BOOK 1 - ETHICS AND PROFESSIONAL

STANDARDS AND QUANTITATIVE

WELCOME TO THE 2008

SCHWESER STUDY NOTES

Thank you for trusting Schweser to help you reach your goals. We are all very pleased to be able to help you

prepare for the Level 1 CFA Exam. In this introduction, I want to explain the resources included with the Study

Notes, suggest how you can best use Schweser materials to prepare for the exam, and direct you toward other

educational resources you will find helpful as you study for the exam.

Besides the Study Notes themselves, there are many educational resources available at SchweseLcom. Just log in

using the individual username and password that you received when you purchased the Schweser Study Notes,

and go to Online Access. All purchasers of our 2008 Level 1 Schweser Study Notes pack receive:

Study Notes - Five volumes that include complete coverage of all 18 Study Sessions and all Learning Outcome

Statements (LOS) with examples, Concept Checkers (multiple-choice questions for every reading), and

Comprehensive Problems for many readings to help you master the material and check your progress. At the end

of each topic area, we include a Self-test. Self-test questions are created to be exam-like in format and difficulty

in order for you to evaluate how well your study of each topic has prepared you for the actual exam.

Practice Exams Volume 1 - Three full (240-quesrion, 6-hour) Level 1 practice exams to help you prepare for the

exam itself as well as to better target your final review efforts.

Schweser Library - I have created five videos that are available to all Schweser Study Notes purchasers. Each

Schweser Library volume is approximately 30 to 60 minutes length. Topics include: "Using Your Calculator,"

"Ethics Overview," "GIPS®," "Level 1 Exam Overview," and "Accounting for Capital Leases."

Schweser Study Planner - Use your Online Access to tell us when you will start and what days of the week you

can study. Study Planner will create a study plan just for you, breaking each study session into daily and weekly tasks to keep you on track and help you monitor your progress through the curriculum.

If you purchased the Schweser Study Notes as part of the Essential or Premium Package, you will also receive

access to Faculty Office Hours. Office Hours allow you to get your questions about the curriculum answered in real time and see others' questions (and faculty answers). Office hours is a text-based live interactive online chat

with a Level 1 expert. Archives of previolls Office Hours sessions are sorted by topic and are posted shortly after

each session.

The Level 1 CFA exam is a formidable challenge (76 Readings and 450+ Learning Outcome Statements), and you

must devote considerable time and effort to be properly prepared. There is no shortcut; you must learn the

material, know the terminology and techniques, understand the concepts, and be able to answer (70% of) 240

questions quickly and correctly. Fifteen to 20 hours per week for 20 weeks is probably a good estimate of the

study time required on average, but some candidates will need more time or less depending on their individual

backgrounds and experience.

To help you master this material and be well prepared for the CFA Exam, we offer several other educational

resources, including:

Live Weekly Classroom Programs - We offer weekly classroom programs in several large cities. Please check at

Schweser.com for locations, dates. and availahility.

Welcome to the 2008 Schweser Study Notes

\Xfeekly Online Program - I teach two Live Online Programs (16 3-hour sessions) each week, beginning in

January (August for the December exam). The schedule for the Weekly Online Program is:

Class #

1 Exam 1nrro and Ethics 55 # I

2 Quantitative Methods 55 #2

3 Quantitative Methods 55 #3

4 Economics 55 #4, #5

5 Economics 55 #5, #6

6 Financial Statement Analysis 55 #7

7 Financial Statement Analysis 55 #8

8 Financial Statement Analysis 55 #9

Class #

9 Financial Statement Analysis 55 #10

10 Corporate Finance 55#1 1

11 Portfolio Management & Securities Markets 55 #12, 13

12 Eguity Securities 55 #14

13 Fixed Income Investments 55 # 15, 16

14 Fixed Income Investmen ts 55 # 16

15 Derivatives 55 # 17

] 6 Alternative Investments 55 #18

Candidates have a choice of two different live online classes, one at 6:30-9:30 p.m. New York time and one at

6:00-9:00 p.m. London time. Archived classes are available for viewing at any time throughout the season.

Candidates enrolled in the Weekly Online Program also have access to another 15+ hours of video instruction in

the Schweser Online Library, downloadable slide files for all slides presented in class, workshop problems and

solutions, and a special e-mail address where they can send questions to me at any time.

Intensive Review - Visit Schweser.com for locations and dates of 3-Day Seminars (offered worldwide). In May

we also offer a 5-day intensive review program in Dallas and our flagship 7-day residence program in Windsor,

Ontario.

Practice Questions

In order to retain what you learn, it is important that you quiz yourself often. We offer CD, download, and

online versions of SchweserPro, which contains thousands of Level 1 practice questions and explanations. You

can create quizzes by LOS, by Reading, or by Study Session, with the degree of difficulty you select.

