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CFA > Concept 6 > Flashcards

Concept 6 Flashcards

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CFA flashcards
1
Q

If a manager changes his investment strategy, should he acquire written notice from customer first or should he promptly inform the client after the change

A

Standard V(B) Communication with Clients and Prospective Clients requires prompt disclosure of any change that might significantly affect the manager’s investment processes. The disclosure need not be in writing.

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2
Q

If a candidate changes his mother’s account for tax purpose, but does not do that for other clients, does he violate fair dealing?

A

No, tax is different for everyone, acting the same on everyone might not be for their best interest

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3
Q

Under GIPS, what does total firm asset include?

A

Discretionary and non-discretionary accounts, fee-paying and non-fee-paying accounts.

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4
Q

If a candidate change recommendation from “buy” to “sell”. then another customer immediately called to buy the share, what should he do?

A

He may accept the order but must advise the customer of the change in recommendation before accepting the order. No written permission is required

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5
Q

Can candidate mimic client’s account action on his own account?

A

Yes, as long as they do not harm client’s interest

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6
Q

If a company want to make a purchase, and a candidate possess material non public information that the purchase should not be executed, what should he do?

A

He should not act on it. He should not put the company on restriction list because that would also be “acting” on the information. He should contact the source of the information to urge them to make the information public, otherwise would make the purchase anyway.

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7
Q

Contrarian technical analyst

A

Anticipate bearish market if indicators are bullish, vice versa

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8
Q

Put-call ratio

A

Put option means people expect price to lower, thus high put-call ratio means a bearish market

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9
Q

Volatility index

A

High VIX indicates investor fear the drop of stock price, indicates a bearish market

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10
Q

Low mutual fund cash position

A

Low cash position indicates aggressive investing -> bullish market

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11
Q

Margin debt

A

Increase in margin debt indicates aggressive borrowing to buy, thus bullish market

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12
Q

Elasticity approach (exchange rate change)

A

Under the elasticities approach, a currency depreciation will lead to a greater reduction in a trade deficit when export demand and/or import demand are more elastic.

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13
Q

Open market operation

A

Central buys or sells security.

When central bank buy stocks, cash replace stock position, money supply increase and interest rate decrease

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14
Q

Most used monetary tool for central bank to control money supply

A

Open market operation

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15
Q

Reserve requirement

A

Percentage of reserve bank need to keep for deposits. Lower reserve requirement increase money supply and lower interest rate.

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16
Q

Policy rate

A

Also discount rate or refinancing rate. It is the rate that banks can borrow money from fed.
Lower rate makes it easier to borrow money, decrease interest rate overall

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17
Q

Short run aggregate supply curve

A

Upward sloped, Output(real gdp, x axis) v.s. Price level (y axis)

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18
Q

Long run aggregate supply curve

A

Vertical, Output(real gdp, x axis) v.s. Price level (y axis)

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19
Q

What’s the effect of increased money supply on AD and AS

A

It will increase aggregated demand

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20
Q

A natural monopoly is most likely to exist when

A

economies of scale are great

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21
Q

Report of extraordinary item

A

Separately in income statements

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22
Q

How is interest expense categorized for manufacturing company and financial service company?

A

Interest expense is shown as a non-operating component of net income for a manufacturing company but would typically be classified as an operating expense for a financial services company.

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23
Q

If a 4M bond is converted into 6M common stock, how should that be recorded on cash flow statement?

A

Conversion of bonds into common stock is a non-cash transaction, but the conversion should be disclosed in a footnote to the statement of cash flows.

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24
Q

Should we use coupon rate or market rate of newly issued debt to estimate debt cost of capital

A

Market rate

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25
Q

What risk does beta measure

A

Systematic risk

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26
Q

What risk does standard deviation measure

A

Total risk

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27
Q

Short sale

A

Short seller

1) simultaneously borrows and sells securities through a broker
2) must return securities at the request of the lender or when short sale close out
3) must keep a portion of the proceeds of the short sale on the account

28
Q

Is price of a lower-coupon payment bond more or less sensitive to interest rate change compared to a higher-coupon bond?

A

Lower coupon payment is more sensitive, since higher coupon bonds always pay same coupon no matter the interest rate.

29
Q

Positive convexity

A

Bend inward, default bond yield curve

30
Q

Price yield curve

A

It’s curved inward (positive convexity), thus for same percent change, decrease would result in a larger price increase compared to increase would result in the price decrease

31
Q

Forward rate curve

What’s the next point on the curve for 2y2y?

A

Plots forward rates in years.

The next point would be 2 year rate 3years from now

32
Q

In matrix pricing for illiquid bonds, should we use bonds with higher liquidity or similar liquidity?

A

Matrix pricing for untraded or infrequently traded bonds should be based on yields of more frequently traded bonds with similar credit ratings.

33
Q

1000 bond is trading for 89.14 , what’s the flat price

A

$891.4

34
Q

Benefit of derivative market

A
  1. Provide price information
  2. Allow risk to be managed and shifted among market partificpants
  3. reduce transactions costs
35
Q

Under Standard V(C) Record Retention, should records be kept in hard copies or is electronic copy acceptable?

