CFA command words: ‘Analyze’ vs ‘calculate’ questions

Let’s look at the three CFA LOS command words:

Analyze

• Definition: to examine the constituent parts of something and how the parts relate to each other and to the whole
• Explanation: Analyze asks you to be able to take apart something for study (e.g., a financial statement or an investment strategy) in order to understand the whole in full detail. In the first example of use below, the phrase “including …” highlights points that must be included in an analysis.
• Examples:
  • “analyze bottom-up active strategies, including their rationale and associated processes”
  • “analyze the effects of currency movements on portfolio risk and return”

Calculate

• Definition: to compute, to determine by mathematical processes
• Explanation: This command word asks you to be able to show that you can find a correct numerical value for a quantity of interest, such as a rate of return, a present value, or a cost of capital. When the numerical value is not found using math but by some other means determine may replace calculate. Calculate is frequently used in the phrase “calculate and interpret,” in which interpret addresses the ability to explain verbally the numerical result.
• Examples:
  • “calculate and interpret the cost of equity capital using the capital asset pricing model”
  • “calculate and interpret the leverage ratio”

Explain

• Definition: to make clear and intelligible, provide insight into
• Explanation: Explain incorporates the expectation that you can clarify meaning and relationships. Explain subsumes the ability to describe. [Where calculations are relevant to understanding and covered in the text, explain subsumes the ability to calculate.] “Explain how …” means “provide insight into the ways …”
• Examples:
  • “explain professionalism in investment management”
  • “explain international parity conditions”
  • “explain how flows in the balance of payment accounts affect currency exchange rates”

So explicitly explain includes calculation questions. Analyze is less clear. I think it can technically include calculation questions but most of it will be the kind of question that asks “When conditions are X, will metric Y be positive/negative/unchanged?”

For example, here’s Reading 42e of CFA Level 2:

analyze the relationship between spot prices and future prices in markets in contango and markets in backwardation;

And here’s a typical question:

When the market is in backwardation, the roll yield will be ______ for a long investor.

A. negative.
B. positive.
C. zero.

Hope that’s clear – if there are any follow-up questions just reply to the thread.