Asset Management

Question 1

5-year interest rates go down by 2% - how much is the drop in %?

Answer 1

Value of position in 5-yr. notes would go down by about 2% * 4 year duration (of 5 year bonds) = 8%

Question 2

Sharpe ratio formula

Answer 2

Question 3

Beta anomaly from data in the real world:

Answer 3

Question 4

cross-sectional vs time series predictability - and what is the Beta anomaly?

Answer 4

• Beta anomaly: Cross-sectional
• Cross-sectional predictability involves analyzing and making predictions across different entities at a single point in time. This method examines differences between units (like stocks, individuals, or companies) at the same moment.
• Time-series predictability involves analyzing and making predictions based on data collected from the same entity over multiple time periods. This method focuses on the temporal sequence of data points.

Question 5

Low beta: Data snooping?

Answer 5

Question 5

What is Berkshire Hathaway’s ratio of leverage to equity and where does the leverage come from?

Answer 5

• equals 1.6
• 40% of debt comes from insurance float whose annual cost is 3% below the T-bill rate

Question 6

factor regression (with b the factor loading)

Answer 6

Question 7

3-factor FF model statistical significance

Answer 7

Question 8

Fund flows chase…

Answer 8

…past performance

Question 8

Mispricing: Can behavioral biases explain momentum?

Answer 8

Question 9

Disposition effect - Mispricing: Price reaction to good news (and other way around for bad news)

Answer 9

Question 10

What happens with momentum strategies during market crashes?

Answer 10

• Perform very poorly
• When markets are down, momentum is likely to be long low-beta stocks and short high-beta stocks
• The long-short portfolio, in turn, has a very low beta and rebounds much less than the marke

Question 11

Manual correction for t-stats

Answer 11

Question 12

P-hacking

Answer 12

Data dredging (also known as data snooping or p-hacking) is the misuse of data analysis to find patterns in data that can be presented as statistically significant, thus dramatically increasing and understating the risk of false positives.

Question 13

The balance of the bank’s account at the Federal Reserve bank is called:

Answer 13

Federal Funds

Question 14

Main monetary policy tools

Answer 14

Question 15

Taylor rule

Answer 15

Question 16

Repurchase agreement:

Answer 16

• Fed Reserve buys a security (e.g. Treasuries) from a primary dealer and agrees to sell it back within 1 to 7 days.
• The amount of money/credit in the economy increases
• Easier to borrow, the interest rate goes down
• Doing repo = “borrowing liquidity from Fed”

Question 17

Reverse repo:

Answer 17

• Federal Reserve lends a security (e.g. Treasuries) to a primary dealer and agrees to buy it back within 1 to 7 days.
• The amount of money/credit in the economy decreases
• It becomes more difficult to borrow, the interest rate goes up.
• Doing reverse repo = “Fed borrows liquidity from the market”

Question 18

turns around FOMC announcements: S&P500 & International evidence

Answer 18

Question 19

Misclassification of credit quality of funds

Answer 19

• On average, 30% of high and medium credit quality funds are misclassified
• Some funds report 100% of assets in AAA and hold essentially 0
• Misclassified funds have higher risk. They misreport specifically to make it appear that they have safer holdings and then are re-classified based on this into “overly safe” peer groups.
• Misclassified funds have significantly higher returns than the correctly reported funds in their official MS categories

Question 20

R-squared: How much does the manager deviate from the benchmark.
The standard deviation of e is often referred to as…

Answer 20

tracking error

Question 21

Information ratio:

Answer 21

Question 22

Answer 22

Question 23

Decomposing returns: Policy vs. Timing vs. Selectivity

Answer 23