Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA II > CFA II > Flashcards

CFA II Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

What are the three approaches to estimating VaR?

A
  • Parametric method
  • Historical simulation
  • Monte Carlo simulation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the three steps when estimating VaR of a portfolio?

A
  1. Decompose risk factors
  2. Collect historical data
  3. Third step depends on approach used
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How many trading days are there in one year?

A

250

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the z-score for a one-tailed test with a 5% significance level?

A

1.645

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the z-score for a two-tailed test with a 5% significance level?

A

1.96

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is surplus at risk cause by?

A

A mismatch between the duration of the assets and the duration of the liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Leverage for banks (formula)

A

RWAs
———
Equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Information Ratio (formula)

A

Information Coefficient x (Breadth)^0.5 (x Transfer Coefficient)

Or

Active Return
——————— (x Transfer Coefficient)
Active Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Optimum Level of Active Risk

A

IR
——— x sd(b)
SR(b)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Sharpe Ratio of Actively Managed Portfolio (formula)

A

SR(p)^2 = SR(b)^2 + IR^2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Risk Neutral Probability (Formula)

A

1 + r - d
————
u - d

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What view does a positive delta signify?

A

Bullish

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What view does a negative delta signify?

A

Bearish

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

When is gamma at its highest?

A

When it is ATM and near to expiry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What accounting method(s) is used for <20% ownership in a company?

A

Cost or FV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What accounting method is used for 20-50% ownership in a company?

A

Equity method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What accounting method(s) is used for >50% ownership in a company?

A

Consolidation method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

R^2

A

RSS
——
SST

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Standard deviation of the residuals (SEE)

A

(MSE)^0.5

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Adjusted R^2 (formula)

A

n - 1
1 - [(————) x (1 - R^2)]
n - k - 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How do you correct for serial correlation? (2 methods)

A
  • Adjust the coefficient standard errors using the Hansen method
  • Improve the specification of the model
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How to detect serial correlation? (Two methods)

A
  • Scatter plot with residuals

- Durbin-Watson test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How do you detect heteroskedasticity? (Two methods)

A
  • Scatter plot

- Breusch-Pagan Chi-Squared test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Breusch-Pagan test statistic (formula)

A

n x R^2(resid)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

How do you correct for heteroskedasticity?

A

Use White-corrected standard errors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

How do you correct for multicollinearity?

A

Drop one of the correlated variables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

How do you detect multicollinearity? (Two methods)

A
  • Conflicting t and F statistics

- Correlations among independent variables (if k = 2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Mean-reverting level

A

b(0)
————
1 - b(1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Standard error of estimated autocorrelation (Formula)

A

1
———
T^0.5

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

How do you detect serial correlation for AR models?

A

Test the autocorrelations of the residuals using the t-test (NOT the Durbin-Watson test, which is only for trend models)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What are two advantages of simulations?

A
  • Promote better input quality

- Provide a distribution of expected values rather than a single point estimate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Fisher relation (Formula)

A

R(nom) = R(real) + E(inflation)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Covered interest rate parity (Forward)

A

1 + R(price)
F = S x ——————
1 + R(base)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Uncovered interest rate parity (Formula)

A

E(%ΔS) = R(price) - R(base)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Absolute purchasing power parity (Formula)

A

CPI(price)
S = —————
CPI(base)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Relative purchasing power parity (Formula)

A

%ΔS = Inflation(price) - Inflation(base)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

International Fisher effect (Formula)

A

R(price) - R(base) = E(infl,price) - E(infl,base)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Slope coefficient (Formula)

A

cov(x,y)
b(1) = ————
var(x)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Accuracy (Formula)

A

TP + TN
—————————
TP + TN + FP + FN

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

F1 score (Formula)

A

2 x P x R
————
P + R

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

True positive rate (Formula)

A

TP
————
TP + FN

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

False positive rate (Formula)

A

FP
————
FP + TN

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Normalised X(i)

A

X(i) - X(min)
————————
X(max) - X(min)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Standardised X(i)

A

X(i) - X̄
————
sd

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

F-statistic (Formula)

A

MSR
———
MSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Value of forward contract prior to expiration (Formula)

A

[FP(t) - FP] x (contract size)
—————————————
[1 + r(days/360)]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Sustainable growth rate of output per capita (Formula)

A

θ
g* = ———
1 - α

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

Sustainable growth rate of output (Formula)

A

θ
G* = ——— + ΔL
1 - α

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

Output per worker

A

Y/L = T(K/L)^(α)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Growth rate in potential GDP (Formula 1)

A

Long-term growth rate in technology + α(long-term growth rate of capital) + (1 - α)(long-term growth rate in labour)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Growth rate in potential GDP (Formula 2)

A

Long-term growth rate of labour force + long-term growth rate of labour productivity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

How is in-process R&D recognised?

