Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

2025 CFA Level II Derivatives & Portfolio Management > TEST > Flashcards

TEST Flashcards

1
Q

What is the formula for the Coefficient of Determination, R2?

A

R2 = total variation − unexplained variation

Total variation can also be expressed as SST − SSE, which equals explained variation (RSS)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What does Adjusted R2 account for in regression analysis?

A

Adjusted R2 accounts for the number of predictors in the model

It adjusts the R2 value to penalize for adding non-significant predictors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Akaike’s Information Criterion (AIC) used for?

A

AIC is used if the goal is to have a better forecast

A lower AIC value indicates a better model fit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the purpose of the F-statistic in regression analysis?

A

To evaluate nested models

It helps to determine if the inclusion of additional predictors improves the model significantly.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is heteroskedasticity?

A

Non-constant error variance

It can be detected with scatter plots or Breusch–Pagan test.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How can autocorrelation among error terms be detected?

A

Using the Durbin–Watson test or Breusch–Godfrey test

Correcting it often involves using robust standard errors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does the Variance Inflation Factor (VIF) measure?

A

Multicollinearity among independent variables

A high VIF indicates a high correlation among predictors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the formula for the odds in logistic regression?

A

odds = ey

Where P = odds / (1 + odds) = 1 / (1 + e−ŷ).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does the term ‘covariance stationary’ mean?

A

Mean and variance stable over time

To conclude a time series is covariance stationary, one can plot data or conduct a Dickey-Fuller test.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a unit root in time series analysis?

A

Coefficient on lagged dependent variable = 1

A series with a unit root is not covariance stationary.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the purpose of normalization in big data projects?

A

Scales values between 0 and 1

Normalization is important for ensuring comparability across different scales.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the F1 score in machine learning?

A

F1 score = (2 × P × R) / (P + R)

Where P is precision and R is recall.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the bid-ask spread?

A

Bid-ask spread = ask quote − bid quote

It represents the difference between the buying price and selling price of a currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is covered interest rate parity?

A

F = (1 + RA) / (1 + RB) × S

It ensures that the returns on investments in different currencies are equal when hedged.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does the Cobb-Douglas production function represent?

A

Y = TKαL(1–α)

It describes the relationship between output (Y), technology (T), capital (K), and labor (L).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the primary focus of the Neoclassical Growth Theory?

A

Sustainable growth rate is a function of population growth, labor’s share of income, and the rate of technological advancement

It emphasizes the role of technology in economic growth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the balance sheet funded status?

A

Funded status = fair value of plan assets − PBO

It indicates the financial health of a pension plan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the purpose of the Beneish model?

A

Detects earnings manipulation using eight variables

An M-score greater than -1.78 suggests potential earnings manipulation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What does the term ‘sustainable earnings’ refer to?

A

Earnings expected to recur in future periods

High-quality earnings are considered sustainable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the current ratio formula?

A

current ratio = current assets / current liabilities

It measures a company’s ability to pay short-term obligations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What does Basel III establish?

A

Minimum levels of capital and liquidity

It aims to strengthen regulation, supervision, and risk management within the banking sector.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What does the term ‘defensive interval’ refer to?

A

Daily cash expenditures

It is important for financial institutions due to their systemic importance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the formula for calculating cash and marketable securities?

A

cash + marketable securities

This calculation is essential for assessing liquidity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are current liabilities?

