cfa course of study changes 2016 - · pdf filecfa® course of study changes 2016 level ii...

CFA® Course of Study Changes 2016

Level II

September 2015

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CFA Level II Curriculum Changes 2016 The CFA Institute has now released the Level II Course of Study for 2016, and there are a limited number of changes from 2015. We have reviewed and compared the new Learning Objective Statements (LOS) to help Candidates who are either repeating or using prior year materials. While it is important to know the whole curriculum thoroughly, always make sure you have a particularly good understanding of any new Readings or LOS as there is always a high chance that new material may be tested. If you have any comments please contact us at [email protected]

Summary of Changes • 4 new Readings have been added:

o Reading 12 in Study Session 3; Quantitative Methods o Readings 53,54,55 in Study Session 18; Portfolio Management

• 3 Readings from 2015 have been removed: o Readings 53, 54, 55 in Study Session 18; Portfolio Management

• 6 out of the 18 Study Sessions have been affected by changing LOS. • In total 35 new LOS have been added, while 3 have been amended, and 34 have

been removed. • There has been no change in the exam weighting of subjects in 2016.

Exam Weighting Summary In 2016 the CFA Institute has indicated that there has been no change in exam weightings.


1 Study Session 1: Ethical and Professional Standards

1.1 Reading Text Changes NO CHANGE FROM 2015

1.2 LOS Changes NO CHANGE FROM 2015

1.3 Exam Weighting Change NO CHANGE FROM 2015

2 Study Session 2: Ethical and Professional Standards: Application




3 Study Session 3: Quantitative Methods for Valuation

3.1 Reading Text Changes In 2016 there is one new Reading:

• Reading 12: Excerpt From “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations”

3.2 LOS Changes


3.2.1 Reading 12: Excerpt From “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations”

LOS Change type

2015 Syllabus 2016 Syllabus

a. New - Describe steps in running a simulation;

b. New - Explain three ways to define the probability distributions for a simulation’s variables;

c. New - Describe how to treat correlation across variables in a simulation;

d. New - Describe advantages of using simulations in decision making;

e. New - Describe some common constraints introduced into simulations;

f. New - Describe issues in using simulations in risk assessment;

g. New - Compare scenario analysis, decision trees, and simulations.


4 Study Session 4: Economics for Valuation





5 Study Session 5: Financial Reporting and Analysis – Inventories and Long-lived Assets




6 Study Session 6: Financial Reporting and Analysis – Intercorporate Investments, Post-Employment and Share-Based Compensation, and Multinational Operations


6.2 LOS Changes 6.2.1 Reading 20: Multinational Operations

LOS Change type 2015 Syllabus 2016 Syllabus

i.

Partial Change:

Addition of Word

Explain how changes in the components of sales affect earnings sustainability;

Explain how changes in the components of sales affect the sustainability of sales growth;



7 Study Session 7: Financial Reporting and Analysis – Quality of Financial Reports and Financial Statement Analysis




8 Study Session 8: Corporate Finance





9 Study Session 9: Corporate Finance – Financing and Control Issues




10 Study Session 10: Equity Valuation – Valuation Concepts


10.2 LOS Change

10.2.1 Reading 29: Equity Valuation: Applications and Processes


b. Partial

Change: Grammar

Contrast absolute and relative valuation models, and describe examples of each type of model;

Contrast absolute and relative valuation models and describe examples of each type of model;



11 Study Session 11: Equity Valuation – Industry and Company Analysis in a Global Context




12 Study Session 12: Equity Investments – Valuation Models


12.2 LOS Change NO CHANGE FROM 2015



13 Study Session 13: Alternative Investments




14 Study Session 14: Fixed Income – Valuation Concepts


14.2 LOS Changes

14.2.1 Reading 43: The Term Structure and Interest Rate Dynamics


c. Removal

Describe the assumptions concerning the evolution of spot rates in relation to forward rates implicit in active bond portfolio

management;

-

c. New - Describe how zero-coupon rates (spot rates) may be obtained from the par curve by bootstrapping;

d. New - Describe the assumptions concerning the evolution of spot


m. Removed Calculate the value of a capped or floored floating-rate bond; -


rates in relation to forward rates implicit in active bond portfolio management;

g.

