Flashcards in SAMPLES Deck (71):
have current annual expense and inflation, what is required return based on?
expense * ( 1 + inflation ) and use it as PMT in calculator
have long term plans to donate X million, how to determine required return?
consider donations in real dollars as FV using calculator
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
low stock basis to be included in which constraint on IPS?
real estate owned but not considered as asset base. in which contraint of IPS to be mentioned ?
do not mess University's operating budget with the budget of
do not forget to include in liquidity requirement for institutions (in addition to spending) the
investment management expense !
spending + expense (compounding not needed)
adoption of 3 yr average spending rule will impact ability to take risk ?
yes, it will allow taking more risk
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
smaller duration impact on ability to take risk?
smaller ability to take risk
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
Corridor - fixed range of ±10% of the target weight of 50% of equities --- what is the range?
MAKE SURE TO HOLBATE AT ALL
NUMBERS FROM TEST CONDITIONS !!!!
two formula version for information ratio
net of fees and gross of fees
bias of buying historical top performers
bias of not selling recent lossers
when having investors with liabilities keep in TOP of mind
investment rating, which is better ? BBB or BB
BBB is better quality !!!
for mortgage backed securities ALWAYS keep in mind
PREPAYMENT and REINVESTMENT risk
when interest compounded continuously do not forget to use
'e' in claculation
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
shares are held by institutions which frequently provide liquidity for
(electronic)crossing network orders
Higher volumes toward the end of the day would make a
front-loaded implementation shortfall strategy (ISS) less suitable.
dont mess what values when calculating rebalancing (CPPI, constant mix)
calculate the necessary trade based on new equity value (not historical) !!!!!!!!!!!!!!!!
when analyzing fixed income managers where to find value added from predicting interest
in interest rate MANAGEMENT effect
NOT in interest rate effect
The Interest Rate Management Effect - 3 components
(returns due to
- yield-curve shape change
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.
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
when calculating outcome from hedging, use
amount of currency hedged, not number of futures in calculation of profit from hedge
implied assets of individuals at retirement age reach
implied liabilities for individuals at retirement reach
maximum then gradually decline along their life expectancy
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.
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)
when 2 numbers seem applicable, first thing to do is to
read condition and exhibits in VERY detail
grinold croner model is trying to determine
Equity compounded annual growth rate
when looking at taylor rule result, do compare it with
EXISTING INTEREST RATE (NOT NEUTRAL)
contrarian style seek
little or no earnings
roll yield declines with
decline in convenience yields
increase in interest rates
in individual IPS if something happens in 1 year it is a must to have
additional stage in multistage long term horizon
limitations of cyclical indicator approach
- currency of data and revisions
- economic sectors not reported
- changes in relationships among economic variables
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
what rate to use in discounting of liabilities in immunization
internal rate of return on the immunized postfolio (not zero coupon rate)
ultimate goal while verifying beta hedging
determining if resulting beta from asset+hedge is close to target beta
benchmark quality - two indicators of quality
relative beta closer to 1
tracking error closer to 0
managers value added function of (normal, market, actual) =
actual - normal portfolio
if investor buys something regardless P/E, the type of investor may be
market oriented (not value not growth)
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
what the hell is functional duration ?
key rate duration !!!!! lol
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 !!!!
for couples time horizon, do not forget to
add extra stage for living alone after death of spouse
why using historical data in monte carlo good idea?
not good, better to also include capital market expectations
impact on maintaining the real value of portfolio for investor who decides to take less risk
less risk => less return => lower portfolio growth.
as donations increase >
a lower proportion of invested assets is required to meet current spending needs, so endowment can assume greater risk
V = D/(R-GL) * ( 1+GL + N/2* (GS- GL) )
when calculating monthly VAR watch the
periods of time used... is return or standdev MONTHLY ? dont be moron to miss this.
interest rate management = components
duration, convexity, and yield curve slope changes
contraint impaired if investor outlives the retirement annuity
new stage in the time horizon
in IPS liquidity needs usually focus on
near term needs (not those happening in 10+ years at retirement, etc)
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
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
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
duration of the call (based on delta and underlying) =
delta call option X duration underlying X price underlying / price of call option
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 !!!!!! )
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
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.
in correlation calculations, do not mess
variante with standard deviation !!!
bond yield plus risk premium
10yr treasury + equity risk premium
is weights not given when you calculate standdev for a sum of 2 risks, seek to replace weights with
when comparing value of different options strategies, you must
actually calculate each profit - to make sure everything is right !!!
PAY FIXED + COLLAR --- WHAT TO NOT FORGET WHEN CALCULATING EFFECTIVE RATE
CONSTANT ADDED TO LIBOR FROM THE FLOATING RATE