A

As an intangible asset under both IFRS and US GAAP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

Plan assets at end of period (Formula)

A

Plan assets at beginning of period + employer contributions + actual return - benefits paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

PBO at end of period

A

PBO at beginning of period + service cost + interest cost + past service cost +/- actuarial losses/gains - benefits paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

Funded status (Formula)

A

Plan assets - PBO

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

Total periodic pension cost (Formula 1)

A

Employer contributions - (ending funded status - beginning funded status)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

Total periodic pension cost (Formula 2)

A

Current service cost + interest cost - actual return of plan assets +/- actuarial losses/gains + prior service cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

IFRS periodic pension cost on income statement(Formula)

A

Current service cost + prior service cost +/- net interest cost/income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

US GAAP periodic pension cost on income statement (Formula)

A

Current service cost + interest cost - expected return on plan assets +/- amortisation of actuarial losses/gains* +/- amortisation of prior service cost/benefit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

Which method do you use if the functional and presentation currency are different?

A

The current rate method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

Which method do you use if the functional and presentation currency are the same?

A

The temporal method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

Underwriting loss ratio (Formula)

A

Claims paid + Δ loss reserves
——————————————
Net premium earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

Expense ratio (P&C company) (Formula)

A

Underwriting expenses
———————————
Net premium written

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

Combined ratio (Formula 1)

A

Total insurance expenses
————————————
Net premium earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

Combined ratio (Formula 2)

A

Underwriting loss ratio + expense ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

Loss and loss adjustment ratio (Formula)

A

Loss expense and loss adjustment expense
————————————————
Net premium earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

Dividends to policyholders ratio (P&C companies) (Formula)

A

Dividends to policy holders
—————————————
Net premium earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

Combined ratio after dividends (CRAD) (Formula)

A

Combined ratio + dividends to policyholders ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

Receivables turnover

A

Net annual sales
—————————
Average receivables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

Days of sales outstanding (Formula)

A

365
——————————
Receivables turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

What do you do with subsidiaries in hyper inflationary economies under IFRS?

A

Restate financial statements for inflation and convert at current rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

What do you do with subsidiaries in hyper inflationary economies under US GAAP?

A

Use temporal method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
73
Q

Dividend/interest income and interest expense classification under IFRS?

A

Operating or financing cash flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
74
Q

Dividend/interest income and interest expense classification under US GAAP?

A

Operating cash flows only

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
75
Q

Modigliani and Miller proposition I (No taxes)

A

Capital structure is irrelevant and the value of the firm is not affected

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
76
Q

Modigliani and Miller proposition II (No taxes)

A

The cost of equity increases linearly as a company increases its proportion of debt financing, exactly offsetting the benefits of debt financing and resulting in no change to the WACC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
77
Q

Modigliani and Miller proposition I (with taxes)

A

Value is maximised at 100%, as the tax shield provided by debt causes the WACC to decline as leverage increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
78
Q

Modigliani and Miller proposition II (with taxes)

A

WACC is minimised at 100% debt as the tax shield provided by debt causes the WACC to decline as leverage increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
79
Q

Accruals (balance sheet approach)

A

Net operating assets (end) - net operating assets (beg)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
80
Q

Accruals ratio (Formula)

A

NOA(end) - NOA(beg)
————————————
(NOA(end) + NOA(beg))/2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
81
Q

Accruals (cash flow approach)

A

Net income - CFO - CFI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
82
Q

Estimated cash flow (Formula)

A

EBIT + depreciation/amortisation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
83
Q

What does a ratio of proportional CapEx to proportional assets greater than 1 signify?

A

The firm is growing that business segment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
84
Q

Cash generated from operations (Formula)

A

CFO + cash interest paid + cash taxes paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
85
Q

How do you adjust operating income for pension items?

A

Add back reported pension expense (difference formulas depending on IFRS or US GAAP)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
86
Q

What is pecking order theory?

A

Managers prefer financing choices that send the least visible sign to investors (internal capital, then debt financing, then equity financing)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
87
Q

What is static trade-off theory?