A

Obligations that a company needs to settle within one year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is the formula for total current assets?
cash + marketable securities + receivables ## Footnote Total current assets are vital for understanding short-term financial health.
26
What defines financial institutions as different from other companies?
Systemic importance and regulated status.
27
What does the term 'defensive interval' refer to?
Daily cash expenditures.
28
What are the minimum levels of capital and liquidity established by Basel III?
Regulations for financial institutions to maintain financial stability.
29
What does CAMELS stand for?
* Capital adequacy * Asset quality * Management * Earnings * Liquidity * Sensitivity
30
What is the liquidity coverage ratio?
Expected cash outflows to be covered by highly liquid assets.
31
What is the net stable funding ratio?
Available stable funding to required stable funding.
32
What is the underwriting loss ratio formula?
(claims paid + Δ loss reserves) / net premium earned
33
What does the expense ratio measure?
Underwriting expenses including commissions relative to net premiums.
34
What is the receivables turnover formula?
annual sales / average receivables
35
What is the formula for inventory turnover?
cost of goods sold / average inventory
36
What is the formula for days of sales outstanding?
365 / receivables turnover
37
What does the payables turnover ratio measure?
total purchases / average payables
38
What is the total asset turnover formula?
revenue / average total assets
39
What is the fixed asset turnover formula?
revenue / average fixed assets
40
What is the gross profit margin formula?
gross profit / revenue
41
What is the operating profit margin formula?
operating profit / revenue
42
What is the net profit margin formula?
net income / revenue
43
What is the sustainable growth rate in the PRAT model?
g = net income - dividends / net income
44
What is the interest coverage ratio formula?
EBIT / interest expense
45
What does the return on assets measure?
net income / average total assets
46
What is the financial leverage ratio formula?
total assets / total equity
47
What is the payout ratio?
dividends paid / net income
48
What is the retention ratio formula?
1 - payout ratio
49
What is the formula for earnings per share?
(net income - preferred dividends) / average common shares outstanding
50
What defines corporate restructuring?
Actions including investment, divestment, or restructuring to improve performance.
51
What are investment actions in corporate restructuring?
* Equity investments * Joint ventures * Acquisitions
52
What are divestment actions?
* Sales * Spin-offs
53
What are restructuring actions aimed at?
Improving ROIC through cost cutting and balance sheet restructurings.
54
How is materiality defined?
By both size and fit.
55
What are the valuation methods for corporate restructurings?
* Comparable company analysis * Comparable transaction analysis * Premium paid analysis
56
What is the formula for Free Cash Flow to Firm (FCFF)?
FCFF = NI + Dep + [Int × (1 - tax rate)] - FCInv - WCInv.
57
What is the formula for Free Cash Flow to Equity (FCFE)?
FCFE = FCFF - [Int × (1 - tax rate)] + Net borrowing.
58
What are Porter’s Five Forces of Industry Structure?
* Rivalry (intra-industry) * Threat of new entrants * Threat of substitutes * Bargaining power of suppliers * Bargaining power of buyers
59
What conditions should be met to use discounted cash flow (DCF) methods?
When the firm has a dividend history and stable dividend policy.
60
When should free cash flow (FCF) models be used?
When the firm lacks a stable dividend policy.
61
What is the Gordon Growth Model (GGM)?
V = D0(1 + g) / (r - g)
62
What does the H-Model formula represent?
V0 = [D0 × (1 + gL)] / (r - g) + [D0 × H × (gS - gL)] / (r - gL)
63
What is the required return formula from the Gordon Growth Model?
r = (D1 / P0) + g
64
What is the effective tax rate formula?
corporate tax rate + (1 - corporate tax rate) × (individual tax rate)
65
What is the target payout adjustment model?
expected increase in dividends = (expected target - previous) / adjustment ratio
66
What is the dividend coverage ratio?
dividend coverage = net income / dividends
67
What does an unexpected share repurchase indicate?
Good news for the company.
68
What are the advantages of share repurchases?
* Tax advantages * Share price support * Increased flexibility * Offsetting dilution * Increased leverage
