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CFA Level II Updated
What is blue ocean strategy and how do I value a company pursuing it?
Blue ocean strategy creates uncontested market space via the four actions: eliminate, reduce, raise, create. Valuation challenges include no comparable multiples, long education ramps, and uncertain TAM...
What are dynamic capabilities and how do they differ from static resources?
Dynamic capabilities extend RBV by emphasizing the ability to sense opportunities, seize them by mobilizing capital, and transform by reconfiguring assets. Measured by R&D intensity, pivot speed, and retraining depth...
How do I decompose Operating Profit Margin for operational analysis?
Decompose OPM into GM, SG&A ratio, D&A, and mix effects. Driftwood's 400bps compression likely reflects arabica spike hitting GM 500bps, partially offset by SG&A leverage. Forecast margins line-by-line, not aggregate.
How is the host contract accounted for after bifurcating an embedded derivative?
After bifurcation, the host contract is accounted for as if it were a standalone instrument...
How do I bifurcate an embedded derivative from its host contract?
Bifurcation separates the embedded derivative from the host at inception...
How do you estimate cost and revenue synergies in M&A?
Cost synergies are more credible and quantifiable; revenue synergies are notoriously unreliable and should be discounted heavily.
Why do conglomerate mergers happen despite academic criticism?
Academic finance is skeptical of conglomerate mergers, yet they persist due to internal capital markets, tax benefits, and managerial motives.
What is the difference between horizontal and vertical mergers?
Horizontal mergers combine firms at the same stage of the value chain; vertical mergers combine firms at different stages.
How do I calculate a price-weighted index with a divisor adjustment?
Price-weighted index = sum of prices / divisor. Divisor adjusts for splits and constituent changes to maintain continuity. Higher-priced stocks have more influence regardless of market cap.
What are industrial revenue bonds (IRBs)?
IRBs: muni issues debt for private company (Ridgeline Plastics $9.5M). Corporate credit is obligor; bonds are AMT private-activity, priced off BB+ rating (4.8%).
How do I aggregate convexity across a bond portfolio with multiple holdings?
Portfolio convexity is the market-value-weighted sum of bond convexities — same approach as duration, useful for estimating P&L on large parallel yield shifts.
How does litigation finance work as an alternative investment?
Litigation finance provides non-recourse capital to plaintiffs in exchange for a share of any eventual recovery. If the case loses, the funder loses its investment.
What are blue bonds and how do they work?
Blue bonds are a subset of green bonds financing ocean and marine projects. Often use blended finance with DFI guarantees and debt-for-nature swaps.
How does the variance ratio test detect mean reversion or momentum?
Under a random walk, the variance of k-period returns equals k times the variance of one-period returns. The variance ratio is VR(k) = Var(r_t(k)) / (k * Var(r_t))...
How does a TAC (Targeted Amortization Class) tranche differ from a PAC tranche?
A TAC tranche provides one-sided prepayment protection, shielding against faster-than-expected prepayments but not against extension risk from slower prepayments. It offers higher yield than a PAC tranche in exchange for accepting extension risk.
What is the difference between going concern value and liquidation value, and when does each matter?
Going concern value assumes continued operations and is based on future cash flows, while liquidation value assumes all assets are sold and liabilities paid. Liquidation value serves as a floor valuation and is relevant for distressed companies or asset-heavy businesses.
What are the basics of hedge accounting, and how do fair value hedges differ from cash flow hedges?
Fair value hedges protect against changes in the fair value of recognized items, with both the hedged item and hedge instrument gains/losses in P&L. Cash flow hedges protect against variability in future cash flows, with the effective portion of hedge gains/losses in OCI until the hedged transaction affects P&L. Net investment hedges protect foreign currency exposure on foreign operations, with effective portions in OCI.
How does a change in the discount rate affect both the PBO and pension expense, and why is sensitivity analysis important?
A decrease in the discount rate increases the PBO, typically increases service cost, and deteriorates funded status. The relationship is convex, meaning rate decreases have a larger impact than equivalent increases. Sensitivity disclosures help analysts stress-test pension risk.
What techniques do companies use to manipulate cash flow statements and how can analysts detect them?
Companies manipulate CFO by stretching payables, selling receivables, capitalizing operating costs, and using supply chain financing. Analysts detect manipulation by tracking CFO/NI ratios, DPO trends, capex-to-depreciation ratios, and reviewing footnotes for factoring and securitization programs.
How does an LSTM cell solve the vanishing gradient problem?
LSTM adds forget, input, output gates and a cell state that preserves info via additive updates. Solves vanishing gradient, handles long sequences.
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