Partial Change:

Removal & Addition

Calculate and interpret the swap spread for a default-free bond;

Calculate and interpret the swap spread for a given maturity;

14.2.2 Reading 45: Valuation and Analysis: Bonds with Embedded Options


15 Study Session 15: Fixed Income: Topics in Fixed income Analysis

15.1 Reading Text Changes Reading Removed:

• 2015 Reading 46: Introduction to Asses-Backed Securities

15.2 LOS Changes 15.2.1 Reading 46: Introduction to Asset-Backed Securities This reading has been removed completely.


m. Removed Calculate the value of a capped or floored floating-rate bond

-


a. Removed Explain benefits of securitization for economies and financial markets -



16 Study Session 16: Derivative Investments – Forwards and Futures




b. Removed Describe the securitization process, including the parties to the process, the roles they play, and the legal structures involved

-

c. Removed Describe types and characteristics of residential mortgage loans that are typically securitized -

d. Removed Describe types and characteristics of residential mortgage-backed securities, and explain the cash flows and credit risk for each type;

-

e. Removed

Explain the motivation for creating securitized structures with multiple tranches (e.g., collateralized mortgage obligations), and the characteristics and risks of securitized structures;

-

f. Removed Describe the characteristics and risks of commercial mortgage-backed securities; -

g. Removed Describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and credit risk of each type;

-

h. Removed Describe collateralized debt obligations, including their cash flows and credit risk. -


17 Study Session 17: Derivative Investments – Options, Swaps, and Interest Rate and Credit Derivatives




18 Study Session 18: Portfolio Management – Capital Market Theory and the Portfolio Management Process

18.1 Reading Text Changes 3 Readings Removed:

• Reading 53. Portfolio Concepts • Reading 54: Residual Risk and Return: The Information Ratio • Reading 55: The Fundamental Law of Active Management

3 New Readings

• Reading 53: An Introduction to Multifactor Models • Reading 54: Analysis of Active Portfolio Management • Reading 55: Economics and Investment Markets


18.2 LOS Change

18.2.1 New Readings 18.2.1.1 Reading 53: An Introduction to Multifactor Models


a. New - Describe arbitrage pricing theory (APT), including its underlying assumptions and its relation to multifactor models;

b. New - Define arbitrage opportunity and determine whether an arbitrage opportunity exists;

c. New - Calculate the expected return on an asset given an assets factor sensitivities and the factor risk premiums;

d. New - Describe and compare macroeconomic factor models, fundamental factor models, and statistical factor models;

e. New - Explain sources of active risk and interpret tracking risk and the information ratio;

f. New - Describe uses of multifactor models and interpret the output of analyses based on multifactor models;

g. New - Describe the potential benefits for investors in considering multiple risk dimensions when modelling asset returns;

18.2.1.2 Reading 54: Analysis of Active Portfolio Management


a. New - Describe how value added by active management is measured;

b. New - Calculate and interpret the information ratio (ex post and ex ante) and contrast it to the Sharpe ratio;

c. New -

State and interpret the fundamental law of active portfolio management including its component terms – transfer coefficient, information coefficient, breadth, and active risk (aggressiveness);

d. New - Explain how the information ratio may be useful in investment manager selection and choosing the level of active portfolio risk;


e. New -

Compare active management strategies (including market timing and security selection) and evaluate strategy changes in terms of the fundamental law of active management;

f. New - Describe the practical strengths and limitations of the fundamental law of active management.

