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CFA Updated
Gordon growth model vs. exit multiple — which terminal value method should I use?
The Gordon growth model assumes perpetual FCF growth and is theoretically rigorous but highly sensitive to inputs. The exit multiple method uses market-based multiples and is easier to benchmark. Best practice is to use both and reconcile differences.
What are the key red flags for detecting earnings manipulation?
Key red flags include revenue growing faster than operating cash flow, rising DSO, capitalizing operating expenses, declining depreciation-to-asset ratios, and persistent gaps between accruals and cash flows. The Beneish M-Score is a quantitative tool for detection.
What are the key characteristics of infrastructure as an alternative investment?
Infrastructure investing involves long-lived assets (toll roads, utilities, airports) with stable, inflation-linked cash flows and high barriers to entry. Greenfield investments in new projects carry more risk than brownfield investments in existing assets.
Share buyback vs. cash dividend — what's the difference for shareholders?
Share buybacks reduce shares outstanding and boost EPS, while cash dividends distribute cash directly to all shareholders. Buybacks are generally more tax-efficient and flexible, but dividends provide a stronger commitment signal.
What is a Forward Rate Agreement (FRA) and how does settlement work?
A Forward Rate Agreement (FRA) is a contract locking in an interest rate for a future borrowing or lending period. Settlement is based on the difference between the agreed FRA rate and the actual reference rate, discounted to the settlement date.
What's the difference between strategic and tactical asset allocation?
Strategic asset allocation (SAA) is the long-term baseline mix based on client objectives and long-term expectations, while tactical asset allocation (TAA) involves short-term deviations from that baseline to exploit perceived market opportunities.
How does liability-driven investing (LDI) work for pension funds?
Liability-Driven Investing is a portfolio management approach where investment decisions are driven by liability characteristics rather than asset-only return targets. It focuses on matching the interest rate sensitivity of assets to liabilities to minimize surplus volatility.
What makes timberland unique as an investment, and how does harvest flexibility create an option-like payoff?
Timberland returns come from biological growth (2-6% annual volume increase), timber price changes, and land appreciation. Harvest flexibility acts as an embedded real option — investors can delay harvest when prices are low while trees continue growing.
What are the key corporate governance mechanisms that protect shareholders, and how do governance failures destroy value?
Key governance mechanisms include independent boards, separation of CEO/Chair roles, and strong shareholder rights. Governance failures like empire building, related-party transactions, and entrenched management can destroy significant shareholder value.
What is roll yield in commodities, and how do contango and backwardation affect commodity fund returns?
Roll yield arises from selling expiring futures and buying the next contract. In contango (upward-sloping curve), roll yield is negative as you sell cheap and buy expensive. In backwardation (downward-sloping), roll yield is positive.
What is the difference between enterprise value and equity value, and when should I use EV-based multiples instead of price-based ones?
Enterprise value represents the total operating business value (Market Cap + Debt - Cash), while equity value represents only equity holders' claim. EV-based multiples are preferred when comparing firms with different capital structures because they neutralize leverage effects.
How do sterilized and unsterilized central bank interventions differ in their effect on exchange rates?
Unsterilized intervention changes the money supply and is more effective at moving exchange rates because it alters monetary conditions. Sterilized intervention offsets the money supply impact and relies mainly on signaling and portfolio balance channels.
How does the Brinson-Hood-Beebower performance attribution model separate allocation from selection effects?
The Brinson model decomposes active returns into allocation (sector weighting decisions), selection (stock picking within sectors), and interaction effects. The allocation effect measures whether the manager overweighted outperforming sectors.
How do interest rate caps, floors, and collars work for hedging floating-rate debt?
Interest rate caps protect floating-rate borrowers from rising rates by paying out when rates exceed the cap strike. Floors protect lenders from falling rates. Collars combine a long cap with a short floor to reduce the net premium cost.
How does the suitability standard work when a client insists on an unsuitable investment?
Standard III(C) requires reasonable inquiry into a client's objectives, risk tolerance, and constraints before making recommendations. When a client insists on unsuitable investments, the advisor must educate, document, and potentially refuse.
What are leading, lagging, and coincident indicators — and which ones matter most for investment decisions?
Leading indicators (building permits, yield curve, new orders) signal where the economy is heading. Coincident indicators (industrial production, payrolls) show the current state. Lagging indicators (unemployment rate, CPI) confirm past trends.
What drives swap spreads and what does a negative swap spread mean?
Swap spreads represent the difference between the fixed swap rate and the matching-maturity Treasury yield. They're driven by credit risk, Treasury supply, balance sheet constraints, and hedging demand. Negative swap spreads can occur when Treasury supply overwhelms dealer capacity.
What are covered bonds and how are they different from regular asset-backed securities?
Covered bonds differ from ABS primarily through dual recourse: investors have claims on both the segregated cover pool and the issuer itself. Additionally, the cover pool is dynamic — the issuer must replace defaulted or prepaid assets.
What types of sampling bias should I know for CFA Level I, and how do they show up in finance research?
The three key sampling biases for CFA Level I are survivorship bias (only survivors in the dataset), look-ahead bias (using information not yet available), and time-period bias (unrepresentative sample window). Each inflates or distorts research findings.
How does a credit default swap (CDS) work and how is the spread determined?
A credit default swap is a bilateral contract providing credit protection. The protection buyer pays a periodic spread in exchange for compensation at a credit event. The CDS spread is set so PV of premiums equals PV of expected loss, approximately equal to PD times LGD.
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