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What diagnostic tools help identify client biases, and how reliable are they?
The Pompian BIT grid, risk-tolerance questionnaires, and decision journals each capture different bias signals. Combining them across the first year of engagement gives the sharpest client profile.
How do catastrophe-linked (cat) bonds work?
Cat bonds: SPV invests collateral, pays SOFR+spread, writes down principal on defined trigger. Coral Reef Re covers FL Cat 4+ hurricanes at $300M, SOFR+725.
What is the mega backdoor Roth and when does it apply?
The mega backdoor Roth exploits after-tax 401(k) contributions and in-plan Roth conversion, allowing up to $36,500/year additional Roth contribution...
How are partial durations (key rate durations) computed and used for targeted hedging?
Key rate durations measure sensitivity to individual points on the curve via tent-function shifts — essential for hedging barbells, butterflies, and curve-shape views.
What restrictive covenants appear in bond indentures?
Covenants cap leverage, restrict payments, require liens/affiliate discipline, trigger change-of-control puts. Cov-lite deals reduce protection.
What's random effects in panel data and when is it appropriate?
Random effects treats entity effects as random draws, offering efficiency gains over FE when unobserved heterogeneity is uncorrelated with regressors—tested via Hausman.
When should I use fixed effects in panel regression?
Fixed effects absorbs time-invariant unobserved heterogeneity by including entity dummies—use it when you suspect omitted variable bias from unobservable firm characteristics.
Explain the Fama-MacBeth two-step procedure
Fama-MacBeth runs time-series regressions to get betas, then monthly cross-sectional regressions to estimate risk premia, averaging across time with Newey-West standard errors.
How do cross-sectional regressions estimate factor returns?
Cross-sectional regression estimates factor returns by regressing asset returns on characteristics each period—the monthly slope IS that period's factor return.
What rebalancing approach should the IPS specify?
Four rebalancing approaches: calendar, threshold, calendar+threshold (most common), tactical. Bands typically 25% of target. Use cash flows first, harvest losses, avoid short-term gains.
How is scenario analysis different from sensitivity analysis?
Sensitivity analysis flexes inputs one at a time and treats them as independent. Scenario analysis changes a coherent set of inputs together...
When should a client use a revocable trust instead of just a will?
Revocable trusts avoid probate costs, handle incapacity, preserve privacy, and enable complex distributions - but cost more upfront...
How do I build an emerging market debt portfolio across hard and local currency?
Blend hard/local sovereign, hard corporate, frontier. Target 50/30/15/5. Currency and liquidity are main risks; active adds 100-250 bps.
What are Euro Medium-Term Notes (EMTNs) and how does the EMTN program structure work?
EMTNs are debt instruments issued under a pre-established program allowing continuous, flexible issuance. The program structure reduces time-to-market from weeks to days, allows any currency or structure, and supports reverse-inquiry deals tailored to specific investor needs.
Why do some companies maintain stable payout ratios while others let them fluctuate with earnings?
Payout ratio stability is explained by Lintner's dividend smoothing model, signaling theory, and clientele effects. Stable-dividend companies trade at higher multiples, while cyclical firms with volatile payouts are better valued using FCF models rather than constant-growth DDMs.
How are deferred taxes handled for undistributed earnings of a foreign subsidiary?
A deferred tax liability may be required for undistributed earnings of a foreign subsidiary when the parent will owe additional domestic tax upon repatriation. However, both IFRS and US GAAP allow an exception when earnings are considered indefinitely reinvested. This creates an off-balance-sheet liability that analysts must consider when assessing financial position.
When should borrowing costs be capitalized under IAS 23?
IAS 23 requires capitalizing borrowing costs for qualifying assets that take a substantial period to prepare for use. For specific borrowings, capitalize the actual interest cost. For general borrowings, calculate a weighted average capitalization rate and apply it to expenditures on the qualifying asset.
How do IO and PO strips work and why do they have opposite sensitivities to interest rates?
IO and PO strips are created by splitting a mortgage-backed security's cash flows into interest and principal components. Their opposite sensitivities to prepayment speed — driven by interest rate changes — make them powerful hedging tools.
How do pre-money and post-money valuations work in venture capital?
Pre-money valuation is what a company is worth before a new investment; post-money equals pre-money plus the investment. The investor's ownership percentage equals their investment divided by post-money valuation. VCs work backward from expected exit values and required returns to determine acceptable pre-money valuations.
Why is the P/B ratio linked to ROE, and how do I use this relationship?
The justified P/B ratio equals (ROE - g) / (r - g), derived from the Gordon Growth Model. When ROE exceeds the cost of equity, the justified P/B exceeds 1.0, indicating the company creates shareholder value. When ROE equals the cost of equity, P/B should equal 1.0.
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