A

Managers will try to balance the benefits of debt with the costs of financial distress, and thus there is an optimal level of debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
88
Q

Initial outlay for an expansion project (Formula)

A

FCInv + NWCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
89
Q

After-tax operating cash flows for an expansion project (Formula)

A

(S - C)(1 - T) + TD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
90
Q

Terminal-year non-operating cash flows for an expansion project (Formula)

A

Sal(t) + NWCInv - T[Sal(t) - B(t)]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
91
Q

Impairment of goodwill under IFRS

A

Single step approach; impairment exists when the carrying amount is greater than the recoverable value; impairment loss is carrying amount - recoverable value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
92
Q

Impairment of goodwill under US GAAP

A

Two step approach; impairment exists if carrying value exceeds the fair value; impairment loss is the difference between the carrying value of goodwill and the implied fair value of goodwill

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
93
Q

Economic profit (Formula)

A

NOPAT - $WACC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
94
Q

Market Value Added (Formula)

A

Economic profit(t)
Sum of ————————
(1 + WACC)^t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
95
Q

Economic income (Formula 1)

A

Cash flow + (ending market value - beginning market value)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
96
Q

Economic income (Formula 2)

A

Cash flow - economic depreciation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
97
Q

Residual income

A

Net income - equity charge (using beginning of period book value of equity)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
98
Q

NOPAT (Formula)

A

EBIT(1 - tax rate)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
99
Q

FCFE (NI Formula)

A

NI + non-cash charges - FCInv - WCInv + net borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
100
Q

FCFE (CFO Formula)

A

CFO - FCInv + net borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
101
Q

FCFE coverage ratio (Formula)

A

FCFE
————————————
(Div. + share repurchases)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
102
Q

Dividend coverage ratio (Formula)

A

Net income
——————
Dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
103
Q

Dividend payout ratio (Formula)

A

Dividends
——————
Net income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
104
Q

Equity method on balance sheet (Formula)

A

Share of net assets + share of net income - share of dividends - share of extra depreciation - share of derecognised profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
105
Q

Equity method on income statement (Formula)

A

Share of net income - share of extra depreciation - share of derecognised profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
106
Q

Porter’s Five Forces

A
  • Threat of new entrants
  • Threat of substitutes
  • Bargaining power of buyers
  • Bargaining power of suppliers
  • Rivalry among existing competition
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
107
Q

What discount rate should be used for an FCFF model?

A

The WACC of the firm

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
108
Q

What discount rate should be used for an FCFE model?

A

The cost of equity of the firm

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
109
Q

Justified leading P/E (Formula)

A

P(0) 1 - b
—— = ———
E(1) r - g

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
110
Q

Justified trailing P/E (Formula)

A

P(0) (1 - b)(1 +g)
—— = ——————
E(0) r - g

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
111
Q

What does the remeasurement component of periodic pension cost include?

A

Actuarial gains and losses on pension obligation and the net return on plan assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
112
Q

Single-stage residual income model (Formula)

A

(ROE - r) x B(0)
V(0) = B(0) + ———————
r - g

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
113
Q

WCInv (Formula)

A

Accounts receivable + inventory - accounts payable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
114
Q

FCFF (EBIT Formula)

A

EBIT(1 - tax rate) + Dep - FCInv - WCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
115
Q

FCFF (EBITDA Formula)

A

EBITDA(1 - tax rate) + Dep x (tax rate) - FCInv - WCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
116
Q

FCFF (CFO Formula)

A

CFO + [Int x (1 - tax rate)] - FCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
117
Q

FCFE (DR Formula)

A

NI - [(1 - DR) x (FCInv - Dep)] - [(1 - DR) x WCInv]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
118
Q

Justified P/B ratio (Formula)

A

ROE - g
————
r - g

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
119
Q

Discount for lack of control (Formula)

A

1
1 - (——————————)
1 + control premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
120
Q

Total discount with DLOC and DLOM (Formula)

A

1 - [(1 - DLOC)(1 - DLOM)]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
121
Q

Present value of growth opportunities (Formula)

A

E(1)
V(0) = —— + PVGO
r

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
122
Q

Value of perpetual preferred shares (Formula)

A

D(p)
V(p) = ——
r(p)

123
Q

H-model (Formula)

A

D(0) x [1 + g(l)]
———————— +
r - g(l)

D(0) x H x [g(s) - g(l)]
———————————
r - g(l)

124
Q

PEG ratio (Formula)

A

P/E ratio
————
g

125
Q

Justified dividend yield (Formula)

A

D(0) r - g
—— = ———
P(0) 1 + g

126
Q

Justified P/S multiple (Formula)

