CHAPTER 1 THE INVESTMENT INDUSTRY: A TOP-DOWN VIEW Describe the financial services industry; Identify types of financial institutions, including banks and insurance companies; Define the investment industry; Explain how economies benefit from the existence of the investment industry; Explain how investors benefit from the existence of the investment industry; Describe types and functions of participants of the investment industry; Describe forces that affect the evolution of the investment industry. CHAPTER 2 ETHICS AND INVESTMENT PROFESSIONALISM Describe the need for ethics in the investment industry; Identify obligations that individuals in the investment industry have to clients, prospective clients, employers, and co-workers; Identify elements of the CFA Institute Code of Ethics; Explain standards of practice (professional principles) that are based on the CFA Institute Code of Ethics; Describe benefits of ethical conduct; Describe consequences of conduct that is unethical or unprofessional; Describe a framework for making ethical decisions. CHAPTER 3 REGULATION Define regulations; Describe objectives of regulation; Describe potential consequences of regulatory failure; Describe a regulatory process and the importance of each step in the process; Identify specific types of regulation and describe the reasons for each; Describe elements of a company’s policies and procedures to ensure the company complies with regulation; Describe potential consequences of compliance failure CHAPTER 4 MICROECONOMICS Define economics; Define microeconomics and macroeconomics; Describe factors that affect quantity demanded; Describe how demand for a product or service is affected by substitute and complementary products and services; Describe factors that affect quantity supplied; Describe market equilibrium; Describe and interpret price and income elasticities of demand and their effects on quantity and revenue; Distinguish between accounting profit and economic profit; Describe production levels and costs, including fixed and variable costs, and describe the effect of fixed costs on profitability; Identify factors that affect pricing; Compare types of market environment: perfect competition, pure monopoly, monopolistic competition, and oligopoly. CHAPTER 5 MACROECONOMICS Describe why macroeconomic considerations are important to an investment firm and how macroeconomic information may be used; Define gross domestic product (GDP) and GDP per capita; Identify basic components of GDP; Describe economic growth and factors that affect it; Describe phases of a business cycle and their characteristics; Explain the global nature of business cycles; Describe economic indicators and their uses and limitations; Define inflation, deflation, stagflation, and hyperinflation, and describe how inflation affects consumers, businesses, and investments; Describe and compare monetary and fiscal policy; Explain limitations of monetary policy and fiscal policy. CHAPTER 6 ECONOMICS OF INTERNATIONAL TRADE Define imports and exports and describe the need for and trends in imports and exports; Describe comparative advantages among countries; Describe the balance of payments and explain the relationship between the current account and the capital and financial account; Describe why a country runs a current account deficit and describe the effect of a current account deficit on the country’s currency; Describe types of foreign exchange rate systems; Describe factors affecting the value of a currency; Describe how to assess the relative strength of currencies; Describe foreign exchange rate quotes; Compare spot and forward markets CHAPTER 7 FINANCIAL STATEMENTS Describe the roles of standard setters, regulators, and auditors in financial reporting; Describe information provided by the balance sheet; Compare types of assets, liabilities, and equity; Describe information provided by the income statement; Distinguish between profit and net cash flow; Describe information provided by the cash flow statement; Identify and compare cash flow classifications of operating, investing, and financing activities; Explain links between the income statement, balance sheet, and cash flow statement; Explain the usefulness of ratio analysis for financial statements; Identify and interpret ratios used to analyse a company’s liquidity, profitability, financing, shareholder return, and shareholder value. CHAPTER 8 QUANTITATIVE CONCEPTS Define the concept of interest; Compare simple and compound interest; Define present value, future value, and discount rate; Describe how time and discount rate affect present and future values; Explain the relevance of net present value in valuing financial investments; Describe applications of time value of money; Explain uses of mean, median, and mode, which are measures of frequency or central tendency; Explain uses of range, percentile, standard deviation, and variance, which are measures of dispersion; Describe and interpret the characteristics of a normal distribution; Describe and interpret correlation. CHAPTER 9 DEBT SECURITIES Identify issuers of debt securities; Describe features of debt securities; Describe seniority ranking of debt securities when default