● Calculating rolling yield.

(Normally less tenure has higher rolling return, keeping coupon

same - All else same except tenure)
● Riding down the yield curve works best when curve is steepest.
● Expected return on Real Estate - Cap Rate + G (NOI) - Change in Cap Rate
● Investment fees should be added to required return but management fees is not. Ie. if
investment fess is 20 bps and mgmnt fees 30bps and required return 5%. Then firm
must earn 5.2% and donate 5.2-0.30= 4.9%
● a high wealth level permits flexibility in deviations from optimal allocations.
● Read the question carefully, it's not confusing, it's only written in that way.
● Real Expected GDP = Growth from Labour Inputs + Growth from labour productivity
● Labor Inputs = Labour force size + Labour Force Participation
● labour productivity = Capital Inputs + Labour Productivity
● I = Real Neutral + Exp Inflation + 0.5 (Ye - Y(Trend)) + 0.5 (Infla (E) - Infla (T))
● The benchmark has specific primary risk exposure characteristics, as captured by
modified adjusted duration, key rate durations(Partial Rate) , sector, and quality
allocations, sector and quality spread durations, sector/coupon/maturity cell weights, and
issuer exposure.
● Completion Overlay is mostly due to cash build up….change in index and overlay due to
this is rebalancing overlay.
● Borrowers typically provide collateral worth more than the value of the securities
borrowed, and the lending agent monitors the value of the collateral daily to ensure that
it is still more valuable than the securities borrowed.
● global macro tends to use a discretionary approach while managed futures tend to use a
systematic/quantitative approach.
● A long calendar spread, using calls, involves going short on a near dated call option and
going long on a longer-dated call option.
Both R-MVO and BL produce E(R) estimates for use in MVO for asset class weight,
Asset class weight is done by MVO only.
● For immunization with a single-liability, we match on MacDur (assuming parallel shifts)
unless we have optionality then in that case, we'd match on EffDur. Recall that
Macaulay duration of a zero-coupon bond is equal to its maturity.
● For Surplus optimization if aggressive then identical to asset only portfolio (Also
Aggressive), IF conservative then asset allocation like return seeking.
● When a bank has short term liabilities, the duration of the these liabilities is small
and also negative. To make a point, if bank increases its deposit rates it can increase
Liability duration by drawing more funds in. (L/E) rises.
● Spread Duration if floating rate note because moddur will be very small (its just for a
period), spread duration is for life.
● To create a riskless position, the delta of the combined positions must = 0.
● There is no indication that Rogic knowingly made a misleading statement, however.
Misrepresentation hinges on the word “knowingly”
● Long call options on bonds (or on bond futures contracts) increase in value as the
underlying increases. Thus they provide increased upside as bond prices increase and
rates decline. More upside means more positive convexity.
● Long put options on bonds (or on bond futures contracts) increase in value as the
underlying decrease. Thus they reduce the downside as bond prices decline and rates
increase. Less downside means more positive convexity.
● Roll Down Return is Different from pull-to-par.
● While equities generally provide a good inflation hedge during periods of average
inflation, some studies have shown that, during periods of severe inflation, equities have
been poor inflation hedges
● Method 3 – writing cash-covered put options – does not run the risk of losing shares; if
