CFA Level I terms: S

Core property is stable and well leased, often residential with many tenants on long leases, or leased back under a sale-leaseback: the owner sells the property to an investor and rents it back for continued use.

Real estate returns: core to opportunistic, leverage and diversification Alternative Investments

Retailers report same-store sales because total sales growth blends two things: more sales in existing stores, and new stores. Sales per square meter is revenue over selling space.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

US GAAP labels finance leases for lessors as either a sales-type lease (selling profit at the start) or a direct financing lease (the lessor simply financed a purchase and earns interest only).

Lessor accounting: finance vs operating leases Financial Statement Analysis

Use the same basis for the company and its peers, and prices from the same date: same-date prices stop market moves between reporting dates from distorting a comparison.

Trailing, current and forward multiples Equities

Retailers report same-store sales because total sales growth blends two things: more sales in existing stores, and new stores.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

Capacity-based measures multiply the number of outlets by sales per outlet. Same-store sales growth looks only at stores that were open in both periods, and new stores add revenue on top.

Revenue models: historical, bottom-up and top-down Equities

It tests whether the true population correlation, $\rho$, differs from zero, given only the sample correlation coefficient $r$ you measured. A sample of paired returns will almost never show exactly zero correlation, even for unrelated series.

Is a correlation significant? The t-test of correlation Quantitative Methods

With sample data, divide by n − 1 instead, for the same reason as the sample variance; that is what a spreadsheet's COVARIANCE.S does (COVARIANCE.P divides by n). This is the sample covariance.

Covariance and correlation Quantitative Methods

When the data are a sample, the same calculation gives the sample mean.

Mean, median, mode and what outliers do to them Quantitative Methods

With sample data you divide by n − 1 instead. That is the sample variance, and its square root is the sample standard deviation.

Range, mean absolute deviation, variance and standard deviation Quantitative Methods

A sample statistic is the matching value computed from the sample, such as X̄ or s. The statistic is the estimate; the parameter is what you want to know.

Sampling methods and sampling error Quantitative Methods

Sample variance measures spread around the mean in squared units; its square root is the standard deviation. Covariance measures whether two returns tend to be on the same side of their own means at the same time.

Portfolio variance, covariance and correlation Portfolio Construction

Sample-size neglect treats a small sample as if it described the whole population. The fix is to compare the group the investment looks like with the group it most often turns out to belong to, then gather base-rate data or a wider sample before deciding.

Cognitive errors: belief perseverance and information processing Portfolio Construction

The sample mean is therefore a random variable, and the pattern of values it takes across all possible samples of the same size is its sampling distribution.

The central limit theorem and the standard error of the mean Quantitative Methods

Sampling error is the gap between the statistic and the parameter it estimates. It arises because you looked at only part of the population, so it is the price paid for saving time and money.

Sampling methods and sampling error Quantitative Methods

The full set of rules for drawing the sample is the sampling plan. Its quality decides how far the statistic can be trusted.

Sampling methods and sampling error Quantitative Methods

The rule that matters is sampling with replacement: each item drawn goes back into the pool before the next draw, so it can be drawn again.

Bootstrapping: simulating from the data you have Quantitative Methods

Non-cooperative ones are limits on access to local currency markets, restrictions on foreign investment, and sanctions, which restrict trade or financial dealings with a target to influence its behavior.

Tools of geopolitics: national security, economic and financial Economics

An obligation satisfied over time produces revenue gradually as the work is done. One satisfied at a single moment produces it all at once.

Revenue recognition: the five-step model Financial Statement Analysis

Savings deposits are held for non-transactional purposes and often have a stated term. A deposit with a set maturity and interest rate is a certificate of deposit (CD).

How banks fund themselves short term Fixed Income

At a constant yield, Macaulay duration drifts down smoothly between coupon dates and jumps up just after each coupon is paid. This is the saw-tooth pattern.

What makes duration higher or lower Fixed Income

It is the most common way investors take part. At the AGM, say on pay votes on executive pay are non-binding.

Corporate governance mechanisms Corporate Finance

The logistic distribution is a symmetric bell with an S-shaped cumulative curve. It has a location parameter μ, which is its mean, and a scale parameter s.

Continuous distributions: uniform, normal and logistic Quantitative Methods

A scatter plot puts one variable on each axis, one dot per pair of observations. An upward drift means they tend to rise together, a downward drift means they move opposite ways, and a shapeless cloud means no clear pattern.

Covariance and correlation Quantitative Methods

Laying out the outcomes as a short table of scenarios, such as recession, normal and boom, is scenario analysis.

Unconditional expected value, variance and standard deviation Quantitative Methods

In scenario evaluation (calculation engine) the formulas from the setup run on every scenario and produce one output each.

Historical, bootstrap or Monte Carlo: the four-step engine Quantitative Methods

Scenario generation produces the sets of input values, often thousands of them. In scenario evaluation (calculation engine) the formulas from the setup run on every scenario and produce one output each.

Historical, bootstrap or Monte Carlo: the four-step engine Quantitative Methods

Multiply each position by the percentage change that day's log return implies, and add the positions. The result is that day's scenario profit and loss, written P/L.

Historical simulation and historical value at risk Quantitative Methods

When the forecast is a set of scenarios with probabilities, find the portfolio's return in each scenario first, then its probability-weighted mean and variance. That gives the scenario-based portfolio return and variance.

Portfolio expected return, variance and the role of correlation Quantitative Methods

Acquisitions and disposals are a scope change. They are forecast separately and are not part of organic growth.

Building a sales-based pro forma income statement Financial Statement Analysis

How to query data. Big data need applications that can examine large quantities and locate requested content.

Data science: processing, visualization and text analytics Quantitative Methods

A seasoned equity offering, or follow-on offering, sells more shares of a company that is already listed. If the company issues new shares, it is a dilutive (primary) follow-on offering: each existing share's claim on earnings and assets shrinks.

Primary and secondary equity markets: issuing shares and why trading matters Equities

Second lien debt has an interest in the same pledged assets, but ranks below first lien debt in both collateral protection and payment priority.

Seniority, recovery rates and notching Fixed Income

In the secondary bond markets investors trade existing bonds with each other. A sale can be a public offering, open to anyone, or a private placement.

Primary and secondary bond markets vs equity markets Fixed Income

Best practice: a secondary contact. Ask the client at account opening to name one, such as a trusted family member or a legal adviser, so you know whom to approach if concerns arise.

Standard III(E): Preservation of Confidentiality Ethical and Professional Standards

The secondary equity market is where those listed shares trade afterwards.

Primary and secondary equity markets: issuing shares and why trading matters Equities

Secondary liquidity sources are used when the primary sources are not enough. They cost more and often signal a deteriorating position: suspending or cutting dividends, delaying or cutting capital spending (which can damage long-term value), issuing equity (dilution), renegotiating contracts (refinancing short-term debt into long-term…

Liquidity sources and liquidity ratios Corporate Finance

A secondary sale is a sale to another private equity firm or group of financial buyers. It becomes a clean exit when there is no strategic buyer or open IPO window.

How private equity exits: trade sale, IPO, SPAC and more Alternative Investments

Secondary-stage investments are existing, fully operating assets that need no further investment or development over the holding period.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

A sector index holds companies in one business. Sector indexes exist because broad cap-weighted indexes are dominated by the largest companies (often those whose shares have risen most) and by concentrated industries.

Types of equity indexes Equities

Sector risk (industry risk) is the possibility that forces particular to one sector affect all firms in it. Managers often use simple sector groupings for this, for example in sector rotation strategies.

Macro and micro risk and the risk-return trade-off Quantitative Methods

An unsecured bond relies on operating cash flows alone, which is typical for higher-quality corporate issuers. A secured bond adds a legal claim on specific assets.

Bond indentures and covenants Fixed Income

They need a lot of financing, and because their assets can be pledged, much of it is cheap: secured debt is backed by specific assets as collateral, and leases give the company the use of an asset in return for lease payments, much like a loan.

Factors affecting capital structure and the cost of capital Corporate Finance

Companies without enough credit quality for unsecured loans arrange a secured loan, also called an asset-based loan.

