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CFA 3 > Volume 3 > Flashcards

Volume 3 Flashcards

1
Q

Describe the factors affecting FIXED-INCOME Portfolio Returns, to a change in Benchmark Yields.

–> factors affecting E(Δprice du to investors view of benchmark yields).

A
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2
Q

Formulate a Portfolio position strategy given forward interest rates and an interest view that coincides with the MKT view (static yield curve).

A

1) Buy & Hold + 2) Rolling down the YC –> will add DURATION (can be mimicked with the derivatives: long futures & receive fixed swap)

3) Repos = Add LEVERAGE.

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3
Q

Formulate a Portfolio Position Strategy given Forward Interest Rates and an interest rate view that diverges from the MKT view in terms of rate level, slope, and shape.

RATE LEVEL ?????

A
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4
Q

Formulate a Portfolio Position Strategy given Forward Interest Rates and an interest rate view that diverges from the MKT view in terms of rate level, slope, and shape.

RATE SLOPE, add or reduce DURATION ???

A

With that, we can set these PFs to be duration neutral, slightly duration positive, or slightly duration negative.

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5
Q

Formulate a Portfolio Position Strategy given Forward Interest Rates and an interest rate view that diverges from the MKT view in terms of rate level, slope, and shape.

RATE SLOPE, how to Position your PF (neutral, steepener, flattener, bear, bull) ???

A
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6
Q

Formulate a Portfolio Position Strategy given Forward Interest Rates and an interest rate view that diverges from the MKT view in terms of rate level, slope, and shape.

RATE SHAPE ????

A

le graph c’est les rates en y, et le temps en x.

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7
Q

Formulate a Portfolio position strategy based upon expected changes in interest rate volatility.

A
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8
Q

Evaluate a Portfolio Sensitivity using Key Rate Durations of the PF and its benchmark.

A
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9
Q

Discuss Yield Curve Strategies Across Currencies.

A

We want country A: upward sloping YC, expected stable YC, low yield to fund.
Country B: flatter, expected stable or increasing YC, high yield to invest.

(stable, or dynamic –> then forecasts for levels+slope+shape ?)

If we hedge out S_p/b, we will earn r_dom.
UIRP says that without hedging, you’re still gonna get r_dom. But it doesn’t hold, and carry trades are possible.

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10
Q

Losa: Describe risk considerations for spread-based (=credit risky) income Portfolios.

Yield Spread ?

A

Yield (excess) spread = liquidity premium + credit risk = (YTMbid - YTMask) + credit risk.

Credit risk is composed of
- Default risk (POD)
- Loss Severity ( LGD)

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11
Q

Losa: Describe risk considerations for spread-based (=credit risky) income Portfolios.

Proba of Default ?

A
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12
Q

Losa: Describe risk considerations for spread-based (=credit risky) income Portfolios.

Credit migration & Spread Curves ?

A

Credit Spread curve:
- lower rated issuers = greater slope & level changes over the cycle

  • spread difference between rating categories (IG-HY) narrows during strong economic booms.
  • ModDur&EffDur = Overstates %ΔPV_full –> even more so for HY.
    Reason: negative correl between rates and credit spreads + empirical duration is a better measure.
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13
Q

Losb: discuss the advantages and disadvantages of credit spread measures for spread-based (=credit risky) Fixed-Income Portfolios; and explain why OAS is considered the most appropriate measure.

CREDIT SPREAD MEASURES ?

A

1) Yield Spread = Corporate YTM - nearest on-the-run USTreasury YTM.
- slope and maturity mismatch
- not a good measure of carry.

2) G-Spread = Corporate YTM - maturity matching UST YTM.
- interpolated if needed.

3) I-Spread = Corporate YTM - Maturity matching swap rate.
- interpolated if needed.
- more accurately measures carry for a leveraged position.

4) Asset-SWAP-Rate = (Corporate Bond Coupon - SWAP Fixed Rate) * MRR.
- Synthetic FRN (duration ~= 0); swap fixed rate = same maturity as bond & coupon (at or close to PAR) dates are matched.
- Full Duration hedge = low or 0 price volatility.

5) Z-Spread = Constant spread over spot/swap rates, not YTMs.
- More accurate than G or I spread (to measure credit risk of a bond).

6) CBS basis = CDS spread - (Z-spread).
- If CDS Spread < Z-spread; sets up a negative basis trade (buy bond, buy CDS).

7) OAS = constant spread over forward rates in a pricing model (can compare all bonds –> option-free or not).

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14
Q

Negative basis trade ?

A

If CDS Spread < Z-spread; sets up a negative basis trade (buy bond, buy CDS)

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15
Q

Losb: discuss the advantages and disadvantages of credit spread measures for spread-based (=credit risky) Fixed-Income Portfolios; and explain why OAS is considered the most appropriate measure.

FLOATING RATE NOTES, AND MARGINS ?

A

1) Quoted Margin = Yield spread over MRR on issuance.

