- Code & Standards at Level II — what changes?
- The Code and seven Standards are identical to Level I, but tested inside richer vignettes. You must identify the exact sub-standard violated and the recommended action from competing facts.
- Law vs. Code — which governs?
- Follow the stricter of applicable law or the Code and Standards. If a law is less strict or silent, you still meet the Code; if a law requires violating the Code, comply with the law.
- The seven Standards of Professional Conduct?
- I Professionalism, II Integrity of Capital Markets, III Duties to Clients, IV Duties to Employers, V Investment Analysis, VI Conflicts of Interest, VII Responsibilities as a Member/Candidate.
- Standard II(A) — Material Nonpublic Information?
- Members must not act, or cause others to act, on material nonpublic information. Information is material if a reasonable investor would want it or it would affect price.
- What is the mosaic theory?
- Combining public information with non-material non-public information to reach a conclusion is permitted — even if the conclusion is material. It is a defense against an MNPI allegation under II(A).
- Recommended control for MNPI?
- An information barrier (firewall) restricting the flow of information between departments, plus restricted and watch lists.
- Standard III(B) — Fair Dealing?
- Treat all clients fairly when disseminating recommendations and taking action — fair, not necessarily identical, treatment. Don't favor some clients in a hot issue.
- Standard III(C) — Suitability?
- Recommendations must fit the client's written objectives and constraints (the IPS). Judge a single security in the context of the total portfolio.
- Standard VI — Conflicts of Interest?
- Disclose conflicts (VI-A), give clients and employers priority over personal transactions (VI-B), and disclose referral fees (VI-C).
- Standard V(A) — Diligence & Reasonable Basis?
- Have a reasonable and adequate basis, supported by research and investigation, for any analysis, recommendation, or action.
- What is GIPS?
- Global Investment Performance Standards — voluntary, ethical standards for calculating and presenting investment performance so results are fair and comparable across firms.
- Who can claim GIPS compliance?
- Only an entire firm (a distinct business entity), not a single composite, product, or individual. Compliance is firm-wide and all-or-nothing.
- What is a GIPS composite?
- An aggregation of all discretionary portfolios managed to a similar strategy or objective. Performance is presented at the composite level.
- Time-weighted vs money-weighted return for presentation?
- GIPS and Standard III(D) favor time-weighted returns for performance presentation because they remove the effect of client cash-flow timing the manager doesn't control.
- Standard IV(A) — Loyalty to employer?
- Act for the employer's benefit; don't deprive it of your skills or take confidential information or client lists when leaving.
- Standard VII — Reference to the CFA designation?
- Use the marks correctly; don't overstate the meaning of the designation or misrepresent candidacy. 'CFA' is an adjective, never a noun.
- Standard I(B) — Independence & Objectivity?
- Maintain independence and objectivity; pay your own travel, refuse lavish gifts from issuers you cover, and don't let relationships compromise analysis.
- Standard III(E) — Confidentiality?
- Keep current, former, and prospective client information confidential unless it concerns illegal activity, disclosure is required by law, or the client permits it.
- Multiple regression equation?
- Y = b0 + b1·X1 + b2·X2 + … + ε. Each slope b_j is the effect of that variable holding the others constant.
- t-test vs F-test in regression?
- The t-test checks whether one coefficient is individually significant; the F-test checks whether the regression is jointly significant (at least one slope ≠ 0).
- R² vs adjusted R²?
- R² is the fraction of the dependent variable's variation explained. Adjusted R² penalizes adding variables, so it can fall when a useless variable is added.
- What is heteroskedasticity?
- Non-constant variance of the regression error term. Conditional heteroskedasticity (variance related to the X's) biases standard errors, making t- and F-tests unreliable.
- Detect & fix heteroskedasticity?
- Detect with the Breusch-Pagan test; fix with robust (White) standard errors or generalized least squares. Coefficients stay unbiased; only standard errors are wrong.
- What is serial correlation?
- Correlation between regression errors across observations. It biases the standard errors (often understating them), inflating t-statistics. Detect with Durbin-Watson.
- What is multicollinearity?
- High correlation among independent variables. It inflates coefficient standard errors, so individual t-tests are insignificant even with a high R² and a significant F-test.
- The classic multicollinearity symptom?
- A high R² and a significant F-test but insignificant individual t-statistics — the model explains the data, yet no single variable looks important.
- Fix for multicollinearity?