occurs; Describe types of bonds; Describe bonds with embedded provisions; Describe securitisation and asset-backed securities; Define current yield; Describe the discounted cash flow approach to valuing debt securities; Describe a bond’s yield to maturity; Explain the relationship between a bond’s price and its yield to maturity; Define yield curve; Explain risks of investing in debt securities; Define a credit spread. CHAPTER 10 EQUITY SECURITIES Describe features of equity securities; Describe types of equity securities; Compare risk and return of equity and debt securities; Describe approaches to valuing common shares; Describe company actions that affect the company’s shares outstanding. CHAPTER 11 DERIVATIVES Define a derivative contract; Describe uses of derivative contracts; Describe key terms of derivative contracts; Describe forwards and futures; Distinguish between forwards and futures; Describe options and their uses; Define swaps and their uses CHAPTER 12 ALTERNATIVE INVESTMENTS Describe advantages and limitations of alternative investments; Describe private equity investments; Describe real estate investments; Describe commodity investments. CHAPTER 13 STRUCTURE OF THE INVESTMENT INDUSTRY Describe needs served by the investment industry; Describe financial planning services; Describe investment management services; Describe investment information services; Describe trading services; Compare the roles of brokers and dealers; Distinguish between buy-side and sell-side firms in the investment industry; Distinguish between front-, middle-, and back-office functions in the investment industry; Identify positions and responsibilities within firms in the investment industry CHAPTER 14 INVESTMENT VEHICLES Compare direct and indirect investing in securities and assets; Distinguish between pooled investments, including open-end mutual funds, closed-end funds, and exchange-traded funds; Describe security market indices including their construction and valuation, and identify types of indices; Describe index funds, including their purposes and construction; Describe hedge funds; Describe funds of funds; Describe managed accounts; Describe tax-advantaged accounts and describe the use of taxable accounts to manage tax liabilities. CHAPTER 15 THE FUNCTIONING OF FINANCIAL MARKETS Distinguish between primary and secondary markets; Explain the role of investment banks in helping issuers raise capital; Describe primary market transactions, including public offerings, private placements, and right issues; Explain the roles of trading venues, including exchanges and alternative trading venues; Identify characteristics of quote-driven, order-driven, and brokered markets; Compare long, short, and leveraged positions in terms of risk and potential return; Describe order instructions and types of orders; Describe clearing and settlement of trades; Identify types of transaction costs; Describe market efficiency in terms of operations, information, and allocation. CHAPTER 16 INVESTORS AND THEIR NEEDS Describe the importance of identifying investor needs to the investment process; Identify, describe, and compare types of individual and institutional investors; Compare defined benefit pension plans and defined contribution pension plans; Explain factors that affect investor needs; Describe the rationale for and structure of investment policy statements in serving client needs. CHAPTER 17 INVESTMENT MANAGEMENT Describe systematic risk and specific risk; Describe how diversification affects the risk of a portfolio; Describe how portfolios are constructed to address client investment objectives and constraints; Describe strategic and tactical asset allocation; Compare passive and active investment management; Explain factors necessary for successful active management; Describe how active managers attempt to identify and capture market inefficiencies. CHAPTER 18 RISK MANAGEMENT Define risk and identify types of risk; Define risk management; Describe a risk management process; Describe risk management functions; Describe benefits and costs of risk management; Define operational risk and explain how it is managed; Define compliance risk and explain how it is managed; Define investment risk and explain how it is managed; Define value at risk and describe its advantages and weaknesses. CHAPTER 19 PERFORMANCE EVALUATION Describe a performance evaluation process; Describe measures of return, including holding-period returns and time-weighted rates of return Compare use of arithmetic and geometric mean rates of returns in performance evaluation; Describe measures of risk, including standard deviation and downside deviation; Describe reward-to-risk ratios, including the Sharpe and Treynor ratios; Describe uses of benchmarks and explain the selection of a benchmark; Explain measures of relative performance, including tracking error and the information ratio; Explain the concept of alpha; Explain uses of performance attribution. CHAPTER 20 INVESTMENT INDUSTRY DOCUMENTATION Define a document; Describe objectives of documentation; Describe document classification systems; Describe types of internal documentation; Describe types of external documentation; Describe document management.