the option holder decides to exercise the option, the fund will have to buy shares (or
settle the payoff in cash), not deliver shares
● While it is true that an asset-only approach does not consider the liabilities, it is incorrect
that the asset-only approach just considers traditional financial assets. The PV of
human capital can be modeled as a portfolio
● Deviating from the policy weights within a range over a short-term period is called
tactical asset allocation (TAA). A strategy of deviating from the SAA that is motivated by
longer-term valuation signals or economic views is referred to as dynamic asset
allocation (DAA).
● Gamma, the rate of change of delta with respect to the price of the underlying stock, is
greatest when the option is near expiration and the option is at-the-money. The higher
the gamma, the greater the change in delta for a small change in the price of the
underlying stock, the greater the number of shares that MMM must buy or sell to
maintain the delta hedge, and the greater the cost of maintaining the hedge.
● Hard Catalyst - Post Announcement (Merger Arb.)
● Taylor Rule - Rule - If Expected GDP growth rate or Expected inflation is high, Rates are
going to increase. Normally pleasee. Current nominal target rate = neutral target rate
(real neutral + exp infla) + 0.5 (exp - target) + 0.5 (exp - trend)
● Appraisal ratio - alpha / non-systematic risk (non sys = Whole root((1-R^2) * variance)
● Capital gains are related to gdp growth, not income component (dividend yield)
● (X-M) = (S-I) + (T-G)
● Rolling yield = Rolldown return + income yield
● Variance Swaps - gain/loss on 1% change in volatility is measured by variance notional.
Variance notional = Vega notional / 2*Strike price….Payoff to variance buyer = variance
notional * (Realize variance - variance strike)
● As time passes value of variance swaps depends more on realized vol. Then implied vol.
● Structural risk can be removed for single liab. Via ZCB
● Private and public re debt covered in general provision for gips.
● If outliers - spearman rank correlation
● Broker commission is not a slippage cost
● Whenever asked about goal quantification - write which goals are quatified and which
can get quantified
● Whenever asked about prioritization - write goals signifying high priority or determine
which goals have high priority, are high priority goals competing each other, can be
achieved simultaneously or not, do capital sufficiency analysis for that
● Value of Gift - Beneficiary’s Return, Tax will be counted + Any Tax on Gift
● Value of bequest - Giver’s Return and Tax will be counted. + Any Tax on Bequest
● Cash flow matching generally locks in lowest interest
● Summary of full report to client is okay as long detailed one is maintained, made
available on request
● GIPS requires monthly valuation and on the date of all large external cashflows (Verify
2nd Part)
● Just Remember - In upward sloping yield curve Cash Flow Yield (IRR) will be greater
than the average ytm
● Shorting option = Negative convexity
● Turnover ratio = Lower of Purchase or sale / Average net assets
● Two Countries will share default free yield curve only if - Perfect capital mobility and
Exchange Rates are credibly fixed.
● How much percent of portfolio variance is by X Factor = (Coefficient of X Factor *
Covariance of X with X * Coefficient of X Factor) * (Coeff X * Cov X Y * Coeff Y) * (Coeff
X * Cov X Z * Coeff of Z) / Total Portfolio Variance
● How much percent of portfolio variance is by Asset 2 = Weight of A2* Weigh 1* Cov 1,1
+ W2*W2*Cov2,2 + W2*W3*Cov2,3
● Information edge is to Sector Specialize Long/short strategy vs Generalist Long/Short.
● Interest Rate Immunization = Zero Replication