- Drop one of the correlated variables, or collect more or different data. Do not simply add more correlated predictors.
- What is a dummy variable?
- A 0/1 variable representing a qualitative condition. Use n − 1 dummies for n categories to avoid the dummy-variable trap (perfect multicollinearity).
- Assumptions of the classical linear model?
- Linearity, independent variables uncorrelated with the error, homoskedasticity (constant error variance), no serial correlation, and normally distributed errors.
- What is a unit root / random walk?
- A time series with a unit root is non-stationary (a random walk: x_t = x_t-1 + ε). Test with Dickey-Fuller; difference the series to make it stationary.
- What is covariance stationarity?
- A time series has a constant mean, constant variance, and constant covariance with lagged values over time — required before fitting an autoregressive model.
- What is an autoregressive (AR) model?
- A model where the variable is regressed on its own past values: x_t = b0 + b1·x_t-1 + ε. Check for serial correlation in residuals and seasonality.
- Supervised vs unsupervised learning?
- Supervised learning trains on labeled data to predict an output (regression, classification); unsupervised learning finds structure in unlabeled data (clustering, dimension reduction).
- What is overfitting?
- A model that fits the training data's noise rather than its signal, so it performs poorly out of sample. Combat it with cross-validation and regularization.
- Covered interest rate parity?
- A no-arbitrage condition: the forward premium or discount on a currency equals the interest-rate differential between the two currencies. It holds exactly because the position is hedged with a forward.
- Uncovered interest rate parity?
- The unhedged version: the expected change in the spot exchange rate equals the interest-rate differential. It relies on expectations and holds only on average over time.
- Purchasing power parity (PPP)?
- The expected change in the exchange rate equals the inflation differential between the two countries. Relative PPP links currency moves to relative inflation.
- International Fisher relation?
- The nominal interest-rate differential between two countries equals their expected inflation differential, assuming equal real rates.
- Higher-yielding currency under covered parity?
- It trades at a forward discount. The interest advantage is exactly offset by an expected depreciation embedded in the forward rate — so no arbitrage.
- Direct vs indirect exchange-rate quote?
- A direct quote is domestic currency per one unit of foreign currency; an indirect quote is the reverse (foreign per one unit of domestic).
- Sources of long-run economic growth?
- Growth in labor, growth in capital, and total factor productivity (technology/efficiency), combined in a production-function (growth-accounting) framework.
- Why does regulation exist (economic rationale)?
- To address market failures: externalities, public goods, information asymmetry, and the need to protect consumers and ensure market integrity.
- What is a forward premium?
- When a currency's forward rate is higher than its spot rate. Under covered parity, the lower-interest-rate currency trades at a forward premium.
- Bid-ask spread in FX — what drives it?
- Dealer spreads widen with lower liquidity, higher volatility, and larger transaction size, and differ across currency pairs and times of day.
- Mundell-Fleming model — what does it analyze?
- How monetary and fiscal policy affect output and exchange rates under different capital mobility and exchange-rate regimes.
- Carry trade — what is it?
- Borrowing in a low-interest-rate currency to invest in a high-interest-rate currency, profiting if uncovered parity fails. It earns the differential but bears crash risk.
- Intercorporate investments — what drives the method?
- The degree of influence: under ~20% a financial asset (fair value/amortized cost); 20–50% significant influence (equity method); over 50% control (consolidation).
- What is the equity method?
- For significant influence (20–50%): the investment is one balance-sheet line, increased by the investor's share of the associate's profit and reduced by dividends received.
- What is consolidation?
- For control (over 50%): the parent combines all of the subsidiary's assets, liabilities, revenues, and expenses, reporting any non-controlling interest in equity and income.
- Equity method vs consolidation — net income?
- Net income is the SAME under both. Consolidation grosses up revenue, assets, and liabilities, so margins fall and leverage rises versus the equity method.
- What is goodwill?
- The excess of a business combination's purchase price over the fair value of identifiable net assets acquired. It is tested for impairment, not amortized.
- Funded status of a defined-benefit plan?
- Fair value of plan assets minus the benefit obligation (PV of promised benefits). Positive = overfunded (net asset); negative = underfunded (net liability).
- Effect of a lower pension discount rate?
- A lower discount rate raises the present value of the benefit obligation, worsening the funded status and increasing the reported pension liability.
- Key DB pension actuarial assumptions?
