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CFA Level I Updated
What special GIPS provisions apply to real estate investments?
GIPS requires real estate investments to be externally appraised at least annually, with returns broken into income and capital components. Firms must disclose valuation methods, appraiser qualifications, and leverage levels.
What is the relationship between a protective put and a fiduciary call, and how does this connect to put-call parity?
A protective put (stock plus put) and a fiduciary call (call plus risk-free bond) always produce the same payoff at expiration. This equivalence is put-call parity: c + PV(K) = p + S.
How does Roy's safety-first criterion work, and how is it different from Sharpe?
Roy's safety-first criterion minimizes the probability of the portfolio return falling below a threshold level. The formula is identical to Sharpe but replaces the risk-free rate with a minimum acceptable return.
What is the difference between general collateral repo rate and special repo rate?
General collateral repos accept any security from a class and pay the standard secured rate. Special repos demand a specific security and offer a lower rate to the security holder as compensation for delivering the scarce bond.
What is rollover risk for commercial paper and why did it cause problems in 2008?
Rollover risk is the danger of being unable to issue new commercial paper to repay maturing paper. Since CP is short-term and continuously rolled, any disruption in market confidence can leave issuers unable to refinance hundreds of millions in obligations.
What biases exist in market-cap-weighted indexes and why should investors care?
Market-cap-weighted indexes inherently overweight stocks that have recently risen in price, creating a built-in momentum bias. They also suffer from concentration risk when a few mega-caps dominate. Despite these biases, cap-weighting is the only method consistent with CAPM.
What is the difference between growth and value investing styles, and how are they defined for CFA Level I?
Growth and value are the two primary equity style categories. Value stocks have low P/E, low P/B, and high dividend yields. Growth stocks have high P/E, high P/B, and above-average earnings growth. Most index providers use multiple factors for classification.
What is the difference between lower of cost and NRV under IFRS versus LCM under US GAAP?
IFRS uses the simpler 'lower of cost and NRV' approach where NRV equals selling price minus costs to complete and sell. US GAAP uses 'lower of cost or market' where market is replacement cost bounded by a ceiling (NRV) and floor (NRV minus normal profit margin). A key difference is that IFRS allows write-down reversals while US GAAP does not.
How does the IS-LM model show the effects of monetary and fiscal policy on interest rates and output?
The IS-LM model shows how the goods market and money market jointly determine interest rates and output. Fiscal policy shifts the IS curve, monetary policy shifts the LM curve, and their interaction determines the net effect on the economy.
How do storage costs and convenience yield affect forward pricing for commodities?
Forward pricing for commodities adds storage costs and subtracts convenience yield from the basic cost-of-carry formula. Storage costs increase the forward price because holding the physical commodity is expensive, while convenience yield decreases it because physical possession provides non-monetary benefits.
Why does a floating rate note (FRN) always trade at par on its coupon reset date?
A floating rate note pays a coupon that resets to the current reference rate plus a fixed spread. On each reset date, if the bond's credit risk hasn't changed, the coupon rate equals the discount rate and the bond prices at par.
What do the different yield curve shapes mean and how do I interpret them for the exam?
The yield curve plots bond yields against maturity for same-credit-quality instruments. Its shape — normal, inverted, flat, or humped — carries powerful economic signals about growth expectations, monetary policy, and recession risk.
What are the costs of short selling and how does the rebate rate work?
Short selling involves borrowing shares and selling them, but the position carries costs including lending fees, dividend obligations, and reduced rebate rates. The rebate rate is the portion of interest earned on cash collateral that the broker passes back to the short seller.
What is the portfolio management process and how do you write an Investment Policy Statement?
The portfolio management process is a structured approach with three phases: planning, execution, and feedback. The Investment Policy Statement (IPS) is the governing document created during the planning phase, with two major sections covering objectives (return and risk) and constraints (time horizon, liquidity, taxes, legal, unique).
When can a company recognize revenue in a bill-and-hold arrangement where the customer hasn't taken physical delivery?
In a bill-and-hold arrangement the seller invoices the customer and retains physical possession of goods until a later date. Revenue can be recognized if the reason is substantive, goods are separately identified, ready for transfer, and the seller cannot use them for other purposes.
What's the difference between operating leverage and financial leverage, and how do they affect earnings volatility?
Operating leverage amplifies EBIT changes relative to revenue changes through fixed operating costs, while financial leverage amplifies EPS changes relative to EBIT changes through fixed interest expense. Both work as double-edged swords, magnifying both gains and losses.
How does Standard III(B) Fair Dealing apply to IPO allocations and simultaneous trade dissemination?
Standard III(B) Fair Dealing requires that members deal fairly and objectively with all clients. For IPO allocations, the pro-rata method based on indicated interest is the fairest approach. For recommendation changes, all clients must receive the update at approximately the same time.
What exactly does the ANOVA F-test tell us in a regression, and how do I interpret the F-statistic?
The ANOVA F-test in regression asks whether the model as a whole explains a statistically significant portion of the variation in the dependent variable. The null hypothesis is that all slope coefficients equal zero, and we reject it when the F-statistic exceeds the critical value.
Why do interest payments show up in different places on the cash flow statement under IFRS vs US GAAP?
You've identified one of the trickiest comparability issues in FRA. The classification differences between IFRS and US GAAP on the cash flow statement can make two identical companies look very different. Under US GAAP, interest paid must be classified as operating, but under IFRS, companies can choose to classify it as either operating or financing.
What's the difference between the direct and indirect methods for the cash flow statement?
The direct and indirect methods both produce the same CFO total. The indirect method starts with net income and adjusts for non-cash items and working capital changes, while the direct method lists actual cash receipts and payments.
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