UNIT 2: CERTIFICATE IN INVESTMENT

MANAGEMENT (IMC)
THE INVESTMENT PRACTICE V.21 TESTED
FROM 1 DECEMBER 2023
UNIT AIMS
By the end of this unit, learners should be able to demonstrate:

an ability to apply statistical and financial mathematics techniques;

an understanding of micro-economics;

an understanding of the macro-economic environment and its impact on investments;

an understanding of accounting principles;

an ability to evaluate the characteristics, inherent risks and behaviour of equities,

cash and cash equivalents, and fixed-income securities;

an ability to analyse the characteristics, inherent risks, behaviours and relevant tax
considerations of derivatives;

an ability to analyse the characteristics, inherent risks and behaviours of alternative

investments;

an understanding of the merits and limitations of the main investment theories;

an ability to analyse the correlation of asset classes;

an understanding of the principles of investment management;

an ability to analyse the characteristics, inherent risks and behaviours of investment

products; and

an understanding of the principles of investment performance measurement;

QUESTION ALLOCATION:
Question allocation across the syllabus is balanced on the guidance of psychometric and industry
specialists. The following question allocation for Version 21 of the IMC is provided as a broad
indication of the relative ‘weighting’ of different parts of the syllabus in IMC examinations from 1
December 2023.

Question
Content area Topic Topic name
allocation
Quantitative
7 Quantitative methods 10–20
methods
8 Micro-economics

Economics 5–15
9 Macro-economics

Accounting 10 Accounting 10–20

Asset classes
11 Equities

12 Fixed income
25–30
13 Derivatives

Alternative investments and private

14
markets

15 Portfolio management

Investment theory,
management and 16 Investment products 25–30
measurement

17 Investment performance measurement

OTHER INFORMATION REGARDING THIS UNIT:

Exam format: 105 questions.

Online testing using standard multiple choice, item sets and gap-fill style
questions.

Time allowed for exam: 2 hours and 20 minutes.

Grades: Pass or fail.

Study materials: Official Training Manual v.21 is available from the CFA UK website, including
revision questions with fully worked calculations.
Mock exam available on the CFA UK website.

Recommended study hours: 140 hours.

Availability of exam sessions: Every working day through Pearson VUE testing centres and every day via
OnVUE remote proctoring.
TOPIC 7 QUANTITATIVE METHODS
By the end of this topic, learners should be able to:

Demonstrate an ability to apply statistical and financial mathematics techniques.

7.1 SOURCES OF DATA

7.1.1 Identify and distinguish between different sources and types of data
7.1.2 Distinguish between a population and a sample
7.1.3 Explain the key sampling methods
7.1.4 Distinguish between continuous and discrete data
7.1.5 Define categorical data and explain how it can be converted to ordinal data
7.1.6 Interpret a frequency and relative frequency distribution
7.1.7 Explain the use of the following in the presentation of data: pie chart, bar chart,
histogram, scatter plots and line graphs
7.2 SUMMARY DATA
7.2.1 Define, explain and calculate the arithmetic mean, geometric mean, median and
mode using raw and interval data, and calculate the geometric mean return using a
series of returns
7.2.2 Explain the relationship between the mean, median and mode for symmetric and
skewed data
7.2.3 Define, explain and calculate the following measures of dispersion for both raw data
and interval data: standard deviation (population and sample), variance, range,
quartiles and percentiles, and interquartile range
7.2.4 Explain the notion of probability distributions and identify the properties of the normal
distribution
7.2.5 Explain and apply the concepts of null hypothesis, alternative hypothesis and the role
of statistical significance in rejecting/accepting the null/alternative hypotheses in the
context of investment decision-making
7.3 CORRELATION AND BIVARIATE LINEAR REGRESSION
7.3.1 Define correlation and identify alternative measures of correlation
7.3.2 Explain the least-squares regression technique in deriving a line of best fit and
interpret the correlation coefficient R, R-squared, adjusted R-squared and measures
of unexplained variation (for example the mean squared error)
7.3.3 Calculate and interpret a forecast value for the dependent variable given the intercept
and slope coefficients of a regression equation taking into account their statistical
significance and adjusted R-squared
7.3.4 Explain the shortfalls in the application of linear regression to forecasting, including
why correlation does not imply causation, and the pitfalls of data-mining
7.3.5 Describe the impact of extreme events on alternative measures of correlation
7.4 INDEX NUMBERS
7.4.1 Explain the role of financial market indices
7.4.2 Explain and calculate a price relative for a share or index and calculate an index level
for the current year, given the base year data and the current year data
7.4.3 Calculate an index level having re-based the index series
7.4.4 Calculate a price-weighted index, an equally weighted index, a market value-
weighted index and a geometrically weighted index
7.4.5 Identify and explain the impact of a free float adjusted versus pure market
capitalisation methodology on index calculation
7.4.6 Describe the composition and construction of key global bond and equity market
indices and identify strengths and weaknesses of their respective construction
methods
7.5 SIMPLE AND COMPOUND INTEREST
7.5.1 Calculate simple and compound interest earned over multiple periods
7.5.2 Calculate the annual compound rate given the simple rate and the frequency of
compounding
7.5.3 Calculate the annual simple rate of interest given the annual compound rate and the
frequency of compounding
7.5.4 Calculate the effective annual rate given a nominal annual rate with continuous
compounding
7.6 THE TIME VALUE OF MONEY – PRESENT AND FUTURE VALUE
CALCULATIONS, ANNUITIES, PERPETUITIES AND MORTGAGES
7.6.1 Calculate and interpret future values for single sums and annuities
7.6.2 Calculate and interpret present values for single sums, annuities, and perpetuities
7.6.3 Calculate equal instalments on a repayment mortgage given the present value of the
borrowings, the fixed mortgage rate and the term of the borrowing
7.7 THE INTERNAL RATE OF RETURN AND NET PRESENT VALUE
7.7.1 Calculate and interpret the net present value (NPV) and internal rate of return (IRR)
of a series of investment cash flows
7.7.2 Explain how NPVs and IRRs can be used in investment decision making and their
limitations
TOPIC 8 MICRO-ECONOMICS
By the end of this topic, learners should be able to:

Demonstrate an understanding of micro-economics.

8.1 INTRODUCTION TO MICRO-ECONOMICS

8.1.1 Explain the main ways in which micro-economics might assist investment
professionals
8.1.2 Describe the strengths and weaknesses of micro-economics as a means of analysing
financial market behaviour
8.1.3 Describe the main applications of micro-economic theory
8.2 ANALYSING DEMAND AND SUPPLY
8.2.1 Explain the laws of supply and demand and the concept of equilibrium
8.2.2 Distinguish between movements along demand and supply curves, and shifts thereof
8.2.3 Identify the factors that cause a demand or supply schedule to shift
8.2.4 Describe, calculate and interpret ‘own price elasticity of demand’, the factors that
determine this and its impact on total revenues
8.2.5 Explain, calculate and interpret the concept of cross elasticity of demand (as applied
to substitute and complementary goods)
8.2.6 Explain, calculate and interpret the concept of income elasticity
8.3 ANALYSING COST AND PROFITABILITY
8.3.1 Distinguish between explicit (accounting) costs and opportunity (economic) costs
8.3.2 Explain the concept of normal, supernormal and subnormal levels of profit
8.3.3 Define fixed costs, variable costs, marginal costs, total costs and average costs
8.3.4 Explain the shapes of the short-run marginal cost, average variable cost, average
fixed cost and average total cost curves
8.3.5 Explain the law of diminishing marginal returns and its impact on the shape of short-
run cost curves
8.3.6 Explain the relationship between total revenue, average revenue and marginal
revenues for a normal demand schedule
8.3.7 Explain the relationship between marginal cost and marginal revenue, and how this
determines the profit-maximising level of output for a firm
8.3.8 Define short run and long run in the context of cost behaviour
8.3.9 Explain the notions of economies of scale, a minimum efficient scale and
diseconomies of scale and their impact on the shape of the long-run average cost
curve
8.3.10 Explain the relationship between long-run marginal costs and long-run average costs
and explain how this determines the level of output for productive efficiency to arise
8.4 ANALYSING THE COMPETITIVE ENVIRONMENT
8.4.1 Identify the conditions that characterise a perfectly competitive (price-taker) market
8.4.2 Explain the conditions of long-run equilibrium for a price-taker
8.4.3 Explain the market mechanics through which only normal levels of profit can be
earned by price-takers in the long run
8.4.4 Explain the relationship between short-run supply and marginal cost for a price-taker
8.4.5 Describe the shape of the long-run supply curve for a perfectly competitive industry
8.4.6 Explain the decision by a price-taker facing economic losses to either continue to
operate or shut down
8.4.7 Explain, calculate and interpret elasticity of supply and its dependence on the
flexibility of factors of production
8.4.8 Identify the conditions that characterise a pure monopoly
8.4.9 Distinguish between the equilibrium price, output levels and productive efficiency of a
monopoly compared to a perfectly competitive firm
8.4.10 Explain price discrimination and the conditions under which it will prevail
8.4.11 Describe the characteristics of monopolistic competition and oligopoly
8.4.12 Describe how business cycles may affect relative industry performance
8.4.13 Identify Porter’s five competitive forces that drive industry competition
8.4.14 Describe the product life cycle and the characteristics of each phase (introduction,
growth, maturity and decline)
8.4.15 Describe the concept of strengths, weaknesses, opportunities and threats (SWOT)
analysis and its role in corporate evaluation
8.4.16 Describe the four Ps of marketing mix (product, price, promotion and place) in the
context of analysing competitive advantage and threats

