- Thread starter
- #21
Guys…. take a look at how much of what we put together was tested. Truly amazing.
I put stars (****) by the topics that were tested.
The AF community could have written the exam.
Dwight Wrote:
——————————————————-
> Source:
> http://www.analystforum.com/phorums/read.php?13,96
> 7038
>
> ————————————————–
> —————————–
>
> If our Human Capital is Bond-like, we should
> invest more aggressively (equity) and our demand
> for life insurance increases.
>
>
****> A short position in an option is either
> out-of-the-money and no payment is due, or it is
> in-the-money and the short owes payment to the
> long. Therefore the short position bears NO CREDIT
> RISK. ****
>
>
****> Honour willingness as long as it is below or equal
> to ability – except for the wealthy independent! ****
>
>
> Additional compensation arrangement requires both
> clients and employer give the written approval.
>
>
> Box Spread: combo of a Bull Call and Bear Put
> Spread; a non-directional strategy… seeks to
> exploit arbitrage opportunities between options
> prices of the same underlying.
>
>
**** > Taylor Rule: gives an estimate for central bank
> interest rate decisions: ****
>
>
****> R target = R Neutral + 0.5*(GDP expected - GDP
> trend) + 0.5*(Inflation expected - Inflation
> target) ****
>
>
> When distinguishing between Type I and Type II
> errors, remember “Type I HORN.”
> Type I HO (Null Hypothesis) RN (Reject Null)
> Null = Manager adds no value; Reject and conclude
> that manager adds value when he actually does
> not.
>
>
****> SAMURAI (For properties of a valid benchmark):
> Specified in advance, Appropriate, Measurable,
> Unambiguous, Reflective of manager’s current
> opinions, Accountable (Manager), Investable.****
>
>
****> Types of benchmarks - MBS FRAC!
> Manager Universe - Broad Mrkt indices - Style
> indices
> Factor model - Returns based - Absoute - Custom****
>
>
> If only defense - lack of action or inaction
> Ceteris paribus - because of unexpected
> action/event, all else same
>
>
> Legal / Regulatory Constraints for Endowments and
> Foundations: UMIFA and Prudent Investor
>
>
> ERISA prohibits investment of more than 10% of DB
> plan assets in the company stock, but NO such law
> applies to DC plans
>
>
****> Durations: Dfixed-Dfloating>0. To shorten duration
> take floating Asset (i.e. receive floating and pay
> fixed)****
>
>
> Claw back provision: If PE sponsor received early
> distribution but failed to deliver the expected
> profit; he has to give back money.
>
>
****> Private equity has low liquidity and allocation to
> this class should be 5% or less with a plan to
> keep the money invested for 7-10 yrs****
>
>
> Adding REITs to stock / bond –> higher return –>
> marginally lower sd –> higher sharpe ratio
> Adding direct real estate investment to stock /
> bond –> lower return –> significantly lower sd
> –> higher sharpe ratio
>
>
****> Going long a pay-fixed swap will lower your
> portfolio duration, while going long a
> pay-floating swap will increase your portfolio
> duration. ****
>
>
> For a domestic investor, currency risk is about
> half the risk of foreign stocks and about twice
> the risk of foreign bonds.
>
>
> There are four main reasons not to trade bonds -
> “please stop bothering susan”
> please = Portfolio constraints (biggest cause of
> inefficiency in bond markets)
> stop = story disagreements
> bothering = buy and hold
> susan = seasonality
>
>
> There are eight main reasons to trade bonds -
> “really can cook, no salt you say?”
> really = relative value pick up (biggest reason)
> can = credit upside
> cook = credit defence
> no = new issue trades
> salt = secot-rotation trades
> you = yield curve pickups
> say? = structure trades
>
>
> Distressed Debt Arbitrage = long debt and short
> equity of the same company.
>
>
****> Total Active Return = True active return + Misfit
> active return
> true = Manager return - Normal port return
> misfit = Normal port return - Benchmark****
>
>
> Increase in Age -> Lower demand for life insurance
>
> Higher risk aversion -> Higher demand for life
> insurance
> Greater initial wealth -> Lower demand for life
> insurance
> Stronger Bequest Motive -> Higher demand for life
> insurance
>
>
> Stock-based compensation and bonuses: Complements
>
> Explicit Incentives and Implicit Incentives:
> Substitutes
>
>
****> In a non-trending market, Constant Mix outperforms
> Buy-and-Hold outperforms CPPI
> In a trending market, CPPI outperforms
> Buy-and-Hold outperforms Constant Mix****
>
>
> Investor’s Utility Adjusted Return = Expected
> Return Portfolio - 0.005 * Risk Aversion Score *
> Portfolio Variance
>
>
> “(Insert name of firm) has prepared and presented
> this report in compliance with the Global
> Investment Performance Standards (GIPS®).”
