CFA Program Level I Exam Ultimate Cheat Sheet
Your Quick Reference Study Guide
This cheat sheet covers the core concepts, terms, and definitions you need to know for the CFA Program Level I Exam. We've distilled the most important domains, topics, and critical details to help your exam preparation.
💡 Note: While this study guide highlights essential concepts, it's designed to complement—not replace—comprehensiv e learning materials. Use it for quick reviews, last-minute prep, or to identify areas that need deeper study before your exam.
About This Cheat Sheet: This study guide covers core concepts for CFA Program Level I Exam. It highlights key terms, definitions, common mistakes, and frequently confused topics to support your exam preparation.
Use this as a quick reference alongside comprehensive study materials.
CFA Program Level I Exam
Cheat Sheet •
About This Cheat Sheet: This study guide covers core concepts for CFA Program Level I Exam. It highlights key terms, definitions, common mistakes, and frequently confused topics to support your exam preparation.
Use this as a quick reference alongside comprehensive study materials.
Ethical and Professional Standards
18%CFA Code & Hierarchy of Obligations
CFA professional standards plus a hierarchy: follow the law first; when lawful, apply the stricter professional standard
Key Insight
Law governs; when both apply, choose the stricter lawful requirement; disclosure doesn't legalize wrongdoing
Often Confused With
Common Mistakes
- Assume jurisdiction never changes which law applies — cross-border law matters
- Think CFA standards override illegal acts — the law governs
- Rely on disclosure to fix conflicts or permit illegal conduct
Ethics Issue-Spotting
Translate vignette facts into specific ethical types (conflict, confidentiality, misrep, insider info) to choose duties
Key Insight
Vignettes often contain multiple, overlapping issues — spot all, rank by severity/hierarchy, then apply remedies
Often Confused With
Common Mistakes
- Assume legality equals ethics — legal can still be unethical
- Think disclosure alone resolves every conflict of interest
- Treat insider information as only trading-related — other MNPI counts
Professionalism (Std I): Law ≠ Ethics
Requires legal compliance plus higher duties: integrity, independence, truthful disclosure, and avoidance of misconduct.
Key Insight
Local law can be permissive — follow the CFA Code & Standards; disclosure alone does not always cure impaired objectivity.
Often Confused With
Common Mistakes
- Assuming compliance with local law automatically meets Std I
- Treating disclosure as an automatic cure for conflicts
- Ignoring serious personal conduct because it occurs outside work
Duties to Clients (Std III): Loyalty & Suitability
Client-first rules: loyalty, prudence, fair dealing, ongoing suitability, accurate performance presentation, and strict-
Key Insight
Fair dealing = equitable (not identical); suitability is ongoing; confidentiality requires proper consent or a legal exception.
Often Confused With
Common Mistakes
- Believing suitability is only required at the initial recommendation
- Equating fair dealing with treating all clients identically
- Assuming informal client approval waives confidentiality
Discretionary Portfolios — Composite Inclusion (GIPS)
Accounts where the firm has explicit trading authority; only these reflect manager decisions and belong in GIPS comps.
Key Insight
Inclusion requires explicit, continuing trading authority — recommendations or model allocations don't qualify; temporary lapses must be managed, not
Often Confused With
Common Mistakes
- Confusing a signed investment policy with actual trading authority.
- Including accounts where the firm only gives recommendations or model allocations.
- Assuming temporary paperwork lapses or wrap/pool status automatically exclude the account.
GIPS Composite Presentation & Disclosures
Required content and minimum performance history firms must report per composite to ensure transparency and comparabilty
Key Insight
Must report annual returns, composite assets, # portfolios, dispersion, fees, benchmark and calc policies; present ≥5 years (or since inception) and t
Often Confused With
Common Mistakes
- Forgetting to report composite assets, number of portfolios, or internal dispersion.
- Mixing up minimum history — start with ≥5 years (or since inception) and add one year annually up to 10.
- Omitting mandatory disclosures: fee schedules, benchmark rationale, or significant events.
CFA Code & Hierarchy of Obligations
CFA professional standards plus a hierarchy: follow the law first; when lawful, apply the stricter professional standard
Key Insight
Law governs; when both apply, choose the stricter lawful requirement; disclosure doesn't legalize wrongdoing
Often Confused With
Common Mistakes
- Assume jurisdiction never changes which law applies — cross-border law matters
- Think CFA standards override illegal acts — the law governs
- Rely on disclosure to fix conflicts or permit illegal conduct
Ethics Issue-Spotting
Translate vignette facts into specific ethical types (conflict, confidentiality, misrep, insider info) to choose duties
Key Insight
Vignettes often contain multiple, overlapping issues — spot all, rank by severity/hierarchy, then apply remedies
Often Confused With
Common Mistakes
- Assume legality equals ethics — legal can still be unethical
- Think disclosure alone resolves every conflict of interest
- Treat insider information as only trading-related — other MNPI counts
Professionalism (Std I): Law ≠ Ethics
Requires legal compliance plus higher duties: integrity, independence, truthful disclosure, and avoidance of misconduct.
Key Insight
Local law can be permissive — follow the CFA Code & Standards; disclosure alone does not always cure impaired objectivity.
Often Confused With
Common Mistakes
- Assuming compliance with local law automatically meets Std I
- Treating disclosure as an automatic cure for conflicts
- Ignoring serious personal conduct because it occurs outside work
Duties to Clients (Std III): Loyalty & Suitability
Client-first rules: loyalty, prudence, fair dealing, ongoing suitability, accurate performance presentation, and strict-
Key Insight
Fair dealing = equitable (not identical); suitability is ongoing; confidentiality requires proper consent or a legal exception.
