2016 Level III CFA Program Curriculum CFA Institute.Code of Ethics and Standards of Professional ConductThe readings in this study session establish a framework for ethical conduct in the investmentprofession.TeprinciplesandguidancepresentedintheCFAInstitute Standards of Practice Handbook (Handbook) form the basis for the CFA Institute self- regulatory program to maintain the highest professional standards among investment practitioners. A clear understanding of the CFA Institute Code of Ethics and Standards of Professional Conduct (both found in the Handbook) should allow practitioners to identify and appropriately resolve ethical conficts, leading to a reputation for integrity that benefts both the individual and the profession. Material under Guidance in the Handbook addresses the practical application of the Code and Standards. Te guidance for each standard reviews its purpose and scope, presents recommended procedures for compliance, and provides examples of the standardin practice.READING ASSIGNMENTSReading 1 Code of Ethics and Standards of Professional Conduct Standards of Practice Handbook, Eleventh EditionReading 2 Guidance for Standards IVII Standards of Practice Handbook, Eleventh Edition S T U DY S E S S I ON12016 Level III CFA Program Curriculum CFA Institute.Study Session 1 2LEARNING OUTCOMESREADING 1. CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCTTe candidate should be able to:adescribe the structure of the CFA Institute Professional Conduct Program and the disciplinary review process for the enforcement of the Code of Ethics and Standards of Professional Conduct;bexplain the ethical responsibilities required by the Code of Ethics and the Standards of Professional Conduct, including the sub- sections of each standard.READING 2. GUIDANCE FOR STANDARDS IVIITe candidate should be able to:ademonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situa-tions involving issues of professional integrity;brecommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.2016 Level III CFA Program Curriculum CFA Institute.Ethical and Professional Standards in PracticeUsingexamplesandcasestudies,thereadingsinthisstudysessiondemonstrate the use of the CFA Institute Code of Ethics and Standards of Professional Conduct as a body of principles for ethical reasoning and decision making. Te readings serve as efective aids in understanding and internalizing the values and standards presented intheCFAInstituteStandardsofPracticeHandbook.ByapplyingtheCodeand Standardstocasestudyconficts,thecandidatewillgainexperienceinidentifying and explaining fundamental principles of conduct that serve as the basis for dealing with real world challenges.Te Asset Manager Code of Professional Conduct uses the basic tenets of the CFA InstituteCodeofEthicsandStandardsofProfessionalConducttoestablishethical and professional standards for frms managing client assets. Te Asset Manager Code of Professional Conduct also extends the Code and Standards to address investment management frm practices regarding trading, compliance, risk management, security pricing, and disclosure.READING ASSIGNMENTSReading 3 Application of the Code and Standards Ethics CasesReading 4 Asset Manager Code of Professional Conduct by Kurt Schacht, JD, CFA, Jonathan J. Stokes, JD, and Glenn Doggett, CFA S T U DY S E S S I ON22016 Level III CFA Program Curriculum CFA Institute.Study Session 2 2LEARNING OUTCOMESREADING 3. APPLICATION OF THE CODE AND STANDARDSTe candidate should be able to: aevaluate professional conduct and formulate an appropriate response to actions that violate the Code of Ethics and Standards of Professional Conduct;bformulate appropriate policy and procedural changes needed to assure compli-ance with the Code of Ethics and Standards of Professional Conduct.READING 4. ASSET MANAGER CODE OF PROFESSIONAL CONDUCTTe candidate should be able toaexplain the purpose of the Asset Manager Code and the benefts that may accrue to a frm that adopts the Code;bexplain the ethical and professional responsibilities required by the six General Principles of Conduct of the Asset Manager Code;cdetermine whether an asset managers practices and procedures are consistent with the Asset Manager Code;drecommend practices and procedures designed to prevent violations of the Asset Manager Code.2016 Level III CFA Program Curriculum CFA Institute.Behavioral FinanceBehavioral Finance is introduced in the frst study session on portfolio management because all market participants, regardless of expertise, may be subject to behavioral biases. An understanding of emotional and cognitive behavioral biases provides insight intohowthesebiasesmayinfuenceindividualsperceptionsandinvestmentdeci-sions. As a consequence, knowledge of behavioral biases may help in understanding client goals, in constructing investment portfolios, and in identifying inconsistencies in investment decision making. Behavioral fnance also provides insights into issues such as market anomalies. Te readings argue that integration of behavioral and tra-ditional fnance may lead to a better outcome than either approach used in isolation. READING ASSIGNMENTSReading 5 Te Behavioral Finance Perspective by Michael M. Pompian, CFAReading 6 Te Behavioral Biases of Individuals by Michael M. Pompian, CFAReading 7 Behavioral Finance and Investment Processes by Michael M. Pompian, CFA, Colin McLean, FSIP, and Alistair Byrne, PhD, CFA LEARNING OUTCOMESREADING 5. THE BEHAVIORAL FINANCE PERSPECTIVETe candidate should be able to:acontrast traditional and behavioral fnance perspectives on investor decision making; S T U DY S E S S I ON3Note:Thereadingsinthisstudy sessionusewidelyrecognized terminology.Nevertheless, readersshouldbeaware thatwritersonbehavioral financevaryintheirchoiceof terminology. 2016 Level III CFA Program Curriculum CFA Institute.Study Session 3 2bcontrast expected utility and prospect theories of investment decision making;cdiscuss the efect that cognitive limitations and bounded rationality may have on investment decision making;dcompare traditional and behavioral fnance perspectives on portfolio construc-tion and the behavior of capital markets.READING 6. THE BEHAVIORAL BIASES OF INDIVIDUALSTe candidate should be able to:adistinguish between cognitive errors and emotional biases;bdiscuss commonly recognized behavioral biases and their implications for fnancial decision making;cidentify and evaluate an individuals behavioral biases;devaluate how behavioral biases afect investment policy and asset allocation decisions and recommend approaches to mitigate their efects.READING 7. BEHAVIORAL FINANCE AND INVESTMENT PROCESSESTe candidate should be able to:aexplain the uses and limitations of classifying investors into personality types;bdiscuss how behavioral factors afect adviserclient interactions;cdiscuss how behavioral factors infuence portfolio construction;dexplain how behavioral fnance can be applied to the process of portfolio construction;ediscuss how behavioral factors afect analyst forecasts and recommend remedial actions for analyst biases;fdiscuss how behavioral factors afect investment committee decision making and recommend techniques for mitigating their efects; gdescribe how behavioral biases of investors can lead to market characteristics that may not be explained by traditional fnance. 