Volume 1

Question 1

Describe the first three elements of the capital markets expectation framework? Expectations needed, research historical record, specify methods/models?

Answer 1

Question 2

Describe elements 4,5,6?
Sources of info, interpret current environment, provide expectations, monitor actual outcomes?

Answer 2

Question 3

High quality forecasts have what?
What are the limitations of economic data and what are the data and measurement biases?

Answer 3

Question 4

What are the limitations of historical estimates, what may be different going forward and using long data series may result in?
Why can ex-post risk be a biased measure of ex-ante risk?

Answer 4

Question 5

Challenges in high quality forecasts (includes past two cards): What are the biases in analysts estimates, the failure to account for conditioning information, the misinterpretation of correlation?

Answer 5

Question 6

Describe these psychological traps: anchoring, status-quo, confirming evidence trap, overconfidence, prudence, availability ?

Answer 6

availability bias - tendency of forecasts to be overly influenced by events that have left a strong impression

Question 7

What is model uncertainty, parameter & input uncertainty? What is an exogenous shock and what can drive trend growth?

Answer 7

Question 8

What are the 6 types of exogenous shocks,

Answer 8

Question 9

What is economic trend growth analysis and what growth be decomposed into?

Answer 9

Question 10

Equation for capital appreciation of market value of equity and return on equity?

Answer 10

Question 11

Describe the econometric and economic indicators methods of economic forecasting and what types of models they commonly are?

Answer 11

Diffusion index can be an indicator model

Question 12

What is the checklist approach and describe the pros and cons of each of three methods of economic forecasting?

Answer 12

Question 13

Business cycles: describe the initial recovery and early upswing phases and the CME effects of each?

Answer 13

Up swing :CME effects/ * short rates begin to move up, long rates stable
* stocks - rising

Question 14

Describe late upswing and slowdown phases and the CME effects of each

Answer 14

Question 15

Describe recession stage and CME effects, inflation and inflation expectations are what?

Answer 15

Question 16

Describe the asset classes of Cash, Bonds, Stocks and Real estate in terms of how inflation and inflation expectations affects them?

Answer 16

Cash is Rf bond

Question 17

What is the aim of Central banks, in CME what do monetary and fiscal policy each impact, what is the taylor rule?

GDP trend is long term expectations

Answer 17

Question 18

What is Quantitative easing, in CME what should LR and SR rates consider?

Answer 18

Question 19

What happens to rates when M/F policy is T/L and how to the business cycle phases effect the shape of the yield curve?

Answer 19

Question 20

Explain the international macro-economic linkages and what is the trade deficit/surplus formula?

Answer 20

Question 21

What are the interest rate/ exchange rate linkages and what 3 things can a country not do at the same time?

Answer 21

Question 22

Expected return on equity equation

Answer 22

Question 23

How does a higher trend growth vs lower trend growth impact when actual growth increases?

Answer 23

Question 24

Describe the YTM approach of forecasting fixed income returns?
What happens when MacDur is greater, equal or less than investment horizon?
What is the basic building block aproach - 4 components and the risk premium with each component?

Answer 24

Question 25

What is the one period default rate, what are the four main drivers of the term/maturity premium?

Answer 25

Question 26

What are the components of the credit premium? What are credit spread primarily driven by and what do IG and HY credit premiums reflect?

Answer 26

Question 27

Liquidity premium: When is the liquidity premium lower?

Answer 27

Question 28

In emerging market bonds what are the economic risks?

Answer 28

Question 29

In EM bonds what are the political and legal risks?

Answer 29

Question 30

What is the historical statistics approach of forecasting equity returns?

Answer 30

Question 31

What is the DCF method of forecasting equity returns and what is the Grinold -kroner model?

Answer 31

Question 32

What is the equity risk premium approach to forecasting equity returns?

Answer 32

Question 33

What is the equilibrium risk premium approach and what two models it is a combo of?

Answer 33

Question 34

What is the combined equilibrium model equation?

Answer 34

Question 35

What are the risk in EM equities?

Answer 35

Question 36

What are the characteristics of RE as an asset class? What is the historical approach to forecasting RE returns? RE cycles are what?

