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CFA Updated
What are the main methods for estimating a factor model?
Three main approaches: time-series regression (macro factors observable), cross-sectional regression (characteristics observable), and statistical factor models (PCA or ML)...
What is empirical duration and how does it differ from analytical duration?
Empirical duration is the negative slope from regressing bond returns on yield changes. Captures credit and liquidity effects that analytical duration misses.
How do I tune the proposal distribution in Metropolis-Hastings?
Acceptance rate diagnoses proposal quality. Target 23.4% for multi-dimensional problems. Too high means proposal too narrow; too low means proposal too wide...
Why does decomposing ROE into operating spread and financial spread matter?
Alpha (RNOA 16% + small leverage) vs Beta (RNOA 10% + heavy leverage) both yield 18% ROE but Alpha is sustainable and Beta is fragile — a 3pt RNOA drop cuts Beta's ROE by 4.8pts vs Alpha's 3pts. Decomposition reveals quality.
How should an advisor manage a Passive Preserver client?
The Passive Preserver (PP) is low risk tolerance + emotional biases. Example: Ingrid Solvaag, 71-year-old widow with $5.8M inherited. Dominant biases: loss aversion, endowment, status quo, regret aversion. Advisor approach: MODERATE not educate — IPS 30-40% equity, heavy liquidity buffer...
How do I identify derivatives embedded in host contracts?
An embedded derivative is a contractual provision that causes some or all of the cash flows of a host...
How is hedge ineffectiveness measured and reported?
Hedge ineffectiveness is the difference between the change in the derivative's fair value...
What are the main motivations for mergers and acquisitions?
M&A motivations fall into categories — synergy, growth, market power, capability acquisition, tax, unlocking hidden value, diversification.
What is the change of numeraire technique in derivatives pricing?
Change of numeraire is a Girsanov-powered technique that lets you price derivatives using any tradeable asset as reference.
What is the swap measure and how is it used for swaptions?
The swap measure uses the swap annuity A(t) as numeraire. Under this measure, the forward swap rate becomes a martingale.
What is regime-based dynamic asset allocation?
Regime-based DAA adjusts weights based on identified economic/market regimes (growth/inflation quadrants, cycle phases). Longer horizon than TAA, more active than SAA.
What index construction choices do I need to understand for CFA?
Index construction combines target market, selection rules, weighting scheme, free-float adjustment, rebalancing cadence, and reconstitution rules. Each choice has distinct performance implications.
Quote-driven vs order-driven — which is better for execution?
Quote-driven markets have dealers posting two-sided quotes; order-driven markets match limit orders with price-time priority. Hybrid venues combine both for best execution.
What is loss aversion and how does it distort portfolio decisions?
Loss aversion makes losses feel twice as painful as gains feel good. It drives the disposition effect, under-diversification, and panic selling. Mitigate via longer reporting horizons and IPS rules.
What are special assessment bonds?
Special assessment bonds repaid by lien on benefiting parcels. Birchwood Grove's $4.8M utility-conversion issue assesses 247 parcels $19,430/parcel over 15 years.
What are the main implementation issues with risk parity strategies?
Risk parity sets weights so each asset contributes equally to total portfolio risk, but has leverage, correlation, liquidity, and benchmarking issues...
Why do callable bonds and MBS exhibit negative convexity, and what's the cost to investors?
Negative convexity arises when embedded calls or prepayments cap price appreciation — investors are compensated via OAS, the option-cost component of yield spread.
How do classic cars perform as an investment asset?
Classic cars are a niche alternative that has produced strong headline returns but with enormous dispersion and hidden costs.
What is the ICMA Green Bond Framework?
ICMA GBP has four components: use of proceeds, project selection, proceeds management, reporting. Green bonds fund eligible environmental projects.
How should multi-stage time horizons be described in the IPS?
Multi-stage horizons list each stage with objective. The shortest stage with a critical goal binds the low-risk sleeve; longer stages tolerate more risk. Goal-based allocation responds.
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