principle of AA

Question 1

MVO

Answer 1

Mean-variance optimization:
+ common approach to asset allocation
+ assume: investors are risk averse
+ identifies the portfolio allocations that maximize return for every level of risk
Um = E(Rm) − 0.005 × λ × Var
λ = the investor’s risk aversion coefficent

Question 2

constrant of MVO

Answer 2

+ budget constraint or unity constraint: asset weights must add up to 100%
+ nonnegativity constraint: all weight must be positive between 0% to 100%

Question 3

Constraints of MVO

Answer 3

(1) GIGO
(2) concentrate in some subset of asset class
(3) focus of mean/variance of return
(4) source of risk is not diversified
(5) single pediod, not take account taxes, cost
(6) not connect to liability, consumtion series

Question 4

corner portfolios

Answer 4

all the set of portfolio in frontier line

Question 5

6 Criticism of MVO

Answer 5

(1) The output (asset allocation) are highly sensitive to small changes in the input
(2) The asset allocations tend to be highly concentrated in a subset of available asset classes
REMEDI:
+ Reverse optimization
+ Black – Litterman Model
+ Resampled MVO
(3) Many investors are concerned about more than mean and variance of returns
(4) Although the asset allocations may appear diversified across assets, the source of risk may not be diversified
Remedy: USE FACTORS
(5) Most portfolios exist to pay for a liability or consumption series and MVO allocations are not directly connected to what influences that value of the liability or consumption series
Remedy: liability relative or goal-based asset allocation
(6) MVO is a single period framewok and it does not take into account trading/rebalancing cost and taxes
Remedy: simulation

Question 6

ACTR

Answer 6

Absolute contributioin to risk (measures how much the asset class contributes to σp)
• ACTR = wi * MCTR = wi * βi * σp

Question 7

Quasi

Answer 7

payments that are expected to be made but are not liabilities such as endowment

Question 8

Characteristics of liabilities can effect asset allocation

Answer 8

(1) Fixed vs. contigent flows
(2) Legal vs quasi-liabilities
(3)  Duration and convexity of liability cash flows
(4)  Value of liabilities as compared with the size of the sponsoring organization
(5)  Factors driving future liabilities cash flows such as inflations, economic conditions, interest rates, premiums
(6)  Timing consideration such as longevity risk
(7)  Regulations affecting liability cash flow such as rate`

Question 9

variant 2-portfolio approaches

Answer 9

(1) Liability
(2) Surplus

Question 10

longevity risk

Answer 10

live longer than forecast
+ annuity
+ pension

Question 11

method for liability relative approach

Answer 11

(1) surplus optimization
(2) Hedging/Return seeking portfolio
(3) Integrated asset – liability approach

Question 12

liability return

Answer 12

measures the time value of money for the liabilities plus any expected changes in the discount rate and future cash flows over the planning horizon

Question 13

2 portfolios in Hedging/Return seeking portfolio

Answer 13

(1) hedging portfolio
(2) return seeking portfolio

Question 14

the portion hedge in Hedging/Return seeking portfolio approach

Answer 14

+ fully hedge
+ partial hedge

Question 15

Limitations of hedge/return seeking portfolio approach

Answer 15

(1) Could not creat a fully hedge portfolio if funding ratio < 1
(2) True hedging portfolio may not be available and if the portfolio is not perfectly hedged there will be basis risk

Question 16

Dynamic in hedge/return seeking portfolio approach

Answer 16

means increase the allocation to hedging portfolio as funding ratio increases

Question 17

more critical the goals, the ……… prob of success required

Answer 17

higher

Question 18

The higher prob archieve goal = …….. discount rates

Answer 18

lower

Question 19

The lower discount rates = …. capital allocation to that goal

Answer 19

greater

Question 20

definition of Risk parity

Answer 20

each asset class should contribute equally to the total risk of the portfolio to be well diversified

Question 21

Formula of risk parity

Answer 21

wi×Cov(ri rp)= 1/n σp^2

Question 22

3 methods to incoprate client risk reference into asset allocation

Answer 22

(1) specifying additional constraints,
(2) specifying a risk aversion factor for the investor,
(3) using MCS

Question 23

3 approach of liability-relative asset allocaiton

Answer 23

(1) Surplus efficient frontier approach
(2) Integrated asset-liability approach
(3) Two-portfolio approach.