TOPIC 9 MACRO-ECONOMICS
By the end of this topic, learners should be able to:

Demonstrate an understanding of the macro-economic environment and its impact

on investments.
9.1 INTRODUCTION TO MACRO-ECONOMICS
9.1.1 Describe the main applications of macro-economic theory
9.1.2 Identify the key economic characteristics of historical financial crises
9.2 ANALYSING THE OUTLOOK FOR GDP GROWTH
9.2.1 Identify the main long-term UK and global socio-economic trends
9.2.2 Identify the key economic indicators and their trends
9.2.3 Describe the relationship between, and importance of, the main world economies
9.2.4 Describe economic and financial cycles including their predictability and regional
differences
9.2.5 Distinguish between gross domestic product (GDP), gross national product (GNP)
and national income
9.2.6 Identify the difference between real and nominal GDP
9.2.7 Identify the components of the circular flow of income, distinguishing between
injections into and withdrawals (‘leakages’) from the circular flow
9.2.8 Identify the nature of the relationship between aggregate saving, consumption and
investment as predicted by the Paradox of Thrift
9.3 ANALYSING ECONOMIC POLICY
9.3.1 Identify the major components of the Classical, Monetarist, Keynesian and Austrian
schools of thought and distinguish between them
9.3.2 Describe fiscal policy and its influence on aggregate demand
9.3.3 Identify the problems associated with fiscal policy
9.3.4 Identify money supply (from ‘narrow’ through to ‘broad’)
9.3.5 Identify the key features of, and changes to the understanding of, the fractional
reserve banking system including defining and calculating the money multiplier
9.3.6 Explain the transmission mechanism whereby monetary policy influences economic
aggregates
9.3.7 Define unemployment, distinguish between different types of unemployment and
explain how it is measured in the UK
9.3.8 Define inflation (including deflation), explain how it is measured in the UK and identify
the different causes
9.3.9 Explain the relationship between inflation and unemployment according to the Phillips
curve
9.3.10 Explain how inflation targeting operates in the UK
9.3.11 Distinguish between the different mandates and approaches of the major central
banks
9.3.12 Explain the unconventional tools used by central banks to manage the economy
9.3.13 Explain the impact of bank capital and liquidity requirements and the move towards
macro prudential regulation of the macro-economy
9.3.14 Identify the role of debt in the business cycle
9.4 ANALYSING EXCHANGE RATES
9.4.1 Explain how changes in supply and demand for a currency will affect its value on the
foreign exchange markets
9.4.2 Identify the key components of the balance of payments
9.4.3 Explain the relationship between the supply and demand for a currency, and the
underlying transactions represented in the balance of payments
9.4.4 Distinguish between a fixed, floating and a managed exchange rate (‘dirty floating’
regime)
9.4.5 Explain the economic benefits and costs of a fixed exchange rate mechanism
9.4.6 Explain the implications of persistent global imbalances of trade and capital
9.4.7 Explain the notion of purchasing power parity (PPP) as a forecasting tool for
exchange rates
9.4.8 Explain the effectiveness of monetary and fiscal policy in fixed and floating exchange
rate regimes
9.4.9 Explain an optimal currency area (OCA) and identify the advantages and
disadvantages of implementing a single currency in an OCA
9.4.10 Describe the nature and basic operations of the spot and forward exchange markets
9.4.11 Explain the nature of exchange rate risk and how it can be managed
9.4.12 Apply the concept of PPP to forecast expected future spot exchange rates using the
differential inflation rates between two countries
9.4.13 Distinguish between covered and uncovered interest rate parity and calculate
forward rates using the appropriate method

TOPIC 10 ACCOUNTING
By the end of this topic, learners should be able to:

Demonstrate an understanding of accounting principles.