18.2.1.3 Reading 55: Economics and Investment Markets


a. New -

Explain the notion that to affect market values, economic factors must affect one or more of the following: (1) default-free interest rates across maturities, (20 the timing and/or magnitude of expected cash flows, and (3) risk premiums;

b. New - Explain the role of expectations and changes in expectations in market valuation;

c. New -

Explain the relationship between the long-term growth rate of the economy, the volatility of the growth rate, and the average level of real short-term interest rates;

d. New -

Explain how the phase of the business cycle affects policy and short-term interest rates, the slope of the term structure of interest rates, and the relative performance of bonds of differing maturities;

e. New - Describe the factors that affect yield spreads between non-inflation-adjusted and inflation-indexed bonds;

f. New - Explain how the phase of the business cycle affects credit spreads and the performance of credit-sensitive fixed-income instruments;

g. New - Explain how the characteristics of the markets for a company’s products affect the company’s credit quality;

h. New - Explain how the phases of the business cycle affects short-term and long-term earnings growth expectations;

i. New - Explain the relationship between the consumption-hedging properties of equity and the equity risk premium;

j. New - Describe cyclical effects on valuation multiples;


k. New - Describe the implications of the business cycle for a given style strategy (value, growth, small capitalization, large capitalization);

l. New - Describe how economic analysis is used in sector rotation strategies;

m. New - Describe the economic factors affecting investment in commercial real estate.

18.2.2 Removed Readings

18.2.2.1 Reading 53: Portfolio Concepts This reading has been removed completely.


a. Removed

Explain mean-variance analysis and its assumptions, and calculate the expected return and the standard deviation of return for a portfolio of two or three assets;

-

b. Removed Describe the minimum-variance and efficient frontiers, and explain the steps to solve for the minimum-variance frontier;

-

c. Removed

Explain the benefits of diversification and how the correlation in a two-asset portfolio and the number of assets in a multi-asset portfolio affect the diversification benefits;

-

d. Removed

Calculate the variance of an equally weighted portfolio of n stocks, explain the capital allocation and capital market lines (CAL and CML) and the relation between them, and calculate the value of one of the variables given values of the remaining variables;

-

e. Removed Explain the capital asset pricing model (CAPM), including its underlying assumptions and the resulting conclusions;

-

f. Removed

Explain the security market line (SML), the beta coefficient, the market risk premium, and the Sharpe ratio, and calculate the value of one of these variables given the values of the remaining variables;

-

g. Removed Explain the market model, and state and interpret the market model’s predictions with respect to asset returns, variances, and covariance’s;

-


18.2.2.2 Reading 54: Residual Risk and Return: The Information Ratio This reading has been removed completely.

h. Removed Calculate an adjusted beta, and explain the use of adjusted and historical betas as predictors of future betas;

-

i. Removed Explain reasons for and problems related to instability in the minimum-variance frontier; -

j. Removed Describe and compare macroeconomic factor models, fundamental factor models, and statistical factor models;

-

k. Removed Calculate the expected return on a portfolio of two stocks, given the estimated macroeconomic factor model for each stock;

-

l. Removed

Describe the arbitrage pricing theory (APT), including its underlying assumptions and its relation to the multifactor models, calculate the expected return on an asset given an assets factor sensitivities and the factor risk premiums, and determine whether an arbitrage opportunity exists, including how to exploit the opportunity;

-

m. Removed Explain sources of active risk, interpret tracking error, tracking risk, and the information ratio, and explain factor portfolio and tracking portfolio;

-

n. Removed

Compare underlying assumptions and conclusions of the CAPM and APT model, and explain why an investor can possibly earn a substantial premium for exposure to dimensions of risk unrelated to market movements.

-


a. Removed Define the terms “alpha” and “information ratio” in both their ex post and ex ante senses; -

b. Removed Compare the information ratio and the alpha’s T-statistic; -

c. Removed Explain the objective of active management in terms of value added; -

d. Removed Calculate the optimal level of residual risk to assume for given levels of manager ability and investor risk aversion;

-

e. Removed Justify why the choice for a particular active strategy does not depend on investor risk aversion.

-


18.2.2.3 Reading 55: The Fundamental Law of Active Management This reading has been removed completely.



a. Removed Define the terms “information coefficient” and “breadth” and describe how they combine to determine the information ratio;

-

b. Removed

Describe how the optimal level of residual risk of an investment strategy changes with information coefficient and breadth, and how the value added of an investment strategy changes with information coefficient and breadth;

-

c. Removed Contrast market timing and security selection in terms of breadth and required investment skill; -

d. Removed Describe how the information ratio changes when the original investment strategy is augmented with other strategies or information sources;

-

e. Removed Describe the assumptions on which the fundamental law of active management is based. -

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