CFA Level 1 Volume 5

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