CFA Level 1 Volume 5

✍ Scribed by CFA Institute

• Publisher: CFA Institute
• Year: 2023
• Tongue: English
• Leaves: 685
• Category: Library

✦ Table of Contents

How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Feedback
Fixed Income
Learning Module 1 Understanding Fixed-Income Risk and Return
Introduction
Sources of Return
Macaulay and Modified Duration
Macaulay, Modified, and Approximate Duration
Approximate Modified and Macaulay Duration
Effective and Key Rate Duration
Key Rate Duration
Properties of Bond Duration
Duration of a Bond Portfolio
Money Duration and the Price Value of a Basis Point
Bond Convexity
Investment Horizon, Macaulay Duration and Interest Rate Risk
Yield Volatility
Investment Horizon, Macaulay Duration, and Interest Rate Risk
Credit and Liquidity Risk
Empirical Duration
Summary
References
Practice Problems
Solutions
Learning Module 2 Fundamentals of Credit Analysis
Introduction
Credit Risk
Capital Structure, Seniority Ranking, and Recovery Rates
Capital Structure
Seniority Ranking
Recovery Rates
Rating Agencies, Credit Ratings, and Their Role in the Debt Markets
Credit Ratings
Issuer vs. Issue Ratings
ESG Ratings
Risks in Relying on Agency Ratings
Traditional Credit Analysis: Corporate Debt Securities
Credit Analysis vs. Equity Analysis: Similarities and Differences
The Four Cs of Credit Analysis: A Useful Framework
Credit Risk vs. Return: Yields and Spreads
Credit Risk vs. Return: The Price Impact of Spread Changes
High-Yield, Sovereign, and Non-Sovereign Credit Analysis
High Yield
Sovereign Debt
Non-Sovereign Government Debt
Summary
Practice Problems
Solutions
Derivatives
Learning Module 1 Derivative Instrument and Derivative Market Features
Introduction
Summary
Derivative Features
Definition and Features of a Derivative
Derivative Underlyings
Equities
Fixed-Income Instruments
Currencies
Commodities
Credit
Other
Investor Scenarios
Derivative Markets
Over-the-Counter (OTC) Derivative Markets
Exchange-Traded Derivative (ETD) Markets
Central Clearing
Investor Scenarios
Practice Problems
Solutions
Learning Module 2 Forward Commitment and Contingent Claim Features and Instruments
Introduction
Summary
Forwards
Futures
Swaps
Options
Scenario 1: Transact (ST > X)
Scenario 2: Do Not Transact (ST < X)
Credit Derivatives
Forward commitments vs contingent claims
Practice Problems
Solutions
Learning Module 3 Derivative Benefits, Risks, and Issuer and Investor Uses
Introduction
Summary
Derivative Benefits
Derivative Risks
Issuer Use of Derivatives
Investor Use of Derivatives
Practice Problems
Solutions
Learning Module 4 Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives
Introduction
Summary
Arbitrage
Replication
Costs and Benefits Associated with Owning the Underlying
Learning Module 5 Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
Introduction
Summary
Pricing and Valuation of Forward Commitments
Pricing versus Valuation of Forward Contracts
Pricing and Valuation of Interest Rate Forward Contracts
Interest Rate Forward Contracts
Practice Problems
Solutions
Learning Module 6 Pricing and Valuation of Futures Contracts
Introduction
Summary
Pricing of Futures Contracts at Inception
MTM Valuation: Forwards versus Futures
Interest Rate Futures versus Forward Contracts
Forward and Futures Price Differences
Interest Rate Forward and Futures Price Differences
Effect of Central Clearing of OTC Derivatives
Practice Problems
Solutions
Learning Module 7 Pricing and Valuation of Interest Rates and Other Swaps
Introduction
Summary
Swaps vs. Forwards
Swap Values and Prices
Practice Problems
Solutions
Learning Module 8 Pricing and Valuation of Options
Introduction
Summary
Option Value relative to the Underlying Spot Price
Option Exercise Value
Option Moneyness
Option Time Value
Arbitrage
Replication
Factors Affecting Option Value
Value of the Underlying
Exercise Price
Time to Expiration
Risk-Free Interest Rate
Volatility of the Underlying
Income or Cost Related to Owning Underlying Asset
Practice Problems
Solutions
Learning Module 9 Option Replication Using Put–Call Parity
Introduction
Summary
Put–Call Parity
Option Strategies Based on Put–Call Parity
Put–Call Forward Parity and Option Applications
Put–Call Forward Parity
Option Put–Call Parity Applications: Firm Value
Learning Module 10 Valuing a Derivative Using a One-Period Binomial Model
Introduction
Summary
Binomial Valuation
The Binomial Model
Pricing a European Call Option
Risk Neutrality
Practice Problems
Solutions
Alternative Investments
Learning Module 1 Categories, Characteristics, and Compensation Structures of Alternative Investments
Introduction
Why Investors Consider Alternative Investments
Categories of Alternative Investments
Investment Methods
Summary—Investment Methods for Alternative Investments
Methods of Investing in Alternative Investments
Advantages and Disadvantages of Direct Investing, Co-Investing, and Fund Investing
Due Diligence for Fund Investing, Direct Investing, and Co-Investing
Investment and Compensation Structures
Summary—Investment and Compensation Structures (GP/LP, Performance Fees, Hurdle Rates, High-Water Marks, Lock-Ups, Waterfall Calculations)
Partnership Structures
Compensation Structures
Common Investment Clauses, Provisions, and Contingencies
Practice Problems
Solutions
Learning Module 2 Performance Calculation and Appraisal of Alternative Investments
Summary—Issues in Performance Appraisal
Overview of Performance Appraisal for Alternative Investments
Common Approaches to Performance Appraisal and Application Challenges
