Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Level I Updated
When should I use a straddle versus a strangle, and how do I calculate the breakeven points?
A straddle buys an ATM call and put at the same strike, while a strangle buys OTM options at different strikes. Straddles cost more but require smaller moves to profit; strangles are cheaper but need larger moves. Both benefit from large price moves and rising implied volatility.
How does the tax treatment of municipal bonds work, and what is the tax-equivalent yield?
Municipal bonds are generally exempt from federal income tax, and if issued in your state, from state taxes too. The tax-equivalent yield formula (muni yield divided by one minus the marginal tax rate) allows comparison with taxable bonds.
Why do stock prices move when they're added to or removed from a major index?
When a stock is added to a major index, passive funds tracking that index must buy shares, creating a predictable demand shock. Stocks added to major indices historically see 3-7% abnormal returns, though roughly half reverses within weeks.
What are the GIPS requirements for reporting private equity fund performance?
GIPS requires private equity funds to report since-inception IRR as the primary return metric, classified by vintage year. Firms must also present capital multiples including DPI, RVPI, and TVPI alongside committed and paid-in capital figures.
What is a box spread, and how does it create a risk-free arbitrage opportunity?
A box spread combines a bull call spread with a bear put spread at the same strikes, creating a guaranteed payoff of K2 minus K1 at expiration. If the box market price differs from the present value of this payoff, a risk-free arbitrage exists.
How do I use the coefficient of variation to compare investments with different expected returns?
The coefficient of variation measures risk per unit of expected return, making it a standardized way to compare investments when their return levels are very different. Lower CV means a more efficient risk-return tradeoff.
How do you calculate the inflation breakeven rate from TIPS and nominal Treasury yields?
The breakeven inflation rate equals the nominal Treasury yield minus the TIPS real yield. If you expect inflation above the breakeven, buy TIPS. If below, buy nominals. The breakeven is not a pure forecast because it includes risk and liquidity premiums.
What are Treasury STRIPS and how are they created from regular Treasury bonds?
Treasury STRIPS are zero-coupon securities created by separating a Treasury bond's coupon and principal payments into individual tradeable instruments. They eliminate reinvestment risk and are ideal for liability matching.
What is the GICS classification system and how is it used in equity analysis?
GICS is a four-tiered industry classification system developed by MSCI and S&P Dow Jones. It has 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries. Companies are classified based on their primary revenue source.
Why do equal-weighted indexes have higher rebalancing costs than cap-weighted indexes?
Equal-weighted indexes require periodic rebalancing because stock prices diverge, pushing weights away from equality. This creates higher turnover, increased small-cap trading in illiquid names, and tax inefficiency from selling winners regularly.
What are the key differences between perpetual and periodic inventory systems?
Perpetual inventory systems update records continuously with each purchase and sale, while periodic systems only update at period-end. Under FIFO both produce identical results, but under LIFO and weighted average, the two systems can produce different COGS and ending inventory because cost calculations are performed at different times.
What is the Phillips curve and does the inflation-unemployment tradeoff still hold today?
The Phillips curve shows an inverse relationship between inflation and unemployment in the short run. The modern expectations-augmented version explains that the tradeoff is temporary, and in the long run, unemployment returns to its natural rate regardless of inflation.
How do you calculate the settlement amount for a forward rate agreement (FRA)?
FRA settlement occurs at the start of the notional borrowing period, so the interest differential must be discounted back. The settlement amount equals the interest differential divided by one plus the reference rate times the day count fraction.
What is credit migration risk and how does a downgrade affect bond prices even without default?
Credit migration risk is the risk that an issuer's credit rating deteriorates, causing the bond's market value to fall even though the issuer continues making all promised payments.
Can someone explain the Security Market Line and how to tell if a stock is overvalued or undervalued using CAPM?
The Security Market Line (SML) is the graphical representation of CAPM, plotting expected return against beta. Securities above the SML are undervalued (positive alpha), below it are overvalued (negative alpha), and on it are fairly priced.
What is the difference between a stock dividend and a stock split, and how does each affect share price?
Stock splits divide existing shares into more shares with a proportional price reduction and require only a memo entry. Stock dividends distribute additional shares as a percentage of holdings and require a journal entry reducing retained earnings.
When does a consignor recognize revenue for goods shipped on consignment?
In a consignment arrangement, the consignor ships goods to the consignee but retains ownership until the consignee sells to an end customer. Revenue is recognized only when the final sale occurs because that is when control transfers.
How does the Degree of Total Leverage (DTL) combine operating and financial leverage, and how do I calculate it?
The Degree of Total Leverage (DTL) equals DOL times DFL and captures the total sensitivity of EPS to revenue changes. A DTL of 3.3 means a 1% revenue change produces a 3.3% change in EPS, amplifying both gains and losses.
How do I calculate and interpret price elasticity of demand? When is demand elastic vs inelastic?
Price elasticity of demand (PED) is one of those concepts that seems simple but has nuances the CFA exam loves to test. PED measures the sensitivity of quantity demanded to a change in price. When the absolute value exceeds 1, demand is elastic and a price increase will reduce total revenue.
What can and can't I do when leaving my employer under Standard IV — Duties to Employers?
Standard IV(A) Loyalty requires that while employed, you must not solicit your employer's clients, take proprietary materials, or compete with your employer. However, you may prepare to leave by searching for jobs, forming a business entity, and making other non-competing preparations.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 488 CFA Level I 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.