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CFA Level I Updated
When should I use Spearman rank correlation instead of Pearson?
Spearman correlates ranks rather than raw values, making it robust to outliers and capable of capturing monotonic but nonlinear relationships.
What is the difference between finite-life and indefinite-life intangible assets?
Finite-life intangible assets have a determinable useful life and are amortized over that period, while indefinite-life intangibles have no foreseeable limit and are not amortized. Indefinite-life intangibles must be tested for impairment at least annually, whereas finite-life intangibles are only tested when indicators of impairment exist.
When should I use EV/EBITDA instead of P/E for equity valuation?
Use EV/EBITDA when comparing companies with different leverage levels, when earnings are negative, in capital-intensive industries, or for M&A analysis. Use P/E when companies have similar capital structures, positive stable earnings, and you want an equity-level comparison.
Why does IFRS capitalize development costs while US GAAP expenses almost everything?
Under IFRS, development costs must be capitalized as an intangible asset when six specific criteria are met, while research costs are always expensed. US GAAP expenses virtually all R&D costs as incurred, with a narrow exception for software development after technological feasibility.
What are the key properties of the normal distribution I need to know for CFA Level I?
The normal distribution is bell-shaped, symmetric, and fully described by its mean and standard deviation. The 68-95-99.7 rule states that approximately 68%, 95%, and 99.7% of observations fall within 1, 2, and 3 standard deviations of the mean.
How does the cash conversion cycle work and why is working capital management important?
The cash conversion cycle (CCC) measures how long it takes a company to convert its investment in inventory and receivables into cash, accounting for how long it takes to pay suppliers. CCC = DIO + DSO - DPO.
What exactly does the Pearson correlation coefficient measure and when does it fail?
Pearson correlation captures linear association; it fails for nonlinear relationships, outliers, and heavy-tailed data — always pair it with a scatterplot.
How do I interpret the covariance between two assets?
Covariance quantifies co-movement in squared return units; divide by both standard deviations to get correlation for a dimensionless, interpretable measure.
What is the prudent investor standard under the duty of care?
The prudent investor standard requires acting with the care, skill, and diligence that a prudent person acting in a like capacity and familiar with such matters would use...
What is the difference between permanent and temporary differences in deferred tax accounting?
Temporary differences reverse over time and create deferred tax assets or liabilities, while permanent differences never reverse and therefore create no deferred tax items. Permanent differences cause the effective tax rate to differ from the statutory rate, which is a key analytical insight tested on the CFA exam.
What are the industry life cycle stages and their investment implications?
The five industry life cycle stages — embryonic, growth, shakeout, mature, and decline — each have distinct implications for profitability, competition, and investment strategy. Growth-stage firms justify high multiples, while mature firms offer dividends and stability.
How does accelerated tax depreciation create a deferred tax liability, and will it ever reverse?
A deferred tax liability arises when accelerated tax depreciation creates higher deductions early on, reducing current taxes payable below book tax expense. The DTL builds in early years when tax depreciation exceeds book depreciation, then reverses as the pattern flips.
How should I handle conflicts of interest under Standard VI?
Standard VI requires disclosure of all conflicts of interest, maintaining transaction priority (clients first, personal last), and disclosing referral fee arrangements. When in doubt, always disclose.
How does short selling actually work mechanically? What are the risks?
Short selling is betting that a stock's price will decline. You borrow shares, sell them, wait for the price to drop, buy them back cheaper, and return them. The critical risk is unlimited loss potential since there's no cap on how high a price can rise.
Can someone explain callable and putable bonds? How do embedded options affect bond pricing?
Embedded options give one party the right to alter the bond's cash flows, and they fundamentally change how you value the bond. Callable bonds trade at a discount to straight bonds, while putable bonds trade at a premium.
What is the financial statement impact of capitalizing an operating lease?
Capitalizing an operating lease increases both assets and liabilities on the balance sheet, front-loads expenses on the income statement, and reclassifies part of the cash payment from CFO to CFF. This affects leverage ratios, asset turnover, EBITDA, and CFO.
What is Chebyshev's inequality and how is it useful when we don't know the distribution?
Chebyshev gives a distribution-free lower bound on how much data falls within k standard deviations — useful when normality cannot be assumed.
How do I interpret skewness and kurtosis in return distributions?
Skewness captures asymmetry and kurtosis captures tail thickness — together they reveal whether mean-variance statistics understate true tail risk.
What does the duty of loyalty require under CFA Institute standards?
Duty of loyalty is the principle that investment professionals must place client interests above their own, their firm's, and any third party's. It is the cornerstone of Standard III(A)...
How do you perform an effective tax rate reconciliation?
An effective tax rate reconciliation starts with the statutory rate and adjusts for items that cause the actual tax expense to differ, including tax-exempt income, non-deductible expenses, tax credits, and foreign rate differentials. It explains why the effective tax rate differs from the statutory rate and helps analysts assess the sustainability of a company's tax position.
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