Private Equity and Real Estate Performance Evaluation
Hedge Funds: Leverage, Illiquidity, and Redemption Terms
Calculating Fees and Returns
Summary—Calculating Fees and Returns of Alternative Investments
Custom Fee Arrangements
Alignment of Interests and Survivorship Bias
Practice Problems
Solutions
Learning Module 3 Private Capital, Real Estate, Infrastructure, Natural Resources, and Hedge Funds
Summary—Private Capital
Introduction and Overview of Private Capital
Description of Private Equity
Description of Private Debt
Risk and Return Characteristics of Private Capital
Diversification Benefits of Private Capital
Real Estate
Summary—Real Estate
Introduction and Overview of Real Estate
Description of Real Estate
Forms of Real Estate Investing
Risk and Return Characteristics of Real Estate
Diversification Benefits of Real Estate
Infrastructure
Summary—Infrastructure
Introduction and Overview of Infrastructure
Description of Infrastructure
Risk and Return Characteristics of Infrastructure
Diversification Benefits of Infrastructure
Natural Resources
Summary—Natural Resources
Introduction and Overview of Natural Resources
Description of Commodities
Description of Timberland and Farmland
Risk and Return Characteristics of Natural Resources
Diversification Benefits of Natural Resources
Hedge Funds
Summary—Hedge Funds
Introduction and Overview of Hedge Funds
Description of Hedge Funds
Forms of Hedge Fund Investments
Risk and Return Characteristics of Hedge Funds
Diversification Benefits of Hedge Funds
Practice Problems
Solutions
Portfolio Management
Learning Module 1 Portfolio Management: An Overview
Introduction
Portfolio Perspective: Diversification and Risk Reduction
Historical Example of Portfolio Diversification: Avoiding Disaster
Portfolios: Reduce Risk
Portfolio Perspective: Risk-Return Trade-off, Downside Protection, Modern Portfolio Theory
Historical Portfolio Example: Not Necessarily Downside Protection
Portfolios: Modern Portfolio Theory
Steps in the Portfolio Management Process
Step One: The Planning Step
Step Two: The Execution Step
Step Three: The Feedback Step
Types of Investors
Individual Investors
Institutional Investors
The Asset Management Industry
Active versus Passive Management
Traditional versus Alternative Asset Managers
Ownership Structure
Asset Management Industry Trends
Pooled Interest - Mutual Funds
Mutual Funds
Pooled Interest - Type of Mutual Funds
Money Market Funds
Bond Mutual Funds
Stock Mutual Funds
Hybrid/Balanced Funds
Pooled Interest - Other Investment Products
Exchange-Traded Funds
Hedge Funds
Private Equity and Venture Capital Funds
Summary
References
Practice Problems
Solutions
Learning Module 2 Portfolio Risk and Return: Part I
Introduction
Investment Characteristics of Assets: Return
Return
Money-Weighted Return or Internal Rate of Return
Time-Weighted Rate of Return
Annualized Return
Other Major Return Measures and their Applications
Gross and Net Return
Pre-tax and After-tax Nominal Return
Real Returns
Leveraged Return
Historical Return and Risk
Historical Mean Return and Expected Return
Nominal Returns of Major US Asset Classes
Real Returns of Major US Asset Classes
Nominal and Real Returns of Asset Classes in Major Countries
Risk of Major Asset Classes
Risk–Return Trade-off
Other Investment Characteristics
Distributional Characteristics
Market Characteristics
Risk Aversion and Portfolio Selection
The Concept of Risk Aversion
Utility Theory and Indifference Curves
Indifference Curves
Application of Utility Theory to Portfolio Selection
Portfolio Risk & Portfolio of Two Risky Assets
Portfolio of Two Risky Assets
Portfolio of Many Risky Assets
Importance of Correlation in a Portfolio of Many Assets
The Power of Diversification
Correlation and Risk Diversification
Historical Risk and Correlation
Historical Correlation among Asset Classes
Avenues for Diversification
Efficient Frontier: Investment Opportunity Set & Minimum Variance Portfolios
Investment Opportunity Set
Minimum-Variance Portfolios
Efficient Frontier: A Risk-Free Asset and Many Risky Assets
Capital Allocation Line and Optimal Risky Portfolio
The Two-Fund Separation Theorem
Efficient Frontier: Optimal Investor Portfolio
Investor Preferences and Optimal Portfolios
Summary
Practice Problems
Solutions
Learning Module 3 Portfolio Risk and Return: Part II
Introduction
Capital Market Theory: Risk-Free and Risky Assets
Portfolio of Risk-Free and Risky Assets
Capital Market Theory: The Capital Market Line
Passive and Active Portfolios
What Is the “Market”?
The Capital Market Line (CML)
Capital Market Theory: CML - Leveraged Portfolios
Leveraged Portfolios with Different Lending and Borrowing Rates
Systematic and Nonsystematic Risk
Systematic Risk and Nonsystematic Risk
Return Generating Models
Return-Generating Models
Decomposition of Total Risk for a Single-Index Model
Return-Generating Models: The Market Model
Calculation and Interpretation of Beta
Estimation of Beta
Beta and Expected Return
Capital Asset Pricing Model: Assumptions and the Security Market Line
Assumptions of the CAPM
The Security Market Line
Capital Asset Pricing Model: Applications
Estimate of Expected Return
Beyond CAPM: Limitations and Extensions of CAPM
Limitations of the CAPM
Extensions to the CAPM
Portfolio Performance Appraisal Measures
The Sharpe Ratio
The Treynor Ratio
M2: Risk-Adjusted Performance (RAP)
Jensen’s Alpha
Applications of the CAPM in Portfolio Construction
Security Characteristic Line
Security Selection
Implications of the CAPM for Portfolio Construction
Summary
References
Practice Problems
Solutions