Often Confused With
Common Mistakes
- Believing suitability is only required at the initial recommendation
- Equating fair dealing with treating all clients identically
- Assuming informal client approval waives confidentiality
Discretionary Portfolios — Composite Inclusion (GIPS)
Accounts where the firm has explicit trading authority; only these reflect manager decisions and belong in GIPS comps.
Key Insight
Inclusion requires explicit, continuing trading authority — recommendations or model allocations don't qualify; temporary lapses must be managed, not
Often Confused With
Common Mistakes
- Confusing a signed investment policy with actual trading authority.
- Including accounts where the firm only gives recommendations or model allocations.
- Assuming temporary paperwork lapses or wrap/pool status automatically exclude the account.
GIPS Composite Presentation & Disclosures
Required content and minimum performance history firms must report per composite to ensure transparency and comparabilty
Key Insight
Must report annual returns, composite assets, # portfolios, dispersion, fees, benchmark and calc policies; present ≥5 years (or since inception) and t
Often Confused With
Common Mistakes
- Forgetting to report composite assets, number of portfolios, or internal dispersion.
- Mixing up minimum history — start with ≥5 years (or since inception) and add one year annually up to 10.
- Omitting mandatory disclosures: fee schedules, benchmark rationale, or significant events.
Quantitative Methods
8%Pearson Correlation (r)
Standardized covariance measuring linear association (−1 to +1); crucial for diversification and portfolio risk.
Key Insight
r measures only linear association — r=0 ≠ independence; outliers can dominate magnitude and sign.
Often Confused With
Common Mistakes
- Treating r = 0 as proof of independence
- Interpreting a high r as evidence of causation
- Assuming removing outliers always gives a 'better' correlation
Skewness & Kurtosis (3rd/4th Moments)
Skewness = asymmetry of returns; kurtosis = tail heaviness (normal kurtosis = 3; excess = k−3).
Key Insight
Kurtosis baseline is 3 (use excess=k−3); both are highly sensitive to outliers and biased in small samples.
Often Confused With
Common Mistakes
- Using kurtosis = 0 as the normal benchmark (forget baseline 3)
- Flipping skew sign — negative skew means mean < median < mode
- Assuming skewness/kurtosis are robust; single extremes distort them
Skewness — Tail Direction
Standardized third moment showing tail asymmetry; positive = long right tail, negative = long left; impacts tail risk.
Key Insight
Sign gives tail direction; |skew|>0.5 usually signals meaningful asymmetry and shifts mean vs median and VaR.
Often Confused With
Common Mistakes
- Zero skew ≠ proof of normality
- Positive skew ≠ most outcomes are large — it's driven by few extreme gains
- Treating small skew (0.1–0.4) as economically important
Return Distribution Features — Moments & Tails
Describe returns with mean, variance, skewness, kurtosis; always specify parameters for simulation and inspect tails.
Key Insight
Mean and variance suffice only for normal or quadratic-utility cases; skewness and kurtosis determine tail risk and extreme-loss behavior.
Often Confused With
Common Mistakes
- Assuming mean ± 2σ captures extremes for non-normal returns
- Treating high kurtosis as a single outlier rather than generally heavier tails
- Believing matching first two moments guarantees identical distributions
CLT — Sample Means Go Normal
Sample means/sums ≈ normal for large n if independent with finite variance — enables z-tests and CIs.
Key Insight
CLT applies to sums/means (not individual observations); it requires independence/finite variance and sufficient n — heavy tails need larger n.
Often Confused With
Common Mistakes
- Using n ≥ 30 as a universal cutoff for normality
- Applying the CLT to individual observations instead of sample means/sums
- Assuming lognormal prices are exact rather than an approximation from aggregated log returns
Expectation, Variance & Portfolio SD
E[X]=mean; Var(X)=E[(X−μ)^2]; SD=√Var — use scaling rules and covariances to compute portfolio variance.
Key Insight
Variance ≥ 0; Var(aX+b)=a^2Var(X) and adding a constant doesn't change Var; portfolio Var = ΣiΣj wi wj Covij — correlations drive diversification.
Often Confused With
Common Mistakes
- Expecting negative covariances to produce negative portfolio variance
- Treating standard deviation as a downside-only risk measure
- Assuming diversification always reduces variance regardless of asset correlations
Economics
8%Shutdown Rule — Short‑Run: P vs AVC
Operate if market price (P or AR) ≥ AVC; shut down temporarily if P < AVC because fixed costs are sunk.
Key Insight
Compare price to average variable cost — fixed costs don't affect short‑run output; P=AVC is indifferent.
Often Confused With
Common Mistakes
- Using ATC instead of AVC to decide short‑run shutdown
- Including fixed (sunk) costs in the operate/stop decision
- Treating P>AVC as required (P=AVC means firm is indifferent and may operate)
Profit Max Rule: Produce Where MR = MC
Set output where marginal revenue equals marginal cost; for perfect competition MR = price, for others MR < price.
Key Insight
MR = MC gives the optimal quantity but not profitability — always check price vs average cost and second‑order condition.
Often Confused With
Common Mistakes
- Assuming MR = MC guarantees positive profit (it may maximize a loss)
- Ignoring the second‑order test — MC must cross MR from below
- Shutting down because MR < MC without checking if P ≥ AVC
Market Structures — Perfect, Monopolistic, Oligopoly, Monopoly
Classify markets by firm count, product differentiation, entry barriers and price power to predict pricing and output.
Key Insight
Many firms + no barriers → price taker (P≈MC); single firm + high barriers + no close substitutes → price maker (MR≠P).
Often Confused With
Common Mistakes
- Treating product differentiation as price immunity — differentiated goods still face downward-sloping demand.
- Assuming close substitutes imply infinite elasticity (perfectly elastic demand).
- Assuming oligopolies always collude to set prices (ignores incentives to compete and antitrust constraints).
