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