IMC cheat sheet

The IMC is delivered by CFA UK and covers investment practice, regulation, ethics, and the UK financial services environment; it is a Level 3 qualification benchmarked to the FCA's appropriate qualification framework.

Ethics: the CFA Institute Code of Ethics and Standards of Professional Conduct require integrity, competence, diligence, and placing client interests before personal interests; the Standards are enforceable and violations can lead to sanction.

Six components of the Code: act with integrity, professionalism, and competence; place client interests first; use reasonable care and independent judgement; practice and encourage ethical behaviour; promote integrity of capital markets; maintain and improve professional competence.

Standard I (Professionalism) covers knowledge of the law, independence and objectivity, misrepresentation, and misconduct; Standard II (Integrity of Capital Markets) covers material non-public information and market manipulation.

Standard III (Duties to Clients) covers loyalty, prudence and care, fair dealing, suitability, performance presentation, and confidentiality; Standard IV (Duties to Employers) covers loyalty and additional compensation arrangements.

Standard V (Investment Analysis) covers diligence and reasonable basis, communication with clients, and records retention; Standard VI (Conflicts of Interest) covers disclosure of conflicts, priority of transactions, and referral fees.

GIPS (Global Investment Performance Standards) are voluntary, ethics-based standards for calculating and presenting investment performance; firms claiming compliance must present at least five years of verified-compliant performance, growing to ten years.

Time-weighted return removes the effect of cash flows and measures the manager's investment skill; money-weighted return (IRR) reflects the actual timing of investor cash flows and is used for private equity and client-specific reporting.

Equity valuation: dividend discount model P0 = D1 / (r - g); the Gordon growth model assumes constant growth g where g = retention ratio × return on equity, and requires r > g.

Price-earnings ratio = price per share / earnings per share; the justified forward P/E = payout ratio / (r - g); a higher payout or lower required return raises the justified multiple.

Bond pricing: price = sum of coupon / (1 + y)^t plus face value / (1 + y)^n; price and yield move inversely, and the relationship is convex.

Macaulay duration is the weighted average time to cash flows; modified duration = Macaulay duration / (1 + y/m), and percentage price change ≈ -modified duration × change in yield.

Convexity adjustment: percentage price change ≈ -D_mod × Δy + 0.5 × convexity × (Δy)^2; positive convexity means gains exceed losses for equal yield moves.

Yield curve shapes: normal (upward sloping), inverted (downward sloping, often a recession signal), and flat; the expectations, liquidity preference, and market segmentation theories explain shape.

Real return ≈ nominal return - inflation (Fisher approximation); exact Fisher relation: (1 + nominal) = (1 + real) × (1 + inflation).

Money market instruments include Treasury bills, commercial paper, certificates of deposit, and repurchase agreements; they are short-dated, highly liquid, and quoted on a discount or add-on yield basis.

Derivatives: a forward is a customised obligation to trade at a set price; a futures contract is standardised and exchange-cleared with daily marking to margin; an option gives the buyer a right but not an obligation.

Portfolio expected return = weighted average of asset expected returns: E(Rp) = Σ wi × E(Ri).

Portfolio variance for two assets: σp² = w1²σ1² + w2²σ2² + 2 w1 w2 ρ12 σ1 σ2; with ρ = -1, a zero-variance portfolio can be constructed.

The efficient frontier plots portfolios with the highest expected return for each level of risk; the optimal risky portfolio maximises the Sharpe ratio.

Sharpe ratio = (Rp - Rf) / σp; Treynor ratio = (Rp - Rf) / βp; Jensen's alpha = Rp - [Rf + βp (Rm - Rf)].

CAPM: E(Ri) = Rf + βi [E(Rm) - Rf]; beta measures systematic risk and equals Cov(Ri, Rm) / Var(Rm).

Total risk = systematic risk + unsystematic risk; diversification eliminates unsystematic risk but not systematic risk, so only systematic risk is priced.

Risk-adjusted measures: information ratio = active return / tracking error; tracking error is the standard deviation of the difference between portfolio and benchmark returns.

Value at Risk (VaR) estimates the maximum loss over a given horizon at a stated confidence level; it does not describe the size of losses beyond that threshold (tail risk).

Asset allocation typically explains the majority of a diversified portfolio's return variability; strategic allocation sets long-term weights, tactical allocation makes shorter-term deviations.

The FCA is the conduct regulator and the PRA the prudential regulator for UK banks and insurers; the FCA's statutory objectives include consumer protection, market integrity, and promoting effective competition.

The FCA Principles for Businesses are high-level, ever-applicable rules; Principle 6 requires a firm to pay due regard to clients' interests and treat them fairly, and Principle 9 requires reasonable care in suitability of advice.