>
>
****> Total commodity return = collateral return + roll
> return + spot return
> *For roll return it is the futures differential
> minus the spot return****
>
>
****> Without rebalancing, classical immunization only
> works for a 1-time instaneneous change in i-rates.
> We cease to be immunized when (1) i-rates change
> and (2) Time passes****
>
>
> Currency Management Strategies:
> Balanced Mandate - Asset Manager also manages
> currency
> Currency Overlay - Currency managed within IPS by
> another currency manager
> Seperate Asset Class - Currency managed under its
> own seperate guidelines
> (Note - CFAI says it’s a suboptimal strategy if
> managed in two-steps. Simultaneous management
> would be better.)
>
>
****> For Grinold/Kroener: always look for real or
> nominal g! - real should be used, as inflation is
> a separate component; thus, do not sum nominal g
> and i****
>
>
> Beta of A = standard deviation of A / standard
> deviation of market * correlation
> Covariance of A and B = Beta of A * beta of B *
> square of standard devation of market
>
>
> Jensen’s Alpha: Portfolio Return - Expected
> Portfolio Return based on SML
> IR: Active Return / Standard Deviation of Active
> Returns
> * Note: IR doesn’t capture all portfolio
> variability, just the variability of excess
> returns *
> Sharpe: (Return Portfolio - Rf) / (Standard
> Deviation Portfolio)
> Treynor: (Return Portfolio - Rf) / Beta Portfolio
>
****> M2: Rf + Sharpe * Standard Deviation Market****
>
>
> Implication of cyclical and secular changes in the
> corporate bond market include:
> 1. securities with embedded options will command a
> premium due to their scarcity
> 2. the percentage of long-term issues will decline
> - effective duration and aggregate interest rate
> risk sensitivity will also decline.
>
>
> Moral Hazard Problems (Corporate Governance):
> a) Insufficent effort results when company execs
> are too occupied with various non work related
> interests (i.e. golf game, buying expensive art,
> etc.) instead of focusing and putting enough
> effort to get the job done
> b) Exravagant projects is when management continue
> to invest in high profile or pet projects even
> though the return on the investments is not in the
> best interest of the company and its shareholders
>
> c) Entrechement – when managers invest in bad
> projects but in projects where they have a strong
> understanding so that they become more valuable to
> the company
> d) Self-Dealing – I am not 100% sure, but I think
> when they funel business to companies they own or
> family and friends.
>
>
> ****> Corridor Widths
> Factor…………………..(Value - effect on
> corridor widths)
> Transaction
> Costs……………………………(higher-high
> er)
> Risk
> tolerance………………………………..(hi
> gher-higher)
> Correlation…………………………………
> …(higher-higher)
> Volatility………………………………….
> …….(higher-lower)
> Volatility of the rest of the
> portfolio……….(higher-lower)****
>
>
****> A contango commodity market occurs when the lease
> rate is less than the risk free rate.****
>
>
> Cross Default Provision: issue considered in
> default if defaulted on another credit agreements
>
> Jump to Default: AKA current credit risk
>
>
****> Grinold and Kroner:
> R(i) = Div1/P0 + i + g - (DELTA) S + (DELTA) P/E
> Ri = expected return on stock i
> Div1 = dividend next period
> P0 = current stock price
> i = expected inflation rate
> g = real growth rate in total earnings
> (DELTA) S = change in shares outstanding
> (DELTA) P/E = change in P/E ratio ****
>
>
> Market Neutral Strategy has a Beta of Zero.
> Manager can add Beta exposure using futures,
> swaps, etc.
> Short Extension Strategy: Net Portfolio beta=Beta
> Long+Beta Short, hence can outperform long only
> strategy as it exploits benefits of short-selling
>
>
> Payer’s Swaption–gives the buyer of the option
> the right to enter into a swap where the option
> buyer pays the fixed rate . Converts a future FRN
> into fixed rate obligation.
> Receiver’s Swaption–gives the buyer of the option
> the right to enter into a swap where the option
> buyer receives the fixed rate. Converts a future
> fixed rate obligation into floating rate
> obligation.