A

Net profit margin x trailing P/E ratio

127
Q

Residual income valuation (Formula)

A

[ROE - r] x B(0)
B(0) + (———————)
r - g

128
Q

PV of continuing residual income in year T-1 (using persistence factor formula)

A

RI(t)
————
1 + r - w

129
Q

PV of continuing residual income in year T-1 (using decline to long-run rate formula)

A

[P(t) - B(t)] + RI(t)
—————————
1 + r

130
Q

Clean surplus relation (Formula)

A

B(t) = B(t - 1) + E(t) - D(t)

131
Q

Unlevered beta (Formula)

A

Beta(L)
—————
1 + D/E

132
Q

Where are actuarial assumptions included in the financial statements?

A

Notes to financial statements

133
Q

What is the day basis for an FRA contract?

A

360

134
Q

What is the day basis for foreign currency contracts?

A

365

135
Q

Fixed swap rate (Formula)

A

1 - final discount factor
———————————
Sum of discount factors

136
Q

Value of an interest rate swap (Formula)

A

ΣZ x [SFR(new) - SFR(old)]

days x ——— x notional principal
 360
137
Q

N(-d1) (Formula)

A

1 - N(d1)

138
Q

N(-d2) (Formula)

A

1 - N(d2)

139
Q

BSM Model call option (Formula)

A

S(0)N(d1) - e^(-rT)XN(d2)

140
Q

BSM Model put option (Formula)

A

e^(-rT)XN(-d2) - S(0)N(-d1)

141
Q

Capitalisation rate (Formula)

A

NOI
———————
Property value

142
Q

Property value (cap rate Formula)

A

NOI
————
Cap rate

143
Q

FFO (Formula)

A

Accounting net earnings + depreciation and amortisation expense - gains from sales of property + losses from sales of property

144
Q

AFFO (Formula)

A

FFO - non-cash rent adjustment - recurring maintenance-type capital expenditures and leasing commission

145
Q

How can you value REITs and REOCs? (Three methods)

A
  • NAVPS
  • Relative value (price-to-FFO and price-to-AFFO)
  • Discounted cash flow
146
Q

NAV before distributions (Formula)

A

NAV after distributions in prior year + capital called down - management fees + operating results

147
Q

NAV after distributions (Formula)

A

NAV before distributions - carried interest - distributions

148
Q

What does a ratchet do within private equity?

A

Enables the management team to increase its equity allocation depending on the company’s actual performance and the return achieved by the PE firm

149
Q

Per-share effective spread transaction cost

A

Side x (transaction cost - misquote price)

150
Q

Effective spread

A

2 x per-share effective spread transaction cost

151
Q

Linear regression assumptions (x6)

A
  1. There is a linear relationship between the dependent and independent variable
  2. Independent variable is uncorrelated with the residuals
  3. Expected value of the residual term is zero
  4. The variance of the residual term is constant for all observations
  5. Residual term is independently distributed
  6. The residual term is normally distributed
152
Q

How many tails does an F-Test have?

A

One

153
Q

Three conditions of being covariance stationary?

A
  1. Constant and finite expected value
  2. Constant and finite variance
  3. Constant and finite covariance between values at any given leg
154
Q

What criterion is used to compte the accuracy of AR models in forecasting out-of-sample values?

A

Root mean squared error (RMSE)

155
Q

How do data scientists reduce overfitting? (Two methods)

A
  • Complexity reduction

- Cross validation

156
Q

What is complexity reduction?

A

Method that adds a penalty to exclude features that do not meaningfully contribute to model

157
Q

What is cross validation?

A

Estimates out-of-sample error rates directly from the validation sample

158
Q

What is k-fold cross validation?

A
  • Sample divides into k parts
  • Training sample = k-1; validation sample = 1
  • Repeat k times
  • Compile average in-sample and out-of-sample error rates
159
Q

Least absolute shrinkage and selection operator (LASSO)

A

Minimises SSE and the sum of the absolute values of the slope coefficients

160
Q

Support vector machine

A

Linear classification algorithm that separates data into one of two possible classifieds by determining a boundary farthest away from all observations

161
Q

K-nearest neighbour (KNN)

A

Technique used to classify an observation based on nearness to observations in the training data (k is hyperparameter, and algorithm looks for the ‘k’ nearest neighbours)

162
Q

What does principal component analysis (PCA) produce?

A

Eigenvectors, each with an eigenvalue

163
Q

What does an eigenvalue tell us?