Question 24

encounter restriction

Answer 24

gặp hạn chế

Question 25

commingled investment vehicle

Answer 25

like mutual fund, ETF, ...

Question 26

MCTR when portfolio optimal

Answer 26

= sharpe ratio

Question 27

what is optimum risk budget

Answer 27

An optimum risk budget allocates risk efficiently

Question 28

measuring the success of TAA relative to SAA

Answer 28

Sharpe ratio

Question 29

3 steps in Process of MVO

Answer 29

S1: Do inputs: + expected return of each asset + Variances + Covariances (correlations) between asset (pairwise) + Risk averse factor + Constraints S2: Do MVO: + Maximize Utility + Subject to constraint S3: Do output + Asset Allocation (Port weight) + Port expected return + Port variance

Question 30

Step of reverse optimization

Answer 30

1. S1: do input: + Assumed optimal AA +Variances + Covariances (correlations) + Risk averse factor + Constraints 2. reverse MVO + Maximize MVO + Subject to constraint 3. Output: implied returns 4. Do MVO again + Implied returns + Variances + Covariances (correlations) + Risk averse factor + Constraints 5. Do MVO + Maximize utilities + Subject to constraint 6. Outputs: + revise AA + port expected return + port variance

Question 31

step of Black Litterman do

Answer 31

It is extension of reverse MVO, not only implied return, but also reverse implied return

Question 32

resample MVO

Answer 32

S1: start with basic MVO S2: Do Monte Carlo, generate thousands of random variations for the inputs around the initial estimates, resulting in efficient frontier S3: The resampled efficient frontier is average of all the simulated efficient frontier S4: Do AA base on the average efficient frontier

Question 33

Key rate Duration (truoc gio bi hieu sai)

Answer 33

+ 1 danh mục có 3 position P1, P2, P3, va P la tong danh muc + Mod Du cua tung position la D1, D2, D3 Khi do: + KRD1 = D1 x P1/P + Danh muc co KRD = KDR1 + KRD2 + KRD3 + Bien dong gia cua danh muc Delta P = KDR1 x DeltaP1 + KRD2 x DeltaP2 + KRD3 x DeltaP3

Question 34

tangency portfolio

Answer 34

portfolio tiep tuyen, is corner portfolio

Question 35

Roy's Safety first

Answer 35

+ = (Re - Rm)/sigma + provides a probability of getting a minimum-required return on a portfolio

Question 36

Adv & Dis adv of MVO

Answer 36

Adv: + widely understood & accepted + modeling of EF can be simplified with the use of corner portfolio Disadv: + Estimate errro -> use Resample EF + Static -> use MCS + Input base on historical bases

Question 37

Adv & Dis adv of resample EF

Answer 37

Adv: + More stable than MVO -> Able to judge the need for rebalancing -> less port. turnover & lower transactio cost + Better diversification than MVO Dis Adv: + No theoretical basis + Static + Input base on historical data

Question 38

Adv & Dis adv of Black litterman

Answer 38

Adv: + More stable than MVO + Better diversification than MVO + Incorporate manager view Dis adv: + Complicated + Static + Input base on historical data

Question 39

Adv & Dis adv of MCS

Answer 39

Adv: + use to complement to others approach + Model path dependency Dis adv: + complicated + output is as accurate as input

Question 40

Adv & dis adv of ALM

Answer 40

Adv: + same as MVO but add liabilities Dis Adv: + Sames as MVO

Question 41

Experiance base

Answer 41

Adv: + Incoporate asset allocation experiance + Easy to understand + Not expensive Dis adv: + too simple

Question 42

Active accumulator va independence individualist khac nhau ntn

Answer 42

II is: (1) lower active (2) some bias is different

Question 43

When asset classes move in sync, further divergence from target weights is less likely, which favor ............. rebalancing ranges

Answer 43

wider

Question 44

When asset classes move in sync, further divergence from target weights is more likely, which favor ............. rebalancing ranges

Answer 44

narrower

Question 45

the most comprehensive method: A. The two portfolio approach B. Surplus optimization/ Surplus efficient approach C. Intergrate asset-liability

Answer 45

C. Because it is multiple period

Question 46

how the funded position of 3 method to use: A. The two portfolio approach B. Surplus optimization/ Surplus efficient approach C. Intergrate asset-liability

Answer 46

All of them can be use for over/under/in funded but with the two portfolio, only for basic