IAR cheat sheet

Business cycle phases in order: expansion, peak, contraction (recession), trough; two consecutive quarters of declining real GDP is a common recession rule of thumb, not the official NBER definition.

Real GDP = nominal GDP ÷ price deflator × 100; real values strip inflation so cross-period comparisons reflect quantity changes.

Fiscal policy levers are government spending and taxation; monetary policy levers are the policy rate, reserve requirements, and open market operations.

Expansionary monetary policy lowers rates and buys securities, raising money supply; it typically weakens the currency and supports bond prices.

Inflation erodes fixed-income purchasing power; nominal return minus inflation approximates real return, and (1+nominal)/(1+inflation)−1 is exact.

Leading indicators (yield curve slope, building permits, initial claims) turn before the economy; coincident indicators (industrial production, payrolls) move with it; lagging indicators (CPI, prime rate) follow.

Demand-pull inflation follows excess aggregate demand; cost-push inflation follows input cost shocks such as energy or wage spikes.

Unemployment categories: frictional (job search), structural (skills/geography mismatch), cyclical (demand shortfall); only cyclical is directly tied to recession.

Yield curve inversion (short rates above long rates) has historically preceded recessions; a steepening curve often accompanies recovery expectations.

Bond price and yield move inversely; price sensitivity rises with longer maturity and lower coupon, measured by duration and convexity.

Current yield = annual coupon ÷ market price; yield to maturity accounts for coupon reinvestment and price convergence to par at maturity.

Preferred stock ranks above common in liquidation and dividends but below all debt; it typically carries no maturity and often is callable.

Common shareholders bear residual risk, hold voting rights, and receive dividends only after preferred and debt claims are satisfied.

Mutual fund NAV is computed once daily at market close; open-end shares trade at NAV, while ETFs and closed-end funds trade intraday at market prices.

ETF share creation and redemption by authorized participants in kind keeps market price close to NAV; closed-end funds can trade at persistent discounts.

Options: buyer pays premium for rights, writer receives premium and bears obligation; American exercise anytime, European at expiration only.

Call option gains as underlying rises; put option gains as underlying falls; long option maximum loss is the premium paid.

Forward contracts are private, customizable, and carry counterparty risk; futures are standardized, exchange-traded, and marked to market daily through a clearinghouse.

REITs must distribute at least 90% of taxable income to shareholders to retain pass-through tax treatment.

Risk tolerance combines ability (financial capacity, time horizon, liquidity needs) and willingness (psychological attitude); the binding constraint governs the recommendation.

Investment policy statement elements: objectives (return and risk), constraints (liquidity, time horizon, tax, legal, unique), and review procedures.

Asset allocation explains most return variability; rebalancing to target weights enforces a sell-high/buy-low discipline.

Dollar-cost averaging buys fixed dollar amounts at intervals, lowering average cost per share when prices fluctuate; lump-sum investing wins on average in rising markets.

Capital market line plots efficient portfolios mixing the risk-free asset and the market portfolio; only systematic risk is compensated.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation; higher is better for a given risk level.

Beta measures sensitivity to market moves (beta 1 = market); standard deviation measures total volatility including diversifiable risk.

Taxable accounts favor tax-efficient holdings; tax-deferred accounts favor high-turnover or income-generating holdings; asset location affects after-tax return.

Suitability requires recommendations fit the client's objectives, time horizon, risk tolerance, and financial situation, documented before or at the transaction.

Fiduciary duty comprises care, loyalty, and disclosure; acting in the client's best interest outranks the firm's compensation interest.

Material nonpublic information may not be traded on or tipped; information is material if a reasonable investor would consider it important.

Front-running client orders, trading ahead of research, and market manipulation (spoofing, marking the close) are prohibited practices.

Gifts and entertainment must be disclosed and pre-cleared per firm policy; excessive or lavish items create conflicts of interest.

Soft dollar arrangements may pay only for research and brokerage that benefit the client, not for overhead or marketing.

Know-your-customer and anti-money-laundering rules require identity verification, source-of-funds review, and suspicious activity escalation.

Recordkeeping: client communications and order records must be retained per applicable rules; falsifying or backdating records is a violation.

Fair dealing prohibits preferential treatment of select clients; allocation of oversubscribed issues must follow disclosed, pre-established procedures.

Outside employment, personal trading, and board service require disclosure and approval to avoid conflicts and misuse of position.