●
● Structural model and Diffusion Index = Econometric Model
● Output gap = Diff between trend gdp and current, if negative (Initial recovery) - Trend
GDP > Actual/current.
● A variety of government actionscould undermine the pro-growth nature of these
developments; for example,tariffs on solar panels, restrictions on electrical transmission
lines, subsidies to support less efficient energy sources, failure to protect intellectual
property rights, or prohibition on transfer of technology.
●
● Goals based approach - allocation on stated max volatility
● Language Fluency - TEchnical skill
● Changing of accounts - from taxable to tax exempt is tax avoidance.
● vested pension benefits can be considered components of financial capital.
● non-forfeiture clause - whereby there is the option to receive some portion of the benefits
if premium payments are missed (i.e., before the policy lapses).
● A capture ratio equal to 1 would describe a symmetric return profile
● Time Frame and Amount - Specification of goal also quantification
● Risk perception may be changed but risk tolerance is objective and cannot be changes
● Capital sufficiency analysis - The Monte Carlo model assumes a simple average return
and a standard deviation of returns for the portfolio, whereas the deterministic model
assumes linear portfolio growth
● Client’s confidence in achieving lifetime retirement income goal (Without plan just
confidence) should be matched/measured with annuities.
● Illusion of Control - Highly complex forecast model
● MCTR - Beta of Asset * SD of Portfolio
● Written permission for additional compensation - receiving in future.
● net stable funding ratios are a mandated liquidity requirement for banks, not life
insurance companies.
● All shares are executed - Opportunity cost is zero.
● Low Volatility compared to other asset class - Wider Rebalancing Range
● Resampling MVO (Using Monte Carlo) - leads to riskier asset allocations are
over-diversified.
● Goals based is for individual, but when institution use it name changes to asset
segmentation approach. (Insurance companies use asset segmentation)
● asset classes should be diversifying but low pairwise correlations with other asset
classes is not sufficient.
● The disposition effect — the tendency among investors to sell stock market winners too
soon and hold on to losers too long — has also been attributed to loss aversion. But the
disposition effect means wanting to both realize gains and avoid losses, not favoring the
latter over the former.
● risk aversion—how the individual behaves when faced with negative outcomes.
● Risk reduction entails mitigating a risk by lowering its probability of occurrence or
decreasing the magnitude of loss. Life insurance is a form of risk transfer.
● Diversified would have lower tracking risk compared to SMAs
● A leveraged employee stock ownership plan (ESOP, Strategy 3) will not satisfy Omo’s
goal to maintain his ownership and control of the company but may allow him to avoid a
taxable event.
● Failure to explore other portfolio opportunities - status quo bias
● Risk is part of all phases of performance evaluation—that is, performance
measurement, performance attribution, and performance appraisal.
● Performance appraisal does determine the quality of a fund manager’s performance
● Holding Based Analysis - The residual term cannot be explained by a fund manager’s
actions. The residual can be the result of measuring a fund’s holdings less frequently
than the frequency of fund transactions.
● needs analysis method - begging period TVM
● Market Adjusted Cost - Arrival Cost Denominator
● Performance appraisal indicates whether the portfolio’s performance was achieved
through manager skill or through luck.
● cLOSING Price as Benchamrk - Index & MUtual Fund Manager
● Intrest Rate Swaps - If BPV not given, use duration and multiply with MV of Portfolio
(Fixed Income)
● The focus of the initial screening process is on building a universe of managers that
could potentially satisfy the identified portfolio need and should not focus on historical
performance.
● Because incentive fees are fees charged as a percentage of returns its use lowers the
standard deviation of realized returns. Charging a management fee lowers the level of
realized return without affecting the standard deviation of the return series.
● The largest gamma occurs when options are trading at the money or near expiration,
when the deltas of such options move quickly toward 1.0 or 0.0. Under these conditions,
the gammas tend to be largest and delta hedges are hardest to maintain.
● A direct hedge on each currency is the most appropriate strategy for the long positions in
the Australian and New Zealand dollar. The high correlation between the currencies
does not help here because the investor will be using forward contracts to sell both of
these currencies. The high correlation between the currencies could have been exploited
with a cross-hedge or a minimum-variance hedge if one of the foreign assets was held
long and the other short.
● Variance Swaps - use variance
● Typical end-of-month (EOM) activity by large financial and banking institutions often
induces “dips” in the effective federal funds (FFE) rate that create bias issues when
using the rate as the basis for probability calculations of potential Federal Open Market
Committee rate moves.
● Bonds Futures - If the basis is positive, a trader would make a profit by “selling the
basis”—that is, selling the bond and buying the futures. In contrast, when the basis is
negative, the trader would make a profit by “buying the basis,” in which the trader would
purchase the bond and short the futures.
● Some - emerging and frontier market fixed income securities pose economic, political
and legal risk. Economic risks arise from the fact that emerging market countries have
poor fiscal discipline, rely on foreign borrowing, have less diverse tax base and
significant dependence on specific industries. They are susceptible to capital flight. Their
ability to pay is limited. In addition, weak property rights, weak enforcement of contract
laws and political instability pose hazard for emerging markets debt investors - as many
countries classified as “emerging” are considered to be healthy and prosperous
economies.
● Problem with Historical Real Estate Returns - Properties trade infrequently so there is no
data on simultaneous periodic transaction prices for a selection of properties. Analysis
therefore relies on appraisals. Secondly, each property is different, it is said to be
heterogenous. The returns calculated from appraisals represent weighted averages of
unobservable returns. Published return series is too smooth and the sample volatility
understates the true volatility of returns. It also distorts estimates of correlations.

