Volume 3 Flashcards
E(r) can be decomposed into?
Describe on-the-run vs of the run bonds?
What is a stylised YC?
What is a constant maturity yield?
What are the primary YC risk features of Levels, slopes and Shape? What percent do each make up of YC moves?
More curvature = ….. butterfly spread?
Expected change in price from YC change formula = ?
What to PMs tend to use (related to above formula)?
For convexity: Longer maturity bonds have ….? The greater the dispersion the ……?
High convexity portfolio will outperform low convexity portfolio when ….?
When YC is expected to be static (upward sloping) you should do what?
Describe the technique buy and hold and rolling down the YC to achieve desired approach above?
For rolling down the YC should buy a bond with a maturity greater than….?
How can repos be used to as a trading strategy given the same YC forcast and the profit is equal to?
How can leverage be added through futures?
How can a received fixed swap add leverage, what is the profit? Example of change in yield effect on bullet vs barbell portfolio with same weighted duration?
How can derivatives be used instead of cash position in a bond for the same example?
Example of riding YC using bond cash position vs derivatives? 3 components of cash bond position
Dynamic yield curve: What are the strategies if rates expected to drop vs rates expected to rise? Would you favour derivates vs over/under selling bonds and why?
Dynamic yield curve: What are bullish and bearish steepener/flatteners? What is strategy for steepenening vs flattening curve
Example of a steepening (just a change in slope)? Want to be duration neutral
Bull steepner exmaple (chang in slope + drop in rates)? Want to be net positive duration
What happens in bear steepener what is the trading strategy? What are the strategies for neutral, bull and bear flatteners?
Dynamic yield curve: Shape
What is butterfly spread and what is it usually? What is a positive and negative butterfly twist and the trading strategy under each (body and wings)? What happens to convexity under a butterfly
Dynamic yield curve: Volatility
How to use options and swaptions to profit from changing volatility? explain difference in convexity between putable and callable bonds?
Dynamic yield curve: Key rate durations
What is formula for key rate duration?
Multiple yield curves, have to assess shape, level and steepness for each country curve?
Why do high-yielding currencies trade at a forward discount? UIRP implies … as CIRP?
Under UIRP and CIRP forward rates are …. of future spot rates? What is forward rate bias?
Since UIRP does not hold ….. is possible and what is …..?
What are the risks of this strategy?
Change in price due to change in spread: what are the two components of credit risk?
Spread is approximately = ?
POD is = ?
What is credit loss rate?
Formula for POD = ?
loss rate (credit rating) depends on ?
What is credit migration?
Properties of IG bonds relative to HY in terms of rating, default risk, recovery rate, YTM, impact from adverse events?
Credit curve spreads: How are they usually classified? What are curve changes driven by?
What is happening to Economic activity, profitability, leverage, defaults, spread level, spread slope over the credit cycle (early expansion, lat exp, peak, contraction)?
What happens to spread differences between categories in economic growth vs recession?
For HY bonds ModDur tends to do what?
Compare neg corr with spreads and rates for HY vs IG and magnitude of credit spread changes?
For fixed rate bonds, floating rate bonds and Porfolio level what are the important spread measures?
Fixed rate bond credit measures: what is yield spread (nearest yield spread)? What is g-spread and I-spread?
Explain difference between yield spread and G-spread?
G-spread is interpolated while yield spread is direct
What can the I-spread be used for?
What is the asset swap spread (ASW)?
What is the Z-spread and the CDS basis?
What is the OAS? What is
What is the quoted margin (QM) and the discount margin (DM)?
For FRN = Par, premium, discount what is the relationship between QM and DM?
What is the Zero discount margin (ZDM)?
Portfolio level impacts of spread
Change in portfolio value formula, therefore what is most appropriate measure of portfolio level spread?
What is spread duration?
DTS (duration spread) formula?
Excess spread return = ?
How do active credit managers deal with interest risk and spread risk?
Define the credit universe?
PM’s prefer company-level risk exposure rather than …..?
What are the key areas of company specific information?
Structural credit models are based on what?
This implies debt and equity can be expressed as ?
What do reduced form credit models do?
Example of reduced form credit model?
Bottom-up relative value analysis: Use of Ex spread (R) formula?
other considerations include?
Z altman score lower = more financial distress
What do top down credit strategies focus on?
In determining the desired credit quality of portfolio, what is this influenced by?
As higher GDP growth expectations then expectations for …. default rates and …. spreads
How do bond risks tend to change and thus what weightings methods can be used to overcome this?
What are the main factor based portfolio methods and what is each measured by?
What are the ESG considerations?
Liquidity risks - markets rely heavily on what?
What is TRACE?
When managing liquidity risks what tools might a PM use?
What is tail risk and how is it assessed?
What are the downside of VAR?
What is Conditional VAR, IVar and Relative VAR?
For parametric, historical simulation and monte carlo of estiamting tail risk, provide the description, pros and cons of each?
Tools for managing tails risks are?
CDS review: What it means to be protection buyer/seller?
IG and HY fixed spreads?
Upfront payment formula?
%change in CDS price formula?
What is a payer/reciever option on CDS index?
What are CDS commonly used to do?
CDS curve: CDS position strategies can be based on?
Explain credit spread curves for IG an HY for each of early exp, late exp, peak and contraction?
For static credit spread strategies what is the belief?
Describe the technique of rolling down Credit spread curve when static?
Describe the technique of using derivates to add SD when static?
What are the dynamic credit curve strategies ?
Describe the properties of credit markets for developed vs emerging countries?