10.1 FUNDAMENTAL PRECEPTS

10.1.1 Explain the legal requirement to prepare financial statements
10.1.2 Define ‘small companies’ for the purpose of financial statement preparation and
explain the relevance of this definition to financial reporting requirements
10.1.3 Explain the concept of a company being a separate legal entity, and the purpose of
the preparation of the accounts
10.1.4 Explain when accounts may be required to be prepared under International Financial
Reporting Standards (IFRS) rather than Generally Accepted Accounting Principles in
the UK (UK GAAP)
10.1.5 Explain the role of the auditor and identify, in outline, the reasons for auditors issuing
a qualified report
10.2 THE BALANCE SHEET
10.2.1 Explain the purpose of a balance sheet or statement of financial position
10.2.2 Identify and explain the key balance sheet categories and content
10.2.3 Distinguish between capitalising costs and expensing costs
10.2.4 Explain the valuation of non-current assets
10.2.5 Calculate depreciation under the straight-line and reducing balance methods
10.2.6 Calculate the profit or loss on disposal of a non-current asset
10.2.7 Explain the principles behind the valuation of inventories
10.2.8 Explain the effects of first-in-first-out and last-in-first-out valuations on inventory
values and profits
10.2.9 Identify the types of current and non-current liabilities that typically appear in financial
statements
10.2.10 Explain the concept of a provision and its treatment within the financial statements
10.2.11 Explain the concept of a contingent liability and its treatment within financial
statements
10.2.12 Describe the treatment of pension costs in financial statements
10.2.13 Explain what is meant by a post-balance sheet event
10.2.14 Distinguish among authorised, issued, paid-up and called-up share capital
10.2.15 Explain the effect of the following on a balance sheet: rights issue, bonus/scrip
issue, stock split and share repurchases
10.2.16 Identify and explain the main types of reserve found in the balance sheet
10.3 THE ACCOUNTING TREATMENT OF FINANCIAL INSTRUMENTS
10.3.1 Identify the various classifications of financial instrument and describe the accounting
treatment of each
10.4 THE INCOME STATEMENT AND STATEMENT OF CHANGES IN EQUITY
10.4.1 Identify and explain the classification of expenses based on nature or function
10.4.2 Explain the principle of revenue recognition
10.4.3 Identify the following different levels of profit and which classes of expenses are
considered in arriving at each level: operating profit and net profit including the
implications of using non-statutory profit measures
10.4.4 Explain the objective of, and identify the information to be reported in, a statement of
changes in equity
10.5 THE CASH FLOW STATEMENT
10.5.1 Explain the purpose of a cash flow statement
10.5.2 Identify the classification of cash flow activities
10.5.3 Calculate net cash flow from operations given operating profit (or vice versa) and the
relevant balance sheet movements
10.6 GROUP ACCOUNTS
10.6.1 Define and distinguish between corporate investments, associated companies and
subsidiaries
10.6.2 Explain the purpose of group accounts
10.6.3 Define a minority interest and explain how it is represented in financial statements
10.6.4 Explain how goodwill arises in acquisition accounting
10.6.5 Explain the treatment of goodwill and intangible assets in the group accounts,
including amortisation, useful lives and the requirement for impairment reviews
10.7 MAJOR ACCOUNTING RATIOS
10.7.1 Distinguish between profitability, liquidity and gearing ratios
10.7.2 Define and calculate return on capital employed and return on equity ratios
10.7.3 Explain how return on capital employed can be broken down into profit margin and
asset turnover
10.7.4 Define, calculate and interpret operational gearing, financial gearing, the current ratio
and the quick ratio (acid test)
10.7.5 Explain the effect of the following on the major accounting ratios: rights issue,
bonus/scrip issue, stock split and share repurchases

TOPIC 11 EQUITY
By the end of this topic, learners should be able to:

Demonstrate an ability to evaluate the characteristics, inherent risks and behaviour of