● Currency Trading/Management Costs - Trading requires dealing on the bid/offer

spread offered by dealers. Dealer profit margin is based on these spreads. Maintaining a
100% hedge will require frequent rebalancing of minor changes in currency movements
and could prove to be expensive. “Churning” the hedge portfolio would progressively add
to hedging costs and reduce the hedge’s benefits.

A long position in currency options involves an upfront payment. If the options expire
out-of-the-money, this is an unrecoverable cost.

Hedging requires maintaining the necessary administrative infrastructure for trading

(personnel and technology systems). These overhead costs can become a significant
portion of the overall costs of currency trading.

Forward contracts have a maturity date and need to be “rolled” forward with an FX swap
transaction to maintain the hedge. Rolling hedges typically generate cash inflows and
outflows, based on movements in the spot rate as well as roll yield.
● Hedging costs come mainly in two forms: trading costs and opportunity costs(any
favorable currency movements).
● In singer-trehaar model if risk free rate and illiquidity premium (ex - small caps) add on it.
● the ex post risk (i.e., the volatility of the actual data) tends to have a downward bias
relative to the ex ante risk displayed by the survey data. This tendency is evidence of ex
post risk being a biased measure of ex ante risk.
● Futures have margin requirement but low transection cost.
● emerging market currencies often leads to higher returns through carry trades, but
comes with higher risks and trading costs. - (Results are fatter tails ,negatively skewed)
● Wakuluk’s approach to economic forecasting utilizes both a structural model (e.g., an
econometric model approach) and a diffusion index (e.g., a leading indicator-based
approach).
● High-frequency data are more sensitive to asynchronism across variables.
● a factor-based VCV matrix approach may result in some portfolios that erroneously
appear to be riskless if any asset returns can be completely determined by the common
factors or some of the factors are redundant.
● Declining Per Capita Income is a political stress.
● Investments in private equity represent long-term capital committed to the market and
are most supportive of the currency. Public equity would likely be considered the next
most supportive of the currency. Debt investments are the least supportive of the
currency.
● bond portfolios are typically associated with hedge ratios closer to 100% than equity
portfolios
● A cross hedge exposes the fund to basis risk; that the risk that the hedge fails to protect
against adverse currency movements because the correlations between the value of the
assets being hedged and the hedging instrument change. - Cross-Corelations
● Increasing curvature means the curve is more concave. Decreasing curvature means the
curve is more linear
● Both look-ahead bias and survivorship bias are risks inherent in backtesting quantitative
active strategies.
● The use of the rewarded factor - price momentum is subject to extreme tail risk.
● Growth Trap - considers earning not share price
● The three requirements for an index to become the basis for an equity investment
strategy are that the index be (a) rules based, (b) transparent, and (c) investable.
Buffering makes index benchmarks more investable by making index transitions a more
gradual and orderly process.
● Stratified is simple - But Optimization requires a high level of technical sophistication,
including familiarity with computerized optimization software or algorithms, and a good
understanding of the output.
● For Equity only - Low volatility is generally desired by investors seeking to lower their
downside risk.
● For replication managers - The proper measure of skill is the tracking error
● Relative to broad-market-cap-weighting, passive factor-based strategies tend to
concentrate risk exposures, leaving investors exposed during periods when a chosen
risk factor is out of favor.
● Stratified vs Optimization typically involves maximizing a desirable characteristic or
minimizing an undesirable characteristic, subject to one or more constraints.
Vs blended approach consisting of full replication for more liquid issues and stratified
sampling or optimization for less liquid issues.
● Impact Investing engages but Thematic doesnt engage with mgmt.
● Sector bets are likely to affect active risk - more sec bets more active risk
● The three main building blocks of portfolio construction are alpha skills, position sizing,
and rewarded factor weightings.