- The discount rate, the expected rate of compensation growth, and (where used) the expected return on plan assets. Optimistic assumptions can flatter results.
- Current-rate translation method?
- Used when the local currency is functional: assets and liabilities at the current rate, income at the average rate, with the translation gain/loss reported in equity (CTA).
- Temporal translation method?
- Used when the parent's currency is functional: monetary items at the current rate, non-monetary items at historical rates, with the gain/loss in net income.
- Which translation method makes earnings more volatile?
- The temporal method, because it runs the translation gain or loss through net income rather than equity.
- Signs of low financial reporting quality?
- Aggressive revenue recognition, capitalizing costs that should be expensed, classifying operating cash outflows as investing, and frequent 'one-time' charges.
- What is the Beneish M-score?
- A statistical model combining eight ratios to estimate the likelihood that earnings have been manipulated. A higher score flags higher manipulation risk.
- Clean-surplus relation — why it matters?
- Ending book value = beginning book value + net income − dividends. It underlies the residual income model; items bypassing income (dirty surplus) require adjustment.
- Equity method impairment trigger?
- Objective evidence that the recoverable amount of the investment is below its carrying value; the loss is recognized in profit or loss.
- Proportionate consolidation vs equity method (JV)?
- IFRS requires the equity method for joint ventures; proportionate consolidation (combining your share line-by-line) is generally not permitted under current standards.
- Modigliani-Miller Proposition I (no taxes)?
- In perfect markets with no taxes, a firm's value and its WACC are independent of its capital structure — leverage doesn't change firm value.
- Modigliani-Miller Proposition II (no taxes)?
- The cost of equity rises linearly with the debt-to-equity ratio, exactly offsetting the cheaper debt, so the WACC stays constant.
- MM with corporate taxes?
- Interest is tax-deductible, so debt creates a tax shield that raises firm value as leverage increases — favoring more debt, absent other costs.
- Trade-off theory of capital structure?
- The optimal capital structure balances the tax shield benefit of debt against the rising expected costs of financial distress and agency costs.
- Pecking-order theory?
- Firms prefer internal funds first, then debt, and issue equity last, because financing choices signal information to the market.
- Dividends vs share repurchases — equivalence?
- Absent taxes, a cash dividend and an equal-size buyback are economically equivalent; they differ in signaling, flexibility, and tax treatment.
- When does a buyback raise EPS?
- Only when the after-tax cost of funds used for the repurchase is less than the earnings yield (E/P) of the stock.
- Residual dividend policy?
- Pay out as dividends whatever earnings remain after funding all positive-NPV projects at the target capital structure — so dividends are volatile.
- Agency costs of equity vs debt?
- Equity agency costs arise from manager-shareholder conflicts (perks, empire building); debt agency costs arise from shareholder-creditor conflicts (asset substitution).
- Role of ESG in issuer analysis?
- Environmental, social, and governance factors are integrated into credit and equity analysis as material risks affecting cash flows and the cost of capital.
- Static trade-off — optimal debt level?
- The point where the marginal tax-shield benefit of additional debt equals the marginal expected cost of financial distress.
- Choosing an equity valuation model?
- Match the model to the firm: DDM for stable dividend payers, FCFF/FCFE for non-payers, residual income for negative early cash flow, multiples for quick relative checks.
- Gordon constant-growth model?
- V0 = D1 ÷ (r − g), valid only when g < r. It values a stock as the present value of dividends growing at a constant rate forever.
- Two-stage DDM?
- Model an explicit high-growth period of dividends, then capitalize a terminal value with the Gordon model at a stable long-run growth rate, and discount both to today.
- What is the H-model?
- A two-stage DDM where the growth rate declines linearly from a high initial rate to a stable long-run rate over 2H years, approximating a gradually maturing firm.
- Free cash flow to the firm (FCFF)?
- Cash available to all capital providers after operating costs, taxes, and investment: FCFF = NI + NCC + Int(1 − tax) − FCInv − WCInv. Discount at the WACC.
- Free cash flow to equity (FCFE)?
- Cash for shareholders after debt flows: FCFE = FCFF − Int(1 − tax) + net borrowing. Discount at the cost of equity to value equity directly.
- FCFF vs FCFE — when to use which?
- Use FCFE when leverage is stable; use FCFF when leverage is changing or FCFE is negative, because the WACC is more stable than the cost of equity then.
- Residual income model?