equities.
11.1 EQUITY CAPITAL – CHARACTERISTICS
11.1.1 Identify the characteristics, and the risks to the investor, of the various classes of
equity capital
11.1.2 Identify the reasons for primary issuance and secondary markets for ordinary shares
with investor implications
11.1.3 Identify the reasons for issuance of preference shares and the implications to the
investor
11.1.4 Identify the characteristics of global and American Depository Receipts
11.2 EQUITY – ISSUANCE AND CAPITAL RETURN
11.2.1 Distinguish between primary and secondary share issuance
11.2.2 Define the key features of an equity issuance
11.2.3 Define and explain the purpose of a rights issue, a bonus/scrip issue and a stock split
11.2.4 Calculate the theoretical ex-rights price and the value of the right (nil-paid) given the
cum-rights price, the issuance ratio and the subscription price
11.2.5 Evaluate the options open to an investor in response to a rights offer and explain the
effect on the investor’s wealth
11.2.6 Calculate the theoretical ex-scrip price given the scrip ratio and the cum-scrip price
11.2.7 Identify and explain the motivations behind a company buying back its own shares
11.3 EQUITY – VALUATION
11.3.1 Calculate a holding period return for an ordinary share, comprising capital gain and
dividend income
11.3.2 Identify the reasons for a company’s chosen dividend policy
11.3.3 Explain the practical constraints on companies paying dividends
11.3.4 Explain the importance of the dividend yield and dividend cover in stock analysis
11.3.5 Calculate dividend yield and dividend cover
11.3.6 Calculate an estimated growth rate for dividends using historic data, or using return
on equity, and a retained earnings ratio
11.3.7 Identify the components, assumptions and limitations of the dividend discount model
(Gordon growth model)
11.3.8 Calculate the present value of a share using the dividend discount model
11.4 EQUITY – ALTERNATIVE VALUATION METRICS
11.4.1 Distinguish between and evaluate the merits of relative valuation models and
absolute valuation models, and between historic and prospective measures of value
11.4.2 Explain what is meant by earnings per share and diluted earnings per share
11.4.3 Calculate a basic earnings per share
11.4.4 Explain the possible shortfalls of using price multiples in corporate valuation
11.4.5 Calculate price–earnings (both historic and prospective), price to book, price to sales,
price to cash flow, and enterprise value to earnings before interest, tax and
depreciation and amortisation (EBITDA) ratios for a company
11.4.6 Explain the basics of free cash-flow based valuation methods (FCFF and FCFE) and
residual income valuation methods
11.4.7 Define financial gearing and evaluate the effect on required equity returns and thus
valuations

TOPIC 12 FIXED INCOME

By the end of this topic, learners should be able to:

Demonstrate an ability to analyse the characteristics, inherent risks, and behaviour of

cash, cash equivalents, and fixed-income securities.
12.1 CASH AND CASH EQUIVALENTS
12.1.1 Explain the main characteristics and risks associated with cash deposits and money
market instruments (including Treasury Bills, certificates of deposit (CDs),
commercial paper (CP) and floating rate notes (FRNs))
12.1.2 Calculate the discount and quoted yield on a UK Treasury Bill
12.2 FIXED-INCOME SECURITIES – CHARACTERISTICS
12.2.1 Explain the structure and characteristics of the various types of fixed-income
instruments issued in the UK, including government bonds, index-linked bonds,
corporate bonds and Eurobonds
12.2.2 Calculate the price of a fixed income security given its maturity, coupon and yield
12.2.3 Explain clean (quoted) and dirty pricing
12.2.4 Identify the rationale for and risks to the issuer and holder of a convertible, callable or
puttable bond
12.3 FIXED-INCOME SECURITIES – RISK AND RETURN
12.3.1 Identify the components of return of the present value calculation
12.3.2 Identify the main risks faced by bond holders and how these risks can be addressed
12.3.3 Identify the nature of the relationship between yield and price
12.3.4 Identify the two components of interest rate risk (price and reinvestment risk)
12.3.5 Analyse the factors that affect the sensitivity of a bond’s price to a change in required
yield
12.3.6 Define and calculate the (Macaulay) duration of a bond
12.3.7 Define and calculate the modified duration of a bond
12.3.8 Calculate, given the duration of a bond, the change in price given a change in
required yield
12.3.9 Explain the convexity error that arises from using duration to estimate a change in
bond price using duration
12.3.10 Define credit risk as it affects bonds
12.3.11 Identify the role and drawbacks of the major credit rating agencies
12.3.12 Interpret the key classes of rating on the scales published by the major rating
agencies
12.3.13 Explain the concept of debt seniority
12.3.14 Identify key features and financial ratios considered by credit rating agencies in
conducting a corporate rating
12.4 FIXED-INCOME SECURITIES – YIELDS AND THE YIELD CURVE
12.4.1 Define and calculate flat yield, gross redemption yield (GRY), net redemption yield
(NRY) and grossed-up NRY
12.4.2 Explain when each of these measures may be appropriate to use
12.4.3 Define the yield curves
12.4.4 Explain the theories that contribute to explaining the shape of the yield curve
12.4.5 Define and calculate forward and spot interest rates
12.4.6 Explain the relationship between forward rates, spot rates and the GRY

TOPIC 13 DERIVATIVES
By the end of this topic, learners should be able to:

