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Wiley Level 2 > Portfolios > Flashcards

Portfolios Flashcards

1
Q

Provide the formula for the VWAP transaction cost estimate.

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2
Q

What is wash trading?

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3
Q

Explain how risk measures may be used in capital allocation decisions.

A

Putting limits on capital assigned to each of the firm’s activities prevents an unproven strategy from potentially siphoning away all risk capital from other potentially lucrative strategies.

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4
Q

Calculate and interpret the information ratio (ex postand ex ante) and contrast it to the Sharpe ratio.

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5
Q

List possible measures to safeguard against systemic risk.

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6
Q

Describe how value added by active management is measured

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7
Q

What are explicit costs?

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8
Q

Demonstrate how options measures may be used in measuring and managing market risk and volatility risk.

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9
Q

Explain cash drag.

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10
Q

State and interpret the fundamental law of active portfolio management including its component terms.

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11
Q

Describe advantages and limitations of sensitivity risk measures and scenario risk measures.

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12
Q

Explain the equity risk premium.

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13
Q

Explain impact of electronic trading on transaction costs.

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14
Q

Explain the relationship between the long-term growth rate of the economy, the volatility of the growth rate, and the average level of real short-term interest rates.

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15
Q

Describe how ETFs are traded in the U.S. market.

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16
Q

Define a strategy used by electronic quote matchers.

A

Electronic quote matchers try to exploit the option values of standing orders (limit orders waiting to be filled). Quote matchers buy when they believe they can rely on standing buy orders to get out of their positions, and they sell when they can do the same with standing sell orders.

If prices then move in the quote matchers’ favor, they profit as long as they stay in the security or contract.

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17
Q

Explain risk budgeting as a risk management method.

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18
Q

List potential causes of systemic risks associated with fast trading.

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19
Q

Describe advantages and limitations of VaR.

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20
Q

Interpret tracking risk and the information ratio.

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21
Q

Describe risk measures (other than sensitivity and scenario analysis) used by banks.

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22
Q

Explain how market values are affected by default-free interest rates across maturities, the timing and/or magnitude of expected cash flows, and risk premiums.

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23
Q

Describe the comparative benefits of computers versus humans.

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24
Q

Define market manipulation.

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25
Q

List five advantages of electronic trading systems (ETSs).

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26
Q

How is latency associated with physical limitations of computers minimized?

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27
Q

Explain the use of value at risk (VaR) in measuring portfolio risk.

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28
Q

Explain how the phase of the business cycle affects policy and short-term interest rates, the slope of the term structure of interest rates, and the relative performance of bonds of differing maturities.

A

When the output gap or inflation expectation changes, the neutral policy rate changes. Rate levels relative to neutral policy determine the level of the term structure curve. The yield difference at the short and long ends of the curve determines the slope.

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29
Q

Describe the historical simulation method for estimating VaR.

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30
Q

Explain how ETFs are related to the following terms: creation units, creation basket, redemption basket.

A

ETF transactions between authorized participants (APs) and ETF managers are done in large blocks called creation units.

Once an ETF is created, the ETF manager publishes a list of required in-kind securities for each ETF every business day. This list of securities is made publicly available and is referred to as the creation basket.

If an AP wants to redeem ETF shares, they exchange their ETF shares in exchange for the redemption basket, which is the underlying basket of securities in the ETF.

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31
Q

Describe the shortcomings of the effective spread.

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32
Q

Explain how the information ratio may be useful in investment manager selection and choosing the level of active portfolio risk.

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33
Q

Describe arbitrage pricing theory (APT) including its underlying assumptions and its relation to multifactor models.

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34
Q

Describe cyclical effects of valuation multiples.

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35
Q

Why do electronic traders need a comparative speed advantage?

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36
Q

Explain the following as they relate to ETFs: portfolio efficiency and liquidity; asset class exposure management; active and factor investing.