A

The proportion of data explained by the eigenvector

164
Q

What types of hierarchical clustering are there?

A
  • Agglomerative (each data point starts as a cluster)

- Divisive (start with one giant cluster)

165
Q

How many hidden layers does a deep neural network (DNN) have?

A

Often more than 20

166
Q

Data analysis steps (5)

A
  1. Conceptualisation
  2. Data collection
  3. Data preparation and wrangling
  4. Data exploration
  5. Model training
167
Q

What is Winsorisation?

A

Replacing extreme values by the maximum value allowable for that variable

168
Q

Bag-of-words procedure

A

Collects all words and a document term matrix puts them into structured data

169
Q

N-grams

A

Used to represent word sequences (e.g. bigrams, trigrams)

170
Q

What is an FX carry trade a bet against?

A

Uncovered interest rate parity

171
Q

Preconditions for economic growth (6 preconditions)

A
  1. Savings and investment
  2. Financial markets and intermediaries
  3. Political stability, rule of law, and property rights
  4. Investment in human capital
  5. Tax and regulatory systems
  6. Free trade and unrestricted capital flows
172
Q

Equity price correlation to GDP (short-term)

A

ΔP = ΔGDP + Δ(E/GDP) + Δ(P/E)

173
Q

Equity price correlation to GDP (long-term)

A

ΔP = ΔGDP

174
Q

Cobb-Douglas production function (formula)

A

Y = TK^(α)L^(α-1)

175
Q

Growth accounting relation (growth rate in potential GDP)

A

ΔY/Y = ΔA/A + α x (ΔK/K) + (1-α) x (ΔL/L)

176
Q

What is “Dutch disease”?

A

When natural resource-rich countries see their currency appreciate heavily due to demand for those natural resources, making all exports more expensive and other domestic industries less competitive

177
Q

Absolute convergence hypothesis

A

Less developed countries will achieve equal living standards over time

178
Q

Conditional convergence hypothesis

A

States that convergence in living standards will only occur for countries with the same savings rates, population growth rates, and production functions

179
Q

Club convergence hypothesis

A

Countries may be part of a club (with similar institutional features) and able to rapidly catch up to richer peers within that club

180
Q

Classical growth theory

A

Growth in real GDP per capita is temporary - when the GDP per capita rises above the subsistence level, a population explosion occurs, driving GDP per capita back to the subsistence level

181
Q

Neoclassical growth theory

A

Sustainable growth rate of GDP is a function of population growth, labour’s share of income, and the rate of technological advancement. Growth gains from other means are only temporary

182
Q

Endogenous growth theory

A

Investment in capital can have constant returns (unlike neoclassical theory), which allows for a permanent increase in growth rate attributable to an increase in savings rate

183
Q

What are self-regulatory bodies (SRBs)?

A

Private organisations that represent as well as regulate their members

184
Q

What are self-regulating organisations (SROs)?

A

SRBs that are recognised by the government. They are independently funded

185
Q

Regulatory capture

A

A regulatory body will, at some point in time, be influenced or even possibly controlled by the industry that is being regulated

186
Q

Regulatory competition

A

Where regulators compete to provide the most business-friendly regulatory environment

187
Q

Regulatory arbitrage

A

Where businesses shop for a country that allows a specific behaviour rather than changing the behaviour

188
Q

Regulatory tools (three)

A
  1. Price mechanisms (taxes / subsidies)
  2. Restricting or requiring certain activities
  3. Provision of public goods or financing of private projects
189
Q

Regulatory burden

A

Refers to the cost of compliance for the regulated entity

190
Q

Net regulatory burden

A

Regulatory burden minus the private benefits of regulation

191
Q

What accounting treatment do joint ventures require?

A

Equity method (almost always) under both IFRS and US GAAP

192
Q

Two criteria for amortised cost (debt securities only) for investments in financial assets?

A
  1. Business model test - debt securities being held to collect contractual cash flows
  2. Cash flow characteristic test - cash flows are either principal, or interest in principal, only
193
Q

Can you reclassify equity securities once classified as FVPL or FVOCI?

A

No

194
Q

Goodwill created in purchase (equity method)

A

Excess of purchase price less excess allocated to equipment

195
Q

What values are the two coefficients in the Taylor equation?

A

0.5

196
Q

How do you account for a variable interest entity (VIE)?

A

It must be consolidated by the primary beneficiary

197
Q

What are the characteristics of a VIE?