I put stars (****) by the topics that were tested.
The AF community could have written the exam.
Dwight Wrote:
——————————————————-
> Source:
> http://www.analystforum.com/phorums/read.php?13,96
> 7038
>
> ————————————————–
> —————————–
>
> If our Human Capital is Bond-like, we should
> invest more aggressively (equity) and our demand
> for life insurance increases.
>
>
****> A short position in an option is either
> out-of-the-money and no payment is due, or it is
> in-the-money and the short owes payment to the
> long. Therefore the short position bears NO CREDIT
> RISK. ****
>
>
****> Honour willingness as long as it is below or equal
> to ability – except for the wealthy independent! ****
>
>
> Additional compensation arrangement requires both
> clients and employer give the written approval.
>
>
> Box Spread: combo of a Bull Call and Bear Put
> Spread; a non-directional strategy… seeks to
> exploit arbitrage opportunities between options
> prices of the same underlying.
>
>
**** > Taylor Rule: gives an estimate for central bank
> interest rate decisions: ****
>
>
****> R target = R Neutral + 0.5*(GDP expected - GDP
> trend) + 0.5*(Inflation expected - Inflation
> target) ****
>
>
> When distinguishing between Type I and Type II
> errors, remember “Type I HORN.”
> Type I HO (Null Hypothesis) RN (Reject Null)
> Null = Manager adds no value; Reject and conclude
> that manager adds value when he actually does
> not.
>
>
****> SAMURAI (For properties of a valid benchmark):
> Specified in advance, Appropriate, Measurable,
> Unambiguous, Reflective of manager’s current
> opinions, Accountable (Manager), Investable.****
>
>
****> Types of benchmarks - MBS FRAC!
> Manager Universe - Broad Mrkt indices - Style
> indices
> Factor model - Returns based - Absoute - Custom****
>
>
> If only defense - lack of action or inaction
> Ceteris paribus - because of unexpected
> action/event, all else same
>
>
> Legal / Regulatory Constraints for Endowments and
> Foundations: UMIFA and Prudent Investor
>
>
> ERISA prohibits investment of more than 10% of DB
> plan assets in the company stock, but NO such law
> applies to DC plans
>
>
****> Durations: Dfixed-Dfloating>0. To shorten duration
> take floating Asset (i.e. receive floating and pay
> fixed)****
>
>
> Claw back provision: If PE sponsor received early
> distribution but failed to deliver the expected
> profit; he has to give back money.
>
>
****> Private equity has low liquidity and allocation to
> this class should be 5% or less with a plan to
> keep the money invested for 7-10 yrs****
>
>
> Adding REITs to stock / bond –> higher return –>
> marginally lower sd –> higher sharpe ratio
> Adding direct real estate investment to stock /
> bond –> lower return –> significantly lower sd
> –> higher sharpe ratio
>
>
****> Going long a pay-fixed swap will lower your
> portfolio duration, while going long a
> pay-floating swap will increase your portfolio
> duration. ****
>
>
> For a domestic investor, currency risk is about
> half the risk of foreign stocks and about twice
> the risk of foreign bonds.
>
>
> There are four main reasons not to trade bonds -
> “please stop bothering susan”
> please = Portfolio constraints (biggest cause of
> inefficiency in bond markets)
> stop = story disagreements
> bothering = buy and hold
> susan = seasonality
>
>
> There are eight main reasons to trade bonds -
> “really can cook, no salt you say?”
> really = relative value pick up (biggest reason)
> can = credit upside
> cook = credit defence
> no = new issue trades
> salt = secot-rotation trades
> you = yield curve pickups
> say? = structure trades
>
>
> Distressed Debt Arbitrage = long debt and short
> equity of the same company.
>
>
****> Total Active Return = True active return + Misfit
> active return
> true = Manager return - Normal port return
> misfit = Normal port return - Benchmark****
>
>
> Increase in Age -> Lower demand for life insurance
>
> Higher risk aversion -> Higher demand for life
> insurance
> Greater initial wealth -> Lower demand for life
> insurance
> Stronger Bequest Motive -> Higher demand for life
> insurance
>
>
> Stock-based compensation and bonuses: Complements
>
> Explicit Incentives and Implicit Incentives:
> Substitutes
>
>
****> In a non-trending market, Constant Mix outperforms
> Buy-and-Hold outperforms CPPI
> In a trending market, CPPI outperforms
> Buy-and-Hold outperforms Constant Mix****
>
>
> Investor’s Utility Adjusted Return = Expected
> Return Portfolio - 0.005 * Risk Aversion Score *
> Portfolio Variance
>
>
> “(Insert name of firm) has prepared and presented
> this report in compliance with the Global
> Investment Performance Standards (GIPS®).”