Surplus & Deadweight Loss — Consumer and Producer
Areas under demand/above supply (consumer) and above supply/below price (producer); policies and market power reallocate
Key Insight
Transfers vs total welfare: taxes/subsidies/controls block mutually beneficial trades and create DWL; monopoly causes DWL since MR≠P (Q < competitiveQ
Often Confused With
Common Mistakes
- Confusing producer surplus with accounting profit.
- Believing a binding price control only transfers surplus and never creates DWL.
- Assuming subsidies always increase total welfare (they can create DWL and fiscal costs).
Fiscal Stance: Expansionary vs Contractionary
Taxes, spending and transfers used to shift aggregate demand; stance judged by change in cyclically‑adjusted fiscal (net
Key Insight
Stance = change in the cyclically‑adjusted (structural) balance — remove output‑gap effects and one‑offs; headline deficit can mislead.
Often Confused With
Common Mistakes
- Equating structural and headline deficits; ignore output gap and one‑offs.
- Assuming deficit reduction always means contractionary policy — could be cyclical recovery or one‑offs.
- Expecting deficit cuts to immediately lower interest rates and spur private investment.
FX Forwards: High Rates → Forward Discount
Covered interest parity: higher domestic rate ⇒ domestic currency trades at a forward discount; forward set by interest‑
Key Insight
Forward = Spot * (1+rd)/(1+rf). If rd > rf then forward < spot → domestic currency at discount (not a premium).
Often Confused With
Common Mistakes
- Thinking higher domestic rates imply a forward premium (inverse relationship).
- Confusing covered vs uncovered parity — forward ≠ expected future spot.
- Ignoring base/quote conventions and misreading which currency is at premium/discount.
Business Cycle Phases — Expansion & Contraction
Four-phase swings in real GDP—expansion, peak, contraction, trough; use leading/coincident/lagging indicators to time tr
Key Insight
Cycles are irregular in length and intensity; leading indicators signal turning points, and a single negative quarter doesn't define a recession.
Often Confused With
Common Mistakes
- Assuming cycles recur at fixed, seasonal-like intervals
- Treating any single negative GDP quarter as the end of an expansion
- Equating any short GDP decline immediately with a recession
Growth Cycle — Output Gap (GDP vs Potential)
Percent deviation of real GDP from estimated potential output; shows cyclical overheating (positive) or slack (negative)
Key Insight
Output gap = temporary percent deviation of real (not nominal) GDP from potential; it's not the trend growth rate and maps imperfectly to inflation/un
Often Confused With
Common Mistakes
- Using nominal GDP or nominal changes to measure the gap
- Interpreting a positive output gap as a permanent rise in potential output
- Mixing absolute percentage-point differences with percent (relative) gaps
FX Effects on Trade — Marshall‑Lerner & J‑Curve
How exchange‑rate moves change import/export prices and volumes; long‑run gain needs |εx|+|εm|>1; expect a J‑curve short
Key Insight
A depreciation improves the trade balance only if export+import price elasticities (absolute) >1; short‑run often worsens (J‑curve).
Often Confused With
Common Mistakes
- Treat nominal depreciation as real — ignore relative inflation effects.
- Assume depreciation always improves trade balance; ignore elasticity sum and time lags.
- Misread quote convention and flip which currency is appreciating.
Interest Rate Parity — Covered vs Uncovered
No‑arbitrage link: forward vs spot reflect interest differentials; CIRP pins forward, UIP links expected future spot.
Key Insight
CIRP gives a no‑arbitrage forward (removes FX risk if contract honored); UIP is an expectation relation and can include risk premia/errors.
Often Confused With
Common Mistakes
- Flip which currency interest rate goes in numerator/denominator — sign/direction errors.
- Treat UIP like CIRP — expect a guaranteed arbitrage instead of an expectation with premium.
- Use simple interest inconsistently — forget correct discrete/continuous compounding for forward pricing.
FX Forward — CIP (Covered Interest Parity)
OTC contract locking a future FX rate; price set by covered interest parity, not the expected future spot.
Key Insight
F = S × (1+r_dom)/(1+r_for) (discrete) — forward points reflect interest differentials; it's an arbitrage price, not a forecast.
Often Confused With
Common Mistakes
- Assuming hedging with a forward boosts expected cash flows or is costless.
- Treating the forward rate as the market's expected future spot.
- Adding cash flows across currencies without converting or using a forward.
Real vs Nominal Exchange Rate (q = E·P*/P)
Nominal = market FX quote; real adjusts for relative price levels (q = E·P*/P) — use q to judge competitiveness.
Key Insight
q rising (q↑) = domestic goods relatively more expensive → real depreciation; approx %ΔE ≈ π_domestic − π_foreign.
Often Confused With
Common Mistakes
- Swapping domestic and foreign price levels when computing q.
- Using the nominal rate alone to judge competitiveness.
- Interpreting q↑ as a real appreciation (it's a depreciation).
Financial Statement Analysis
12%Disclosures & Reconciliations (Notes)
Mandatory notes explaining policies, judgments, subsequent events, related‑party deals and reconciliations—use to adjust
Key Insight
Notes contain the actionable adjustments—identify adjusting vs non‑adjusting subsequent events, estimate unrecognized liabilities, and scrutinize 관련‑
Often Confused With
Common Mistakes
- Treating disclosures as optional; they can change reported amounts and ratios.
- Assuming policy text is only descriptive — it changes how you interpret balances.
- Believing reconciliations fully explain differences; you may need further analyst adjustments.
IFRS — Principle‑Based Standards
Principles-based global rules for recognition, measurement (varied bases), presentation and disclosure of financials.
Key Insight
IFRS does not mandate fair value for everything—measurement depends on the specific standard; fair‑value level is set by input observability, not by '
Often Confused With
Common Mistakes
- Assuming IFRS requires fair value for all assets and liabilities.
- Using asset class to pick fair‑value hierarchy level instead of input observability.
