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CFA Updated
How do equity factor strategies travel across international markets?
Equity factors travel internationally with typically higher premiums in EM than developed markets (value 4.6% EM vs 2.0% US). Multi-region factor diversification adds meaningful Sharpe improvement.
What is sector neutrality in cross-border portfolio construction?
Sector neutrality matches portfolio sector weights to the benchmark to isolate pure factor exposure. Without it, value and momentum tilts become sector bets. Implementation via within-sector ranking or constrained optimization.
How does SASB define materiality and why is it industry-specific?
SASB defines materiality as sustainability issues likely to affect financial performance of a typical industry company; the Materiality Map maps 26 issues to 77 industries.
What are covenant-lite loans and why have they grown?
Covenant-lite loans omit maintenance financial covenants and retain only incurrence covenants. Share of new-issue loans reached 92% in 2026.
How does a high-water mark work and why does it matter for investors?
A high-water mark is the highest NAV-per-share the fund has ever achieved for a particular investor. The manager cannot earn performance fees until NAV climbs back above that mark.
How does the classic 2 and 20 hedge fund fee structure actually work?
The '2 and 20' fee structure has two layers: a management fee of roughly 2% of assets under management plus an incentive fee of 20% of profits above any hurdle or high-water mark.
How do I estimate sustainable debt capacity for a corporate issuer?
Debt capacity = max leverage compatible with target rating. For Brookmere Foods targeting BBB: binding constraint from Debt/EBITDA 2.5x = $1,050M max. Stress-test at -20% EBITDA and include lease/pension adjustments. Brookmere's max debt well below $1,614M FFO limit...
What is Chebyshev's inequality and how is it useful when we don't know the distribution?
Chebyshev gives a distribution-free lower bound on how much data falls within k standard deviations — useful when normality cannot be assumed.
How do I interpret skewness and kurtosis in return distributions?
Skewness captures asymmetry and kurtosis captures tail thickness — together they reveal whether mean-variance statistics understate true tail risk.
Asset-Only vs Liability-Relative vs Goals-Based: when do you use each approach?
Asset-Only optimizes risk-return without liabilities (best for endowments). Liability-Relative focuses on funding specific obligations (best for pensions). Goals-Based divides wealth into sub-portfolios per goal (best for HNW individuals). The vignette's investor description usually makes the right choice clear.
How does Penman decompose equity returns into fundamental drivers?
Penman decomposes ROE into RNOA plus leverage times the RNOA-NBC spread, isolating operating value creation from financing amplification. Further decomposition into margin and turnover drives forecasting.
How do top PE firms source proprietary deals?
Proprietary deal flow comes from executive networks, family office relationships, thematic outreach, add-ons, and sector conferences — built over years.
What are economies of scope and how do they differ from scale?
Economies of scope reduce cost across multiple products through shared acquisition, data, compliance, distribution, and brand. Measure via per-customer cost of multi-product households, cross-sell lift, and retention uplift...
How do economies of scale create durable cost advantages?
Scale economies spread fixed costs, earn volume rebates, and increase logistics density. Minimum efficient scale (MES) marks the volume where per-unit cost bottoms; players below MES are structurally disadvantaged...
How do options on credit indices (credit index options) work?
Credit index options give the right to enter a CDS index position at a predetermined spread. Payers profit when spreads widen; receivers profit when spreads tighten...
How do variable annuities with guaranteed living benefit riders work?
Variable annuities invest the premium in subaccounts inside an insurance wrapper. Living benefit riders add insurance guarantees on top.
What is a factor-mimicking portfolio and how is it constructed?
A factor-mimicking portfolio is a long-short portfolio engineered to track a specific factor's return while minimizing exposure to other factors. Constructed via sorting, regression, or optimization...
How do I isolate spread duration from rate duration in a credit portfolio?
Buy the credit bonds and short Treasury futures sized to neutralize rate DV01. The residual P&L is pure spread exposure.
What does the duty of loyalty require under CFA Institute standards?
Duty of loyalty is the principle that investment professionals must place client interests above their own, their firm's, and any third party's. It is the cornerstone of Standard III(A)...
How do operating and financial margins interact in profitability analysis?
When RNOA (12%) > ROE (6%), financing structure destroys value — either negative spread (NBC > RNOA, suggesting distress) or negative FLEV (idle cash earning below operating returns). Meridian Power faces refinance or capital redeployment.
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