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CFA Updated
How are program-related investments (PRIs) structured and taxed?
PRIs are below-market loans/equity made primarily for charitable purpose; count toward 5% payout when made, with repayments added to next year's required distribution.
How do foundations implement mission-related investing (MRI) in the endowment?
MRIs are market-rate endowment investments aligned with mission. Scale from 5% to 20% over 3 years, match traditional risk-adjusted return bar, report impact separately. Not counted toward 5% payout.
What is a seagull spread and how do its three legs combine?
A seagull spread is a three-legged option strategy typically structured as a long call spread financed by a short OTM put, or a long put spread financed by a short OTM call.
How is a fence collar constructed for zero-cost hedging?
A fence collar is a hedging structure combining a long OTM put with a short OTM call while holding the underlying. Strikes are chosen so the call premium equals the put cost.
What is return on capital employed and how does it differ from ROIC?
Return on capital employed (ROCE) and return on invested capital (ROIC) are closely related but not identical.
How do you actually construct sub-portfolios in goals-based asset allocation?
Goals-based allocation assigns each goal a priority, time horizon, and required success probability, then matches it to a pre-built sub-portfolio module. The overall portfolio is the aggregation of all sub-portfolios, making trade-offs between goals transparent.
What is the Damodaran country risk methodology and how do I apply it?
Damodaran's framework: CRP = Default spread × Relative equity/bond volatility. Example for Ayurvedant Labs in India: 215bps × 1.18 = 2.54% CRP, plus 5.5% US ERP = 8.04% India ERP. Uses lambda for firm-specific exposure...
What is a macroeconomic factor model?
Macro factor models use observable economic surprises (GDP, inflation, spreads) as factors, aiding interpretation and scenario analysis.
How is alpha-beta separation implemented in practice?
Implementation: identify beta targets, source alpha separately, combine via overlay/swaps/completion; monitor hidden beta and leverage...
What is portable alpha and how does it separate alpha from beta?
Portable alpha: invest cash in market-neutral alpha source + derivative for beta = alpha ported onto any beta...
How does a range accrual swap work and why use one?
In a range accrual swap, the coupon accrues only on days when a reference index stays inside a pre-defined range. Days outside contribute zero...
Which sectors hold up best during a recession and why?
Recession winners are Staples, Healthcare, Utilities, and Telecom. Financials, Industrials, Materials, and Real Estate lag the most.
When should I use a jump-diffusion model like Bates instead of pure stochastic vol?
Heston can't generate enough short-dated skew. Implied vol smiles for 1-week options are dramatically steeper than any diffusion-only model can produce. Jumps are the cure...
How do foundation spending rules work and how do they differ from endowments?
US private foundations must distribute at least 5% of net investment assets annually (IRC §4942). This legal floor forces liquidity planning and a ~7.5-8.5% real-return target.
How is an endowment's governance structured and how does that affect its IPS?
Endowments have tiered governance (Trustees, Investment Committee, CIO), perpetual horizons, and smoothed spending policies — enabling heavy illiquid-asset tilts vs. pension plans.
How do I compute the dollar-value LIFO index and new layers?
DVL converts ending inventory to base-year dollars using a price index, identifies real quantity growth, then layers in the increase at current cost. Cascade's 22.58% index implies a $100K real layer worth $122.58K at current prices.
What is reverse causality in finance research?
Reverse causality flips the direction of causation. Pemberton's 'ESG causes returns' may actually be 'profitability funds ESG.' Instrumental variables and natural experiments help.
What is the sustainable growth rate and how does it differ from a firm's actual growth?
SGR = ROE × retention ratio — the growth ceiling without external financing. Actual growth above SGR signals leverage, dilution, or operational improvement.
How should I manage Days Sales Outstanding to strengthen cash flow?
Days Sales Outstanding measures average collection time. Rising DSO consumes cash and signals deteriorating customer quality or collection discipline.
How do you measure rivalry intensity among competitors?
Measure rivalry via share volatility, HHI, price dispersion, A/S ratio, capacity utilization, exit barriers, and fixed-cost intensity.
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