2016 Level III CFA Program Curriculum CFA Institute.Private Wealth Management (1)Thisstudysessionaddressestheprocessofprivatewealthmanagementandthe construction of an investment policy statement for the individual investor. Te invest-ment policy statement (IPS) is a blueprint for investing client assets. Te IPS identifes the needs, goals, and risk tolerance of the investor, as well as constraints under which theinvestmentportfoliomustoperate.Teadviserthenformulatesaninvestment strategy to tax-efciently reconcile these potentially conficting requirements. Because taxes and regulations vary from locality to locality, tax-efcient strategies for portfolio construction and wealth transfer are necessarily specifc to the locality inwhichtheinvestoristaxed.Testudysessionfocusesoninvestmentstrategies applicable across a wide range of localities. Although illustrations of such strategies maybepresentedfromacountry- specifcperspective,candidatesshouldfocuson the underlying investment principles and be able to apply them to other tax settings. READING ASSIGNMENTSReading 8 Managing Individual Investor Portfolios by James W. Bronson, CFA, Matthew H. Scanlan, CFA, and Jan R. Squires, DBA, CFAReading 9 Taxes and Private Wealth Management in a Global Contextby Stephen M. Horan, PhD, CFA, CIPM, and Tomas R. Robinson, PhD, CFAReading 10 Estate Planning in a Global Contextby Stephen M. Horan, PhD, CFA, CIPM, and Tomas R. Robinson, PhD, CFA S T U DY S E S S I ON42016 Level III CFA Program Curriculum CFA Institute.Study Session 4 2LEARNING OUTCOMESREADING 8. MANAGING INDIVIDUAL INVESTOR PORTFOLIOSTe candidate should be able to:adiscuss how source of wealth, measure of wealth, and stage of life afect an indi-vidual investors risk tolerance;bexplain the role of situational and psychological profling in understanding an individual investors attitude toward risk;cexplain the infuence of investor psychology on risk tolerance and investment choices;dexplain potential benefts, for both clients and investment advisers, of having a formal investment policy statement;eexplain the process involved in creating an investment policy statement;fdistinguish between required return and desired return and explain how these afect the individual investors investment policy;gexplain how to set risk and return objectives for individual investor portfolios and discuss the impact that ability and willingness to take risk have on risk tolerance;hdiscuss the major constraint categories included in an individual investors investment policy statement;iprepare and justify an investment policy statement for an individual investor;jdetermine the strategic asset allocation that is most appropriate for an individ-ual investors specifc investment objectives and constraints;kcompare Monte Carlo and traditional deterministic approaches to retirement planning and explain the advantages of a Monte Carlo approach.READING 9. TAXES AND PRIVATE WEALTH MANAGEMENT IN A GLOBAL CONTEXTTe candidate should be able to:acompare basic global taxation regimes as they relate to the taxation of dividend income, interest income, realized capital gains, and unrealized capital gains;bdetermine the efects of diferent types of taxes and tax regimes on future wealth accumulation;ccalculate accrual equivalent tax rates and after- tax returns;dexplain how investment return and investment horizon afect the tax impact associated with an investment;ediscuss the tax profles of diferent types of investment accounts and explain their impact on after- tax returns and future accumulations;fexplain how taxes afect investment risk;gdiscuss the relation between after- tax returns and diferent types of investor trading behavior;hexplain the benefts of tax loss harvesting and highest-in/frst-out (HIFO) tax lot accounting;idemonstrate how taxes and asset location relate to meanvariance optimization.2016 Level III CFA Program Curriculum CFA Institute.Study Session 4 3READING 10. ESTATE PLANNING IN A GLOBAL CONTEXTTe candidate should be able to:adiscuss the purpose of estate planning and explain the basic concepts of domes-tic estate planning, including estates, wills, and probate;bexplain the two principal forms of wealth transfer taxes and discuss efects of important non- tax issues, such as legal system, forced heirship, and marital property regime;cdetermine a familys core capital and excess capital, based on mortality proba-bilities and Monte Carlo analysis;devaluate the relative after- tax value of lifetime gifts and testamentary bequests;eexplain the estate planning beneft of making lifetime gifts when gift taxes are paid by the donor, rather than the recipient;fevaluate the after- tax benefts of basic estate planning strategies, including gen-eration skipping, spousal exemptions, valuation discounts, and charitable gifts;gexplain the basic structure of a trust and discuss the diferences between revo-cable and irrevocable trusts;hexplain how life insurance can be a tax-efcient means of wealth transfer;idiscuss the two principal systems (source jurisdiction and residence jurisdic-tion) for establishing a countrys tax jurisdiction;jdiscuss the possible income and estate tax consequences of foreign situated assets and foreign- sourced income;kevaluate a clients tax liability under each of three basic methods (credit, exemption, and deduction) that a country may use to provide relief from double taxation;ldiscuss how increasing international transparency and information exchange among tax authorities afect international estate planning.2016 Level III CFA Program Curriculum CFA Institute.Private Wealth Management (2)Thewealthofmanyindividualsandfamiliesisoftenconcentratedinalimited number of fnancial securities, business holdings, or real estate properties. Te sale of such holdings to allow diversifcation may create a substantial tax liability. Dealing with concentrated single asset positions is the subject of the frst reading in this study session.Tesecondreadingexaminesthedynamicmixofhumanandfnancialcapital during an investors lifetime and the challenge of meeting fnancial goals throughout thatlifetime.Itspecifcallyaddressesmortalityandlongevityrisksbyintegrating insurance products into the asset allocation solution.READING ASSIGNMENTSReading 11 Concentrated Single Asset Positions by Tomas J. Boczar, Esq., LL.M., CFA, and Nischal R. Pai, CFAReading 12 Lifetime Financial Advice: Human Capital, Asset Allocation, and Insuranceby Roger G. Ibbotson, PhD, Moshe A. Milevsky, PhD, Peng Chen, PhD, CFA, and Kevin X. Zhu, PhDLEARNING OUTCOMESREADING 11. CONCENTRATED SINGLE- ASSET POSITIONSTe candidate should be able to:aexplain investment risks associated with a concentrated position in a single asset and discuss the appropriateness of reducing such risks; S T U DY S E S S I ON52016 Level III CFA Program Curriculum CFA Institute.Study Session 5 2bdescribe typical objectives in managing concentrated positions;cdiscuss tax consequences and illiquidity as considerations afecting the man-agement of concentrated positions in publicly traded common shares, privately held businesses, and real estate;ddiscuss capital market and institutional constraints on an investors ability to reduce a concentrated position;ediscuss psychological considerations that may make an investor reluctant to reduce his or her exposure to a concentrated position;fdescribe advisers use of goal-based planning in managing concentrated positions;gexplain uses of asset location and wealth transfers in managing concentrated positions;hdescribe strategies for managing concentrated positions in publicly traded com-mon shares;idiscuss tax considerations in the choice of hedging strategy;jdescribe strategies for managing concentrated positions in privately held businesses;kdescribe strategies for managing concentrated positions in real estate;levaluate and recommend techniques for tax efciently managing the risks of concentrated positions in publicly traded common stock, privately held busi-nesses, and real estate.READING 12. LIFETIME FINANCIAL ADVICE: HUMAN CAPITAL, ASSET ALLOCATION, AND INSURANCETe candidate should be able to:aexplain the concept and discuss the characteristics of human capital as a com-ponent of an investors total wealth;bdiscuss the earnings risk, mortality risk, and longevity risk associated with human capital and explain how these risks can be reduced by appropriate port-folio diversifcation, life insurance, and annuity products;cexplain how asset allocation policy is infuenced by the risk characteristics of human capital and the relative relationships of human capital, fnancial capital, and total wealth;ddiscuss