overview

Question 1

investment governance

Answer 1

organization of decision-making responsibilities and oversight activities

Question 2

governance structure

Answer 2

+ governing investment commitee
+ investment staff
+ third-party resources

Question 2

Effective governance models

Answer 2

+ articulate long, short-term objectives of investment program
+ Allocate decision rights & responsibilities among functional units; take account of knowledge, capacity, time, position in the governance hierachy
+ Specify processes for developing & approving IPS
+ Specify processes for developing & approving SAA
+ Establish framework to monitor program towards goals - objectives
+ preodically audit

Question 3

decision-reversal risk

Answer 3

the risk of reversing a chosen course of action at exactly the wrong time, the point of maximum loss

Question 4

economic balance sheet

Answer 4

include:
+ Conventional assets & liabilities (financial asset & liability)
+ Extended portfolio assets & liabilities

Question 5

extended portfolio assets & liabilities of individual investors

Answer 5

Extended portfolio assets:
+ human capital (PV of earnings)
+ PV of pension income
+ PV of expected inheritances
Extended portfolio liabilities:
+ PV of future consumptions

Question 6

extended portfolios assets & liabilities of institutional investor

Answer 6

Extended portfolio assets:
+ underground mineral resources
+ PV of future interllectual property royalties
Extended portfolio liabilities:
+ PV of payouts for foundation

Question 7

3 broad approaches to AA

Answer 7

(1) Goal-base
(2) Asset-only
(3) liability-relative

Question 8

objective of Asset-only approach

Answer 8

maximize Sharpe ratio in
+ acceptable level of risk
+ constraints of IPS

Question 9

owner of asset-only

Answer 9

+ Foundation, endownment
+ sovereign wealth fund
+ Individual investors

Question 10

objective of liability - relative approach

Answer 10

+ fund liailities
+ invest excess for growth

Question 11

owner of liabilities relative approach

Answer 11

+ banks
+ insurers
+ Define benefit pensions

Question 12

objective of goal-based approach

Answer 12

archive goals with specified required probabilities of success

Question 13

strategic asset allocation

Answer 13

an asset allocation in long-term investment planning

Question 14

decision-reversal risk

Answer 14

+ is the risk of reversing investment decisions at the worst possible time
+ Effective investment governance aims to minimize decision-reversal risk

Question 15

content of IPS

Answer 15

(1) • Introduction
(2) investment objectives
(3) • Investment constraints
(4) • Duties and responsibilities\
(5) • Investment guidelines
(6) • Reporting

Question 16

in decision rights and responsibilities of effective governence, what is the most important

Answer 16

• delegation to those (1) who are best qualified (2) to make informed decisions

Question 17

governance audit, what is the most should conduct

Answer 17

conducted by an independent 3rd party

Question 18

Characteristics of asset-only approach

Answer 18

Focus solely on the asset side of the investors’ BS

Question 19

Characteristics of liability relative approach

Answer 19

Choose an asset allocation in relation to the objective of funding liabilities

Question 20

Characteristics of goal base approach

Answer 20

• Used primarily fod individuals and families
• Specify asset allocation for sub-portfolios, each of which aligned to specific goals
• Each goal include: cashflow, time horizon and risk tolerance.

Question 21

Example of asset only approach

Answer 21

MVO

Question 22

example of liability relative approach

Answer 22

Surplus MVO

Question 23

Risk metric of asset only approach

Answer 23

• Volatility of return: standard deviation of portfolio
• Risk relative to benchmarks: tracking risk
• Downside risk: semi-variance, VaR
• Monte Carlo simulation: tail risk

Question 24

Risk metric of liability relative approach

Answer 24

- Risk of having insufficient assets to pay obligations when due (shortfall risk) - Volatility of contribution needed to fund current and future liabilities

Question 25

risk metric of goal based approach

Answer 25

- Risk of failing to achieve goals: max accetable prob of not achieveing goal - Overall profolio risk = weighted sum of the risks associated with each goal

Question 26

Criteria for specifying asset classes

Answer 26

(1) relatively homogenuous (2) mutually exclusive (3) bring diversification benefit (low correlation between different asset classes) (4) make up the majority of world investable wealth (5) have the capacity to absorb a meaningful proportion of an investor’s portfolio

Question 27

3 super classes of assets

Answer 27

(1) Capital assets: + Source of value (interest/dividend) + Value by NPV (2) Consumable/transformable assets + Can be comsumed/transformed + Do not yield ongoing stream of value (3) Store of value assets + Neither income generating nor valuable as a consumable or an economic input + Value is realized through sale/exchange + Eg: currency, art,...

Question 28

Process of asset allocation

Answer 28

(1) quantify: + objectives + risk tolerance (2) Determine + investment horizon + requirements and constraints + suitable asset allocation approach (3) Specify asset classes + CME (4) combination of asset allocation choices (5) Test/simulat potential stress cases

Question 29

goal classification system of Brunel 2012

Answer 29

• Personal goals • Dynastic goals • Philanthropic goals

Question 30

goal classification system of Chhabra 2005

Answer 30

• Personal risk bucket • Market risk bucket • Aspirational risk bucket

Question 31

Disadvantage of goal based

Answer 31

• Sub-portfolios add complexity • Goals may be ambiguous or may change over time

Question 32

 Higher transaction cost of an asset class will result in......rebalancing ranges

Answer 32

wider

Question 33

More risk averse investors will result in ...... rebalancing ranges

Answer 33

tigher

Question 34

Belief in momentum will result in ...... rebalancing ranges

Answer 34

wider

Question 35

 Beief Mean reversion will result in ...... rebalancing ranges

Answer 35

narrow

Question 36

Taxes (is cost) discourage rebalancing will result in ...... rebalancing ranges

Answer 36

wider

Question 37

 Low correlate will result in ...... rebalancing ranges

Answer 37

narrow

Question 38

High volatility of the rest of portfolio will result in ...... rebalancing ranges

Answer 38

narrow coridor

Question 39

nondiversifiable risk

Answer 39

+ market risk or + priced risk or + systematic risk

Question 40

other name of Diversifiable risk

Answer 40

+ non-market risk + non-priced risk + company-specific risk + unsystematic risk

Question 41

Type of investors

Answer 41

(1) Barnewall Two-Way Model: Passive - Active (2) Bailard, Biehl, and Kaiser Five-Way Model: Individualist - Celebrity - Gardian - Adventure - Straight arrow (3) Behavioral investor type: PFIA: Passive preserver - Friend follower - Independent individualist - Active accumulator

Question 42

Distinguish SAA - TAA - DAA - GTAA

Answer 42

SAA = related to long term TAA = deviate from SAA DAA = TAA + motivated by longer-term valuation signals or economic views GTAA = opportunistic investment strategy that seeks to take advantage of pricing or valuation anomalies across multiple asset classes, typically equities, fixed income, and currencies

Question 43

what side the goal-based focus on ? (1) Asset side (2) Liability side

Answer 43

(2) liability side

Question 44

Liability-hedging portfolio (definition)

Answer 44

focused on funding liabilities and, for any remaining balance of assets, a risky-asset portfolio

Question 45

2 kind of rebalancing approach

Answer 45

(1) proportional range (2) cost-benefit approach

Question 46

what kind of manager get out of constraint to employ complex strategies ? A. Internal manager B. External manager

Answer 46

A. Internal manager

Question 47

what constraint the internal manager get out of ?

Answer 47

(1) employing complex strategies (2) the oversight committee lack individuals with sufficient investment understanding

Question 48

Tax rate apply for Municipal fixed income

Answer 48

tax exempt -> tax rate = 0