Qual Info Flashcards

Question

Celebrity

Answer 1

-5 Way BBK Model (anxious, impetuous) -Center of attention who holds some opinions but also knows his limitations

Answer 2

-5 way BBK model (confident, careful) -independent and confident by nature

Answer 3

-5 Way BBK Model (anxious, careful) -Cautious and concerned about future, meaning other types may become more guardian like as they age

Answer 4

-5 Way BBK Model (center) -sensible and secure, willing to accept risk commensurate with a normal return

Answer 5

-BIT (Conservative style, passive) -Not sophisticated investors with focus on financial security and wealth preservation -Primarily emotional biases

Answer 6

-BIT (Moderate style, Passive) -May be difficult to advise bc their cognitive biases give them confidence that encourages them to accept greater risk than their regret aversion will actually allow

Answer 7

-BIT (Growth style, Active) -Most likely to be contrarian, resist following a financial plan, and are comfortable investing and taking risks -Primarily cognitive biases

Answer 8

-BIT (Aggressive style, Active) -Likely to have concentrated positions and high port turnover rates -Primarily emotional biases

Answer 9

P(A|B) = [P(B|A) * P(A)]/[P(B)

Answer 10

-Type 1 - A permanent, one-time decline with resumption of the trend rate after initial shock -Type 2 - No persistent one-time decline but continuing a lower trend rate -Type 3 - Both a permanent, one-time decline and continuation at a lower trend rate after initial shock

Answer 11

Ve = GDP * (E/GDP) * (P/E) + Div Yield (for total return of stock market) -Key insight is that corp earnings as a % of GDP and PE multiple cannot continually rise over the long-term -Only way value of stock mrkt can increase over the long term is through long term GDP growth

Answer 12

=Labor input growth + Labor productivity growth

Answer 13

-Result from short to medium term cycles that cause oscillations around longer term trend growth rate of economy -Initial recovery -> Early Expansion -> Late Expansion -> Slowdown -> Contraction -> repeat

Answer 14

-After contraction, before early expansion (a few months) -Economic features: After low point, output gap is large, inflation is decelerating, stimulative policies remain in place, economy starts to grow -Captial Market Features: ST and LT govt bond yields likely to be bottoming but may still decrease, stock mrkt may begin to rise quickly as recession fears subside, riskier small cap stocks, HY bonds, and EM secs will do well

Answer 15

-After initial recovery, before late expansion -Economic Features --output gap remains negative, but unemployment starts to fall --consumers start to borrow to spend (housing and consumer durable demand increases) --businesses step up production (profits begin to expand rapidly) --central banks remove stimulus -Capital Market features --short rate begin to increase (long rates remain stable/increase slightly) --Flattening yield curve --stock price trend upwards

Answer 16

-After early expansion, before slowdown -Economic Features --Positive output gap and danger of inflation (capacity pressures boost investment spending) --low unemployment, strong profits, rising wages and prices (inflation) --debt coverage ratios may deteriorate as business borrows to fund growth --Monetary policy becomes more restrictive -Capital Market Features --private sector borrowing causes rates to rise --yield curve continues to flatten as short rates rise faster than long rates --stocks are volatile as investors watch for deceleration --inflation hedges (e.g. commodities) may begin to OP cyclical assets

Answer 17

-After late expansion, before contraction -Economic Features --Fewer viable investment projects and overleveraging cause slowing growth (business confidence wavers) --inflation continues to rise as business pricing attempt to outpace rising input costs --Economy is vulnerable to shocks -Capital market features: --LT bonds may top but ST rates continue to rise/may peak (yield curve may invert) --credit spread widens, depressing bond prices for lower credit issues --stocks may fall (utilities and quality stocks likely to OP)

Answer 18

--After slowdown, before initial recovery -Economic Features --Firms cut investment spending, then decrease production (unemployment can rise quickly) --Profits drop sharply with credit mrkts tightening, accounting transgressions discovered, and bankruptcies -Capital Market features --ST and LT rates begin to fall (yield curve steepens) --credit spreads widen, remains wide until trough --early phase stock mrkt declining while late phase stock mrkt begins to rise

Answer 19

i* = r,neutral + pi,e + 0.5(y^,e - y^, trend) + 0.5(pi,e - pi,target) i*: target Policy nominal rate, r,neutral: real policy rate targeted with trend growth and target inflation, (y^,e - y^, trend): expected and trend real GDP growth rates -When the interest rate given is nominal, do not need to add expected inflation: i* = r,neutral + 0.5(y^,e - y^, trend) + 0.5(pi,e - pi,target) -if the target rate calculated is greater than the current target rate, econ could grow too fast which would cause tightening of output gap. This is unsustainable and would lead to higher inflation and weaker growth

Answer 20

-Yield curve steepens as business cycle bottoms -Flattens during expansions -Becomes flat to inverted toward the peak as rates rise -Re-steepens during contraction

Answer 21

Reflects exports and imports of goods and services, investment income flows, and unliteral transfers -Because financial market reacts more quickly to changes than real markets, changes to current account are reflected quickly in the capital account vis ST rates, exchange rates, and financial asset prices -ST changes in current account are less likely to result in exchange rate changes -Larger, persistent imbalances must be financed by adjustments to private or public savings

Answer 22

Reflects foreign direct investment (FDI), involving productive asset purchases and sales, and portfolio investments (PI), involving financial asset transactions

Answer 23

(X - M) = (S - I) + (T - G) -(X-M) = net exports, representing the current account -(S - I) = Domestic savings - Domestic investment -(T - G) = Taxes - govt spending -for a floating rate exchange regime to be in EQ (every buyer has a corresponding seller), current account surplus (positive X-M term), where there are net buyers of a currency. This must be offset by a deficit of the capital account (i.e. investment overseas), where there are net sellers of the currency. This capital required to invest oversees comes from domestic savings (S) in excess of domestic investment (I) or a govt budget surplus where taxes raised (T) are higher than govt spending (G)

Answer 24

1) Cash flow of bond are received in full and on time 2) Bond is held to maturity 3) Cash flows are reinvested at YTM -Generally effects of conditions 2 and 3 offset eachother. If horizon is less than port duration , condition 2 will dominate and investor underperforms YTM when rates rise. If horizon is more than port duration, 3 will dominate and investor underperforms YTM when rates fall

Answer 25

-Breaks the expected return for fixed income security into 4 components: 1) ST nominal default risk free rate 2) Term premium 3) Credit premium 4) Liquidity premium

Answer 26

-Extends gordon growth model to consider effects of share repos and changes in valuation levels through forecast horizon -E(R,e) = (D/P) + (%Delta(E) - %Delta(S)) + %Delta(P/E) + Expected Inflation -D/P = Div yield, %Delta(E) = Nominal earnings growth rate, %Delta(S) = Expected change in shares outstanding

Answer 27

Model: E(R,e) = (D/P) + (%Delta(E) - %Delta(S)) + %Delta(P/E) + Inflation Expectation -%Delta(P/E) = growth rate of PE ratio, the "repricing return" -Income Component of Expected Return = D/P - %Delta(S) -Expected Capital Gains = %Delta(E) + %Delta(P/E) -Est. Rate of change in EPS= %Delta(E) - %Delta(S)

Answer 28

-EQ Approach RP,i,sig = P,i,GM * Sig,i * (RP,GM / Sig,GM) RP,i,Sig = Risk premium of mrkt "i" assuming 100% integration with global mrkts -P,i,GM = Correl coefficient between i and global mrkt -(RP,GM / Sig,GM) = Sharpe ratio of global mrkt port

Answer 29

RP,i,s = Sig,i * Sharpe Ratio,i

Answer 30

RP,i = (row)RP,i,G + (1-row)(RP,i,s)

Answer 31

E(R,RE) = Cap Rate + g,NOI - %Change(Cap Rate) Cap rate = NOI / Prop Value

Answer 32

-Assuming perfect cap mobility, assumes that cap flowing into a higher returning domestic economy will instantly strengthen the currency up to the point where, looking forward, currency is expected to weaken by the return advantage of domestic economy E(%Delta(S,d/f)) = (r,d - r,f) + (Term,d - Term,f) + (Credit,d - Credit,f) + (ERP,d - ERP,f) + (LIQ,d - LIQ,f)

Answer 33

R,t = (1 - lambda)r,t + (lambda)R,t-1 Lamda = parameter of model taking value between 0 (unsmoothed original data) and 1 (smoothed original data) -R,t = current observed (smoothed) return r,t = unobservable true return

Answer 34

var(r) = [(1 + lamda) / (1 - lamda)]* var(R) Lamda = parameter of model taking value between 0 (unsmoothed original data) and 1 (smoothed original data) var(r) = est. variance of true return series var(R) = observed variance of smoothed returns -since lambda is b/t 0 and 1, true variance is always higher than reported smoothed variance

Answer 35

=Asset Beta * Port. Std. Dev.

Answer 36

=Asset weight * MCTR

Answer 37

=(Expected return - risk free rate) / MCTR -Asset allocation optimal when this ratio is the same for all assets

Answer 38

-An asset allocation process with the presence of a clients liabilities within the investment horizon. includes Surplus optimization approach, 2-portfolio Approach, and Integrated Asset-Liability Approach

Answer 39

-Liability-Relative Asset Allocation approach -Uses the traditional MVO approach based on the volatility of the surplus volatility as the measure of risk, Characteristics: Simple, linear correlation, all levels of risk, any funding ratio, single period

Answer 40

-Liability-Relative Asset Allocation approach -Partitions assets into 2 groups: A hedging port managed so that its assets are expected to produce a good hedge to cover req CFs from liabilities, and a return-seeking port that can be treated as an asset only port -Characteristics: Simple, linear/nonlinear correlation, conservative levels of risk, positive funding ratio for basic approach, single period (S-LN-CPS)

Answer 41

-Liability-Relative Asset Allocation approach -The most comprehensive of the 3 Liability-Relative Asset Allocation approaches, where decisions regarding the composition of liabilities are made in conjunction with their asset allocation -Characteristics: complex, linear/nonlinear correlation, all levels of risk, any funding ratio, multiple periods

Answer 42

r,at = p,d(r,pt)(1-t,d) + p,cg(r,pt)(1-t,cg) r,at: expected after-tax return, r,pt: expected pre-tax return, p,d: proportion of r,pt attributed to dividend income, p,cg: proportion of r,pt attributed to capital gains stdDev,at = stdDev,pt(1-t) --> means expected after tax return std dev is smaller than pre-tax return std dev