A
  1. At-risk equity that is insufficient to fianance the entity’s activities without additional financial support
  2. Equity investors that lack any of the following:
    - Decision making rights
    - Obligation to absorb expected losses
    - Right to receive expected residual returns
198
Q

Where is remeasurement (temporal method) gain or loss recognised?

A

Income statement

199
Q

Where is translation (current rate method) gain or loss recognised?

A

Shareholder’s equity

200
Q

Three pillars of the Basel III framework?

A

The maintenance of minimum levels of:

  1. Capital
  2. Liquidity
  3. Stable funding
201
Q

What does the CAMELS approach entail?

A 
C - Capital adequacy
A - Asset quality
M - Management
E - Earnings
L - Liquidity
S - Sensitivity
202
Q

Liquidity coverage ratio (LCR)

A

Highly liquid assets
———————————
Exp. cash outflows (1-month stress)

203
Q

Net stable funding ratio (NSFR)

A

Available stable funding
———————————
Required stable funding

204
Q

What is a soft pricing period?

A

When P&C insurers cut prices during periods of heightened competition

205
Q

What is a hard pricing period?

A

After insurers leave the industry following soft pricing periods, the industry enters a healthier pricing environment and fatter margins

206
Q

What does Basel III recommend for LCR and NSFR ratios?

A

100%

207
Q

What is the Beneish Model?

A

A pro it regression model estimating the probability of earnings manipulation using 8 dependent variables. A higher M-score indicates higher probability of manipulation

208
Q

What is the Altman model?

A

A Z-score model developed to assess the probability that a firm will file for bankruptcy

209
Q

What are three characteristics of high-quality financial balance sheet reporting?

A
  1. Completeness
  2. Unbiased measurement
  3. Clarity of presentation
210
Q

6-step process for financial statement analysis?

A
  1. Establish the objectives
  2. Collect data
  3. Process data
  4. Analyse data
  5. Develop and communicate conclusions
  6. Follow up
211
Q

Cash generated from operations (CGO) (formula 1)

A

EBIT + non-cash charges - increase in working capital

212
Q

Cash generated from operations (CGO) (formula 2)

A

CFO + cash taxes paid + cash interest paid

213
Q

Which of sunk costs, externalities, and opportunity costs should be included in capital budgeting analysis?

A

Sunk costs - no
Externalities - yes
Opportunity costs - yes

214
Q

NWCInv (formula)

A

Δnon-cash current assets - Δnon-debt current liabilities

215
Q

Replacement project initial outlay (formula)

A

FCInv + NWCInv - Sal(0) + T[Sal(0) - B(0)]

216
Q

Replacement project incremental operating cash flows (formula)

A

(ΔS - ΔC)(1-T) + ΔDT

217
Q

Replacement project terminal year non-operating cash flow (formula)

A

[Sal(TNew) - Sal(TOld)] + NWCInv - T[(Sal(TNew) - B(TNew) - (Sal(TOld) - B(TOld)]

218
Q

What option is an abandonment option the equivalent of?

A

Put option

219
Q

What option is an expansion option the equivalent of?

A

Call option

220
Q

Required rate of return on equity from MM proposition II no taxes (Formula)

A

D
r(0) + — [r(0) - r(d)]
E

221
Q

Amount of capital gains required if differential in tax rates between capital gains and dividends (formula)

A

[1 - T(d)]
D x —————
[1 - T(cg)]

222
Q

What six factors affect a company’s dividend payout policy?

A
  1. Investment opportunities
  2. Expected volatility of future earnings
  3. Financial flexibility
  4. Tax considerations
  5. Flotation costs
  6. Contractual and legal restrictions
223
Q

Effective tax rate under a double-taxation system (formula)

A

Corporate tax rate + (1 - corporate tax rate)(individual tax rate)

224
Q

What is a split-rate corporate tax system?

A

A system where corporate earnings paid out as dividends are taxed as a lower rate than corporate earnings otherwise

225
Q

Imputation tax system

A

Taxes are paid at the corporate level but are attributed to the shareholder so that all taxes are paid at the shareholder’s rate (shareholder pays [shareholder tax rate - corporate tax rate] in tax)

226
Q

Expected increase in dividends under target payout adjustment model

A

[(expected earnings x target payout ratio) - previous dividend] x adjustment factor

227
Q

What is the residual dividend model?

A

Dividends are paid from residual earnings after the optimal capital structure has been financed

228
Q

What are the four common methods for share buybacks?