how asset allocation and the appropriate level of life insurance are infuenced by the joint consideration of human capital, fnancial capital, bequest preferences, risk tolerance, and fnancial wealth;ediscuss the fnancial market risk, longevity risk, and savings risk faced by inves-tors in retirement and explain how these risks can be reduced by appropriate portfolio diversifcation, insurance products, and savings discipline;fdiscuss the relative advantages of fxed and variable annuities as hedges against longevity risk;grecommend basic strategies for asset allocation and risk reduction when given an investor profle of key inputs, including human capital, fnancial capital, stage of life cycle, bequest preferences, risk tolerance, and fnancial wealth.2016 Level III CFA Program Curriculum CFA Institute.Portfolio Management for Institutional Investors Broadlydefned,institutionalinvestorsincludedefned- beneftpensionplans, defned-contribution plans, foundations, endowments, insurance companies, banks, and investment intermediaries. Tese institutions typically have a well- defned purpose or business model in which their investment portfolio plays a role. Each group faces a unique set of investment objectives and constraints. Te study session begins with an introduction of the concepts and practices import-anttodeterminingtheinvestmentpolicystatementforaninstitutionalinvestment managementclient.Tesecondreadingthenexaminesthespecifcissueofasset/liability management in the context of defned- beneft pension plans. Te implications for asset allocation and risk management are relevant, however, for a wide range of institutions that manage assets to fund anticipated liabilities. READING ASSIGNMENTSReading 13 Managing Institutional Investor Portfolios by R. Charles Tschampion, CFA, Laurence B. Siegel, Dean J. Takahashi, and John L. Maginn, CFAReading 14 Linking Pension Liabilities to Assets by Aaron Meder, FSA, CFA, and Renato Staub, PhD S T U DY S E S S I ON6Note:Theconceptsandpractices importanttoinstitutional investmentmanagementappear inmanyreadingsthroughoutthe LevelIIIstudysessions. 2016 Level III CFA Program Curriculum CFA Institute.Study Session 6 2LEARNING OUTCOMESREADING 13. MANAGING INSTITUTIONAL INVESTOR PORTFOLIOSTe candidate should be able to:acontrast a defned-beneft plan to a defned-contribution plan and discuss the advantages and disadvantages of each from the perspectives of the employee and the employer;bdiscuss investment objectives and constraints for defned-beneft plans;cevaluate pension fund risk tolerance when risk is considered from the per-spective of the 1) plan surplus, 2) sponsor fnancial status and proftability, 3) sponsor and pension fund common risk exposures, 4) plan features, and 5) workforce characteristics;dprepare an investment policy statement for a defned-beneft plan;eevaluate the risk management considerations in investing pension plan assets;fprepare an investment policy statement for a participant directed defned- contribution plan;gdiscuss hybrid pension plans (e.g., cash balance plans) and employee stock own-ership plans;hdistinguish among various types of foundations, with respect to their descrip-tion, purpose, and source of funds;icompare the investment objectives and constraints of foundations, endow-ments, insurance companies, and banks;jdiscuss the factors that determine investment policy for pension funds, founda-tion endowments, life and non-life insurance companies, and banks;kprepare an investment policy statement for a foundation, an endowment, an insurance company, and a bank;lcontrast investment companies, commodity pools, and hedge funds to other types of institutional investors;mcompare the asset/liability management needs of pension funds, foundations, endowments, insurance companies, and banks;ncompare the investment objectives and constraints of institutional investors given relevant data, such as descriptions of their fnancial circumstances and attitudes toward risk.READING 14. LINKING PENSION LIABILITIES TO ASSETSTe candidate should be able to:acontrast the assumptions concerning pension liability risk in asset-only and liability-relative approaches to asset allocation;bdiscuss the fundamental and economic exposures of pension liabilities and identify asset types that mimic these liability exposures;ccompare pension portfolios built from a traditional asset-only perspective to portfolios designed relative to liabilities and discuss why corporations may choose not to implement fully the liability mimicking portfolio.2016 Level III CFA Program Curriculum CFA Institute.Applications of Economic Analysis to Portfolio ManagementAnecessarytaskintheinvestmentmanagementprocessistoformulatecapital marketexpectations.Teseforecastsofriskandreturncharacteristicsforvarious asset classes form the basis for constructing portfolios that maximize expected return for given levels of risk. Te frst reading in this study session examines the process of setting capital market expectations and covers the major tools of economic analysis. Te second reading demonstrates the application of neo-classical growth theory to develop economic forecasts. It then illustrates how such forecasts can be integrated with equity valuation techniques to value an equity market.READING ASSIGNMENTReading 15 Capital Market Expectations by John P. Calverley, Alan M. Meder, CPA, CFA, Brian D. Singer, CFA, and Renato Staub, PhDReading 16 Equity Market Valuation by Peter C. Stimes, CFA, and Stephen E. Wilcox, PhD, CFALEARNING OUTCOMESREADING 15. CAPITAL MARKET EXPECTATIONSTe candidate should be able to:adiscuss the role of, and a framework for, capital market expectations in the portfolio management process;bdiscuss challenges in developing capital market forecasts; S T U DY S E S S I ON72016 Level III CFA Program Curriculum CFA Institute.Study Session 7 2cdemonstrate the application of formal tools for setting capital market expecta-tions, including statistical tools, discounted cash fow models, the risk premium approach, and fnancial equilibrium models;dexplain the use of survey and panel methods and judgment in setting capital market expectations;ediscuss the inventory and business cycles, the impact of consumer and business spending, and monetary and fscal policy on the business cycle;fdiscuss the impact that the phases of the business cycle have on short- term/long- term capital market returns;gexplain the relationship of infation to the business cycle and the implications of infation for cash, bonds, equity, and real estate returns;hdemonstrate the use of the Taylor rule to predict central bank behavior;ievaluate 1) the shape of the yield curve as an economic predictor and 2) the relationship between the yield curve and fscal and monetary policy;jidentify and interpret the components of economic growth trends and demon-strate the application of economic growth trend analysis to the formulation of capital market expectations;kexplain how exogenous shocks may afect economic growth trends;lidentify and interpret macroeconomic, interest rate, and exchange rate linkages between economies;mdiscuss the risks faced by investors in emerging-market securities and the coun-try risk analysis techniques used to evaluate emerging market economies;ncompare the major approaches to economic forecasting;odemonstrate the use of economic information in forecasting asset class returns;pexplain how economic and competitive factors can afect investment markets, sectors, and specifc securities;qdiscuss the relative advantages and limitations of the major approaches to fore-casting exchange rates;rrecommend and justify changes in the component weights of a global invest-ment portfolio based on trends and expected changes in macroeconomic factors.READING 16. EQUITY MARKET VALUATIONTe candidate should be able to:aexplain the terms of the Cobb-Douglas production function and demon-strate how the function can be used to model growth in real output under the assumption of