Answer 43

S,0 + p,0 = c,0 + [X / {(1+r)^T}] S,0: price of underlying security; p,0 and c,0 are prices of put and call options, both with strike price 'X' and expiration 'T'; [X / {(1+r)^T}]: the PV of a risk free 0 coup bond paying X at option expiration

Answer 44

Call Option: MAX[S,T - X, 0] - c,0 Put Option: MAX[X - S,T, 0] - p,0

Answer 45

-A combo of long underlying security position and a short call position -Investment objectives: Yield enhancement (writting slightly OTM calls in a static mrkt), Reducing overweight position (selling ITM call in static mrkt increases effective sale price), or target price realization

Answer 46

-Value of Covered Calls @ Expiration: S,T - MAX[S,T - X, 0] -P&L: S,T - MAX[S,T - X, 0] + c,0 - S,0 -Max Profit: X - S,0 + c,0 -Max Loss: S,0 - C,0 Breakeven: S,0 - c,0

Answer 47

-Max gain occurs when stock price appreciates to the strike price -Max loss occurs when stock price falls to 0

Answer 48

-A combo of a long underlying security position and a long put position -Basically a form of insurance with objective of protective against investment loss. Can think of put premium as cost of insurance -Major risk is they have a finite term and have to be rolled over periodically (expensive)

Answer 49

-Value of Protective Puts @ Expiration: S,T + MAX[X - S,T, 0] -P&L: S,T + MAX[X - S,T, 0] - S,0 - p,0 -Max Profit: Theoretically unlimited -Max Loss: S,0 - X + p,0 -Breakeven: S,0 + p,0

Answer 50

-Max gain unlimited as gains on underlying long stock are unbound above -Max loss occurs when stock price falls to exercise price

Answer 51

-Delta = Change(option price)/Change (underlying) -Long Call Delta: Always positive, between [0,1]. Long ATM call option will have delta = 0.5 -Long Put Delta: Always negative, between [-1,0]. Long ATM put option will have delta = -0.5

Answer 52

-Objective is to benefit from rising prices with a lower cost than a simple long position or a call option -Both call and put bull spreads you are long the lower strike option and short the higher strike option

Answer 53

-Buying a lower strike price call option (X,L) and selling a higher strike price call option (X,H) with the same expiration date -As the higher strike call (which you are short on) is less expensive than lower strike call (which you are long on), call bull spread requires a cash outflow (debit spread) -Risk is that underlying must rise above lower strike price to offset initial costs

Answer 54

-Buying a lower strike put option and selling a higher strike put option with the same expiration date -As the higher strike price (short on) is more expensive, put bull spread generates an initial cash inflow (credit spread) -Risk is that if stock price falls below high strike price, investor will begin losing initial cash flow

Answer 55

-Value @ Expiration: MAX[0, (S,T - X,L)] - MAX[0, (S,T - X,H)] -Profit: MAX[0, (S,T - X,L)] - MAX[0, (S,T - X,H)] - (c,L - c,H) -Max Profit: X,H - X,L - (c,L - c,H) when S,T > X,H -Max Loss: (c,L - c,H), when S,T < X,L -Breakeven Price: X,L + (c,L - C,H)

Answer 56

-Max profit occurs when S,T > X,H -Max Loss occurs when S,T < X,L

Answer 57

-Value @ Expiration: MAX[0, (X,L - S,T)] - MAX[0, (X,H - S,T)] -Profit: MAX[0, (X,L - S,T)] - MAX[0, (X,H - S,T)] - (p,L - p,H) -Max Profit: p,H - p,L, when S,T> X,H -Max Loss: (X,H - X,L) - (p,H - p,L), when S,T < X,L -Breakeven: X,H - (p,H - p,L)

Answer 58

-Max profit occurs when S,T > X,H -Max Loss occurs when S,T < X,L

Answer 59

-Objective is to benefit from falling prices at a lower cost than a simple short position/put option with same expiration date -Both call and put spreads you are long the higher strike option and short the lower strike option

Answer 60

-Investor buys a higher strike call and sells a lower strike call with same expiration date -As the higher strike call option is less expensive than lower strike call, results in an initial cash inflow (credit spread) -Risk is that stock price rises above the lower strike price, causing him to loose initial credit spread

Answer 61

-Investor buys higher strike put option and writes lower strike put option with same expiration date -As higher strike put option is more expensive, put bear spread generates initial cash outflow (debit spread) -Risk is that if stock price does not fall below the high strike price, investor will lose initial cash outflow

Answer 62

-Value @ Expiration: MAX[0, S,T - X,H] - MAX [0, S,T - X,L] -P&L: MAX[0, S,T - X,H] - MAX [0, S,T - X,L] - (c,H - c,L) -Max Profit: Net premium received, c,L - c,H, when S,T < X,L -Max Loss: (X,H - X,L) - c,L + c,H, when S,T > X,H -Breakeven: X,L + c,L - c,H

Answer 63

-Max Profit occurs when S,T < X,L -Max Loss occurs when S,T > X,H

Answer 64

-Value @ Expiration: MAX[0, X,H - S,T] - MAX[0, X,L - S,T] -P&L: MAX[0, X,H - S,T] - MAX[0, X,L - S,T] - (p,H - p,L) -Max Profit: (X,H - X,L) - (p,H - p,L), when S,T < X,L -Max Loss: (p,H - p,L) -Breakeven: X,H - (p,H - p,L)

Answer 65

-Max Profit occurs when S,T < X,L -Max Loss occurs when S,T > X,H

Answer 66

-Objective is to profit from a directional play on volatility, either for decreasing (short straddle) or increasing (long straddle). Both involving going long/short both put/call with same expiration on same asset

Answer 67

-Profitable when volatility rises above market consensus -Buy a put and a call with same strike prices and same expiration on same asset

Answer 68

-Value @ Expiration: MAX [0, S,T - X] + MAX[0, X - S,T] -P&L: MAX [0, S,T - X] + MAX[0, X - S,T] - c,0 - p,0 -Max Profit: X - S,T - c,0 - p,0. Unlimited if S,T > X. Limited to X - c,0 - p,0 if S,T = 0 -Max Loss: c,0 + p,0, when S,T = X -Breakeven: Upside breakeven (when S,T > X) = X + c,0 + p,o, downside breakeven (when S,T < X) = X - c,0 - p,0

Answer 69

-Max Profit (Upside): Unlimited when S,T > X. Max Profit (downside) limited to X - c,0 - p,0 when S,T = 0 -Max Loss when S,T = X

Answer 70

-Profitable when volatility declines and there is minimal movement in underlying asset -Sell a put and a call with same strike prices, same expiration and on same asset

Answer 71

-Same as long straddle but with signs reversed -Value @ Expiration: -MAX[0, S,T - X] - MAX [0, X - S,T] -P&L: -MAX[0, S,T - X] - MAX [0, X - S,T] +c,0 + p,0 -Max Profit: c,0 + p,0 when S,T = X -Max Loss: Unlimited when S,T > X, limited to X - c,0 - p,0 when S,T =0 -Breakeven: Upside Breakeven (when S,T > X) = X + c,0 + p,0, downside breakeven (when S,T < X = X - p,0 - c,0

Answer 72

-Max Profit: When S,T = X -Max Loss (Upside): Unlimited when S,T > X. Max Loss (downside) limited to X - c,0 - p,0 when S,T = 0

Answer 73

-Assumes investor owns underlying. Achieves downside protection by buying long put below current market price and reducing this cost of protection by writing covered call exercisable above current market price -Risk is that it the short call limits upside participation

Answer 74

-Value @ Expiration: S,T + MAX [0, X,L - S,T] - MAX[0, S,T - X,H] -P&L: S,T + MAX [0, X,L - S,T] - MAX[0, S,T - X,H] - S,0 - p,0 + c,0 -Max Profit: X,H - S,0 - p,0 + c,0 when S,T >/= X,H -Minimum Profit (potentially a loss) X, L - S,0 - p,0 + c,0, when S,T

Answer 75

-Options strategy where investor sells and buys same type of option, but with different expiration dates to take advantage of time decay

Answer 76

-ST option is sold and LT option is purchased --Investor expects to profit from time passage as ST option falls in value by more than LT option -Profitable when markets are stable in sort term and longer-term implied volatility rises

Answer 77

-ST option is bought and LT option is sold -Investor expects to profit from time passage as LT option falls in value by more than ST option -Profitable when markets are volatile in ST with falling LT implied volatility

Answer 78

-Occurs when OTM puts and calls exhibit greater implied volatility than ATM options -Can become a volatility skew in times of market stress as more ppl are interested in buying port protection in the form of puts, driving up prices and implied vol

Answer 79

N,s = [(MDUR,T - MDUR,P) / MDUR,S] * MV,P MDUR,S = MD of receive-fixed Swap

Answer 80

=(Future Settlement Price 100) x CF x Contract size

Answer 81

=Principal Invoice Amount - Cost of purchasing bond

Answer 82

-Measures the absolute change in value of a portfolio for a 1 bp change in yields BPV,P = MV,P x MDUR,p x 0.01%

Answer 83

N,f = [(BPV,T - BPV,p) /( BPV,f / CF)

Answer 84

BPV,f = BPV,CTD / CF -Fair futures prices are inversely related to the CF of the CTD bond

Answer 85

N,F = (S/F) * [(B,T - B,S) / B,F] =(S/F) * (-B,S / B,F) S = mrkt value of equity portfolio F = value per futures contract (price x multiplier) B,S = Equity portfolio beta -When doing a 2-piece trade (i.e. buying one future, selling another), B,s = 0 for the buy side and B,T = 0 for the sell side. S = Target allocation, or what you are working with

Answer 86

-Flat shape shows vol is expected to remain stable over near to LT -Downward slope shows decreasing vol expectations over time, making prices higher for ST contracts (backwardation). If VIX is in backwardation and vol expectations are expected to remain constant, VIX prices will increase as contract approaches maturity -Upward slope shows increasing vol expectations overtime, making prices lower for ST contracts (contango). If VIX is in contango and vol expectations are expected to remain unchanged, VIX prices will decrease overtime

Answer 87

-Allows investors to take directional bets on implied vs realized vol to speculate/hedge portfolios -The payoff at expiration of long variance swap will be positive when realized variance is greater than strike variance -Only exchange cash at settlement

Answer 88

N,Variance = N,Vega / (2 x Strike Price) -Ignore decimals/%'s, make all numbers whole numbers

