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Category: Level II
p vs. α
Candidates galore have problems (nightmares, really . . . but let’s not rub it in) with p-values. I’m here to tell you that understanding p-values is easy. Seriously: easy. A p-value is nothing more nor less than a level of significance, just like α. The best description I’ve heard is that α is the chosen…
Inventory Methods: FIFO vs. LIFO vs. Average Cost vs. Specific Identification and Periodic vs. Perpetual
I apologize in advance: this article’s long. Every inventory method has two important characteristics: How will costs be assigned to cost of goods sold (COGS) and ending inventory (EI)? When will those costs be assigned to COGS and EI? There are four possible answers to the first question: First-in, first-out (FIFO) Last-in, first-out (LIFO) Average…
R² vs. Adjusted R²
There’s a lot more to R2 and adjusted R2 than appears in the CFA curriculum. I’ll discuss what you need to know for the exam; the rest you can get from a statistics textbook if you’re interested. R2 Whether for a simple (i.e., single) regression or a multiple regression, R2 is the percentage of the…
Degrees of Freedom
Suppose that, for reasons known only to yourself and your therapist, you need to know the average height of all giraffes in the world. Desperately. You face a number of obstacles, not the least of which is that there are estimated to be about 80,000 giraffes in the world, and giraffes are notoriously difficult to…
Durbin-Watson Statistic (Test)
The Durbin-Watson (DW) statistic is used in a test for serial correlation of residuals (i.e., error terms) in several types of regression models: Simple regression models Multiple regression models Time-series trend models DW is not appropriate for testing for serial correlation of residuals in autoregressive (AR) models. The CFA curriculum doesn’t specify exactly why DW…
Valuing Equity Swaps
Equity swaps are just as easy to value as plain vanilla interest rate swaps; once again, as with all derivatives, the formula for the value is: \[Value\ =\ PV(what\ you\ will\ receive)\ –\ PV(what\ you\ will\ pay)\] If one leg is a fixed or floating rate, it is valued exactly as described for plain vanilla…
Pricing Equity Swaps
Remember that the price of a swap is the fixed rate on the swap. An equity swap can take many forms: The equity side can pay the return on a single stock, on a portfolio of stocks, or on an equity index. The equity side can pay only the price appreciation on the stock, portfolio,…
Valuing Currency Swaps
Currency swaps are only slightly more difficult to value than plain vanilla interest rate swaps; once again, as with all derivatives, the formula for the value is: \[Value\ =\ PV(what\ you\ will\ receive)\ –\ PV(what\ you\ will\ pay)\] Because the swap is equivalent to two bonds (one long, one short, one in one currency, one…
Pricing Currency Swaps
Remember that the price of a swap is the fixed rate on the swap. A currency swap can take one of three forms: Each side pays a fixed rate: one in one currency, the other in a different currency. In this case, there are two prices for the currency swap: the two fixed rates (which…
Venture Capital Method (Funding)
The venture capital (VC) method is an idea with which candidates often struggle, but it’s not nearly as difficult as some people would have you believe. (I know: I say that a lot. This time, however, it’s true). I’ll cover a single round of funding, then multiple rounds of funding, and will include the IRR…