CAIA - 02 - Tactical AA, Mean-Variance Ext, Risk Budg, Risk Par and Factor Investing Flashcards Preview

CAIA > CAIA - 02 - Tactical AA, Mean-Variance Ext, Risk Budg, Risk Par and Factor Investing > Flashcards

Flashcards in CAIA - 02 - Tactical AA, Mean-Variance Ext, Risk Budg, Risk Par and Factor Investing Deck (84)
Loading flashcards...
1

___ ___ ___ is an active approach to allocating capital to assets expected to have desirable short-to medium-term risk-return profiles. Thus, ___ essentially shifts a portfolio's strategic asset allocation based on short- to medium-term changes.

Tactical asset allocation is an active approach to allocating capital to assets expected to have desirable short-to medium-term risk-return profiles. Thus, TAA essentially shifts a portfolio's strategic asset allocation based on short- to medium-term changes.

2

According to the ___ ___ of ___ ___ , an active portfolio manager's risk-adjusted added value is a function of his/her skill at forecasting returns and the number of positions taken. The value added by active management may be expressed as the manager's ___ ___ .

According to the Fundamental Law of Active Management, an active portfolio manager's risk-adjusted added value is a function of his/her skill at forecasting returns and the number of positions taken. The value added by active management may be expressed as the manager's information ratio.

3

What is the equation for information ratio for a given information coefficient (IC) and breadth (BR).

4

What is the equation for information ratio for a given Alpha and standard deviation of alpha?

5

The fundamental law of active management (FLOAM) assumes portfolio managers are ___. In practice, managers face constraints imposed by S___ ___ ___, r___ and i___ costs.

The fundamental law of active management (FLOAM) assumes portfolio managers are unconstratined. In practice, managers face constraints imposed by Strategic Asset Allocationregulations and implementation costs.

6

The fundamental law of active management (FLOAM) can be extended to include a third term, called ___ ___ , which relaxes the assumption that manager face no constraints and incorporates implementation costs.

The fundamental law of active management (FLOAM) can be extended to include a third term, called transfer coefficient, which relaxes the assumption that manager face no constraints and incorporates implementation costs.

7

The ___ ___ reflects a manager's ability to implement her recommendations.

The transfer coefficient reflects a manager's ability to implement her recommendations.

8

What is the equation for information ratio using information coefficient and transfer coefficient.

9

The ___ ___ ___ ___ is borne by every investor in funds with asymmetric fee structures, and arises when investors lose the fee benefits of owning a fund below its high watermark.

The foregone loss carry forward is borne by every investor in funds with asymmetric fee structures, and arises when investors lose the fee benefits of owning a fund below its high watermark.

10

Despite the cost associated with forgoing loss carry forward, there are four reasons investors may still choose to replace a manager with a carry forward loss.

 

1. The manager may not have ___ ___ to perform until the high watermark is reached.

2. The fund my no longer represent an ___ -___ fund, since it may be unable to retain best traders, risk management and compliance infrastructure.

3. Other investors may ___ their capital, which can result in the investor's position becoming too ___ .

4. The investor may believe that the fund's strategy is no longer ___

Despite the cost associated with forgoing loss carry forward, there are four reasons investors may still choose to replace a manager with a carry forward loss.

1. The manager may not have sufficient incentive to perform until the high watermark is reached.

2. The fund my no longer represent an institutional-quality fund, since it may be unable to retain best traders, risk management and compliance infrastructure.

3. Other investors may withdraw their capital, which can result in the investor's position becoming too large

4. The investor may believe that the fund's strategy is no longer attractive

11

What are the 4 lags associated with redeeming from 1 manager and investing in another?

 

1. The time needed to ___ ___and make a decision

2. The time between the ___ ___and ___

3. The time between ___ and ___ ___

4. The time between ___ ___ and ___.

What are the 4 lags associated with redeeming from 1 manager and investing in another?