Answer 89

Settlement Amt, T = N,Vega * [ (var - X^2) / (2 * Strike Price) =N,variance * (Var - X^2) --Ignore decimals/%'s, make all numbers whole numbers

Answer 90

-Ignore decimals/%'s, make all numbers whole numbers

Answer 91

F, FC/DC - S, FC/DC = S, FC/DC * {[(i,FC - i,DC) * (Act/360)] / [1 + (i,DC * (act / 360))]} -If forward rate is higher than spot rate, base currency (domestic currency) is said to be trading at a forward premium and is expected to appreciate in the future

Answer 92

=S,FC/DC * {[1 + (i,FC x act/360)] / [1 + (i,DC x act/360)]}

Answer 93

R,DC = [w1 * (1 + R,FC1)(1 + R,FX1) + w2 * (1 + R,FC2) (1 + R,FX2)] - 1 -Make sure return terms are stated with domestic currency in numerator

Answer 94

Var(R,DC) = var(R,FC) + var(R,FX) + [2 * stdDev(R,FC) x stdDev(R,FX) x p(R,FC , R,FX)] -make sure return terms are stated with domestic currency in numerator

Answer 95

= [(PV-) - (PV+)] / [2(Delta(curve))(PV,0)]

Answer 96

=[(PV-) + (PV+) - 2(PV,0)] / [(Delta(curve)^2)(PV,0)] -Bonds with greater convexity enjoy greater price increase when yields fall and smaller price decline when yields rise -Bonds with longer maturity tend to have greater convexity than shorter maturity bonds

Answer 97

-E(r) = Coupon income + rolldown return + E((delta(P)) due to yield change and spread) + E(currency gains/losses) -Coupon income = Coupon income + reinvestment interest relative to bonds price (if no reinvestment income, coup inc = Bonds annual current yield) -Roll-Down Return = (B,1 - B,0) / B,0 -Rolling Yield = yield income + roll-down return -E((delta(P)) due to yield change and spread) = (-D * Delta(Y)) + [0.5 x CX x (delta(Y)^2)]

Answer 98

r,P = Leveraged return / Portfolio equity = {[r,i x (V,E + V,B)] - (r,B x V,B)} / V,E =(return to Equity + return to borrowed) / Portfolio equity = [r,i(V,E) + V,B(r,i - r,B)] / V,E =Return on equity capital + return on borrowed capital = r,i + (V,B / V,E)(r,i - r,B) r,i: Asset return, V,E: Invested equity, V,B: Borrowed equity capital, r,B: Cost of borrowed capital

Answer 99

Leverage = (Notional Value - Margin) / Margin

Answer 100

=(Selling price - Repurchase price) / Selling price

Answer 101

Principal (initial selling price) + interest = Principal x [1 + r,R(Term/360)] r,R = repo rate

Answer 102

=Collateral earnings rate - security lending rate

Answer 103

-A form of Asset-liability mgmt (ALM) that takes the liabilities as given and builds the asset portfolio in accordance with the interest rate characteristics of the liabilities

Answer 104

-I: Traditional fixed rate bonds with no embedded options II: Bonds with embedded options, term life insurance policy III: Floating rate notes/inflation protected security IV: property and casualty insurance payouts

Answer 105

-Changes in yield levels: Occur when yield curve changes by same number of bps at each maturity (AKA Parallel shift) -Changes in yield curve slope: Can be quantified as the difference between yields for long maturities less yields for short maturities (when spread widens, curve is said to steepen and when it narrows, curve is said to flatten) -Changes in yield curve shape (curvature) - Can be quantified by the Butterfly Spread

Answer 106

-Can be used to quantify the yield curve shape (curvature) -Butterfly Spread = 2YTM10 - (YTM2 + YTM30) -Generally positive, increases as curve becomes more concave (humped) and would likely be negative for a convex (U-shaped) curve

Answer 107

%Delta(V, Full price) = -MD,P x Delta(Y) + 0.5(C,P)(Delta(Y)^2) -Use Effective Duration when available -Use end of horizon measurements when available

Answer 108

-Buy bond with duration greater than benchmark -Excess return: Price appreciation as YTM declines -Risks: Yields increase rather than decrease

Answer 109

-Fixed rate receiver -Excess return: Swap MTM gain as yield falls plus carry (fixed less floating rate) and less margin cost -Risks: Higher floating rate/higher swap yield level

Answer 110

-Buy contract for forward delivery -Excess return: Futures MTM gain less margin cost -Risks: Yields increase/funding costs increase

Answer 111

-Bull scenarios generally denote falling rates while bear scenarios denote rising rates -Duration neutral strategies apply when port mgmt has no view on which end of the curve may change more than the other (no net change in duration between long and short end) -Steepening scenarios suggest long end will increase in yield relative to short end -Flattening scenarios suggest long end will decrease in yield relative to short end

Answer 112

-Net 0 duration -Excess return: Gain from slope increase -Risks: Yield curve flattens

Answer 113

-Net 0 duration -Excess return: Gain from slop decrease -Risks: Yield curve steepens

Answer 114

-Net long duration -Excess Return: Gain from slop increase / lower yields -Risks: Yield curve flattens or higher yields

Answer 115

-Net short duration -Excess return: Gain from slope increase / higher yields -Risks: Yield curve flattens or lower yields

Answer 116

-Net long duration -Excess return: Gain from slope decrease / lower yields -Risks: Yield curve steepens or higher yields

Answer 117

-Net short duration -Excess return: Gain from slope decrease / higher yields -Risks: Yield curve steepens or lower yields

Answer 118

-Identifies risk that a debt issuer will fail to make a promised interest/principal payment, and includes Default risk (probability that debt issuer will fail to make the payment) and Loss severity (amt of loss if default occurs)

Answer 119

=EE * (1 - RR) EE = expected exposure (bond value)

Answer 120

=LGD * POD

Answer 121

-Difference between bond YTM and similar-maturity govt bond -Advantages: simple to calculate, widely understood -Disadvantages: Maturity mismatch, curve slope bias, inconsistent over time

Answer 122

-Spread over interpolated govt bond -Advantages: Transparent, maturity matching default risk free govt bond -Disadvantages: Subject to changes in govt bond demand

Answer 123

Yield spread over swap rate of same maturity -Advantages: Spread vs mrkt based (MRR) measure often used as hedge or for carry trade -Disadvantages: Point estimate of term structure and not useful for option bonds

Answer 124

-Spread over MRR of fixed bond coupon -Advantages: Transparent, traded spread that converts current bond coupon to MRR plus a spread -Disadvantages: Market-based spread rather than cash flow absed spread and now useful for option bonds

Answer 125

-Constant yield spread over a govt (or swap) spot curve -Advantages: Reflects term structure of govt or swap zero rates -Disadvantages: More complex calculation and not useful for option bonds

Answer 126

-Difference between yield spread and CDS spread of same maturity -Advantages: Transparent, interpolated CDS spread vs Z spread -Disadvantages: Market based spread rather than cash flow based spread and not useful for option bonds

Answer 127

-Yield spread using Z spread including bond option volatility -Advantages: Allows comparison of option free risk bonds with option bonds -Disadvantages: Complex calculation based on volatility and, with MBS, prepayment assumptions. Bonds with embedded options unlikely to earn OAS over time

Answer 128

-Portfolio management selects the best relative value securities from bonds in the same country, industry, or other category -First segment the potential universe of credit issues into similar credit risks, then use credit relative value analysis to find most attractive in that credit segment . Then applies a weighting method.

Answer 129

-Used in Bottom Up Approach -Looks at the spread for similar securities with the idea that, all else equal, mgmt would prefer greater yield for the same risk. For non-similar securities, mgmt would determine whether excess return sufficiently compensates for the risk imparted by the nonsimilar factors -E[Excess Spread] = Spread,0 - (EffSpread Dur x Delta(Spread)) - (POD x LGD)

Answer 130

-Shows the spread of the fitted curve for each issuers securities of different maturity or duration. Higher spread curve indicates wider spread over benchmark and thus greater perceived risk -Recent issues by well known issuers have narrower spreads compared to older issues by infrequent issuers. Spreads widen as issues age

Answer 131

-The % change in price for a given % change in yield spread -W,MV, Sdc = W,MV,Index x [D,S,index / D,S,sector] -Spread duration weighting structures the portfolio to provide the same % change in price from each position given a 1% change in spread

Answer 132

-Mgmt first broadly defines appropriate sectors, then selects sectors expected to benefit from perceived macro trends, the over/underweights the sectors

Answer 133

-A secondary credit market measure of liquidity -The % change in spread over a reference rate for a % change in outflows from mutual funds or credit market

Answer 134

P,CDS = (Fixed CDS Coupon - CDS Spread) x EffSpreadDur,CDS -If spread is greater than fixed coupon, P,CDS < 0 and buyer pays seller -Fixed coupon is determined the the Intl Swaps and Derivatives Association: IG issuers usually carry 1% fixed coupon and HY issuers carry 5%

Answer 135

-Full replication should result in negligible tracking error but requires a large enough mandate size and liquid index constituents. This is preferred when the index has a relatively small number of constituents (less than 1k) and when the index is market cap weighted -Stratified sampling is used when the benchmark index contains large number of securities / mandate size is small. -Optimization is a middle ground

Answer 136

R,A = nSUMi=1 [w,i - W,i)r,i] w,i = portfolio weight of asset i W,i = benchmark weight of asset i R,A = SUM[(B,pk - B,bk)F,k + (a + e) B,pk = Portfolio sensitivity to each reward factor k B,bk = benchmark sensitivity to each reward factor k F,k = rewarded factor return a = return due to mgmt skill at security selection and timing e = idiosyncratic return

Answer 137

E(R,A) = IC x RAD(BR)stdDev(R,A)(TC) IC = expected information coefficient (correlation between forecast and actual active return) BR = breadth (# of independent, uncorrelated mgmt decisions) TC = transfer coefficient (the degree to which port insights translate to investment decisions)

Answer 138

Top-Down: Macro factors, factor timing, diversified. Bottom-up: Security specific factors, no factor timing, diversified

Answer 139

Top-Down: Macro factors, factor timing, diversified/concentrated Bottom-up: Firm-specific factors, potential factor timing, diversified/concentrated

Answer 140

-Measurement of portfolio weights differences from benchmark weights -Active Share = 1/2 x SUM[|w,i - W,i|] -Value of 0 = mgmt fully matching benchmark -Value of 1 = mgmt holds no benchmark constituents in portfolio