- Value = current book value + present value of future residual income, where residual income = net income − (equity × cost of equity). It recognizes value early.
- When is the residual income model preferred?
- When a firm pays no dividends, has negative early free cash flow, or has an uncertain terminal value — book value anchors much of the value upfront.
- Justified P/E from fundamentals?
- Leading justified P/E = (D1/E1) ÷ (r − g) — the payout ratio divided by (required return minus growth). Compare it to the market multiple.
- Enterprise value (EV)?
- Market value of equity + debt − cash. It is the cost to acquire the whole firm; EV/EBITDA is capital-structure-neutral.
- Why is EV/EBITDA useful?
- It is independent of capital structure and ignores non-cash depreciation, so it compares firms with different leverage and depreciation policies.
- Private company valuation approaches?
- The income approach (DCF/capitalized cash flow), the market approach (guideline public companies/transactions), and the asset-based approach.
- DLOM and DLOC discounts?
- A discount for lack of marketability (private shares are illiquid) and a discount for lack of control (minority stakes can't direct the firm) reduce private-company value.
- Sustainable growth rate?
- g = retention ratio × return on equity (b × ROE). It is the growth a firm can fund without changing leverage or issuing equity.
- Blume vs fundamental beta adjustment?
- Beta is adjusted toward 1.0 (e.g., 0.67·raw + 0.33·1.0) because estimated betas tend to revert to the market beta over time.
- Spot rate vs forward rate?
- A spot rate is today's yield on a single payment received at one future date (zero-coupon). A forward rate is an interest rate set today for a loan starting in the future.
- What is bootstrapping (spot rates)?
- Deriving spot (zero-coupon) rates from the prices of coupon bonds one maturity at a time, so each cash flow can be discounted at its own spot rate.
- Spot curve slopes up — implied forwards?
- When the spot curve slopes upward, implied forward rates lie above the spot rates.
- Pure (unbiased) expectations theory?
- Forward rates equal expected future spot rates; the yield curve's shape reflects only rate expectations, with no term premium.
- Liquidity preference theory?
- Investors demand a term premium for holding longer maturities, so forward rates are upward-biased estimates of expected future spot rates.
- Segmented markets theory?
- Supply and demand within each maturity sector set its rate independently; investors don't move across maturities.
- Preferred habitat theory?
- Investors have a preferred maturity but will move for a sufficient premium, allowing premiums to be positive or negative across the curve.
- Arbitrage-free valuation of a bond?
- Discount each individual cash flow at its own spot rate. If the bond's price differs from this value, a risk-free arbitrage exists between it and a portfolio of strips.
- Binomial interest-rate tree — use?
- To value bonds with embedded options. Calibrate the tree to the benchmark curve and roll values back, applying the call/put rule at each node.
- Callable bond node value rule?
- At each node the value is the lower of the call price and the computed value — the issuer calls when it benefits the issuer.
- Putable bond node value rule?
- At each node the value is the higher of the put price and the computed value — the holder puts when it benefits the holder.
- Option-adjusted spread (OAS)?
- The constant spread added to the rate tree that makes the model price equal the market price after removing the embedded option, allowing comparison across bonds.
- Z-spread vs OAS?
- The Z-spread is the constant spread over the spot curve ignoring options. OAS = Z-spread minus the option cost, so OAS reflects only credit and liquidity risk.
- Effective duration vs modified duration?
- Effective duration is used for bonds with embedded options because their cash flows change with rates; modified duration assumes fixed cash flows.
- Structural credit model?
- Models default as the equity holders' option to default when firm asset value falls below debt — based on option-pricing theory (Merton model).
- Reduced-form credit model?
- Models default as a statistical hazard driven by observable variables, without modeling the firm's asset value directly.
- Credit spread components?
- The spread compensates for expected loss (probability of default × loss given default) plus a risk premium for liquidity and uncertainty.
- No-arbitrage forward price?
- F0 = S0 × (1 + r)ᵀ, adjusted for carry: add storage costs and subtract any income or convenience yield on the underlying.
- Value of a forward after initiation?
- The present value of the difference between the current forward price and the original contract price — zero at inception, then moving with the underlying.
- How is a swap priced?
- As a series of forwards (or off-market forwards) so its value at initiation is zero; that condition determines the fixed swap rate.
- One-period binomial — up/down?
- The underlying moves to S0·u (up) or S0·d (down) over one period. u > 1 and d < 1 define the size of the moves.
