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Flashcards in SAMPLES Deck (71):
1

have current annual expense and inflation, what is required return based on?

expense * ( 1 + inflation ) and use it as PMT in calculator

2

have long term plans to donate X million, how to determine required return?

consider donations in real dollars as FV using calculator

3

what constraint is impacted for individual investors if they are board members and own a part of company

legal regulatory - timing and disclosure of sales should be considered

4

low stock basis to be included in which constraint on IPS?

taxes

5

real estate owned but not considered as asset base. in which contraint of IPS to be mentioned ?

unique circumstances

6

do not mess University's operating budget with the budget of

endowment !!!!!!!!!!!!!!!!!!!!!!!!!!

7

do not forget to include in liquidity requirement for institutions (in addition to spending) the

investment management expense !

spending + expense (compounding not needed)

8

adoption of 3 yr average spending rule will impact ability to take risk ?

yes, it will allow taking more risk

9

rising rates impact on liquidity requirements from annuities ?

rising liquidity needs to meet higher payments to new clients

higher liquidity needs to meet surrender demands

10

smaller duration impact on ability to take risk?

smaller ability to take risk

11

impact on surplus in risking interest environment

negative - if duration of assets is larger than liabilities = valuation risk

negative - if large exposure to mortgages (smaller prepayment CF) = CF volatility risk

negative - higher probability of defaults = credit risk

positive - reinvesting at higher rates = reinvestment risk

12

Corridor - fixed range of ±10% of the target weight of 50% of equities --- what is the range?

50 +/-5%

13

MAKE SURE TO HOLBATE AT ALL

NUMBERS FROM TEST CONDITIONS !!!!

14

two formula version for information ratio

net of fees and gross of fees

15

bias of buying historical top performers

representativeness

16

bias of not selling recent lossers

regret avoidance

17

when having investors with liabilities keep in TOP of mind

ALM !!!!!

18

investment rating, which is better ? BBB or BB

BBB is better quality !!!

19

for mortgage backed securities ALWAYS keep in mind

PREPAYMENT and REINVESTMENT risk

20

when interest compounded continuously do not forget to use

'e' in claculation

21

impact of convenience yield on non-arbitrage range

lower range of the non-arbitrage band is decreased by convenience yield

this is because shorting physical will force the short to compensate the commodity lender for the lost convenience yield

22

shares are held by institutions which frequently provide liquidity for

(electronic)crossing network orders

23

Higher volumes toward the end of the day would make a

front-loaded implementation shortfall strategy (ISS) less suitable.

24

dont mess what values when calculating rebalancing (CPPI, constant mix)

calculate the necessary trade based on new equity value (not historical) !!!!!!!!!!!!!!!!

25

when analyzing fixed income managers where to find value added from predicting interest

in interest rate MANAGEMENT effect
NOT in interest rate effect

26

The Interest Rate Management Effect - 3 components

(returns due to
-duration,
-convexity, and
- yield-curve shape change

27

expected interest rate effect is based on

the implied forward rates in the term structure of Treasury securities calculated at the beginning of the period.

28

unexpected interest rate effect is the

difference between the actual
realized return of the portfolio and the expected interest rate effect.

e.g. unexpected change in yields or a twist in the yield curve

29

when calculating outcome from hedging, use

amount of currency hedged, not number of futures in calculation of profit from hedge

30

implied assets of individuals at retirement age reach

zero level

31

implied liabilities for individuals at retirement reach

maximum then gradually decline along their life expectancy

32

3 yr average vs geometric

A single extraordinary return 3 years ago could still result in a large change in spending in the current year.

33

operating asset beta =

(total asset beta - weighted pension beta) / operating asset weight

total asset beta = old $ beta of capital equity X new weight of equity in capital (after inclusion of pension liabilities)

34

when 2 numbers seem applicable, first thing to do is to

read condition and exhibits in VERY detail

35

grinold croner model is trying to determine

Equity compounded annual growth rate

36

when looking at taylor rule result, do compare it with

EXISTING INTEREST RATE (NOT NEUTRAL)

37

contrarian style seek

low P/B
little or no earnings

38

roll yield declines with

decline in convenience yields
increase in interest rates

39

in individual IPS if something happens in 1 year it is a must to have

additional stage in multistage long term horizon

40

limitations of cyclical indicator approach

-false signals
- currency of data and revisions
- economic sectors not reported
- changes in relationships among economic variables