Answer 141

-Long/Short Equity -Dedicated Short Bias -Equity market neutral

Answer 142

-Merger Arbitrage -Distressed securities -Soft-Catalyst Approach: Mgmt could attempt to profit from forecasting the event -Hard-Catalyst Approach: Mgmt attempts to profil from price movements after an event has been publicly announced (tend to involve lower vol than soft catalyst)

Answer 143

-Fixed income arbitrage -Convertible Bond arbitrage

Answer 144

-Global Macro -Managed Futures -These have the broadest mandates of all HF strategies

Answer 145

-Volatility strategies -Reinsurance strategies

Answer 146

-Multi-strategy -Fund of funds

Answer 147

-Equity Category of HF -Attempt to derive alpha by taking long positions in undervalued secs and short positions in overvalued secs -Can be generalists (cover diverse universe of industries) or sector specific -Management is typically fundamental in nature, with investments based on high conviction ideas derived from intimate knowledge of the business conditions affecting the investment -Leverage levels can vary significantly between management. Higher leverage typically used by more quant mgmt -Relatively liquid strategy that can be employed in both LPs and MF vehicles

Answer 148

-Equity category of HF -Short bias (30-60% net short position in fund), and mgmt will take long positions -Dedicated Short Selling (maintain only short positions, 60-120% short) -Liquidity is relatively high -Returns are too volatile to permit/require use of leverage -Due to operational complexities of short selling, best operated in an LP rather than an MF

Answer 149

-Equity category of HF -Take long and short positions in similar or related securities with overall fund objective of keeping major risk factor exposure (stock mrkt beta, size, value) close to 0 -As market related risks have been eliminated, these strategies often employ large amounts of leverage. This large leverage makes them unsuitable for MFs but good for LPs -Generally have net equity exposures of 0 -Good for periods of non-trending/declining markets

Answer 150

-Event-Driven category of HF -In a cash for stock deal, merger arb mgmt will purchase shares of target company aiming to profit as its value rises once acquisition is completed. In a stock for stock deal, merger arb mgmt will purchase shares of target company and short sell shares of acquirer in same ratio as the offer -Earns relatively small risk premium when acquisitions are successful, faces steep loses if they fall through (risk/return profile similar to writing insurance on deal going through) -Relatively liquid, but face significant tail risk -Due to moderate/high use of leverage, better suited to LPs though some MFs exist

Answer 151

-Event-Driven category of HF -Focus on securities of companies that are in financial distress, facing potential bankruptcy, or have already entered bankruptcy proceedings -Strategies include liquidation (buying positions in debt securities trading below expected recovery values in liquidation, reorganization (long positions in securities deemed to be significantly undervalued relative to a likely reorg outcome) and Capital Structure Arbitrage -Low liquidity and long lockuptimes, redemption gates, etc make them good for LPs -Leverage levels not excessive due to high volatility of assets involved -risk and return at higher end of even driven category

Answer 152

-Relative Value category of HF -Involves buying undervalued debt securities and short selling overvalued with aim of profiting when valuations revert to normal levels -Strategies include yield curve trading, carry trades, L/S credit trading, and differences in vol expectations for securities with embedded options -Involves high levels of leverage to magnify relatively small gains expected -Liquidity is good for strategies involving sovereign debt but could be poor for corporate and muni markets

Answer 153

-Relative value category of HF -Involves buying convertible bond and hedging the market risk of call option through taking delta-adjusted short position in issuers shares. Gains when volatility of share price underlying convertible is greater than volatility implied by the conversion option, net of hedging costs -High use of leverage to extract gains from small profits

Answer 154

-Opportunistic category of HF -Have one of the broadest mandates of all HF strategies -Use global securities and derivatives to express their top down view on relative economic health of different countries and markets. They tend to be anticipatory and not trend following, often taking contrarian positions -Generally employe high leverage through implicit gearing of derivatives

Answer 155

-Opportunistic category of HF -Also have very broad mandate allowing investment in virtually any type of global asset class, primarily through derivatives -While global macro aim to anticipate trends using discretionary techniques and fundamental data, this aims to follow trends using systematic techniques and technical data -As futures markets are among the most actively traded in the world, strategy is liquid -Exhibit low correlations with traditional asset classes, therefore attractive for diversification

Answer 156

-Specialist Strategy of HF Category -Overall goal is to purchase volatility when its undervalued and sell it when its overvalued -Liquidity is good for exchange traded options and VIX futures, but could be low for OTC options and vol/var swaps -Leverage could be high due to derivatives use

Answer 157

-Specialist category of HF -HFs offer high value to policyholders for their life insurance contracts, with them aiming to earn return from paying remaining premiums on contracts and receiving a payout when original insured dies. Similar strategy employed for catastrophe risk

Answer 158

-Mutli Manager category of HF -role of FoF mgmt is to perform due dilligence and monitor risk mgmt of underlying portfolio mgmt -Can be desirable for reporting purposes, pooling capital, greater access to underlying funds -Extra layer of mgmt adds additional fees and may result in lower transparency into indv mgmt process -Experiences the problem of "netting risk" where superior underlying mgmt will charge performance fees to FoF regardless of whether FoF generates positive returns in aggregate

Answer 159

-Multi manager category of HF -Combine several strategies, and are run by different teams of mgmt under a single fund structure -Allows fuller transparency, eliminates most netting of risk, but exposes investors to higher operational risk of fund failure vs FoFs

Answer 160

C,t = RC,t x (CC - PIC,t) C,t: Capital contribution in year t RC,t: Rate of contribution (%) in year t CC: Capital commitment PIC,t: Paid-in-Capital (i.e. capital paid in prior to year t)

Answer 161

D,t = RD,t[NAV,t-1 x (1 + G)] NAV,t = [NAV,t-1 x (1 + G)] + C,t - D,t D,t = dollar distributions in Year t RD,t = rate of distributions (%) in year t G = growth rate in NAV

Answer 162

-Background and IOs -Investment parameters -Portfolio Asset allocation -Portfolio management -Duties and Responsibilities -IPS appendix

Answer 163

-Details clients relevant details and investment needs -Background info likely to include mrkt values of client assets, tax status, expected cash flows

Answer 164

-Builds the framework in which the clients investment plan should be build, outlines key investment preferences -Risk tolerance, time horizon, asset class preference, other investment preferences, liquidity preferences and constraints (RATLOC)

Answer 165

-Details the target asset allocation for client based on their IOs and parameters -Subsections include discretionary authority, rebalancing framework, tactical changes, and implementation (DR TIT)

Answer 166

-Outlines the responsibilities of those implementing the investment plan

Answer 167

-Tax Havens: Very low or 0 tax rates for foreign investors -Territorial Tax Systems: Tax locally generated returns -Worldwide Tax Systems: Tax all income of residents regardless of where in the world its earned

Answer 168

pre-tax HPR, R = [(Value - Value,0) + Income] / Vallue,0 Post-Tax HPR, R' = R - (Tax / Value,0) Tax Efficiency Ratio (TER) = R' / R (higher ratio indicates more tax efficient mgmt or investment)

Answer 169

R' = R - [Tax / (Value,0 + SUM{C,j(N - j) / N}] C,j = cash flow on day j N = Number of days in calendar month N - j = Number of days from cash flow to the end of month

Answer 170

-Assumes that portfolio investments are sold at the end of an evaluation period, and all capital gains taxes become due (a liquidation tax). Used to capture impact of unrealized capital gains. -Liquidation Tax = (Final Value - Tax basis) x Capital gains tax rate R,PL = {[(1 + R',1) (1 + R',2) ... (1 + R',n) - (Liquidation tax / Final value)] ^ (1/n) } - 1

Answer 171

-Pre-Tax Excess Return, x = R - B -After-Tax Excess Return, x' = R' - B -Tax Alpha, a,tax = x' - x -this represents excess return generated/lost due to tax mgmt decisions made by portfolio management

Answer 172

-Tax-Exempt Account: FV, Tax-Exempt = (1 + R)^n -Taxable Account: FV, Taxable = (1 + R')^n -Tax-Deferred Account: FV, Tax-deferred = (1 + R)^n (1-t)

Answer 173

RV, Tax-Free Gift = FV,Gift / FV,Bequest ={[1 + r,g(1 - t,g)]^n} / {[1 + r,e(1 - t,e)]^n x (1 - T,e)} r,g = pre-tax returns to beneficiary t,g = tax rate on returns in beneficiary portfolio r,e = pre-tax returns to donors estate t,e = tax-rate on returns in donors estate T,e = estate tax rate -If RV,Tax Free Gift > 1, more efficient to gift today rather than to wait and bequeath at death

Answer 174

RV, Taxable Gift = FV,Gift / FV,Bequest = {[1 + r,g(1 - t,g)]^n x (1 - T,g)} / {[1 + r,e(1 - t,e)]^n x (1 - T,e)} T,g = gift tax rate -RV, Taxable Gift = RV,Tax Free Gift x (1 - T,g) r,g = pre-tax returns to beneficiary t,g = tax rate on returns in beneficiary portfolio r,e = pre-tax returns to donors estate t,e = tax-rate on returns in donors estate T,e = estate tax rate

Answer 175

-Irrevocable Trusts - Cannot be changed by the grantor, and trustee files tax-related documents and pays relevant tax from tax assets. Provide better protection from legal claims against grantor -Revocable Trust - Can be dissolved by grantor and assets returns, but grantor, rather than trustee, will be responsible for documents and paying taxes

Answer 176

-Fixed Trusts - Distribute assets to beneficiaries according to a specified fixed schedule or formula -Discretionary Trusts - Allow trustees discretion as to the timing and size of distributions to beneficiaries. These are seen as less of a legal right to beneficiary and therefore creditors to beneficiary are less likely to be able to make claims against this kind of trust

Answer 177

-A structure in which a trustee holds and manages assets donated by the grantor (or settlor) for the benefit of beneficiaries -Allow control, asset protection, and some favorable tax treatment

Answer 178

-Legal structure set up for a certain spending purpose, like trusts can be set up to outlive the donor -Usually donations to foundation are tax deductible, and returns are taxed favorable with assets in the foundation not subject to estate taxes -Likely required to distribute 5% of assets annually to its programs

Answer 179

-A company located in a tax jurisdication different from controlling taxpayers home jurisdiction -Typically established in jurisdictions with low/no corporate income tax, allowing taxation to be deferred until profits are distributed from corporation back to owner

