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CFA Level I Updated
How do I know when the exam wants Macaulay duration instead of modified duration?
Ask what the question is requesting before you think about formulas. - If it wants the weighted-average time of promised cash flows, use Macaulay duration. - If it wants approximate percentage price change from a yield move, use modified duration. Qu
Why is modified duration still reported in years if I am using it to estimate price sensitivity?
Treat modified duration as an approximate percentage price sensitivity that is built from a time-weighted bond structure. That is why market tables may still display it in years even though the operational use is: `Approximate % price change = - Modi
Why does a callable bond break the normal duration shortcuts I use for straight bonds?
The shortcut fails because the bond's expected cash flows are no longer fixed. When yields fall, the issuer becomes more likely to call the bond. That shortens the expected life and caps some of the upside price gain.
Is immunization basically just matching my bond portfolio duration to the liability horizon?
Duration matching is necessary, but it is not the whole immunization story.
How should I read a key rate duration table without memorizing every single maturity point?
Read a key rate duration table as a map, not as a formula sheet. Each entry tells you where along the curve the portfolio is most vulnerable.
Why can a bond portfolio still lose money after I match its duration to the benchmark?
Matching aggregate duration only hedges a small parallel shift reasonably well. It does not guarantee protection if one part of the curve moves much more than the rest.
Why is convexity not a free lunch on a static yield curve?
Your skepticism is correct. Convexity does not generate return by itself in a completely motionless market. The more defensible interpretation is that convexity becomes valuable when yields fluctuate over time, when the manager rebalances, or when th
What does the convexity effect actually mean for equal rate moves?
There is a clean way to think about it. Positive convexity means the bond price-yield line bows outward. Because of that bow, a yield decline lifts the bond price by more than a yield increase of the same size pushes it down. If you imagine duration
How does convexity change a duration-based price estimate?
Duration gives a linear approximation. Convexity adds a curvature adjustment. If the yield move is tiny, the adjustment is often negligible. As the yield move becomes larger, or when answer choices are close together, the convexity term can change bo
Why does a barbell beat a bullet when duration is the same?
Matching duration only aligns first-order interest-rate sensitivity. It does not guarantee the same second-order sensitivity, which is convexity. A barbell spreads cash flows across shorter and longer maturities, so it often has more convexity than a
What are the CFA Standards requirements for research reports, and what must be disclosed versus recommended?
CFA Standards require research reports to have a reasonable and adequate basis, clearly distinguish fact from opinion, and disclose all material conflicts of interest. Key disclosures include beneficial ownership, investment banking relationships, and significant methodology changes.
What are the most reliable candlestick reversal patterns, and how should CFA candidates interpret them in context?
Candlestick reversal patterns like hammers, engulfing patterns, and morning/evening stars signal potential trend exhaustion. Their reliability depends on appearing after sustained trends, receiving volume confirmation, and occurring at established support or resistance levels.
How does algorithmic bias manifest in lending models, and what are the ethical obligations of investment professionals using AI-driven credit decisions?
Algorithmic bias in lending arises when proxy variables correlated with protected characteristics reproduce historical discrimination. CFA standards require professionals to audit models for disparate impact, implement fairness constraints, and maintain ongoing bias monitoring.
How do CFA Standards require fair dealing in trade allocation, and what allocation methods satisfy the standard?
Standard III(B) requires equitable trade allocation across all client accounts. Pro-rata allocation based on account size is the most common compliant method. Tiered service levels are permitted only with full upfront disclosure. No client should be systematically favored.
How are Fibonacci retracement levels used to identify support and resistance, and do they actually work?
Fibonacci retracement levels (23.6%, 38.2%, 50%, 61.8%, 78.6%) are drawn between swing highs and lows to identify potential reversal zones. Their effectiveness is debated, but they gain practical value when they coincide with other technical indicators like moving averages and prior support/resistance.
How does Elliott wave theory work, and what are the rules for identifying impulse versus corrective waves?
Elliott Wave Theory describes markets moving in 5 impulse waves followed by 3 corrective waves, with this pattern repeating fractally at all timeframes. Three inviolable rules govern wave structure, while Fibonacci-based guidelines provide target levels for each wave's length and retracement.
How do you account for inventory shrinkage, and what is the financial statement impact?
Inventory shrinkage is the shortfall between book and physical inventory. Under perpetual systems it is explicitly identified and recorded, while under periodic systems it is embedded in COGS and cannot be separately identified.
What are the main inventory count procedures, and when is a physical count required under periodic vs. perpetual systems?
Even perpetual inventory systems require periodic physical counts for reconciliation. Under periodic systems, the physical count is the only way to determine ending inventory, while perpetual systems use counts to identify shrinkage from theft, breakage, or errors.
Can someone break down the 3-step and 5-step DuPont decomposition with a real example?
DuPont analysis is one of the most testable frameworks in CFA Level I FRA because it connects profitability, efficiency, and leverage into a single coherent picture of return on equity. The 3-step version decomposes ROE into net profit margin, asset turnover, and the equity multiplier, while the 5-step further breaks down the margin into tax burden, interest burden, and EBIT margin.
What are the key fairness metrics for evaluating AI models in finance, and why can't a model satisfy all fairness criteria simultaneously?
The three core fairness metrics — demographic parity, equalized odds, and predictive parity — are mathematically incompatible when base rates differ across groups. Financial practitioners must choose the most appropriate metric, document their rationale, and disclose tradeoffs.
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