Practice Exams

In addition to the practice exams included with the Study Notes pack, we also offer six other Level 1 practice exams. Practice Exams Volume 2 contains three full 240-question (6-hour) exams, and three more are available as

online exams. These are important tools for gaining the speed and confidence you will need to pass the exam. Each book contains the answers for self-grading, and explanations are available online for all questions. By

entering your answers at Schweser.com, you can use our Performance Tracker to find our how you have

performed compared to other Schweser Level 1 candidates.

How to Succeed

There are no shortcuts; depend on the fact that CFA Institute will test you in a way that will reveal how well you

know the Level 1 curriculum. You should begin early and stick to your study plan. You should first read the

Schweser Study Notes and complete the Concept Checkers and Comprehensive Problems for each reading. You

should prepare for and attend a live class, an online class, or a study group each week. You should create and take quizzes often using SchweserPro and go back to review previous readings and Study Sessions as well. At the end

of each topic area you should take the Self-test to check your progress. You should finish the overall curriculum at least two weeks (preferably four weeks) before the Level 1 exam so that you have sufficient time for Practice

Exams and for further revIew of those topics that you have not yet mastered. Best regards.

READINGS AND

LEARNING OUTCOME STATEMENTS

READINGS

The following material is a review of the Ethics and Professional Standards and Quantitative Methods principles designed to address the learning outcome statements set forth by CPA Institute.

STUDY,SESSION 1

, '

Reading Assignments

Ethical and Professional Standards and Quantitative Methods, CFA Program Curriculum, Volume 1 (CFA Institute, 2008)

1. Code of Ethics and Standards of Professional Conduct

2. "Guidance" for Standards I-VII

3. Introduction to the Global Investment Performance Standards (GIPS®)

4. Global Investment Performance Standards (GIPS®)

Reading Assignments

Ethical and Professional Standards and Quantitative Methods, CFA Program Curriculum, Volume 1 (CFA Institute, 2008)

5. The Time Value of Money

6. Discounted Cash Flow Applications

7. Statistical Concepts and Market Returns

8. Probability Concepts

- ,:' -.', - ,

STllOY SESSION 3'

~\_! .\<:'t.;-; .... , -... ." :.r.~ ":' • 1_';.

page 11

page 11 page 70 page 72

page 98 page 135 page 159 page 197

Reading Assignments

Ethical and Professional Standards and Quantitative .Methods, CFA Program Curriculum, Volume 1 (CFA Institute, 2008)

9. Common Probability Distributions

10. Sampling and Estimation

11. Hypothesis Testing

12. Technical Analysis

Ethics and Professional Standards and Quanritativ~ Methods

Readings and Learning Outcome Statements

LEARNING OUTCOME STATEMENTS (LOS)

STUDY SESSION 1

'.

Page 6

The topical coverage corresponds with the following CFA Institute assigned reading:

1. Code of Ethics and Standards of Professional Conduct

The candidate should be able to:

a. describe the structure of the CFA Institute Professional Conduct Program

and the process for the enforcement of the Code and Standards. (page 11)

b. state the six components of (he Code of Ethics and the seven Standards of

Professional Conduct. (page 12)

c. explain the ethical responsibilities required by the Code and Standards,

including the multiple subsections of each Standard. (page 13)

The topical coverage corresponds with the following CFA Institute assigned reading:

2. "Guidance" for Standards I-VII The candidate should be able to:

a. demonstrate a thorough knowledge of the Code of Ethics and Standards

of Professional Conduct by applying the Code and Standards to specific

situations presenting multiple issues of questionable professional

conduct. (page 17)

b. distinguish between conduct that conforms to the Code and Standards

and conduct that violates the Code and Standards. (page 17)

c. recommend practices and procedures designed to prevent violations of

the Code of Ethics and Standards of Professional Conduct. (page 17)

The topical coverage corresponds with the following CFA Institute assigned reading:

3. Introduction to the Global Investment Performance Standards (GIPS)

The candidate should be able to:

a. explain why the GIPS standards were created, what parties the GIPS

standards apply to, and who is served by the standards. (page 70)

b. explain the construction and purpose of composites in performance

reporting. (page 71)

c. explain the requirements for verification of compliance with eIPS

standards. (page 71)

The topical coverage corresponds with the following CFA Institute assigned reading:

4. Global Investment Performance Standards (GIPS)

The candidate should be able to:

a. describe the key characteristics of the G IPS standards and the

fundamentals of compliance. (page 72)

b. describe the scope of the GIPS standards with respect to an investment firm's definition and historical performance record. (page 74)

c. explain how the GIPS standards are implemented in countries with

existing standards for performance reporting and describe the appropriate

. response when the GIPS standards and local regulations conflict. (page 74)

d. characterize the eight major sections of the GIPS standards. (page 74)

Ethics and Professional Standards and Quantitative Methods

Readings and Learning Outcome Statements

The topical coverage co rresp 0ndj' with the fOllowing CFA Institute assigned reading:

5. The Time Value of Money

The candidate should be able [0;

a. interpret inrerest rates as required rate of rewrn, discounr rate, or

opportunity cost. (page 100)

b. explain an interest rate as the Silln of a real risk-free rate, expected

inflation, and premiums that compensate investors for distinct types of

risk. (page 100)

c. calculate and interpret the effecri,'c annllal rate, given the stated annual

interest rate and the frequency of compounding, and solve time value of

money problems when compounding periods are other than annual.

