The Code of Ethics

Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation (“Members and Candidates”)
must:
 Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers,
employees, colleagues in the investment profession, and other participants in the global capital markets.
 Place the integrity of the investment profession and the interests of clients above their own personal interests.
 Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment
recommendations, taking investment actions, and engaging in other professional activities.
 Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
 Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
 Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
Standards of Professional Conduct
1. PROFESSIONALISM
1. Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of
Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association
governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or
regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or
regulations.
2. Independence and Objectivity
Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional
activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be
expected to compromise their own or another’s independence and objectivity.
3. Misrepresentation
Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities.
4. Misconduct
Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects
adversely on their professional reputation, integrity, or competence.
2. INTEGRITY OF CAPITAL MARKETS
1. Material Nonpublic Information
Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to
act on the information.
2. Market Manipulation
Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market
participants.
3. DUTIES TO CLIENTS
1. Loyalty, Prudence, and Care
Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and
Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.
2. Fair Dealing
Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment
recommendations, taking investment action, or engaging in other professional activities.
3. Suitability
1. When Members and Candidates are in an advisory relationship with a client, they must:
1.
Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial
constraints prior to making any investment recommendation or taking investment action and must reassess and update this
information regularly.
2. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives,
mandates, and constraints before making an investment recommendation or taking investment action.
3. Judge the suitability of investments in the context of the client’s total portfolio.
2. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make
only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the
portfolio.
4. Performance Presentation
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair,
accurate, and complete.
5. Preservation of Confidentiality
Members and Candidates must keep information about current, former, and prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.
4. DUTIES TO EMPLOYERS
1. Loyalty
In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the
advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.
2. Additional Compensation Arrangements
Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to
create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.
3. Responsibilities of Supervisors
Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable
laws, rules, regulations, and the Code and Standards.
5. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
1. Diligence and Reasonable Basis
Members and Candidates must:
 1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking
investment actions.
2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis,
recommendation, or action.
2. Communication with Clients and Prospective Clients
Members and Candidates must:
1. Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze
investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those
processes.
2. Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
3. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and
include those factors in communications with clients and prospective clients.
4. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.
3. Record Retention
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and
other investment-related communications with clients and prospective clients.
6. CONFLICTS OF INTEREST
1. Disclosure of Conflicts
Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and
objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such
disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
2. Priority of Transactions
Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the
beneficial owner.
3. Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or
benefit received from or paid to others for the recommendation of products or services.
7. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE
1. Conduct as Participants in CFA Institute Programs
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation
or the integrity, validity, or security of CFA Institute programs.
2. Reference to CFA Institute, the CFA Designation, and the CFA Program
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates
must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in
the CFA Program.

Answering the following questions may help you apply the counting methods we have presented in this section.
1 Does the task that I want to measure have a finite number of possible outcomes? If the answer is yes, you may be
able to use a tool in this section, and you can go to the second question. If the answer is no, the number of outcomes is
infinite, and the tools in this section do not apply.
2 Do I want to assign every member of a group of size n to one of n slots (or tasks)? If the answer is yes, use n factorial.
If the answer is no, go to the third question.
3 Do I want to count the number of ways to apply one of three or more labels to each member of a group? If the answer
is yes, use the multinomial formula. If the answer is no, go to the fourth question.
4 Do I want to count the number of ways that I can choose r objects from a total of n, when the order in which I list the r
objects does not matter (can I give the r objects a label)? If the answer to these questions is yes, the combination
formula applies. If the answer is no, go to the fifth question.
5 Do I want to count the number of ways I can choose r objects from a total of n, when the order in which I list the r
objects is important? If the answer is yes, the permutation formula applies. If the answer is no, go to question 6.
6 Can the multiplication rule of counting be used? If it cannot, you may have to count the possibilities one by one, or use
more advanced techniques than those presented here.
Joint Probability Function of Security A and Security B Returns (Entries Are Joint Probabilities)

  Return on Security B = 30% Return on Security B = 20%

The covariance of the returns between Securities A and B is closest to:

1. 12.
2. 14.
3. 13.
Solution

A is correct. First calculate the expected returns on securities A and B with the formula:

E(X)=∑i=1nP(Xi)Xi

Expected return on security A = 0.6 × 25% + 0.4 × 20% = 15% + 8% = 23%

Expected return on security B = 0.6 × 30% + 0.4 × 20% = 18% + 8% = 26%

Then calculate the covariance of returns between securities A and B with the formula:

Cov(RA,RB)=∑i∑jP(RA,i,RB,j)(RA,i−ERA)(RB,j−ERB)

where

RA and RB = the returns on securities A and B, respectively

P = the joint probability

ERA and ERB = the expected returns of securities A and B, respectively

i and j = the line and column of the joint probability function table above

Cov(RA,RB)
 =  0.6[(25−23)(30−26)]+0.4[(20−23)(20−26)]

   =  0.6[2×4]+0.4[(−3)(−6)]

   =  0.6×8+0.4×18

   =  4.8 + 7.2