Short-term funding for companies: credit lines, secured loans and commercial paper Fixed Income

Securities regulators, such as the Securities and Exchange Commission in the United States, require listed companies to prepare reports under specified standards and to file them.

Regulatory filings, notes, MD&A and the audit report Financial Statement Analysis

Down the chain. The materials travel from the company through the securities depository and the custodian to a shareholder voting service and on to the beneficial owner.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Securitization pools cash-generating assets such as loans or receivables, transfers them to a separate legal entity, and has that entity issue securities that are paid from the pool's interest and principal.

Why securitize? Benefits for issuers, investors and markets Fixed Income

The pool is called the securitized assets, and is also known as the collateral or the reference portfolio. Investors end up with a direct link to the borrowers.

Why securitize? Benefits for issuers, investors and markets Fixed Income

Security analysis. Analysts use their knowledge of companies and industries to assess the cash flows each security will produce, put a value on it and find preferred investments.

The three steps of the portfolio management process Portfolio Construction

The fitted line is the security characteristic line, and its slope is beta. A common choice is 60 monthly returns against a broad index.

How to calculate and interpret beta Portfolio Construction

A security market index is a group of securities with a rule for combining them into one number, so that the number stands for the performance of a market.

Index value, price return and total return Quantitative Methods

The security market line (SML) is the CAPM drawn on a chart: beta on the horizontal axis, expected return on the vertical axis.

The CAPM and the security market line Portfolio Construction

Plotted against beta, the equation is a straight line called the security market line (SML): intercept $r_f$, slope the MRP.

Estimating the cost of equity with the CAPM and the market model Equities

Trying to beat an asset class's benchmark by choosing securities with higher expected returns, for example holding more of a stock than the benchmark does and funding it by selling another.

Asset classes, strategic asset allocation and portfolio construction Portfolio Construction

A security token digitizes ownership rights in a security. Holding it on a ledger can speed up post-trade processing, settlement and custody, and a single ledger removes the need to reconcile records.

Distributed ledgers and blockchain: how digital assets are recorded Alternative Investments

Seed capital supports product development and marketing, including market research. It is the first stage at which VC funds usually invest.

Private equity strategies: buyouts, venture capital and growth equity Alternative Investments

Companies report material operating segments separately, and segment revenue growth lets each one keep its own pace.

Revenue models: historical, bottom-up and top-down Equities

The segment-weighted peer multiple weights each segment's peer multiple by the segment's share of revenue, operating income or assets.

Choosing a peer group for multiples Equities

Are they particular types, or segmenting groups of customers by attributes such as geography, demographics, behavior, preferences, income, affinity for technology or self-image?

Business model features Corporate Finance

Hedge fund indexes suffer from selection bias: the funds in the database are not a fair draw of all funds.

Fund of funds fees, survivorship bias and backfill bias Alternative Investments

Because every draw faces the same n observations, each one has the same selection probability 1/n on every draw, whatever was drawn before.

Bootstrapping: simulating from the data you have Quantitative Methods

Selective performance reporting picks the period, benchmark or ratio that flatters the result. It is a performance-presentation problem as much as a statistical one: see Standard III(D), Performance Presentation for the duty to present performance fairly and completely.

P-values, p-hacking and critical values from software Quantitative Methods

Taking credit for successes and blaming others, or bad luck, for failures.

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

Self-control bias is failing to act on long-term goals because of short-term satisfaction. It is linked to hyperbolic discounting, a preference for a small reward now over a larger one later.

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

Self-dealing is exploiting company resources for personal benefit: excessive perks (a company-paid holiday home, a chauffeur for the family), related-party contracts or outright misappropriation.

Principal-agent problems and stakeholder conflicts Corporate Finance

Self-insurance is bearing a risk that is undesirable but too costly to remove by outside means. It may simply mean bearing the risk, or setting up a reserve.

Modifying risk: prevention, acceptance, transfer and shifting Portfolio Construction

Monitors conduct. Members must be accountable. Professional bodies use self-regulation: they monitor members and impose sanctions.

How professions build trust, and professionalism in investment management Ethical and Professional Standards

General language. The model first reads a huge body of general text to learn grammar, meaning and the patterns of language.

Large language models and generative AI in finance Quantitative Methods

The sell side is the large dealing banks that make markets, quoting prices to clients and earning the bid-offer spread.

The foreign exchange market and who trades in it Economics

A sell-side research report is written for wider distribution among external users, often by the firm that underwrites a company's securities.

Sell-side, buy-side and activist short-seller research Equities

The three main parties are the seller of the collateral (also called the depositor), the SPE and the servicer.

The securitization process and its parties Fixed Income

If the receivable is more than the asset's carrying amount, the lessor books the difference as selling profit on day one.

Lessor accounting: finance vs operating leases Financial Statement Analysis

The semi-variance is the variance of the observations below the mean; its square root is the semi-deviation.

Semi-deviation, downside deviation and the coefficient of variation Quantitative Methods

Semi-structured data mix both. They do not fit a table, yet they can be tagged, stored and organized: web pages in HyperText Markup Language (HTML) code, news articles tagged by company and date.

Big data, the four Vs and alternative data Quantitative Methods

The semi-variance is the variance of the observations below the mean; its square root is the semi-deviation.

Semi-deviation, downside deviation and the coefficient of variation Quantitative Methods

To compare with a bond that pays semiannual coupons, put the rate on a semiannual bond basis. Use the periodicity formula from the fixed-rate yields lesson, taking $m = 365/Days$ and $n = 2$.

Comparing money market instruments: bond equivalent yield Fixed Income

Periodicity usually matches the coupon frequency, which is 2 for most US and UK bonds. A semiannual bond basis yield is the yield per half-year times 2.

Periodicity: converting yields between compounding frequencies Fixed Income

A semiannual bond basis yield is the yield per half-year times 2. You will also see it called the semiannual bond equivalent yield.

Periodicity: converting yields between compounding frequencies Fixed Income

Among unsecured lenders, senior unsecured debt is the highest-ranked and the most common corporate bond. Subordinated debt and junior subordinated debt rank below it and often recover little or nothing.

Seniority, recovery rates and notching Fixed Income

In a senior/subordinated structure, the senior classes are paid first and the subordinated (junior) classes absorb losses first.

Why securitize? Benefits for issuers, investors and markets Fixed Income

Seniority is a claim's priority in bankruptcy or liquidation. Senior debt is paid before subordinated debt (also called junior debt), which is paid only once senior claims are satisfied.

The features of a bond Fixed Income

A seniority ranking is the order in which a defaulted company's creditors are paid. The most senior debt has the first claim on the issuer's cash flows and assets, and the level of seniority drives how much an investor gets back.

Seniority, recovery rates and notching Fixed Income

Sensitivity analysis is different. It changes one or more chosen inputs while holding all the others constant, to see how much the value depends on them.

Scenario analysis with probability weights Equities

With $g$ = 4%, a required return of 8% gives 65.00, 9% gives 52.00 and 10% gives 43.33. This is the sensitivity to g: always test the inputs before trusting a constant growth value.

Constant growth models, implied growth and the sustainable growth rate Equities

Because the terminal value dominates, small changes to $n$, $g_l$ or $r_e$ move the result a lot. This is the sensitivity to n, g_l and r_e.

Two-stage (multistage) growth models Equities

Tasks include translation, speech recognition, text mining, sentiment analysis and topic analysis.

Data science: processing, visualization and text analytics Quantitative Methods

A separate account lets an institution use an adviser but keep control of the timing and value of purchases and sales.

Real estate: features and ways to invest (direct, REITs, funds) Alternative Investments

A separately managed account (SMA) is managed exclusively for one individual or institution, which owns the assets directly.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

Commodity trading advisers (CTAs) run managed futures strategies that take directional positions based on technical and fundamental signals.

Commodities: sectors, ways to invest, contango and backwardation Alternative Investments

In a sequential-pay structure, all principal from the pool, scheduled and prepaid, goes first to Tranche A until it is retired, then to Tranche B, then to Tranche C.

Prepayment risk and time tranching Fixed Income

Lesson 1 introduced the sequential-pay tranche: principal goes to A until it is retired, then to B, then to C.