constant returns to scale;bevaluate the relative importance of growth in total factor productivity, in capital stock, and in labor input given relevant historical data;cdemonstrate the use of the Cobb-Douglas production function in obtaining a discounted dividend model estimate of the intrinsic value of an equity market;dcritique the use of discounted dividend models and macroeconomic forecasts to estimate the intrinsic value of an equity market;econtrast top-down and bottom- up approaches to forecasting the earnings per share of an equity market index;2016 Level III CFA Program Curriculum CFA Institute.Study Session 7 3fdiscuss the strengths and limitations of relative valuation models;gjudge whether an equity market is under-, fairly, or over- valued using a relative equity valuation model.2016 Level III CFA Program Curriculum CFA Institute.Asset Allocation and Related Decisions in Portfolio Management (1)The strategic asset allocation follows the development of capital market expectations. Te investment manager combines the investment policy statement with capital mar-ketexpectationstodeterminetargetassetclassweights.Maximumandminimum permissible asset class weights are often specifed as a risk-control mechanism. Te manager may consider both single- period and multi- period perspectives when evalu-ating the return and risk characteristics of potential asset allocations. A single- period perspective has the advantage of simplicity. A multi- period perspective can address liquidityandtaxconsiderationsthatarisefromrebalancingportfoliosandcanalso address serial correlation (long- and short- term dependencies) in returns. However, a multi- period perspective is more costly to implement than a single- period one.READING ASSIGNMENTSReading 17 Asset Allocation by William F. Sharpe, Peng Chen, PhD, CFA, Jerald E. Pinto, PhD, CFA, and Dennis W. McLeavey, CFALEARNING OUTCOMESREADING 17. ASSET ALLOCATIONTe candidate should be able to:aexplain the function of strategic asset allocation in portfolio management and discuss its role in relation to specifying and controlling the investors exposures to systematic risk;bcompare strategic and tactical asset allocation;cdiscuss the importance of asset allocation for portfolio performance; S T U DY S E S S I ON82016 Level III CFA Program Curriculum CFA Institute.Study Session 8 2dcontrast the asset-only and asset/liability management (ALM) approaches to asset allocation and discuss the investor circumstances in which they are com-monly used;eexplain the advantage of dynamic over static asset allocation and discuss the trade-ofs of complexity and cost;fexplain how loss aversion, mental accounting, and fear of regret may infuence asset allocation policy;gevaluate return and risk objectives in relation to strategic asset allocation;hevaluate whether an asset class or set of asset classes has been appropriately specifed;iselect and justify an appropriate set of asset classes for an investor;jevaluate the theoretical and practical efects of including additional asset classes in an asset allocation;kdemonstrate the application of meanvariance analysis to decide whether to include an additional asset class in an existing portfolio;ldescribe risk, cost, and opportunities associated with nondomestic equities and bonds;mexplain the importance of conditional return correlations in evaluating the diversifcation benefts of nondomestic investments;nexplain expected efects on share prices, expected returns, and return volatility as a segmented market becomes integrated with global markets;oexplain the major steps involved in establishing an appropriate asset allocation;pdiscuss the strengths and limitations of the following approaches to asset allo-cation: meanvariance, resampled efcient frontier, BlackLitterman, Monte Carlo simulation, ALM, and experience based;qdiscuss the structure of the minimum- variance frontier with a constraint against short sales;rformulate and justify a strategic asset allocation, given an investment policy statement and capital market expectations;scompare the considerations that afect asset allocation for individual investors versus institutional investors and critique a proposed asset allocation in light of those considerations;tformulate and justify tactical asset allocation (TAA) adjustments to strategic asset class weights, given a TAA strategy and expectational data.2016 Level III CFA Program Curriculum CFA Institute.Asset Allocation and Related Decisions in Portfolio Management (2)Whenthestrategicassetallocationincludesexposuretoglobalmarkets,non- domestic currencies create an additional source of portfolio volatility. Te investment managermaychoosetohedgetheportfolioscurrencyexposures,atacost,orto actively manage currencies as an additional source of portfolio returns. Te frst read-ing addresses how currency exposures can be managed to refect a clients investment objectives and constraints.When a strategic asset allocation is determined, benchmarks are specifed to rep-resent the performance of each allocation. Te second reading introduces the topic ofbenchmarks,focusingontheuseofmarketindexes.Laterstudysessionsonthe portfolio management of fxed-income securities, equities, and alternative investments will address additional, asset class specifc issues, while the study session on perfor-mance evaluation will explore the theory and practice of performance benchmarking. READING ASSIGNMENTSReading 18 Currency Management: An Introduction by William A. Barker, CFAReading 19 Market Indexes and Benchmarks by C. Mitchell Conover, PhD, CFA, CIPMLEARNING OUTCOMESREADING 18. CURRENCY MANAGEMENT: AN INTRODUCTIONTe candidate should be able to:aanalyze the efects of currency movements on portfolio risk and return;bdiscuss strategic choices in currency management; S T U DY S E S S I ON92016 Level III CFA Program Curriculum CFA Institute.Study Session 9 2cformulate an appropriate currency management program given fnancial market conditions and portfolio objectives and constraints;dcompare active currency trading strategies based on economic fundamentals, technical analysis, carry- trade, and volatility trading;edescribe how changes in factors underlying active trading strategies afect tacti-cal trading decisions;fdescribe how forward contracts and FX (foreign exchange) swaps are used to adjust hedge ratios;gdescribe trading strategies used to reduce hedging costs and modify the riskreturn characteristics of a foreign-currency portfolio;hdescribe the use of cross-hedges, macro-hedges, and minimum- variance-hedge ratios in portfolios exposed to multiple foreign currencies;idiscuss challenges for managing emerging market currency exposures.READING 19. MARKET INDEXES AND BENCHMARKSTe candidate should be able to:adistinguish between benchmarks and market indexes;bdescribe investment uses of benchmarks;ccompare types of benchmarks;dcontrast liability-based benchmarks with asset-based benchmarks;edescribe investment uses of market indexes;fdiscuss tradeofs in constructing market indexes;gdiscuss advantages and disadvantages of index weighting schemes;hevaluate the selection of a benchmark for a particular investment strategy.2016 Level III CFA Program Curriculum CFA Institute.Fixed- Income Portfolio Management (1)The elements of the investment management process, such as the consideration of risk, return, and investment constraints, are the same for a fxed-income portfolio as for any other type of portfolio. As part of the process, an appropriate benchmark is selected to serve as a reference for portfolio construction and performance evalua-tion. For investors taking an asset-only approach, the benchmark is typically a bond market index. For investors with a liability- based approach, performance is measured in terms of the portfolios ability to meet a set of investor- specifc liabilities. Te frst reading addresses these primary elements of managing fxed-income portfolios and introducesspecifcportfoliomanagementstrategies.Tesecondreadingdiscusses additional relative- value methodologies.READING ASSIGNMENTSReading 20 Fixed-Income Portfolio ManagementPart I by H. Giford Fong and Larry D. Guin, DBA, CFAReading 21 Relative- Value Methodologies for Global Credit Bond Portfolio Management by Jack Malvey, CFALEARNING OUTCOMESREADING 20. FIXED- INCOME PORTFOLIO MANAGEMENTPART ITe candidate should be able to:acompare, with respect to investment objectives, the use of liabilities as a bench-mark and the use of a bond index as a benchmark; S T U DY S E S S I ON102016 Level III CFA Program Curriculum CFA Institute.Study Session 10 2bcompare pure bond indexing, enhanced indexing, and active investing with respect to the objectives, advantages, disadvantages, and management of each;cdiscuss the criteria for selecting a benchmark bond index and justify the selec-tion of a specifc index when given a description of an investors risk aversion, income needs, and liabilities;dcritique the use of bond market indexes as benchmarks;edescribe and evaluate techniques, such as duration matching and the use of key rate durations, by which an enhanced indexer may seek to align the risk expo-sures of the portfolio with those of the benchmark bond index;fcontrast and demonstrate the use of total return analysis and scenario analysis to assess the risk and return characteristics of a proposed trade;gformulate a bond immunization strategy to ensure funding of a predetermined liability and evaluate the strategy under various interest rate scenarios;hdemonstrate the process of rebalancing a portfolio to reestablish a desired dol-lar duration;iexplain the importance of spread duration;jdiscuss the extensions that have been made to classical immunization theory, including the introduction of contingent immunization;kexplain the risks associated with managing a portfolio against a liability struc-ture, including interest rate risk, contingent claim risk, and cap risk;lcompare immunization strategies for a single liability, multiple liabilities, and general cash fows;mcompare risk minimization with return maximization in immunized portfolios;ndemonstrate the use of cash fow matching to fund a fxed set of future liabil-ities and compare the advantages and disadvantages of cash fow matching to those of immunization strategies.READING 21. RELATIVE- VALUE METHODOLOGIES FOR GLOBAL CREDIT BOND PORTFOLIO MANAGEMENTTe candidate should be able to:aexplain classic relative- value analysis, based on top-down and bottom- up approaches to credit bond portfolio management;bdiscuss the implications of cyclical supply and demand changes in the primary corporate bond market and the impact of secular changes in the markets domi-nant product structures;cexplain the infuence of investors short- and long- term liquidity needs on port-folio management decisions;ddiscuss common rationales for secondary market trading;ediscuss corporate bond portfolio strategies that are based on relative value.2016 Level III CFA Program Curriculum CFA Institute.Fixed- Income Portfolio Management (2)Study Session 11 builds on the fundamentals of fxed- income portfolio management to address international and emerging market strategies and the use of derivatives to manage interest rate and credit risks. READING ASSIGNMENTSReading 22 Fixed-Income Portfolio ManagementPart II by H. Giford Fong and Larry D. Guin, DBA, CFALEARNING OUTCOMESREADING 22. FIXED- INCOME PORTFOLIO MANAGEMENTPART IITe candidate should be able to:aevaluate the efect of leverage on portfolio duration and investment returns;bdiscuss the use of repurchase agreements (repos) to fnance bond purchases and the factors that afect the repo rate;ccritique the use of standard deviation, target semivariance, shortfall risk, and value at risk as measures of fxed-income portfolio risk;ddemonstrate the advantages of using futures instead of cash market instruments to alter portfolio risk;eformulate and evaluate an immunization strategy based on interest rate futures;fexplain the use of interest rate swaps and options to alter portfolio cash fows and exposure to interest rate risk; S T U DY S E S S I ON112016 Level III CFA Program Curriculum CFA Institute.Study Session 11 2gcompare default risk, credit spread risk, and downgrade risk and demonstrate the use of credit derivative instruments to address each risk in the context of a fxed- income portfolio;hexplain the potential sources of excess return for an international bond portfolio;ievaluate 1) the change in value for a foreign bond when domestic interest rates change and 2) the bonds contribution to duration in a domestic portfolio, given the duration of the foreign bond and the country beta;jrecommend and justify whether to hedge or not hedge currency risk in an international bond investment;kdescribe how breakeven spread analysis can be used to evaluate the risk in seek-ing yield advantages across international bond markets;ldiscuss the advantages and risks of investing in emerging market debt;mdiscuss the criteria for selecting a fxed-income manager.2016 Level III CFA Program Curriculum CFA Institute.Equity Portfolio ManagementBecause equity securities represent a signifcant portion of many investment port-folios,equityportfoliomanagementisoftenanimportantcomponentofoverall investment success. Tis study session focuses on the role of equities in an investment portfolio, three major approaches used to manage equity portfolios, and the evaluation of equity managers.READING ASSIGNMENTReading 23 Equity Portfolio Management by Gary L. Gastineau, Andrew R. Olma, CFA, and Robert G. Zielinski, CFALEARNING OUTCOMESREADING 23. EQUITY PORTFOLIO MANAGEMENTTe candidate should be able to:adiscuss the role of equities in the overall portfolio;bdiscuss the rationales for passive, active, and semiactive (enhanced index) equity investment approaches and distinguish among those approaches with respect to expected active return and tracking risk;crecommend an equity investment approach when given an investors investment policy statement and beliefs concerning market efciency;ddistinguish among the predominant weighting schemes used in the construc-tion of major equity market indices and evaluate the biases of each; S T U DY S E S S I ON122016 Level III CFA Program Curriculum CFA Institute.Study Session 12 2ecompare alternative methods for establishing passive exposure to an equity market, including indexed separate or pooled accounts, index mutual funds, exchange- traded funds, equity index futures, and equity total return swaps;fcompare full replication, stratifed sampling, and optimization as approaches to constructing an indexed portfolio and recommend an approach when given a description of the investment vehicle and the index to be tracked;gexplain and justify the use of equity investmentstyle classifcations and discuss the difculties in applying style defnitions consistently;hexplain the rationales and primary concerns of value investors and growth investors and discuss the key risks of each investment style;icompare techniques for identifying investment styles and characterize the style of an investor when given a description of the investors security selection method, details on the investors security holdings, or the results of a returns- based style analysis;jcompare the methodologies used to construct equity style indices;kinterpret the results of an equity style box analysis and discuss the conse-quences of style drift;ldistinguish between positive and negative screens involving socially respon-sible investing criteria and discuss their potential efects on a portfolios style characteristics;mcompare longshort and long-only investment strategies, including their risks and potential alphas, and explain why greater pricing inefciency may exist on the short side of the market;nexplain how a market-neutral portfolio can be equitized to gain equity market exposure and compare equitized market-neutral and short-extension portfolios;ocompare the sell disciplines of active investors;pcontrast derivatives-based and stock-based enhanced indexing strategies and justify enhanced indexing on the basis of risk control and the information ratio;qrecommend and justify, in a risk-return framework, the optimal portfolio allo-cations to a group of investment managers;rexplain the core- satellite approach to portfolio construction and discuss the advantages and disadvantages of adding a completeness fund to control overall risk exposures;sdistinguish among the components of total active return (true active return and misft active return) and their associated risk measures and explain their relevance for evaluating a portfolio of managers;texplain alpha and beta separation as an approach to active management and demonstrate the use of portable alpha;udescribe the process of identifying, selecting, and contracting with equity managers;vcontrast the top-down and bottom- up approaches to equity research.2016 Level III CFA Program Curriculum CFA Institute.Alternative Investments for Portfolio ManagementAlternative investments comprise groups of investments with risk and return char-acteristics that difer markedly from those of traditional stock and bond investments. Common features of alternative investments include: relative illiquidity, which tends to be associated with a return premium as compensation; diversifying potential relative to a portfolio of stocks and bonds; high due diligence costs; and performance appraisal that is unusually difcult, due in part to the complexity of establishing valid benchmarks.Many institutional and high-net- worth individuals make portfolio allocations to alternative investments that are comparable in size to those they make to the tradi-tional asset classes of stocks and bonds. In doing so, such investors may be seeking risk diversifcation and/or greater opportunities to apply active management skills and capture alpha. Portfolio managers who take advantage of the opportunities presented by alternative investments may have a substantial advantage over those who do not.READING ASSIGNMENTSReading 24 Alternative Investments Portfolio Management by Jot K. Yau, PhD, CFA, Tomas Schneeweis, PhD, Tomas R. Robinson, PhD, CFA, and Lisa R. Weiss, CFA S T U DY S E S S I ON132016 Level III CFA Program Curriculum CFA Institute.Study Session 13 2LEARNING OUTCOMESREADING 24. ALTERNATIVE INVESTMENTS PORTFOLIO MANAGEMENTTe candidate should be able to:adescribe common features of alternative investments and their markets and how alternative investments may be grouped by the role they typically play in a portfolio;bexplain and justify the major due diligence checkpoints involved in selecting active managers of alternative investments;cexplain distinctive issues that alternative investments raise for investment advis-ers of private wealth clients;ddistinguish among the principal classes of alternative investments, including real estate, private equity, commodity investments, hedge funds, managed futures, buyout funds, infrastructure funds, and distressed securities;ediscuss the construction and interpretation of benchmarks and the problem of benchmark bias in alternative investment groups;fevaluate the return enhancement and/or risk diversifcation efects of adding an alternative investment to a reference portfolio (for example, a portfolio invested solely in common equity and bonds);gdescribe advantages and disadvantages of direct equity investments in real estate;hdiscuss the major issuers and suppliers of venture capital, the stages through which private companies pass (seed stage through exit), the characteristic sources of fnancing at each stage, and the purpose of such fnancing;icompare venture capital funds and buyout funds;jdiscuss the use of convertible preferred stock in direct venture capital investment;kexplain the typical structure of a private equity fund, including the compensa-tion to the funds sponsor (general partner) and typical timelines;ldiscuss issues that must be addressed in formulating a private equity investment strategy;mcompare indirect and direct commodity investment;nexplain the three components of return for a commodity futures contract and the efect that an upward- or downward- sloping term structure of futures prices will have on roll yield;odescribe the principal roles suggested for commodities in a portfolio and explain why some commodity classes may provide a better hedge against infa-tion than others;pidentify and explain the style classifcation of a hedge fund, given a description of its investment strategy;qdiscuss the typical structure of a hedge fund, including the fee structure, and explain the rationale for high- water mark provisions;rdescribe the purpose and characteristics of fund-of-funds hedge funds;sdiscuss concerns involved in hedge fund performance evaluation;tdescribe trading strategies of managed futures programs and the role of man-aged futures in a portfolio;2016 Level III CFA Program Curriculum CFA Institute.Study Session 13 3udescribe strategies and risks associated with investing in distressed securities;vexplain event risk, market liquidity risk, market risk, and J-factor risk in rela-tion to investing in distressed securities.2016 Level III CFA Program Curriculum CFA Institute.Risk ManagementEfectiveriskmanagementidentifes,assesses,andcontrolsnumeroussourcesof risk,bothfnancialandnonmarketrelated,inaneforttoachievethehighestpos-sible level of reward for the risks incurred. With the increasingly complex nature of investment management frms and investment portfolios, sophisticated risk manage-ment techniques have been developed to provide analysts with the necessary tools to properly measure the varying facets of risk. Tereadinginthisstudysessiondescribesaframeworkforriskmanagement, focusingontheconceptsandtoolsformeasuringandmanagingmarketriskand credit risk. READING ASSIGNMENTSReading 25 Risk Management by Don M. Chance, PhD, CFA, Kenneth Grant, and John Marsland, CFALEARNING OUTCOMESREADING 25. RISK MANAGEMENTTe candidate should be able to:adiscuss features of the risk management process, risk governance, risk reduc-tion, and an enterprise risk management system;bevaluate strengths and weaknesses of a companys risk management process;cdescribe steps in an efective enterprise risk management system;devaluate a companys or a portfolios exposures to fnancial and nonfnancial risk factors; S T U DY S E S S I ON142016 Level III CFA Program Curriculum CFA Institute.Study Session 14 2ecalculate and interpret value at risk (VaR) and explain its role in measuring overall and individual position market risk;fcompare the analytical (variancecovariance), historical, and Monte Carlo methods for estimating VaR and discuss the advantages and disadvantages of each;gdiscuss advantages and limitations of VaR and its extensions, including cash fow at risk, earnings at risk, and tail value at risk;hcompare alternative types of stress testing and discuss advantages and disadvan-tages of each;ievaluate the credit risk of an investment position, including forward contract, swap, and option positions;jdemonstrate the use of risk budgeting, position limits, and other methods for managing market risk;kdemonstrate the use of exposure limits, marking to market, collateral, netting arrangements, credit standards, and credit derivatives to manage credit risk;ldiscuss the Sharpe ratio, risk-adjusted return on capital, return over maximum drawdown, and the Sortino ratio as measures of risk-adjusted performance;mdemonstrate the use of VaR and stress testing in setting capital requirements.2016 Level III CFA Program Curriculum CFA Institute.Risk Management Applications of DerivativesThis study session addresses risk management strategies using forwards and futures, optionstrategies,foorsandcaps,andswaps.Tesederivativescanbeusedfora varietyofriskmanagementpurposes,includingmodifcationofportfolioduration and beta, implementation of changes in asset allocation, and creation of