Answer 180

-Human Capital - The PV of of the individuals future expected labor income -Financial Capital - Consists of bank accounts, individual securities, pooled funds, and any other assets owned by individual that are not considered human capital -Best to diversify financial capital from human capital

Answer 181

-Risk Avoidance: Not engaging in risky activity -Risk Reduction: Lowering the likelihood that a risk will occur or decreasing the severity of the loss -Risk Transfer: Through the purchase of insurance or annuities -Risk Retention (Self-Insuring): Keeping the risk and setting aside money to cover potential loses

Answer 182

-First Stage -Investing in knowledge through formal education/skill development -Characteristics: Financially dependent on parents, very little financial capital, almost no focus on savings or risk mgmt

Answer 183

-Second Stage -Completes education and enters workforce, age 18-20s / early 30s -Gets married, has children, buys home -FA can help with Life insurance can supplement lack of sufficient financial and human capital

Answer 184

-Third Stage -Specific skill development with a given field, ages 35-50 -Accumulation for childrens college education, large purchases such as vacation home, travel -FA can help with retirement savings

Answer 185

-Fourth Stage -Moving towards max earnings and greatest opportunity for wealth accumulation, age 51-60 -Retirement planning and travel, high career risk as high paying job may not be replaced -FA can help with reducing investment risk, developing retirement income strategies

Answer 186

-Fifth Stage -A few years before retirement age -Income often at career highs -FA can help with decreasing investment risk, tax planning for retirement distributions

Answer 187

-Sixth Stage -Period of comfortable income and enough assets to cover living expenses, at least first 10 yrs of retirement -Use savings for enjoyment, most active period of retirement, less likely to suffer from cognitive/mobility impairments -FA can help with the still existent need for asset growth as this phase could last 20 years

Answer 188

-Unknown duration -Physical activity declines, cognitive/physical problems may deplete savings, may need LT health care -FA can help with annuities to reduce/eliminate longevity risk

Answer 189

-Benefits: Contracted lifetime pension payments generally based on salary -Contributions: Employer contributions based primarily on investment performance of underlying assets; employee may also contribute -Investment Decision Making: Determined by pension fund in meeting plan objectives -Investment Risk: Borne by employer -Mortality/Longevity Risk: Borne by pool of employees

Answer 190

-Benefits: Based on underlying investments -Contributions: Employee is primary contributor, employer may also contribute -Investment Decision Making: Determined by employee -Investment Risk: Borne by employee -Mortality/Longevity Risk: Borne by employee

Answer 191

-State owned investment funds/entities that look to invest funds from budget surpluses to meet various IOs. Many SWFs are a hybrid of 2/more of these -Budget Stabilization Funds -Development Funds -Pension Reserve Funds -Reserve Funds -Savings Funds

Answer 192

-SWF -Main objective is to insulate the budget and economy from commodity price volatility (esp oil) and external shocks -Liabilities and Time Horizons: Short term, liabilities uncertain - to fund budget shortfalls in event of revenue falls from cyclical/volatile industries -Liquidity Needs: government spending needs may spike during periods of negative price shocks, which would require the fund to maintain high levels of liquidity -Asset Allocation: Dominated by fixed income, risk averse due to need for counter-cyclical assets and mgmt by CB or finance ministry (which tend to be more risk averse)

Answer 193

-SWF -Main objective is to fund priority socioeconomic projects -Liabilities and Time Horizons: Medium to long term, liabilities uncertain -Liquidity Needs: Will depend on the economic development initiatives that the fund was created to support -Asset Allocation: Depends on time horizon

Answer 194

-SWF -Main Objective is to fund pension-like liabilities of the government -Liabilities and Time Horizon: Long term, liabilities are more certain pension-related funding and less certain healthcare funding -Liquidity Needs: Likely to have an accumulation phase (where surpluses are being used to build the fund) which would have low liq needs and a decumulation phase which would have high liq needs -Asset Allocation: tilted towards EQs and Alts, typically follow the endowment model but may also follow Canada reference portfolio model

Answer 195

-SWF -Main objective is to aim to increase returns (or reduce negative carrying costs) of government reserves -Liabilities and Time Horizon: Very long, liabilities are no real claim on the fund as it is the investment of excess FX reserves - used to help fund the cost of carry on CB balance sheet -Liquidity Needs: Likely low to moderate -Asset Allocation: Titled towards EQs

Answer 196

-SWF -Main objective is to share wealth across generations, with the wealth usually related to high revenues from nonrenewable assets -Liabilities and Time Horizon: Long term, liabilities uncertain - used to fund intergenerational wealth transfer -Liquidity Needs: Low due to LT nature of fund, but savings funded by natural resources may have liq needs change once natural resource begins to burn out -Asset Allocation: Tilted towards EQs and Alts, typically follow endowment model

Answer 197

-A largely passive managed portfolio with a mix of public equities and FI securities only (little, if any alternatives) -Useful for institutional investors seeking low cost and transparent investment management -Disadvantages are limited value adding potential

Answer 198

-High allocation to alts, actively managed through external asset management -Useful for those with low liq needs with a moderate levels of assets -Disadvantages is that its expensive and can be difficult to implement

Answer 199

-High allocation to alts, internally managed -Incorporates a reference portfolio that drives asset and risk allocations -Useful for those with low liq needs and resources to manage investments

Answer 200

-High allocation to FI securities (long duration for DB pension plans, SWFs, endowments, and foundations to match liability durations; shorter durations for banks and insurers) -Can incorporate a hedging portfolio of bonds and derivatives and a return generating portfolio

Answer 201

-D*E = [(A/E) * D*A] - [((A/E) - 1) * D*L x (Delta(i) / Delta(y))]

Answer 202

-Short-Term Alpha: Represents investment price movement over the period between investment decision and trade execution -Alpha Decay: The erosion of ST alpha until the trade is executed or abandoned, the rate of this affects trade urgency

Answer 203

-Measures total cost of executing the trade above a decision price -IS = r,paper - r,actual -IS = SUM[s,j(p,j)] - SUM[s,j(P,d)] + {S - SUM[S,j]}(p,n - P,d) + Fees -IS,bps = {IS / [S x p,d]} x 10,000 s,j, p,j: Number of shares executed and prices of the jth trade. USE NEGATIVE SHARE NUMBERS FOR SELL ORDERS P,d: Price when trade decision is made (arrival price) S: total number of shares ordered P,n: Current share price (Closing share price) -First 2 terms are the execution costs and second 2 terms are the opportunity costs -IS Minimization strategy is app when there is a need for formal control, like when mgmt is switching

Answer 204

r,paper = S(P,n - P,d) = S(P,n) - S(p,d) S: total number of shares ordered P,n: Current share price P,d: Price when trade decision is made

Answer 205

r,actual = SUM(s,j)(P,n) - SUM[s,j(P,j)] - Fees s,j and p,j = number of shares executed and the prices of the jth trade SUM(s,j) = Total number of shares executed Fees = commissions, exchange fees, and taxes

Answer 206

-Positive values indicate additional cost and underperformance relative to benchmark -Cost/share = Side x (P,bar - P!) -Total cost = Side x (P,bar - P!) x # shares -Arrival Cost in bps = Side x [(P,bar - P!) / P!] x 10,000 Buy Side = +1, Sell Side = -1 P,bar = Weighted average execution price of order P! = Arrival/Reference price (Price when order is released for market execution)

Answer 207

-Index cost (bps) = Side x [(Index VWAP - Index arrival price) / Index arrival price] x 10,000 -Market-Adjusted Cost (bps) = Arrival cost bps - B(Index cost (bps))

Answer 208

-Uses only total returns to establish sources of return and risk. -Most appropriate when underlying portfolio return info is not available -Approach is easiest to implement, but least informative and most subject to data manipulation

Answer 209

-Relates return and risk to holdings at the beginning of period -Holdings based returns will not equal actual portfolio return, and the difference can be attributed to a timing/trading effect -Appropriate for passive strategies -Better when using data with shorter time span as longer time periods will be subject to trading effects which this does not capture

Answer 210

-Uses the weights and returns of all transactions, including their transaction costs -All excess returns can be calculated and accurately explained but its the most difficult and time consuming -Most accurate attribution

Answer 211

-An equity return attribution approach -Considers that portfolio and benchmark returns for a period are each the sum of asset-weighted individual sectors

Answer 212

-Occur when portfolio management adds or loses value by having portfolio sector weights different from benchmark sector weights -A,i,BHB = (w,i - W,i)B,i w,i = Portfolio sector weight W,i = Benchmark sector weight B,i = Benchmark sector return

Answer 213

-Occurs when management creates a different return from his selection within a sector than occurred in the benchmark, which results from different security weights within a sector -This is the same for both BHB and BF model S,i = W,i(R,i - B,i) W,i = Benchmark sector weight R,i = Portfolio sector return B,i = Benchmark sector return

Answer 214

-Describes the portion of return that results from both differences in portfolio weights and differences in securities -This is the same for both BHB and BF model I,i = (w,i - W,i)(R,i - B,i) w,i = Portfolio sector weights W,i = Benchmark sector weights R,i = Portfolio sector returns B,i = Benchmark sector returns

Answer 215

-Fixed income return attribution approach that is duration based -Involves working through a hierarchy of portfolio positions from the top down to explain active management of a portfolio relative to its benchmark -Has duration effects (relate specifically to return attributable to shifts in the yield curve across all duration buckets) and duration bucket effects (relate to yield curve shift effects, curve effects, sector allocation effects, and bond selection effects within the same duration bucket

Answer 216

-Fixed income attribution approach -Breaks active return contributions into time effects, yield curve effects, and spread effects. Can be bottom up or top down -Duration Based Yield Curve Decomposition: Uses active return calculated using negative duration multiplied by specific type of yield change. As it uses duration it is subject to estimation errors -Full Repricing Yield Curve Decomposition - Rather than duration based repricing, this uses 0-coupon spot rates to calculat individual bond price changes that result from yield changes in each yield curve attribution category. Better aligned with how portfolio management view the instruments, but more costly, difficult, and hard to explain

Answer 217

-Identifies sources of volatility for portfolios managed to absolute return mandates and sources of tracking risk for portfolios managed to benchmark-relative mandates

Answer 218

-Appropriate when the fund sponsor must defease a specific liability (should focus on cash flows that must be generated to defease the liability) -For a fully funded plan, benchmarks should focus on asset performance relative to change in plan liabilities. For unfunded/overfunded plans, benchmark should help sponsor track progress toward full funding of pension liability