>
>
****> Total commodity return = collateral return + roll
> return + spot return
> *For roll return it is the futures differential
> minus the spot return****
>
>
****> Without rebalancing, classical immunization only
> works for a 1-time instaneneous change in i-rates.
> We cease to be immunized when (1) i-rates change
> and (2) Time passes****
>
>
> Currency Management Strategies:
> Balanced Mandate - Asset Manager also manages
> currency
> Currency Overlay - Currency managed within IPS by
> another currency manager
> Seperate Asset Class - Currency managed under its
> own seperate guidelines
> (Note - CFAI says it’s a suboptimal strategy if
> managed in two-steps. Simultaneous management
> would be better.)
>
>
****> For Grinold/Kroener: always look for real or
> nominal g! - real should be used, as inflation is
> a separate component; thus, do not sum nominal g
> and i****
>
>
> Beta of A = standard deviation of A / standard
> deviation of market * correlation
> Covariance of A and B = Beta of A * beta of B *
> square of standard devation of market
>
>
> Jensen’s Alpha: Portfolio Return - Expected
> Portfolio Return based on SML
> IR: Active Return / Standard Deviation of Active
> Returns
> * Note: IR doesn’t capture all portfolio
> variability, just the variability of excess
> returns *
> Sharpe: (Return Portfolio - Rf) / (Standard
> Deviation Portfolio)
> Treynor: (Return Portfolio - Rf) / Beta Portfolio
>
****> M2: Rf + Sharpe * Standard Deviation Market****
>
>
> Implication of cyclical and secular changes in the
> corporate bond market include:
> 1. securities with embedded options will command a
> premium due to their scarcity
> 2. the percentage of long-term issues will decline
> - effective duration and aggregate interest rate
> risk sensitivity will also decline.
>
>
> Moral Hazard Problems (Corporate Governance):
> a) Insufficent effort results when company execs
> are too occupied with various non work related
> interests (i.e. golf game, buying expensive art,
> etc.) instead of focusing and putting enough
> effort to get the job done
> b) Exravagant projects is when management continue
> to invest in high profile or pet projects even
> though the return on the investments is not in the
> best interest of the company and its shareholders
>
> c) Entrechement – when managers invest in bad
> projects but in projects where they have a strong
> understanding so that they become more valuable to
> the company
> d) Self-Dealing – I am not 100% sure, but I think
> when they funel business to companies they own or
> family and friends.
>
>
> ****> Corridor Widths
> Factor…………………..(Value - effect on
> corridor widths)
> Transaction
> Costs……………………………(higher-high
> er)
> Risk
> tolerance………………………………..(hi
> gher-higher)
> Correlation…………………………………
> …(higher-higher)
> Volatility………………………………….
> …….(higher-lower)
> Volatility of the rest of the
> portfolio……….(higher-lower)****
>
>
****> A contango commodity market occurs when the lease
> rate is less than the risk free rate.****
>
>
> Cross Default Provision: issue considered in
> default if defaulted on another credit agreements
>
> Jump to Default: AKA current credit risk
>
>
****> Grinold and Kroner:
> R(i) = Div1/P0 + i + g - (DELTA) S + (DELTA) P/E
> Ri = expected return on stock i
> Div1 = dividend next period
> P0 = current stock price
> i = expected inflation rate
> g = real growth rate in total earnings
> (DELTA) S = change in shares outstanding
> (DELTA) P/E = change in P/E ratio ****
>
>
> Market Neutral Strategy has a Beta of Zero.
> Manager can add Beta exposure using futures,
> swaps, etc.
> Short Extension Strategy: Net Portfolio beta=Beta
> Long+Beta Short, hence can outperform long only
> strategy as it exploits benefits of short-selling
>
>
> Payer’s Swaption–gives the buyer of the option
> the right to enter into a swap where the option
> buyer pays the fixed rate . Converts a future FRN
> into fixed rate obligation.
> Receiver’s Swaption–gives the buyer of the option
> the right to enter into a swap where the option
> buyer receives the fixed rate. Converts a future
> fixed rate obligation into floating rate
> obligation.