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How do multivariate GARCH models capture volatility dynamics across assets?
Multivariate GARCH models time-varying covariance matrices via parameterizations like VEC, BEKK, CCC, and DCC, each trading flexibility against dimensionality.
How are illiquidity adjustments applied in fair value measurement?
Illiquidity discounts reduce fair value for restricted or thinly traded positions. Methods include restricted stock studies, put option proxies, and pre-IPO studies. Level 1 prohibits blockage discounts on quoted prices.
What are CVA and DVA adjustments to derivative fair value?
CVA reduces derivative assets for counterparty default risk. DVA reduces derivative liabilities for your own default risk. Both are Level 2 or 3 adjustments to risk-free fair value.
How should I analyze dual-class share structures?
Dual-class shares give insiders super-voting rights; assess the ownership wedge, sunset provisions, and sovereign discount of 50-150 bps on cost of equity.
What is a vulture fund and how does it operate?
Vulture funds specialize in buying deeply distressed sovereign, corporate, or municipal debt at single-digit cents on the dollar, pursuing aggressive legal recovery.
What pitfalls should I watch out for with one-hot encoding?
Three common pitfalls with one-hot encoding: the dummy variable trap, curse of dimensionality, and train/test category mismatch.
What are the main ways to encode categorical variables for regression and when should I use each?
The right encoding depends on the model type and what you want the coefficients to mean. Four common choices: reference coding, effect coding, one-hot, and target encoding.
What are the main criticisms of MVO and how do you address them for CFA Level III?
MVO is highly sensitive to inputs, produces concentrated portfolios, and assumes a single period with normal returns. Key fixes include reverse optimization (Black-Litterman), shrinkage estimation, resampled MVO, adding constraints, and Monte Carlo simulation.
How do I construct an iron condor and when does it work best?
An iron condor sells an OTM strangle and buys further-OTM wings for defined risk — ideal for range-bound markets with elevated implied vol.
How does a long strangle differ from a straddle and when is it preferred?
A strangle uses OTM options for a cheaper entry but wider breakevens — better for expected large moves, worse for modest moves.
How does the fair value option work for financial liabilities?
Under FVO for financial liabilities, own credit risk changes go to OCI and are not reclassified; other fair value changes hit P&L. This prevents counterintuitive gains from credit deterioration.
How are PE fund secondaries priced?
Secondaries price as a percent of reported NAV, discounted for staleness, duration, GP quality, and unfunded commitment.
How does Porter's focus strategy work and when does it beat broad strategies?
Focus strategy concentrates on a narrow segment and pursues cost focus or differentiation focus within it. Wins when segment needs differ from the broader market, broad competitors serve it poorly, and the segment is large enough to be profitable...
Differentiation vs cost leadership: how do I tell which strategy a company is pursuing?
Cost leaders show below-median gross margins, high asset turnover, low R&D and marketing intensity, concentrated suppliers, and standardized SKUs. Differentiators show the opposite: premium margins, lower turnover, heavy R&D...
How do CDS index tranches work and what risks do equity, mezzanine, and senior tranches carry?
CDS index tranches slice the default loss distribution into layers. Equity tranche absorbs first 3% of losses, mezzanine layers follow, super senior sits at top...
How do I integrate human capital and financial capital in a total-wealth framework?
The integrated total-wealth framework treats human capital as an asset on the investor's balance sheet and optimizes financial-capital holdings.
What's the difference between common factor variance and specific variance?
Variance decomposes into common (systematic) and specific (idiosyncratic) parts. Common variance equals factor exposures times factor covariance. Specific variance diversifies away...
How do I compute effective convexity for a bond with embedded options?
Effective convexity uses finite differences: (P− + P+ − 2×P0) / (P0 × (Δy)²). Requires an option-aware pricing model to revalue at shifted yields.
How does Gibbs sampling work and when is it preferred?
Gibbs sampling is an MCMC method that cycles through parameters, sampling each from its full conditional distribution given all others. When full conditionals have known form...
How do I compute Net Borrowing Cost and use it in spread analysis?
NBC = (Interest Expense - Interest Income) x (1-t) / Average NFO. Calypso's 5.04% vs RNOA 11% yields 5.96% spread, amplifying ROE via leverage. Validate against treasury + credit spread; watch for capitalized interest distortions.
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