Mortgage pass-throughs and CMOs Fixed Income

"special items" that appear period after period. Focus on net income over long periods instead.

Warning signs of earnings manipulation Financial Statement Analysis

An interest rate swap is, economically, a series of forward contracts on the market reference rate (MRR): on each payment date the fixed-rate payer settles the gap between the MRR and the fixed rate, on a notional that never changes hands.

A swap as a series of forwards: what is the same and what is different Derivatives

Service cost goes to profit. It is the present value of the extra pension the employees earned by working one more year (current service cost).

Defined contribution vs defined benefit pension plans Financial Statement Analysis

The service period, usually from grant to vesting, is when the employee earns it. On the vesting date the employee can first exercise.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

The TAM narrowed by the constraints of the company's focus (what it chooses to sell) and its geographic presence (where it sells).

Company life cycle and the addressable market Equities

Customers keep making monthly payments, collected by the servicer (here Vireo's finance arm).

The securitization process and its parties Fixed Income

When it closes, and how it is paid.

What a derivative is Derivatives

At the end of every trading day the clearinghouse takes an average of the final prices of the day and calls it the settlement price.

Futures contracts, daily settlement and margin calls Derivatives

One party pays or delivers and the other does not. The loss is driven by the timing of payments, often across time zones. Also called Herstatt risk.

Financial and non-financial risks, and how they interact Portfolio Construction

In setup and parameterization you define the goal and the output you want, choose the inputs and their parameters, and write the calculations that link inputs to output.

Historical, bootstrap or Monte Carlo: the four-step engine Quantitative Methods

When neither sets a period, CFA Institute recommends keeping records for at least seven years: the seven-year guideline.

Standard V(C): Record Retention Ethical and Professional Standards

SG&A expenses are the other main operating cost. They have a looser link with sales than COGS does, because they mix fixed and variable costs.

Expense models: margins, itemization and operating leverage Equities

The SG&A forecast works the same way. It is often modeled as a percentage of revenue, or as last year's amount grown at a chosen rate when the costs are mainly salaries and rent.

Building a sales-based pro forma income statement Financial Statement Analysis

A bond's sensitivity to these changes in shape is its shaping risk. Effective duration cannot see it, because it assumes one parallel move.

Key rate duration Fixed Income

Dividends have trended down as large US companies switched to share buybacks, in which a company repurchases its own shares.

Long-run asset class returns and their components Quantitative Methods

In a dual-class structure one share class (Class A) carries one vote per share and is publicly traded, while another (Class B) carries several votes per share and is held only by insiders or founders.

Principal-agent problems and stakeholder conflicts Corporate Finance

A reverse stock split (also called a share consolidation) does the opposite, as in a 1-for-4 reverse split. None of these three moves cash or changes the company's value.

Dividends, share repurchases, stock splits and the dividend timetable Equities

The other financing lines: debt issued and repaid (shown separately), and share issuance less buybacks. Cash flow from financing activities is their total.

Investing and financing cash flows: asset sales, debt and dividends Financial Statement Analysis

The top-down approach sizes the company's future market and its likely share of it. Lesson 2 defined the three markets; a top-down forecast projects all three and then the company's share of the obtainable market.

Revenue drivers and pricing power Equities

A share repurchase, or buyback, is a transaction in which a company uses cash to buy back its own shares. Unlike a split, it moves cash.

Dividends, share repurchases, stock splits and the dividend timetable Equities

Share repurchase effects show up in book value first. If Ostra buys back 2 million shares at EUR 22.00 on the last day of its year, book equity falls by the cash paid, 2 × 22.00 = EUR 44 million (680 → 636).

Book value, market capitalization and enterprise value Equities

Share-based compensation pays staff in shares or in cash tied to the share price, which aligns their interests with shareholders and needs no cash up front.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

Owner–manager separation means the people who own the corporation need not run it. Shareholders elect a board of directors.

Key features of corporate issuers Corporate Finance

Shareholder activism is an investor strategy to compel a company to act in a desired way. The main aim is usually to raise value quickly, though some campaigns pursue social, political or environmental goals.

Corporate governance mechanisms Corporate Finance

A shareholder derivative lawsuit is brought by a shareholder on the company's behalf against the board, management or a controlling shareholder who has failed to act in the company's interest.

Corporate governance mechanisms Corporate Finance

A shareholder proposal comes from an investor. It asks, or requires, the company or its board to take a particular action, often on environmental or social policy.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

A shareholder rights plan (poison pill) lets other shareholders buy extra shares at a discount if one holder passes a set ownership percentage.

Corporate governance mechanisms Corporate Finance

The shareholder theory of corporate governance says other groups matter only to the extent they affect shareholder value.

Corporate stakeholders and their interests Corporate Finance

Down the chain. The materials travel from the company through the securities depository and the custodian to a shareholder voting service and on to the beneficial owner.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Eligibility. Only shareholders of record, or holders confirmed by the depository or custodian, on the record date may vote.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Shares outstanding include shares held privately or by management, such as restricted stock, as well as freely traded ones.

Book value, market capitalization and enterprise value Equities

The shares outstanding forecast starts with the weighted average basic count and adds the dilution from options and convertibles.

Building a sales-based pro forma income statement Financial Statement Analysis

The Sharpe ratio is the portfolio's excess return per unit of total risk. It is the slope of the capital allocation line through the portfolio.

Sharpe ratio, Treynor ratio, M² and Jensen's alpha Portfolio Construction

Adding hedge funds to a traditional 60/40 portfolio has typically lowered portfolio volatility and raised the Sharpe ratio. This is the Sharpe ratio improvement investors seek, but it varies over time, so manager due diligence still matters.

Hedge fund returns: market beta, strategy beta, alpha and diversification Alternative Investments

Frequent investment-grade issuers use a shelf registration, one broad offering document kept up to date that covers future issues, so they can move when markets are favorable.

Primary and secondary bond markets vs equity markets Fixed Income

A short biased fund holds mainly short positions in overvalued shares, often after forensic accounting work that exposes hidden flaws.

Hedge fund strategies: equity, event-driven, relative value, opportunistic Alternative Investments

The seller holds the short forward: a position that gains when the underlying falls.

Forward contracts: payoff for the long and the short Derivatives

The buyer of a derivative holds a long position: its value moves like owning the underlying. The seller holds a short position, with exposure like a short sale.

What a derivative is Derivatives

Easy shorts. Without a liquid derivative market, taking a short position needs a lender of the asset. A derivative sells exposure directly, so short positions are cheap to take.

Why use derivatives: the four benefits Derivatives

Short selling means borrowing a security and selling it, to buy it back later, which gives a negative weight. With no short selling, k can only lie between the lowest and the highest expected return of the assets.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

Each plant size has its own short-run cost curve, a short-run average total cost curve shaped like a smile. When the firm can choose its plant, it picks the size with the lowest cost for the output it wants.

Economies and diseconomies of scale Economics

All of these are immediate and obvious, while the long-term considerations (your integrity, the integrity of the market, your reputation) feel distant. That is the short-term focus problem: pressure narrows attention to the near term, so long-term costs to clients, the firm and yourself get ignored or minimized, and ethical lapses become…

Challenges to ethical behavior, and ethical vs legal standards Ethical and Professional Standards

Short-term funding strategy means deciding when to borrow and in what form. The aim is flexibility: a company that fails to explore its options or to use the cheaper ones is more likely to face high financing costs or even distress, where it cannot borrow from any source.

Cost of trade credit Corporate Finance

Short-term government bills, the usual stand-in for the risk-free rate, earned about the rate of inflation. Their real return, the return after inflation, was close to zero.

Long-run asset class returns and their components Quantitative Methods

The simplest case is the two-stage growth model. It gives the company two growth rates: a short-term growth rate g_s for a finite number of periods $n$, and a long-term growth rate g_l forever after.

Two-stage (multistage) growth models Equities

The short-term lease exemption covers terms of 12 months or less under both IFRS and US GAAP. The low-value asset exemption covers items worth about USD 5,000 or less when new, such as laptops and small office equipment, and exists only under IFRS.