- Treating present value measurements as always equal to fair value.
Balance Sheet — Snapshot of Resources & Claims
Snapshot of assets, liabilities and shareholders' equity (carrying amounts); used to assess liquidity and solvency.
Key Insight
Point-in-time snapshot of carrying (book) amounts — current vs noncurrent drives liquidity ratios; equity = residual value, not cash.
Often Confused With
Common Mistakes
- Treating carrying/book value as market value — check disclosures for fair value.
- Reading the balance sheet as a flow over time — it's a snapshot at a date.
- Applying a strict 12‑month current rule without checking operating cycle or contracts.
Income Statement — Profitability Over a Period
Period report of revenues, expenses and gains/losses used to measure profitability, margins and operating performance.
Key Insight
It's a flow for a period that separates operating vs non‑operating items; presentation style (single vs multi‑step) doesn't change net income.
Often Confused With
Common Mistakes
- Confusing accrual net income with cash flows — income ≠ cash inflows/outflows.
- Assuming single‑step vs multi‑step changes net income — format only reorganizes subtotals.
- Treating gross profit as including operating expenses — gross profit = revenue − COGS.
Revenue Recognition — IFRS 15 / ASC 606 (Five‑Step)
Five‑step model: contract, performance obligations, transaction price, allocate, recognise — timing drives margins, rece
Key Insight
Over‑time vs point‑in‑time hinges on control transfer or enforceable right/no alternative use; cap variable consideration if likely to reverse.
Often Confused With
Common Mistakes
- Assuming all long‑term contracts qualify for over‑time recognition
- Including unconstrained variable consideration fully in the transaction price
- Treating every contract modification as a separate contract
Inventory & Cost Flows — FIFO / LIFO / Weighted Avg + LCM/NRV
Cost‑flow choice and LCM/NRV determine COGS, margins, taxes and working capital; use the LIFO reserve to convert compars
Key Insight
FIFO COGS = LIFO COGS − change in LIFO reserve; rising prices → higher LIFO COGS and lower inventory; IFRS forbids LIFO.
Often Confused With
Common Mistakes
- Using the wrong sign when converting LIFO to FIFO (remember subtraction)
- Believing inventory write‑downs are non‑cash and don't reduce profit
- Assuming LIFO is permitted under IFRS
Corporate Issuers
8%Related‑Party Transactions (RPTs)
Deals between the firm and insiders/affiliates that can skew valuation and harm minority holders—identify, disclose, and
Key Insight
Identical price ≠ arm's‑length; material RPTs need independent committee review, independent valuation, or shareholder approval.
Often Confused With
Common Mistakes
- Assuming all RPTs are illegal or automatically fraudulent.
- Believing disclosure alone fixes the conflict—independent review or approvals are often required.
- Thinking an identical internal price proves the deal was arm's‑length.
Agency Theory (Principal–Agent Tradeoffs)
Explains owner–manager conflicts and the tradeoffs of incentives, monitoring, and costs that affect firm value.
Key Insight
Agency cost = monitoring + bonding + residual loss; incentives reduce costs but can induce risk‑shifting and short‑termism.
Often Confused With
Common Mistakes
- Assuming equity‑based pay eliminates agency costs.
- Believing increased monitoring always raises firm value.
- Treating board independence alone as proof of effective governance.
Greenwashing (False Sustainability Claims)
Misleading ESG claims that inflate perceived sustainability and skew investment due diligence.
Key Insight
Exam flag: vague targets, missing Scope 1–3 detail, no external assurance, or KPI mismatches = likely greenwashing.
Often Confused With
Common Mistakes
- Assuming labels like ‘carbon neutral’ mean real, material emission cuts.
- Treating glossy CSR reports as proof of substantive ESG performance.
- Trusting third‑party logos without checking assurance scope and methodology.
Climate Risk — Physical vs. Transition
Physical hazards and policy/market/tech shifts that alter cash flows, costs, and asset values.
Key Insight
Map risks to timing and channels: physical = asset damage/supply shocks now; transition = rapid repricing, stranded assets, litigation, or tech shifts
Often Confused With
Common Mistakes
- Ignoring transition risk as ‘long‑term’ — it can reprice assets quickly.
- Assuming physical risk only hits a firm's own assets, not its supply chain or counterparties.
- Thinking transition risk comes only from government regulation, not tech, markets, or lawsuits.
Operating vs Financial Leverage (DOL, DFL, DTL)
How fixed costs magnify returns: DOL = %ΔEBIT/%ΔSales; DFL = %ΔEPS/%ΔEBIT; DTL = DOL × DFL.
Key Insight
Leverage magnifies changes and varies with output—DFL → ∞ as EBIT → 0; these ratios are not constant.
Often Confused With
Common Mistakes
- Using net income instead of EBIT when applying DOL
- Adding DOL + DFL instead of multiplying to get DTL
- Assuming DOL/DFL are constant across all sales or output levels
Modigliani–Miller (MM) Capital-Structure Rules
Perfect-market benchmark: Prop I—capital structure irrelevant; Prop II—equity cost rises with leverage; taxes make debt価
Key Insight
No-tax MM: WACC stays constant because equity return rises with leverage; corporate taxes add PV of interest tax shield.
Often Confused With
Common Mistakes
- Treating MM as proof capital structure never matters in real firms
- Assuming the interest-tax shield is unbounded — more debt always increases value
- Believing leverage lowers WACC in the no-tax MM world
Liquidity Ratios & Cash Conversion Cycle (CCC)
Balance-sheet short-term solvency metrics—working capital, current/quick ratios and CCC measure liquidity and cash-cycle
Key Insight
Use reported current (book) balances and operating cash timing; exclude restricted/noncurrent items—high current ratio can signal idle assets.
Often Confused With
Common Mistakes
- Assuming a higher current ratio is always better — may indicate idle or inefficient assets.
