# Formulas/Information in CFA Curriculum that is not in Schweser

Hey guys, Tried doing a search and didn’t find a post about formulas/information that is not in Schweser but is in the CFA Curriculum. I was very diligent in my preparation this year (for Schweser materials) and made notes as I read each study session so I feel I know what is and isn’t in the notes. Here is what I found so far (let’s add to this till the exam): SS8: ASSET ALLOCATION reading Equation 26-3 – To generalize, the formula is used to aide in the decision of whether an asset should be included in the portfolio using the new securities Sharpe ratio and the porfolio’s Sharpe ratio. Here is the formula: SHARPE RATIOnew.asset > (SHARPE RATIOport)(CORRnew.asset,port) What it means – adding to an asset class to a current portfolio makes sense if the new asset’s sharpe ratio is greater than the portfolios sharpe ratio multiplied by the correlation of the asset to the portfolio. ---------------------------------------------------------- SS8 (The Case for International Diversification reading) Schweser’s list of barriers to international investing differs from the curriculum (not all but some of the points). According to the curriculum the four barriers are: 1)Asset risk and currency risk are not additive due to correlation less than 1.0 2)Currency risk decreases with the length of the investment horizon becuase exchange rates tend to revert to fundamentals 3)Can be hedged 4)If foriegn assets are small holding in portfolio then the contribution of currency risk is insignificant. *Schweser captures some of the points above but their list differs. I erased my notes from what I had in the Schweser books and replaced with the CFA notes in my notebook so unfortunately I cannot compare and contrast. I could do it later but I’m at work so I don’t have all my materials. Thanks. Let’s keep this going

Thanks for sharing.

yeah, i noticed the sharpe x correlation to see if you add new asset… is it in LOS? my thought was no, but it was still a surprise to see it.

westbruin Wrote: ------------------------------------------------------- > yeah, i noticed the sharpe x correlation to see if > you add new asset… is it in LOS? my thought was > no, but it was still a surprise to see it. There were some EOC questions that focused on this.

wow, you only find two after so much hardworking? schweser did a really good job.

No, I’m not done yet. I’ve only reviewed SS 1,2,3,6,7 and 8 so far in CFA. Will finish the rest this week.

Basically, I’m doing the CFA curriculum questions now. That’s how I spotted the difference. I highly recommend doing the CFA problems.

Thanks for the headsup but I doubt I’ll dig into CFAI text at this point and get messed up…

You don’t have to. That’s what this post is for. As I go through and find differences I’ll post them. If you feel compelled to look into it the differences you are welcome to. I welcome others to point out differences as well. I want to have the most accurate information for the exam.

leveraged LIBOR notes… an EOC question, in CFA readings… question and the text are confusing. i don’t understand the concept. the question’s answer seems to remove the leverage. i personally think they added too much leverage and didn’t realize it. … not in LOS or in schweser… or Vega/theta regarding options in CFA… CDO question in EOC questions too … or do mean things specifically in the LOS that aren’t in schweser??.. because i think the new sharpe > old sharpe x covariance isn’t in the LOS… certainly in the EOC Q’s but then so are CDO’s and leveraged LIBOR notes. one strange thing i saw was that the options chapter (with all the butterfly, straddles etc.) has a bunch of EOC questions but nothing on interest rate options. one frustrating thing is that similar stuff seems to be scattered throughout Level 3 and/or taught somewhat differently than level 2

The main one I don’t see in Schweser is “2)Currency risk decreases with the length of the investment horizon becuase exchange rates tend to revert to fundamentals.” Number 4) is somewhat self-evident.

SS10 (hedging morgtage securities reading): Schweser does not explicitally address the LOS in regards to hedging of mortgage security risks (I’ve summarized from CFA Curriculum – pls do not rely on the notes below for accuracy, refer to the reading in the CFA Curriculum): Spread Risk • Because a portfolio manager wants to capture an attractive option-adjusted spread, the manager does not seek to hedge spread risk but only interest rate risk. Interest Rate Risk • Risk hedged directly by selling a package of Treasury notes or Treasury note futures. After netting the value of the option, the portfolio manager earns the T-bill rate plus the potential to capture OAS (may not capture all due to prepayments) • To properly hedge the interest rate risk of a mortgage security, the portfolio manager needs to estimate how mortgage security prices will change taking into account (1) how the yield curve can change over time and (2) the effect of changes in the yield curve on the prepayment option granted to homeowners. • Yield Curve Risk o In hedging a mortgage security, it is difficult to use key rate duration to manage yield curve risk. o An alternative approach is to investigate how yield curves have changed historically and incorporate typical yield curve change scenarios into the hedging process. Prepayment Risk • A portfolio manager should adjust for changes in durations of mortgage securities or equivalently, manage negative convexity either by buying options or by hedging dynamically. • Hedging dynamically requires lengthening duration (buying futures) after rates have declined, and shortening duration (selling futures) after rates have risen. • If this strategy is used the manager is bearing the cost associated with managing negative convexity by foregoing part of the spread over treasuries. Volatility Risk • A portfolio manager will hedge dynamically when the volatility implied in the option price is high and the portfolio manager believes that future realized volatility will be lower than implied volatility. • A portfolio manager will hedge by purchasing options when the implied volatility in option prices is low and the portfolio manager believes that actual future volatility will be higher than implied. Model Risk • Although a portfolio manager cannot hedge model risk explicitly, he can measure it and manage it by keeping a portfolio’s exposure to this risk in line with that of the broad-based bond market indices.

I’ve found some more… will add later working on SS11 right now… lots to do…

Thanks for this thread. I suggested it awhile back but unfortunately had nothing to offer as I am using practically 100% Schweser. So obviously, I was being self-serving. Did I violate Priority of Transactions? (Helping myself before helping the community.)

No problem…

sterling76 Wrote: ------------------------------------------------------- > Thanks for this thread. I suggested it awhile back > but unfortunately had nothing to offer as I am > using practically 100% Schweser. So obviously, I > was being self-serving. > > Did I violate Priority of Transactions? (Helping > myself before helping the community.) hey, email me your study notes. LOL… just kidding, i appreciate the honesty and i’m somewhat the same. with a few posters, i certainly get more out of it than i give.

SS11 (Equity) Schweser not very clear on benefits of Stock-Based Enhanced Indexing (greater breadth than synthetic approach, however gaining a satisfactory IC is difficult) and Derivatives-based Enhanced Indexing (straightforward, however has lower narrower breadth so higher IC is required for same IR)

I found one from CFAI that was not available anywhere in the Schweser readings for calculating # of contracts to hedge CTD Bonds CFAI text has = # of Contracts = [(Dt - Dp)*Pi / (Dctd*Pctd)] * Conversion factor Schweser Has # of contracts = (DDt - DDp) -------------- DDctd/Conversion factor Anyone notice this?

richsg21 Wrote: ------------------------------------------------------- > I found one from CFAI that was not available > anywhere in the Schweser readings for calculating > # of contracts to hedge CTD Bonds > > CFAI text has = > > # of Contracts = [(Dt - Dp)*Pi / (Dctd*Pctd)] * > Conversion factor > > > > Schweser Has > > # of contracts = (DDt - DDp) > > -------------- > DDctd/Conversion > factor > > > Anyone notice this? Thanks

Why CFAI curriculm questions this year did not indicate those problem tested in official CFA exam before? I remember L1 curriculum did that…