Cr.FA cheat sheet

CFA Institute Code of Ethics requires acting with integrity, competence, diligence, and respect toward clients, employers, and the profession.

Standard I(A) Knowledge of the Law: comply with the stricter of applicable law or the Code and Standards; do not knowingly participate in violations.

Standard II(A) Material Nonpublic Information: information is material if its disclosure would likely move price; mosaic theory permits combining public and nonmaterial nonpublic data.

Standard III(B) Fair Dealing: distinguish between the client's investment objectives and the client's ability to bear risk; suitability requires both.

Standard IV(B) Additional Compensation: obtain written consent from employer before accepting bonuses, benefits, or fees that compete with the employer.

Standard V(A) Diligence and Reasonable Basis: independently verify third-party research; a reasonable basis requires adequate information and analysis.

Standard VI(A) Disclosure of Conflicts: disclose all actual and potential conflicts to clients and prospective clients in a timely manner.

GIPS requires composites of all actual, fee-paying, discretionary portfolios; non-fee-paying portfolios may be included but must be disclosed.

Performance presentation under GIPS: returns must be time-weighted; asset-weighted standard deviation is required for composite dispersion.

Accounting equation: Assets = Liabilities + Shareholders' Equity; every transaction preserves the balance.

Revenue recognition (IFRS 15 / ASC 606): recognize when control transfers, in five steps from contract to performance obligation.

LIFO vs FIFO: rising prices make LIFO show lower ending inventory, higher COGS, lower pretax income, and higher cash flow from tax deferral.

Inventory write-downs: IFRS allows reversal up to original cost; US GAAP prohibits reversal.

Capitalizing vs expensing: capitalization raises current income and assets but raises later depreciation; expensing lowers current income.

Deferred tax liability arises when book income exceeds taxable income (e.g., accelerated tax depreciation).

Operating lease treatment under IFRS 16 / ASC 842: lessee records right-of-use asset and lease liability; removes off-balance-sheet financing.

Quality of earnings: high accruals relative to cash flow signal lower earnings quality; CFO/Net income ratio below 1 warrants scrutiny.

DuPont decomposition: ROE = net profit margin × asset turnover × financial leverage (equity multiplier).

Time value: PV = FV / (1 + r)^n; FV = PV × (1 + r)^n; use periodic rate matching the compounding frequency.

Effective annual rate: EAR = (1 + periodic rate)^m − 1, where m is compounding periods per year.

Annuity present value: PV = PMT × [1 − (1 + r)^(−n)] / r; annuity due multiplies by (1 + r).

Perpetuity: PV = PMT / r; growing perpetuity: PV = PMT / (r − g), valid only when r > g.

CAPM: E(R) = Rf + β × (E(Rm) − Rf); beta measures systematic risk relative to the market.

Regression: R² is the fraction of variance in the dependent variable explained by the independent variable; t-stat tests coefficient significance.

Hypothesis testing: reject the null when |test statistic| exceeds the critical value; Type I error rejects a true null.

Normal distribution: approximately 68% of observations fall within ±1 standard deviation, 95% within ±2, 99% within ±3.

Monte Carlo simulation generates random paths from assumed distributions to estimate a distribution of outcomes, not a single forecast.

Price elasticity of demand = %Δ quantity demanded / %Δ price; demand is elastic when |elasticity| > 1.

GDP expenditure approach: GDP = C + I + G + (X − M); income approach sums wages, rents, interest, and profits.

Inflation measures: CPI uses a fixed basket; GDP deflator covers all domestic output; PPI tracks producer prices.

Business cycle: expansion, peak, contraction, trough; leading indicators (yield spread, building permits) turn before the economy.

Monetary policy: central bank raises policy rate to curb inflation; lowering rates stimulates borrowing and spending.

Fiscal policy multiplier: government spending multiplier = 1 / (1 − MPC) in a simple closed economy.

Interest rate parity: forward premium/discount reflects the interest rate differential between two currencies.

Purchasing power parity: exchange rate adjusts so a basket of goods costs the same across countries in the long run.

Comparative advantage: a country gains by specializing where its opportunity cost of production is lower.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate); use market values for weights.

Cost of equity via CAPM: Re = Rf + β × ERP; via dividend growth: Re = D1/P0 + g.