Demonstrate an ability to analyse the characteristics, inherent risks and behaviours

of derivatives.
13.1 DERIVATIVES
13.1.1 Distinguish between forwards, futures and options
13.1.2 Explain the nature, trading and settlement of exchange-traded and OTC derivatives
and explain the nature of bilateral margin requirements in uncleared derivatives
13.1.3 Identify the motive for using a futures contract rather than a trade in the underlying
asset
13.1.4 Define the ‘basis’ of a futures contract
13.1.5 Explain the nature of, and reasoning behind, a contango and backwardation market
13.1.6 Describe the main features of the following ICE Futures Europe contracts: short-term
interest rate futures, long gilt futures and FTSE 100 futures
13.1.7 Explain the possible uses of the above contracts in an investment management
context
13.1.8 Define the concept of index arbitrage
13.1.9 Distinguish between American-style and European-style options
13.1.10 Differentiate between the time value and intrinsic value components of an option
premium
13.1.11 Determine when an option is in-the-money, out-of-the-money or at-the-money
13.1.12 Calculate the time value of an option, given the premium, strike price and current
market price in the context of the Black-Scholes model of option pricing
13.1.13 Identify and explain the factors that determine the premium of an option
13.1.14 Determine the maximum profit, maximum loss and the motivation behind the
following option strategies: short and long call, put, straddle, covered call and protective put
13.1.15 Explain the use of futures and options in hedging an equity portfolio
13.1.16 Calculate the number of futures or options contracts required to hedge a portfolio
with a specified beta value
13.1.17 Identify the main purposes, mechanics and implications of a credit default swap
(CDS)
13.2 SELLING SHORT, STOCK LENDING AND CONTRACT FOR DIFFERENCES
(SWAPS)
13.2.1 Explain the role of stock lending in the markets and the benefits to the participants
13.2.2 Explain the mechanics and uses of short selling
13.2.3 Explain the nature of contracts for differences
13.2.4 Explain the nature of, and motivations behind, interest rate swaps, currency swaps,
equity swaps and inflation swaps
13.3 CONVERTIBLES AND WARRANTS
13.3.1 Explain the nature of convertible bonds and convertible preference shares
13.3.2 Calculate a conversion price, conversion value and conversion premium
13.3.3 Explain the component parts of the valuation of a convertible bond (namely straight
bond value, call option value, dilution effect and conversion ratio)
13.3.4 Distinguish between a warrant and a call option
13.3.5 Explain the key features of covered warrants

TOPIC 14 ALTERNATIVE INVESTMENTS AND PRIVATE MARKETS

By the end of this topic, learners should be able to:

Demonstrate an ability to analyse the characteristics, inherent risks and behaviours

of alternative investments.
14.1 ALTERNATIVE INVESTMENTS, PRIVATE MARKETS AND PORTFOLIO
DIVERSIFICATION
14.1.1 Describe the main features and risks of alternative investments and
their increasing role as a diversifier in portfolios
14.2 COMMODITIES INCLUDING CRYPTOCURRENCIES
14.2.1 Describe the main features of commodity markets
14.2.2 Identify the main ways investors can access the commodity markets
14.2.3 Explain the characteristics of the main commodity and emission derivatives, including
energy, metals, softs/biofuels and carbon emissions
14.2.4 Explain the characteristics and risks of investing in precious metals
14.2.5 Identify the main commodity derivative indices
14.2.6 Explain how commodity exposure can be viewed as a hedge against inflation and
‘event’ risk
14.2.7 Explain the role and main features of cryptocurrencies
14.3 PROPERTY AND OTHER REAL ASSETS
14.3.1 Explain the rationale for investing in property and contrast the investment
characteristics with the other major asset classes
14.3.2 Distinguish between the commercial and residential property markets
14.3.3 Describe the role and challenges of using indices when measuring property returns
14.3.4 Identify the main investors in the commercial property and other real asset markets
and the characteristics of the principal commercial property sectors
14.3.5 Explain how the direct commercial property market works with regard to ownership
and lease structures, buying and selling, costs, the valuation of property and
investment performance measurement
14.3.6 Describe the main valuation techniques applied to property investment
14.3.7 Identify the role of sustainability and environmental, social and governance (ESG)
characteristics in property valuation and investment
14.3.8 Explain the routes to indirect property investment
14.3.9 Describe the other main classes of real assets and the rationale for investing in
them, contrasting their investment characteristics with those of other major asset
classes

14.4 HEDGE FUND AND PRIVATE (UNLISTED) ASSETS

14.4.1 Explain the features and objectives of hedge funds and funds of hedge funds
14.4.2 Describe the various hedge fund strategies
14.4.3 Identify the potential benefits and limitations of hedge funds
14.4.4 Describe the management fee structure for hedge funds and unlisted asset investing
14.4.5 Describe the various approaches to unlisted asset investing
14.4.6 Identify the potential benefits and limitations of unlisted asset investing

TOPIC 15 PORTFOLIO MANAGEMENT

By the end of this topic, learners should be able to:

Demonstrate an understanding of the merits and limitations of the main investment

theories.

