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What is look-ahead bias in backtesting?
Look-ahead uses data unavailable at trade time. Fenwick Strategies' 18% return drops to 11% after applying 75-day earnings lag and point-in-time data.
What is the 'growth of growth rates' concept and why does it matter for terminal value?
Terminal value sensitivity to g accelerates as g nears r — the convex relationship means small terminal-g revisions create outsized valuation swings.
How do I interpret and improve Days Inventory Outstanding?
Days Inventory Outstanding measures how many days of sales a company's inventory represents. Rising DIO without proportionate demand growth is usually a warning sign.
How does buyer concentration affect industry attractiveness?
Buyer power scales with concentration, volumes, standardization, low switching costs, and backward integration threat — reducing supplier margins.
How does multiperiod portfolio choice differ from single-period mean-variance optimization?
Multiperiod choice adds intertemporal hedging demand, human capital, consumption smoothing, and predictable returns to static Markowitz...
How does a 130/30 long-short equity strategy enhance returns vs long-only?
130/30 lets managers short overvalued names, raising transfer coefficient and IR by ~50%. Costs: shorting, fees, short squeeze risk.
What are 'cookie jar reserves' in earnings management, and how can an analyst detect them?
Cookie jar reserves involve overstating provisions during strong years and releasing excess reserves during weak years to smooth earnings. Analysts can detect them by comparing provision ratios to peers, tracking provision volatility against credit metrics, and watching for sudden reversals.
What are the most common debt covenants, and how do accounting choices affect covenant compliance?
Common debt covenants include minimum interest coverage, maximum debt-to-equity, minimum current ratio, and maximum debt-to-EBITDA. Companies approaching violations may use aggressive accounting -- capitalizing costs, changing depreciation methods, or recognizing revenue earlier -- to improve reported ratios.
What is the financial reporting quality spectrum and how do analysts use it?
The financial reporting quality spectrum ranges from conservative (biased low) through neutral, aggressive (biased high), non-compliant, to fraudulent. Analysts use quantitative tools like the Beneish M-Score, accrual analysis, and peer comparisons alongside qualitative factors like footnote analysis and auditor reports to position companies along this spectrum.
How does the effective interest method work for bond amortization?
The effective interest method calculates interest expense as the bond's carrying value multiplied by the market rate at issuance. For discount bonds, interest expense exceeds the coupon, and the difference amortizes the discount upward toward par. For premium bonds, the coupon exceeds interest expense, amortizing the premium downward.
What can and can't a firm say in advertisements under GIPS advertising guidelines?
The GIPS Advertising Guidelines allow firms to reference their GIPS compliance in marketing materials without presenting the full compliant performance report. However, there are strict requirements about what must be included and what is prohibited.
How is a floorlet different from a caplet in terms of payoff and pricing?
Floorlet pays max(K-L, 0), priced as Black put on rates. Put-call parity: Caplet - Floorlet = discounted forward minus strike.
How does the total return spending approach work for endowments?
Spends a target percent of a smoothed market value (3-year average or weighted blend of prior spending and target rate). Yale-style w=0.7-0.8 is common under UPMIFA.
How is the 5% foundation minimum distribution actually calculated?
5% of prior-year monthly-average investment FMV. Grants, direct program costs, and PRIs count; investment fees don't. Five-year excess carry-forward applies.
How does DBSCAN handle outliers and irregular-shaped clusters?
DBSCAN groups dense regions and labels sparse points as noise; it handles irregular cluster shapes and outliers without requiring K in advance.
When comparing firms, which profitability margin matters most?
Each margin answers a different question. Using only one leads to misjudgment; use them in sequence to triangulate.
How do taxes change asset allocation and rebalancing decisions?
Taxes affect asset allocation through asset location (placing tax-inefficient assets in tax-advantaged accounts), after-tax return adjustments that tilt toward equities, and wider rebalancing corridors to avoid triggering capital gains. Cash flow rebalancing and tax-loss harvesting help manage the tax drag.
How do I use the sovereign bond adjusted CAPM for international valuations?
Sovereign-adjusted CAPM: ke = Rf + β × ERP_mature + λ × CRP. For Varejo Azul in Brazil with 275bps sovereign spread, 0.90 lambda, and 1.05 beta: ke = 4.25% + 5.25% + 3.27% = 12.77% USD...
What are the Stambaugh-Yuan mispricing factors?
Stambaugh-Yuan combines 11 anomalies into MGMT and PERF factors reflecting shared mispricing signals.
When is a concentrated manager structure (few managers) preferable?
Concentrated (1-3 mgrs) works with high conviction, fee leverage, strong governance — risk of style/key-person exposure...
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