HS 300 cheat sheet

Bond price and yield move inversely: when market yields rise, existing fixed-coupon bond prices fall, and the effect lengthens with maturity and lowers with coupon size.

Macaulay duration measures weighted average time to cash flows; modified duration approximates percentage price change per 1% yield change (ΔP/P ≈ −D_mod × Δy).

Convexity corrects duration error: price change ≈ −D_mod·Δy + ½·C·(Δy)², making duration-only estimates too pessimistic for large yield moves.

Equity valuation multiples: P/E uses earnings per share, P/B compares price to book value, and EV/EBITDA is capital-structure neutral because enterprise value includes net debt.

Mutual fund NAV = (total assets − total liabilities) / shares outstanding, struck at end-of-day prices; ETFs trade intraday at market prices that can deviate from NAV.

Capital market assumptions pair expected return with volatility; expected portfolio return is the weighted average of asset returns, but portfolio risk also depends on correlations below 1.

Yield curve shapes: normal (upward), inverted (downward, historically a recession signal), and flat; a steepening curve typically widens the spread between long and short maturities.

Money market instruments (T-bills, commercial paper, CDs) mature in one year or less, carry low credit and duration risk, and are quoted on a discount or add-on yield basis.

Real return ≈ nominal return − inflation; after-tax return = pre-tax return × (1 − marginal tax rate) for fully taxable interest income.

Know-your-customer and anti-money-laundering rules require identity verification, beneficial ownership identification, and ongoing transaction monitoring with suspicious activity reported to the financial intelligence unit.

Suitability versus fiduciary duty: suitability requires recommendations consistent with the client's profile; fiduciary duty adds a duty of loyalty and must place client interests ahead of the firm's.

Insider trading prohibitions cover material nonpublic information and tippees; a 'material' fact is one a reasonable investor would consider important to an investment decision.

Recordkeeping rules generally require retention of client communications and order records for a defined period (commonly five to seven years depending on jurisdiction).

Regulation best interest and similar conduct standards require disclosure of conflicts, care, and conflict mitigation, but do not create a blanket fiduciary duty in every jurisdiction.

Personal account dealing policies typically require pre-clearance, blackout periods around client orders, and minimum holding periods to prevent front-running and conflicts.

Gifts and entertainment limits are usually set by firm policy and regulator guidance; exceeding thresholds requires disclosure and approval to avoid improper influence.

Privacy rules restrict sharing nonpublic personal information with third parties absent notice and opt-out, and require safeguarding of client data.

Risk tolerance combines willingness (psychological) and ability (financial capacity); the lower of the two governs the recommended risk level.

Time horizon: short horizons favor liquidity and capital preservation; long horizons allow higher equity exposure to absorb volatility.

Liquidity needs should be funded separately from the investment portfolio; emergency reserves typically cover three to six months of expenses.

Risk capacity rises with stable income, low debt, long horizon, and no near-term large expenditures; it falls with concentrated employer stock or variable income.

Suitability analysis documents objectives, constraints (liquidity, time, tax, legal, unique), and the rationale linking each recommendation to the profile.

Concentration risk: a single position above roughly 10-20% of investable assets warrants documented justification and diversification planning.

Client risk questionnaires are point-in-time; profiles should be reviewed on life events (marriage, job change, inheritance, retirement) rather than only on a fixed schedule.

Tax status (account type, bracket, jurisdiction) is a constraint that can change the optimal product choice even for identical objectives.

Asset allocation explains most return variability; strategic allocation sets long-term weights, tactical allocation makes shorter-term deviations within policy limits.

Diversification reduces unsystematic risk; systematic (market) risk remains and is compensated with a risk premium.

Rebalancing to target weights enforces buy-low/sell-high discipline; calendar rebalancing uses fixed dates, threshold rebalancing uses band breaches (e.g., ±5%).

Efficient frontier plots portfolios with the highest expected return for each level of risk; the optimal portfolio depends on the client's risk aversion.

Portfolio expected return = Σ (weight × expected return); portfolio variance includes covariance terms, so adding low-correlation assets lowers total risk.

Tax-aware construction: asset location places tax-inefficient income assets in tax-deferred accounts and tax-efficient equity in taxable accounts.

Cost drag matters: a 1% annual fee reduces long-run wealth materially through compounding; expense ratios, spreads, and turnover all reduce net return.

Rebalancing, withdrawal sequencing, and glide paths (target-date funds) should align with the client's spending needs and risk capacity over time.

Fiduciary duties: duty of care (competence, diligence) and duty of loyalty (avoid or disclose conflicts, act in client's best interest).

Conflicts of interest must be disclosed in plain language, and disclosure alone is insufficient if the conflict is not mitigated or the client cannot consent.

Fair dealing requires treating all clients equitably, not equally; allocation of IPO shares and trades must follow written pro-rata policies.

Independence: gifts, referral fees, or outside business activities that could bias advice require written approval and disclosure.

Confidentiality applies to client information; exceptions include legal compulsion, client consent, and prevention of fraud or harm.

Market manipulation (spoofing, layering, wash trades) and misrepresentation of performance are prohibited; performance must be presented fairly with fees and benchmarks.

Whistleblowing and escalation: report suspected violations internally first, then to the regulator if unresolved, consistent with firm policy and law.

Competence and continuing education: advisers must maintain knowledge of products and rules and decline engagements outside their expertise.