Answer 219

SR = (R - B) / DD R = Portfolio return (expected return for ex-ante SR) B = Benchmark (target) return. As it uses a target return it cannot be compared across investors like the sharpe ratio DD = downside deviation =(avg. Port Return - Minimum Acceptable Return (MAR)) / Target semideviation -Risk-adjustment metric used to determine additional return for each unit of downside risk. High SR is preferred as it indicates investor will earn higher return for each unit of downside risk -App for opportunistic hedge funds or other strategies with non-normal distribution and leverage, option writing and commodity derivatives

Answer 220

-Compares annualized Jensen's alpha (active mgmt return) to the std deviation of the error term (unsystematic, security specific, risk) -Higer ratio is desired as it shows more units of active return per unit of unsystematic risk

Answer 221

-Represents managements success in capturing the benchmark return Capture = R,t / B,t Upside Capture if B,t >/= 0, Downside Capture if B,t < 0 UC > 1 = outperformance DC < 1 = outperformance

Answer 222

-Measures upside capture relative to downside Capture CR = UC / DC > 1 = convex (positive asymmetry): Returns from these strategies increase at an increasing rate with the magnitude of benchmark returns (ideal in most cases) < 1 = concave (negative asymmetry): Returns increase at a decreasing rate with the magnitude of benchmark returns -Suffer from measurement base bias

Answer 223

-Type I Errors: Rejecting the correct null hypothesis that the mgmt has no skill and subsequently hiring/retaining a manager who underperforms. More common for investors to be concerned with this as they create explicit costs. These are errors of commission (errors due to action) -Type II Errors: Failing to reject an incorrect null hypothesis and subsequently not hiring/firing a manager who achieves or exceeds expectations, create opportunity costs. These are errors of ommission (due to lack of action)

Answer 224

-A top-down approach that estimates the portfolios sensitivity to common risk factors, usually by regressing actual portfolio returns vs security market indices representing the risk factors -Advantages: Low data reqs, can be applied to complex strategies, objective, unaffected by window dressing -Disadvantages: Backward looking, understate exposures for illiquid portfolios with smoothed returns, does not look at individual holdings

Answer 225

-Bottom up approach that estimates risk exposures based on portfolio securities at a specific time -Advantages: Looks at current, not historic risk factors, likely to capture changes in style quicker, looks at individual holdings -Disadvantages: Subject to window dressing, can get complex, high data reqs, also understates exposures for illiquid ports with smoothed returns

Answer 226

=D,A - K(D,L) -K = Leverage = L/A -Positive Gap = Assets fall more than liabilities in rising rates -Negative gap = Liabilities fall more than assets in rising rates

Answer 227

-Early Retirment Provisions (-) -Average age of employees (-) -Ratio of retired to active lives (-) -Funded Status (+) -D/E ratio (-) as it indicates the business exposure to financial risk. lower DE means they have lower leverage and more able to contribute to fund in times of poor business performance

Answer 228

-Bullet portfolio will OP when yield curve steepens / becomes less curved due to less sensitivity to LT rates (which will relatively increase under both of these scenarios) -Barbell portfolio will OP when yield curve flattens / becomes more curved due to greater sensitivity to LT rates (which are expected to fall)

Answer 229

-Butterfly spread is an inverse volatility strategy that profits when volatility is falling -If curve is steepening/becoming less curved, create butterfly spread by going long intermediate bullet portfolio and short a barbell portfolio in short and long duration securities -If curve is flattening/becoming more curved, create spread by going short intermediate bullet portfolio and long a barbell portfolio in short and long duration securities

Answer 230

Delta(V,P) = V,P x - (MDUR / 10,000) x Shift,bps

Answer 231

Delta(V,P) = V,P x - (MDUR / 10,000) x Shift,bps V,p = Par value of portfolio

Answer 232

-Mutually Exclusive: One company is not included in 2 different independent variables -Exhaustive: The independent variables cover the fully market cap and style range of the portfolio being analyzed -Represent Distinct Sources of Risk: The independent variables each generate different types of investment returns

Answer 233

-In a Returns-based style analysis this represents the proportion of the variation in fund returns coming from passive techniques -High R^2 means the model used is a good fit for describing the factors that affect the variance in port returns -High R^2 in a factor analysis suggests factor selection is very important

Answer 234

-Consistent growth in dividends -High dividend cover -High cash flow generation -High ROE

Answer 235

CV, Asset Class i = nSUMj=1[w,i(w,j)Cov(i,j)] CV, Factor i = nSUMj=1 [B,Fi(B,Fj)Cov(Fi,Fj)

Answer 236

-Will increase as the exchange rate correlation with foreign returns increases from -1 to +1 h = p(R,DC, R,DC/FC) x [Std.Dev(R,DC) / Std.Dev(R,DC/FC)]

Answer 237

-Portfolio is immunized when the PV and Macaulay duration of the assets = PV and Macaulay duration of liabilities -PV of a portfolio of bonds is the sum of the market value of all bonds -Duration of assets is calculated as the cash-weighted (from market values) Macaulay duration of the bonds in portfolio -When mrkt values of assets and liabilities differ, matching the money duration or BPV becomes more important

Answer 238

-A liability-based framework -Active management of surplus funds can be performed when the current market value of assets is greater than the PV of the liability

Answer 239

-Allocates weight to constituents relative to the mrkt value of outstanding shares freely traded -Leads to less frequent rebalancing than equal-weighting and results in lower turnover cost -May overweight overvalued companies and extremely large cap companies. (equal weighting will overweight the effects of small companies)

Answer 240

-Achieved by removing the beta of the manager by shorting futures with the same systematic risk as the manager. Can then add the desired systematic risk by adding a relevant futures contract

Answer 241

IR = IC(RAD(BR))TC

Answer 242

-A strategic asset allocation approach that uses the behavioral finance insight that investors ted to think of their funds in "buckets" earmarked for specific purposes

Answer 243

-Analyst determines what characteristics the mrkts reward with return and selects secs with those characteristics -Usually implemented in a hedged portfolio approach, which ranks indv secs by expected performance given factor forecast and then groups then into quintiles/deciles. Mgmt goes long best expected quantile and shorts worst. -Hedged portfolio approach generates a dollar neutral portfolio (dollar value of long positions = dollar value of short positions)

Answer 244

Econ: S(timulative policies removed) O(utput gap negative) C(onsumers start to borrow to spend. Durables, housing demand up) U(nemployment falls) P(roduction up) P(rofits up) Capital Markets: M(arket trending up) F(lattening yield curve) S(hort term rates up)

Answer 245

Econ: D(own): Profits, production, investment U(nemployment up) C(redit markets tighten) E(rrors discovered) Capital Markets: S(teepening yield curve) W(idening spreads) E(arly market phase down) R(ates, long and short, down) L(ate market phase up)

Answer 246

Econ: S(tim policies remain) O(utput gap large) I(nflation slowing) E(con starts to grow) Capital Markets: R(ates bottom) M(arket trends up) R(isky assets OP)

Answer 247

Econ: V(ulnerable to shocks) I(nvest opps down) S(lowing growth) I(nflation up) O(overleveraging) Capital Markets: T(opping LT rates) W(idening credit spreads) I(nversion potential for YC) R(ising ST rates) D(ownward market potential) D(efensive stocks OP)

Answer 248

Econ: O(utput gap positive) D(ebt coverage ratios falling) I(nflation danger) R(estrictive monetary policy) U(nemployment low) U(p): investment , prices, wages, production Capital Markets: I(nflation hedges OP) M(arkets volatile) F(lattening yield curve) P(rivate borrowing leads to rising rates)

Answer 249

-Hedging ratio (HR) is the % of the duration gap that is closed with derivatives. HR = 0 implies no hedging while HR = 100% implies immunization and completely removes interest rate risk

Answer 250

-Bc of pension funds negative duration gap (asset BPV is less than liability BPV), typical plan suffers when rates fall and could become underfunded -To fix: Receive-fixed swaps (preferred when rates are expected to be low). Swaption collar (preferred if rates are expected to go up). Purchased receiver swaption (preferred if rates are projected to reach a certain threshold that depends on the option costs and strike rates)

Answer 251

-True Active return = mgmt port reutrn less normal (i.e. benchmark) port retun -Style return = Benchmark return less market index return -Excess return = Port return less market index return

Answer 252

-Portfolio is managed in order to match the interest rate sensitivity of a liability portfolio. -Accounts for parallel shifts in yield curve but not nonparallel (twists)

Answer 253

-Portfolio is managed in order to match the cash flows of a liability portfolio -Portfolio will have no exposure to the level or shape of the yield curve -Can still benefit from rebalancing if market conditions change (new cheapest to hold bond) or if characteristics of holdings change (i.e. callable bonds)

Answer 254

-Portfolio is managed by using futures to provide key portfolio characteristics such as duration level -This can reduce transactional and liquidity costs

Answer 255

-Attribution decomposes risk and return into its sources -Appraisal establishes mgmt skill vs risk and return from uncontrollable sources. Appraisal can be used to inform and improve the port mgmt process

Answer 256

1) Credit risk if swaption is not collateralized 2) collateral exhaustion risk if it is collateralized 3) Spread risk between swap fixed rates and the corporations cost of funds

Answer 257

= Coupon / Current price

Answer 258

-The expected price appreciation/depreciation of the bond based on current yield curve over the next 12 months -Longer-maturity portion of yield curve is flatter and will result in less roll yield each period. So ports OW in LT securities would experience lower alpha due to roll yield

Answer 259

-All else equal, investor would have stronger desire to hedge when -higher allocation to fixed income -Shorter time horizon -High vol expectations

Answer 260

-Laddered portfolio helps diversify CFs against structural yield curve changes by balancing bond price risk and reinvestment risk. These are better for liquidity management -Bullet portfolio has significant bond price risk but little reinvestment risk -Barbell portfolio has significant reinvestment risk in the short end and significant bond price risk in the long end

Answer 261

-Have relatively high correlation (indicates statistically strong directional relationship) -Have relatively low market bets (results in a milder rise/fall than public equities)

Answer 262

-Ignoring funding costs -Leverage will increase expected single period (arithmetic) returns/standard deviation of portfolio to [Leverage factor x unlevered port return/standard deviation] --Extra vol will lower long-term geometric compounded returns as large falls will require larger proportional gains to revover. -Expected Geometric Return of Port: R,g = R,A - (StdDev^2/2) where R,A and StdDev are the arithmetic return/std dev to the levered portfolio

Answer 263

-Would expand the definition of fiduciary to all professionals providing advice for retirement plans and IRAs

