# Some common CFAI tricks

It would be useful to make a thread that would encompass some common tricks/curveballs that CFAI plays against us. Obviously, CFA exam is not overly tricky but given the overall difficulty a few points not missed here and there could mean a lot to us. Here are some basic tricks that CFAI uses on the exam to misguide you when you are in a hurry to get everything on time. Feel free to add anything you think it could be useful:

- Not putting all crucial info in a table (especially in the economics section); so far there were occasions in which if you completely focused on table of data you could miss on what is stated in the text that precedes the table. For example, you need to comment on the economy and how it is overheating (for example) and pick three justifications but the table has 6 variables. You could pick two from the table but third one would be in the text.

- Challenging your comfort with a formula and instead of doing A+B = C, you need to rearrange it to C-B=A. This is an easy one but nevertheless in a stressful situation it could throw you off. For example, you could be used to calculating required rate of return when you see a PWM/Institutional questions but the problem itself would be to calculate the spending rate by rearranging the whole formula.

- Making the calculation easier just to trick you. If you for example need to calculate Sharpe Ratio, you would need to do the standard (Rm - Rf)/portfolio sigma but they provide you with information such as market premium, risk free and portfolio sigma. If you do not pay attention, you could subtract Rf from market premium instead of simply calculating market premium / portfolio sigma.

- Tricking you with a constraint: for example, a pension plan could have a certain constraint stated in the initial text (before 7A), then it would get to 7D with some additional text and asking you which investment would be the most aligned based on overall criteria. If you look at the text just prior to 7D you could miss on a constraint that makes the solution different.

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Ethics.

The holy trinity

fair dealing

Priority of transactions

Misconduct

all perfectly intertwined. But only 1 right answer

when to accept a gift in a Standard 1 sense or a AMC sense? both contradictory.

providing Variance….people assume SD (utility function)

providing Justified E1/P when its just Forward earnings yeild….

Derivatives. Target Beta calc or Risk free rate calc for NF

IPS question…..stop telling me about what house they have. its not going into the asset base no matter how many times you ask.

this ones pretty easy to catch but still we can get easily preyed on:

giving three statements -> statement 1, statement 2, statement 3

choices are
A. Statement 2

B. Statement 3

C. Statement 1

It was a long shot, glad i made it.

I have not seen those tricks on the EOCs or previous exams only on the mock/practice questions.

Top down bottom up (credit)

top down bottom up (econ)

Depends on the author what it is.

Torsten55 wrote:

I have not seen those tricks on the EOCs or previous exams only on the mock/practice questions.

I agree. In the exam they tend to be in order. In topic tests, CFAI has made it into an art form to have the answers in a different order than in the vignette. I’ve been trying to think what is the benefit of that but haven’t really gotten anywhere.

If you're the first out the door, that's not called panicking

My guess is that they want to teach candidates to read better the answer choice.

You know what, Epsilon is right! I noticed a fixed income problem R23 #6 in which they inverted second (C) and third (B).

change in number of shares outstanding in GK Model

Frequency of performance reporting depending on CFAI vs GIPS and asset class in question. Have to go with my gut on these and hope my subconscious remembers something I don’t.

No law against waiting, people do it all the time.

Funny Girl wrote:

Frequency of performance reporting depending on CFAI vs GIPS and asset class in question. Have to go with my gut on these and hope my subconscious remembers something I don’t.

That’s my plan as well. All I can think about when reading GIPS is that out there, there are people who do GIPS verifications as their day job.What’s wrong with them?

If you're the first out the door, that's not called panicking

If you can stand to work with GIPS for extended periods of time that’s a rare skill in the marketplace and might be compensated as such

Nukular wrote:

If you can stand to work with GIPS for extended periods of time that’s a rare skill in the marketplace and might be compensated as such

That’s exactly what I thought when I saw a job posting that involves working on GIPS the other day :P

This is no trick, but I’ll likely soil my pants if I see a 12 point question on inter-market carry trade in the AM.

Some tricks:

1. Throwing in an illiquidity constraint in Singer Terhaar
2. Availability bias vs representativeness bias
3. The old “so do I add inflation or not?” in ind IPS
4. Providing weekly mean/sd and asking for annual VaR
5. IVaR vs MVaR (IVaR is for new, MVaR is for addition to existing)
6. Any Ethics question that requires distinguishing between requirement and recommended
7. The nitty-gritties in GIPS (like no need to report # of portfolios if <5)
8. Not using forward earnings yield in Fed/Yardeni

So incremental VaR is when you add a new asset into portfolio while marginal VaR is to gauge how much each asset contributes to VaR?

And we ARE supposed to use FEY in FED/Yardeni and compare it to current forward earnings growth?

Can you expand on 1 - 3?

For 1. I don’t believe you include a illiquid constraint in Singer Terhaar

For 3. Inflation is added only if the factors in the material do not consider inflation?

Just want to make sure I don’t mess these key points up on exam day

Torsten55 wrote:

So incremental VaR is when you add a new asset into portfolio while marginal VaR is to gauge how much each asset contributes to VaR?

And we ARE supposed to use FEY in FED/Yardeni and compare it to current forward earnings growth?

Your IVaR is correct. MVaR is how much an addition (emphasis on the “marginal” part) of existing assets contribute to VaR

Use FEY in Fed/Yardeni. For Fed, compare with 10 yr bond yield, and for Yardeni compare with current SPX earnings yield.

mfedrizzi wrote:

Can you expand on 1 - 3?

For 1. I don’t believe you include a illiquid constraint in Singer Terhaar

For 3. Inflation is added only if the factors in the material do not consider inflation?

Just want to make sure I don’t mess these key points up on exam day

You need to absolutely 100% add the illiquidity premium in Singer Terhaar.

Whether to add inflation depends on the question. Hence the trick. E.g., when calculating return requirements, you do the x/asset base calculation, and then add inflation.

When calculating return using a calculator, you don’t add inflation since the return required takes into account how much you need to earn to convert the nominal PV to nominal FV over a period of N, adding (or removing) a certain PMT every period.

Please double check your point 8 - every question I’ve done I have always used the forward earnings yield.

¯\_(ツ)_/¯ It be like that sometimes.

Tactics wrote:

This is no trick, but I’ll likely soil my pants if I see a 12 point question on inter-market carry trade in the AM.

Some tricks:

1. Throwing in an illiquidity constraint in Singer Terhaar
2. Availability bias vs representativeness bias
3. The old “so do I add inflation or not?” in ind IPS
4. Providing weekly mean/sd and asking for annual VaR
5. IVaR vs MVaR (IVaR is for new, MVaR is for addition to existing)
6. Any Ethics question that requires distinguishing between requirement and recommended
7. The nitty-gritties in GIPS (like no need to report # of portfolios if <5)
8. Not using forward earnings yield in Fed/Yardeni

12 points on inter market carry trade ? Come on the world ain’t that bad.

mfedrizzi wrote:

Can you expand on 1 - 3?

For 1. I don’t believe you include a illiquid constraint in Singer Terhaar

For 3. Inflation is added only if the factors in the material do not consider inflation?

Just want to make sure I don’t mess these key points up on exam day

Point 3 : Singer-Terhaar includes illiquidity premium when calculating ERP for Emerging/Developing country.

It ain't what you don't know that gets you in trouble. It's what you know for sure that just ain't so.

Hey, we’re allowed to use pens right? Stupid question.

¯\_(ツ)_/¯ It be like that sometimes.

CEO10K-DAY wrote:

Please double check your point 8 - every question I’ve done I have always used the forward earnings yield.

That’s what I meant. Not using the forward yield is the mistake.

Tactics wrote:

CEO10K-DAY wrote:

Please double check your point 8 - every question I’ve done I have always used the forward earnings yield.

That’s what I meant. Not using the forward yield is the mistake.

haha okay. I read that the opposite way.

¯\_(ツ)_/¯ It be like that sometimes.

CEO10K-DAY wrote:

Please double check your point 8 - every question I’ve done I have always used the forward earnings yield.

I just confirmed with the text, it is FEY for both Fed and Yardeni. Vol 3 Pg 151

Private Wealth: They give a description of tax regime in the country at the very beginning of the case (let’s say Heavy Dividend or something else) which implicitly gives you FLAT or PROGRESSIVE taxes. Later they can ask what is more efficient: tax exempt or tax defferred account. If regime is flat then there’s no difference.

AndreevM wrote:

Private Wealth: They give a description of tax regime in the country at the very beginning of the case (let’s say Heavy Dividend or something else) which implicitly gives you FLAT or PROGRESSIVE taxes. Later they can ask what is more efficient: tax exempt or tax defferred account. If regime is flat then there’s no difference.

did not notice this in any of the cfa am i did. where did you see this?

Maybe it’s just me but picking the right number of forward points when calculating the forward rate has thrown me a few times

Forward Earnings Yield. IE E1 / P0.

E1 on the formula sheet represents its the forward earning yield. Correct?

Sorry. I don’t mean to ask a dumb question here but triple confirming.

(Degree of Integration) X (ST Dev - i) X (correlation - i, m) X (Sharpe m) + (Degree of Segmentation) X (St Dev) X (Sharpe - m)

Then you add the illiquid Premium on top of ERPi?

Fully understand the second part of the response regarding inflation. Thanks for the help & confirmation