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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.
What is a double barrier option and how does it differ from single barrier options?
Double barrier options have two barriers (upper and lower); the option lives only while underlying stays inside (knock-out) or activates on breach (knock-in).
Is there a pricing relationship between knock-in and knock-out barrier options?
Knock-in plus knock-out equals vanilla option with identical parameters and no rebate, because exactly one of the pair is alive at expiry.
What are the life cycle wealth stages in CFA Level III private wealth management?
The life cycle framework identifies four primary stages: (1) Foundation 22-35 — high human capital, long horizon, 80-90% equity; (2) Accumulation 35-55 — peak earnings, 70-75% equity, tax efficiency; (3) Maintenance 55-70 — de-risking, 55-65% equity, sequence-of-returns risk; (4) Distribution 70+ — withdrawal phase...
What are the main approaches to estimating DCF terminal value?
Terminal value captures cash flows beyond the explicit forecast horizon and often represents 60-80%...
What is a reverse DCF and how do I use it?
A reverse DCF starts with the current market price and solves for the growth rate embedded...
What are the detailed rules for composite construction under GIPS?
All fee-paying discretionary portfolios must be in a composite. Strategy-based grouping, timely additions, terminated portfolios kept through last period.
What are the key calculation methodology requirements under GIPS?
GIPS requires time-weighted returns for traditional strategies and money-weighted returns for private equity and closed-end structures.
What are the general requirements of the Global Investment Performance Standards (GIPS)?
GIPS general requirements include firm definition, all-firm compliance, 5-year history, specific calculation methods, composite construction, and disclosure.
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