Answer 36

Question 37

How does cyclicality differ between RE types? What is the boom-bust cycle?

Answer 37

Question 38

What is the cap rate? Difference between short and long term expected return to real estate?

Answer 38

Question 39

What are the common cap rates for property types and what must be consider when forecasting a cap rate?

Answer 39

Question 40

What is the risk premium perspective for RE? In terms of term, credit and equity risk?

Answer 40

Question 41

Describe RE in an equilibrium framework? What are the difference in E(r) by property types?

Answer 41

Question 42

Forecasting exchange rates: Explain the trade flows and PPP methods?

Answer 42

Question 43

How can competitiveness and CA sustainability impact forecasting FX rates? For fx rates to affect CA imbalances what must happen?

Answer 43

Question 44

What are the implications of capital mobility on forecasting FX rates?

Answer 44

Question 45

Portfolio balance, portfolio composition and sustainability: What happens to countries with trade deficits and balances are large and persistent over time?

Answer 45

Question 46

What are the short/medium term currency effect and long term effect?

Answer 46

Question 47

Forecasting volatility: What are the sample statistics - constant VCV matrix and VCF multi factor model methods? What is portfolio variance formula? What are downside of constant VCV sample statistics?

Answer 47

Question 48

what are the characteristics of VCV from factor models and compare to sample statistics method? What is the shrinkage estimator model?

Answer 48

Question 49

Describe the smoothed returns and time varying volatility models for estimating volatilty?

Answer 49

Question 50

How do trend growth and global integration impact returns and how would it effect asset allocation?

Answer 50

Question 51

How doe business cycle phases, M&F policy, CA balances and Capital account & currencies impact asset returns and asset allocation?

Answer 51

Question 52

Explain the links between the IPS, strategic asset allocation and investment governance?

Answer 52

Question 53

What are the three levels for effective governance?

Answer 53

Question 54

What are the first two elements for effective governance (L&S objectives, Allocate decision rights)?

Answer 54

Question 55

Describe elements 3 and4 and their features? Developing IPS, developing SAA,

Answer 55

Question 56

Describe elements 5&6 and their features? Establish reporting framework, periodically undertake governance audit

Answer 56

Question 57

Describe the economic balance sheet for the portfolio, what does it include, what should asset allocation consider?

Answer 57

Question 58

What are the 3 broad approaches to Asset allocation?

Answer 58

Question 59

What are the objectives of each approach? What are the liabilities of insto investors compared to goals?

Answer 59

Question 60

What are the relative risk concepts of each approach?

Answer 60

Question 61

What is the definition of asset class and what are the three superclasses of assets?

Answer 61

Question 62

What are the five criteria for specifying asset classes?

Answer 62

Question 63

What are the 4 main asset classes and what comes under SAA vs implementation?

Answer 63

Question 64

How does a factor-based approach differ in terms of portfolio construction and what of the investor it focuses on? When using factors as the unit of analysis you should specify..... and acknowledge......?

Answer 64

Question 65

What are the 8 steps in SAA?

Answer 65

Question 66

What are the important risk factors/metrics for asset only and for liability relative?

Answer 66

Question 67

How do goals based usually set SAA? Describe the two goal classification systems from Brunei (2012) and Chabra (2005)?

Answer 67

Question 68

What is the global market portfolio and its baseline uses?

Answer 68

Question 69

Describe the implementation choice of asset class weights? What is TAA and DAA?

Answer 69

Question 70

Describe passive and active strategy in allocation to asset class decision?

Answer 70

Question 71

Whats is involved in portfolio rebalancing? What is calendar rebalancing?

Answer 71

Question 72

What is percentage range rebalancing? What are the strategic considerations and how do they impact rebalancing ranges?

Answer 72

Question 73

What are cost-benefit ranges?

Answer 73

Question 74

Describe mean-variance optimisation? What is required? What is the objective function? What does optimisation involve?

Answer 74

Question 75

What are the constraints for MVO? What is an efficient asset mix?

Answer 75

Question 76

What are the effects of sensitising inputs?

