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CFA JH > Untitled Deck > Flashcards

Untitled Deck Flashcards

1
Q

What does Standard I(A) cover in the CFA Institute Code of Ethics and Standards of Professional Conduct?

A

Knowledge of the Law - Members must understand and comply with applicable laws, rules, and regulations.

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2
Q

What is required under Standard III(A): Loyalty, Prudence, and Care?

A

Members must act for the benefit of their clients and place their clients’ interests above their own.

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3
Q

Describe the concept of ‘Fair Dealing’ under Standard III(B).

A

Members must deal fairly and objectively with all clients when providing investment analysis, recommendations, or taking investment actions.

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4
Q

What does Standard IV(A): Loyalty require?

A

Members must act in the best interests of their employer and not deprive their employer of their skills.

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5
Q

What actions are prohibited under Standard II(B): Market Manipulation?

A

Practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

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6
Q

How is the Holding Period Return (HPR) calculated?

A

HPR = .

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7
Q

Define ‘Geometric Mean’ and its use in finance.

A

It is used for calculating compounded annual growth rates: .

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8
Q

What is Bayes’ Formula?

A

.

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9
Q

What is the Z-Score formula and its use?

A

Z = . It measures how many standard deviations an observation is from the mean.

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10
Q

Explain the Central Limit Theorem.

A

It states that the sampling distribution of the sample mean approaches a normal distribution as sample size increases.

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11
Q

What is the purpose of DuPont Analysis?

A

To break down ROE into profit margin, asset turnover, and financial leverage: .

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12
Q

What is a ‘Common-Size’ financial statement?

A

A statement where all items are expressed as a percentage of a base item, like total assets or revenue.

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13
Q

Define ‘Basic EPS’.

A

.

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14
Q

How is Free Cash Flow calculated?

A

.

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15
Q

What does a Qualified Audit Opinion indicate?

A

Exceptions to accounting principles but not sufficient to invalidate the entire financial statement.

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16
Q

What are the four market structures in economics?

A

Perfect competition, monopolistic competition, oligopoly, and monopoly.

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17
Q

When should a firm shut down in the short run?

A

If total revenue is less than total variable costs.

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18
Q

Explain the fiscal balance equation.

A

, where G is government spending, T is taxes, S is savings, I is investment, X is exports, and M is imports.

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19
Q

Define ‘Expansionary Monetary Policy’.

A

It occurs when the policy rate is less than the neutral interest rate.

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20
Q

What is the purpose of a customs union?

A

It removes trade barriers among members and adopts a common trade policy with non-members.

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21
Q

How is Net Present Value (NPV) calculated?

A

where CF_t is cash flow at time t and r is the discount rate.

22
Q

Define Weighted Average Cost of Capital (WACC).

A

, where is weight, is cost, and is tax rate.

23
Q

What is Modigliani-Miller Proposition I with no taxes?

A

Capital structure is irrelevant to a firm’s value.

24
Q

What is the difference between a hard and soft hurdle rate?

A

Hard hurdle: incentive fee only on returns above the hurdle rate. Soft hurdle: fee on entire return if it exceeds the hurdle rate.

25
Q

List the types of capital investment projects.

A

Maintenance, regulatory, expansion, and other (e.g., strategic investments).

26
Q

What is the Investment Policy Statement (IPS)?

A

A document that outlines an investor’s objectives and constraints for portfolio management.

27
Q

Define ‘Efficient Frontier’.

A

A set of optimal portfolios that offer the highest expected return for a defined level of risk.

28
Q

What is the Security Market Line (SML)?

A

A graphical representation of the CAPM, showing the relationship between expected return and systematic risk.

29
Q

What is unsystematic risk, and how can it be mitigated?

A

Risk specific to a company or industry; it can be mitigated through diversification.

30
Q

Explain the difference between the Capital Market Line (CML) and the Security Market Line (SML).

A

The CML represents risk-return tradeoff for efficient portfolios, while the SML represents it for individual assets.

31
Q

What is the purpose of the Dividend Discount Model (DDM)?

A

To value a stock by discounting expected future dividends.

32
Q

Define ‘Price-to-Earnings (P/E) Ratio’.

A

.

33
Q

What are the three forms of market efficiency?

A

Weak, semi-strong, and strong forms.

34
Q

What does the weak form of the Efficient Market Hypothesis (EMH) state?

A

Current stock prices fully reflect all past market data.

35
Q

What is a ‘margin call’ in leveraged investing?

A

A demand for additional funds when the value of the investor’s equity falls below the maintenance margin.

36
Q

What is a bond’s ‘Yield to Maturity’ (YTM)?

A

The rate of return earned by an investor if the bond is held to maturity.

37
Q

Define ‘Duration’ in bond analysis.

A

A measure of the sensitivity of a bond’s price to changes in interest rates.

38
Q

What are ‘floating-rate notes’?

A

Bonds with variable coupon rates tied to a benchmark rate.

39
Q

Explain the concept of ‘convexity’ in bond pricing.

A

Convexity accounts for the non-linear relationship between bond prices and interest rates.

40
Q

What is a ‘callable bond’?

A

A bond that allows the issuer to repay the bond before maturity at specified terms.

41
Q

What is the primary difference between forwards and futures?

A

Forwards are private agreements, while futures are standardized and traded on exchanges.

42
Q

Define ‘Put-Call Parity’.

A

A relationship between the prices of European call and put options: .

43
Q

What is an ‘interest rate swap’?

A

A derivative where two parties exchange interest payments on a notional principal.

44
Q

How is the intrinsic value of a call option calculated?

A

Intrinsic value = Max, where S is the stock price and X is the strike price.

45
Q

What is a ‘credit default swap’ (CDS)?

A

A derivative that provides protection against the default of a borrower.

46
Q

What are the stages of venture capital investment?

A

Formative stage, later stage, and mezzanine stage.

47
Q

Define ‘Contango’ and ‘Backwardation’.

A

Contango: Futures price > spot price. Backwardation: Futures price < spot price.

48
Q

What is the purpose of a Real Estate Investment Trust (REIT)?

A

To provide investors with income from real estate without owning properties directly.

49
Q

What are the key benefits of hedge funds?

A

Diversification, access to alternative strategies, and potential for absolute returns.

50
Q

Explain the concept of ‘infrastructure investing’.

A

Investing in physical assets like roads, utilities, and airports, often for stable cash flows.

CFA JH (3 decks)

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