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# Category: Level II General

## Correlation . . . of, What, Exactly?

I already wrote an article on the tendency of people in finance to be sloppy in the language they use; you’ll find it here. The purpose of this article is to expand on one specific area in which the language of finance people is particularly sloppy: correlation. The problem, as I see it, is that…

## Sloppy Language, Sloppy Thinking: Don’t Try This at Home

As a mathematician, I’ve been trained to write and speak (and, consequently, to think) using precise, accurate terminology. There are, of course, occasions when even mathematicians abbreviate the things that they write or say, but on those occasions: We know that we’re abbreviating, and All mathematicians have agreed to the abbreviations used. As an educator,…

## Linear Interpolation/Extrapolation

After reading a number of posts on AnalystForum in which candidates have had difficulty with linear interpolation or extrapolation, I figured it was time to write an article on the subject. At Level I it applies to binomial trees for calculating the weights for equity options, and for combining risky portfolios with the risk-free asset…

## Amortization Tables

Although you are not allowed to use Excel (or any other spreadsheet program) on the exam – you have to survive with your lowly financial calculator – it’s still useful to be able to create amortization tables in a spreadsheet, to help you visualize the cash flows and account balances in a variety of financial…

## Cash (Currency): the Wonky Commodity

Throughout Level II and Level III – and a little bit at Level I – we see calculations that involve commodities; e.g., calculating the price or value of a forward or futures contract on an underlying commodity. In all of those calculations, the quantity of the commodity is constant; for example, if you’re given the…

## Arbitrage

Arbitrage means the ability to earn a profit without risk. One method by which arbitrage is commonly accomplished by buying an asset in one market, and simultaneously selling an identical asset in another market at a higher price (e.g., T-Notes or T-Bonds). Another is by borrowing an asset (e.g., a currency) and investing it at…

## Nominal vs. Effective Interest Rates

The ideas behind nominal and effective interest rates are fairly simple, but you need to be sure that you understand the differences, and that you know which convention is used for which common rate quotes. At the heart of the difference is the idea of compound interest, so let’s start there. Throughout this article, we’ll…

## How to Approach the Level II CFA Exam

If you’ve never taken the Level II CFA exam, you’re in for a real treat. (If you’ve taken it before, you already know what I mean.) As with the Level I exam, this exam will be six hours – three in the morning, and three in the afternoon – and it will be exhausting, both…