Topics from Outer Space ... Let's bring them back to Earth.

I think many of us are in the boat where:

time needed to study > time available

I was hoping everyone could list some real obscure/granular topics that they haven’t seen on previous CFAI Mocks (or barely covered in Schweser). Not to say they won’t test the same topics again - but even the CFAI Institute says:

"You should expect to encounter questions that you will not be able to answer correctly. "

So I began putting together a list of ‘outer space’ topics … for most of them, it doesn’t take more than 10 min to be familiar enough to recognize it on the exam if it comes up and bank some time + marks!

I am in no way basing this forum on past CFAI exams I have written - this is purely observational, based only on the Mocks the CFAI institute provides for L3 and my experience with the Mocks. And in the end, all you are doing is covering more material by spending a little time on these outer space topics …

Also, if you look at this list and say “crap, I don’t know any of these topics” I would not worry at all - just take 30 min and look them up (or ignore them completely cause they are so minor). Most of them are honestly dead simple.

Please feel free to add !!!

Outer Space Topics:

  1. Fixed Income - Cuspy Coupon Bonds

Answer: Cuspy coupon bonds are basically MBS that are more sensitive to interest rate changes and the impact on prepayment risk. The implication: they have greater negative convexity and if you are heding a cuspy coupon MBS, you could address the additional risk by adding options to your hedge.

  1. Behavioural Finance - Double Inflection Utility Function

Answer: this is where your utility function can go from concave, to convex, to concave, based on changes in your wealth. Implication: the convexity of a utility function can change.

  1. Monitoring and Rebalancing - Perold Sharpe Analysis

Answer: this is just a summary of how trading strategies perform in different markets. Implication: don’t be thrown off if the question says “A CPPI strategy outperforming a Buy and Hold strategy in a upward trending market is consistent with Perold Sharpe Analysis” - this statement is true.

  1. Alternative Investments - J-Factor Risk

Answer: Risk associated with judge’s record in deciding bankruptcy cases/restructing cases. Implication: try to predict the outcome based on the J-factor risk for your strategy (if J-factor risk leads you to believe the company will go bankrupt, then maybe you would choose to short the equity of the company).

  1. Options - Strangle (Hint: it’s a modification of a Straddle)

Same as a straddle, except the strike price for the call option and put option is different. Implication: if you see strangle on the exam, just apply a straddle approach and use the different strike prices.

If you posted any outer space topics below, could you do a similar “Answer” and “Implication” ???


I like the idea, lets post the answer with the topic though. Institutional PM:

Leverage Adjusted Duration Gap = Dassets - (L/A)(Dliab)

Net Interest Margin = Net interest income/ average earning assets

I haven’t seen these in the books I guess. 1) Fixed Income - Cuspy Coupon Bonds 2) Behavioural Finance - Double Inflection Utility Function 3) Monitoring and Rebalancing - Perold Sharpe Analysis Though my “space” is Schweser. Just know j factor risk because it’s there and I know about strangle because have studied it before.

not sure what planet you all have been on for the past six months, but you better know the hell out of Perold Sharpe analysis. My god that is a crucial part of this exam potentially.

perold sharpe just the aggregate of:

Constant mix,

CPPI and buy and hold

i ran out of space to post all the recommended GIPS items…

Ya perold sharpe is just the name for the overall original 2 asset class analysis of cppi, buy and hold , constant mix. People may not know the term… I am assumming he knows cppi, buy and hold, constant mix though…

Weather derivatives :slight_smile:


If i was a betting man I would say this shit would come up. Who wants to put money on these tools finding a way to put “saitsfice, homo economicus, and bounded rationality” all in the same vignette?

+1 This, along with gambler’s fallacy is “due”


+1 This, along with gambler’s fallacy is “due”


brilliant (said in voice of Guinness commercial)

A few more:

1, Disposition effect(?). 2, Price is right and no free lunch. Can you explain what is the relationship between the two and three forms of EMH?

How about the gain loass ratio for hedge funds?

months up/ # months down X Avg up move/Avg down move

i think it shows up in one page on AI, but you never know…

Normative, desciptive, prescriptive

Pompian model - Bottom up or Top down?

Hyperbolic Discounting (Hint: BF)

Black-Scholes Merlion? Model

Hint: Risk Mgmt

Maturity variance

  1. Monitoring of Immunized & cash flow matched portfolio

  2. Three principles of TAA

  3. Steps in Behavioural alpha approach

Correlation breakdown

Variable prepaid forward