A

Electronic copies are ok

36
Q

If clients have confidential information that might relate to illegal activities, how should candidate act?

A

In the case of illegal activity, candidate have a legal obligation to report the activity. Ideally, he should consult with his employer first about what actions he may be required to take. Seeking the advice of outside counsel as to whether he has such an obligation under local law and whether the activity is indeed illegal is the one permitted under the Standard.

37
Q

Under Code and Standard, can one report individual account instead of composite?

A

Individual account performance is permitted and no minimum number of years is recommended

38
Q

Quintile

A

Distribution divided into 5 groups

39
Q

Subjective probability

A

Subjective probability is based on personal judgement.

40
Q

empirical probability

A

Based on historical data

41
Q

Key assumption of technical analysis

A

Market price reflect both rational and irrational activity
Investor behavior is reflected in trends and patterns.
Patterns tends to repeat.

42
Q

Elasticity of an perfectly inelastic supply and perfectly elastic supply

A

For perfect inelastic, elasticity = 0
For perfect elastic, elasticity = infinity
Think of demand change = supply change * elasticity. For perfect inelastic, demand change = 0, for perfect elastic, demand change = infinity

43
Q

Law of diminishing return

A

Determine the upward sloping portion of the short run supply curve

44
Q

Return to scale

A

Determine the long run supply curve

45
Q

Marginal revenue

A

Note, it is the increase in revenue (NOT PROFIT) for an additional unit

46
Q

Free trade areas

A

All barriers to import and export of goods and services among member countries are removed

47
Q

Customs Union

A
  1. All barriers to import and export of goods and services among member countries are removed
  2. All countries adopt a common set of trade restrictions with non members
48
Q

Common market

A
  1. All barriers to import and export of goods and services among member countries are removed
  2. All countries adopt a common set of trade restrictions with non members
  3. All barriers to the movement of labor and capital goods among member countries are removed
49
Q

Economic Union

A
  1. All barriers to import and export of goods and services among member countries are removed
  2. All countries adopt a common set of trade restrictions with non members
  3. All barriers to the movement of labor and capital goods among member countries are removed
  4. Member countries establish common institutions and economic policy for the union
50
Q

Monetary union

A
  1. All barriers to import and export of goods and services among member countries are removed
  2. All countries adopt a common set of trade restrictions with non members
  3. All barriers to the movement of labor and capital goods among member countries are removed
  4. Member countries establish common institutions and economic policy for the union
  5. Member countries adopt a single currency
51
Q

retrospectively

A

Directed to the past

52
Q

Is change from LIFO to FIFO conducted retrospectively or prospectively?

A

Prospectively, no adjustments are made to the prior periods

53
Q

Assumption of IFRS statement

A

In the IFRS framework, the two assumptions that underlie the preparation of financial statements are the accrual basis and the going concern assumption.

54
Q

Capitalizing cost and income variability

A

Capitalizing costs tends to smooth earnings, thus reduce income variability

55
Q

Declaration date

A

The data board of directors approves dividend payment

56
Q

Ex-dividend date

A

The first day a share of stock trades without dividend. It is the cut-off date for receiving dividend. Occur two days before holder of record date

57
Q

Holder of record date

A

Date on which shareholders of record are designated to receive dividends

58
Q

Payment date (dividend)

A

Date when dividend checks are mailed out

59
Q

What if investor’s willingness to take risk greater than his ability to take risk?

A

The advisor’s assessment of the client’s risk tolerance in the IPS should reflect the client’s ability to bear investment risk.

60
Q 
Given 
Jan 1, 20X1	Beginning portfolio value	$10 million
Jul 1, 20X1	Account value	$11.2 million
Jul 1, 20X1	Deposit of cash	$1.2 million
Jan 1, 20X2	Account value	$12.5 million
Jan 1, 20X2	Withdrawal of cash	$0.6 million
Dec 31, 20X2	Account value	$15 million
Calculate manager's performance
A

Since the portfolio manager is not directing the flow of cash into and out of the account, the time-weighted annual rate of return is the appropriate performance measure. Calculate the 2-year holding period return +1, then take the square root and subtract 1 to get the annual time-weighted rate of return:
[(11.2 / 10)(12.5 / 12.4)(15 / 11.9)]1/2 – 1 = 19.29%.

61
Q

Statutory voting

A

a minority shareholder could not elect any board members based only on their share voting rights.

In statutory voting, if you owned 50 shares and were voting on six board positions, you could cast 50 votes for each board member, for a total of 300 votes. You could not cast 20 votes for each of five board members and 200 for the sixth.

62
Q

Modified duration in terms of Macaulay duration

A

Modified duration = Macaulay duration / (1 + YTM)

63
Q

Notching

A

“Notching” refers to the credit rating agency practice of assigning ratings to debt issues that differ from the issuer’s credit rating.

64
Q

Duration gap

A

a difference between a bond’s Macaulay duration and the bondholder’s investment horizon.

65
Q

Management fee for Fund of Fund?

A

The fee may actually be substantial since, in addition to paying the manager of the FOF, a fee must be paid to each hedge fund within the FOF.

66
Q

Private investment in public equities

A

Private investment in public equities refers to a private equity firm providing equity financing to publicly traded companies.

CFA (11 decks)

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