Demonstrate an ability to analyse the correlation of asset classes.

Demonstrate an understanding of the principles of investment management.

15.1 RISK AND RETURN AND THE IMPORTANCE OF DIVERSIFICATION

15.1.1 Explain the ‘normal’ trade-off between risk and return, and the concept of
‘dominance’ between investment strategies
15.1.2 Explain the importance of risk measurement in the analysis of investments, and why
ex-ante and ex-post measures of risk may be very different
15.1.3 Identify the commonly used measures of risk in investment analysis and fund
management
15.1.4 Explain the advantages and disadvantages of standard deviation as a measure of
risk
15.1.5 Explain the implications of assuming that returns are normally distributed
15.1.6 Explain the meaning of value at risk (VaR) and its advantages and disadvantages for
risk management
15.1.7 Explain the meaning of drawdown and its advantages and disadvantages as a
measure of risk
15.1.8 Explain tracking error and identify its advantages and disadvantages as a measure of
risk
15.1.9 Explain the impact of changing levels of price volatility over time and how this
impacts measures of risk
15.1.10 Explain the meaning of relative weights and the concept of active share and their
respective advantages and disadvantages as measures of risk
15.1.11 Explain diversification and its role in constructing efficient portfolios, and its
limitations during extreme market conditions
15.1.12 Explain the importance of correlation in constructing efficient portfolios, and the
difficulties, limitations and meaning of correlation coefficients
15.1.13 Calculate correlation coefficients from standard deviation/covariance of two
investments
15.1.14 Analyse and explain other types of investment risk, including inflation, currency,
interest rate, fraud, liquidity and counterparty risk
15.2 CORRELATION BETWEEN ASSET CLASSES
15.2.1 Identify the correlation between the various asset classes (equity, fixed income,
property, cash and alternative investments) and explain its relevance to asset
allocation
15.2.2 Explain the limitations of correlation analysis in extreme market conditions
15.3 MODELS OF RETURN AND RISK
15.3.1 Identify the assumptions behind the single-factor capital asset pricing model (CAPM)
and identify other factors in common use
15.3.2 Calculate the expected return on a security by applying the CAPM through
interpreting the beta of a security
15.3.3 Explain how the historic beta may be estimated using a scatter chart of historic
returns
15.3.4 Calculate the beta of a portfolio given the component betas and the investment
weightings
15.3.5 Define the segmentation of risk into systematic (factor) risk and unsystematic
(‘investment specific’) risk
15.3.6 Calculate the total risk given systematic and unsystematic components
15.3.7 Calculate the beta of an investment given the systematic risk of the investment and
the risk of the market
15.3.8 Calculate the beta of an investment given the variance of the market return, and the
covariance of the investment return with the market return
15.3.9 Explain the limitations of the CAPM model
15.3.10 Explain the concept of investments being exposed to a number of common factors
which partially explain their return and risk profile (‘arbitrage pricing theory’)
15.3.11 Explain the concepts of factor investing and smart beta
15.4 THE EFFICIENT MARKETS HYPOTHESIS
15.4.1 Identify and explain the key concepts of the efficient markets hypothesis (EMH), and
explain the limitations of the EMH
15.4.2 Evaluate the evidence on market anomalies in relation to EMH
15.4.3 Explain the basic concepts of the behavioural finance school of thought
15.4.4 Evaluate the evidence on market anomalies in relation to behavioural finance
15.4.5 Explain the notion of ‘bubbles’ and ‘financial amnesia’ in financial markets
15.5 PRICING, LIQUIDITY AND FAIR VALUE
15.5.1 Explain the relationship between pricing, liquidity and fair value for the asset classes
of equity, fixed income, derivatives and alternative investments
15.5.2 Explain the relationship between liquidity and the capacity of investment strategies
15.6 APPROACHES TO FUND MANAGEMENT
15.6.1 Distinguish between a ‘top-down’ and ‘bottom-up’ approach to fund management
15.6.2 Explain how active and passive approaches can be blended in portfolio construction
15.6.3 Distinguish between strategic and tactical asset allocation
15.6.4 Distinguish between active and passive fund management, and explain the costs and
benefits to the investor
15.6.5 Explain the major investment styles prevalent in the fund management industry
15.7 INVESTMENT MANAGEMENT PRINCIPLES – FIXED INCOME
15.7.1 Explain the following bond portfolio management techniques: cash
matching/dedication, immunisation, credit risk management and riding the yield curve
15.7.2 Calculate the duration for a bond portfolio
15.7.3 Calculate the theoretical gain from riding the yield curve
15.7.4 Explain the benefits and risks of bond portfolio management strategies such as the
barbell
15.7.5 Explain the characteristics and risks of a liability-driven investment (LDI) strategy
15.7.6 Explain the process of an LDI strategy
15.7.7 Evaluate some of the techniques and basic measures of risk used in LDI
15.8 SOCIALLY RESPONSIBLE INVESTING AND ENVIRONMENTAL, SOCIAL AND
GOVERNANCE INVESTING
15.8.1 Explain what is meant by environmental, social and governance (ESG)
characteristics and socially responsible investment (SRI) and how they differ
15.8.2 Describe the history and evolving regulatory environment of ESG investing and
explain the factors that have led to their development
15.8.3 Identify why investors might (or might not) include ESG issues in their investment
decisions
15.8.4 Describe the evidence on whether ESG investing leads to superior portfolio returns
15.8.5 Explain the main methods of incorporating ESG characteristics into investment
decisions
15.8.6 Describe the main challenges of incorporating ESG characteristics into investment
decisions
15.8.7 Explain what is meant by impact investing and contrast impact investing with
traditional investment and ESG strategies