- Including long‑term liabilities, noncurrent receivables, or restricted cash in current balances.
- Using net income or market values instead of operating cash flows and book current balances for CCC/ratios.
Working Capital Policy — Conservative, Matching, Aggressive
How a firm sizes and finances current assets; tradeoffs: liquidity (lower risk) vs. profitability (higher return).
Key Insight
Policy = financing tenor + asset investment level: conservative raises liquidity (lower return), aggressive boosts return but increases default/roll‑/
Often Confused With
Common Mistakes
- Believing a conservative policy always maximizes firm value.
- Assuming short‑term financing is always cheaper and therefore preferable.
- Thinking matching/hedging eliminates all liquidity or rollover risk.
Equity Investments
12%Common Stock — Residual Claim
Equity holders receive net assets/cash flows only after senior claims; dividends discretionary and uncertain.
Key Insight
Common shareholders get leftovers after creditors, taxes, and preferred — that residual volatility = equity risk/return.
Often Confused With
Common Mistakes
- Treating dividends as fixed contractual payments
- Assuming common shareholders outrank creditors in liquidation
- Interpreting 'residual' as ownership of specific assets
Primary vs Secondary Markets — Who Gets the Money?
Primary markets raise capital for issuers (IPOs, follow‑ons); secondary markets trade existing securities and determine价
Key Insight
Primary transfers proceeds to the issuer once; secondary provides ongoing price discovery and liquidity among investors.
Often Confused With
Common Mistakes
- Assuming proceeds from a secondary trade go to the issuing company
- Believing an IPO price equals the long‑term market price
- Confusing underwriters (origination) with market makers (liquidity providers)
DuPont ROE — Margin × Turnover × Leverage
Express ROE as net profit margin × asset turnover × equity multiplier to pinpoint the driver of returns.
Key Insight
Rising ROE can come from profits, efficiency, or more leverage — only margin/turnover gains are sustainably less risky.
Often Confused With
Common Mistakes
- Assuming higher ROE always equals better performance; it can be driven by more debt or one‑time gains.
- Using net income that includes nonrecurring items — don't forget to adjust earnings before analysis.
- Comparing ROE across firms without normalizing for industry, asset intensity, or accounting policies.
Economic Moat — Durable Advantage Sources
Firm attributes (scale, switching costs, network effects, intangibles, regulation) that can sustain returns above cost‑0
Key Insight
Durability is key: test if advantages are replicable, contestable, or erodible by technology, competitors, or regulation.
Often Confused With
Common Mistakes
- Treating current high profits as proof of a moat — durability must be tested.
- Assuming patents/brands automatically provide perpetual protection.
- Ignoring market contestability or regulatory/technological threats to the moat.
Gordon (Constant‑g) DDM
Values a stock as a perpetuity of dividends growing at constant rate: P0 = D1/(k − g); requires k > g.
Key Insight
Always convert D0 to D1 (D1 = D0·(1+g)); if k ≤ g the model is invalid and price blows up as (k−g)→0.
Often Confused With
Common Mistakes
- Using D0 in numerator instead of D1 — must convert D1 = D0·(1+g).
- Applying model to firms that don't pay dividends or lack perpetual constant growth.
- Ignoring k ≤ g — treat as invalid, not a large finite price.
Global Equity Valuation
DDM/DCF/multiples are core; for international equities adjust rates, cash flows, and comparables for country, currency,
Key Insight
Add country‑risk/currency premium to ke, convert financials to a common accounting basis, and normalize comparables for leverage.
Often Confused With
Common Mistakes
- Using home‑country discount rate for a foreign firm — omits country/currency risk.
- Trying to value non‑dividend payers with DDM without switching to DCF or residual‑income methods.
- Comparing P/Es across countries without adjusting for accounting standards or capital structure.
Fixed Income
12%Yield Measures & Spreads — YTM, YTC, OAS
Quantifies expected return and benchmark gaps: YTM/YTC/current yield; nominal, Z‑spread, OAS adjust for option risk.
Key Insight
YTM assumes coupons reinvested at YTM; current yield ignores capital gain/loss; OAS isolates option cost vs benchmark.
Often Confused With
Common Mistakes
- Treat YTM as a guaranteed realized return — ignores reinvestment and call/credit risk.
- Use current yield as total return — ignores capital gain/loss and time to maturity.
- Assume YTM = coupon rate — only true when price = par.
Bond Valuation & Price Drivers
Price = PV of promised cash flows discounted at market yield; prices move inversely to yields; apply clean/dirty, accr..
Key Insight
Duration approximates % price change for small yield moves; lower coupon or longer maturity → higher duration/volatility.
Often Confused With
Common Mistakes
- Assume same absolute price change for equal yield shifts — ignores duration/convexity.
- Confuse coupon rate with YTM or current yield — yield depends on price.
- Think bond prices rise when yields rise — it's the inverse relationship.
PV: Discounting & Additivity
Discount each expected cash flow to today with matching compounding; PVs add and can reveal implied yields.
Key Insight
Match cash‑flow timing and compounding frequency exactly; only correctly discounted flows can be summed to get total PV.
Often Confused With
Common Mistakes
- Leave out final principal or stub coupons — missing cash flows bias PV down.
- Use simple/linear discounting or wrong compounding frequency — mismatch gives wrong PV.
- Discount nominal cash flows with a real rate (or vice versa) — mixing real/nominal invalidates the result.
Nominal Rate Breakdown (Real + Inflation + Premiums)
Nominal rate = real risk‑free rate + expected inflation + premiums (term, liquidity, default); use T‑bills as short‑term
Key Insight
Fisher is an approximation at low rates; exact relation has a multiplicative term — use expected (ex‑ante) inflation for valuation.
Often Confused With
Common Mistakes
- Treat T‑bill yields as containing credit/default risk — they serve as the short‑term risk‑free proxy.
