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CFA Updated
How are spending rate adjustments made when markets move dramatically?
When markets move sharply, endowment boards use collars, caps, discretionary overrides, or reopener provisions to adjust spending.
Should international equity returns be currency-hedged?
Hedging reduces volatility by 2–3 percentage points but costs 50–150bps annually. A common default is 50% hedged — balancing vol reduction against hedging cost and USD safe-haven diversification.
What is the country factor in international equity returns?
Country factor drives 30–40% of EM return variation vs 10–20% from sector factors — country dominates sector in EM. Developed markets are more integrated, so sector effects dominate there.
How does GRI differ from SASB and TCFD, and who is the audience?
GRI uses double materiality targeting broad stakeholders; SASB/TCFD (now ISSB) uses single materiality targeting investors; both can be used together.
How is a collateralized loan obligation (CLO) structured?
A CLO pools 150-300 leveraged loans and issues tranches of securities backed by the loan portfolio cash flows in a senior-to-subordinate waterfall.
What does 'crystallization' of a performance fee mean and why does frequency matter?
Crystallization is the moment when accrued performance fees become realized. Between crystallizations, fees accrue as a liability that can still reverse.
What's the difference between a soft hurdle and a hard hurdle rate?
A hurdle rate is a minimum return the fund must deliver before the manager earns any incentive fee. The 'soft vs hard' distinction is about what the incentive fee applies to.
How do I assess industry risk in corporate credit analysis?
Industry risk dimensions: cyclicality, competition, barriers, capital intensity, regulation, technology, ESG, macro. Use S&P's 1-6 IRA scale. Same Ba2 rating differs for Ridgeline Steel (weak industry) vs Riverside Food Services (stable) — industry drives bias direction...
What exactly does the Pearson correlation coefficient measure and when does it fail?
Pearson correlation captures linear association; it fails for nonlinear relationships, outliers, and heavy-tailed data — always pair it with a scatterplot.
How do I interpret the covariance between two assets?
Covariance quantifies co-movement in squared return units; divide by both standard deviations to get correlation for a dimensionless, interpretable measure.
How is free cash flow valuation different from general DCF?
DCF is the general framework; FCF valuation specifically discounts FCFF at WACC or FCFE at cost of equity. FCFF is capital-structure-neutral and preferred for changing capital structures.
What are the main value creation levers in private equity?
Value creation comes from revenue growth, margin expansion, multiple expansion, and debt paydown — modern PE leans operational.
How do I value a putable bond and why is it worth more than a straight bond?
Putable bond: V_putable = V_straight + V_put_option. Backward induction with floor at put price. At nodes where backward value is below 100, floor to 100 — holder will put. Put option more valuable when rates rise and volatility is high...
How do I value a callable bond using backward induction on a binomial tree?
Backward induction starts from maturity and works back node-by-node: V_t = [0.5*(V_up + C) + 0.5*(V_down + C)] / (1 + r_t). At callable nodes, cap the value at the call price. V_callable = V_straight - V_call_option...
What is a constant maturity CDS (CMCDS) and how does it differ from standard CDS?
A CMCDS pays a floating spread that periodically resets to the current market spread for a reference maturity, multiplied by a participation rate...
What is a QLAC and how does it help with retirement account RMDs?
A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity purchased inside a qualified retirement account that receives favorable tax treatment.
How do I detect factor crowding?
Factor crowding occurs when too many investors pile into the same exposure, inflating valuations and creating unwind risk. Indicators include valuation spread, short interest, hedge fund ownership...
How do I adjust Z-spread to OAS for a callable bond?
Z-spread minus OAS equals option cost. OAS strips the embedded option value to show the credit/liquidity spread cleanly for relative value.
What is the prudent investor standard under the duty of care?
The prudent investor standard requires acting with the care, skill, and diligence that a prudent person acting in a like capacity and familiar with such matters would use...
How do I assess sustainable growth rate from operating and financing capacity?
SGR = ROE x (1-payout); Vantage's 12% SGR vs 25% growth target creates 13pt gap requiring debt, equity, efficiency gains, or payout cut. Growth above SGR without clear financing plan often destroys value.
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