Answer 264

-Requires non US financial institutions to report info about financial accounts held by US taxpayers or by non US entities in which US taxpayers hold substantial ownership interest

Answer 265

-Would require dealers and brokers to act in the best interest of clients and restrict the usage of the term adviser or advisor

Answer 266

-No notional is exchanged and the payments are netted

Answer 267

-Notionals are exchanged at the beginning and at the ending of the swap. Payments typically are not netted

Answer 268

BPV,Asset + [NP x (Swap BPV / 100)] = BPV,Liability -Solving for NP above would produce the NP of a receive-fixed interest rate swap for a 100% hedging ratio

Answer 269

-Exposure to short and long end of maturity spectrum -Beneficial when yields are expected to flatten while being volatile (want more exposure to the long-end)

Answer 270

-Exposure to the middle portion of the maturity spectrum -Benefits from a normal and stable yield curve -Low convexity (good when yields are not expected to provided added price gains from yield volatility (i.e. stable yield curve))

Answer 271

-Can use either qualitative or quant methods to determine firms with correlation in price movement -Short OP sec (idea is it will return to correlation with a lower price), long UP sec

Answer 272

Leverage = Assets / Equity (A/E) A/E = 1 / (E/A) E/A = 1 - (D/A) Therefore A/E = 1 / (1 - D/A)

Answer 273

a version of pairs trading that invests 100% of a long or short position in parent company and invests the other way in the subsidiaries based on the proportion owned by parent

Answer 274

-Uses mean-variance optimization in asset allocation

Answer 275

-Considers market sentiment indicators such as margin borrowing, short interest, and the vol index

Answer 276

-Uses risk factors such as value and momentum to capture short-term returns

Answer 277

-Do not require that attribute pairs be mutually exclusive -Used to assess mgmt performance relative to a style benchmark -Used to determine risk and return profiles from specific sets of security attributes

Answer 278

-Will: Activates at the death of the testator, which subjects it to additional expense and exposure to public in the probate process -Inter vivos Trust: Established prior to grantors death, thus avoiding probate -Joint Tenancy with Survivorship: Creates automatic transfer from a decedent to the other members of the joint tenancy, also avoiding probate

Answer 279

-SWFs may use probability of loss as well as traditional volatility measures -Volatility of surplus is most likely to be used by a DB pension plan -Conditional Value at risk is a common risk measure for banks and insurers

Answer 280

-Based on identifying return and risk objectives and divsersifying across asset classes as to maximize returns given a risk tolerance level . Looking at overall asset allocation rather than account by account

Answer 281

-Equity and Equity Like: Public equity, Long-short equity, hedge funds -Fixed Income and Fixed Income Like: Fixed income, cash -Real Estate: Public real estate, commodities

Answer 282

-Equity and Equity Like: Private equity -Fixed Income and Fixed Income Like: Private credit -Real Estate: Private real estate, private real assets

Answer 283

Portfolio returns - Trading costs = Gross-of-Fee Returns Gross of fee returns - Management fees = net of fee returns Net of fee returns - Admin expenses = Client returns

Answer 284

-Result of increasing implied vols for OTM puts and decreasing implied vols for OTM calls -Typically more common than Vol Smile bc investors are more interested in port protection through OTM puts, driving up those option prices through increased implied vol

Answer 285

-Checklist approach: Monitors a wide variety of economic data but developed estimates for model inputs based on subjective judgement -Economic Indicators and Econometric methods both use inputs derived without subjective judgement in the data, though the selection of data types may require substantial judgement

Answer 286

-Reinvests the proceeds of sales of the concentrated position in a diversified port which is designed to offset the specific risk of the concentrated position -Use gain deferral and opportunistic tax-loss harvesting to offset tax liabilities of the concentrated position -Completion port eventually becomes an index-tracking port once the concentrated position has been significantly reduced in size

Answer 287

Spreads the sale of the concentrated position over several years, investing the proceeds in a diversified portfolio of stocks (exposure to concentrated position is longer)

Answer 288

-Appropriate for investors with concentrated positions wishing to raise liquidity without selling the position -Involves 1) Hedging the risk of the concentrated position and 2) Borrow funds, using the hedged position as collateral, and invest in a diversified portfolio

Answer 289

-A partnership which allows investors to contribute their low-basis stock position in exchange for a share in the fund. Since the exchange itself isnt a taxable event, investor can defer cap gains on the disposal of the concentrated position until they redeem investment in exchange fund -In US exchange fund has minimum investment period of 7 years

Answer 290

Not likely to have any currency management, with currency transactions taking place according to fund transactional needs

Answer 291

-Likely to hedge all exposures back to domestic currency. -Likely to utilize currency forward derivatives to ensure domestic investors receive the performance of the underlying securities in their local currencies

Answer 292

-Likely to hedge most exposures back to domestic currency. -Mgmt may maintain exposures to some currencies if its expected to add to overall performance in domestic currency

Answer 293

-Does not consider the currency exposures of the portfolio, but instead seeks additional performance from taking currency exposures

Answer 294

-Public equities for private equities -Public debt for private credit -Energy stocks/commodity futures for private real assets -REITs for private real estate

Answer 295

Correlation (A,B) = (Covariance(A,B)) / [Std.Dev,A x Std.Dev,B]

Answer 296

Sig^2, R = w1^2(Var,1) + w2^2(Var,2) + 2(w1)(w2)(StdDev1)(StdDev2)(P,1,2)

Answer 297

-To execute, go long the currency that is at a discount and short the currency that is at a premium in forward market -If the exchange rate quote is higher than what is implied by the forward points in the duration of the forward contract, mgmt will make a profit

Answer 298

-Constructed by: -Low Strike: taking a synthetic long exposure (long call + short put) -High Strike: synthetic short position (short call long put)

Answer 299

-If the yield curve in the future = the current implied forward curve at that time then the 1 Yr return from a bond regardless of maturity will = the return of a 1 year bond -If the yield curve in the future is less than the current implied forward curve at that time then the 1 year return will be greater than the return of a 1 yr bond -If the yield curve in the future is greater than the current implied forward curve at that time then the 1 year return will be less than the return of a 1 yr bond

Answer 300

-Emotional bias where they claim credit for the successes (self-enhancing bias) and blame others for failures (self-protecting bias). -To correct, maintain an accurate recording of all investment decisions and their reasonings, which would provide a clearer picture on the performance attribution -This is a form of overconfidence

Answer 301

-Can occur when a group is made up of indvs with similar backgrounds. What will occur is the indvs will moderate their own viewpoints toward the consensus viewpoint. -Can be mitigated through better diversification within the group - meaning to include members of different backgrounds and ways of thinking

Answer 302

-Those who exhibit individualism (make their own decisions), self-confidence in those decisions, or spontaneity around making decisions will be less risk averse

Answer 303

-Assumption that corp earnings grow at a premium to economic growth for long run not plausible. It implies either an ever rising ratio of economy wide earnings to GDP or earnings accuring to domestic business not included in the index (e.g. private firms) continually shrinking relative to GDP. Neither are likely -Perpetual share repos would eventually eliminate all shares -Perpetually rising PE would lead to arbitrarily high P/E

Answer 304

-Liabilities that are immunized with a bond portfolio must be rebalanced regularly as the Mac Dur changes over time and as yields change. Otherwise, duration gap will increase and the undefeased liability will experience greater variability -Must weigh the trade-off between allowing some duration gap vs rebalancing transaction costs. To reduce transaction costs, could use derivatives to manage duration

Answer 305

-An immunization strategy whereby a certain amount is set aside in cash or high quality (govt) bonds to match required liability cash flows to effectively remove the liability from the balance sheet -Basically prepays without a prepayment penalty

Answer 306

-Convexity is a measure of the variability of cash flows around the duration of the portfolio. -Lower CX means less variation in realized return over time, with no CX reflecting a 0 coupon bond. Good when their are no cash flows associated with the liability -CX greater than the liablities CX is required bc the liabilities will have dispersed cash flows. Otherwise, for large rate changes the value change of the liabilities may be greater than value change for assets

Answer 307

-Net equity exposure = Absolute long equity positions - absolute short equity positions -If fund beta is greater than net equity exposure, it implies that on average the stocks in the fund have betas that are greater than 1.0 -If fund beta is less than net equity exposure, implies that on average the stocks in the fund have bets that are less than 1.0

Answer 308

-Traditional forecasts returns, volatility, and correlations of the asset classes -Risk-Based estimates each assets exposure to targeted risk factors Advantages (Risk vs Traditional): -Allows port mgmt to more accurately target specific desired exposures -Leads to development of multi-dimensional framework compared to a traditional allocation Disadvantages -Sensitive to the observation period and may change over time -Complex to understand -Can be difficult to translate risk-factor targets to actual asset classes in the portfolio

Answer 309

-VaR is the minimum amount you can expect to lose on any given day x% of the time -CVaR is the average amount you will lose on any given day x% of the time, conditional on exceeding the VaR cutoff

Answer 310

R,Asset Category X = [Ending value / (Beginning value + contributions)] - 1 Return From Asset Categories = nSUMi=1[w,i(R,i)] - r,f

Answer 311

-Normal Benchmark represents the managers typical positions in his investment universe. -True active return is active return against a normal benchmark -Misfit active return is active return against an unsuited benchmark

Answer 312

-The fall in LT YTMs will lead to price appreciation under a Buy and hold strategy -Higher ST yields would enable mgmt to reinvest bond coupon at a higher rate in a yield rolldown strategy -Mgmt would face negative carry when financing a bond purchase in the repo market

Answer 313

-Value of call options is negatively related to YTM (decrease in YTM increases value of call option) -Value of put options positively related to YTM (decrease in YTM decreases value of put option)

Answer 314

-When the shape of the yield curve flattens from LT rates falling faster than ST rates

Answer 315

-Shape of yield curve flattens from ST rates rising faster than LT rates

Answer 316

-Yield curve steepens from ST rates falling faster than LT rates

Answer 317

-Yield curve steepens from LT rates rising faster than ST rates

Answer 318

-Liabilities that have less certainty around size and timing of cash flows are likely to use curve duration stats in estimating value -Liabilities with high certainty around the size and timing of payments will generally be modeled using yield duration stats

Answer 319

-Ventures are still in the idea phase and conducting market research

Answer 320

-Ventures are developing the product and conducting initial marketing

Answer 321

-Ventures are producing the producing and selling

Answer 322

N,F = [V* (1 + r,f)^t] / F,q F,q = Futures price x Multiplier

Answer 323

-Both involve buying/selling a put and call option, but a strangle involves using options with different exercise prices -Strangle Break Even: Upside: High Strike + Net premium Downside: Low strike - net premium

