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How do you calculate a bond's duration contribution to overall portfolio risk?
Duration contribution equals a bond's portfolio weight multiplied by its modified duration. Summing all contributions gives the portfolio's total duration, revealing which holdings drive the most interest rate risk regardless of their market value weight.
What are the key provisions of the Uniform Prudent Investor Act, and how does it affect trust investment management?
The UPIA modernized trust investing by adopting a total portfolio approach, permitting all asset classes, requiring diversification (with documented exceptions), allowing delegation, and mandating cost awareness. Trustees are judged by their process, not outcomes.
How do correlation trading strategies work, and why is implied correlation often higher than realized correlation?
Correlation trading profits from changes in asset co-movement. Implied correlation typically exceeds realized correlation by 5-15 points due to hedging demand and crash protection premiums. Traders access this spread through correlation swaps, dispersion trades, and structured products.
What is a completion portfolio in fixed income, and how does it fill factor exposure gaps in a multi-manager structure?
A completion portfolio fills the gap between a fund's aggregate factor exposures from multiple active managers and its benchmark or liability profile. It addresses unintended duration, sector, and credit quality mismatches that emerge when combining separate mandates.
How should tax-aware rebalancing be implemented in taxable accounts, and what strategies minimize the tax drag?
Tax-aware rebalancing weighs the risk reduction benefit against the capital gains tax cost of selling appreciated assets. Strategies include tax-lot selection, cash flow rebalancing, loss harvesting offsets, wider bands in taxable accounts, and prioritizing rebalancing in tax-deferred accounts.
What are the differences between calendar rebalancing and percentage-of-portfolio rebalancing, and which approach is better for different investor types?
Calendar rebalancing uses fixed time intervals and is simpler to implement, while percentage-of-portfolio rebalancing triggers on allocation drift thresholds and provides tighter risk control. Most institutions use a hybrid approach combining scheduled governance with continuous drift monitoring.
When do you switch from the equity method to the acquisition method for intercorporate investments?
Great question — this is one of the most frequently tested areas in CFA Level II FRA. The ownership thresholds are guidelines: below 20% uses fair value, 20-50% uses the equity method, and above 50% requires full consolidation under the acquisition method.
What is the clientele effect in dividend policy, and how do different investor groups sort themselves by payout preference?
The clientele effect describes how investors self-select into stocks matching their payout preferences based on tax brackets and income needs. In equilibrium, every payout level has its natural clientele, but changing policy causes transitional disruption.
How does the quantitative goodwill impairment test work under IFRS versus US GAAP, and what happens to the impairment loss?
IFRS tests goodwill at the CGU level by comparing the unit's carrying amount to its recoverable amount, with excess losses allocated to other assets. US GAAP compares reporting unit fair value to carrying value, capping the loss at the goodwill balance.
What are the disclosure requirements for referral fees under CFA Standard VI(C), and when must disclosure occur?
Standard VI(C) requires disclosure of all referral fees -- cash, non-monetary, and reciprocal arrangements -- at the time of referral, before the client acts on it. Both the referrer and the receiving party must disclose, and all forms of compensation must be included.
Why does WACC calculation sometimes require an iterative approach, and how do you handle the circularity?
WACC is circular because it depends on market value weights which depend on the firm value which depends on WACC. The iterative approach starts with initial weight estimates, computes WACC, re-derives market values, and repeats until convergence.
How do AIC, BIC, and HQC differ in penalizing model complexity, and which should I use?
AIC, BIC, and HQC all penalize model complexity but differ in severity. AIC uses a fixed penalty of 2k, BIC penalizes with k x ln(n) which grows with sample size, and HQC falls in between. BIC favors simpler models, while AIC optimizes prediction accuracy.
How does donating appreciated securities provide a double tax benefit compared to donating cash, and what are the limitations?
Donating appreciated securities provides a double tax benefit: avoiding capital gains tax on the unrealized appreciation and receiving an income tax deduction for the full fair market value. This can save 40-50% more in taxes compared to selling and donating cash.
How does a carry trade work in fixed income, and how is it different from a yield pickup trade?
A fixed income carry trade borrows at short-term rates and invests in longer-duration bonds to earn the term premium. Total return includes carry plus roll-down return, but the strategy fails when the yield curve flattens, inverts, or when funding costs spike unexpectedly.
What is a yield pickup trade in fixed income, and what risks does the investor accept in exchange for the additional yield?
A yield pickup trade captures additional spread by swapping into a higher-yielding bond, typically accepting credit, liquidity, or complexity risk in exchange. The trade is profitable only if spreads remain stable or tighten — the breakeven spread widening equals the yield pickup divided by duration.
How do share buybacks affect FCFE, and should I adjust my valuation model when a company repurchases its own stock?
Share buybacks do not affect FCFE — they represent a distribution choice, not a cash flow component. The recommended approach is to discount total FCFE to arrive at aggregate equity value, then divide by current shares outstanding, avoiding the circularity of modeling per-share buyback effects.
What does a negative FCFE mean, and how do you handle it in a dividend discount or FCFE valuation model?
Negative FCFE means the company consumes more cash than it generates, requiring external financing. In a DCF model, negative near-term cash flows are discounted normally, with most equity value coming from the terminal value once the firm reaches profitability.
How is a customer relationship intangible asset identified and valued in a purchase price allocation?
Customer relationship intangibles are valued using the multi-period excess earnings method (MPEEM), which isolates cash flows specifically attributable to existing customer relationships by deducting contributory asset charges — returns required on all other assets used to generate those cash flows.
How are contingent liabilities recognized and measured in a business combination under IFRS 3?
Under IFRS 3, contingent liabilities assumed in a business combination are recognized if they represent a present obligation with a reliably measurable fair value — even when the probability of outflow is below the 'probable' threshold required by standalone IAS 37.
How is acquired inventory measured in a purchase price allocation, and what is the income statement effect when that inventory is later sold?
In a business combination, acquired inventory is measured at fair value on the acquisition date. Finished goods are valued at selling price less disposal costs and a reasonable profit margin on selling effort, creating a step-up above book value that compresses gross margins when sold post-acquisition.
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