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CFA Updated
What is a fund-of-funds manager structure and when is it appropriate?
FoF = invest in multiple manager funds via one vehicle; appropriate for smaller allocations, access, expertise gaps...
Which quantitative metrics are most important in manager due diligence?
IR, Sharpe, capture ratios, TE, factor attribution — distinguish true alpha from factor exposure...
How do I interpret swap spreads and what do they tell investors?
Swap spread equals the par swap rate minus the matching-maturity Treasury yield. It measures supply/demand imbalances and dealer balance sheet costs...
Which sectors historically lead in the early-cycle recovery phase and why?
Early-cycle winners are Discretionary, Financials, and Industrials with high operating leverage. Staples and Utilities lag as the defensive premium unwinds.
How does the Dupire local volatility model work?
The Dupire model assumes volatility is a deterministic function of spot and time: sigma(S, t). It's the unique diffusion consistent with today's vanilla smile surface...
When is specific identification actually required vs optional for inventory?
Specific-ID is required for non-interchangeable items (diamonds, VINs, project-segregated goods) and prohibited for fungible commodities. Meridian Jewelers must use it for individual diamonds but WAC for bulk gold findings.
What is data mining bias and why does it matter for backtests?
Data mining finds false patterns when many hypotheses are tested. Stellar Alpha's 'Indicator #347' likely a chance result; Bonferroni/BH/Harvey-Liu corrections required.
How do I value a firm transitioning from high growth to stable growth using the two-stage DDM?
Two-stage DDM sums PV of high-growth dividends plus PV of terminal Gordon value — the terminal dominates, so anchor long-run g and r carefully.
What are aggressive versus conservative working capital financing strategies?
Aggressive and conservative strategies differ in the mix of short-term and long-term financing used to fund working capital.
How do you quantify threat of substitution?
Quantify substitution via price-performance trajectory, cross-price elasticity, switching costs, adoption curves, and learning rates.
How do I build an alpha budget for an enhanced indexing mandate?
Alpha budget = TE × IR. Allocate TE across signals by IC-squared, enforce position and turnover limits, and monitor realized TE weekly.
Can someone explain the financial reporting quality spectrum from the CFA curriculum — what distinguishes each level?
The financial reporting quality spectrum ranges from GAAP-compliant sustainable earnings (highest quality) through biased accounting choices and earnings management, down to non-compliant reporting and outright fraud. The key distinctions are GAAP compliance, management intent, and earnings sustainability.
What are the key differences between aggressive and conservative accounting, and how can an analyst detect each?
Aggressive accounting accelerates revenue and defers expenses, inflating current earnings. Conservative accounting does the opposite. Analysts detect aggressiveness by comparing assumptions to peers, monitoring accruals relative to cash flow, and watching for changes in estimates.
What is execution shortfall (implementation shortfall) and how do you decompose it into components?
Implementation shortfall (IS) — also called execution shortfall — measures the total cost of implementing an investment decision by comparing the actual portfolio return to the return of a hypothetical 'paper portfolio' that executed instantly at the decision price.
How do I price an interest rate cap and floor using the Black model?
Caps are portfolios of caplets (calls on rates), floors are portfolios of floorlets (puts). Each caplet valued with Black's model using forward rate, strike, vol, and discount factor.
What are the investment implications of perpetual vs limited-life foundations?
Perpetual foundations need real preservation forever; spend-down foundations glide toward zero, requiring declining risk and careful illiquid commitment pacing.
What are the key differences between foundations and endowments for CFA Level III?
Foundations are grant-making with 5% minimum payouts; endowments support institutional operations with smoothed spending rules. Both perpetual but differ in legal and liquidity profile.
How does K-means clustering work and when is it appropriate for financial data?
K-means partitions data into K clusters by iteratively minimizing within-cluster variance; scale features and use the elbow or silhouette for K.
How does the modified DuPont decomposition of ROE work?
The modified 5-step DuPont decomposes ROE into operating, financing, and tax components, giving much more diagnostic power than the classic 3-step.
What behavioral biases affect asset allocation and how do you deal with them?
Key behavioral biases in asset allocation include loss aversion (too conservative), recency bias (pro-cyclical tilts), home bias (insufficient international diversification), and decision-reversal risk (abandoning strategy during stress). Mitigation strategies include disciplined rebalancing policies, long-term framing, and pre-committed investment policy statements.
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