Leases: finance vs operating and lessee accounting (IFRS vs US GAAP) Financial Statement Analysis

In the short run the firm should stop when revenue does not even cover its total variable cost (TVC), that is when price is below average variable cost at every output. The shutdown point is the minimum of the AVC curve.

Breakeven and shutdown points Economics

A side letter is a separate document between the GP and one or more LPs that overrides or adds to the LPA for them.

Ownership structures: general and limited partners Alternative Investments

Because outsiders watch what managers do for clues, financing choices work as signaling. The theory ranks sources by how much information they reveal, from least to most.

Optimal and target capital structure, pecking order and agency costs Corporate Finance

A signpost is an indicator, market level, data point or event showing that a risk is becoming more or less likely.

How geopolitical risk affects investments Economics

The most important test is not the industry label or the size but peers with similar risk, growth and cash flow.

Choosing a peer group for multiples Equities

A company with a simple capital structure has no securities that could turn into common shares (only common and non-convertible preferred), so its diluted EPS equals its basic EPS.

Basic EPS and the weighted average number of shares Financial Statement Analysis

A simple linear regression explains the variation in one variable using one other variable and a straight line.

The regression line: slope, intercept and least squares Quantitative Methods

In simple random sampling every member of the population has the same chance of selection, as if names were drawn from a hat.

Sampling methods and sampling error Quantitative Methods

Simple yield fixes that crudely. It spreads the gain or loss to par evenly over the years left, like straight-line depreciation, and adds it to the coupon.

Current yield, simple yield and yield conventions Fixed Income

Simulated results (model or back-tested returns) are not actual client returns. They may be shown when clearly labeled as simulated and explained.

Standard III(D): Performance Presentation Ethical and Professional Standards

Simulation is computer-generated sensitivity or scenario analysis. Each driver is given a probability distribution, and many runs give a distribution of outcomes.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

A standard swap carries one single fixed rate, the swap rate, for every period. That one difference explains almost everything on the exam.

A swap as a series of forwards: what is the same and what is different Derivatives

The single lessee model treats every lease like a finance lease. The ROU asset is depreciated, usually straight-line over the lease term, and interest is charged on the liability.

Leases: finance vs operating and lessee accounting (IFRS vs US GAAP) Financial Statement Analysis

A model with one risk factor is a single-factor model. The CAPM is the best-known one.

Arbitrage pricing theory and multi-factor models Equities

The simplest case has one factor. The single-index model uses the market as the only factor.

Systematic vs nonsystematic risk and return-generating models Portfolio Construction

A single-price auction (uniform price) charges every winner the price at the cut-off yield, and the bonds carry one coupon.

Government bond auctions and trading vs corporate bonds Fixed Income

A sinking fund is the issuer's plan to retire a bond's principal on a schedule. The issuer may direct the trustee to redeem a set amount of bonds chosen at random, or it may buy bonds back at a fixed price.

Bullet, amortizing and sinking fund bonds Fixed Income

Situational influences are external factors, such as environment and culture, that shape thinking and behavior.

Challenges to ethical behavior, and ethical vs legal standards Ethical and Professional Standards

The six-step valuation process runs from the historical statements to a value for the equity.

From the forecast model to an equity value Equities

Geographic reach. A size cut-off can stand in for it: smaller firms often sell in one country only.

Choosing a peer group for multiples Equities

The size factor, small minus big (SMB), is long small market-capitalization stocks and short large ones.

Arbitrage pricing theory and multi-factor models Equities

Shares: the market risk premium (the equity market over the risk-free asset), the size risk premium (small companies minus large ones) and the value risk premium (companies with a high book-to-market ratio minus those with a low one).

Required return: risk-free rate, inflation and risk premia Quantitative Methods

A broad-based index holds a market's largest listed firms and is usually split into size tiers: large, mid and small cap.

Types of equity indexes Equities

A timing option gives up near-term returns in the hope of better information; investments can also be sequenced so that one project creates the option for the next. A sizing option changes the scale after the investment.

Real options Corporate Finance

Skewness restores it: it measures how lopsided a distribution is around its mean. A distribution that is not symmetric is skewed.

Skewness and kurtosis Quantitative Methods

A skewed distribution of multiples has a few very high values that pull the mean well above the median (positive skew).

Valuing with multiples: comparables and forecasted fundamentals Equities

Skewness is asymmetry. A distribution is negatively (left) skewed when the long tail is on the left, with most outcomes bunched to the right.

How the major asset classes compare on return and risk Portfolio Construction

The slope as the variable component, b, estimates how much the expense moves per unit of revenue change. Use changes (absolute or percentage), never levels, because regressing levels on levels can suggest a relationship that is not there.

Expense models: margins, itemization and operating leverage Equities

The regression coefficients are the intercept, $b_0$, and the slope coefficient, $b_1$. The error term, $\varepsilon_i$, is everything about $Y_i$ that the line does not capture.

The regression line: slope, intercept and least squares Quantitative Methods

The key feature is the slow supply response: producers cannot change output quickly. Farmers need at least a growing season, and new mines or oil infrastructure can take years.

Natural resources: risk, return, inflation hedging and diversification Alternative Investments

At its widest, then narrows (peak)

The business cycle and its four phases Economics

A small country is a price taker in the world market for a good: its trade cannot move the world price. It has nothing to do with area, population or gross domestic product (GDP).

Tariffs, quotas, export subsidies and their welfare effects Economics

Small-cap equities, the shares of smaller companies, earned slightly less than large caps over that sample. The small-cap premium, the extra return small caps sometimes earn over large caps, has appeared in some periods and looks to be shrinking over time.

Long-run asset class returns and their components Quantitative Methods

Small-cap equities, the shares of smaller companies, earned slightly less than large caps over that sample. The small-cap premium, the extra return small caps sometimes earn over large caps, has appeared in some periods and looks to be shrinking over time.

Long-run asset class returns and their components Quantitative Methods

Smart beta sits in between: it uses simple, transparent, rules-based strategies built on factors such as size, value, momentum or dividends.

The asset management industry Portfolio Construction

Programmable coins like Ether are also called smart coins, because they can run smart contracts, and they can be used for more than storing value.

How digital assets differ from stocks, bonds and currencies Alternative Investments

Smart contracts are programs stored on the ledger that carry out themselves when pre-agreed conditions are met.

Distributed ledgers and blockchain: how digital assets are recorded Alternative Investments

Before the 2008 to 2009 crisis, private equity firms did not necessarily mark investments to market unless a liquidity event occurred, and even now marks lag because the assets are illiquid. These smoothed returns understate volatility and understate correlation with other investments, so data need adjusting to measure the benefits…

Private capital in a portfolio: risk, return, vintage years and diversification Alternative Investments

Social factors concern people and relationships: customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights and labor standards.

ESG factors investors consider Corporate Finance

Social influences are culture, consumer trends, demographics, lifestyles and attitudes.

PESTLE and the innovation matrix Equities

Social infrastructure investments serve human activity: educational, health care, social housing and correctional facilities, and in some countries government and municipal buildings.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

The Standard covers written, oral and electronic messages, including social media, and also what you leave out.

Standard I(C): Misrepresentation Ethical and Professional Standards

Social media accounts raise two issues. Messages that could reach current clients must follow the employer's policy on announcing a departure.

Standard IV(A): Loyalty (to employers) Ethical and Professional Standards

The practice of using those commissions to buy research or other services is called soft commissions (soft dollars).

Standard III(A): Loyalty, Prudence, and Care Ethical and Professional Standards

Soft commodities are agricultural products such as corn and cattle. Hard commodities are natural resources such as crude oil and metals.

What derivatives are written on: the main underlyings Derivatives

With a soft hurdle rate, once the fund clears the hurdle the fee applies to the whole return. A catch-up clause is how a soft hurdle works in the cash flow: LPs get 100% of distributions until the hurdle, then the GP gets 100% until it holds its full share of the profit so far, then the profit is split (for example 80/20).

Fees and waterfalls: hurdle, catch-up, high-water mark, clawback Alternative Investments

A soft lockup allows early redemption for a fee, normally paid to the fund rather than the manager, to protect the investors who stay.