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37
Q

Explain how ETFs trade in primary and in secondary markets.

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38
Q

Describe the parametric method for estimating VaR.

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39
Q

Explain what the number of simulation runs depends on.

A

The number of simulation runs increases with the number of probabilistic inputs, the variety of distributions used in the analysis, and the range of potential outcomes for the input variable.

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40
Q

Describe a strategy used by electronic news traders.

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41
Q

Describe relative VaR.

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42
Q

Define systemic risk.

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43
Q

Explain the Monte Carlo simulation method for estimating VaR.

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44
Q

Explain the relationship between the consumption-hedging properties of equity and the equity risk premium.

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45
Q

Explain how the phase of the business cycle affects credit spreads and the performance of credit-sensitive fixed-income securities.

Explain how the characteristics of the markets for a company’s products affect the company’s credit quality.

A

When uncertainty about ability to repay increases (as during a contraction), credit risk premiums increase, and the value of credit bonds decreases. The sensitivity of a company to general business cycles affects the degree to which its credit spread is affected by business cycles.

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46
Q

Identify the general rules that apply to the slope of the yield curve and subsequent economic activity.

A

A steep yield curve usually precedes economic recoveries.

A flat yield curve usually indicates a forthcoming recession.

An inverted yield curve is a strong sign of a forthcoming recession.

47
Q

Describe the economic factors affecting commercial real estate.

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48
Q

Provide examples of systemic risks caused by excessive orders submitted by electronic traders.

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49
Q

How can a runaway algorithm create systematic risk?

A

Runaway algorithms produce streams of unintended orders that result from programming mistakes. The problems sometimes occur when programmers do not anticipate some contingency, resulting in excessive trade orders created under unforeseen conditions.

50
Q

Explain core exposures and strategic/dynamic/tactical strategies for ETFs.

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51
Q

What costs are measured by implementation shortfall?

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52
Q

Describe and interpret the transfer coefficient (TC) as it relates to the fundamental law of active management.

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53
Q

Explain the following: fees and expenses, representative sampling/optimization, depositary receipts, and other ETFs.

A

Fees and expenses: Index performance assumes that frictionless trading occurs at closing prices and does not account for fund expenses. This is a built-in drag on benchmark relative performance.

Representative sampling/optimization: Some funds may only hold a subset of the index by taking bets on stock and industry weightings.

Depositary receipts and other ETFs: Funds may hold securities that are not in the index (e.g., ADRs, GDRs, and other ETFs).

54
Q

Define parasitic traders.

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55
Q

Demonstrate how equity and fixed income exposure measures may be used in measuring and managing market risk and volatility risk.

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56
Q

List improper activities used by market manipulators.

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57
Q

What are historical scenarios?

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58
Q

Explain the Sharpe ratio and information ratio for a closet index fund.

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59
Q

List the most important electronic traders.

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60
Q

Compare scenario analysis and simulations.

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61
Q

Define market fragmentation.

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62
Q

Describe the steps in running a simulation.

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63
Q

Explain active return.

Describe sources of active risk.

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64
Q

Describe how ETFs are traded in European markets.

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65
Q

Calculate the expected return on an asset given an asset’s factor sensitivities and the factor risk premiums.

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66
Q

How is the breakeven expected inflation (BEI) rate determined?

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67
Q

Explain rules-based active management of factor models.

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68
Q

Describe types of ETF risk.

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69
Q

Why may asset managers need to aggregate individual portfolio holdings?

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70
Q

Define latency.

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71
Q

Explain incremental VaR (IVaR) and marginal VaR (MVaR).

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72
Q

Explain the inter-temporal substitution rate.

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73
Q

Describe the information coefficient (IC) as it relates to the fundamental law of active management.

A

IC expresses anticipated correlation between forecasted active return for some number N securities and their realized active return. High IC results from good forecasting ability. At low levels of IC, the investor prefers not to pursue active management.

