LEVEL II SCHWESER' C r it ic a l C o n c e pt s ETHICALAND PROFESSIONAL STANDARDS I Professionalism I (A) Knowledge of the Law I (B) Independence and Objectivity I (C ) I (D) II II (A) II (B) III HI (A) HI (B) HI (C) HI (D) HI (E) IV IV (A) IV (B) IV (C) V v (A) V (B) V (C) VI VI (A) VI (B) VI (C) VII VII (A) VII (B) Misrepresentation Misconduct Integrity o f Capital Markets Material Nonpublic Information Market Manipulation Duties to Clients Loyalty, Prudence, and Care Fair Dealing Suitability Performance Presentation Preservation of Confidentiality Duties to Employers Loyalty Additional Compensation Arrangements Responsibilities o f Supervisors Investment Analysis, Recommendations, and Action Diligence and Reasonable Basis Communication with Clients and Prospective Clients Record Retention Conflicts o f Interest Disclosure o f Conflicts Priority of Transactions Referral Fees Responsibilities as a CFA Institute Member or CFA Candidate Conduct in the CFA Program Reference to CFA Institute, CFA Designation, and CFA Program QUANTITATIVEMETHODS Simple Linear Regression Correlation: covXY rXY = ( s x )( s y ) t-test for r (n - d f): t = rVn —2 Estimated slope coefficient: cov xy critical t or p-value < a Confidence Interval: bj ± |tc X sg SST = RSS + SSE M SR = RSS / k M SE = SSE / ( n - k - 1) Test statistical significance o f regression: F = M SR / M SE with k and n —k — df (1-tail) A X vC, bid B , bid 'A ' /A X vC, offer \ B , offer VC ^ /bid / T-x \ B X \C ^ /offer Currency arbitrage: “Up the bid and down the ask.” Forward premium = (forward price) - (spot price) Value o f fwd currency contract prior to expiration: Vt = (FPt — FP)(contract size) \ days 1+ RA 360 Covered interest rate parity: Uncovered interest rate parity: e • Forecasting the past • Test statistical significance o f b; H (): b = 0, t= y ECONOMICS bid-ask spread = ask quote - bid quote Cross rates with bid-ask spreads: n> B 'A ' 'A ' days 1+ R a •0 360 / F = ^ -days 1+ R B 360 M odel M isspecification A Y ± tc x SE of forecast E xa m (% a s w , = R , - K Fisher relation: R nominal = R real + E(inflation) International Fisher Relation: R nominal A —R nominal B = E(inflation.) v A' E(inflationB) Relative Purchasing Power Parity: High inflation rates leads to currency depreciation %AS(A/B) = inflation Xj - inflation,B) where: % AS(A/B) = change in spot price (A/B) Profit on FX Carry Trade = interest differential change in the spot rate of investment currency Mundell-Fleming model: Impact o f monetary and fiscal policies on interest rates & exchange rates Under high capital mobility, expansionary monetary policy/restrictive fiscal policy —>low interest rates —> currency depreciation Under low capital mobility, expansionary monetary policy/ expansionary fiscal policy —> current account deficits —» currency depreciation Dornbusch overshooting model: Restrictive monetary policy —» short-term appreciation of currency, then slow depreciation to PPP value Labor Productivity: output per worker Y/L = T(K/L)‘' Growth Accounting: growth rate in potential GDP = long-term growth rate of technology + a (long-term growth rate o f capital) + (1 - a) (long-term growth rate of labor) growth rate in potential GDP = long-term growth rate of labor force + long-term growth rate in labor productivity Classical Growth T heory • Real GDP/person reverts to subsistence level A A2 CTt+l = a0 + al£t Risk Types: Appropriate m ethod Distribution o f risk Sequential? Accommodates Correlated Variables' Simulations Continuous Does not matter Yes Scenario analysis Discrete No Yes Decision trees Discrete Yes No Neoclassical Growth T heory • Sustainable growth rate is a function of population growth, labor’s share o f income, and the rate of technological advancement • Growth rate in labor productivity driven only by improvement in technology