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CFA Level I Updated
When do I use a chi-square test in CFA Level I, and how do I set up the hypothesis for variance testing?
For CFA Level I, the chi-square test is primarily used for hypothesis tests about a single population variance or standard deviation. The test statistic is χ² = (n-1)s²/σ₀², and the distribution is right-skewed and non-negative, requiring different critical value treatment than symmetric tests.
How does Standard II protect capital markets? What exactly counts as insider trading?
Standard II protects capital market integrity. The key concepts are material nonpublic information (MNPI) and the mosaic theory defense. Analysts can piece together public and non-material nonpublic information, but must not act on material nonpublic information.
Can someone break down joint, conditional, and marginal probability with a finance example?
Let's build all probability concepts using one consistent example. Marginal probability is unconditional, joint probability measures two events together, and conditional probability gives the likelihood of one event given another has occurred.
What are the must-know financial ratios for CFA Level I and how do I interpret them?
Financial ratios fall into four categories: liquidity (current ratio, quick ratio), solvency (debt-to-equity, interest coverage), profitability (ROE, ROA, margins), and activity (turnover ratios). DuPont analysis decomposes ROE into net margin, asset turnover, and leverage.
What protections exist for whistleblowers in the finance industry?
US whistleblower protections in finance come from several statutes and regulatory programs. Dodd-Frank offers monetary awards of 10-30% of sanctions over $1M recovered...
How does open banking reshape competitive dynamics in financial services, and what are the investment implications for incumbent banks versus fintech challengers?
Open banking mandates that banks share customer data via APIs, eroding their data moat. Incumbent banks with high payment fee revenue face compression, while API-native challengers and platform-strategy banks benefit from ecosystem effects and lower infrastructure costs.
How does the proliferation of social media affect the definition of material nonpublic information, and when does the mosaic theory apply?
Social media disclosure is considered 'public' only if the channel is broadly accessible and the company has designated it for material disclosures. The mosaic theory protects analysts who combine individually immaterial or public information through their own analysis to reach material conclusions.
What are the GIPS requirements for broad distribution pooled funds, and how do they differ from segregated account composites?
Broad distribution pooled funds under GIPS may use a GIPS Pooled Fund Report showing net-of-fees returns, benchmark comparisons, total assets, and expense ratios. Unlike segregated account composites, internal dispersion and number of portfolios are not required.
What criteria must be met to classify a business segment as a discontinued operation, and how is it reported on the income statement?
Discontinued operations must represent a strategic shift involving a major line of business, geographical area, or equity method investment. Results are presented net of tax below continuing operations on the income statement, and prior periods must be restated for comparability.
What is a sinking fund provision, and is it good or bad for bondholders?
A sinking fund provision requires issuers to retire portions of a bond issue on a scheduled basis before maturity. It reduces credit risk for bondholders but creates reinvestment risk if bonds are called at par in a low-rate environment.
What exactly is 'smart beta' or factor investing, and how does it differ from traditional passive indexing?
Factor investing, or 'smart beta,' uses systematic rules-based approaches to capture specific return drivers like value, momentum, quality, and low volatility — sitting between traditional passive indexing and active management.
How does the private equity secondary market work, and why would an LP sell their fund interest?
The PE secondary market allows limited partners to sell their fund interests before termination. Transactions typically occur at a discount to NAV, with pricing driven by fund quality, age, remaining commitments, and market conditions.
What is the Asset Manager Code of Professional Conduct, and how do firms adopt it?
The Asset Manager Code is a voluntary code for asset management firms, distinct from the individual Code of Ethics. Adoption requires notifying CFA Institute, implementing compliance policies, and publicly committing to six principles centered on client benefit and professional conduct.
Why do we assume asset prices follow a lognormal distribution instead of normal?
If continuously compounded returns are normally distributed, then prices follow a lognormal distribution. This ensures prices can never be negative, which is economically necessary for limited-liability equity.
How does duration matching immunize a portfolio against a single liability?
Duration matching immunizes against rate changes because price risk and reinvestment risk offset each other at the duration point. For a single liability, set the portfolio's Macaulay duration equal to the liability's time horizon and ensure sufficient initial value.
What is free-float adjustment and why do indexes use it instead of total market cap?
Free-float adjustment excludes shares not available for public trading — insider stakes, government holdings, treasury shares, and strategic cross-holdings. Most major indexes use free-float market cap for weighting to reflect actual investability.
How does the specific identification method work for inventory costing?
Specific identification tracks each individual inventory item to its actual purchase cost. When that specific item is sold, its actual cost becomes COGS with no cost flow assumption needed. It is most appropriate for high-value, low-volume items like jewelry or real estate, but it raises manipulation concerns since management can cherry-pick which items to sell.
How do I interpret regression output for CFA Level I? The R-squared, coefficients, and t-stats all blur together.
Regression analysis interpretation follows a systematic four-step sequence: check R-squared for explanatory power, test overall significance with the F-statistic, evaluate individual coefficients with t-statistics, then interpret the slope magnitude.
How are recovery rates estimated and why do they vary so much across different types of debt?
Recovery rate is the percentage of face value that bondholders actually receive when an issuer defaults. It varies significantly based on seniority in the capital structure, collateral quality, industry, and economic conditions.
What are the main equity index construction methods and how do they differ?
The three main equity index construction methods are price-weighted (weight based on share price), market-cap weighted (weight based on market capitalization), and equal-weighted (all stocks get equal weight). Each has different biases, rebalancing requirements, and sensitivity to stock splits.
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