|Author||Topic: Common Mistakes and Acronyms|
|Some items I included and posted by someone else and was useful when I took lv1
good luck everyone..
Though a list of common mistakes could help others.
- Forgetting to take the calculator out of BGN mode
- Computing a zero-coupon bond without semi-annual compounding
- Forgetting to double the yield after calculating a semi-annual coupon bond when they clearly ask for annual yield
- Getting number of discounting periods wrong! e.g. using 5 years instead of 4 because of question regarding beginning/end of period payments
- Answering the question based on variance and not standard deviation!!
- Being careless about questions that already give you the market premium? so you do not need to subtract the risk free rate.
- Automatically assuming a distribution is normally distributed when the questions doesn?t say that at all!!
- Forgetting about certain synonymous terms. e.g. coupon rate = nominal rate. Market maker = specialist.
- Not being careful about whether the question provides a sample of data or a full population of data.
- Getting overvalued/undervalued confused. Over/under term refers to position of SML relative to expected return.
- Thinking that if one covariance is greater than another? that this automatically means there is a stronger relationship? when in fact you need to find the correlation to compare on standardized terms.
- Forgetting that you must pay tax on implicit interest on a zero-coupon bond. (bit more specific, but important).
- FAILING TO RECOGNIZE THAT SOME QUESTIONS THAT APPEAR TO REQUIRE COMPLEX MATH CAN BE SOLVED LOGICALLY IN 2 SECONDS. e.g? remember than the realized rate of return must fall between the YTM and the Reinvestment Rate.
- Forgetting that in an FRA, the long position wants interest rates to rise!
- Forgetting that swap payments are paid in arrears? i.e. you use the rate from the beginning of the period, not the end.
- Equity margin = borrowing. Future margin = posting cash.
- CFA considers anything related to real-estate to be real estate investing.. e.g. MBS/CMOs
- Market value of real estate does not equal investment value of real estate. Investment value with factor in user specific details such as plans for use and individual tax rates.
- The cost of failure of a venture capital project is not 0. You still have all those costs to date to deal with!
- Economic depreciation and accounting depreciation are VERY different. Economic deprecation is about value. Accounting depreciation is about allocation.
- Duties to employers go out the window if you are protecting clients/capital markets.
- Non-renewable resources have elastic supply (this still feels counter intuitive).
- Land is not depreciated.
- Do not confused the effects of capitalizing costs with capitalized leases!
- Working capital is higher under an operating lease. In a capital lease, current liability will increase by the current portion of the lease obligation without an increase in current assets.
- Market risk = systematic risk = non-diversifiable risk = risk you are compensated for.
- Sinking fund provision is an OBLIGATION not a right to pay-down debt.
- If OAS
- The tax expense less DTL = Tax payable less DTA
- Under GIPs: definition of firm asset should include all fee paying and non fee paying, discretionary and non-discretionary accounts.
- Under GIPs: composite must include all fee-paying discretionary accounts. non-fee paying can be added if disclosed. non-discretionary cannot be added.
- Fed primarily uses open market operations as their primary tool to obtain price stability as their primary goal.
- Efficient frontier plots return v stddev. CML plots against total risk. CML plots against systematic risk measured by beta.
- Beta is covariance of asset with market divided by market variance. This is NOT THE CORRELATION OF AS ASSET WITH THE MARKET.
- Components of risk are CLEF-B. Country, liquidity, exchange rate, financial, and business.
- TIPs have PRINCIPAL AND NOT COUPON that change with inflation.