What a hedge fund is, and how it differs from other funds Alternative Investments

Culture and soft power. Shared history, migration ties and cultural links give countries reasons to cooperate.

Geopolitics: cooperation vs competition Economics

A soft-bullet covered bond delays default and acceleration until a new final maturity, usually up to a year after the original one.

Covered bonds Fixed Income

Software shows both: a license the customer installs and that you do not keep changing is a point in time sale, usually recognized up front, while cloud access is recognized over time. The exam labels this software license vs software as a service.

Revenue recognition: the five-step model Financial Statement Analysis

A solar ABS is backed by loans or leases for home solar systems, often to prime homeowners and sometimes secured by a junior lien on the home.

Credit card, auto loan and solar ABS Fixed Income

A sole proprietorship is the simplest form: one owner puts in the capital, makes every decision and keeps every dollar of profit.

Organizational forms of businesses Corporate Finance

solicitation of the employer's clients or prospects before you leave;.

Standard IV(A): Loyalty (to employers) Ethical and Professional Standards

Solvency (next section) is the ability to meet longer-term obligations.

Common-size balance sheets, liquidity and solvency ratios Financial Statement Analysis

The ability to meet long-term obligations. Solvency ratios come in two kinds.

Liquidity and solvency ratios: can the company pay? Financial Statement Analysis

The organization fails to survive or succeed because it runs out of cash, even though it might otherwise be solvent.

Financial and non-financial risks, and how they interact Portfolio Construction

A negative figure is a financing surplus. The sources and uses of financing follow the sign.

Asset and financing models Equities

Work through four steps in order: the big picture of sources of cash and uses of cash, then what drives each of operating, investing and financing cash flow.

Reading a cash flow statement: sources, uses and common-size Financial Statement Analysis

The sources of factors are three kinds of observed data: company stock market data (prices, returns, market values), macroeconomic data, and company accounting data (for example book values).

Arbitrage pricing theory and multi-factor models Equities

The sources of repayment vary by issuer and are a key driver of risk.

Bond indentures and covenants Fixed Income

The sovereign bond yield spread is the extra yield those bonds pay over that currency's benchmark. The equity-to-bond volatility ratio scales the bond-market risk up to equity-market risk.

Industry betas, the market risk premium and country risk Equities

sovereign debt is debt issued by a national government. What sets it apart from every private issuer is the legal power to tax economic activity in its jurisdiction.

Sovereign debt: who borrows, in what currency, for how long Fixed Income

For a sovereign it is critical because of sovereign immunity: national law limits bondholders' power to force a government into bankruptcy or liquidate its assets.

Sovereign credit analysis: qualitative factors Fixed Income

A sovereign wealth fund (SWF) is a state-owned investment fund, often funded by commodity revenue or reserves.

Types of investors, and DB vs DC pension plans Portfolio Construction

Invest national surpluses; behave like large real money funds.

The foreign exchange market and who trades in it Economics

The Spearman rank correlation coefficient is the non-parametric test of correlation (a non-parametric test assumes no distribution).

Spearman rank correlation: the non-parametric test Quantitative Methods

A repo that requires delivery of one particular security, as a short sale does, is a special trade, done at the special collateral rate.

Repurchase agreements (repos) Fixed Income

If a listed company buys it, the private firm becomes a part of a public company, usually a much bigger one. A special purpose acquisition company (SPAC) is a different route.

Public vs private companies, going public and going private Corporate Finance

It sells the pool to Vireo Ride Trust, a newly created special purpose entity (SPE), and receives cash.

The securitization process and its parties Fixed Income

The SPE is a separate legal entity, also called a special purpose vehicle, that buys the loans and issues the securities.

The special purpose entity and bankruptcy remoteness Fixed Income

Company law is not the same everywhere, but shareholders of a listed company generally get their say on the big decisions at the annual general meeting (AGM), or at a special shareholder meeting called between AGMs.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Special situations are investments in companies facing financial distress or event-related change, typically in the decline stage.

Public vs private equity: venture capital, buyouts and PIPEs Equities

The first source is exchange and specialization. Each country gets a better price for its exports, or pays less for imports than it would cost to make them at home.

Benefits and costs of international trade Economics

Specialized commodity funds bring sector expertise: private energy partnerships have private-equity-style terms and are used by institutions, and public energy funds focus on oil and gas.

Commodities: sectors, ways to invest, contango and backwardation Alternative Investments

Specialized corpora. Next it reads specialized corpora: collections of financial texts such as annual reports, disclosure statements, earnings-call transcripts and market commentary.

Large language models and generative AI in finance Quantitative Methods

They need specialized knowledge to value cash flows and risks, so investors often hold them through funds and partnerships rather than directly.

What makes an investment alternative: features and categories Alternative Investments

Specialty loans are extended to niche borrowers in specific situations. In litigation finance, for example, a specialist funder lends to a plaintiff to cover legal fees and expenses in exchange for a share of any judgment.

Private debt: direct lending, mezzanine, venture and distressed debt Alternative Investments

Each unit sold carries its own actual cost. It suits unique, high-value items such as jewelry or custom projects.

FIFO, LIFO and weighted average when prices rise or fall Financial Statement Analysis

High leverage invites speculative use: a trader can take a big position with little capital, and losses can arrive fast.

Derivative risks: leverage, basis, liquidity, counterparty and systemic Derivatives

An endowment's spending policy sets how much it pays out each year. A common design smooths the figure: spend a fixed percentage of the average value over the last three years, so a market fall does not cut the budget at once, while the real value of the fund is still protected over time.

Types of investors, and DB vs DC pension plans Portfolio Construction

A company splits a division off as a new listed company, called a spin-off.

Primary and secondary equity markets: issuing shares and why trading matters Equities

Complex or new issuers can receive split ratings. An issuer might be rated B by one agency and BB by another.

Credit ratings: uses and limitations Fixed Income

The easiest way is to divide the purchase price by the split ratio and use the end price and dividend as quoted after the split. These are split-adjusted prices.

Price return, total return and the price of a share Equities

A sponsored depositary receipt is set up with the foreign company's direct involvement. Holders have the same rights as direct owners, including the vote and the dividend, and the company must meet greater reporting requirements (in the US, registration with the Securities and Exchange Commission (SEC)).

Investing across jurisdictions: dual listings and depositary receipts Equities

Orders meant to move the bid or offer, and then cancelled (spoofing).

Standard II(B): Market Manipulation Ethical and Professional Standards

spot rates are the yields to maturity on default-free zero-coupon bonds, one for each maturity. The set of them, plotted against maturity, is the spot curve.

Spot rates and pricing a bond with the spot curve Fixed Income

The spot price is what the asset costs today. The expected future price, E(S_T), is what investors think it will be worth at T.

Cost of carry: income, storage and convenience yield Derivatives

A spot rate is the rate today for money lent from now to a given date. An implied forward rate is the rate agreed today for a loan that starts at one future date and ends at a later one, deduced from spot rates.

Cash flow additivity and implied forward rates Quantitative Methods

spot rates are the yields to maturity on default-free zero-coupon bonds, one for each maturity. The set of them, plotted against maturity, is the spot curve.

Spot rates and pricing a bond with the spot curve Fixed Income

Building spot rates from forward rates is the reverse of the calculation above.

Implied forward rates: from spot to forward and back Fixed Income

A spot transaction settles in about two business days at today's rate. An outright forward settles on a future date at a rate fixed today.

The foreign exchange market and who trades in it Economics

Because the formula is the same as for a yield change, some people call the duration used here spread duration.

Price impact of spread changes Fixed Income

Investment-grade investors, who rarely face default, worry about this spread risk: the effect on price and return when spreads change.

Price impact of spread changes Fixed Income

The curriculum shows the logic with spreadsheet simulation functions in Excel and Google Sheets. Learn which function does which job and which method uses it.