A
  1. Open market transactions
  2. Fixed price tender offer
  3. Dutch auction
  4. Repurchase by direct negotiation
229
Q

Five common rationales for share repurchases (versus dividends)

A
  1. Potential tax advantages
  2. Share price support / signalling
  3. Added flexibility
  4. Offsetting dilution from employee stock options
  5. Increasing financial leverage
230
Q

When will EPS increase if share repurchases are financed by borrowing?

A

When the after-tax cost of borrowing is less than the initial earnings yield of the shares

231
Q

Five major ownership structure factors impacting corporate governance

A
  1. Director independence
  2. Board structure
  3. Special voting arrangements
  4. Corporate governance codes, laws , and listing requirements
  5. Stewardship codes
232
Q

What is a statutory merger?

A

Where the acquiring company acquired all of the targets assets / liabilities and the target company ceases to exist

233
Q

What is a subsidiary merger?

A

Where the target company becomes a subsidiary of the acquirer

234
Q

What is a consolidation (merger)?

A

Where both companies cease to exist and they form a new company

235
Q

What is a horizontal merger?

A

Both companies operate in the same or similar industries

236
Q

What is a vertical merger?

A

Acquiring company seeks to move up or down the supply chains

237
Q

What is a conglomerate merger?

A

Both companies operate in completely separate industries

238
Q

What are the two forms of acquisition?

A

Stock purchase and asset purchase

239
Q

What is a poison pill (pre-offer defence)?

A

Gives current shareholders the right to purchase additional shares at attractive prices, increasing the cost to the acquirer

240
Q

What is a poison out (pre-offer defence)?

A

Gives bondholders the right to demand immediate repayment in the case of a merger

241
Q

What are golden parachutes (pre-offer defence)?

A

Compensation agreements between the target and its senior management for lucrative payouts if they leave following a merger

242
Q

What is greenmail (post-offer defence)?

A

Payoff to the potential acquirer to terminate a hostile takeover attempt

243
Q

What is a crown jewel defense (post-offer defence)?

A

Selling a key asset

244
Q

What is a pac-man defense (post-offer defence)?

A

Target acquired the acquirer

245
Q

What is a white knight defense (post-offer defence)?

A

Friendly third party acquires the target

246
Q

What is a white squire defense (post-offer defence)?

A

Friendly third party acquires a minority interest in target

247
Q

FCFF (corporate finance topic formula)

A

Net income + net interest after tax + change in deferred taxes + net no cash charges - change in net working capital - capital expenditures

248
Q

Post-merger value (formula)

A

Pre-merger value of acquirer + pre-merger value of target + synergies - cash paid to target shareholders

249
Q

Gain accrued to target (formula)

A

Price paid to target - pre-merger value of target (this overall equals takeover premium)

250
Q

Gains accrued to acquirer (formula)

A

Synergies - takeover premium

251
Q

PRAT model (formula)

A

Profit margin x retention rate x asset turnover x financial leverage

252
Q

FCInv (formula assuming no long-term assets have been sold)

A

Ending net PP&E - beginning net PP&E + depreciation

253
Q

FCInv (formula assuming long-term assets were sold)

A

Ending net PP&E - beginning net PP&E + depreciation - gain on sale of long-term assets

254
Q

What is the difference between Total Invested Capital (TIC) and EV?

A

TIC includes cash and short-term investments

255
Q

Conversion value of convertible bond

A

Market price of stock x conversion ratio

256
Q

Market conversion price of convertible bond

A

Market price of convertible
—————————————
Conversion ratio

257
Q

Market conversion premium per share for convertible bond

A

Market conversion price - stock’s market price

258
Q

Value of noncallable, nonputable convertible bond

A

Straight value + value of call option on stock

259
Q

Value of callable convertible bond

A

Straight value + value of call option on stock - value of call option on bond

260
Q

CDS upfront payment (by protection buyer)

A

PV(protection leg) - PV(premium leg)

261
Q

Upfront CDS premium %

A

(CDS spread - CDS coupon) x duration

262
Q

Profit for CDS protection buyer

A

Change in spread x duration x notional principal

263
Q

Forward price (if no storage costs)

A

S(0) x (1 + R(f))^T

264
Q

Forward price of an equity security with dividends

A

(S(0) - PVD) x (1 + R(f))^T

265
Q

Forward price on an equity index (continuous dividends)

A

S(0) x e^[(R(cf) - D(c)) x T]