The FCA's Treating Customers Fairly (TCF) outcomes and the Consumer Duty require fair value, good products and services, consumer understanding, and consumer support; the Consumer Duty applies to retail customers.

The Senior Managers and Certification Regime (SM&CR) imposes prescribed responsibilities and a duty of responsibility on senior managers; the Certification Regime covers material-risk takers and client-facing staff.

Market abuse under UK MAR includes insider dealing, unlawful disclosure of inside information, and market manipulation; inside information is precise, non-public, and price-sensitive.

MiFID II requires best execution, transaction reporting, and appropriateness and suitability assessments; costs and charges must be disclosed to clients.

UK individual savings: ISAs allow tax-free growth and withdrawals, with an annual subscription limit; a Lifetime ISA attracts a government bonus but carries withdrawal penalties before age 60 except for a first home.

Pensions: contributions receive tax relief at the investor's marginal rate subject to annual and lifetime allowance limits; pension funds grow largely free of UK income and capital gains tax.

Capital gains tax applies to disposals of chargeable assets; the annual exempt amount and the investor's marginal rate determine the liability, while gilts and ISAs are outside CGT on gains.

Balance sheet identity: assets = liabilities + equity; the income statement links to retained earnings via net income less dividends.

Profitability: gross margin = gross profit / revenue; net margin = net income / revenue; ROE = net income / equity; ROA = net income / total assets.

DuPont decomposition: ROE = net margin × asset turnover × financial leverage, where asset turnover = revenue / assets and leverage = assets / equity.

Liquidity: current ratio = current assets / current liabilities; quick ratio excludes inventory; a ratio below 1 signals potential short-term liquidity stress.

Leverage: debt-to-equity = total debt / equity; interest coverage = EBIT / interest expense; higher coverage indicates greater capacity to service debt.

Free cash flow to the firm = operating cash flow - capital expenditure - increase in working capital, or NOPAT + depreciation - capex - Δ working capital.

Monetary policy: a central bank raises the policy rate to reduce inflation, which raises borrowing costs, lowers bond prices, and typically strengthens the currency; lower rates do the reverse.

Fiscal policy: expansionary policy (higher spending or lower taxes) raises aggregate demand and can lift the budget deficit; contractionary policy reduces demand.

Inflation measures: CPI tracks a basket of consumer goods; the GDP deflator = nominal GDP / real GDP × 100; real interest rate ≈ nominal rate - expected inflation.

Open-ended funds (unit trusts and OEICs) issue and redeem units at net asset value; closed-ended investment trusts have a fixed share count and can trade at a premium or discount to NAV.

An ETF is an exchange-traded fund, typically tracking an index, with intraday liquidity and low costs; physically replicated ETFs hold the underlying securities, synthetic ETFs use swaps.

Hedge fund strategies include long/short equity, global macro, event-driven, and relative value; they often use leverage and charge a management fee plus a performance fee.

Private equity funds are closed-ended limited partnerships with committed capital, drawdowns, and a typical ten-year life; returns are commonly reported as IRR and multiples of invested capital.

Money market funds hold short-term, high-quality debt and aim for capital preservation; constant NAV funds seek a stable price, variable NAV funds reflect market value.

Bond types: gilts are UK government bonds; corporate bonds carry credit spread over the gilt yield; index-linked bonds adjust principal and coupons for inflation.

Property investment is illiquid and valued periodically; key metrics include net initial yield = net rent / purchase price and equivalent yield, which blends initial and reversionary yields.

Derivative uses: hedging reduces unwanted risk, speculation takes a view for profit, and arbitrage exploits price discrepancies; leverage magnifies both gains and losses.

Suitability requires matching recommendations to the client's knowledge and experience, financial situation including capacity for loss, and investment objectives.

Risk tolerance combines attitude to risk (willingness) and capacity for loss (ability); a client with high willingness but low capacity should not be placed in high-risk assets.

The risk-return trade-off: higher expected return requires accepting higher risk; diversification reduces unsystematic risk without necessarily reducing expected return.

Asset allocation should reflect time horizon: longer horizons support higher equity weightings, while short horizons favour cash and short-dated bonds to protect capital.

Know-your-client information includes objectives, time horizon, liquidity needs, existing holdings, tax position, dependants, and any ethical or ESG preferences.

Rebalancing restores target weights after drift; it enforces a sell-high, buy-low discipline but incurs transaction costs and potential tax liabilities.

Costs reduce net returns: ongoing charges, transaction costs, and adviser fees should be disclosed and considered against expected gross returns; a 1% annual charge compounds to a large shortfall over decades.

Behavioural biases affecting clients include loss aversion, overconfidence, anchoring, and herding; advisers should identify them and structure advice to mitigate their effect.