● The biggest risk in pairs trading is that the observed price divergence is not temporary
and could be due to structural reasons. Frequent use of stop-loss rules, which are set to
exit trades when a loss limit is reached, addresses this risk.
● Hedging tail risks through portfolio diversification is not difficult to implement and only
has modest incremental cost. Hedging with derivatives, such as credit default swaps, is
effective but costly.
● Positive default correlation meaning - chances of defaulting Inv. Grade or Non Inv grade
is equal - then buy non inv and sell inv grade
● The expected change in yield based on a 99% confidence interval for the bond and a
1.50% yield volatility over 21 trading days equals 16 bps = (1.50% × 2.33 standard
deviations × √21). We can quantify the bond’s market value change by multiplying the
familiar (–ModDur × ∆Yield) expression by bond price to get $1,234,105 = ($75 million ×
1.040175 ⨯ (–9.887 × .0016)).
● Credit Spread Vol. - Spread Duration - more for investment grade bonds.
● Benchmark spread = Yield Spread
● Key rate durations do not form a macro factor used in the top-down approach to select
securities or sectors using relative value. Key rate durations are used by a portfolio
manager to measure a portfolio’s exposures to non-parallel yield curve changes.
● International (Int.) Bond Market - Most Imp - check if spread advantage is negated by the
cost of a currency hedge.
● Int. Bond Investment - credit cycles may vary across regions and this can be used to the
advantage of the portfolio manager to diversify.
● Asset liquidity risk is for active investing (not passive) (Bond)
● Measurement error can happen anywhere, even passive immunization.
● Regional diff in credit cycle means - differences exist in credit cycles, credit quality,
sector composition, and market factors.
● Barbell - Higher CF reinvestment risk then ladder
● Bond ETFs can trade at discounts to their underlying indexes, and those discounts can
persist.
● Banks use ADLs to structure their liabilities in a way that matches the maturities of the
assets. (not other way round - structure assets to manage liabilities)
● With Type II, III, and IV liabilities, a curve duration statistic known as effective duration is
needed to estimate interest rate sensitivity. This statistic is calculated using a model for
the uncertain amount and/or timing of the cash flows and an initial assumption about the
yield curve.
● Stratified sampling is not for bonds.
● Bullet - Lowest convexity.
● A bond’s yield spread includes both credit and liquidity risk. Liquidity risk depends on
both market conditions and the specific supply-and-demand dynamics of each
fixed-income security. (Therefore not easy to separate)
● Structured Credit Models - Market Based variables and Asset-liab.
● Reduced Form Credit Models - Macroeconomic Variables
● To measure tail risk - historical simulation accommodates options but assumes no
probability distribution.
● If CDS at premium - then seller pays upfront payment - Standard Coupon is more than
Spread
● If CDS at Discount - then buyer pays upfront payment - Standard coupon is less than
spread
● CDS price = (Fixed - Spread) * SD (*notional amt if we want this price)
● Fixed exchange rate regimes usually result in greater instability and a higher probability
of financial distress.
● long/short equity strategies tend to be exposed to some natural equity market beta risk
but have less beta exposure than simple long-only beta allocations.
● Global macro strategies come with naturally higher volatility in the return profiles typically
delivered.
● managed futures strategies - positive right-tail skewness
● An absolute return hedge fund has a greater potential to diversify the fund’s dominant
public equity risk than either private equity or private real estate.
● Over long period of time - Bonds are better for diversification to public equities then short
biased strategy.
● Managed futures strategy (one variety)— a cross-sectional momentum approach.
● Multistrategy funds typically use more leverage and have more volatile return profiles
than funds of funds.
● Although multistrategy funds have faster reaction times for tactical allocation changes,
funds of funds potentially offer a more diverse mix of strategies.
● the assumption of normality is assumed for both traditional and alternative asset classes.
● In alternative investments, what other investors affects us,,illiquid strategy and investors
pull out.
● Short-term based compensation - not allowed in ethics (Ex - Quarterly performance vs
Annual performance)
●