In emerging market countries describe the following related to the credit market - currency, currency of sovereign bonds, expected growth, risk, external debt, concentration in IG and HY, liquidity, currency volatility?
What are some other market differences?
What is structured credit?
What are CDO’s?
What are CLO’s, MBS, ABS, covered bonds?
Describe the rolls of Equity in a portfolio: Capital appreciation, Dividend income and Diversification?
Rolls of equity, describe hedge against inflation? What are the client and ESG considerations?
Describe how stocks can be segmented by size and style? What are the benefits of portfolio construction this way?
Describe segmenting by geography?
Describe segmentation by economic activity?
Difference between product and market-orientated economic activity segmentation?
Describe segmentation of equity indexes and benchmarks and what are some examples
Describe the sources of income that come from equity (dividend, security lending, Ancillary investment strategies)?
Fees: what are management, performance and admin fees?
Fees: what are marketing and trading costs (implicit vs explicit)?
What is shareholder engagement and what are the positives that come from it? What does this typically involve for an equity manager?
Describe rationals for EM to do active or passive: confidence to outperform, client preference, suitable benchmark, client-specific mandates, risk/costs of active management and taxes?
What is the definition of passive investing?
3 requirements for selecting a benchmark?
What is buffering and packeting?
What should be considered when selecting a benchmark?
What is selective vs exhaustive index construction?
Describe market cap weighted benchmarks and their pros/cons?
What is the goal of factor based strategies?
What are selective vs factor tilts?
What are passive rules for inclusion?
Describe the types of return orientated, risk orientated and diversification orientated strategies?
What are pooled investments and benefits and comparison between ETFS and MFs?
Describe the derivate based approaches, what are they typically used for?
What will using derivate strategies add to the portolfio (risk)?
What are separately managed equity index based portfolios?
What is full replication and stratified sampling and when is each used?
Describe optimisation approach for seperate portolfio?
Describe the blended approach?
What is tracking error and what are the causes for it?
What are the techniques for controlling tracking error? Describe the sources of return and risk for a passive portfolio?
Describe completion, currency and rebalancing overlays
What is the difference between fundamental and quantitative analysis? Describe the style, decision-making process, primary resources, information, analysis focus, orientation to data, portfolio construction for each?
Example of quant model? What is difference in risk between fundamental and quant?
What is the difference in rebalancing?
Describe bottom strategies and the valuation methods?
Describe the 7 value-based approaches: relative, contrarian, high quality, income, deep-value, restructuring/distressed, special situations?
What do growth based approaches focus on?
Describe the top down approaches and how you implement them: country/geography, sector/industry, volatility based, thematic?
What are factor based strategies and the goal of it? What are equity style rotation strategies? What is the hedged portfolio approach?
What is the value factor and the possible reasons it may exist?
What are the momentum, growth, quality and the unconventional factors?
What are activist strategies?
What are the tactics employed and what are company defences?
What are the typical targets for activists?
What is statistical arbitrage and what does it take advantage of? What is pairs trading and the biggest risk?
biggest risk is that observed price
divergence is not temporary (may be structural
What are the seven steps in how a active investment strategy is established?
What are the common pitfalls in strategies?
What are the steps in creating a quant investment strategy?
What are the pitfalls of quant strategies?
What are style classifications, what should correlation between and out of style groups be, what do style classifications allow?
What is the portfolio holdings based approach?
What is returns based style analysis?
What is manager self identification?
Returns based style analysis, how is this done?
decomposing between measure of fit and selection return?
Describe holdings base style analysis for detecting manager style?
What are the pros and cons of returns based vs holdings based for portfolio categorisation?
When will an active manager generate positive active returns? Gains on… vs losses on..? Formula for active return and then decomposed into noise, alpha and alternative beta?
What are the building blocks in active investment management?
What is now not considered to be alpha?
In sizing positions what methods can be used?
Equation for expected active return?
Success is a function of ….? What will broader expertise increase?
Compare and contrast top down vs bottom and systematic vs discretionary portfolio construction?
What is active share and active risk? What are their formulas? Which can managers control? What is key difference between the two?
Active risk formula? Active risk attributed to active share will be smaller if……? High net exposure to a risk factor will lead to ….?
Where do pure indexing, closet indexing, factor neutral, diversified factor bets, concentrated factor bets and concentrated stock picks rank in terms of active risk and active share?
Compare the constraint between stock picker vs sector rotation? Compare absolute vs relative framework in terms of constraints?
What are the first two key steps in risk management that a PM must follow? What are the causes/sources of absolute risk?
What is the equation for absolute portfolio variance and what can it be decomposed into?
What are the causes of active risk? low/high risk assets will not always…?
Its not the volatility of an asset that matters but the ….?
Determining the appropriate level of risk is a …. exercise?
Describe the following limits to risk: implementation constraints, limited diversification opportunities, leverage levels?
Compare a contrast a heuristic vs formal risk constraint? Give examples of each
How does AUM, position size, liquidity and turnover influence equity portfolio construction decisions?
How must a managers strategy be related to the feasibility of implementing it? example
What four key things does a good portfolio construction process have?
Describe a long/short portfolio and what it allows a manager to do, and what is net exposure vs gross exposure?
What does the long extension style allow a manager to do?
What is a market neutral strategy?
What is the objective of one and what is the characteristics of it?
What are two examples of a market neutral strategy and what are the two limitations?
What are the benefits and costs of long only vs long/short strategy?
Describe the characteristics of the long only strategy?