69
What are ESG-related risk exposures?
Downside risk in fixed-income and both upside and downside in equity analysis.
70
What does the Grinold-Kroner model calculate?
ERP = [DY + ∆P/E + i + G - ∆S] - rf
71
What is the weighted average cost of capital (WACC) formula?
WACC = (we × r) + [wd × rd × (1 - tax rate)]
72
What is the Price-to-Earnings (P/E) ratio?
market price per share / EPS over previous 12 months
73
What is the Price-to-Book (P/B) ratio?
book value of equity / market value of equity
74
What is the Price-to-Sales (P/S) ratio?
total sales / market value of equity
75
What is the Price-to-Cash Flow ratio?
cash flow / market value of equity
76
What is the formula for expected exposure in credit analysis?
Amount a risky bond investor stands to lose before any recovery is factored in.
77
What is the loss given default?
loss severity × exposure
78
What is the formula for the single-stage RI model?
(ROE − r) × B ## Footnote ROE = Return on Equity, r = required rate of return, B = book value
79
What components make up the value of callable and putable convertible bonds?
* Straight value of bond * Value of call option on stock * Value of call option on bond * Value of put option on bond
80
What is expected exposure in credit analysis models?
Amount a risky bond investor stands to lose before any recovery is factored in.
81
What is the formula for loss given default?
Loss given default = loss severity × exposure
82
What does the economic value added (EVA) measure?
EVA = NOPAT − $WACC
83
What is the market value added (MVA) formula?
MVA = market value − total capital
84
What does NOPAT stand for and how is it calculated?
NOPAT = EBIT × (1 − t) ## Footnote EBIT = Earnings Before Interest and Taxes, t = tax rate
85
What is the probability of default?
Likelihood in a given year.
86
What is the recovery rate?
% of $ received upon issuer default
87
What is the formula for expected loss?
Expected loss = prob. default × loss given default
88
What is a credit valuation adjustment (CVA)?
Sum of the present values of expected losses for each period.
89
What are the four phases of the Real Estate Cycle?
* Recovery * Expansion * Oversupply * Recession
90
What is the value of an interest rate swap to a fixed payer?
Value = ΣZ × (SFR − SFR) × days × notional
91
What are the binomial stock tree probabilities for an up move?
πU = (1 + Rf − D) / (U − D)
92
What is put-call parity?
S0 + P0 = C0 + PV(X)
93
What is dynamic delta hedging?
* # of short call options = delta of call option * # of long put options = − delta of put option
94
What is the Black–Scholes–Merton option valuation model for a call option?
C0 = S0e^(-δT) N(d1) − e^(-rT) XN(d2)
95
What does the hazard rate represent?
Conditional probability of default.
96
What is the formula for the price of an equity forward with discrete dividends?
FP(on an equity security) = (S − PVD) × (1 + R)^T
97
What is the NAV approach to REIT share valuation?
NAV = estimated cash NOI ÷ assumed cap rate
98
What is contango in futures markets?
Futures prices > spot prices
99
What does the term 'backwardation' mean?
Futures prices < spot prices
100
What is the debt service coverage ratio (DSCR)?
DSCR = NOI1 ÷ debt service
101
What is the formula for the price-to-FFO approach to REIT share valuation?
NAV/share = FFO ÷ shares outstanding × sector average P/FFO multiple
102
What is the definition of a credit default swap (CDS)?
Upon credit event, protection buyer compensated by protection seller.
103
What is the main goal of the merger arbitrage strategy?
Bets on a corporate takeover succeeding.
104
What is the definition of active return?
Active return = portfolio return − benchmark return
105
What is the formula for the information ratio?
Information ratio = Active return / Active risk
106
What does the term 'survivorship bias' refer to?
Using data that only includes entities that have persisted until today.
107
What is the purpose of stress testing in portfolio management?
Examines performance under the worst combinations of events and scenarios.
108
What is the definition of an ETF premium (discount)?
ETF premium (discount) % = (ETF price − NAV per share) / NAV per share
109
What is the marginal utility of current consumption?
Marginal utility of consuming 1 unit in the future / marginal utility of current consumption of 1 unit
110
What does the term 'real risk-free rate of return' signify?
The return on an investment with no risk of financial loss.
