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CFA Updated
How many managers should a portfolio have for adequate diversification?
5-8 managers per asset class hits most diversification benefit; beyond that correlations dilute active returns...
How do I construct an interest rate collar to hedge a floating-rate loan?
A collar combines a purchased cap with a sold floor. The sold floor's premium partially offsets the cap premium, creating a corridor of acceptable rates...
What characterizes mid-cycle sector performance and which names lead?
Mid-cycle favors Technology, Communication Services, and Industrials. Materials, Utilities, and REITs lag as rates rise and cyclical momentum fades.
What makes the Heston model different from local vol?
Heston treats volatility as a second random factor with its own mean-reverting dynamics. Unlike local vol, Heston has realistic forward smile dynamics...
How does the retail inventory method estimate ending inventory at cost?
Compute cost-to-retail ratio (goods available at cost / at retail), subtract sales from goods available at retail for ending retail, then multiply by ratio. Harborlight ends with $419.5K cost inventory from a 57.46% ratio.
How does survivorship bias inflate historical returns?
Survivorship bias excludes failed entities, overstating returns. Mira Kaltenbach's study shows 34% of 2016 funds gone; correction reduces returns 0.8-1.5% annually.
When should I use a three-stage DDM instead of a two-stage and how is the middle stage modeled?
Three-stage DDMs linearly taper growth from high to stable over a declining stage, producing more realistic valuations for maturing growth firms.
How can a company improve its cash conversion cycle?
The cash conversion cycle equals DIO + DSO - DPO. Each component offers distinct improvement levers from inventory management to collections to payables.
What metrics measure supplier bargaining power?
Measure supplier power via HHI, cost share, switching costs, forward integration threat, uniqueness, and supplier margin expansion.
How does portable alpha work when you use index futures to transport alpha?
Put $500M in market-neutral fund plus S&P futures overlay. Total return = SOFR + alpha + S&P excess. Watch beta drift, margin, and basis risk.
What is a 'big bath' in earnings management, and why would management intentionally make a bad year worse?
A big bath involves deliberately inflating current-period losses through aggressive write-downs, restructuring charges, and expense acceleration. This depresses the current year but artificially boosts future earnings through lower depreciation, reserve reversals, and reduced expense base.
What is the difference between pro forma earnings and GAAP earnings, and why should analysts be cautious with pro forma figures?
Pro forma earnings exclude items management deems non-recurring or non-core, often producing higher figures than GAAP. While sometimes useful for isolating ongoing performance, analysts should scrutinize whether excluded items truly are non-recurring and whether stock-based compensation represents a real cost to shareholders.
Can you break down a single caplet valuation step-by-step?
Work through caplet: d1 and d2, normal CDFs, then Black formula. Discount to payment date not fixing date.
What is the difference between operating and non-operating private foundations?
Non-operating foundations grant to others and face 5% payout; operating foundations run their own programs and don't face the 5% rule but must pass activity tests.
How do community foundations work and what's unique about their investment policy?
Community foundations pool donor funds under one public charity, offer pooled investment options, manage DAF liquidity, and avoid the 5% private foundation payout rule.
What is hierarchical clustering and how do I read a dendrogram?
Hierarchical clustering builds a nested tree of clusters; read the dendrogram by cutting at large vertical gaps to choose a natural K.
How do I optimize GST exemption allocation using a Dynasty Trust?
Dynasty Trusts compound wealth across generations shielded from estate/gift/GST taxes by allocating GST exemption at funding to create a zero inclusion ratio.
How do I judge the quality of asset turnover?
Equal asset turnover numbers can hide very different quality. Always decompose turnover into fixed asset turnover and working capital turnover.
How do I calculate country-specific ERP for emerging markets?
For Quantafric across Nigeria (Caa1), Kenya (B3), and Egypt (Caa1), calculate CRP as sovereign spread × equity/bond volatility ratio. Revenue-weighted ERP: 0.40×16.4% + 0.35×12.3% + 0.25×15.25% = 14.66%...
What are RMW and CMA in the Fama-French five-factor model?
RMW captures profitability and CMA captures investment; together they subsume much of the original HML premium.
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