2) Discount Margin = reflects changes in credit risk (spread over MRR discount rate)

3) Zero-Discount Margin = Yield Spread over forward MRRs

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16
Q

Losb: discuss the advantages and disadvantages of credit spread measures for spread-based (=credit risky) Fixed-Income Portfolios; and explain why OAS is considered the most appropriate measure.

SPREADS AT THE PORTFOLIO LEVEL ????

A
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17
Q

Losb: discuss the advantages and disadvantages of credit spread measures for spread-based (=credit risky) Fixed-Income Portfolios; and explain why OAS is considered the most appropriate measure.

Expected Excess Spread Return ????

A
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18
Q

Losc: discuss bottom-up approaches to credit strategy.

A
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19
Q

Losd: Discuss top-down approaches to credit strategy.

A
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20
Q

Lose: Discuss liquidity Risk in credit markets, and how liquidity risk can be managed in a credit PF.

A

liquidity risk = risk that you can’t convert your BOND to cash to the modeled price.

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21
Q

Losf: Describe how to assess and manage Tail Risk in Credit Portfolios.

A
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22
Q

Losg: Discuss the use of CDS strategies in Active Fixed-income PF management.

A

The use of CDS allows us to create Synthetic Credit Strategies.

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23
Q

Losg: Discuss the use of CDS strategies in Active Fixed-income PF management.

UPFRONT PMT TO BUYER ???

A
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24
Q

Losg: Discuss the use of CDS strategies in Active Fixed-income PF management.

PRICE OF CDS PER 1$ ????

A
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25
Q

Losg: Discuss the use of CDS strategies in Active Fixed-income PF management.

%ΔCDS Price ????

A

~=

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26
Q

Losg: Discuss the use of CDS strategies in Active Fixed-income PF management.

PAYER OPTION ? RECEIVER OPTION ?

A
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27
Q

Losg: Discuss the use of CDS strategies in Active Fixed-income PF management.

CDS CURVE ?

A

For the slope strategy given slope movements, we want to be DURATION NEUTRAL.

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28
Q

Losh: Discuss various portfolio positioning strategies that managers can use to implement a specific credit spread view.

STATIC CREDIT CURVE ??

A
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29
Q

Losh: Discuss various portfolio positioning strategies that managers can use to implement a specific credit spread view.

DYNAMIC CREDIT CURVE ??

A
30
Q

Losi: Discuss considerations in constructing and managing PORTFOLIOS across International Credit Markets.

A
31
Q

Losj: Describe the use of Structured financial instruments as an alternative to Corporate Bonds in Credit Portfolios.

A

Structured Credit = exposure that you could not get in the Bond Market –> Securities backed by collateral = TYPICALLY OFFER HIGHER RETURNS THROUGH CREDIT TRANCHING.

1) CDO = backed by a pool of debt obligations (corporate loans).

2) CLO = backed by a pool of floating rate leveraged loans.

3) MBS = backed by commercial/residential mortgages.

4) ABS = backed by non-mortgage Assets.

5) Covered bonds = Segregated debt obligations –> Full Recourse to the issuer, non-performing assets get replaced.

32
Q

Losa: Describe the roles of equities in the overall PORTFOLIO.

A
33
Q

Losb: Describe how an Equity Manager’s investment universe can be segmented.

partie 1

A

1) Size & Style (core/blend = entre growth et value).
- Disadvantage = categories have no clear standardized definition.

34
Q

Losb: Describe how an Equity Manager’s investment universe can be segmented.

partie 2 & 3 & 4

A

2) Geography
3) Economic Activity

4) Segmentation of Equity Indexes & benchmarks (=combination of the three other segmentation factors).
–> Geography + size/style index.
–> Geography + industry/sector index.
–> investment approaches.

35
Q

Losc: Describe the type of income and costs associated with owning and managing an equity PF, and the potential effects on PF performance.

Income ?

A
36
Q

Losc: Describe the type of income and costs associated with owning and managing an equity PF, and the potential effects on PF performance.

Fees?

A
37
Q

Losd: describe the potential benefit of shareholder engagement, and the role an equity manager might play in shareholder engagement.

A
38
Q

Losa: Discuss considerations in choosing a benchmark for a passively managed equity portfolio.

What’s passive investing + how to select a benchmark ?

A
39
Q

Losa: Discuss considerations in choosing a benchmark for a passively managed equity portfolio.

Buffering ? Packeting ?

A

Processes used by index providers to make their indexes more investable (eg. when do stocks enter/live index) ?

40
Q

Losa: Discuss considerations in choosing a benchmark for a passively managed equity portfolio.

Considerations in choosing a benchmark ?

A
41
Q

Losb: Compare passive factor-based strategies to market capitalization weight indexing.

MCAP weighting ?

A
42
Q

HHI (index) ? Effective n° of stocks in an index ?

A

Index of industry concentration:

1) HHI = Σ(wi)².

2) Effective n° of stocks in an index = 1/HHI.