74
Q

Describe risk measures (other than sensitivity and scenario analysis) used by traditional asset managers.

A
75
Q

Describe breadth (NR) as it relates to the fundamental law of active management.

A

Breadth is the number of independent forecasting decisions the manager makes each year. This will be equal to the number of securities in the portfolio unless the returns from those securities are cross-sectionally correlated.

76
Q

Explain portfolio completion and transition management.

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77
Q

Describe sources of tracking error for ETFs, including index changes, fund accounting practices, regulatory and tax requirements, and asset manager operations.

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78
Q

Describe option price gamma.

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79
Q

Distinguish among scenario analysis and simulations as pertains to types of risk.

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80
Q

Compare the exposures life insurers consider to assess risk.

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81
Q

Describe the implementation shortfall.

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82
Q

What is the impact of market fragmentation?

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83
Q

Describe how economic analysis is used in sector rotation strategies.

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84
Q

Explain the optimal level of active risk.

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85
Q

Compare active management strategies (including market timing and security selection) and evaluate strategy changes in terms of the fundamental law of active management.

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86
Q

Describe advantages of using simulations in decision making.

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87
Q

Describe statistical factor models.

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88
Q

Define arbitrage opportunity and determine whether an arbitrage opportunity exists.

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89
Q

Describe sensitivity risk measures and scenario risk measures and compare these measures to VaR.

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90
Q

List the practical limitations of the fundamental law.

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91
Q

Describe uses of multifactor models.

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92
Q

Explain the role of expectations and changes in expectations in market valuation.

A

An asset’s price at time t depends on the expectations at time t. If expectations change after time t, then it will alter asset value.

93
Q

Why is the VWAP transaction cost estimate so popular?

A

The VWAP transaction cost estimate is easy to interpret and tells if the average price obtained was better or worse than that obtained by all traders.

Investment managers like its bias toward zero. However, the conclusion that trading was not costly might be misleading if the trade had a substantial price impact.

94
Q

What techniques are used to minimize latency associated with software?

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95
Q

Describe sources of ETF premiums and discounts to NAV.

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96
Q

Describe costs of owning an ETF.

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97
Q

Contrast the exposures property/casualty insurers focus on.

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98
Q

Explain hypothetical scenarios.

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99
Q

Explain rumormongering

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100
Q

Provide the formula for the effective spread transaction cost estimate.

A
101
Q

Explain how the phase of the business cycle affects short-term and long-term earnings growth expectations.

A
102
Q

Describe the potential benefits for investors in considering multiple risk dimensions when modeling asset returns.

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103
Q

Explain the origin of implicit costs.

A

Implicit costs are indirect costs caused by the market impact of trading.

They result from bid-ask spreads, market impact, delay costs, and opportunity costs.

104
Q

Describe conditional VaR.

A
105
Q

Explain what is meant by gunning the market.

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106
Q

Explain the use of liquidity by hedge fund managers to assess risk.

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107
Q

Explain the neutral policy rate.

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108
Q

Describe how to measure active return from asset allocation versus from security selection.

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109
Q

Describe factors affecting ETF bid-ask spreads.

A

The primary factors that drive the bid-ask spread are the amount of daily trade volume (liquidity), the amount of competition among market makers for that ETF, and the actual costs and risks for the liquidity provider.

Spreads tend to widen in the face of rising market volatility or when markets expect material news regarding the ETF’s underlying index securities.

110
Q

Describe factors that affect yield spreads between noninflation adjusted and inflation-indexed bonds.

A
111
Q

What question is answered by the VWAP transaction cost estimate?

A
112
Q

Describe and compare macroeconomic factor models and fundamental factor models.

A
113
Q

Describe risk measures (other than sensitivity and scenario analysis) used by pension fund sponsors and managers.

A

Interest rate/yield curve

Surplus at risk

Liability hedging/return generating exposures

Wiley Level 2 (11 decks)

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