cash market instruments.Agrowingnumberofsecuritytypesnowhaveembeddedderivatives, andportfoliomanagersmustbeabletoaccountfortheirefectonthereturn/risk profle of the security. After completing this study session, the candidate will better understand advantages and disadvantages of derivative strategies, including the dif-fculties in creating and maintaining a dynamic hedge.READING ASSIGNMENTSReading 26 Risk Management Applications of Forward and Futures Strategies by Don M. Chance, PhD, CFAReading 27 Risk Management Applications of Option Strategies by Don M. Chance, PhD, CFAReading 28 Risk Management Applications of Swap Strategies by Don M. Chance, PhD, CFA S T U DY S E S S I ON152016 Level III CFA Program Curriculum CFA Institute.Study Session 15 2LEARNING OUTCOMESREADING 26. RISK MANAGEMENT APPLICATIONS OF FORWARD AND FUTURES STRATEGIESTe candidate should be able to:ademonstrate the use of equity futures contracts to achieve a target beta for a stock portfolio and calculate and interpret the number of futures contracts required;bconstruct a synthetic stock index fund using cash and stock index futures (equitizing cash);cexplain the use of stock index futures to convert a long stock position into syn-thetic cash;ddemonstrate the use of equity and bond futures to adjust the allocation of a portfolio between equity and debt;edemonstrate the use of futures to adjust the allocation of a portfolio across equity sectors and to gain exposure to an asset class in advance of actually com-mitting funds to the asset class;fexplain exchange rate risk and demonstrate the use of forward contracts to reduce the risk associated with a future receipt or payment in a foreign currency;gexplain the limitations to hedging the exchange rate risk of a foreign market portfolio and discuss feasible strategies for managing such risk.READING 27. RISK MANAGEMENT APPLICATIONS OF OPTION STRATEGIESTe candidate should be able to:acompare the use of covered calls and protective puts to manage risk exposure to individual securities;bcalculate and interpret the value at expiration, proft, maximum proft, maxi-mum loss, breakeven underlying price at expiration, and general shape of the graph for the following option strategies: bull spread, bear spread, butterfy spread, collar, straddle, box spread;ccalculate the efective annual rate for a given interest rate outcome when a bor-rower (lender) manages the risk of an anticipated loan using an interest rate call (put) option;dcalculate the payofs for a series of interest rate outcomes when a foating rate loan is combined with 1) an interest rate cap, 2) an interest rate foor, or 3) an interest rate collar;eexplain why and how a dealer delta hedges an option position, why delta changes, and how the dealer adjusts to maintain the delta hedge;finterpret the gamma of a delta-hedged portfolio and explain how gamma changes as in- the-money and out-of- the-money options move toward expiration.2016 Level III CFA Program Curriculum CFA Institute.Study Session 15 3READING 28. RISK MANAGEMENT APPLICATIONS OF SWAP STRATEGIESTe candidate should be able to:ademonstrate how an interest rate swap can be used to convert a foating-rate (fxed-rate) loan to a fxed-rate (foating-rate) loan;bcalculate and interpret the duration of an interest rate swap;cexplain the efect of an interest rate swap on an entitys cash fow risk;ddetermine the notional principal value needed on an interest rate swap to achieve a desired level of duration in a fxed-income portfolio;eexplain how a company can generate savings by issuing a loan or bond in its own currency and using a currency swap to convert the obligation into another currency;fdemonstrate how a frm can use a currency swap to convert a series of foreign cash receipts into domestic cash receipts;gexplain how equity swaps can be used to diversify a concentrated equity port-folio, provide international diversifcation to a domestic portfolio, and alter portfolio allocations to stocks and bonds;hdemonstrate the use of an interest rate swaption 1) to change the payment pat-tern of an anticipated future loan and 2) to terminate a swap.2016 Level III CFA Program Curriculum CFA Institute.Trading, Monitoring, and RebalancingBecause the investment process is not complete until securities are bought or sold, the quality of trade execution is an important determinant of investment results. Te methods by which managers and traders interact with markets, choose appropriate trading strategies and tactics, and measure success in execution are key topics in the frst reading. Tesecondreadingdiscussestheongoingmonitoringandrebalancingofthe investment portfolio, which are integral parts of the portfolio management process. Portfoliomanagersmustunderstandthereasonsformonitoringportfoliosandbe able to formulate appropriate portfolio rebalancing policies. READING ASSIGNMENTSReading 29 Execution of Portfolio Decisions by Ananth Madhavan, Jack L. Treynor, and Wayne H. WagnerReading 30 Monitoring and Rebalancing by Robert D. Arnott, Terence E. Burns, CFA, Lisa Plaxco, CFA, and Philip MooreLEARNING OUTCOMESREADING 29. EXECUTION OF PORTFOLIO DECISIONSTe candidate should be able to:acompare market orders with limit orders, including the price and execution uncertainty of each;bcalculate and interpret the efective spread of a market order and contrast it to the quoted bidask spread as a measure of trading cost; S T U DY S E S S I ON162016 Level III CFA Program Curriculum CFA Institute.Study Session 16 2ccompare alternative market structures and their relative advantages;dcompare the roles of brokers and dealers;eexplain the criteria of market quality and evaluate the quality of a market when given a description of its characteristics;fexplain the components of execution costs, including explicit and implicit costs, and evaluate a trade in terms of these costs;gcalculate and discuss implementation shortfall as a measure of transaction costs;hcontrast volume weighted average price (VWAP) and implementation shortfall as measures of transaction costs;iexplain the use of econometric methods in pretrade analysis to estimate implicit transaction costs;jdiscuss the major types of traders, based on their motivation to trade, time versus price preferences, and preferred order types;kdescribe the suitable uses of major trading tactics, evaluate their relative costs, advantages, and weaknesses, and recommend a trading tactic when given a description of the investors motivation to trade, the size of the trade, and key market characteristics;lexplain the motivation for algorithmic trading and discuss the basic classes of algorithmic trading strategies;mdiscuss the factors that typically determine the selection of a specifc algorith-mic trading strategy, including order size, average daily trading volume, bidask spread, and the urgency of the order;nexplain the meaning and criteria of best execution;oevaluate a frms investment and trading procedures, including processes, dis-closures, and record keeping, with respect to best execution;pdiscuss the role of ethics in trading.READING 30. MONITORING AND REBALANCINGTe candidate should be able to:adiscuss a fduciarys responsibilities in monitoring an investment portfolio;bdiscuss the monitoring of investor circumstances, market/economic conditions, and portfolio holdings and explain the efects that changes in each of these areas can have on the investors portfolio;crecommend and justify revisions to an investors investment policy statement and strategic asset allocation, given a change in investor circumstances;ddiscuss the benefts and costs of rebalancing a portfolio to the investors strate-gic asset allocation;econtrast calendar rebalancing to percentage-of- portfolio rebalancing;fdiscuss the key determinants of the optimal corridor width of an asset class in a percentage- of- portfolio rebalancing program;gcompare the benefts of rebalancing an asset class to its target portfolio weight versus rebalancing the asset