TOPIC 16 INVESTMENT PRODUCTS

By the end of this topic, learners should be able to:

Demonstrate an ability to analyse the characteristics, inherent risks and behaviours

of investment products.
16.1.1 Compare and contrast investing through direct investments in securities and assets,
and investing through indirect investments
16.1.2 Distinguish the features, risks and benefits of unit trusts, investment trusts and open-
ended investment companies
16.1.3 Identify the key features and objectives of exchange-traded funds (ETFs) and
exchange-traded commodities (ETCs)
16.1.4 Identify the advantages and disadvantages of investing in ETFs
16.1.5 Explain the features and objectives of private client funds, structured products and
wraps
16.1.6 Identify the characteristics and advantages of life assurance-based investments
16.1.7 Identify the characteristics, and advantages and disadvantages, of defined
contribution (DC) versus defined benefit (DB) pension arrangements from the
perspective of both sponsors and beneficiaries
16.1.8 Describe the characteristics of execution-only investment platforms
16.1.9 Identify how the appropriateness of different investment products may vary according
to portfolio liquidity

TOPIC 17 INVESTMENT PERFORMANCE MEASUREMENT

By the end of this topic, learners should be able to:

Demonstrate an understanding of the principles of investment performance

measurement.
17.1 TOTAL RETURN AND ITS COMPONENTS
17.1.1 Identify the components of total return for a fixed income or equity portfolio
17.1.2 Calculate the income, capital and total return over a single period for an equity or
fixed income portfolio
17.1.3 Calculate the reinvestment return on income over a specified investment horizon
17.1.4 Explain how returns are typically decomposed and attributed within equities (e.g.
sector/stock/interaction effect) and fixed income (e.g. shift /twist/spread return)
17.2 MONEY-WEIGHTED AND TIME-WEIGHTED RETURNS
17.2.1 Distinguish between money-weighted and time-weighted return, and identify when
each method is most appropriate
17.2.2 Calculate and interpret the money-weighted return or time-weighted return from data
provided
17.3 CHOOSING A BENCHMARK, COMPARISONS WITH INVESTMENT OBJECTIVES
AND INDICES
17.3.1 Identify the desirable properties and characteristics of an appropriate benchmark
17.3.2 Identify the key types of benchmark used in the investment management industry
17.3.3 Explain how to construct a benchmark portfolio
17.4 PERFORMANCE MEASUREMENT INCLUDING RISK-ADJUSTED RETURNS
17.4.1 Explain the importance of risk analysis in performance evaluation
17.4.2 Calculate and interpret the following risk-adjusted measures of return: the Sharpe
measure, the Treynor measure, the information ratio and Jensen’s alpha
17.4.3 Explain how total return can be decomposed into the following: risk-free return, return
due to choice of benchmark, return due to market timing, return due to diversifiable
risk and pure selectivity