Community Q&A
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CFA Level I Updated
What does Standard VI(C) say about referral fees?
Standard VI(C) requires disclosing the nature and value of all referral compensation — both received and paid — to employers, clients, and prospective clients before engagement.
How does Standard VI(B) priority of transactions work in practice?
Standard VI(B) requires this order: clients first, firm second, personal and family accounts last — with fee-paying family clients treated equally with others.
What are samurai bonds and how do they fit into the global bond market taxonomy?
Samurai bonds are yen-denominated bonds issued in Japan by non-Japanese entities. They belong to a family of foreign bonds (yankee, bulldog, maple, etc.) named after the domestic market. Issuers choose samurai bonds for Japan's low rates and access to its large institutional investor base.
How does duration matching work for immunizing a liability, and what are the conditions for it to work?
Duration matching immunizes a portfolio by setting the Macaulay duration of assets equal to the liability horizon. Three conditions must be met: duration match, present value match, and convexity minimization. The strategy assumes parallel yield curve shifts and requires periodic rebalancing.
How does the low-volatility anomaly contradict CAPM, and why hasn't it been arbitraged away?
The low-volatility anomaly shows that stable, boring stocks deliver better risk-adjusted returns than volatile ones, contradicting CAPM. It persists because of lottery preferences, leverage constraints, benchmarking pressure, and agency problems in the asset management industry.
How effective are real assets (real estate, infrastructure, commodities) as an inflation hedge?
Real assets provide varying degrees of inflation protection depending on the time horizon. Commodities are the best short-term hedge, infrastructure provides strong long-term protection through contractual CPI links, and real estate works over 5+ year periods but can suffer initially from rising interest rates.
What are the key differences between the Code of Ethics, the Standards of Professional Conduct, and the Asset Manager Code?
The Code of Ethics provides aspirational principles, the Standards of Professional Conduct give specific enforceable rules, and the Asset Manager Code applies to firms on a voluntary basis. The Code and Standards are mandatory for individual CFA members; the AMC is voluntary for firms.
How is the interquartile range used to identify outliers in financial data?
The interquartile range is Q3 minus Q1, capturing the middle 50% of data. Outliers are identified using fences at Q1 minus 1.5 times IQR and Q3 plus 1.5 times IQR. This approach is more robust than standard deviation for skewed data.
How does the revaluation model under IAS 16 work for property, plant, and equipment?
Under IAS 16, PP&E can be carried at fair value with gains generally going to OCI (revaluation surplus) and losses going to P&L. However, if a prior impairment exists, a revaluation gain first reverses it through P&L. Conversely, losses first reduce any existing revaluation surplus in OCI before hitting the income statement.
How do I calculate intrinsic value using the two-stage DDM?
The two-stage DDM projects dividends at a high growth rate for an initial period, then calculates a terminal value using the Gordon Growth Model at the sustainable growth rate. Sum the present values of all projected dividends and the terminal value to get intrinsic value.
What is component depreciation under IFRS, and how does it differ from the US GAAP approach?
Component depreciation under IFRS requires that significant parts of an asset with different useful lives be depreciated separately. This typically produces higher depreciation in early years compared to the US GAAP approach where the entire asset can be depreciated as one unit.
How does the Gordon Growth Model work for valuing a stock? What happens if g is close to r?
The Gordon Growth Model (GGM) is one of the foundational valuation tools in the CFA curriculum. The formula V_0 = D_1 / (r - g) looks simple, but the exam tests whether you truly understand its assumptions and limitations, particularly what happens when the growth rate approaches the required return.
What are my duties to my employer under Standard IV? Can I prepare to leave for a competitor?
Standard IV requires loyalty to your employer but not absolute loyalty — client interests still come first. You can prepare to leave while employed but cannot solicit clients or take proprietary information before resigning.
How does the binomial distribution apply to finance? I want a practical example beyond coin flips.
The binomial distribution models two-outcome scenarios. In finance, it directly maps to up/down stock price movements and credit default modeling. The formula P(X=x) = C(n,x) x p^x x (1-p)^(n-x) is used extensively.
Market orders, limit orders, stop-loss — when do you use each type?
Order types are a practical topic tested on the CFA exam. Market orders guarantee execution but not price, limit orders guarantee price but not execution, and stop orders combine elements of both.
How does bond pricing actually work? I keep hearing 'present value of cash flows' but need a concrete example.
Bond pricing is fundamentally about time value of money. You discount every future cash flow — each coupon payment and the final par repayment — back to today using the bond's yield to maturity (YTM) as the discount rate.
When are financial instruments measured at amortized cost vs fair value, and what's the impact?
Financial instruments are classified into three categories under IFRS 9: amortized cost, FVOCI, and FVTPL. Classification depends on the business model test and cash flow characteristics test. Each category treats unrealized gains/losses differently on the financial statements.
What exactly does Standard VI(A) on disclosure of conflicts require?
Standard VI(A) requires prominent, plain-language disclosure of any conflict (ownership, boards, compensation, relationships) to clients, prospects, and employers.
What are the most common violations of the CFA Code of Ethics that lead to disciplinary action?
Most common violations involve misrepresentation, front-running, undisclosed conflicts, inadequate supervision, and plagiarism — each mapped to specific numbered Standards.
What counts as material non-public information under CFA standards?
Standard II(A) prohibits acting on or causing others to act on material nonpublic information. Two tests must be met: materiality and non-public status...
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