Remembere point for exam BY Yashraj PDF

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CFA 1st Degree Training (EBP-B5-FIN-006-E-L-BOD CFA) - 2017-S2 (Toutes sections)...

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Equity Investments

Derivatives

1. Remember that technical analysis is a direct violation 1. Always remember, FRA payments are discounted of weak-form EMH and Fundamental analysis is a using the FLOATING rate. Interest rate options and direct violation of semi-strong from EMH Swaps payments are NOT discounted. 2. Concepts that need to be crystal clear before entering the exam hall: The difference in FCFE and FCFF and which discount rate is applicable under both of them is of utmost importance.

2. Don’t get confused because of the name, a Eurodollar deposit is a Dollar denominated account operating ANYWHERE outside the United States.

3. Don’t forget to discount the terminal value while calculating the intrinsic value of a stock in the exam. This is a general mistake which students do.

3. Remember the shortcut: Because Eurodollar contracts are highly standardized, its structure works out in a way that if interest rates change by 1bp, the change in contract value is $25. So in your exam, if you see a question where there is a 3bps change in yield, the contract value changes by 3*25 = $75.

4. Never confuse between the required rate of return and the growth rate in the Gordon Growth Model Equation.

4. Don’t get confused between margins in Derivatives and Equity! In case your account balance drops below the maintenance margin, in Derivative, you need to deposit enough money to bring it back to the INITIAL margin

5. Enterprise Value (EV) = Market Cap (of Equity) + Market Value of Debt – Cash and Cash Equivalents (including marketable securities)

5. Remember this to eliminate option in the exam: The Upper and Lower bounds for a European and American CALL Option are IDENTICAL. The Upper and Lower bounds for a European and American PUT Options are DIFFERENT. 6. Don’t forget the important characteristics of these two swaps: for a currency swap, there is an actual loan being made in the two currencies and the payments are NEVER netted. In an equity swap, since equity can have a negative return, it is possible that the fixed payer act

Quantitative analysis

Alternative Investment

1. Remember the rule: AM > GM > HM

1. NEVER consider depreciation and financing costs for calculating the NOI. Also, the only taxes relevant for this calculation are property taxes (not the investor's tax).

2. Don't forget that sample mean, and population mean, and sample standard deviation and population standard deviation have different formulas (denominator: sample uses n-1 vs. n of population)

2. Between MF's and ETFs, ETF's are clearly the best (due to in-kind creation and redemption). Hence, don't waste too much time studying the disadvantages of ETFs.

3. Whenever risk or volatility is mentioned in a question to be 6% it stands for "standard deviation" of the returns and not the Variance.

3. Be sure to remember the advantages and disadvantages of High Watermark Provision and Fund of Funds. They are highly testable.

4. Some candidates tend to forget that the formula below will change correlation is given instead of covariance is given in question. In that case Cov (A, B) should be replaced with Corr (A,B)* A* B

4. The Hedge Fund Return Reporting Biases are very important. Understand the biases through diagrams (stick figures for fund managers, squares for funds, and graph depicting fund performances).

5. Whenever you get a problem on normal distribution, draw a rough sketch of it in your paper and shade the relevant area. It will ensure that you will not get it wrong.

5. Remember the three components of Total Return on a Commodities Investment = Collateral Yield +Price Return + Roll Yield

6. Remember, a binomial distribution is a series obtained by 6. Don't confuse between the two! In Contango, the Roll independent Bernoulli trials Yield is Negative. In Backwardation, the Roll Yield is Positive. 7. A trick to remember the formula for the Safety-First Ratio. It is like Sharpe ratio, just that it measures excess returns over a threshold return

7. Unlike Equity Funds, a Commodity Index Strategy is NOT a passive strategy. The index comprises of not just Commodities but their Futures and Collateral. It is active because you need to roll over futures positions and reinvest in T-Bills (collateral) that have matured.

