MAFF: Financial Analysis Fundamentals

What the domain tests

The MAFF financial analysis fundamentals domain checks whether you can move fluently between cash-flow timelines, return measures, and basic statistics. Expect calculation-led items on TVM, NPV/IRR, holding-period returns, and dispersion, plus interpretation questions about which measure is appropriate.

Core rules

• Compounding: FV = PV(1 + r/m)^(m t). Effective annual rate = (1 + r/m)^m − 1; EAR > APR when m > 1.
• NPV discounts all cash flows at the opportunity cost of capital; IRR is the rate that sets NPV to zero. Use NPV for value creation, IRR only with conventional cash flows.
• Arithmetic mean ≥ geometric mean; geometric mean is the correct compound growth rate. CAGR = (End/Begin)^(1/n) − 1.
• Variance uses squared deviations; standard deviation is its square root. Covariance sign indicates co-movement; correlation standardizes to [−1, 1].

Worked example

An investment grows from 100 to 144 over three years. CAGR = (144/100)^(1/3) − 1 = 1.129 − 1 = 12.9%. If an item instead asks for the average annual return from annual returns of 10%, 20%, and 8%, the arithmetic mean is 12.67%, but the geometric mean is [(1.10)(1.20)(1.08)]^(1/3) − 1 = 12.53%. The geometric figure is the realized compound return.

Traps

APR vs EAR; beginning- vs end-of-period annuity; IRR multiple roots; mixing percentage and decimal units; using arithmetic mean for multi-period growth.