Answer 76

Kinks/corner portfolios are where asset classes leave/enter the allocation

Question 77

What are the two treatments of cash?

Answer 77

Human capital is usually modelled as 70% bonds and 30% equity

Question 78

Describe monte carlo simulation and its properties, and the first criticism?

Answer 78

Question 79

What is the second critique of monte carlo and what are the remedies for both critiques?

Answer 79

Question 80

What does the black-littman allow for and remedy? What are the two methods for accepting views? What other constraints can be added beyond budget constraint?

Answer 80

Question 81

What is the remedy of resampled MVO? What are the tools developed to help investor concerns beyond mean and variance of returns?

Answer 81

Question 82

What are the MVO criticisms of sources of risk not being diversified, MVO not being directly connected to a liability e.g pension, MVO is a single period framework, and the remedies for each critique?

Answer 82

Question 83

What are the problems and remedies for allocating to less liquid assets?

Answer 83

Question 84

Final remedy for less liquid asset classes?

Answer 84

Question 85

What is involved in the process of risk budgeting? What is MCTR?

Answer 85

Question 86

What is absolute contribution to risk (ACTR)? When is an allocation optimal?

Answer 86

Question 87

What is factor-based asset allocation?

Answer 87

Question 88

What is the true risk of. a portfolio that is designed to fund a liability? Describe the difference between fixed vs contingent cash flows?

Answer 88

Question 89

What are the different characteristics for liabilities and the effects on how to model them? Legal vs quasi, duration & convexity, factors driving liability, value of L compared to sponsoring Org, Timing considerations, Regulations?

Answer 89

Question 90

What is the funding ratio?

Answer 90

Question 91

What is the surplus optimisation approach? What do you need for it?

Answer 91

Question 92

Difference in asset allocation produced by surplus optimisation vs asset only?

Answer 92

Question 93

What is hedging/return seeking porfolio? What is the basic and variants for it? Who would basic and variants be more appropriate for?

Answer 93

Question 94

How to form the hedging portfolio, what are the limitations of the approach and what is it complicated by?

Answer 94

Question 95

What is the integrated asset-liability approach? Which type of firm might use this?

Answer 95

Question 96

What is involved in goals based asset allocation? Why are there pre-established set of risk-return modules or models? How/why are sub-portfolios introduced?

Answer 96

Question 97

Describe minimum expectations and what this rate is used for? How do changes in this rate impact the portfolio?

Answer 97

Question 98

Example of adjustments to to select the portfolio with highest probability/time adjusted return

Answer 98

Question 99

Probabilities for needs, wants and desires?

Answer 99

Question 100

Describe Heuristic AA?

Answer 100

Question 101

Describe the 60/40, endowment model, risk parity AA approaches?

Answer 101

Question 102

What us the 1/N AA approach?

Answer 102

Question 103

What are the benefits/costs of rebalancing and adjusting weights back to SAA to reflect price drift?

Answer 103

Question 104

What is calendar rebalancing, what factors percentage rebalancing?

Answer 104

Question 105

Describe the constraint of asset size and explain economies and diseconomies of scale in this context?

Answer 105

Question 106

What are the size constraints on equity, cash, bonds, RE and Alt Investments?

Answer 106

Question 107

Describe the liquidity and time horizon constraint

Answer 107

Question 108

Describe regulatory and other external constraints

Answer 108

Question 109

Discuss tax constraints and how they may differ between investors and assets?

Answer 109

Question 110

How to account for after-tax returns in portfolio optimisation?

Answer 110

Question 111

How do taxes affect rebalancing and the ranges?

Answer 111

Question 112

What are the strategies to reduce tax impact?

Answer 112

Question 113

What usually triggers a revision in the SAA?

Answer 113

Question 114

Describe TAA, the objectives, what usually causes an investor to undergo it, how to measure performance of it?

Answer 114

Question 115

What are potential downside to TAA? What are the two broad approaches?

Answer 115

Question 116

What are the biases of loss aversion and illusion of control and they might affect AA?

Answer 116

Question 117

How do mental accounting, representative bias, framing bias and availability bias impact AA?

Answer 117