CAIA - 01 - Asset Allocation Processes and the Mean-Variance Model Flashcards Preview

CAIA > CAIA - 01 - Asset Allocation Processes and the Mean-Variance Model > Flashcards

Flashcards in CAIA - 01 - Asset Allocation Processes and the Mean-Variance Model Deck (68)
Loading flashcards...
1

Whether asset allocation or security selection has the greatest impact on portfolio performance depends on what two factors?

Diversified vs concentrated

Definition of performance

2

There are 3 key questions regarding the importance of asset allocation for the performance of diversified portfolios:

1. How much return variability is explained by ___ ___ ?

2. How much of the difference in average returns between diversified funds is explained by differences in ___ ___ ?

3. What part of a fund's ___ return is explained by its ___ ___ policy?

There are 3 key questions regarding the importance of asset allocation for the performance of diversified portfolios:

1. How much return variability is explained by asset allocation?

2. How much of the difference in average returns between diversified funds is explained by differences in investment policies?

3. What part of a fund's average return is explained by its asset allocation policy?

3

Most studies find that ___ - ___% of variation in diversified traditional portfolios is explained by overall asset allocation decisions.

Most studies find that 85-90% of variation in diversified traditional portfolios is explained by overall asset allocation decisions.

4

Most studies find that less than 50% of the difference in average returns can be explained by differences in asset allocation. The remaining differences are explained by factors such as asset-class ___, s___, s___ s___, and f___.

Most studies find that less than 50% of the difference in average returns can be explained by differences in asset allocation. The remaining differences are explained by factors such as asset-class timing, style, security selection, and fees.

5

The five steps for implementing a systemic asset allocation program are:

1. Identify asset owners' ___ and ___

2. Develop an ___ ___ ___

3. Implement ___ ___ policy described in IPS

4. ___ ___ according to optimal weights

5. ___ and ___ the investments

The five steps for implementing a systemic asset allocation program are:

1. Identify asset owners' objectives and constraints

2. Develop an investment policy statement

3. Implement asset allocation policy described in IPS

4. Allocate capital according to optimal weights

5. Monitor and evaluate the investments

6

___ funds are funds established by not-for-profit entities that invest supporters' charitable contributions and use the invested capital to support the activities of an organization.

Endowment funds are fund established by not-for-profit entities that invest supporters' charitable contributions and use the invested capital to support the activities of an organization.

7

___ raise funds through charitable contributions and use the capital to fund grants and support charities.

Foundations raise funds through charitable contributions and use the capital to fund grants and support charities.

8

___ funds have long investment horizons and are not heavily regulated in terms of investment activities, so they can use a broad universe of assets (including alternative assets).

Endowment funds have long investment horizons and are not heavily regulated in terms of investment activities, so they can use a broad universe of assets (including alternative assets).

9

Like ___ funds, ___ can use a broad universe of assets due to their long investment horizons and light regulation. However, to take advantage of beneficial tax treatments, ___ must distribute a minimum percentage of their assets each year.

Like endowment funds, foundations can use a broad universe of assets due to their long investment horizons and light regulation. However, to take advantage of beneficial tax treatments, foundations must distribute a minimum percentage of their assets each year.

10

  What are the 4 types of pension funds?  

National

Private DB

Private DC

Individually Managed Accounts

11

___ pension funds are established to provide retirement income to a country's citizens.

National pension funds are established to provide retirement income to a country's citizens.

12

For national pension funds, investment decisions are made by ___ ___.

For national pension funds, investment decisions are made by national governments.

13

___ ___ ___ plans are established to provide pension benefits to private companies' employees. The employees are promised a specific retirement income based on a number of factors.

Private defined benefit plans are established to provide pension benefits to private companies' employees. The employees are promised a specific retirement income based on a number of factors.

14

The ___ ___ directs the management of a private defined benefit plans assets.

The plan sponsor directs the management of a private defined benefit plans assets.

15

___ ___ ___ funds receive contributions for employees from the plan sponsors, as specified by the plan. Each beneficiary's assets are managed by the plan sponsor and the employee. The sponsor decides on the list of available asset classes and the employee selects the asset allocation. When the employee retires, they are given the value of their account.

Private defined contribution funds receive contributions for employees from the plan sponsors, as specified by the plan. Each beneficiary's assets are managed by the plan sponsor and the employee. The sponsor decides on the list of avaialbel asset classes and the employee selects the asset allocation. When the employee retires, they are given the value of their account.

16

The Broad categories of asset owners are:

1. Endowments and Foundations

2. Pension Funds

3. Sovereign Wealth Funds

4. Family Offices

17

___ ___ ___ funds are established and managed by national governments and invest a country's income to benefit its citizens

Sovereign wealth funds are established and managed by national governments and invest a country's income to benefit its citizens

18

The growth of sovereign wealth funds is linked to increases in prices of ___ ___

The growth of sovereign wealth funds is linked to increases in prices of natural resources

19

Family offices (are/are not) typically large enough to have access to a full menu of assets.

Family offices are typically large enough to have access to a full menu of assets.

20

  A(n) ___ is a preference that differentiates between optimal and suboptimal solutions.  

An objective is a preference that differentiates between optimal and suboptimal solutions.

21

A ___ is a condition that must be satisfied by any solution.

constraint is a condition that must be satisfied by any solution.

22

___ constraints are set by the asset owner and depend on factors such as the owner's time horizon, liquidity needs, and desire to avoid certain sectors.

Internal constraints are set by the asset owner and depend on factors such as the owner's time horizon, liquidity needs, and desire to avoid certain sectors.

23

____ IPS constraints come from market conditions and regulations.

External IPS constraints come from market conditions and regulations.

24

Asset owners should clearly state their investment objectives in terms of ___ and ___ that are consistent with their risk tolerance levels and current ___ ___ . In addition, objectives need to be consistent with the fact that higher ___ are associated with higher levels of ___ .

Asset owners should clearly state their investment objectives in terms of risks and returns that are consistent with their risk tolerance levels and current market conditions. In addition, objectives need to be consistent with the fact that higher returns are associated with higher levels of risk.

25

The probability weighted expected return may be expressed as

26

The probability weighted standard deviation may be expressed as

27

___ is a measure of satisfaction gained from investment wealth or return

Utility is a measure of satisfaction gained from investment wealth or return

28

___ ___ is the probability-weighted average utility over all possible outcomes

Expected utility is the probability-weighted average utility over all possible outcomes

29

A ___ ___ U(*) describes the relationship that converts an investment's wealth or return into the investor's level of utility

A utility Function U(*) describes the relationship that converts an investment's wealth or return into the investor's level of utility

30

An investor's utility may be expressed as a function of ___ W as U(W).

An investor's utility may be expressed as a function of wealth W as U(W).

Decks in CAIA Class (39):