Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Updated
What is partial correlation and why does it matter in financial analysis?
Partial correlation isolates the relationship between two variables after removing the influence of a third, exposing spurious correlations from confounders.
When should I use Spearman rank correlation instead of Pearson?
Spearman correlates ranks rather than raw values, making it robust to outliers and capable of capturing monotonic but nonlinear relationships.
What is the 'economic balance sheet' and how does human capital factor into asset allocation?
The economic balance sheet extends beyond traditional financial assets and liabilities to include human capital, pension values, and future consumption needs. Your financial portfolio should complement your human capital — a government employee with bond-like income should tilt toward equities, while a startup founder should tilt toward bonds.
How do I forecast dividends in a multi-stage DDM?
Forecast dividends from fundamentals (EPS x payout, tied to ROE and retention) in three stages: explicit forecast, transition, and terminal. Anchor terminal growth to long-run nominal GDP and verify feasibility.
What are the main PE exit strategies and when is each preferred?
Strategic sale, secondary buyout, IPO, and dividend recap each offer different value/liquidity/certainty tradeoffs.
How is a binomial interest rate tree calibrated?
Calibration ensures the tree prices on-the-run Treasury zeros correctly. Use ratio r_up/r_down = e^(2*sigma). Solve backward: find rates at each horizon that, when used in the tree, reproduce observed zero-coupon prices. Iterate outward...
How do I calculate option-adjusted spread (OAS) step by step?
OAS is the constant spread added to every node rate in the binomial tree that makes the model price equal the market price. Iterate by adjusting z and re-running backward induction with call rules. OAS isolates credit/liquidity from option cost...
What were the 2009 CDS Big Bang and Small Bang conventions and why did they matter?
The 2009 Big Bang (North America) and Small Bang (Europe) standardized CDS with fixed coupons, Determinations Committees, and hardwired auction settlement...
How does a reverse mortgage (HECM) fit into a retirement plan?
A Home Equity Conversion Mortgage (HECM) is the U.S. government-insured reverse mortgage available to homeowners aged 62+.
How do I construct a global minimum variance portfolio (GMVP)?
The GMVP is the portfolio with lowest variance subject to weights summing to one. Closed form: weights proportional to inverse covariance times vector of ones. Depends only on covariance, not expected returns...
How do I quantify credit migration risk in a portfolio?
Use a rating transition matrix, spread curves by rating, and probability-weighted revaluation to quantify migration P&L. The fallen angel transition is the most painful.
How does the standard of care differ for retail vs institutional clients?
The duty of care is the same — prudent, skilled, diligent action. What differs is application: how the standard translates into practice depends on client sophistication...
What are clean-surplus violations and how do they affect residual income valuation?
Clean surplus requires all equity changes flow through NI; OCI items (AFS gains, FX, pensions) violate it. For Zephyr, use Comprehensive Income — $180M OCI difference turns RI from $4M to $184M. Alternatively, use Penman's operating-RI framework.
What is the difference between arithmetic and geometric Asian options?
Arithmetic Asian options average prices normally; geometric uses nth root of products. Geometric has closed-form pricing; arithmetic requires Monte Carlo.
What is a rebate in barrier options and how does it affect pricing?
Rebate is fixed cash paid when a knock-out barrier kills the option, cushioning the loss. It raises knock-out premiums and breaks simple parity relationships.
What's the right investment approach for a client in the Foundation phase?
The Foundation phase (22-35) has high human capital, low financial capital, long horizon. Example: Sienna Castellanos-Wu, 27, data scientist. Priorities: emergency fund first, high-interest debt, tax-advantaged accounts (401k match, Roth IRA, HSA), 85-90% equity allocation, human capital protection via disability insurance, automation...
How is the exit multiple method applied in M&A valuation?
The exit multiple method calculates terminal value as Terminal-Year Financial Metric × Exit Multiple...
What are the limitations of the Gordon growth terminal value?
The Gordon growth terminal value has four principal limitations...
What are the GIPS Advertising Guidelines?
GIPS Advertising Guidelines provide a condensed format for marketing materials with required disclosures and a pointer to the full GIPS report.
How does GIPS handle wrap fee and separately managed accounts (SMAs)?
Wrap fee accounts require separate composite, clear disclosure of pure gross (supplemental) vs. net returns, and full wrap fee deduction.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 2,569 CFA community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.