- Risk-neutral probability formula?
- π = (1 + r − d) ÷ (u − d), where r is the per-period risk-free rate. It is a pricing device, not a real-world probability.
- Why are real-world probabilities irrelevant?
- Because the option can be replicated with the stock and risk-free borrowing, no-arbitrage pricing depends only on the risk-neutral probability.
- Binomial option value?
- Discount the risk-neutral expected payoff: value = [π·c⁺ + (1 − π)·c⁻] ÷ (1 + r), rolling back through the tree.
- American option in a binomial tree?
- At each node compare the value of holding versus exercising, and take the higher — capturing the early-exercise premium.
- Black-Scholes-Merton inputs?
- Five: the underlying price, strike, time to expiration, risk-free rate, and volatility. Volatility is the only input not directly observable.
- BSM assumptions / limits?
- Lognormal prices, constant volatility and rates, no early exercise (European), frictionless markets. It does not directly value American options.
- What is implied volatility?
- The volatility that makes the BSM model price equal the option's market price — the market's expectation of future movement, backed out of prices.
- Option delta?
- The change in option price for a small change in the underlying. Calls have delta 0 to 1; puts 0 to −1. It is the hedge ratio.
- Option gamma?
- The rate of change of delta as the underlying moves. It is largest for at-the-money, near-expiry options, requiring more frequent re-hedging.
- Option vega?
- The change in option price for a 1-point change in volatility. Long options have positive vega; it is largest for at-the-money options.
- Option theta?
- The change in option price as time passes (time decay). It is generally negative for long options — value erodes as expiration approaches.
- Delta hedging — what it achieves?
- Holding the underlying in the opposite direction of the option's delta to neutralize small price moves; it must be rebalanced as delta changes (gamma).
- Put-call parity (deeper)?
- c + PV(X) = p + S0 for European options. Rearranging builds synthetic positions; a violation is an arbitrage.
- Three approaches to value real estate?
- The income approach (capitalize NOI or discount cash flows), the cost approach (replacement cost less depreciation plus land), and the sales-comparison approach.
- Direct capitalization method?
- Value = NOI ÷ cap rate. A lower cap rate implies a higher value and typically a lower-risk, prime property.
- What is net operating income (NOI)?
- Potential rental income minus vacancy and collection losses and operating expenses, before financing and taxes — the numerator in direct capitalization.
- Cost approach — when used?
- For special-purpose properties (e.g., a school or hospital) with few comparable sales; value = land + replacement cost − depreciation.
- REIT valuation multiples?
- Net asset value (NAV), price-to-FFO (funds from operations), and price-to-AFFO (adjusted FFO) — FFO adds back real-estate depreciation to net income.
- Private equity — buyout vs venture?
- Buyout funds acquire mature companies using leverage; venture capital funds back early-stage, high-growth startups. Both target high IRRs over a multi-year horizon.
- The 2-and-20 fee structure?
- A typical private fund charges a 2% annual management fee on assets plus 20% carried interest on profits, often above a hurdle rate.
- What is carried interest?
- The share of fund profits (often 20%) paid to the general partner as a performance incentive, usually after limited partners earn a hurdle return.
- Hedge fund strategy categories?
- Equity long/short, event-driven (e.g., merger arbitrage), relative value (arbitrage), and global macro / managed futures.
- Commodities — sources of return?
- Spot price changes, collateral yield (on cash margin), and roll yield (positive in backwardation, negative in contango).
- Contango vs backwardation?
- Contango: the futures price exceeds the expected spot (upward curve) → negative roll yield. Backwardation: futures below spot (downward curve) → positive roll yield.
- Why do alternatives appeal — and their drawbacks?
- They add diversification and potentially higher returns, but bring illiquidity, high fees, leverage, and valuation difficulty (often appraisal-based, smoothed returns).
- Smoothed (appraisal) returns — effect?
- Appraisal-based real-estate returns are smoothed, understating true volatility and overstating diversification benefits; analysts unsmooth them.
- Survivorship bias in hedge-fund indexes?
- Failed funds drop out of indexes, so reported index returns overstate the average fund's performance and understate risk.
- What is a multifactor model?
- Expected return = risk-free rate + Σ (factor sensitivity × factor risk premium). It generalizes the single-factor CAPM to several systematic factors.
- Arbitrage pricing theory (APT)?
- A multifactor model in which expected return is a linear function of several systematic factor betas and their risk premiums, derived from a no-arbitrage condition.
