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CFA Level I Updated
What's the difference between a bond's maturity and its duration? Why does duration matter more for risk?
Excellent question — the distinction between maturity and duration is fundamental to fixed income analysis and is heavily tested on the CFA Level I exam. Maturity is simply when principal is repaid. Duration, however, measures either the weighted average time to receive cash flows (Macaulay) or the bond's price sensitivity to yield changes (Modified).
What are the duties to clients under Standard III? Especially suitability and fair dealing.
Standard III governs duties to clients: loyalty and fiduciary duty, fair dealing across all clients, suitability based on Investment Policy Statement assessment, honest performance presentation, and confidentiality.
How does Bayes' theorem work? I need a step-by-step CFA-style example.
Bayes' theorem updates your beliefs when you receive new information. It converts a prior probability into a posterior probability using the formula P(A|B) = P(B|A) x P(A) / P(B).
How do stock exchanges actually match buy and sell orders? I want to understand market microstructure.
Market microstructure is the study of how trading actually happens. There are two primary structures: order-driven markets using central limit order books with price-time priority, and quote-driven markets where dealers provide liquidity.
How do I assess earnings quality using the accruals ratio and Beneish M-score?
Earnings quality is assessed using the accruals ratio (measuring how much income is non-cash) and the Beneish M-score (an eight-variable model that flags potential earnings manipulation). High accruals and M-scores above -1.78 are red flags.
What are the responsibilities of CFA members under Standard VII?
Standard VII(A) protects CFA program integrity; VII(B) governs proper use of the designation — strict rules against exam disclosure, cheating, and credential misrepresentation.
How are crypto regulations evolving for payment systems, and what are the key differences between stablecoins and CBDCs from a regulatory perspective?
Stablecoins are evolving toward regulated payment instrument status with reserve requirements and redemption rights. CBDCs are sovereign currency extensions with programmable monetary policy capabilities. Both pose medium-to-long-term competitive threats to traditional card payment networks.
What is a bond ladder strategy, and how does it help manage interest rate risk and reinvestment risk?
A bond ladder staggers maturities so bonds mature at regular intervals, with proceeds reinvested at the top of the ladder. It simultaneously manages interest rate risk and reinvestment risk by ensuring only a fraction of the portfolio is exposed to current rates at any time.
Why does the momentum factor work, and is it truly an anomaly or just compensation for risk?
The momentum factor — stocks that have outperformed recently tend to continue outperforming — is one of the most robust empirical findings in finance. Explanations range from behavioral underreaction and herding to compensation for crash risk.
What are managed futures (CTA) strategies, and why are they considered good diversifiers?
Managed futures or CTA strategies are systematic trend-following approaches that trade across global futures markets. They diversify portfolios because they profit from sustained market trends, including downtrends during equity crises.
What are the CFA Institute Trade Management Guidelines, and how do they define best execution?
Best execution means obtaining the most favorable terms for clients considering price, speed, likelihood of execution, total cost, and confidentiality. The Trade Management Guidelines require firms to establish trading policies, disclose conflicts, and monitor execution quality through transaction cost analysis.
What are the core concepts of technical analysis I need to know for CFA Level I?
Technical analysis rests on three assumptions: prices reflect all information, prices move in trends, and history repeats. Key concepts for CFA Level I include support/resistance, chart patterns, moving averages, and common indicators like RSI and MACD.
How do you calculate depreciation using the units-of-production method?
The units-of-production method calculates depreciation based on actual usage. You divide the depreciable base (cost minus salvage) by total estimated units of production to get a per-unit rate, then multiply by actual units produced each year. It is common in mining, oil and gas, and manufacturing where asset wear depends on usage rather than time.
What's the difference between a barbell and a bullet bond portfolio, and why does convexity matter for this choice?
The barbell vs bullet debate is a cornerstone of fixed income portfolio construction. Both strategies can target the same duration but they behave very differently due to convexity.
How does anchoring bias affect equity investment decisions?
Anchoring bias causes investors to fixate on a reference point — such as a prior earnings estimate, 52-week high, or IPO price — and adjust insufficiently when new information arrives. This leads to systematic mispricing including post-earnings drift and analyst forecast sluggishness.
What do normal, inverted, and flat yield curves tell us about the economy?
The yield curve plots yields against maturities and its shape reflects market expectations about future interest rates, inflation, and economic growth. A normal upward-sloping curve signals healthy growth, an inverted curve has historically predicted recessions with a 12-18 month lead, and a flat curve signals a transition period.
Why does the weighted average cost per unit differ between periodic and perpetual inventory systems?
Under weighted average cost, the periodic system computes one average at period-end using all purchases, while the perpetual system recalculates after every purchase. This timing difference means the same cost-flow method can produce different COGS figures.
When exactly must a CFA charterholder disclose conflicts of interest? What counts as a conflict?
You're right that Ethics can determine a pass or fail on the CFA exam — the CFA Institute has confirmed that Ethics is weighted more heavily for borderline candidates. Standard VI(A) requires full and fair disclosure of all matters that could reasonably impair independence and objectivity, including ownership interests, business relationships, and compensation arrangements.
YTM vs. current yield — what's the actual difference and when does each matter?
Great question — these two yield measures serve different purposes and confusing them is a common exam trap. Current yield captures only income, while YTM is the total return measure including capital gain/loss and reinvestment income.
How does lease accounting differ between IFRS 16 and US GAAP, and why does it matter?
IFRS 16 capitalizes virtually all leases with a single model, while US GAAP (ASC 842) uses a dual model distinguishing finance and operating leases. Both put ROU assets and lease liabilities on the balance sheet, but the income statement and cash flow classification differ.
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