Ethical and Professional Standards
Study Session 1
Weight on Exam 15%
SchweserNotes™ Reference Book 1, Pages 1–52
Ethics is 15% of the Level I examination and is extremely important to your overall success (remember, you can fail a topic area and still pass the exam, but we wouldn’t recommend failing Ethics). Ethics can be tricky, and small details can be important on some ethics questions. Be prepared.
In addition to starting early, study the ethics material more than once. Ethics is one of the keys to passing the exam.
Standards of Practice Handbook
Cross-Reference to CFA Institute Assigned Readings #1 & 2
We recommend you read the original Standards of Practice Handbook. Although we are very proud of our reviews of the ethics material, there are two reasons we recommend you read the original Standards of Practice Handbook (11th Ed., 2014). (1) You are a CFA® candidate. As such, you have pledged to abide by the CFA Institute® Standards. (2) Most of the ethics questions will likely come directly from the text and examples in the Standards of Practice Handbook. You will be much better off if you read both our summaries of the Standards and the original Handbook and all the examples presented in it.
The CFA Institute Professional Conduct Program is covered by the CFA Institute Bylaws and the Rules of Procedure for Proceedings Related to Professional Conduct. The Disciplinary Review Committee of the CFA Institute Board of Governors has overall responsibility for the Professional Conduct Program and enforcement of the Code and Standards.
CFA Institute, through the Professional Conduct staff, conducts inquiries related to professional conduct. Several circumstances can prompt such an inquiry:
Self-disclosure by members or candidates on their annual Professional Conduct Statements of involvement in civil litigation or a criminal investigation, or that the member or candidate is the subject of a written complaint.
Written complaints about a member or candidate’s professional conduct that are received by the Professional Conduct staff.
Evidence of misconduct by a member or candidate that the Professional Conduct staff received through public sources, such as a media article or broadcast.
A report by a CFA exam proctor of a possible violation during the examination.
Analysis of exam scores and materials and monitoring of websites and social media by CFA Institute.
Once an inquiry is begun, the Professional Conduct staff may request (in writing) an explanation from the subject member or candidate, and may:
Interview the subject member or candidate.
Interview the complainant or other third parties.
Collect documents and records relevant to the investigation.
The Professional Conduct staff may decide:
That no disciplinary sanctions are appropriate.
To issue a cautionary letter.
To discipline the member or candidate.
In a case where the Professional Conduct staff finds a violation has occurred and proposes a disciplinary sanction, the member or candidate may accept or reject the sanction. If the member or candidate chooses to reject the sanction, the matter will be referred to a panel of CFA Institute members for a hearing. Sanctions imposed may include condemnation by the member’s peers or suspension of the candidate’s continued participation in the CFA Program.
Code and Standards
Questions about the Code and Standards will most likely be application questions. You will be given a situation and be asked to identify whether or not a violation occurs, what the violation is, or what the appropriate course of action should be. You are not required to know the Standards by number, just by name.
One of the first Learning Outcome Statements (LOS) in the Level I curriculum is to state the six components of the Code of Ethics. Candidates should memorize the Code of Ethics.
Members of the CFA Institute [including Chartered Financial Analyst® (CFA®) charterholders] and candidates for the CFA designation (Members and Candidates) must:
Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
Place the integrity of the investment profession and the interests of clients above their own personal interests.
Use reasonable care and exercise independent, professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
Standards of Professional Conduct
The following is a list of the Standards of Professional Conduct. Candidates should focus on the purpose of the Standard, applications of the Standard, and proper procedures of compliance for each Standard.
The following is intended to offer a useful summary of the current Standards of Practice, but certainly does not take the place of careful reading of the Standards themselves, the guidance for implementing the Standards, and the examples in the Handbook.
Know the law relevant to your position. Comply with the most strict law or Standard that applies to you.
Don’t solicit gifts.
Don’t compromise your objectivity or independence.
Use reasonable care.
Don’t lie, cheat, or steal.
Don’t continue association with others who are breaking laws, rules, or regulations.
Don’t use others’ work or ideas without attribution.
Don’t guarantee investment results or say that past results will be certainly repeated.
Don’t do things outside of work that reflect poorly on your integrity or professional competence.
Economics
Study Sessions 4, 5, & 6
Weight on Exam 10%
SchweserNotes™ Reference Book 2, Pages 1–246
Study Session 4: Economics—Microeconomic Analysis
Demand and Supply Analysis: Introduction
Cross-Reference to CFA Institute Assigned Reading #13
Types of Markets
Factor markets refers to markets for factors of production, and goods markets refers to markets for consumer goods and services.
Capital markets refers to the markets where firms raise money for investment by selling debt (borrowing) or selling equities (claims to ownership), as well as the markets where these debt and equity claims are subsequently traded.
The Demand Function and the Demand Curve
A general form of the demand function for Good X over some period of time is:
QDx = f (Px, I, Py...)
where:
QDx = quantity demanded of Good X
Px = price of Good X
I = some measure of individual or average income
Py… = prices of related goods
As an example, consider the weekly demand function for gasoline:
QD gas = 9 – 1.5Pgas 0.02I 0.11PBT – 0.008Pauto
where income and car price are measured in thousands, and the price of bus travel (BT) is measured in average dollars per 100 miles traveled. The fact that thequantity demanded typically is negatively related to price is referred to as the law of demand. Note that an increase in the price of automobiles will decrease demand for gasoline (they are said to be complements), and an increase in the price of bus travel will increase the demand for gasoline (they are substitutes). The positive coefficient on income indicates that gasoline for this consumer is a normal good. A negative exponent on income would indicate that gasoline is an inferior good.
To get quantity demanded as a function of only the price of gas, insert values for all the other independent variables. Assuming that the average car price is $26,000, income is $40,000, and the price of bus travel is $25, our demand function above becomes QD gas = 9 – 1.5(Pgas) 0.02(40) 0.11(25) – 0.008(26) = 12.342 –1.5Pgas, and at a price of $4 per gallon, the quantity of gas demanded per week is 6.34 gallons.
In order to find the demand curve that shows the price of gasoline as a function of the quantity demanded, invert the demand function to show price as a function of the quantity demanded. For our function, QD gas = 12.342 – 1.5Pgas, we get Pgas =8.228 – 0.667QD gas.