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What is the modern university endowment asset allocation?
Modern large endowments maintain 60%+ alternatives with diversified private equity, real assets, venture, and a liquidity sleeve.
How do fat-tailed distributions differ from the normal distribution, and why does it matter for risk measurement?
Real financial returns have fat tails, meaning the normal distribution systematically underestimates extreme event probabilities. A loss that should occur once in 741 days under normal assumptions may actually happen once every 50-100 days. Understanding excess kurtosis and leptokurtic distributions is essential for accurate VaR calculation.
How do delta and gamma interact in options hedging, and why is gamma risk dangerous?
Delta measures the change in option price for a $1 move in the underlying, while gamma measures how quickly delta itself changes. Gamma risk is dangerous because short gamma positions become increasingly difficult to hedge as the underlying moves — especially near expiration when ATM gamma spikes.
How exactly do futures margin calls work, and what happens if I can't meet one?
Great question — futures margin mechanics are fundamental to FRM Part I and show up frequently on the exam. When you open a futures position, the clearinghouse requires you to post an initial margin as a performance bond. Each trading day, your position is marked to market, and a margin call occurs when your account falls below the maintenance margin level.
How does a private equity fund structure work? I'm confused by the GP/LP relationship and the fee waterfall.
Private equity funds use a limited partnership structure where the GP manages investments and LPs provide most of the capital. The fee structure includes a management fee, hurdle rate, and carried interest distributed through either European or American waterfall methods.
How do autoregressive models work in time series analysis, and why does stationarity matter so much?
Autoregressive models forecast a variable using its own past values. They require stationarity because non-stationary data produces spurious regression results with misleading statistical significance.
How do real options change capital budgeting decisions? I keep getting the wrong answer on NPV-with-options problems.
Real options recognize that managers have flexibility — they're not locked into a static 'invest or don't invest' decision. The expanded NPV equals the static NPV plus the value of any embedded real options.
How do you price a forward contract using the no-arbitrage framework? I keep mixing up the cost-of-carry components.
Forward pricing rests on one core idea: you should be indifferent between buying the asset today and holding it, or entering a forward contract to buy it later. If these two strategies don't cost the same, an arbitrageur will exploit the gap until they converge.
What is the difference between full goodwill and partial goodwill in business combinations?
Full goodwill measures NCI at fair value and includes goodwill attributable to both parent and NCI. Partial goodwill measures NCI at its share of identifiable net assets and includes only the parent's goodwill. Full goodwill results in higher total assets and higher NCI on the balance sheet.
Can someone walk me through the IFRS 15 five-step revenue recognition model with a practical example?
The IFRS 15 five-step model is the universal framework for recognizing revenue from contracts with customers. It involves identifying the contract, identifying performance obligations, determining the transaction price, allocating that price, and recognizing revenue when obligations are satisfied.
What is the Black-Litterman model and why is it better than standard mean-variance optimization?
The Black-Litterman model starts with equilibrium returns implied by market cap weights, then blends investor views using Bayesian statistics. This produces much more stable and intuitive portfolio weights compared to standard mean-variance optimization.
How is logistic regression used in finance and how does it differ from linear regression?
Logistic regression predicts binary outcomes (default/no-default) by constraining output to a 0-1 probability range using the sigmoid function. Unlike linear regression, coefficients are interpreted as log odds. Common financial applications include credit scoring and event prediction.
How do you use market multiples for cross-border equity comparisons?
Cross-border multiple comparisons require adjustments for accounting differences (IFRS vs. GAAP), growth rates, risk premiums, tax rates, and capital structure. EV/EBITDA is generally the most comparable metric because it neutralizes many of these distortions.
What are the key differences between IFRS 16 and ASC 842 for lease accounting?
IFRS 16 uses a single model treating all leases as finance-type, with front-loaded depreciation plus interest expense. ASC 842 retains a dual model where operating leases show a single straight-line expense. Both put ROU assets and lease liabilities on the balance sheet.
How do you value a REIT using NAV and FFO approaches?
REITs are valued using FFO (net income + depreciation - gains on sales) and NAV (market value of properties minus liabilities) because traditional P/E is distorted by non-cash depreciation. AFFO further adjusts for maintenance capital expenditures.
When do NPV and IRR give conflicting signals, and which should I trust?
NPV and IRR can conflict when ranking mutually exclusive projects due to differences in scale, timing, or reinvestment assumptions. When they disagree, always follow NPV because it directly measures the dollar amount of wealth created.
What are the key differences between forward and futures contracts?
Both forwards and futures lock in a future transaction price, but they differ in key structural ways: forwards are private OTC contracts with customized terms and counterparty risk, while futures are exchange-traded, standardized, and use daily mark-to-market settlement.
What is the efficient frontier and why does it matter in portfolio construction?
The efficient frontier represents the set of portfolios that offer the highest expected return for a given level of risk. It is the upper-left boundary of all possible portfolio combinations in risk-return space, and any portfolio below it is suboptimal.
What are the main estate planning and wealth transfer strategies tested on CFA Level III?
Estate planning for CFA Level III focuses on transferring wealth efficiently across generations while minimizing transfer taxes. Key strategies include lifetime gifting, generation-skipping transfers, trust structures, cross-border planning, and valuation discounts.
How do you apply DCF analysis to value a commercial real estate investment at CFA Level II?
CFA Level II real estate DCF involves projecting NOI year by year, calculating terminal value using a terminal cap rate, and discounting all cash flows at an appropriate rate. The terminal cap rate is typically higher than the going-in cap rate.
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