Historical, bootstrap or Monte Carlo: the four-step engine Quantitative Methods

A spurious correlation is the appearance of a relationship that is not there, or is not direct. It arises three ways: by chance in a particular data set; because both variables respond to a third one; or because two unrelated series were both multiplied or divided by the same third series, especially one that is much more volatile than…

Covariance and correlation Quantitative Methods

A stable-growth firm has roughly average market risk, a debt ratio near its industry's, a return on capital close to its weighted average cost of capital (WACC), and fewer new investment opportunities, so lower capital expenditures and a higher payout than a fast-growing firm.

Constant growth models, implied growth and the sustainable growth rate Equities

Stablecoins aim for a stable value by linking to another asset. The usual design is collateral: a reserve basket of legal tender, precious metals or other cryptocurrencies protects holders from price swings.

How digital assets differ from stocks, bonds and currencies Alternative Investments

In the Stackelberg model decisions are sequential. The leader commits to its output first, and the follower chooses after observing it.

Oligopoly pricing: kinked demand, Cournot, Nash and Stackelberg Economics

Stage risk is the risk that comes from how complete the asset is. Operating secondary-stage assets have a track record of steady, bond-like cash flows, so they carry the lowest risk and offer the lowest return.

Infrastructure risk, return and diversification Alternative Investments

Election timing. Most boards are elected all at once for a set term. In a staggered board the directors are split into groups, elected in different years, so replacing a majority takes several years.

Corporate stakeholders and their interests Corporate Finance

Staggered board elections mean only part of the board is elected each year, so shareholders cannot replace the whole board at once.

Corporate governance mechanisms Corporate Finance

Investment-grade bonds are standardized, so a frequent issuer often has several senior unsecured general obligation bonds outstanding on similar terms with different maturities. These staggered maturities reduce rollover risk, since only part of the debt comes due at once, and keep the issuer able to borrow more whenever markets are good.

Long-term funding: investment-grade vs high-yield issuers Fixed Income

A stakeholder is any individual or group with a vested interest in a company. These groups depend on the company, and the company depends on them.

Corporate stakeholders and their interests Corporate Finance

The stakeholder theory of corporate governance says governance should consider the interests of all stakeholders, for example by making environmental and social goals an explicit objective of the board and managers.

Corporate stakeholders and their interests Corporate Finance

Stakeholders are the individuals or groups who could be affected, directly or indirectly, by a decision. In investing that means far more than the client in front of you.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

A derivative can be a stand-alone derivative, its own contract, or an embedded derivative, built into another security.

What a derivative is Derivatives

Noise. There are two gauges. R-squared (R²) is the share of the stock's variation explained by the market (in a one-factor regression the correlation is √R²).

Estimating the cost of equity with the CAPM and the market model Equities

Its square root is the typical size of a miss, the standard error of the estimate, $s_e$. It is also called SEE, the standard error of the regression or the root mean square error.

The ANOVA table and the standard error of the estimate Quantitative Methods

The standard error of the forecast measures the uncertainty in predicting one new Y. It is built from the standard error of the estimate ($s_e$, also called SEE; lesson 4).

Predicting Y and building a prediction interval Quantitative Methods

Its square root, the standard deviation of the sample mean, is the standard error of the sample mean.

The central limit theorem and the standard error of the mean Quantitative Methods

The standard error of the slope coefficient falls when the residuals are small and when X is spread out widely.

Goodness of fit and testing the regression coefficients Quantitative Methods

Orders are entered in standardized lots, typically of at least 100 shares. That size is the standard lot.

Where shares trade: exchanges, off-exchange and over the counter Equities

Its skewness is 0 and its kurtosis is 3 (excess kurtosis 0). The standard normal distribution has μ = 0 and σ = 1.

Continuous distributions: uniform, normal and logistic Quantitative Methods

Standardization. Shared protocols, such as bank regulation, payment messaging and shipping container sizes, cut the cost of dealing across borders.

Geopolitics: cooperation vs competition Economics

The standardized residual (also called the Pearson residual) of each cell answers that: positive means more companies than independence predicts, negative means fewer.

Chi-square test of independence with a contingency table Quantitative Methods

Standardized statements from data vendors can hide a company's most important costs, which is the gap between standardized versus as-reported statements.

Expense models: margins, itemization and operating leverage Equities

Some communities go further and adopt standards of conduct: specific behaviors that are the minimum acceptable, which clarify the code and give a benchmark for discipline.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

The Standards of Professional Conduct turn them into specific duties, arranged under seven headings with 23 sub-sections in all.

The seven Standards of Professional Conduct at a glance Ethical and Professional Standards

A start-up company has little or no revenue, negative cash flow and few assets. Its first job is to establish a business model: build a prototype, or otherwise show it can meet a need customers have that nobody else meets.

Company life cycle and the addressable market Equities

A start-up valuation skips the near-term cash flows and focuses on the terminal value: expected revenue at the end of the horizon times a price-to-sales (P/S) terminal value multiple taken from later-stage peers, discounted at the investor's target return.

Model construction by company life cycle: from venture to decline Equities

State actors are governments, political bodies and leaders. They control national security and a country's resources.

Geopolitics: cooperation vs competition Economics

Governments sometimes create a legally separate corporation, with a board, managers and audited accounts, while keeping 100% or part of the shares. Such a state-owned enterprise may supply public goods, such as infrastructure, or run a dominant domestic industry such as energy.

Public vs private companies, going public and going private Corporate Finance

That number is the periodicity, written $m$. The stated annual rate is the periodic rate times $m$.

Periodicity: converting yields between compounding frequencies Fixed Income

The statement of cash flows shows cash received and paid over a period, grouped into operating, investing and financing activities.

What financial statement analysis is for Financial Statement Analysis

The statement of changes in equity reconciles opening equity to closing equity: profit, dividends, share issues and buybacks, and other comprehensive income.

What financial statement analysis is for Financial Statement Analysis

The statement of comprehensive income is the income statement plus other comprehensive income. It shows performance over a period.

What financial statement analysis is for Financial Statement Analysis

The statement of financial position is the balance sheet. It shows assets, liabilities and equity on one date.

What financial statement analysis is for Financial Statement Analysis

Two stages allow change within set limits, but not reinvention. These are static growth assumptions.

Where DCF and growth models break down Equities

The present value models grow a base-year cash flow at one or more growth rates, and relative valuation applies a market multiple to a base-year number. Both are quick, but both rely on static relationships among value drivers: margins, investment and payout stay as they were.

Why build a disaggregated model, and at what level of detail Equities

Does the mix change over time?

Option price bounds and replication vs forwards Derivatives

Putting the two together gives the static trade-off theory of capital structure.

Optimal and target capital structure, pecking order and agency costs Corporate Finance

Returns, monthly or more frequent, are much closer to stationary: their mean and variance stay broadly the same over time, which is what the formulas assume.

Scaling volatility over time: data frequency and the root-of-time law Quantitative Methods

A result that clears the bar is statistically significant: it is unlikely to be chance alone at the chosen level.

How a hypothesis test works: four steps from claim to decision Quantitative Methods

Status quo bias is choosing to do nothing even when a change is warranted. Positions are maintained by inertia, not by a decision.

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

The statutory tax rate is the corporate income tax rate in the country where the company is domiciled. The effective tax rate is what the company actually bears on its reported profit.

Effective, statutory and cash tax rates Financial Statement Analysis

Two common cases are steepening, where long rates rise relative to short rates (the gap between them widens), and flattening, where short rates rise relative to long rates (the gap narrows).

Key rate duration Fixed Income

Step-up bonds raise the coupon by set amounts on set dates. They protect investors against rising rates and, because the cost climbs, can encourage the issuer to call the bond (the next lesson covers calls).

Floating, step-up, inflation-linked and zero-coupon bonds Fixed Income

Stewardship is using ownership rights, including votes, to protect and enhance the value of the capital invested.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Engagement takes time and often reflects the client's interest more than the manager's, so both must agree who votes, who files shareholder proposals and who talks to management.

ESG considerations in portfolio planning and construction Portfolio Construction

A random variable is a rule that gives every outcome of an uncertain event a number. In finance it is often called a stochastic variable.

Random variables and distribution functions Quantitative Methods

Stock appreciation rights pay the increase in the share price over a base price. Phantom stock pays the value of notional shares and can be used where there is no traded stock, such as a private company or a business unit.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

A stock split or stock dividend gives shareholders more shares for the same assets, so no money comes in and nothing is time-weighted.

