Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Updated
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 are normalized earnings and when do I need them for equity valuation?
Normalized earnings estimate mid-cycle earning power for cyclical companies using either historical average EPS or average ROE applied to current book value. Method 1 is simpler but ignores growth; Method 2 captures the expanded asset base but requires reliable book values.
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.
How is in-process R&D treated in a business combination under US GAAP and IFRS?
Under current US GAAP and IFRS, in-process R&D acquired in a business combination is capitalized at fair value as an indefinite-lived intangible asset. It is not amortized while in progress but tested annually for impairment.
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 Brinson performance attribution model decompose portfolio returns into allocation, selection, and interaction effects?
The Brinson-Hood-Beebower model decomposes active return into allocation effect (sector weighting decisions), selection effect (security picking within sectors), and interaction effect (the combined impact of overweighting sectors where stock picks also outperformed).
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.
When do I use a chi-square test in CFA Level I, and how do I set up the hypothesis for variance testing?
For CFA Level I, the chi-square test is primarily used for hypothesis tests about a single population variance or standard deviation. The test statistic is χ² = (n-1)s²/σ₀², and the distribution is right-skewed and non-negative, requiring different critical value treatment than symmetric tests.
How do you bootstrap spot rates from the par yield curve step by step?
Bootstrapping extracts spot rates from the par yield curve one maturity at a time. Start with the 1-year spot rate (equals par yield), then use it to solve for the 2-year spot rate, and so on. Each step sets the par bond price to 100 and solves for the unknown longest spot rate.
When is P/B valuation most appropriate and how do you interpret a P/B below 1.0?
Price-to-book valuation works best for financial institutions and asset-heavy industries where balance sheet values are meaningful. The justified P/B ratio equals (ROE - g)/(r - g), so a P/B below 1.0 can signal either genuine undervaluation or value destruction when ROE is below the cost of equity.
What makes infrastructure a distinct alternative asset class? How do risk/return profiles compare to other alternatives?
Infrastructure stands out for its essential-service nature, regulated/contracted revenues, inflation linkage, and very long asset lives. It offers a risk-return profile between bonds and equity with strong income characteristics.
How is NLP used in finance? Can text data really predict stock movements?
NLP transforms unstructured text into quantitative signals for investment analysis. Key applications include sentiment analysis of earnings calls, topic modeling of Fed minutes, and detecting material changes in corporate filings.
What are the main theories on dividend policy and which one is 'correct' for the CFA exam?
Three major theories disagree on whether dividends matter. MM says irrelevant in perfect markets, bird-in-hand says investors prefer certainty of dividends, and tax preference says investors prefer capital gains if taxed at lower rates.
How do the option Greeks (delta, gamma, vega, theta) work together in practice? I need a practical mental model.
The Greeks measure how an option's price responds to small changes in different variables. Think of them as sensitivity dials on a control panel — they don't operate in isolation but interact in critical ways for position management.
How does Standard II protect capital markets? What exactly counts as insider trading?
Standard II protects capital market integrity. The key concepts are material nonpublic information (MNPI) and the mosaic theory defense. Analysts can piece together public and non-material nonpublic information, but must not act on material nonpublic information.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 2,569 CFA 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.