(page 101)

d. calculate and interprct the future vallie (FV) and present value (PV) of a

single sum of money, an ordinary annuity, an annuity due, a perpetuity

(PV only), and a series of unequal cash Hows. (page 103)

e. draw a time line, specify a time index, and solve time value of money

applications (for example, mortgages and savings for college tuition or

retiremenr). (page 116)

The topical c01lerage corresponds with the fOllowing CFA Institute assigned reading:

6. Discounted Cash Flow Applications

The candidate should be able to:

a. calculace and interpret the n<.'t prc:selH vallie (NPV) and the internal rate

of return (IRR) of an investment, contrast the NPV rule to the IRR rule,

and idenrify problems associated with the IRR rule. (page 135)

b. define, calculate, and interpret a holding period return ([Otal return).

(page 140)

c. calculacc:, interpret, and distinguish her•veen the money-weighted and

time-weighted rates of return of a p()rct~)lio and appraise the performance

of ponfolio's hased on these meaSllrCs. (page 141)

d. calculate al1d interpret the hank discolIlll yield, holding period yield,

effective at1tllla! yield, and money l1];1rket yield for a U.S. Treasury bill;

and con'crr among holding period )'idds, money market yields, effective

annu,d yields, and bond eqlli,•:tlelll ),i.:lds. (page 144)

The topical CO/lei'dg!! COITCJponcls ,uich thej(;!!olfliilg CfA Imtitute assigned reading:

7. Statistical Concepts and Ma rket Ret urns

The candidate should be ahle to:

a. differemiate between descriptive statistics and inferential statistics,

between a population and a sample, and among the (ypes of measurement scales. (page 159)

b. explain a parameter, a sample statistic, and a frequency disuibution.

(page 160)

c. calcula(e and interpret relative frequeIlcies and cumulative relative

frequencies, given a frequency disaiblltion, and describe (he properties of

a dataset \-JreseIHed as a histogram or a freqllency polygon. (page 162)

d. define, calculate, and interpret meaSllfes of central tendency, including

the popula(ion mean, sample mean, arithmetic mean, weighted average

©200R Sehweser Page 7

Ethics and Professional Standards and Quantitative Methods

Readings and Learning Outcome Statements

or mean (including a portfolio rerum viewed as a weighted mean),

geometric mean, harmonic mean, median, and mode. (page 165)

e. describe, calculate, and interpret quartiles, quintiles, deciles, and

percentiles. (page 171)

f. define, calculate, and interpret 1) a range and a mean absolute deviation,

and 2) the variance and standard deviation of a population and of a

sample. (page 172)

g. calculate and interpret the proportion of observations falling within a

specified number of standard deviations of the mean, using Chebyshev's

inequality. (page 176)

h. define, calculate, and interpret the coefficient of variation and the Sharpe

ratio. (page 177)

1. define and interpret skewness, explain the meaning of a positively or

negatively skewed return distribution, and describe the relative locations

of the mean, median, and mode for a nonsymmetrical distribution.

(page 179)

J. define and interpret measures of sample skewness and kurtosis.

(page 181)

Page 8

The topical coverage corresponds with the following CFA Institute assigned reading:

8. Probability Concepts

The candidate should be able to:

a. define a random variable, an outcome, an event, mutually exclusive

events, and exhaustive events. (page 197)

b. explain the two defining properties of probability, and distinguish among

empirical, subjective, and a priori probabilities. (page 197)

c. state the probability of an event in terms of odds for or against the event.

(page 198)

d. distinguish between unconditional and conditional probabilities.

(page 199)

e. calculate and interpret 1) the joint probability of two events, 2) the

probability that at least one of two events will occur, given the

probability of each and the joint probability of the two events, and 3) a

joint probability of any number of independent events. (page 199)

f. distinguish between dependent and independent events. (page 202)

g. calculate and interpret, using the tOtal probability rule, an uncondi tional

probability. (page 203)

h. explain the use of conditional expectation in investment applications.

(page 207)

1. diagram an investment problem, using a tree diagram. (page 207)

J. calculate and interpret covariance and correlation. (page 208)

k. calculate and interpret the expected value, variance, and standard

deviation of a random variable and of returns on a portfolio. (page 211)

I. calculate and interpret covariance given a joint probability function.

(page 213)

m. calculate and interpret an updated probability, using Bayes' formula.

(page 217)

n. identify the most appropriate method to solve a particular counting

problem, and solve counting problems using the factorial, combination,

and permutation notations. (page 220)