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CFA Level III > BIG REVIEW > Flashcards

BIG REVIEW Flashcards

1
Q

Taylor Rule

A

r = policy neutral rate + 0.5(exp - trend GDP growth) + 0.5(exp - acceptable inflation)

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2
Q

H-Model

A

for emerging economies

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3
Q

Fed Model

A
  • EY > treasury yield, ratio > 1 - undervalued
  • EY < treasury yield, ratio < 1 - overvalued

CONS: ignores ERP, ignores earnings growth, compares real variable (EY) to nominal value (treasury yield)

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4
Q

Yardeni Model

A

compares theoretical EY to acutal EY

  • EY > fair value yield - undervalued
  • EY < fair value yield - overvalued

CONS: assumed r, d varies over time, earnings estimates can be wrong

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5
Q

Q Models

A

MV/ replacement cost

q > 1 - overvalued

q < 1 - undervalued

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6
Q

CAPE

A

cyclically adjusted P/E ratio

CAPE > historical avg - overvalued

CAPE < historical avg - undervalued

10 yr avg earnings captures effects of business cycle and inflation

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7
Q

Credit Risk

A

risk counterparty will default; based on changes in spread

  • %Δ value = - D (Δs)
  • currency swap CR highest closet to maturity
  • int rate or eqty swap CR highest in middle of life
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8
Q

HHI

A

HHI = Σ market share2

effective # stocks = 1/ HHI

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9
Q

Mean Variance Optimization

A

optimizer to set AA, min tracking error, max returns; identify corner portfolios

+: considers correlations

-: doesn’t consider BM variance (need to factor into constraints); based on hist values

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10
Q

M2

A

rf + σmkt * SR

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11
Q

Myopic Loss Aversion

A

overemphasizing ST potential losses, underemphasizing LT potential gains > risk premium too high

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12
Q

Life Insurance

A
  • bond like HK, insure against mortality risk
  • not needed for equity like HK b/c higher risk HK
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13
Q

Corner Portfolios

A
  1. on efficient frontier
  2. move weight from 0% to X% or X% to 0%
  3. GMVP is starting port (doesn’t always follow 2)
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14
Q

Hedging Foreign Markets

A
  • hedge foreign market risk only: earn Rffor + RFX
  • hedge FX risk only: earn Rfdom - Rffor
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15
Q

Effective Beta

A

%Δ value of portfolio / %Δ value of index

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16
Q

FV of Portfolio AT

17
Q

Expected Annual Return

A

D/P - Δs + i + g + ΔP/E

18
Q

Strategic AA

A
  • portfolio’s general AA, under “normal” conditions
  • based on capital market exp and inv obj/ constraints
  • LT time horizon
  • neg: GIGO
19
Q

Tactical AA

A
  • exploit perceived capital market arbitrage opp
  • based on ST cap market exp
  • temporarily deviating from a portfolio’s LT SAA
  • neg = volates linear reg assumptions
20
Q

Return on Leverage

A

Rlev + borrowed/ equity * (Rlev - Rbor)

21
Q

Return

A
  1. coupon yield
  2. %Δ price
  3. manager exp → -DΔy + 1/2C(Δy)2
  4. credit loss
  5. curr g/l
22
Q

Immunization

A
  • PVA = PVL
  • min structural risk
  • single liab = min convexity
  • multiple liab = CA > CL
23
Q

Duration Gap

A
  • gap = BPVA - BPVL
    • BPV = D * V * 0.0001
  • # contracts = gap/ BPV
    • BPVfut = BPV/ CF
    • BPVswap = BPVrec - BPVpaid
24
Q

Active Return

A

IC * √BR * σRa * TC

IC = corr btwn factor and HPR

TC = degree of constraints

25
Q

Duration Matching

A

balance price and reinvestment risk

  • inc yield = ↓ price, ↑ reinv value
  • dec yield = ↑ price, ↓ reinv value
26
Q

Portfolio Construction

A
  1. full replication = dec tracking error (need fewer sec)
  2. optimization = dec tracking error, high turnover
  3. stratified samping = dec turnover, high tracking error
27
Q

Active Share

A

diff btwn portfolio and benchmark; want higher active share b/c paying for active management

0.5 Σ |Wp - Wb|

28
Q

Active Risk

A

tracking error b/c factor exposure and idiosyncratic risk

√ [( Σ RA2 )/ ( T - 1 )]

29
Q

Variance in Portfolio from Asset

A
  • contribution of asset to portfolio var
    • Σ wi wj covij
  • ​contribution of asset to portfolio var (considering index)
    • ( wp - wb ) cov
30
Q

β

A

systematic risk; value equity and FI sec

ρi,m σi / σm

31
Q

Covariance

(Econ)

A

β1 * β2 * σ2

32
Q

ERP

(Econ)

A

σp * SRM * corr + premiums

33
Q

Information Ratio

A

Active Return/ Active Risk

34
Q

Asset Class Characteristics

A
  1. homogeneous
  2. mutually exclusive
  3. diversifying
  4. contain most of the inv universe
  5. liquid
35
Q

Monte Carlo Simulation

A
  • multi-period - incorporate changes (rebalancing, distributions, taxes)
  • include path dependency
  • visualization of potential outcomes
  • doesn’t follow normal distribution
36
Q

Convexity

A
  • stable curve = sell convexity
    • long callable/ putable bonds
    • long MBS
    • short call/ put options
37
Q

Benchmark Characteristics

A
  1. specified in advance
  2. appropriate
  3. measurable
  4. unambiguous
  5. relective of manager’s style
  6. accountable
  7. investable

CFA Level III (12 decks)

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