AFA flashcards
AFA · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Code of Ethics principles
- Six principles: integrity, competence, diligence, respect, and ethical behavior toward capital markets, clients, employers, and the profession. They guide conduct beyond the specific Standards.
- Fair dealing standard
- Requires members to treat all clients fairly when disseminating recommendations or taking investment action. It does not require identical treatment when client mandates or objectives differ.
- Independence and objectivity
- Members must not accept gifts or benefits that could compromise their judgment. Employer-consented gifts must be disclosed, and modest gifts are generally acceptable.
- GIPS composite definition
- A composite groups all actual, fee-paying, discretionary portfolios managed to the same strategy. Composites must include all eligible portfolios to prevent cherry-picking.
- Accounting equation
- Assets equal liabilities plus equity. Every transaction affects at least two accounts while keeping the balance sheet identity intact.
- LIFO inflation effect
- During rising prices, LIFO produces higher cost of goods sold, lower ending inventory, lower net income, and lower taxes than FIFO.
- Capitalizing an expenditure
- Recording a cost as an asset rather than an expense. It raises current net income and assets, then lowers future income through depreciation or amortization.
- Indirect method CFO
- Starts with net income, adds non-cash charges such as depreciation, and adjusts for working capital changes. Increases in receivables or inventory reduce operating cash flow.
- Net present value rule
- Accept projects with positive NPV, computed by discounting expected cash flows at the required return and subtracting the initial outlay. NPV measures added shareholder value.
- WACC formula
- WACC equals (E/V) times cost of equity plus (D/V) times after-tax cost of debt. Weights should reflect market values and the target capital structure.
- Unlevering beta
- Unlevered beta equals levered beta divided by one plus (1 minus tax rate) times debt-to-equity. It removes financial risk so betas can be compared across capital structures.
- Cash conversion cycle
- Days inventory outstanding plus days sales outstanding minus days payables outstanding. It measures how long cash is tied up in operations.
- Gordon growth model
- P0 equals next dividend divided by required return minus growth rate. It applies only when growth is stable, perpetual, and below the required return.
- Justified P/E ratio
- Payout ratio divided by required return minus growth rate. Higher payout, faster growth, or lower required return each raise the justified multiple.
- Residual income model
- Value equals book value plus present value of expected residual income, where residual income is earnings minus required return times beginning book value.
- Enterprise value
- Market value of equity plus market value of debt minus cash and short-term investments. It approximates the total cost of acquiring the operating business.
- Modified duration
- Macaulay duration divided by one plus yield per period. It approximates the percentage price change for a small parallel shift in yields.
- Convexity adjustment
- Price change approximates minus duration times yield change plus one-half convexity times the squared yield change. Convexity improves accuracy for larger yield moves.
- Put-call parity
- For European options on non-dividend stock, call plus present value of strike equals put plus stock price. Deviations imply arbitrage opportunities.
- Forward rate relationship
- Spot and forward rates link through one plus spot for two periods squared equals one plus spot for one period times one plus forward rate.
- Call option payoff
- At expiration a call is worth the greater of zero and stock price minus strike. Before expiration its value also includes time value.
- Hedge fund lockup
- A period, often one to three years, during which investors cannot redeem fund shares. It lets managers hold illiquid positions without forced selling.
- Private equity TVPI
- Total value divided by paid-in capital. It sums distributions and residual net asset value, showing total return multiple rather than annualized return.
- Risk-neutral pricing
- Options are valued by discounting expected payoffs at the risk-free rate using risk-neutral probabilities. These probabilities differ from real-world probabilities.
- Portfolio variance
- Depends on squared weights times variances plus cross terms of two times weights times covariance. Lower covariance reduces total portfolio risk.
- Sharpe ratio
- Portfolio return minus risk-free rate, divided by standard deviation. It measures excess return per unit of total risk and suits fully diversified portfolios.
- Treynor ratio
- Portfolio return minus risk-free rate, divided by beta. It measures excess return per unit of systematic risk for portfolios held within a larger fund.
- Risk tolerance components
- Combines ability to bear risk, such as financial capacity and horizon, with willingness to bear risk. The lower of the two governs the client's portfolio.
- Effective annual rate
- One plus the stated rate divided by compounding periods, raised to the number of periods, minus one. It converts nominal rates to annual compounded returns.
- Coefficient of variation
- Standard deviation divided by expected return. It expresses risk per unit of expected return, useful for comparing investments with differing return levels.
- Price elasticity of demand
- Percentage change in quantity demanded divided by percentage change in price. Absolute values above one indicate elastic demand sensitive to price changes.
- GDP expenditure identity
- GDP equals consumption plus investment plus government spending plus net exports. Real GDP adjusts the total for price-level changes.