- Use long‑term government yields as short‑horizon risk‑free rates for valuation.
- Apply the Fisher relation as a simple sum at high rates — ignore the multiplicative term when it matters.
Yield Curve — Level / Slope / Curvature
Maps yields across maturities; decompose moves into level (parallel), slope (short vs long), and curvature (butterfly) —
Key Insight
Decompose curve moves into three orthogonal factors: level = parallel shifts, slope = steepen/flatten, curvature = butterfly; duration covers level,需用
Often Confused With
Common Mistakes
- Relying on duration alone for non‑parallel curve moves.
- Assuming flattening always means short rates fall and long rates rise.
- Thinking curvature affects only mid‑term bonds.
Effective Duration (option bonds)
First‑order price sensitivity to small, parallel yield shifts that reprices cash flows when embedded options change them
Key Insight
A model‑based numerical first‑order estimate from repricing; differs from modified duration for option‑bearing bonds and fails for large or non‑paral
Often Confused With
Common Mistakes
- Treating effective duration as identical to modified duration for option bonds.
- Using it to estimate price changes for large or non‑parallel yield moves.
- Expecting it to capture convexity (it's only a first‑order measure).
Term (Maturity) Premium
Extra yield for longer maturities to compensate for interest‑rate (price) risk and future rate uncertainty.
Key Insight
It's compensation for time/interest‑rate uncertainty — not credit or liquidity risk; can be positive, zero, or negative.
Often Confused With
Common Mistakes
- Equating maturity premium with credit/default risk
- Assuming the premium must always be positive
- Blaming an upward yield curve solely on a positive maturity premium
Price vs Reinvestment Risk
Price (interest‑rate) risk changes bond values; reinvestment risk changes realized HPR via coupon reinvestment rates.
Key Insight
They act in opposite directions: rising rates → price falls but reinvested coupons earn more; which dominates depends on coupon, duration, and horizon
Often Confused With
Common Mistakes
- Thinking holding to maturity removes coupon reinvestment risk
- Believing YTM always equals the realized return regardless of reinvestment rates
- Assuming zero‑coupon bonds have reinvestment risk
Duration & Convexity: Price‑Sensitivity Toolbox
Macaulay = weighted avg timing; modified ≈ % price change per yield; convexity = curvature correction.
Key Insight
Duration captures timing risk (ties to WAL); modified is a linear approx valid for small Δy; convexity corrects large Δy and can be negative for call/
Often Confused With
Common Mistakes
- Assuming convexity is always positive — callable/prepayable bonds can show negative convexity.
- Using modified duration as exact % price change for large yield moves — ignore convexity at your peril.
- Equating WAL with duration — WAL measures principal timing, not full price sensitivity.
Securitization: SPV, Waterfall & Tranche Risk
Pool receivables into an SPV; tranches follow a waterfall; credit enhancement and correlation set tranche loss risk.
Key Insight
Waterfall priority + pool default dependence determine who eats losses first; seniority reduces but doesn’t eliminate tail risk — run stress scenarios
Often Confused With
Common Mistakes
- Believing ratings are just historical default rates — agencies apply forward-looking stress/scenario analysis.
- Assuming securitization always increases liquidity or lowers funding cost — complexity, transparency, and demand matter.
- Treating senior tranches as risk‑free — senior protection fails under extreme correlated losses.
Default Risk (PD × LGD)
Expected-loss component of yield: probability of default (PD) × loss given default (LGD); drives credit spread.
Key Insight
Credit spread ≈ risk-free + PD×LGD + liquidity + taxes — PD×LGD is the expected loss; seniority/collateral mainly change LGD.
Often Confused With
Common Mistakes
- Assume recovery rates are uniform across an issuer's issues (ignore seniority/collateral).
- Equate a downgrade with imminent/default certainty.
- Rely on credit ratings as real-time default predictors.
Seniority & Collateral — Claim Priority
Legal ranking of claims: senior secured > senior unsecured > subordinated > equity — determines expected recovery and LG
Key Insight
Position in capital structure matters more than issuer name — different liens, first vs second, and admin claims cause big LGD differences.
Often Confused With
Common Mistakes
- Assume secured status guarantees full recovery.
- Treat subordinated debt as identical to other unsecured claims.
- Ignore administrative/preferential claims and bankruptcy costs when estimating recovery.
Derivatives
7%Option Moneyness & Premium Split
Classifies ITM/OTM/ATM; premium = intrinsic + time (extrinsic) value; time value driven by vol & time.
Key Insight
Intrinsic = immediate exercise value; time value = extra value from volatility/time — OTM can be valuable pre-expiry.
Often Confused With
Common Mistakes
- ITM at expiration ≠ guaranteed profit — you must subtract the premium paid.
- OTM options can have positive market value before expiry (time value), not zero.
- Calls are ITM when spot > strike; puts when spot < strike — don't invert them.
Trading Venues & Market Structure
Order- vs quote-driven; exchange-traded vs OTC — determines price discovery, liquidity, customization, and counterparty/
Key Insight
Exchanges use centralized order books and CCP clearing; OTC trades are customizable but carry bilateral credit/liquidity risk.
Often Confused With
Common Mistakes
- Assuming OTC markets are unregulated — they can be regulated or supervised.
- Treating OTC contracts as standardized like exchange contracts — OTC enables customization.
- Assuming OTC trades have lower counterparty risk — usually higher unless centrally cleared.
Forwards — OTC Single-Settlement Contracts
Custom OTC contract to buy/sell an asset at a set future price; priced by cost-of-carry and arbitrage.
Key Insight
No daily mark-to-market: the fixed contract price is not the contract's evolving economic value—value changes with spot, carry, and rates.
Often Confused With
Common Mistakes
- Assuming forwards eliminate counterparty credit risk via daily margining.
