2008 Principles Exam Syllabus
Study Session I: Ethical Standards
The candidate should be able to:
- characterize the investment profession;
- explain the relationship between ethics and the law;
- demonstrate the reasoning process involved in interpreting and applying the CIPM Association Code of Ethics and Standards of Professional Conduct in particular situations;
- state, explain, justify, and apply the ethical responsibilities required by the provisions of the Code and Standards; and
- identify potential violations of the Code and Standards and formulate appropriate corrective actions.
Study Session II: Performance Measurement and Benchmark Analysis
The candidate should be able to:
- justify the importance of performance evaluation to fund sponsors and investment managers;
- explain the calculation of return when an account receives an external cash flow at the beginning of an evaluation period or at the end of an evaluation period;
- calculate time-weighted rates of return;
- compare and contrast time-weighted and money-weighted rates of return;
- evaluate the effect of external contributions and withdrawals in the calculation of time-weighted and money-weighted rates of return;
- calculate annualized rates of return;
- identify and explain potential data quality issues as they relate to calculating rates of return;
- demonstrate the analysis of portfolio returns into components due to the market, to style, and to active management;
- identify and explain the properties of a valid benchmark;
- discriminate among the types of benchmarks and explain each type’s advantages and disadvantages;
- critique the use of manager universes as benchmarks;
- summarize the steps in constructing a custom security-based benchmark;
- identify and explain the tests of benchmark quality;
- explain the difficulties in assigning benchmarks to hedge funds;
- explain the multiple uses of the concept of equity investment style;
- compare and contrast Sharpe’s return-based style analysis and Fama and French’s three-factor model; and
- summarize the comparative advantages and disadvantages of returns-based and holdings-based style analysis.
Study Session III: Performance Attribution
The candidate should be able to:
- distinguish between macro and micro performance attribution;
- list and explain the inputs that are necessary for a macro performance attribution;
- evaluate the incremental-return and incremental-value contributions to the ending value of a fund at the following macro attribution levels: net contributions, risk-free asset, asset category, benchmarks, investment managers, and allocation tactics;
- given data on the portfolio’s and benchmark’s sector weights and returns, calculate the impacts from pure sector allocation, within-sector selection, and allocation/selection interaction;
- explain fundamental factor model micro attribution;
- distinguish between the effect of the interest rate environment and the effect of active management on fixed-income portfolio returns; and
- explain the results of a fixed-income performance attribution analysis.
Study Session IV: Equity Portfolio Characteristics Analysis
The candidate should be able to:
- state and explain the uses of portfolio characteristics analysis in performance evaluation;
- identify, compare, contrast, and demonstrate methods of calculating the mean of a distribution that includes outliers;
- calculate a portfolio characteristic as the weighted arithmetic mean and the weighted harmonic mean of security-level characteristic values;
- distinguish between macroeconomic characteristics, company fundamental characteristics, and company share-related characteristics;
- classify, define, and explain the following equity characteristics: economic sector and industry membership; beta; debt-to-equity (D/E) ratio; return on equity (ROE); market capitalization; price-to-book (PB) ratio; price-to-earnings (P/E) ratio; dividend yield (D/P); price-to-sales (P/S) ratio; price-to-cash flow (P/CF) ratio; relative strength; liquidity; and volatility;
- determine the most likely investment style of a portfolio, given pertinent data such as the average market capitalization, price-to-earnings and price-to-book ratios, dividend yield, and growth characteristics of the portfolio and one or more style indexes; and
- compare and contrast single-factor and fundamental multifactor attribution models.
Study Session V: Performance Appraisal
The candidate should be able to:
- compute, compare, contrast, and critique the following risk-adjusted performance appraisal measures: ex post alpha, Treynor measure, Sharpe ratio, and M2;
- distinguish between the information ratio and the Sharpe ratio;
- explain the use of performance quality control charts in performance appraisal;
- explain the issues involved in manager continuation policy decisions, including the costs of hiring and firing investment managers; and
- given the null hypothesis that managers have no skill, contrast Type I and Type II errors in manager continuation decisions.
