Community Q&A
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CFA Level I Updated
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.
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 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 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.
What are the three main theories that explain the shape of the yield curve?
Three theories explain the shape of the yield curve: pure expectations (forward rates forecast future spot rates), liquidity preference (investors demand a premium for longer maturities), and market segmentation (supply and demand in isolated maturity segments drive yields).
How do I convert between bond equivalent yield and effective annual yield, and when does it matter?
Bond equivalent yield (BEY) is the annualized yield using semiannual compounding — the US bond market convention. Effective annual yield (EAY) accounts for compounding and is needed when comparing investments with different compounding frequencies.
How do you evaluate earnings quality by comparing accruals to cash flows?
Earnings quality is evaluated by comparing accruals to cash flows. High-quality earnings are sustainable and backed by cash. The CFO-to-net-income ratio (above 1.0 is good) and the accruals ratio (below 5% is healthy) are the two primary metrics for assessment.
What is a fintech regulatory sandbox, and how does it balance innovation incentives with consumer protection?
Regulatory sandboxes allow fintech firms to test innovative products with real customers under modified rules for a limited time. Core consumer protections remain in place — fund segregation, disclosure, and complaint handling are non-negotiable even within the sandbox.
What whistleblower protections exist in the investment industry, and how should a CFA charterholder handle knowledge of misconduct at their firm?
Whistleblower protections in the investment industry include anti-retaliation safeguards, job protection, and financial incentives (10-30% of SEC sanctions over $1M). CFA charterholders must dissociate from violations and should follow a documented escalation path from internal reporting to regulatory filing.
What qualifies as supplemental information under GIPS, and how must it be labeled and presented?
Supplemental information under GIPS is any additional performance data beyond required minimums. It must be clearly labeled, cannot be more prominent than required data, and must not contradict compliant composite returns. Examples include individual portfolio returns and non-required risk metrics.
How do you compute the weighted average number of shares outstanding for basic EPS when there are multiple share events during the year?
Weighted average shares for basic EPS require time-weighting each issuance and repurchase by the fraction of the year outstanding, while applying stock splits and dividends retroactively to all prior shares without time-weighting.
What is the fair value option, and why would a company elect to measure a financial instrument at fair value through profit or loss?
The fair value option allows companies to irrevocably elect at initial recognition to measure certain financial instruments at fair value through profit or loss. The main motivation is reducing accounting mismatches between economically related assets and liabilities that would otherwise be measured on different bases.
What are reclassification adjustments in OCI, and why are they necessary to prevent double-counting?
Reclassification adjustments transfer realized gains and losses from AOCI to net income, preventing double-counting in comprehensive income. When an item previously recognized in OCI is realized, a negative OCI entry removes it from AOCI while the gain/loss enters the income statement.
Where does Accumulated Other Comprehensive Income (AOCI) appear on the balance sheet, and how is it different from retained earnings?
Accumulated OCI is a separate component of stockholders' equity that reflects the running balance of all past OCI items. Unlike retained earnings which come from net income, AOCI captures unrealized and deferred gains and losses that bypassed the income statement.
What are the main components of Other Comprehensive Income (OCI), and why don't they go through the income statement?
The four main OCI components under US GAAP are unrealized gains/losses on AFS debt securities, foreign currency translation adjustments, pension and post-retirement benefit adjustments, and cash flow hedge gains/losses. These bypass net income because they are unrealized or volatile.
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