41

why corporate bonds are good for contingent immunitaiton ?

they are bad (expensive) given
- higher cost due to default risk
- subject to credit SPREAD risk
- less liquid

42

what rate to use in discounting of liabilities in immunization

internal rate of return on the immunized postfolio (not zero coupon rate)

43

ultimate goal while verifying beta hedging

determining if resulting beta from asset+hedge is close to target beta

44

benchmark quality - two indicators of quality

relative beta closer to 1
tracking error closer to 0

45

managers value added function of (normal, market, actual) =

actual - normal portfolio

46

if investor buys something regardless P/E, the type of investor may be

market oriented (not value not growth)

47

A shrinkage estimator is a

weighted average of correlation (or covariance) matrices created from at least two different correlation (or covariance) matrices
generated from different sourc

48

what the hell is functional duration ?

key rate duration !!!!! lol

49

return requirement calculation - TRAPS FOR MORONS LIKE ME

1. make sure all expenses are for the next year (apply inflation as needed)
2. add/multuply inflation rate to the required preinflation rate to make sure return will offset inflation - DO THIS REGARDLESS OF INFLATION CONSIDERED IN STEP ONE !!!!

50

for couples time horizon, do not forget to

add extra stage for living alone after death of spouse

51

why using historical data in monte carlo good idea?

not good, better to also include capital market expectations

52

impact on maintaining the real value of portfolio for investor who decides to take less risk

less risk => less return => lower portfolio growth.

53

as donations increase >

a lower proportion of invested assets is required to meet current spending needs, so endowment can assume greater risk

54

H model

V = D/(R-GL) * ( 1+GL + N/2* (GS- GL) )

55

when calculating monthly VAR watch the

periods of time used... is return or standdev MONTHLY ? dont be moron to miss this.

56

interest rate management = components

duration, convexity, and yield curve slope changes

57

contraint impaired if investor outlives the retirement annuity

new stage in the time horizon

58

in IPS liquidity needs usually focus on

near term needs (not those happening in 10+ years at retirement, etc)

59

correlation - asset only vs ALM

in AO - investments needs to have low corelation among them

in ALM - investments needs to have high correlation to liabilities

60

DC benefits for employer

- no responsibility to set objectives and constraints
- no risk of investment results
- future pension obligations are more stable and predictable.
- no pension liabilities on balance sheet
- fiduciary duties limited to providing a wide range of investment choices and periodically evaluating them

61

DC benefits for employees

- can choose a risk and return objective reflecting his or her own personal
financial circumstances, goals, and attitudes toward risk.
- assets are more readily portable.
- employees are immediately vested.
- do not present early termination risk, i.e., the risk that the plan is terminated by the plan sponsor.
- can re-balance and re-allocate investments.
- reduce participants’ exposure to employer's financial condition.
- account balances legally belong to participants

62

duration of the call (based on delta and underlying) =

delta call option X duration underlying X price underlying / price of call option

63

if both duration (or beta) and $ exposure need to be adjusted via futures, avoid

double adjustment (i.e. lower duration 2 times for the portion of $ exposure which need to be reduced !!!!!! )

64

order of transactions --- fair dealing vs priority of transactions

fair dealing - order of transactions for different clients
priority of transactions - order of transactions own vs clients

65

steps in risk management

(1) set policies and procedures,
(2) define risk tolerance,
(3) identify risks,
(4) measure risks
(5) adjust the level of risk.

66

in correlation calculations, do not mess

variante with standard deviation !!!

67

bond yield plus risk premium

10yr treasury + equity risk premium

68

is weights not given when you calculate standdev for a sum of 2 risks, seek to replace weights with

betazzzzzzz

69

when comparing value of different options strategies, you must

actually calculate each profit - to make sure everything is right !!!

70

PAY FIXED + COLLAR --- WHAT TO NOT FORGET WHEN CALCULATING EFFECTIVE RATE

CONSTANT ADDED TO LIBOR FROM THE FLOATING RATE

71

WHEN CALCULATING NUMBER OF CTD FUTURES NEEDED, USE THE PRICE OF

CTD BOND, NOT FUTURES CONTRACT PRICE