Basic EPS and the weighted average number of shares Financial Statement Analysis

A public (listed) company has some or all of its shares listed and traded on a stock exchange, a rules-based, open market where prices and volumes are visible.

Public vs private companies, going public and going private Corporate Finance

A stock grant gives shares outright. Restricted stock and restricted stock units (RSUs) are forfeited if the employee leaves before vesting.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

A stock mutual fund is either actively managed, with a manager picking shares to outperform, or an index fund that tracks an index.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

Stock options give the right to buy shares at a fixed exercise price, so they can expire worthless. Companies have shifted from options toward restricted stock because grants keep value as long as the share price is above zero.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

Stock ownership conflicts. The most common conflict. Beneficial ownership of a security you recommend, or that clients hold, must be disclosed.

Standard VI(A): Avoid or Disclose Conflicts Ethical and Professional Standards

Stock screening is a multistep process that narrows a universe to a small number of stocks that fit the strategy, so each can be researched in enough detail.

Sell-side, buy-side and activist short-seller research Equities

A stock split divides a share's price, so the sum of prices falls even though nothing economic has changed. To stop the index from dropping, the provider changes the divisor so that the index value is the same just after the split as just before.

Price-weighted and equal-weighted indexes Quantitative Methods

Disadvantages. Warrants, fees and other instruments dilute shareholders and raise the cost of capital. The announced equity value can differ from the true value after dilution.

How private equity exits: trade sale, IPO, SPAC and more Alternative Investments

Physical commodities add storage costs, insurance, transport and spoilage. Stocks and bonds add benefits: dividend income and coupons.

Cost of carry: income, storage and convenience yield Derivatives

An operating lease also gets an ROU asset and liability, but the income statement shows a single straight-line lease cost, part of operating expenses.

Leases: finance vs operating and lessee accounting (IFRS vs US GAAP) Financial Statement Analysis

Stranded assets are a particular transition risk: emission-intensive reserves or plants that may become uneconomic before the end of their expected life.

ESG factors investors consider Corporate Finance

Many investors write down a strategic asset allocation, also called the policy portfolio: the baseline allocation of assets to asset classes, given the client's objectives.

The investment policy statement (IPS) Portfolio Construction

The strategic asset allocation (SAA) is the set of exposures to IPS-permitted asset classes that is expected to achieve the client's long-term objectives given the risk profile and constraints.

Asset classes, strategic asset allocation and portfolio construction Portfolio Construction

A strategic default is a borrower choosing to stop paying, and let the lender foreclose, even though the borrower could keep paying.

Residential mortgage loans: the features that matter Fixed Income

A strategic investor and an activist investor may hold a significant minority or a majority and push for change through board seats, a shareholder vote or taking the company private: asset sales, combinations, cost cuts or a restructuring.

Model construction by company life cycle: from venture to decline Equities

Strategy beta is the systematic return that comes from the hedge fund's strategy applied across the market, such as merger spreads or trend following.

Hedge fund returns: market beta, strategy beta, alpha and diversification Alternative Investments

In stratified random sampling the population is divided into subpopulations (strata) by one or more criteria. A simple random sample is then drawn from each stratum, in proportion to its share of the population, and the pieces are pooled.

Sampling methods and sampling error Quantitative Methods

Street convention yields assume every cash flow arrives on its scheduled date, ignoring weekends and holidays.

Current yield, simple yield and yield conventions Fixed Income

The decision rule: reject $H_0$ if p < α; fail to reject if p ≥ α. It gives the same answer as the critical-value method, plus a measure of strength of evidence: the smaller the p-value, the stronger the evidence against $H_0$.

P-values, p-hacking and critical values from software Quantitative Methods

The strengths and weaknesses of historical simulation follow from one fact: it replays the data and nothing else.

Historical simulation and historical value at risk Quantitative Methods

When the law and the Code differ, follow the stricter one (the stricter law rule).

Standard I(A): Knowledge of the Law Ethical and Professional Standards

Zeros made by stripping the coupons and principal off a government bond are strip bonds. Analysts often restate a strip's yield on a semiannual basis so it compares with coupon bonds that pay twice a year.

Periodicity: converting yields between compounding frequencies Fixed Income

The set of them, plotted against maturity, is the spot curve. It is also called the zero curve, or the strip curve, because the coupons of a government bond can be "stripped" off and sold separately as zeros.

Spot rates and pricing a bond with the spot curve Fixed Income

Economists therefore look at the structural budget deficit (also called the cyclically adjusted deficit): the deficit that would exist if the economy were at full employment.

Fiscal stance, structural deficits and policy lags Economics

Only what is left can be passed (upstreamed) to the parent to service its debt. That puts the parent's debt in a weaker position even when both are nominally "senior unsecured", which is called structural subordination, and agencies may rate it lower.

Seniority, recovery rates and notching Fixed Income

Structured data fit rows and columns, with fields that allow comparison across records: prices, financial statements, Structured Query Language (SQL) tables, comma-separated values (CSV) files.

Big data, the four Vs and alternative data Quantitative Methods

Other asset-backed securities (ABS), mortgage-backed securities (MBS) or CDO tranches.

Collateralized debt obligations and CLOs Fixed Income

Structured notes are debt instruments with one or more embedded derivatives built to achieve an issuer's or investor's objective.

Derivative risks: leverage, basis, liquidity, counterparty and systemic Derivatives

A firm with no cost lead, no difference customers will pay for and no niche is stuck in the middle, a weak position with no clear advantage.

Competitive strategy: cost leadership, differentiation and focus Equities

Style drift is about strategy: the portfolio moves away from what it set out to be. Drift in weights can cause it, but it also happens with no portfolio drift at all, when the holdings themselves change.

Portfolio returns over time: buy-and-hold, drift and rebalancing Quantitative Methods

They are the analyst's subjective probabilities, a matter of judgment. They are unlikely to equal the true probabilities, which nobody can know.

Scenario analysis with probability weights Equities

Senior debt is paid before subordinated debt (also called junior debt), which is paid only once senior claims are satisfied.

The features of a bond Fixed Income

In the US, lenders separate prime loans from subprime loans. Prime borrowers have strong employment and credit histories, a low DTI, substantial equity and a first lien.

Residential mortgage loans: the features that matter Fixed Income

Forecast the subscribers kept and won, then the revenue each one pays.

Revenue models: historical, bottom-up and top-down Equities

A subscription model deepens differentiation: the company watches what each customer does, tailors offers and earns a steady, predictable revenue stream.

Competitive strategy: cost leadership, differentiation and focus Equities

Subscriptions deliver products, services or access to them in exchange for recurring fees. They were traditional in media and utilities and now cover application software and cloud computing.

Pricing and revenue models Corporate Finance

Suitability is measured against the client's objectives, constraints and risk tolerance, as written in the investment policy statement.

Cases on market integrity and duties to clients Ethical and Professional Standards

Sukuk are Islamic-finance securities that pay no interest. Investors instead receive rental or profit payments from assets in which they have an ownership claim, and the structure avoids financing activities that Islamic law prohibits.

Domestic, foreign and Eurobonds, and how bonds are taxed Fixed Income

Square each residual and add them up to get the sum of squares error, SSE. The OLS line is the one with the smallest SSE.

The regression line: slope, intercept and least squares Quantitative Methods

The sum of squares regression (SSR, also called the sum of squares model) measures how far the fitted values are from that mean (the explained part).

The ANOVA table and the standard error of the estimate Quantitative Methods

The sum of squares total (SST) measures how far the Y values are from their mean. The sum of squares regression (SSR, also called the sum of squares model) measures how far the fitted values are from that mean (the explained part).

The ANOVA table and the standard error of the estimate Quantitative Methods

The reason is the sunk cost logic. Some fixed costs, such as a lease that cannot be broken, are owed whether the firm produces or not.

Breakeven and shutdown points Economics

Ignore sunk costs. Money already spent (or written off), such as last year's feasibility study, cannot be recovered whatever you decide.