Study Session VI: After-Tax Performance Measurement
The candidate should be able to:
- explain the major issues surrounding after-tax performance measurement;
- evaluate approaches to after-tax benchmark selection;
- compare and contrast the pre-liquidation and mark-to-liquidation methods for calculating after-tax performance;
- calculate anticipated tax rates;
- calculate pre-liquidation returns, including adjustments for nondiscretionary realized taxes; and
- calculate the benefit of tax loss harvesting.
Study Session VII: Foundations of the GIPS Standards
The candidate should be able to:
- summarize the reasons for the creation of the GIPS standards, the Standards’ evolution, and their benefits to prospective clients and investment managers;
- formulate the objectives, key characteristics, and scope of the GIPS standards;
- explain the fundamentals of compliance with the GIPS standards, including the definition of the firm, the conditions under which an investment management firm can claim compliance, and the correct wording of the GIPS compliance statement;
- state the requirements and recommendations of the GIPS standards with respect to input data, including accounting policies related to asset valuation and performance measurement;
- summarize and justify the requirements of the GIPS standards with respect to return calculation methodologies;
- calculate a portfolio’s estimated time-weighted total return using the modified Dietz formula;
- explain the potential impact of large external cash flows on total returns calculated with an estimation method;
- explain why the GIPS standards require the inclusion of returns from cash and cash equivalents in total return calculations;
- define trading expenses and explain why the GIPS standards require performance to be calculated after the deduction of actual trading expenses;
- state the requirements and recommendations of the GIPS standards with respect to composite return calculations, including methods for asset-weighting portfolio returns; and
- calculate composite returns by asset weighting individual portfolio returns using beginning-of-period asset market values and using a method that reflects both beginning-of-period values and external cash flows.
Study Session VIII: Composite Construction
The candidate should be able to:
- explain the meaning of “discretionary” in the context of composite construction and, given a description of the relevant facts, determine whether a portfolio is likely to be considered discretionary;
- explain the role of investment mandates, objectives, or strategies in the construction of composites;
- state the requirements and recommendations of the GIPS standards with respect to composite construction, including switching portfolios among composites and the timing of the inclusion of new portfolios in composites and of the exclusion of terminated portfolios from composites; and
- state the requirements and recommendations of the GIPS standards for asset class segments carved out of multi-class portfolios, and demonstrate the allocation of cash using the “beginning of period” allocation method.
Study Session IX: Disclosures and Presentations
The candidate should be able to:
- state the requirements and recommendations of the GIPS standards with respect to disclosures, including fees; the use of leverage and derivatives; conformity with local laws and regulations that conflict with the GIPS standards; and non-compliant performance records;
- state the requirements and recommendations of the GIPS standards with respect to presentation and reporting, including the required timeframe of compliant performance records, annual returns, composite market values, and benchmarks;
- explain the conditions under which the performance record of a past firm or affiliation must be linked to or used to represent the historical record of a new firm or affiliation;
- evaluate the relative merits of high/low, interquartile range, and standard deviation as measures of the dispersion of portfolio returns within a composite;
- explain and demonstrate the calculation of equal-weighted and asset-weighted standard deviations of the returns of individual portfolios within a composite; and
- identify errors and omissions in given performance presentations.
Study Session X: Alternative Assets
The candidate should be able to:
- identify the types of investments that are subject to the GIPS standards for real estate and private equity;
- state and explain the provisions of the GIPS standards for real estate, and calculate total return, income return, and capital return for real estate assets;
- state and explain the provisions of the GIPS standards for private equity;
- explain the private equity valuation principles, including the hierarchy of fair valuation methodologies for private equity investments; and
- identify errors and omissions in given real estate and private equity performance presentations.
Study Session XI: Verification and the GIPS Advertising Guidelines
The candidate should be able to:
- explain the purpose and scope of verification;
- summarize the pre-verification and verification procedures that must be conducted before a verification report can be issued;
- state and explain the requirements for compliance with the GIPS Advertising Guidelines;
- identify errors and omissions in given advertisements; and
- define the terms presented in the GIPS Glossary.