111
What is the formula for calculating nominal short-term interest rate (r)?
r = real risk-free rate + inflation premium
112
What is the formula for the marginal utility of consuming 1 unit in the future?
marginal utility of current consumption of 1 unit ## Footnote This reflects the concept of utility in economics, comparing future and current consumption.
113
What is the formula for the real risk-free rate of return (R)?
R = _ = _ − 1 ## Footnote This formula relates to the calculation of the real risk-free rate.
114
What is the price of a default-free, inflation-indexed, zero coupon bond?
P = _E(P1) + cov(P , m) / (1 + R) ## Footnote This equation is used to determine the price of bonds considering expected future cash flows.
115
What is the nominal short-term interest rate (r) formula?
r = real risk-free rate (R) + expected inflation (π) ## Footnote This reflects the relationship between nominal rates and inflation expectations.
116
What is the formula for the nominal long-term interest rate?
R + π + θ ## Footnote θ represents the risk premium for inflation uncertainty.
117
What does the Taylor rule formula represent?
r = Rn + π + 0.5(π − π*) + 0.5(y – y*) ## Footnote This rule guides central banks on setting interest rates based on inflation and output gaps.
118
What is the Break-even inflation rate (BEI)?
yield non-inflation indexed bond − yield inflation indexed bond ## Footnote BEI indicates the inflation rate at which investors are indifferent between the two types of bonds.
119
What is the formula for BEI for longer maturity bonds?
expected inflation (π) + inflation risk premium (θ) ## Footnote This accounts for both expected inflation and the risks associated with inflation variability.
120
What is the required return formula for credit risky bonds?
R + π + θ + γ ## Footnote γ represents the risk premium for credit risk.
121
What does the discount rate for equity include?
R + π + θ + γ + κ ## Footnote κ is the risk premium for equity versus risky debt.
122
What is the formula for the discount rate for commercial real estate?
R + π + θ + γ + κ + φ ## Footnote φ is the illiquidity premium.
123
What does the Arbitrage Pricing Theory formula express?
E(R) = R + Σ(β(λ)) ## Footnote This indicates expected return as a function of risk factors and their premiums.
124
What is the expected return formula in a multifactor model?
risk-free rate + Σ(factor sensitivity) × (factor risk premium) ## Footnote This model helps attribute returns to various risk factors.
125
What is the formula for active return?
factor return + security selection return ## Footnote Active return measures the performance of an investment strategy relative to a benchmark.
126
What is the formula for active specific risk?
∑(w − w )² 𝜎² ## Footnote This calculates the risk associated with specific investments in a portfolio.
127
Define Value at Risk (VaR).
Minimum ($ or %) loss with a given probability over a specified period. ## Footnote VaR is a common risk management tool used to assess potential losses.
128
What is Conditional VaR (CVaR)?
The expected loss given that the loss exceeds the VaR. ## Footnote CVaR provides insight into the tail risk of an investment.
129
What does Incremental VaR (IVaR) measure?
The change in VaR from a specific change in the size of a portfolio position. ## Footnote IVaR helps in understanding the impact of position adjustments on overall risk.
130
What is Marginal VaR (MVaR)?
∆ in portfolio VaR for small ∆ in position. ## Footnote MVaR estimates the contribution of individual positions to the total portfolio risk.
131
What is the formula for the variance of a portfolio comprising two funds A and B?
σ² = W²σ²_A + W²σ²_B + 2W_AW_BCov_{AB} ## Footnote This formula calculates the overall risk of a portfolio based on the weights and covariances of its components.
132
What is the formula to annualize standard deviation?
√250 × (daily standard deviation) ## Footnote This conversion is used to compare daily volatility to annual volatility.
133
What is the formula for % change in value vs. change in YTM?
−duration (∆Y) + ½ convexity (∆Y)² ## Footnote This formula helps assess the impact of interest rate changes on bond prices.
134
For Macaulay duration, how is ∆Y modified?
Replace ∆Y by ∆Y / (1+Y) ## Footnote This adjustment accounts for the bond's yield in the duration calculation.

2025 CFA Level II Derivatives & Portfolio Management (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions