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CIPM > CIPM Level 1 > Flashcards

CIPM Level 1 Flashcards

1
Q

Members must

A
  • act with integrity, competence, and diligence
  • put profession and clients above self
  • care and independence in analysis
  • encourage others to be ethical
  • promote health of market and society
  • maintain/ improve professional competence
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2
Q

Professionalism

A
  • knowledge of the law
  • independence and objectivity
  • misrepresentation
  • misconduct
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3
Q

Integrity of capital markets

A
  • material nonpublic information

- market manipulation

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4
Q

duties to client

A
  • Fair Dealing
  • Loyalty, prudence, and care
  • suitability
  • ask about experience, risk, goals, constraints, etc
  • check decisions against answers to these questions
  • Evaluate investments based upon this context
  • Performance Presentation
  • Preservation of confidentiality unless:
  • illegal activities
  • client permission
  • Required by law
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5
Q

Duties to Employer

A
  • Loyalty
  • Additional Compensation
  • Responsibilities of Supervisors
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6
Q

Analysis, Recommendations, Actions

A
  • Diligence
  • Be diligent in analysis
  • Have reasonable support for actions
  • Communication with Clients and prospective clients
  • Disclose general investment process
  • Disclose limitations/risks
  • Use reasonable judgment
  • disclose what is fact and opinion
  • Record retention
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7
Q

Conflicts of interest

A
  • Disclose conflicts of interest
  • Priority of transactions\
  • Referral Fees
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8
Q

Responsibility as CIPM Members

A
  • Conduct as members

- reference to CIPM

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9
Q

4 questions of performance measurement

A
  • How did portfolio achieve outcome and what are expected sources of future returns?
  • Was observed performance luck or skill?
  • Which managers should be hired/fired/kept?
  • What info should be reported and how?
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10
Q

Book Value

A

Price at time of trade

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11
Q

Fair Value Price

A

The price it could be sold for

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12
Q

Unrealized gain/loss

A

Change in market value

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13
Q

Realized Gain/Loss

A

That value once it is redeemed(the asset is sold)

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14
Q

Issues with external cash flows

A
  • Cash flows might not be manager decision so input of cash flows might not be fair
  • Returns cannot be calculated based solely on beginning and ending value
  • Exact dates and values of necessary events and flows may be expensive so can be approximated
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15
Q

When is time-weighted appropriate?

A
  • When there is a need to neutralize impact of flows
  • When comparing portfolios
  • When measuring manager not fund
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16
Q

When is money-weighted appropriate?

A
  • When accurate values are not available
  • When manager is responsible for flows
  • When time value of money matters
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17
Q

Ways to calculate composite returns

A
  • Calculate returns using BMV weights
  • Use weights from denominator of modified Dietz
  • Calculate as a single portfolio
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18
Q

Attribution vs Contribution

A

Contribution doesn’t use a Benchmark

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19
Q

Returns based attribution

A

Looks at TF returns over time to look at factors (easiest and least accurate

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20
Q

Holdings based attribution

A

–misses transactions between measurement times so will not reconcile

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21
Q

Transactions based attribution

A

-uses both holdings and transactions and is the most accurate

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22
Q

Multi level attribution

A

Macro-Level: sponsor level

Micro- Level: manager level

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23
Q

Advantages of Factor Model

A
  • Flexible
  • Can use different models to capture different effects
  • Can be made very sophisticated
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24
Q

Disadvantages of Factor Model

A
  • Usually applied to single asset class
  • Limited by factor used
  • Can be significant computational costs
  • Less consistency
  • Can be less intuitive
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25
Q

Fixed Income return attribution

A

Duration: % change in bond price based on unanticipated change in interest rates
Convexity: nonlinearity in relationship between price and yield change
Credit Spread: Premium paid for riskier bond

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26
Q

Problems in return attribution

A

-Data input
- Residuals
* could be missing data
* missing categories
* missing instruments (i.e., currency effects)
* inconsistent return methodologies
*incomplete model
(arithmetic returns will not add up over time)

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27
Q

Off benchmark decisions

A
  • You can handle it normally but give benchmark 0 weight
  • Give allocation effect a zero for the sector
  • Give the sector only an allocation effect
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28
Q

Benchmark Uses

A
  • reference point
  • instruction communication to manager
  • instruction communication to consultant
  • identification of risk
  • interpretation of past performance
  • manager selection/appraisal
  • demonstrating compliance
29
Q

Types of benchmarks

A
  • absolute return
  • manager universe
  • broad market index
  • factor-model based
  • style index
  • returns based
  • custom security based
  • peer group
30
Q

properties of a valid benchmark

A
  • unambiguous
  • investable
  • measurable
  • appropriate
  • reflective of current investment opinions
  • specified in advance
  • accountable
31
Q