Fixed Income

Portfolio Management

1. The Current Yield of a bond DOES NOT CHANGE with frequency of coupon payments. It is same for annual pay, semi-annual pay, quarterly pay or any other frequency coupon payments.

1. Don't get confused between the different market lines! The CML uses Total Risk on the X-axis and SML uses Systematic Risk on the X-axis.

2. While calculating Forward Rates from Spot Rates or Spot Rates from Forward Rates always draw the timeline with the cash flows for valuing fixed income securities. There is less scope of error when you visually understand what needs to be calculated.<

2. Remember that a risk free asset has a Beta of 0 and the market has a Beta of 1.

3. While asked to find the YTM of a bond, don't forget to adjust the outcome of I/Y on calculator with frequency of coupon payments. If you are calculating YTM using semiannual coupon payments, multiply the outcome of I/Y * 2.

3. Don't get confused between Market Risk Premium (RmRf) and Equity Risk Premium which is Beta* (Rm-Rf)

4. PMT=0 always for Zero coupon bonds. If you don’t explicitly press PMT=0, then the calculator will take the PMT value of your previous TVM calculation.

4. If you were to decide which fund is performing better, the result using M-Squared and Sharpe Ratio will be exactly the same - They use the same risk factor - Total Risk

5. While calculating the Yield to Call (YTC) or Yield to Put (YTP), FV changes to the Call Price or Put Price and not PV, and N changes to the Time till the call date.

5. If you were to decide which fund is performing better, the result using Jensen's Alpha and Treynor's ratio will be exactly the same - They use the same risk factor Systematic Risk (Beta)

6. Effective Duration calculations explicitly take into account 6. Remember - investors are NEVER compensated for the a bond's option provisions such as embedded options. taking on unsystematic risk - the reason being is that they Only Callable bonds exhibit negative effective convexity and can be diversified away. it is more prominent at lower interest rates. The other methods (Macaulay & Modified) ignore the option provision completely. The Macaulay and Modified Duration of a Callable Bond are always positive since they do not factor in the option.

Fixed Income:1. 2. 3.

4. 5. 6.

The Current Yield of a bond DOES NOT CHANGE with frequency of coupon payments. It is same for annual pay, semi-annual pay, quarterly pay or any other frequency coupon payments. While calculating Forward Rates from Spot Rates or Spot Rates from Forward Rates always draw the timeline with the cash flows for valuing fixed income securities. There is less scope of error when you visually understand what needs to be calculated. While asked to find the YTM of a bond, don't forget to adjust the outcome of I/Y on calculator with frequency of coupon payments. If you are calculating YTM using semi-annual coupon payments, multiply the outcome of I/Y * 2. PMT=0 always for Zero coupon bonds. If you don’t explicitly press PMT=0, then the calculator will take the PMT value of your previous TVM calculation. While calculating the Yield to Call (YTC) or Yield to Put (YTP), FV changes to the Call Price or Put Price and not PV, and N changes to the Time till the call date. Effective Duration calculations explicitly take into account the a bond's option provisions such as embedded options. Only Callable bonds exhibit negative effective convexity and it is more prominent at lower interest rates. The other methods (Macaulay & Modified) ignore the option provision completely. The Macaulay and Modified Duration of a Callable Bond are always positive since they do not factor in the option.

Portfolio Management: 1. 2. 3. 4. 5. 6.

Don't get confused between the different market lines! The CML uses Total Risk on the X-axis and SML uses Systematic Risk on the X-axis. Remember that a risk free asset has a Beta of 0 and the market has a Beta of 1. Don't get confused between Market Risk Premium (Rm-Rf) and Equity Risk Premium which is Beta* (Rm-Rf) If you were to decide which fund is performing better, the result using M-Squared and Sharpe Ratio will be exactly the same - They use the same risk factor - Total Risk If you were to decide which fund is performing better, the result using Jensen's Alpha and Treynor's ratio will be exactly the same - They use the same risk factor - Systematic Risk (Beta) Remember - investors are NEVER compensated for taking on unsystematic risk - the reason being is that they can be diversified away....