1. The time needed to review results and make a decision

2. The time between the notification deadline and NAV

3. The time between NAV and receiving cash

4. The time between receiving cash and reinvesting.

12

The four costs associated with liquidation and reinvestment of a manager:

1. Foregone ___ on dormant cash

2. Foregone ___ ___ on uncommitted cash

3. ___ and ___ ___ costs

4. ___ from market impact

The four costs associated with liquidation and reinvestment of a manager:

1. Foregone interest on dormant cash

2. Foregone excess returns on uncommitted cash

3. Administrative and due diligence costs

4. Slippage from market impact

13

Despite FLOAM presenting information coefficient (IC) and breadth (BR) as ___ factors, in practice, they tend to be more ___ on one another. In fact, IC and BR have a ___ relationship: the ___ markets to which managers apply their skills, the ___ accurate their forecasts.

Despite FLOAM presenting information coefficient (IC) and breadth (BR) as independent factors, in practice, they tend to be more dependent on one another. In fact, IC and BR have a negative relationship: the more markets to which managers apply their skills, the less accurate their forecasts.

14

The information coefficient applied to asset classes is (larger/smaller) than that applied to individual securities, since asset class expected returns are (more/less) predictable and thus (easier/harder) to forecast than returns on individual securities that contain (less/considerable) noise.

The information coefficient applied to asset classes is larger than that applied to individual securities, since asset class expected returns are more predictable and thus easier to forecast than returns on individual securities that contain considerable noise.

15

What is the equation for reducing the equity beta by taking short positions in equity futures contracts.

16

___ forecasting models should be used to maximize the value added by TAA, since according to the FLOAM, the value of TAA is enhanced when models' error terms are ___ of one another.

Several forecasting models should be used to maximize the value added by TAA, since according to the FLOAM, the value of TAA is enhanced when models' error terms are independent of one another.

17

Tactical asset allocation models should have strong ___ ___ using ___ -of-___ data.

Tactical asset allocation models should have strong historical performance using out-of-sample data.

18

Tactical asset allocation models should include ___ meaningful signals and entail a ___ process that correctly identifies the signals.

Tactical asset allocation models should include economically meaningful signals and entail a research process that correctly identifies the signals.

19

Development of sound forecasting models has three notable characteristics.

 

1. Use ___ ___ signals

2. No ___ ___

3. Avoidance of ___

Development of sound forecasting models has three notable characteristics.

1. Use economically meaningful signals

2. No data mining

3. Avoidance of overfitting

20

___ ___ signals are signals that have rational, intuitive explanations for their expected predictive power.

Economically meaningful signals are signals that have rational, intuitive explanations for their expected predictive power.

21

___ ___ refers to trying several models and variables to identify the models that perform best.

Data mining refers to trying several models and variables to identify the models that perform best.

22

Models that ___ data generally have a large number of explanatory variables and can generate large r-squareds, particularly using small data sets.

Models that overfit data generally have a large number of explanatory variables and can generate large r-squareds, particularly using small data sets.

23

Models that have (more/fewer) explanatory variables are more stable over time.

Models that have fewer explanatory variables are more stable over time.

24

The most common approach to developing fundamental models is ___ ___ .

The most common approach to developing fundamental models is linear regression.

25

___ ___ models estimate expected returns as functions of values of a set of predictive variables.

Conditional expectation models estimate expected returns as functions of values of a set of predictive variables.

26

When ____ expected returns are used as inputs in the asset allocation process, TAA can be considered SAA.

When conditional expected returns are used as inputs in the asset allocation process, TAA can be considered SAA.

27

There are two types of liquidity risk: ___ liquidity and ___liquidity.

There are two types of liquidity risk: market liquidity and funding liquidity.

28

___ liquidity risk refers to the risk of being forced to sell a fairly illiquid asset in a market with few active market participants.

Market liquidity risk refers to the risk of being forced to sell a fairly illiquid asset in a market with few active market participants.

29

Two factors increase illiquidity of some assets during financially stressed periods:

1. Lack of ___

2. ___ ___ between buyers and sellers

Two factors increase illiquidity of some assets during financially stressed periods:

1. Lack of transparency

2. Asymmetric information between buyers and sellers

30

___ liquidity risk refers to the risk of investors being unable to obtain financing, roll over currently available debt, or meet capital commitments due to lack of liquidity.

Funding liquidity risk refers to the risk of investors being unable to obtain financing, roll over currently available debt, or meet capital commitments due to lack of liquidity.

Decks in CAIA Class (39):