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What makes farmland an attractive alternative investment, and how do returns compare to traditional assets?
Farmland returns come from operating income and land appreciation, driven by crop prices, population growth, and arable land scarcity. It offers strong inflation hedging and low correlation with traditional assets, but carries weather, water, and illiquidity risks.
How does ESG integration affect corporate valuation and the cost of capital?
ESG affects valuation through two channels: the cost of capital (risk premiums) and cash flows (revenues, costs, risk events). Analysts can incorporate ESG by adjusting the discount rate, modifying cash flow projections, or using scenario analysis.
What are the key characteristics of infrastructure as an asset class, and how do brownfield and greenfield investments differ?
Infrastructure assets provide essential services with long lives, stable cash flows, and inflation linkage. Brownfield investments are existing operational assets with lower risk and return, while greenfield investments involve new construction with higher risk and return potential.
When should I use P/E vs. P/B vs. P/S ratios for equity valuation, and what are the pitfalls of each?
Each price multiple suits different company types: P/E for profitable firms, P/B for banks and asset-heavy companies, P/S for unprofitable growth firms, and P/CF for capital-intensive businesses. The key is matching the multiple to the company's characteristics.
How does the Mundell-Fleming model predict the effect of monetary and fiscal policy on exchange rates?
The Mundell-Fleming model shows that under floating exchange rates with high capital mobility, monetary policy is effective while fiscal policy is crowded out through currency appreciation. Under fixed rates, the opposite holds.
What does the Carhart 4-factor model add beyond Fama-French, and how does momentum factor work?
The Carhart 4-factor model adds WML (Winners Minus Losers) to capture momentum — the tendency of recent winners to keep winning. It was designed to strip out momentum-driven returns when evaluating fund manager skill.
How does vega work and why does implied volatility matter more than historical volatility for options pricing?
Vega measures an option's sensitivity to changes in implied volatility, not historical volatility. It is highest for at-the-money, longer-dated options and is always positive for long positions. Portfolio vega determines P&L impact from volatility changes.
What does 'fair dealing' actually mean when disseminating investment recommendations?
Standard III(B) requires dealing fairly with all clients when providing recommendations or taking investment action. Fair does not mean equal — it requires a systematic process that does not systematically advantage any group.
Can someone explain comparative advantage vs. absolute advantage with a clear example?
Comparative advantage means producing a good at a lower opportunity cost, not necessarily with fewer resources. Even a country worse at producing everything benefits from trade by specializing in what it gives up least to produce.
How do you price a currency forward using covered interest rate parity?
Currency forwards are priced using covered interest rate parity: F = S₀ × (1 + r_domestic) / (1 + r_foreign). The currency with the higher interest rate trades at a forward discount. Always check whether the quote is DC/FC or FC/DC before calculating.
How do securitization structures work — can someone walk through the waterfall with an example?
Securitization involves pooling assets in a bankruptcy-remote SPE, then issuing tranches with different priorities. Cash flows follow a strict waterfall: senior tranches receive payments first, while the equity tranche absorbs initial losses.
What are the key assumptions of multiple regression and how do I detect violations?
The five key assumptions of multiple regression are linearity, homoscedasticity, no serial correlation, no multicollinearity, and normality of errors. The CFA exam commonly tests your ability to detect violations from regression output.
How do CMO tranches redistribute prepayment risk, and what are PAC vs. support tranches?
CMOs redistribute pass-through prepayment risk among tranches. Sequential-pay structures direct principal to tranches in order. PAC tranches maintain a predictable schedule within a PSA band, while support tranches absorb all prepayment variability, bearing the highest risk.
What discounts apply when valuing a private company, and how do you estimate DLOC and DLOM?
Private company valuations require two key discounts: DLOC (Discount for Lack of Control) and DLOM (Discount for Lack of Marketability). DLOC adjusts for minority stakes lacking control rights, while DLOM adjusts for the inability to quickly sell at fair value. They are applied multiplicatively.
What are the different money market yield conventions and how do I convert between them?
Money market instruments use different yield conventions than bonds. The three main types — discount yield, add-on yield, and bond equivalent yield — differ in their denominator (face value vs. price) and year basis (360 vs. 365 days).
How do floating rate notes work, and why do they have almost no interest rate risk?
Floating rate notes have coupons that adjust periodically based on a reference rate plus a fixed spread. This reset mechanism keeps the price near par and gives FRNs extremely low duration — approximately equal to the time until the next coupon reset.
How do industry life cycle stages affect equity valuation approach and assumptions?
Industry life cycle stages — embryonic, growth, shakeout, mature, and decline — each imply different growth rates, margins, and cash flow profiles. This determines the appropriate valuation approach: early-stage companies require revenue multiples or option-based models, while mature firms suit stable DDM and peer multiples.
What are the main methods for estimating the equity risk premium and which should I use?
The equity risk premium can be estimated using historical averages (5.5-8.0%), forward-looking GGM approaches (3.5-5.0%), surveys (3.0-6.0%), or macroeconomic models (3.5-5.5%). Each method has trade-offs, and even small differences in ERP dramatically change equity valuations.
How do you classify cash flows into operating, investing, and financing activities, and what are the IFRS vs GAAP differences?
Cash flows are classified into operating, investing, and financing activities. The key exam topic is the IFRS vs. US GAAP difference in classifying interest paid, interest received, dividends paid, and dividends received. Under IFRS, companies have flexibility; under US GAAP, the classification is fixed.
When and how do you impair an equity method investment?
Equity method investments can be impaired when objective evidence of decline exists (IFRS) or when the decline is deemed other-than-temporary (US GAAP). The carrying amount is written down to recoverable amount or fair value, with a key difference being that IFRS allows reversals while US GAAP does not.
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