NPV = Σ CFt / (1 + r)^t − initial outlay; accept projects with NPV > 0; IRR is the rate where NPV = 0.

Project selection conflicts: NPV and IRR can disagree for mutually exclusive projects due to scale or timing; prefer NPV.

Free cash flow to firm = EBIT × (1 − t) + depreciation − capex − ΔNWC.

Free cash flow to equity = FCFF − after-tax interest − net debt repayment + net borrowing.

Dividend discount model: P0 = D1 / (r − g); Gordon growth requires r > g and stable growth.

Relative valuation: P/E, P/B, EV/EBITDA; compare to peers or historical averages, adjusting for growth and risk.

Capital structure: Modigliani-Miller without taxes says firm value is independent of leverage; with taxes, debt adds a tax shield.

Market efficiency: weak form (prices reflect past prices), semi-strong (public information), strong (all information including private).

Intrinsic value estimate: DDM, FCFE, or residual income; compare to market price to judge over/undervaluation.

P/E ratio drivers: payout ratio, growth rate, and required return; higher growth and lower required return raise P/E.

EV/EBITDA is capital-structure neutral and useful for comparing firms with different leverage.

Book value of equity is an accounting measure; market value reflects growth opportunities and intangible assets.

Industry life cycle: embryonic, growth, mature, decline; pricing power and margins vary by stage.

Porter's five forces: rivalry, new entrants, substitutes, supplier power, buyer power shape industry profitability.

Preferred stock valuation: P = D / r; treat as a perpetuity with fixed dividend.

Technical analysis vs fundamental analysis: technical uses price/volume patterns; fundamental uses financial statements and economics.

Bond price and yield move inversely; longer maturity and lower coupon increase price sensitivity to yield changes.

Macaulay duration measures weighted average time to cash flows; modified duration = Macaulay / (1 + y/m).

Price change approximation: %ΔP ≈ −modified duration × Δy + 0.5 × convexity × (Δy)^2.

Yield curve shapes: normal (upward), inverted (downward), flat; expectations, liquidity, and segmentation theories explain shape.

Credit spread = yield on corporate bond − yield on comparable Treasury; wider spreads signal higher default risk.

Callable bonds: issuer redeems when rates fall; investor faces reinvestment risk and negative convexity.

Put-call parity: C + PV(strike) = P + S for European options on non-dividend stock.

Black-Scholes inputs: stock price, strike, time, volatility, risk-free rate; higher volatility raises option value.

Forward contract value at initiation is zero; value changes as the underlying price moves relative to the forward price.

Portfolio expected return = weighted average of asset expected returns; portfolio variance depends on weights, variances, and covariances.

Diversification reduces unsystematic risk; systematic (market) risk remains and is priced.

Efficient frontier: set of portfolios with maximum expected return for each level of risk; optimal portfolio lies on the capital allocation line.

Sharpe ratio = (Rp − Rf) / σp; higher values indicate better risk-adjusted return.

CAPM: required return = Rf + β × (E(Rm) − Rf); beta of the market portfolio equals 1.

Asset allocation drives most of a portfolio's return variability; rebalancing restores target weights.

Risk tolerance combines ability to take risk (financial capacity) and willingness (psychological attitude).

Investment policy statement documents objectives, constraints (liquidity, time horizon, taxes, legal, unique), and guidelines.

Behavioral biases: loss aversion, overconfidence, anchoring, and mental accounting can distort portfolio decisions.

Hedge fund strategies: long/short equity, event-driven, relative value, macro; typically charge management and performance fees.

Private equity: venture capital, growth equity, buyouts; illiquid with long lock-up periods and J-curve return pattern.

Real estate valuation: income approach (NOI / cap rate), cost approach, and sales comparison approach.

Commodities: futures-based exposure; roll yield arises from contango or backwardation in the futures curve.

Infrastructure assets: long-lived, regulated cash flows; lower correlation with public equities.

Value at Risk (VaR): maximum loss over a given horizon at a stated confidence level; does not describe losses beyond the threshold.

Expected shortfall (CVaR) averages losses beyond the VaR threshold and is more sensitive to tail risk.

Risk management process: identify, measure, monitor, and manage risk; includes market, credit, liquidity, and operational risk.

Stress testing and scenario analysis evaluate portfolio losses under extreme but plausible market conditions.