- Using the original delivery price as the contract's current economic value.
- Treating forward and futures prices as always identical (ignore marking/interest correlation).
Futures — Exchange-Traded, Daily‑Marked Contracts
Standardized, exchange-traded contract with daily mark-to-market and clearinghouse margining; price reflects carry plus—
Key Insight
Daily settlement produces immediate cash P/L and interest timing effects; correlation between rates and underlying returns can make futures ≠ forwards
Often Confused With
Common Mistakes
- Assuming futures are identical to forwards except for terminology.
- Thinking daily settlement removes all counterparty risk.
- Ignoring that marking-to-market, dividends, and rate correlation can make futures and forwards differ.
Contingent Claims — Payoff & P/L Maps
Terminal option payoffs and P/L diagrams — build them, adjust for premium/financing, and spot breakevens/arbitrage.
Key Insight
Payoff = terminal cash flow; Profit = payoff − premium ± financing. Short = sign flip. Draw P/L with slope breaks at strikes to find breakevens.
Often Confused With
Common Mistakes
- Forget to flip sign for short positions when drawing payoff or computing P/L.
- Report payoff as profit — omit premium and financing adjustments.
- Price options using physical probabilities or ignore volatility's effect on value.
No-Arbitrage — Parity & Arbitrage Checks
Identical-payoff portfolios must share price; use parity relations to detect arbitrage and to link derivative and asset/
Key Insight
If two portfolios match cash flows in all states, any price gap is exploitable: buy the cheaper, sell the dearer, use financing/dividends to lock risk
Often Confused With
Common Mistakes
- Assume no-arbitrage always pins a unique price in incomplete or ambiguous-input markets.
- Treat Law of One Price and no-arbitrage as identical in every context.
- Conclude no-arbitrage means arbitrage never occurs in real markets (ignore frictions).
Alternative Investments
8%Fees & Incentives — Management, Performance, HWM/Hurdles
Management fee (AUM) + performance fee (% profits); HWM and hard/soft hurdles control when fees are taken.
Key Insight
High‑water mark delays fees until NAV (after fees) exceeds prior peak; hard = fees only on excess, soft = can allow fees on total once hurdle met.
Often Confused With
Common Mistakes
- Think HWM prevents fees after any loss — it only delays fees until the prior peak NAV is exceeded.
- Treat hard and soft hurdles as identical — hard charges only on excess; soft can trigger fees on total returns once met.
- Assume performance fees are always on gross returns — some funds base fees on net returns after management fees.
Long–Short Equity: Net vs Gross Exposure
Long winners, short losers; net exposure sets market beta, gross exposure shows total capital at risk and leverage.
Key Insight
Net exposure = market sensitivity; gross exposure = total long+short risk (alpha opportunity and absolute volatility); net=0 still has stock‑specific/
Often Confused With
Common Mistakes
- Assume long/short is always market‑neutral — many funds are long‑biased or short‑biased.
- Treat gross exposure as only leverage — higher gross raises absolute risk and alpha potential, not just leverage.
- Assume net = 0 implies no risk — concentrated or offsetting factor exposures still create substantial risk.
Private Co Valuation — DCF, Multiples, NAV
Pick DCF with control/illiquidity adjustments, adjusted comps/precedents, or NAV depending on data, control and cash‑gen
Key Insight
Use DCF when cash flows are forecastable; add discounts for illiquidity, precedents show control premiums/synergies, NAV suits asset‑heavy or wind‑up
Often Confused With
Common Mistakes
- Apply public-company multiples unchanged — ignores marketability and control differences
- Treat precedent multiples as pure market prices — ignore acquisition premiums and synergies
- Use public-peer DCF inputs (beta, WACC, growth) without private‑company adjustments
PE Exit Routes — IPO, Trade Sale, Secondary, Recap
Exit choice (IPO, strategic sale, secondary PE sale, recap, liquidation) drives timing, proceeds, taxes and realized IRR
Key Insight
Buyer type and market timing drive price (strategics pay synergies); timing, deal costs, taxes and lock‑ups can change realized IRR even if EV is same
Often Confused With
Common Mistakes
- Assume identical returns for the same enterprise value — ignores timing, deal costs and taxes
- Assume IPO always gives highest return — ignores fees, market risk and lock‑up constraints
- Treat recapitalization as a full exit — it typically provides partial liquidity while retaining sponsor upside
Real Estate Diversification & Correlation
Real estate often shows low–to–moderate correlation with stocks/bonds, offering diversification and partial inflation 보호
Key Insight
Correlations vary by property type, time horizon and cycle; appraisal smoothing underestimates true co‑movement and risk.
Often Confused With
Common Mistakes
- Assuming correlations are constant across market cycles
- Treating real estate as a guaranteed inflation hedge for all property types
- Believing any small allocation to real estate always lowers portfolio volatility
Property Types & Cash‑Flow Drivers
Classifies residential, office, retail, industrial, hospitality by lease terms, cash‑flow drivers and cyclical exposure.
Key Insight
Lease length and tenant cost responsibility control income stability — long net leases = predictable cash flow; hospitality = revenue‑sensitive and l収
Often Confused With
Common Mistakes
- Thinking commercial leases are uniformly short and flexible
- Equating headline rent with investor return (ignores vacancy, Opex, CapEx)
- Treating multifamily and single‑family markets as operationally identical
Commodity Risk Map
Price and non-price risks—volatility, leverage, basis/roll, liquidity, counterparty, geo/weather, FX—vary by instrument.
Key Insight
Instrument choice dictates dominant risks: physical → storage/transport; futures → margin/roll/contango; OTC → counterparty credit.
Often Confused With
Common Mistakes
- Assuming commodities always diversify and lower portfolio risk.
- Treating exchange-traded futures funds as free of counterparty/credit risk.
