FTIP cheat sheet

Equity: residual ownership claim; common shareholders rank last in liquidation, after debt and preferred stock.

Bond price and yield move inversely; for a given duration, the percentage price change is approximately -D x Δy (modified duration times yield change).

Money market instruments (T-bills, commercial paper, CDs) mature in one year or less and are quoted on a discount-yield basis for T-bills.

Forward vs futures: forwards are OTC, customizable, and carry counterparty credit risk; futures are exchange-traded, standardized, and marked to market daily.

Option payoff at expiry: call = max(0, S - K); put = max(0, K - S). Premium paid is separate from intrinsic value.

Put-call parity (European, no dividends): C - P = S - K/(1+r)^T; violations create arbitrage opportunities.

Primary market = new issuance (IPO, follow-on, bond syndication); secondary market = trading among investors and provides liquidity and price discovery.

Market microstructure: bid-ask spread is a transaction cost; a dealer quoting bid 99.50 / ask 99.75 faces a 0.25 spread and earns it per round lot traded.

DCF value = sum of FCFF_t/(1+WACC)^t plus terminal value; terminal value via Gordon growth = FCFF_(n+1)/(WACC - g), with g below the long-run growth rate of the economy.

WACC = (E/V) x Re + (D/V) x Rd x (1 - tax rate); use market-value weights, not book values, and after-tax cost of debt.

CAPM: Re = Rf + beta x (Rm - Rf). Beta measures systematic risk only; unsystematic risk is diversifiable and not compensated.

Gordon growth model: P0 = D1/(Re - g). Requires g < Re; the model is highly sensitive to small changes in g.

Relative valuation: P/E, EV/EBITDA, P/B, and P/S multiples must be applied to comparable firms with similar growth, margins, and risk.

Free cash flow to equity = net income + non-cash charges - capex - change in working capital + net borrowing.

DuPont decomposition: ROE = net margin x asset turnover x financial leverage; rising ROE driven only by leverage signals added risk.

Economic value added: EVA = NOPAT - (WACC x invested capital); positive EVA means returns exceed the cost of capital.

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

Diversification benefit: as pairwise correlation falls below +1, portfolio volatility falls for the same expected return; correlation of -1 can eliminate risk entirely.

Efficient frontier: set of portfolios offering the highest expected return for each level of risk; the tangency portfolio maximizes the Sharpe ratio.

Sharpe ratio = (Rp - Rf)/sigma_p; Treynor ratio uses beta in the denominator and suits well-diversified portfolios.

Strategic asset allocation sets long-term target weights from objectives, risk tolerance, and horizon; tactical allocation makes short-term deviations.

Rebalancing to target weights enforces buy-low/sell-high discipline; calendar and threshold approaches are the two common rules.

Beta of a portfolio = weighted average of constituent betas; portfolio standard deviation is not a weighted average because of covariance.

Asset allocation is generally the dominant driver of long-run portfolio return variability; security selection and timing contribute less.

Value at Risk (VaR) at 95% states a loss threshold not expected to be exceeded on 95% of days; it says nothing about the size of losses beyond it.

Expected shortfall (CVaR) averages losses beyond the VaR threshold and is a coherent risk measure; VaR is not sub-additive in general.

Duration approximates bond price sensitivity to yield; convexity captures the curvature and improves the estimate for larger yield moves.

Credit risk components: probability of default, loss given default, and exposure at default; expected loss = PD x LGD x EAD.

Liquidity risk has two forms: funding liquidity (ability to meet obligations) and market liquidity (ability to trade without moving price).

Stress testing and scenario analysis complement statistical VaR by modeling extreme but plausible events that historical data may omit.

Operational risk arises from failed internal processes, people, systems, or external events; it is managed through controls and loss-event data.

Hedging with derivatives transfers risk but introduces basis risk, counterparty risk, and margin/liquidity demands.

Fiduciary duty comprises duties of loyalty (act in the client's best interest) and care (competence, diligence, and prudence).

Suitability requires that a recommendation fit the client's objectives, risk tolerance, time horizon, and financial circumstances.

Priority of transactions: client accounts take precedence over the professional's own accounts and over employer accounts in most standards.

Independence and objectivity: gifts, bonuses, or entertainment that could impair judgment must be disclosed or refused per policy.

Material nonpublic information (MNPI) must not be traded on or selectively disclosed; the mosaic theory permits acting on assembled public and nonmaterial information.

Know-your-customer (KYC) and anti-money-laundering (AML) rules require identity verification, source-of-funds checks, and suspicious-activity reporting.

Conflicts of interest must be disclosed, mitigated, or avoided; disclosure alone does not cure a conflict that harms the client.

Recordkeeping and fair dealing: communications must be accurate, not misleading, and retained per regulatory retention periods.

Risk tolerance has two parts: willingness (psychological attitude) and ability (financial capacity); recommendations must respect the lower of the two.

Time horizon shapes allocation: longer horizons support more equity exposure; near-term goals should be funded with lower-volatility assets.

Emergency reserve guideline: hold three to six months of essential expenses in liquid, low-risk assets before investing for long-term goals.

Capital needs analysis for life insurance: income replacement, debt repayment, education funding, and final expenses minus existing resources.

Retirement funding: required savings depend on target income, expected return, inflation, and life expectancy; use real (inflation-adjusted) returns consistently.

Tax-aware planning: asset location places tax-inefficient holdings in tax-deferred accounts and tax-efficient holdings in taxable accounts.

Education funding options differ in control and tax treatment: 529 plans, custodial accounts, and prepaid tuition plans each have distinct rules.

Behavioral biases to identify: loss aversion, overconfidence, anchoring, and recency; the advisor's role is to correct them through education and structure.