑢𝑝 (𝑓𝑜𝑟 𝑖𝑛𝑠𝑡𝑎𝑛𝑐𝑒 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛)
Portfolio Expected Return Std Dev CV
A 10% 15% 1.50 0,15/0,10
B 15% 18% 1.20 0,18/0,15 → Kies deze
Bayes formula
P(A│B) = P (B│A) / P(B) x P(A)
Suppose:
• P(Default)=0.02 → 2%
• P(Downgrade ∣ Default)=0.80
• P(Downgrade)=0.10
Then: P(Default ∣ Downgrade)= ((0.80×0.02) / 0,10)=0.16. → 16%
So after observing a downgrade, the probability of default rises from 2% (prior) to 16%
(posterior).
Expected return
E(X) = sum P(xi)xn → probability x return
Return Probability
-10% 0.20
5% 0.50
20% 0.30
E(R)=(−10%)(0.20)+(5%)(0.50)+(20%)(0.30) = 6,5%
Probabilistic variance
Voor een probability distribution is de variance:
σ 2 = sum P(xi) [xi – E(X)]2 → probability x (return – expected mean return)2 together
E(X) = expected value or expected mean
Return Probability Expected mean return
10% 0.3 0,1x 0,3
20% 0.5 0,2 x 0,5
30% 0.2 0,3 x 0,2 = total 19%
Variance =0.3(10−19)2+0.5(20−19)2+0.2(30−19)2
=0.3(81)+0.5(1)+0.2(121) = 49%
Standard deviation = σ=√49=7%
- The expected return is the probability-weighted average of all possible returns.
- Variance measures the dispersion of return (risk) around the expected return. It is the
probability-weighted average of the squared deviations from the expected return.
