Cheat Sheet Flashcards
According to modern portfolio theory, only systematic risk is rewarded.
= undiversifiable risks
Systematic Risk (Beta) (Market Risk)
Well diversified portfolio, efficient markets, market index: beta=1
The rate of return for high-quality corporate bonds is the required return when calculating the benefit liabilites of private defined benefit pension plans in the US (Pension Protection Act of 2006)
In a bond tender offer, the company would buy back the debt liabilities on the open market, paying a premium above the market price. A bond tender offer tends to be difficult and costly to implement, particularly when the bonds are widely held.
After conducting a fair value assessment of a fund, it’s concluded that it is trading well below NAV
This is a fundamental information based trade (not a news/event driven trade)
The information was formed as part of a private research, not public, so the information is private.
To keep the information from becoming public through excessively fast trading activity, the trade should be conducted slowly over time
Private information= low alpha decay
Do losses require proportionally greater gains to reverse or offset? Choose the best response.
Yes, because we calculate percentage gains/losses on the basis of the starting amount of portfolio holdings.
If the denominator of the gain calculation is lower, a higher percentage gain is required to offset the loss. For example, if you lose 10% of $100, your new holding is $90. To earn back the $10 loss, you must earn 10/90, or 11%
(formula FC created)
4x leverage= 75% borrowed & 25% cash
3x leverage= 66.7% borrowed & 33.3% cash
Leverage multiplier
- Redemption frequency indicates how often an investor can withdraw capital from the fund,
- and the notification period indicates how far in advance of the redemption investors must tell the fund of their intention to redeem.
- A lockup is the initial period, after making an investment, during which investors cannot redeem their holding. Lockups have two types: a hard lock, which allows for no redemptions, and a soft lock, which charges a fee, paid into the fund, for redemptions. A mutual fund redemption fee is equivalent to a hedge fund soft lock.
- Gates limit the amount of fund assets, or investor assets that can be redeemed at one redemption date.
Hedge fund liquidity has four basic features: redemption frequency, notification period, lockup, and gates
Investors are contractually obligated to contribute specific amounts (capital calls) during the investment phase and then receive distributions and capital as investments are harvested during the remaining term of the fund. A typical investment phase is 5 years. The typical life of a fund is 10 years, with the option to extend the term for two 1-year periods
Private equity and venture capital funds provide the least liquidity.
Because incentive fees are fees charged as a percentage of returns (reducing net gains in positive months and reducing net losses in negative months), its use lowers the standard deviation of realized returns.
Charging a management fee (a fixed percentage based on assets) lowers the level of realized return without affecting the standard deviation of the return series.
Null: Ho=0
t-stat > a = accept
Alternative: Ha>0
t-stat < a= accept
Higher confidence level = lower significance level = higher accuracy & reduces Type 1 errors & increases Type 2 errors
Type 1 & Type 2 erorrs work in opposite directions
Type 1 error: rejecting the null when it is correct
Type 2 error: not rejecting an incorrect null
is a weighted average of the time to receipt of the bond’s promised payments, where the weights are the shares of the full price that correspond to each of the bond’s promised future payments.
Macaulay duration (MacDur)
The Macaulay duration statistic divided by one plus the yield per period, which estimates the percentage price change (including accrued interest) for a bond given a change in its yield to maturity.
Modified duration (ModDur)
The sensitivity of the bond’s price to a change in a benchmark yield curve (i.e., using a parallel shift in the benchmark yield curve (ΔCurve).
Effective duration is essential to the measurement of the interest rate risk of a complex bond where future cash flows are uncertain.
Used for: complex bonds where cash flows are not certain (bonds w/ embedded options)
reflects initial shape of the yield curve plus assumed upward/downward shifts in the yield curve to estimate the potential amount of timing of liability payouts (LDI)
Effective duration (EffDur)
A measure of a bond’s sensitivity to a change in the benchmark yield curve at a specific maturity point or segment. Key rate durations help identify “shaping risk” for a bond or a portfolio—that is, its sensitivity to changes in the shape of the benchmark yield curve (e.g., the yield curve becoming steeper or flatter or showing more or less curvature).
Key rate duration
(KeyRatDur, also called partial duration)
A measure of interest rate sensitivity that is determined from market data—that is, run a regression of bond price returns on changes in a benchmark interest rate (for example, the price returns of a 10-year euro-denominated corporate bond could be regressed on changes in the 10-year German bund or the 10-year Euribor swap rate).
Empirical duration