266
Q

Forward price of a coupon-paying fixed income security

A

(S(0) - PVC) x (1 + R(f))^T

267
Q

Quoted futures price of a bond

A

[(full price)(1 + R(f))^T - AI(T) - FVC)
1
x ——
CF

268
Q

Value to payer in interest rate swap

A

Sum of discounts x (SFR(new) - SFR(old)) x settlement period days/360 x notional principal

269
Q

Hedge ratio (formula)

A

C(+) - C(-)
—————
S(+) - S(-)

270
Q

BSM call value

A

S(0) x N(d1) - e^(-rT) x X x N(d2)

271
Q

BSM put value

A

e^(-rT) x X x N(-d2) - S(0) x N(-d1)

272
Q

BSM call value (dividend-paying stock)

A

S(0) x e^(-dT)x N(d1) - e^(-rT) x X x N(d2)

273
Q

BSM put value (dividend-paying stock)

A

e^(-rT) x X x N(-d2) - S(0) x e^(-dT)x N(-d1)

274
Q

Black Model call value

A

e^(-RcfT) x [(Ft x N(d1)) - (X x N(d2)]

275
Q

How do you replicate a long FRA using options?

A

Long interest rate call and short interest rate put

276
Q

How do you replicate a short FRA?

A

Short interest rate call and long interest rate put

277
Q

How do you replicate an interest rate cap?

A

Series of interest rate call options with different maturities and the same exercise price

278
Q

How do you replicate an interest rate floor?

A

A series of interest rate put options

279
Q

How to replicate a payer swap?

A

Long interest rate cap and short interest rate floor with the same exercise rate

280
Q

How do you replicate a receiver swap?

A

Short interest rate cap and long interest rate floor with same exercise rate

281
Q

Number of short call options to delta hedge

A

Number of shares hedged
————————————
Delta of call option

282
Q

Number of long put options to delta hedge

A

Number of shares hedged
- ————————————
Delta of put option

283
Q

Three sources of value creation in PE

A
  1. Re-engineering portfolio company so that it operates more efficiently
  2. Obtain debt financing on more advantageous terms
  3. Superior alignment of interests between management and owners
284
Q

r* (adjusted for failure of VC firm)

A

1 + r
—— - 1
1 - q

285
Q

What factor does the Carhart model extend the Fama and French model by?

A

Momentum

286
Q

Information coefficient for market timer (formula)

A

2 x (% correct) - 1

287
Q

Breadth for correlated decisions (formula)

A

N
——————
1 + (N - 1)r

288
Q

Modigliani and Miller value of leverage company (formula)

A

EBIT(1 - t)
—————
WACC

289
Q

What type of banks generally use swaps?

A

Wholesale banks

290
Q

Common adjustments when calculating EVA

A
  1. R&D expenses should be capitalised and amortised
  2. Eliminate deferred taxes (only recognise cash taxes)
  3. Convert LIFO to FIFO (add LIFO reserve)
  4. Treat operating leases as capital leases
  5. Adjust for non-recurring items
291
Q

What is the intercept and slope of the security market line?

A 
Intercept = risk free rate (Rf)
Slope = equity risk premium (Rf - Rm)
292
Q

Intercept for fundamental factor model

A

Not necessarily the risk-free rate due to standardised betas

293
Q

Ibbotsen-Chen formula

A

[(1 + expected inflation) x (1 + expected growth in real earnings per share) x (1 + expected growth in P/E)] + expected income component - risk-free rate (+ other risk premiums)

294
Q

CDS upfront premium

A

(Credit spread - Fixed coupon) x CDS duration

295
Q

CDS price (per 100 notional)

A

100 - upfront premium

296
Q

What are one’s positions on credit risk if you buy or sell a CDS?

A

Buy: short credit risk (pay premiums)
Sell: long credit risk (receive premiums)

297
Q

Is one allowed to impact market price if trading solely for tax purposes?

A

Yes

298
Q

How to check whether an autoregressive model is correctly specified?

A

Check there is no autocorrelation between the residuals

299
Q

Covariance formula

A

E[x(i) - x(avg)][y(i) - y(avg)]
———————————————
n - 1

300
Q

Sample Variance formula

A

E[x(i) - x(avg)]^2
—————————
n - 1

301
Q

Currency spread formula

A

Ask - Bid
—————
Ask

302
Q

What companies is the capitalised cash flow method suitable for?

A

Small private companies (not large private or public companies)

303
Q

Information coefficient (correlation formula)

A

E(Ra) Ra
Corr[——— , ———]
sd sd

304
Q

Transfer coefficient (correlation formula)

A

E(Ra)
Corr[——— , Δw x sd]
sd

CFA II (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions