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.
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.
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?
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:
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
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.
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.