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How should I decide between NPV and IRR when both are available?
For an independent project with conventional cash flows, the accept/reject decision is usually the same. Accept the project when NPV is positive at the required return, or when IRR is above the required return.
Why does begin mode change an annuity answer so much?
Beginning-of-period payments are more valuable because each cash flow is received or paid one full period earlier. For present value, that means less discounting. For future value, it means one extra period of compounding.
When should I use the TVM keys instead of the cash-flow worksheet on CFA Level I?
Use a TVM structure when the cash flows are level, evenly spaced, and tied to one periodic rate. Use an uneven cash-flow structure when each period can have a different amount or when the problem is explicitly asking for project NPV or IRR.
Why can a fund earn a positive return but charge no performance fee?
A positive one-year return does not automatically mean the fund exceeded its prior high-water mark. The high-water mark looks back to the previous peak value, not just the current year's beginning value.
How are hard and soft hurdle rates different?
A hard hurdle excludes the hurdle return from the performance fee base. A soft hurdle acts more like a trigger: once the required return is met, the fee can apply to the full specified profit base.
Should I subtract management fees before applying the high-water mark?
Follow the stem. The exam question should tell you whether the performance fee is calculated on gross assets, net-of-management-fee assets, or another defined base. There is no single ordering rule that overrides the fee language.
What does a high-water mark actually do in a hedge fund fee calculation?
A high-water mark is the prior peak value on which performance fees have already been earned. It protects investors from paying a performance fee twice on the same recovery.
Why do CFA Ethics answers focus so much on the action taken?
Ethics questions usually ask what the member or candidate should do, not merely what the issue is. The correct answer must resolve the ethical problem in a way that satisfies the relevant standard.
Do conflicts have to be disclosed before making a recommendation?
Material conflicts should be disclosed clearly and in time for the client or employer to evaluate the conflict. A recommendation does not become clean simply because it was well researched or ultimately profitable.
When does a duty to clients override pressure from an employer?
Commercial pressure does not erase duties to clients. If the issue involves suitability, fair dealing, priority of client transactions, or full disclosure, the answer must protect the client duty first.
How do I map a CFA Ethics vignette to the right standard?
Start by identifying the duty at risk before reading the answer choices too closely. Ask who owes the duty, who is protected by the duty, and what action the standard requires.
Why does stress testing not replace VaR for an option-heavy portfolio?
Because the two tools answer different governance questions. Stress testing tells you what happens under selected severe scenarios. That is excellent for exposing vulnerability to curve shocks, volatility jumps, or liquidity breaks. But it does not t
How do I fix a Monte Carlo VaR workflow that mixes log returns and simple returns?
The fix is to be consistent about what object you are aggregating. For multi-asset portfolios, the weighted sum relationship applies cleanly to simple returns, not to log returns. A safer workflow is: 1. Simulate correlated log returns for each asset
Why can expected shortfall move a lot even when VaR barely changes?
VaR and expected shortfall look at different parts of the loss distribution. - VaR asks for the cutoff. - Expected shortfall asks for the average loss after the cutoff has already been breached. So two portfolios can share the same `99%` VaR and stil
When should I prefer historical simulation VaR over delta-normal VaR?
Historical simulation becomes more attractive when the portfolio cannot be summarized reliably with a small-move linear approximation. That usually happens when: - options or callable instruments make payoffs curved rather than linear - current holdi
Why do hedge calculations often use dollar duration or DV01 instead of just modified duration?
Modified duration gives relative sensitivity. Hedging needs absolute exposure. Suppose one position is `3,000,000` par and another is `12,000,000` par. Even if the first bond has slightly higher modified duration, the second position may create more
How should I think about the relationship between Macaulay duration and modified duration instead of memorizing two separate definitions?
Start with Macaulay duration as the time structure of the bond, then view modified duration as that timing structure translated into local price sensitivity. Macaulay duration answers: "On a present-value-weighted basis, how far away are the cash flo
When should I stop using modified duration and switch to effective duration?
Switch to effective duration when a rate move can change expected cash flows, not just discount rates. Modified duration works best when promised cash flows stay fixed. That is usually fine for a plain corporate bond. It becomes unreliable for callab
Why is DV01 so much smaller than dollar duration if both are supposed to measure rate risk?
DV01 is not a different risk from dollar duration. It is the same first-order rate exposure shown on a practical basis-point scale. Suppose **Lakeshore Transit Finance 2032** has: - full price `98.50` - modified duration `4.4` Dollar duration per `10
Where does a taxable state refund go on Form 1040?
Under current IRS instructions, a taxable state or local income tax refund is reported on Schedule 1 for Form 1040, not as wages or interest. Other itemized deduction recoveries can have a separate other-income reporting lane.
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