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CFA Updated
What is autocorrelation and why does it matter for time-series analysis?
Autocorrelation in residuals biases OLS standard errors and is a classic smoothing fingerprint in illiquid fund returns — remedies include Newey-West and AR(1) models.
How does multiple correlation (R) relate to R-squared in regression?
Multiple R is the correlation between actual and fitted Y; R² is its square, measuring variance explained — but always cross-check with Adjusted R² for model comparison.
What do stock repurchases signal to the market?
Buybacks signal undervaluation, excess cash flow, and future confidence; tender offers signal more strongly than open-market. Positive 3-5% average announcement returns; long-run abnormal returns in value firms.
How do I compute effective duration for a callable bond?
EffDur = (V_minus - V_plus) / (2 * V_0 * delta_y). Shift tree rates up and down, revalue with call rules, compute. Callable duration is lower than straight because the call caps upside, dampening V_minus and flattening the price-yield curve...
How does volatility affect the value of callable and putable bonds?
Higher volatility widens the tree, making both call and put options more valuable. Callable bond price falls; putable bond price rises. Straight bond is unchanged. OAS is sensitive to volatility assumption — report at multiple vols for robustness...
How does a CDS auction work and what's the difference vs physical settlement?
CDS settle either via auction (cash-settle at auction-determined price) or physical settlement (deliver defaulted bonds for par). The 2009 Big Bang made auction standard...
What is a modern tontine and why are some researchers proposing revival?
A tontine is a pooled longevity arrangement where participants contribute capital to a collective fund; when a member dies, their share is forfeited to surviving members.
How is the efficient frontier computed in mean-variance optimization?
The efficient frontier is the set of portfolios minimizing variance for each target return. Solved via a family of quadratic programs with closed-form parabola when unconstrained...
When does a client gift become a violation of independence and objectivity?
Standard I(B) requires professionals maintain independence in judgment. Gifts from clients can compromise that independence if significant enough to influence behavior...
How do I evaluate earnings persistence for forecasting RNOA?
Orchard's 24% RNOA faces mean reversion absent durable moats (IP, scale, regulation). Test persistence empirically; typical industry persistence 0.6-0.7. Fade assumption from 22% to 14% over 10 years balances current premium with competitive erosion.
What is a forward-start option and where is it used?
Forward-start options set the strike at a future date, typically at-the-money on that date. Priced in closed form under Black-Scholes; used in executive comp and cliquet structures.
How do lookback options work with minimum and maximum references?
Lookback options reference the best price observed. Floating-strike uses min/max as strike; fixed-strike uses preset K with max/min as reference. Most expensive path-dependent options.
How should a Mid-career (Accumulation) client structure their plan?
The Accumulation phase (35-55) is peak earnings + complex multiple goals. Example: Harrison Okafor-Thiele, 46, $700K household income. Priorities: cash flow mapping, tax-optimization stack (401k/backdoor Roth/mega Roth/HSA/529), equity compensation strategy, 70-75% equity allocation, goal-based bucketing, insurance review, estate basics...
What is the competitive advantage period (CAP) and how is it used in valuation?
Competitive Advantage Period (CAP) is the number of years over which a firm sustains ROIC above WACC...
How do I assess if a firm's growth is truly sustainable in steady state?
Sustainable steady-state growth requires three things to hold simultaneously...
What are the GIPS real estate provisions?
Real estate GIPS provisions require annual external and quarterly internal valuations, separate income/capital returns, and IRR for closed-end funds.
What counts as supplementary information under GIPS?
Supplementary information includes carve-outs, after-tax returns, peer comparisons, and attribution. Must be labeled, accurate, and non-misleading.
What is GIPS verification and what is its scope?
Verification is firm-wide review of GIPS policies and composite construction. Performance examination is composite-specific return verification.
What is Bayesian asset allocation and how does it differ from mean-variance?
Bayesian allocation (Black-Litterman) blends equilibrium prior with investor views using Bayes' theorem, producing stable diversified weights that classical MVO cannot achieve.
What is effective annual yield and when do I use it?
EAY = (1 + periodic rate)^m − 1. The true annualized yield accounting for intra-year compounding. Use for apples-to-apples comparison across different compounding conventions.
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