- Expecting roll yield to be positive for long futures in all markets.
Spot Market Dynamics
Immediate-delivery prices set by current supply, inventories, storage costs and convenience yield; react quickly to near
Key Insight
Spot reflects current supply/demand and inventories; basis = spot − futures ≈ storage cost − convenience yield, so spot ≠ nearest future.
Often Confused With
Common Mistakes
- Equating spot and nearest futures (ignores basis, storage and convenience yield).
- Inferring long-term fundamentals from a spot price shock.
- Assuming high inventory always means low spot volatility.
ESG — Infrastructure Risks & Disclosures
E,S,G factors that affect permitting, resilience, cash flows and valuation; integrate into risk models and reporting.
Key Insight
ESG creates material long‑term cash‑flow risk via permitting delays, resilience costs and disclosure gaps; frameworks differ.
Often Confused With
Common Mistakes
- Treating ESG as only environmental — ignore social/governance at exam peril
- Assuming framework adoption = strong ESG performance or effective risk management
- Viewing permitting compliance as mere paperwork rather than a schedule/cost risk
Revenue Models: Availability vs User‑Pay
Who bears demand risk: availability payments shift demand risk to the public payer; user‑pay ties cash flows to traffic.
Key Insight
Availability reduces demand sensitivity but retains operator O&M and performance risk; user‑pay exposes returns to traffic volatility and elasticity.
Often Confused With
Common Mistakes
- Assuming availability payments eliminate all project risk
- Believing user‑pay always yields higher returns regardless of demand volatility
- Treating shadow tolls as equivalent to true user‑pay cash flows
Portfolio Management
7%TWR vs MWR — Return & Risk Rules
How to compute and compare returns: TWR strips external flows; MWR (IRR) measures investor timing impact.
Key Insight
Who controls cash flows decides the metric: use TWR for manager performance, MWR/IRR for investor results.
Often Confused With
Common Mistakes
- Treating manager-suggested but client-approved flows as manager-controlled.
- Defaulting to MWR because the manager might influence flows — control, not possibility, matters.
- Using population SD (n) for sample data; use n‑1 for an unbiased sample SD.
Holding Period Return (HPR)
Realized total return = (ending value + distributions − beginning value) ÷ beginning value; chain periods geometrically.
Key Insight
Always use beginning value as denominator, include reinvested distributions, and link subperiods by ∏(1+HPRi) − 1.
Often Confused With
Common Mistakes
- Confusing HPR with YTM or coupon yield — HPR is realized total return.
- Using the ending value as the denominator instead of the beginning value.
- Chaining subperiod returns with an arithmetic mean or omitting reinvested distributions.
Optimal Risk & CAL — Tangency Portfolio
Pick risky exposure using the tangency (efficient risky) portfolio and the CAL; compute CAL slope and optimal risky w.
Key Insight
Tangency portfolio maximizes Sharpe; optimal risky weight w* = (E[R_p] − R_f) / (A · Var(R_p)). Separation: same risky mix, different w*.
Often Confused With
Common Mistakes
- Treating beta as total risk — beta is systematic, not total volatility contribution.
- Believing every point on a CAL is globally mean–variance efficient.
- Thinking CAPM requires identical dollar risk exposure for all investors.
Portfolio Planning & Rebalancing Playbook
Translate investor goals into strategic allocation; choose rebalancing rule (calendar or band) to manage drift, costs, &
Key Insight
Rebalancing is a cost vs. tracking-error decision: rebalance only when marginal benefit (reduced drift/tracking error) ≥ marginal cost (trading, taxes
Often Confused With
Common Mistakes
- Assuming band rebalancing eliminates tracking error.
- Believing more frequent rebalancing always increases returns (ignores costs/taxes).
- Treating a model's single 'optimal' portfolio as best without considering implementation costs.
Individual vs Institutional Needs
How objectives, constraints (liquidity, horizon, taxes, regs) and risk tolerance dictate asset allocation and security選.
Key Insight
Constraints (liquidity, time horizon, taxes, regulation) — not stated risk appetite alone — determine allowable assets and active/passive choices.
Often Confused With
Common Mistakes
- Assuming institutions are always more risk tolerant than individuals.
- Assuming individual investors always have short horizons and can't hold illiquid assets.
- Assuming institutions have unlimited liquidity and can ignore cash‑flow constraints.
Investment Solutions: Product ↔ Strategy Match
Pick funds, ETFs, active/passive or alternatives by matching return targets, liquidity, tax impact and fee constraints.
Key Insight
Choose products by feature trade-offs: fees vs credible alpha, liquidity vs illiquidity premium, and on‑ vs after‑tax returns.
Often Confused With
Common Mistakes
- Believing active management always outperforms passive indexing.
- Equating higher fees with superior manager skill or future returns.
- Assuming ETFs are always more tax‑efficient than mutual funds.
Beta — Regression Slope (Systematic Risk)
Slope = Cov(asset, market) / Var(market); measures sensitivity to market movements, not total risk.
Key Insight
Beta is covariance/variance; regressing excess or raw returns yields the same slope; the intercept is alpha.
Often Confused With
Common Mistakes
- Treating beta as total volatility instead of market sensitivity.
- Assuming beta is fixed — estimates change with sample period and frequency.
- Thinking raw-returns regression gives a different slope than excess-returns regression.
CAPM — Required Return: Rf + β(Market Risk Premium)
Required (expected) return = Rf + β(E[Rm]−Rf); use to price assets and set benchmark required returns.
Key Insight
Only systematic risk (β) earns a premium; diversifiable risk is not rewarded in equilibrium.
Often Confused With
Common Mistakes
- Rewarding idiosyncratic (diversifiable) risk with expected return.
- Assuming an observable index (e.g., S&P 500) is the exact market portfolio.
- Confusing CAPM expected/required return with realized historical returns.
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