Answer 324

=Side x 2 x (Trade price - [b+a]/2) -Effective Spread Transaction Cost = Side x Trade size x (Trade price - [b+a]/2) -For Volume weighted effective spread, multiply effective spread by the weight of each order relative to total volume of shares orders

Answer 325

=[R,p - R,f] / StdDev,P

Answer 326

E(R,p) = R,f + (SR,GM x StdDev,p x Corr(P,GM))

Answer 327

V,0 = [D,0 / (r - g,L)] x {(1 + g,L) + (N / 2)(g,s - g,L)} r = req. return g,L = long-term normal growth rate g,S = short-term (current) growth rate N = # of years to full development -To get justified forward PE multiple from this, divide V,0 by earnings

Answer 328

-Sale and Leaseback: under this, 100% of the value of the property can be raised if tax loss carryforwards are great enough -Mortgage Refinancing: Requires a high LTV to refinance a large % of the value of the property

Answer 329

-Used to determine if a private client is going to meet retirement goals by using simple variable inputs to create a linear model -Generally simple and unrealistic

Answer 330

-As time passes throughout insureds life, cash value of the policy increases related to the investment performance of underlying assets while insurance value decreases

Answer 331

R,at = R,bt / (1 - t)

Answer 332

-First, estimate the VCV matrix using app sample data (NOT Singer-Terhaar approach) -Then can incorporate VCV matrix into Singer-Terhaar approach to estimate equilibrium asset returns -Macroeconomic estimates can then by employed into Grinold-Kroner model to estimate equity market returns

Answer 333

-Measures the degree of stock concentration in an index -Effective number of stocks, held in equl weights, that would replicate the degree of concentration of an index = 1/HHI

Answer 334

-Key-Rate Duration: Help ID "shaping risk" of a bond, a bonds sensitivity to curvature changes in yield curve -Effective Duration: Effective for determining bond price changes when cash flows change due to yield level -Modified Duration: Effective for determining bond price changes when yield levels change by same amt at all maturities

Answer 335

-Depends on sufficiency, repeatability, and sustainability

Answer 336

-A decedent without a valid will/a will that doesnt dispose of his property is legally considered to have died intestate

Answer 337

-Gift taxes generally apply when a donor transfers funds during their lifetime (lifetime gratuitous transfer) -Inheritance taxes arise as the result of a testamentary gratuitous transfer (i.e. as the result of a will)

Answer 338

R,p - R,f = a,p + B,1(RMRF) + B,2(SMB) + B,3(HML) + B,4(WML) + e,p -Positive alpha will result if the sum of factor returns and risk free rate are less than port return. Therefore, alpha must equal the sum of factor tilt benefits and security selection benefits

Answer 339

U,M = E(R,M) - 0.5(lamda)(Var,M) U,M = Investors utility for asset allocation M R,M = return for asset allocation M Lambda = Investors risk aversion coefficient Var,M = Expected variance of allocation M

Answer 340

-Implement securities lending program: Receive fee on stock loan + return on reinvestment of any cash collateral -Writing options contracts on securities held: Covered calls/cash-covered puts. Puts on names theyre comfrotable with buying at a given strike -Dividend capture strategy

Answer 341

-Reduce admin fees (find cheaper custodian) -Reduce marketing and distribution costs -Reduce trading costs (find better broker for lower explicit/implicit costs) -Change investment approach to more of a buy and hold strategy to reduce frequency of trading

Answer 342

-Survivorship bias: Ignoring stocks that have left investment universe due to adverse developments (leads to overly optimistic results) -Look-Ahead Bias: Using info that was unknown/unavailable at the time an investment decision was made -Data Mining & Overfitting: Data mining can lead to overfitting -Transactions Costs -Constraints on Turnover -Availability of positions

Answer 343

-Simply add the deltas of all positions involved in the strategy

Answer 344

-An MBS is a bond with an embedded short call position -Short call option has negative convexity -Adding MBS allocation would therefore decrease portfolio convexity and result in smaller benefit from large changes in rates

Answer 345

=Notional / (strike price x contract size)

Answer 346

-ATM options provide the best choice to delta hedge any existing positions -This is difficult to maintain as gamma tends to be largest for ATM options

Answer 347

-Concerning oneself more with ST losses than with the big picture of a LT planning strategy -Makes investors more conservative than their risk profile would warrant -Can be mitigated by providing longer term compound return data

Answer 348

=Spread,0/Periods per year - (EffSpreadDur x Change(spread) - (LGD x POD)

Answer 349

=(W,p - W,b) x (R,b - B) -W,p = Portfolio weight W,b = Benchmark weight R,b = Benchmark return B = Overall benchmark return

Answer 350

-To arbitrage an index, they must be reconstituted -Reconstitution based on objective criteria increases arbitrage opps as it makes it easier to ID in advance which secs will be exiting/entering the index. This is more difficult when a committee makes the final decision

Answer 351

-Limits imposed upon the construction of the port that are not scientifically proven to be optimal but are generally acknowledged as good practice

Answer 352

-One in which the underperforming factor (e.g. LC) could be sold short to purchase the OP facts (e.g. SC)

Answer 353

-A cognitive behavioral bias where they wrongly predict a reversal to a LT trend

Answer 354

=g,N.GDP + %Change(E/GDP) + %Change(P/E) + D/P

Answer 355

-Includes conventional financial assets and liabilities, as well as extended portfolio assets and liabilities

Answer 356

-Whole life insurance policy feature whereby there is the option to receive some portion of the benefits if premium payments are missed

Answer 357

=SUM(S,j)P,0 - SUM(S,j)(P,d)

Answer 358

-The risk of an adverse price movement occurring over the trading horizon owing to a change in the fundamental value of the security or bc of trading-induced volatility -This is often proxied by price vol (secs with higher price vol have higher execution risk)

Answer 359

Alpha,p =R - [r,f - Beta(B - r,f)] -Var(Error Term) = R^2 - Beta^2(B^2) -AR = Alpha,p / Std.Dev(Error term) R = Portfolio return B = Benchmark return

Answer 360

-Used for large orders where only part of the full order is shown

Answer 361

=[(1 +Ann. Distribution Rate) x (1 + Inflation rate) x (1 + management fee)] - 1

Answer 362

-Money Duration = MD x Market Value x 0.01 -Rebalancing Ratio = Desired Money duration / Current Money duration -Cash Requirement = (Rebalancing Ratio - 1) x MV,P

Answer 363

-In general, given a quote of DC/FC, a derivatives contract would be long the FC. -Call option on DC/FC: Buying FC, selling DC (long FC) -Put option on DC/FC: Selling FC, buying DC (short FC) -Futures contract on DC/FC: Long FC

Answer 364

-Involves buying LT bond and selling it before it matures as to profit from the declining yield that occurs over the life of a bond. Relies on a reasonably static and upward-sloping yield curve -Works better for steeper yield curves

Answer 365

-Given 2 bonds YTM that are dated longer (H) and shorter (L) the bond you are trying to solve for: YTM,N = YTM,L + {[(N - N,L) / (N,H - N,L)] x (YTM,H - YTM,L)}

Answer 366

= 1 / [1 + (r x t/T)]

Answer 367

-Relies on the assumption that historical means are significant . -Bonds with extreme deviations from their means (spreads wider by 2-3 std devs) in SR tend to return to their means in LR, therefore appreciating in price -Best performer: (Current spread - Historical Spread) / Std.Dev of Spread Pick one with highest number

Answer 368

=RAD(Var,R(Portfolio return - Benchmark return))

Answer 369

1) Calculate FV of an annuity with given premium and discount rate (N = life expectancy) 2) Calculate FV of an annuity with diven dividend payouts (if any) and discount rate 3) Insurance cost = #1 - #2 4) Calculate Payment of annuity with FV = Insurance cost (#3). This is the interest-adjusted cost per period 5) Divide #4 by the face value of policy (death benefit). This is the net payment cost index -Note that the type of annuity (normal or annuity due) in Steps 1,3, and 4 depends on when premiums are paid/dividends are received. If Premiums are paid at beginning of period, Steps 1 and 4 would be annuity dues.

Answer 370

-Mortality expectations -The loading that enables an insurance firm to cover expenses and make a profit -The discount rate used by the insurance company

Answer 371

-A protective put partially financed by selling an OTM put and call -Can be viewed as a put spread plus a short OTM call

Answer 372

-The least credit-worthy constituents in an index tend to increase their debt burden over time, so the bums that have the most debt (and their sector) will tend to be over weighted in importance in a value-weighted index -Problem that leads to poor index construction

Answer 373

-As properties trade infrequently, analysis relies on appraisals -Since each property is different, the data is heterogeneous -Published return and vol data is smoothed, understating true vol and distorting correlation estimates

Answer 374

-According to PPP, if Country X has higher inflation than other countries, X domestic currency should depreciate against the other currencies by approx. the difference between X inflation and that in other countries

Answer 375

-Traded REITs have relatively high correlations with EQs over ST horizons suggesting they are not good diversifiers over ST -Traded REITs are more highly correlated with direct RE and less highly correlated with EQs over multi-year horizons

Answer 376

-Buy a stock just before its ex-dividend date and sell it on/after the date to capture cash dividends -PM earns alpha when price decrease on ex-div date is less than the size of the cash dividend

Answer 377

-Studies show activism at a comp typically leads to improved price momentum and higher DE ratios -Typically positive excess returns for the shares of comps engaged in activism, both one month before the event date and on the event date itself

Answer 378

Involve exploiting supply and demand imbalances in the NYSE Trade and Quote (TAQ) Book or other data source, observing positions in the limit book, or other anomalies that may be available for only milliseconds

Answer 379

-Positive butterfly is a non-parallel yield curve shift that occurs when ST and LT rates shift upwards by more than medium term rates. The shift effectively decreases overall curvature of the yield curve -Negative butterfly is a non-parallel shift that occurs when ST rates and LT rates shift downwards by more than medium term rates. The shift effectively increases overall curvature of the yield curve

Answer 380

-An estimate of the % of a funds assets that represent gains -Measures how much the funds assets have appreciate -Can be used to gauge the amount of tax liability embedded in a fund, and can be an indicator of possible future capital gain distributions PCGE = Net gains (losses) / Total Net Assets -Negative PCGE implies the fund is more likely to be tax efficient going forward