class to stay within its allowed range;hexplain the performance consequences in up, down, and fat markets of 1) rebalancing to a constant mix of equities and bills, 2) buying and holding equi-ties, and 3) constant proportion portfolio insurance (CPPI);2016 Level III CFA Program Curriculum CFA Institute.Study Session 16 3idistinguish among linear, concave, and convex rebalancing strategies;jjudge the appropriateness of constant mix, buy-and-hold, and CPPI rebalancing strategies when given an investors risk tolerance and asset return expectations.2016 Level III CFA Program Curriculum CFA Institute.Performance EvaluationPerformance evaluation addresses three questions that are essential in evaluating the results of the portfolio management process: What was the portfolios performance? Why did the portfolio produce the observed performance? Was the portfolios performance due to luck or skill?Tese questions are answered by performance measurement, performance attribution, and performance appraisal, respectively. Te information developed in performance evaluationprovideskeyinputstoa)assessingcompliancewithinvestmentpolicy andprogresstowardachievingclientgoals,b)determiningwhetheraninvestment managersperformancehasbeenconsistentwiththemanagersstatedinvestment discipline, and c) deciding whether to hire, retain, or dismiss an investment manager.READING ASSIGNMENTSReading 31 Evaluating Portfolio Performance by Jefery V. Bailey, CFA, Tomas M. Richards, CFA, and David E. TierneyLEARNING OUTCOMESREADING 31. EVALUATING PORTFOLIO PERFORMANCETe candidate should be able to:ademonstrate the importance of performance evaluation from the perspective of fund sponsors and the perspective of investment managers; S T U DY S E S S I ON172016 Level III CFA Program Curriculum CFA Institute.Study Session 17 2bexplain the following components of portfolio evaluation: performance mea-surement, performance attribution, and performance appraisal;ccalculate, interpret, and contrast time- weighted and money- weighted rates of return and discuss how each is afected by cash contributions and withdrawals;didentify and explain potential data quality issues as they relate to calculating rates of return;edemonstrate the decomposition of portfolio returns into components attribut-able to the market, to style, and to active management;fdiscuss the properties of a valid performance benchmark and explain advan-tages and disadvantages of alternative types of benchmarks;gexplain the steps involved in constructing a custom security-based benchmark;hdiscuss the validity of using manager universes as benchmarks;ievaluate benchmark quality by applying tests of quality to a variety of possible benchmarks;jdiscuss issues that arise when assigning benchmarks to hedge funds;kdistinguish between macro and micro performance attribution and discuss the inputs typically required for each;ldemonstrate and contrast the use of macro and micro performance attribution methodologies to identify the sources of investment performance;mdiscuss the use of fundamental factor models in micro performance attribution;nevaluate the efects of the external interest rate environment and active man-agement on fxed-income portfolio returns;oexplain the management factors that contribute to a fxed-income portfolios total return and interpret the results of a fxed-income performance attribution analysis;pcalculate, interpret, and contrast alternative risk-adjusted performance mea-sures, including (in their ex post forms) alpha, information ratio, Treynor mea-sure, Sharpe ratio, and M2;qexplain how a portfolios alpha and beta are incorporated into the information ratio, Treynor measure, and Sharpe ratio;rdemonstrate the use of performance quality control charts in performance appraisal;sdiscuss the issues involved in manager continuation policy decisions, including the costs of hiring and fring investment managers;tcontrast Type I and Type II errors in manager continuation decisions.2016 Level III CFA Program Curriculum CFA Institute.Global Investment Performance StandardsThe Global Investment Performance Standards (GIPS) contain ethical and profes-sional standards for presenting investment performance to prospective clients. Tese guidelines provide for standardized performance calculation and presentation among investmentmanagers,enablinginvestorstoobjectivelycomparemanagerreturn historiesandclearlyevaluateperformance.Tisstudysessionconsistsofasingle reading that provides grounding in the requirements and recommendations of GIPS. READING ASSIGNMENTSReading 32 OverviewoftheGlobalInvestmentPerformanceStandards by Philip Lawton, PhD, CFA, CIPMLEARNING OUTCOMESREADING 32. OVERVIEW OF THE GLOBAL INVESTMENT PERFORMANCE STANDARDSTe candidate should be able to:adiscuss the objectives, key characteristics, and scope of the GIPS standards and their benefts to prospective clients and investment managers;bexplain the fundamentals of compliance with the GIPS standards, including the defnition of the frm and the frms defnition of discretion;cexplain the requirements and recommendations of the GIPS standards with respect to input data, including accounting policies related to valuation and performance measurement; S T U DY S E S S I ON182016 Level III CFA Program Curriculum CFA Institute.Study Session 18 2ddiscuss the requirements of the GIPS standards with respect to return calcu-lation methodologies, including the treatment of external cash fows, cash and cash equivalents, and expenses and fees;eexplain the requirements and recommendations of the GIPS standards with respect to composite return calculations, including methods for asset- weighting portfolio returns;fexplain the meaning of discretionary in the context of composite construction and, given a description of the relevant facts, determine whether a portfolio is likely to be considered discretionary;gexplain the role of investment mandates, objectives, or strategies in the con-struction of composites;hexplain the requirements and recommendations of the GIPS standards with respect to composite construction, including switching portfolios among com-posites, the timing of the inclusion of new portfolios in composites, and the timing of the exclusion of terminated portfolios from composites;iexplain the requirements of the GIPS standards for asset class segments carved out of multi-class portfolios;jexplain the requirements and recommendations of the GIPS standards with respect to disclosure, including fees, the use of leverage and derivatives, con-formity with laws and regulations that confict with the GIPS standards, and noncompliant performance periods;kexplain the requirements and recommendations of the GIPS standards with respect to presentation and reporting, including the required timeframe of compliant performance periods, annual returns, composite assets, and benchmarks;lexplain the conditions under which the performance of a past frm or afliation must be linked to or used to represent the historical performance of a new or acquiring frm;mevaluate the relative merits of high/low, range, interquartile range, and equal- weighted or asset- weighted standard deviation as measures of the internal dispersion of portfolio returns within a composite for annual periods;nidentify the types of investments that are subject to the GIPS standards for real estate and private equity;oexplain the provisions of the GIPS standards for real estate and private equity;pexplain the provisions of the GIPS standards for Wrap fee/Separately Managed Accounts;qexplain the requirements and recommended valuation hierarchy of the GIPS Valuation Principles;rdetermine whether advertisements comply with the GIPS Advertising Guidelines;sdiscuss the purpose, scope, and process of verifcation;tdiscuss challenges related to the calculation of after- tax returns;uidentify and explain errors and omissions in given performance presentations and recommend changes that would bring them into compliance with GIPS standards.