- Carhart four-factor model?
- Extends Fama-French with market, size (SMB), value (HML), and momentum (WML) factors to explain equity returns and judge active managers.
- Macroeconomic vs fundamental factor models?
- Macroeconomic models use surprises in variables like inflation and growth as factors; fundamental models use attributes like size, value, and momentum.
- What is the information ratio?
- Active return (portfolio − benchmark) divided by tracking error. It measures consistent value added by active management per unit of active risk.
- What is tracking error?
- The standard deviation of a portfolio's active return (its return minus the benchmark's). It quantifies how closely the portfolio follows the benchmark.
- Fundamental law of active management?
- The information ratio ≈ information coefficient × √breadth — skill times the number of independent active decisions, scaled by the transfer coefficient.
- What is value at risk (VaR)?
- An estimate of the minimum loss over a period at a given confidence level — e.g., a 5% one-day VaR of $1M means a 5% chance of losing at least $1M in a day.
- Three ways to compute VaR?
- Parametric (variance-covariance, assumes normality), historical simulation (uses past returns), and Monte Carlo simulation (generates random scenarios).
- Main limitation of VaR?
- It says nothing about the magnitude of losses beyond the cutoff. Use conditional VaR (expected shortfall) to capture the tail, plus stress tests.
- What is conditional VaR (CVaR)?
- The expected loss given that the loss exceeds the VaR threshold — the average of the tail beyond VaR. It captures tail severity that VaR ignores.
- Active return vs active risk?
- Active return is portfolio return minus benchmark return; active risk (tracking error) is its standard deviation. The information ratio relates the two.
- Stress testing vs scenario analysis?
- Stress testing pushes risk factors to extreme values; scenario analysis evaluates the portfolio under specific hypothetical or historical event sets.
- Sharpe vs information ratio?
- The Sharpe ratio uses total risk relative to the risk-free rate; the information ratio uses active risk relative to a benchmark — isolating manager skill.
- Treynor ratio?
- Excess return per unit of systematic risk: (Rp − Rf) ÷ beta. It rewards return earned for market exposure, suitable for diversified portfolios.
- Backtesting — purpose and pitfalls?
- Testing a strategy on historical data to gauge performance; pitfalls include look-ahead bias, survivorship bias, and overfitting to the sample.
- Standard III(A) — Loyalty, Prudence, and Care?
- Act for the benefit of clients, place their interests before the firm's and your own, and exercise reasonable care and prudent judgment.
- Standard I(C) — Misrepresentation?
- Do not knowingly make false or misleading statements about investments, your qualifications, or performance, including plagiarism and guaranteeing returns.
- Standard I(D) — Misconduct?
- Do not engage in conduct involving dishonesty, fraud, or deceit, or any act that reflects adversely on professional reputation or integrity.
- Standard II(B) — Market Manipulation?
- Do not engage in practices that distort prices or artificially inflate trading volume to mislead market participants — transaction- or information-based.
- Standard V(B) — Communication with clients?
- Disclose the basic format and general principles of the investment process, identify limitations and risks, and distinguish fact from opinion.
- Standard V(C) — Record Retention?
- Develop and maintain records supporting analyses, recommendations, and actions. Records are the firm's property; keep them per regulation (often 7 years).
- Standard IV(B) — Additional Compensation?
- Do not accept gifts or compensation that compete with or create a conflict with your employer's interest without written consent from all parties.
- Standard IV(C) — Responsibilities of Supervisors?
- Make reasonable efforts to prevent and detect violations by those under your supervision, with adequate compliance procedures in place.
- Standard VI(B) — Priority of Transactions?
- Client and employer transactions take priority over a member's personal transactions; personal interests must not disadvantage clients.
- GIPS — minimum performance history?
- A firm claiming compliance must present a minimum of five years of compliant history (or since inception if shorter), then build to ten years.
- GIPS verification — required?
- Independent third-party verification is recommended but not required; it applies firm-wide, not to a single composite.
- Standard error of estimate (SEE)?
- The standard deviation of the regression residuals; a smaller SEE means the model's predictions fit the data more tightly.
- Confidence interval for a slope coefficient?
- Estimated coefficient ± (critical t) × (coefficient standard error). If the interval excludes zero, the coefficient is significant at that level.
- Type I vs Type II error?