43
Q

Losb: Compare passive factor-based strategies to market capitalization weight indexing.

Factors-based strat (general principles) ?

A
44
Q

Losb: Compare passive factor-based strategies to market capitalization weight indexing.

Factors-based strategies (types & orientations) ?

A
45
Q

Losc: Compare different approaches to passive equity investing

A
46
Q

Losd: Compare the full replication, stratified sampling, and optimization approach, for the construction of passively managed equity portfolios (buying the actual shares).

A
47
Q

Lose: Describe potential causes of tracking error, and methods to control tracking error for passively managed equity PORTFOLIOS

CAUSES ?????
(remember benchmark index = paper PF = no fees, no costs, nothing)

A
48
Q

Lose: Describe potential causes of tracking error, and methods to control tracking error for passively managed equity PORTFOLIOS.

METHODS TO CONTROL ?????

A
49
Q

Losf: Explain sources of returns&risk in passively managed equity Portfolios.

A
50
Q

Losa: Compare Fundamental, and quantitative approaches to active equity management.

A

Risk –> Fundamental = @ company level (valuation, forecasts).
Quantitative = @ portfolio level (factor returns).

Rebalancing –> Fundamental = discretionary.
Quantitative = Systematic (usually monthly/quaterly).

51
Q

Losb: Analyze bottom-up active strategies, including their rationale and associated processes.

A
52
Q

Losb: Analyze top-down active strategies, including their rationale and associated processes.

A
53
Q

Losd: Analyze factor-based active strategies, including their rationales and associated processes.

A

Usual (rewarded) style factors:

Value, Price Momentum, Growth, Quality, Unconventional Factors based on unstructured data (satellite images, online mentions).

54
Q

Lose: Analyze activist strategies, including their rationales and associated processes.

A
55
Q

Losf: Describe Active strategies based on statistical arbitrage, and market microstructure.

A

Statistical arbitrage = uses statistical & technical analysis to exploit pricing anomalies
(eg. take advantage of mean reversion in share prices –> PAIRS TRADE = identify 2 stocks that are historically highly correlated; and long underperforming, short overperforming stock).

Market microstructure exploitancy = HFT

56
Q

Losg: Describe how fundamental active investment strategies are created.

A
57
Q

Losh: Describe how quantitative active investment strategies are created.

A
58
Q

Losi: Discuss Equity Investment Style classifications.

A
59
Q

Losi: Discuss Equity Investment Style classifications.

HOLDINGS-BASED APPROACH ???

A
60
Q

Losi: Discuss Equity Investment Style classifications.

RETURNS BASED APPROACH ???
MANAGER SELF-IDENTIFICATION???

A

RETURNS BASED APPROACH = exhaustive and mutually exclusive styles. Then the PF picks within that universe.

61
Q

Losa: Describe elements of the manager’s investment philosophy, that influence the portfolio construction process.

ACTIVE RETURN ???

A
62
Q

Losa: Describe elements of the manager’s investment philosophy, that influence the portfolio construction process.

BUILDING BLOCKS & 2 PHILOSOPHIES ???

A

+ building block
4) Breadth.

= n° of truly independent decisions made each year.

Confidence in a manager’s ability to outperform a benchmark increases when that performance can be attributed to a larger sample of independent decisions.

63
Q

Losb: Discuss approaches for constructing actively managed equity portfolios.

A

Systematic = quant.
Discretionary = Fundamental.

Bottom-up discretionary = stock picker.

64
Q

Losc: Distinguish between active share and active risk, and discuss how each measure relates to a manager’s investment strategy.

A

Concentrated stock picks criteria:

> = 5-6% active risk; >= 0.8 active share.

65
Q

Losd: Discuss the applications of risk budgeting concepts in portfolio construction.

types of risks, and causes of risk ?

A
66
Q

Losd: Discuss the applications of risk budgeting concepts in portfolio construction.

Appropriate level of risk, and risk allocation ?

A

3) Determine appropriate level of risk = different managers with similar styles may have different risk appetites.

67
Q

Lose: Discuss risk measures that are incorporated in equity portfolio construction, and describe how limits set on these measures affect portfolio construction.

A

1) heuristic risk measures = doesn’t require estimates & predictions of risk (they are simply rules).

68
Q

Losf: Discuss how AUM, position size, market liquidity, and PF turnover; affect Equity PF construction decisions.

A
69
Q

Losg: Evaluate the efficiency of a portfolio structure given its investment mandate.

A

A well constructed PF possesses:

1) a clear investment philosophy & a consistent investment process.
2) risk & structural characteristics as promised to investors.

3) a risk efficient delivery methodology.
4) reasonably low costs given the strategy.

70
Q

Losh: Discuss the long-only, long-extension, long-short, and equitize Market Neutral APPROACHES to Equity PF construction (including their risk, costs, and effects on potential alpha).

A

Downside of Market Neutral strategy is that upside is limited.

CFA 3 (5 decks)

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