Capital allocation principles and pitfalls Corporate Finance

Statements that overstate your competence are not allowed, and neither are superior performance claims, whether made for charterholders in general or for you.

Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program Ethical and Professional Standards

The second is not traded: only founders, family members or other insiders hold it, and each share carries several votes. This is the superior voting share class.

Share classes and voting rights: dual class structures and differential voting shares Equities

In supervised learning, the training data carry labels, so the algorithm learns the link between inputs and a known answer, then predicts for new data.

AI and machine learning: supervised, unsupervised, reinforcement, deep Quantitative Methods

Anyone with employees under their control or influence is a supervisor for this Standard, whether or not those employees are CFA Institute members, charterholders or candidates.

Standard IV(C): Responsibilities of Supervisors Ethical and Professional Standards

Tiers. A single board is common in the US and UK. Parts of continental Europe use a two-tier structure, and some countries require it.

Corporate stakeholders and their interests Corporate Finance

Supervisory responsibility means making reasonable efforts to prevent and detect violations by people under your control.

Cases on duties to employers and investment analysis Ethical and Professional Standards

A firm's value chain is different from its supply chain, the sequence of steps involved in producing and delivering a product to the end customer, whether a single firm performs them or not.

Business model features Corporate Finance

A supply shock is, for example, a jump in energy prices. Inflation rises while output slows.

The neutral rate and the limits of monetary policy Economics

The support tranche (also called a companion tranche) takes everything the PAC does not: when prepayments run faster or slower than the band allows, the support tranche's life shrinks or stretches.

Mortgage pass-throughs and CMOs Fixed Income

Supranational issuers are owned by several sovereign governments that join to pursue a common objective, such as lending to developing countries or financing regional development.

Agencies, supranationals and local government bonds Fixed Income

supranational organizations such as the World Bank, the International Monetary Fund and regional development banks are created and supported by several sovereign governments in pursuit of a shared goal, such as economic cooperation, trade or financing for developing economies.

Agency, municipal and supranational bonds Fixed Income

A surety bond: an insurer promises to pay if a third party fails to fulfill its obligation. Used when one party bears the cost of another's non-performance, for example a contractor that does not finish the work.

Modifying risk: prevention, acceptance, transfer and shifting Portfolio Construction

With survivorship bias, the problem is that funds that do badly attract withdrawals and close, and then drop out of the database.

Fund of funds fees, survivorship bias and backfill bias Alternative Investments

Suspension removes membership and the right to use the designation for a period. Revocation ends the right to use the CFA designation for good.

How the Code and Standards are enforced: the Professional Conduct Program Ethical and Professional Standards

Many reports have a sustainability section on factors that matter to investors. Its focus varies by jurisdiction and industry.

Equity research reports: contents, ratings and price targets Equities

Sustainability-linked bonds step the coupon up if an environmental target is missed. Green bonds are different: they carry an ordinary coupon but fund projects with an environmental benefit.

Floating, step-up, inflation-linked and zero-coupon bonds Fixed Income

Results are high quality when they are sustainable earnings (they come from activities likely to recur) and give an adequate return (more than the cost of the investment, and at least the return investors expected).

Reporting quality vs earnings quality, and the quality spectrum Financial Statement Analysis

The second form uses the sustainable growth rate, the growth a firm can fund by retaining earnings at its return on equity.

Valuing with multiples: comparables and forecasted fundamentals Equities

Growth a company can fund from its own earnings depends on how much it invests and how productive that investment is. The sustainable growth rate (SGR) measures it.

Constant growth models, implied growth and the sustainable growth rate Equities

For constant growth, the sustainable growth rate of FCFF is the reinvestment rate times the return on capital.

From the forecast model to an equity value Equities

The sustainable tax rate is the reported effective rate adjusted for one-off items.

Income tax disclosures and the tax rate reconciliation Financial Statement Analysis

Better performance or extra features without changing how the product fundamentally works, usually led by incumbents for their existing or nearby customers.

PESTLE and the innovation matrix Equities

A swap is a firm commitment in which two counterparties exchange a series of cash flows in the future. Like a forward it has a start date, a maturity date and an underlying, all negotiated and written in the contract.

Interest rate swaps: fixed vs floating Derivatives

The swap as a bond portfolio view is the second way to see the same contract. The fixed-rate payer makes fixed payments, like the issuer of a fixed-rate bond, and receives floating payments, like the holder of a floating-rate note (FRN) that pays the MRR.

A swap as a series of forwards: what is the same and what is different Derivatives

The trade is first executed on a swap execution facility (SEF), a trading platform used by many dealers. The details go to the CCP, and then novation replaces the original contract with two identical contracts, each facing the CCP.

OTC vs exchange-traded derivatives and central clearing Derivatives

Convert, deposit abroad, convert back. Swap the unit of B into A at the spot rate S (S units of A), deposit at $r_A$ to get $S(1 + r_A\,\tau)$ units of A, and sell those A forward at F, which gives back $S(1 + r_A\,\tau) \div F$ units of B.

Covered interest rate parity: forward rates from interest rates Economics

They quote the spot rate and the gap between the forward and the spot, in forward points (also called swap points or pips).

Forward points, forward premiums and discounts Economics

The swap price is found by setting two present values equal.

The swap price: solving for the par swap rate Derivatives

The fixed rate is the swap rate. It stays constant for the life of the contract.

Interest rate swaps: fixed vs floating Derivatives

What changes is the swap value: what the contract would be worth if it were marked to market today. The mark-to-market (MTM) value starts at zero and then moves with interest rates and with the passing of time.

Swap value after inception: time and rate changes Derivatives

What a customer gives up to change provider: money, time, the risk of an untested supplier, the upgrades it expects from the current one.

Porter's Five Forces and economic moats Equities

A syndicate (a group of banks) usually provides them for a fee, and the borrower pays whether or not it draws.

Bond market segments, issuers and investors Fixed Income

The synthesis-of-valuation approach sets the value ranges from one or more methods beside the share's recent trading range.

Market price, intrinsic value and perceived value Equities

The first row is a synthetic share, the second a synthetic call, the third a synthetic put and the last a synthetic bond.

Building synthetic positions with put–call parity Derivatives

The first row is a synthetic share, the second a synthetic call, the third a synthetic put and the last a synthetic bond.

Building synthetic positions with put–call parity Derivatives

Credit default swaps referencing debt, not the debt itself.

Collateralized debt obligations and CLOs Fixed Income

A market value CLO pays tranches according to the market value of the portfolio. A synthetic CLO builds its pool with credit derivatives.

Collateralized debt obligations and CLOs Fixed Income

One use: train a generative model on years of market data, then have it create many synthetic data scenarios, including stressed ones that never happened, and test a trading algorithm against all of them.

Large language models and generative AI in finance Quantitative Methods

A long call plus a short put pays S_T − X, which is a long forward plus a bond paying F − X. That pair is a synthetic forward.

Put–call forward parity Derivatives

The other side is its synthetic position: a package of the other instruments that has the same payoff and, by parity, the same cost.

Building synthetic positions with put–call parity Derivatives

The synthetic protective put is a long forward, a bond paying F₀(T), and a long put. The fiduciary call is unchanged: a long call and a bond paying X.

Put–call forward parity Derivatives

The first row is a synthetic share, the second a synthetic call, the third a synthetic put and the last a synthetic bond.

Building synthetic positions with put–call parity Derivatives

The first row is a synthetic share, the second a synthetic call, the third a synthetic put and the last a synthetic bond.

Building synthetic positions with put–call parity Derivatives

In the capital asset pricing model (CAPM) the only systematic risk (risk that diversification cannot remove) is the market, and beta is the only risk measure that matters for the cost of equity.

Arbitrage pricing theory and multi-factor models Equities

Systematic sampling takes every kth member of a list until the sample is big enough. It is practical when you cannot code every member in advance, and the result should be approximately random, unless the list hides a repeating pattern that lines up with k.

Sampling methods and sampling error Quantitative Methods

Systemic risk is the risk that excessive risk taking and leverage in derivative markets spread stress across the financial system.

Derivative risks: leverage, basis, liquidity, counterparty and systemic Derivatives