- A Type I error rejects a true null (probability equals the significance level α); a Type II error fails to reject a false null.
- What is a p-value?
- The smallest significance level at which the null can be rejected. Reject the null when the p-value is below the chosen α.
- Log-linear time-series model — when to use?
- When a series grows at a roughly constant rate (exponential growth); modeling the natural log linearizes it for an AR or trend model.
- Mean reversion in an AR(1) model?
- A series reverts to b0 ÷ (1 − b1); if the current value is above this level it tends to fall, and below it tends to rise, when |b1| < 1.
- Root mean squared error (RMSE)?
- A measure of out-of-sample forecast accuracy; the model with the lower RMSE is preferred for forecasting.
- Cointegration?
- Two non-stationary series share a long-run equilibrium relationship, so a regression between them can be valid despite each having a unit root.
- Real vs nominal exchange rate?
- The nominal rate is the quoted price of one currency in another; the real rate adjusts for relative price levels and measures purchasing-power competitiveness.
- Marshall-Lerner condition?
- A currency depreciation improves the trade balance only if the sum of the export and import demand elasticities exceeds one.
- J-curve effect?
- After a depreciation, the trade balance worsens before it improves, because volumes adjust more slowly than prices.
- Cross rate?
- An exchange rate between two currencies derived from each one's rate against a third currency (often the U.S. dollar).
- Triangular arbitrage?
- Exploiting inconsistent cross rates among three currencies to lock in a riskless profit; it forces quoted cross rates into alignment.
- Capital mobility and policy effectiveness?
- Under high capital mobility and a floating rate, monetary policy is potent and fiscal policy is weaker (the Mundell-Fleming result).
- Acquisition method for business combinations?
- Identifiable assets and liabilities are recorded at fair value at acquisition; the excess of price over fair value of net assets is goodwill.
- Bargain purchase gain?
- When the fair value of net assets exceeds the purchase price, the difference is recognized as a gain in profit or loss.
- Held-to-maturity vs available-for-sale (debt)?
- Held-to-maturity (amortized cost) for fixed-maturity debt the firm intends to hold; fair value (with changes in OCI or P&L) otherwise.
- Service cost in pension expense?
- The present value of benefits earned by employees during the current period; it is recognized in profit or loss.
- Past service cost?
- The change in the obligation from a plan amendment affecting prior service; recognized in P&L under IFRS, in OCI then amortized under U.S. GAAP.
- Remeasurements / actuarial gains and losses?
- Changes in the obligation or asset return from assumption changes; reported in OCI under IFRS (not recycled) and OCI under U.S. GAAP (amortized).
- FIFO vs LIFO under rising prices (recap)?
- FIFO gives higher ending inventory and net income; LIFO gives higher COGS, lower income and taxes. IFRS prohibits LIFO.
- Why analysts adjust for off-balance-sheet items?
- Operating leases, special-purpose entities, and the like can hide debt; analysts capitalize them to compare leverage fairly across firms.
- Cost of equity via CAPM?
- Required return = risk-free rate + beta × (market return − risk-free rate). It prices only systematic risk.
- WACC formula?
- WACC = wd·rd·(1 − tax) + we·re, weighting the after-tax cost of debt and the cost of equity by their market-value proportions.
- Why use the after-tax cost of debt?
- Interest is tax-deductible, so the firm's true cost of debt is rd × (1 − tax rate). Omitting (1 − tax) overstates the WACC.
- Operating vs financial leverage?
- Operating leverage comes from fixed operating costs (magnifies sales → operating income); financial leverage comes from debt (magnifies operating income → net income).
- Degree of total leverage?
- The product of the degree of operating leverage and the degree of financial leverage — the combined sensitivity of net income to a change in sales.
- Capital budgeting decision rule?
- Accept positive-NPV projects; for mutually exclusive projects in conflict, follow NPV over IRR. Use incremental after-tax cash flows and ignore sunk costs.
- Yield to maturity (YTM)?
- The single discount rate that makes a bond's price equal the present value of its cash flows, assuming it is held to maturity and coupons reinvest at the YTM.
- Par, premium, and discount bonds?
- Coupon = market yield → priced at par; coupon > yield → premium; coupon < yield → discount. Prices pull to par as maturity nears.
- Money duration vs duration?
- Duration is a percentage price sensitivity; money (dollar) duration is the price change in currency units for a given yield move.
- Key rate (partial) duration?
- The sensitivity of a bond's price to a change in the yield at one specific maturity, holding others constant — captures non-parallel curve shifts.
- Convexity — what it adds?
- Convexity corrects duration's straight-line estimate for large yield changes; positive convexity helps the holder, gaining more when yields fall than it loses when they rise.
- Z-spread definition?
- The constant spread added to each spot rate that makes the present value of a bond's cash flows equal its market price.
- Forward rate from spot rates?
- (1 + z2)² = (1 + z1) × (1 + 1y1y forward), so the implied one-year forward one year out is solved from the two- and one-year spot rates.
- Expected loss on a bond?
- Probability of default × loss given default × exposure. Loss given default = 1 − recovery rate.
- Forward rate agreement (FRA)?
- An OTC forward on an interest rate: one party locks a rate on a notional deposit for a future period, settling on the difference from the reference rate.
- Notional principal in a swap?
- The amount used to compute swap payments; it is generally not exchanged in an interest-rate swap, only the net interest difference is.
- Plain-vanilla interest-rate swap?
- One party pays a fixed rate and receives floating; the fixed rate is set so the swap's value is zero at initiation.
- Replicating portfolio for an option?
- A position of n shares of the underlying plus risk-free borrowing/lending that reproduces the option's payoff — the basis of no-arbitrage pricing.
- Why convenience yield lowers the forward price?
- Holding the physical asset provides a benefit (availability), reducing the net cost of carry and thus the no-arbitrage forward price.
- Cost of carry — full expression?
- Forward = spot compounded at the risk-free rate, plus storage costs, minus income and any convenience yield over the contract life.
- Lower bound on a European call?
- A European call is worth at least the underlying minus the present value of the strike (and never less than zero).
- Direct vs sequential real-estate cash flows?
- Direct capitalization uses a single stabilized NOI and cap rate; discounted cash flow models each year's NOI plus a terminal value, useful for changing cash flows.
- Going-in vs terminal cap rate?
- The going-in cap rate values the property today; the terminal (exit) cap rate values the expected sale at the end of the holding period.
- REIT — funds from operations (FFO)?
- Net income plus real-estate depreciation and amortization, minus gains on property sales — a better cash-earnings measure than net income for REITs.
- Committed vs invested capital (PE)?
- Limited partners commit capital that the GP draws down (calls) over time to make investments; uncalled commitments are 'dry powder'.
- J-curve in private equity?
- Returns are negative early (fees and write-downs) before investments mature and are exited, producing the J-shaped cumulative return path.
- Vintage year?
- The year a private fund makes its first investment; comparing funds within a vintage controls for the market environment.
- Hurdle rate and clawback?
- The hurdle is the LP return earned before the GP takes carried interest; a clawback returns excess carry to LPs if later losses occur.
- Strategic vs tactical asset allocation?
- Strategic allocation sets long-run target weights from the IPS; tactical allocation makes short-term deviations to exploit perceived mispricing.
- Rebalancing — why and how?
- Returning a portfolio to target weights controls risk drift; calendar rebalancing uses fixed dates, percentage-of-portfolio uses tolerance bands.
- Liability-driven investing (LDI)?
- Structuring assets to match the characteristics of liabilities (e.g., a pension's), focusing on funding the obligations rather than a market benchmark.
- Risk budgeting?
- Allocating a portfolio's total risk among positions or factors deliberately, so active risk is spent where the manager has the most skill.
- Behavioral biases in markets?
- Cognitive errors (anchoring, availability) and emotional biases (loss aversion, overconfidence) can move prices and challenge market efficiency.
- Capital allocation line (CAL)?
- The line of risk-return combinations from mixing the risk-free asset with a risky portfolio; its slope is the Sharpe ratio.
- Capital market line (CML)?
- The CAL using the market portfolio; only total risk (standard deviation) is priced for efficient portfolios on the line.
- Security market line (SML)?
- The graph of CAPM: required return versus beta. A security above the SML is undervalued; below it is overvalued.
- M-squared (M²) measure?
- Risk-adjusted performance stated as the return a portfolio would earn if levered to the market's risk — comparable directly to the market return.
- Active vs passive management trade-off?
- Active management seeks alpha but adds fees and tracking error; passive management minimizes cost and tracking error but forgoes outperformance.
- Factor investing — smart beta?
- Rules-based strategies that tilt toward rewarded factors (value, size, momentum, quality, low volatility) between pure active and pure passive.