Evaluating benchmark quality

A
  • Correlation between active return and style is statistically indistinguishable from zero
  • Correlation between E (difference between portfolio and market) and style is greater than zero
  • Standard deviation of A is less thanks standard deviation of E
  • Betas should be stable over time
  • Fore equities, benchmark should have low turnover (<15-20%)
  • Should be investable without incurring high trading costs
  • Low proportion of zero weight securities
  • Should have high Coverage
32
Q

Examples of inclusion criteria

A
  • minimum trading price
  • minimum available shares
  • minimum liquidity
  • company structure
  • share types
  • country assignment
33
Q

Types of Benchmark weighting

A
  • capitalization weighted
  • value weighted
  • price weighted
  • equal weighted
  • fundamental weighted
  • optimization weighted
34
Q

Free float inclusion criteria excludes:

A
  • Cross ownership
  • Large corporate/private holdings
  • Employee owned shares
  • IPO lockups
  • government holdings

** Free float adjustment is particularly important in less developed countries

35
Q

Index Rules

A
  • reconstruction/rebalancing intervals
  • corporate action handling
  • dividend inclusion
36
Q

Index tradeoffs

A
  • Completeness vs investability
  • Reconstitution and rebalancing frequency vs turnover
  • Objective and transparent rules vs. judgment
37
Q

Pros of weighting schemes

A

Market Cap- unambiguous, macro consistency, reflects CAPM, requires less rebalancing
Price- simple, long track record
Equal- Less influenced by large issuers
Fundamental- less subject to bubbles and market inefficiencies
Optimization based- plots on the efficient frontier of risk and reward

38
Q

Cons of weighting schemes

A

Market cap-influenced by large issuers
Price- influenced by overpriced securities, stock splits reduce influence of successful companies, assumes investors hold one unit of every asset
Equal- small issuer bias, frequent rebalancing, small issuers might be too illiquid to be investable
Fundamental- often less diversified, might not be investable, often not fully known, tilted toward small cap, tend to outperform market cap bm’s although this isn’t really the goal of a benchmark
Optimization- can be over-concentrated in low risk securities, uses historical data that may not be good indicator of future

39
Q

Problems with assigning a manager a style

A
  • Often oversimplified and do not reflect n entire approach
  • process is subjective and difference process gets different results
  • fund may change over time
  • designation often leads to peer group comparison which has its own problems
40
Q

Bond index characteristics

A
  • Issuer: Corporate, government, municipal, asset backed security, mortgage backed security
  • Credit risk: investment grade, high yield
  • Finer
    • Corporate: industrial, utilities, financial
    • Investment grade: AAA,AA,AA,BBB
41
Q

Fixed Income Inclusion Criteria

A

country, credit risk, liquidity, maturity, sector

Typical list:

  • publicly issued
  • Nonconvertible
  • Dollar denominated
  • fixed coupon or one that changes regularly
  • Maturity>1year
  • meet minimum issue size
  • fulfill necessary credit rating
42
Q

Problems with bond indexes

A
  • Bonds don’t trade as easily as socks so prices are often stale
  • bond indexes are often based on appraised prices not traded prices
  • using appraised value can bias standard deviation downward
  • many bond indexes struggle with illiquidity (some will offer a more liquid subset to fix this)
  • because bonds are so heterogeneous, seemingly similar indices can have very different returns
  • Usually a lot of turnover due to updates for maturity, new issues, etc.
  • Bums problem: more weight is given to big borrowers who are more likely to be down-graded
  • Bonds that try to fix bum problem end up being even less liquid
43
Q

Steps to create custom benchmark

A
  • identify features of the manager’s process
  • select securities appropriate for that process
  • develop security weighting scheme and be sure to include cash
  • review and make adjustments
  • rebalance periodically
  • document all changes
44
Q

Hedge Fund Benchmark difficulties

A
  • Hedge funds don’t have specific asset class
  • They reflect manager attempts to exploit inefficiencies
  • so…
    • they can have unlimited universe
    • they can vary a lot from one to another
    • they can change over time
  • they can be highly leveraged
  • they often lack transparency
  • traditional weights don’t apply
45
Q

Hedge fund benchmark solutions

A
  • Absolute returns X: Hedge funds change too much
  • risk free benchmark X: HF’s are not risk free and risk changes when arbitrage comes into the picture
  • broad market index X: Often weakly correlated
  • manager universeX: survivorship bias,selection bias, and prices are reported infrequently and unverified
  • Create custom benchmarks for long and short positions using returns-based or holdings based analysis
46
Q

Components of Liability Portfolio

A
  • Economy
  • Past earnings
  • Future Earnings

Liability relative benchmark is constructed to meet future obligations

47
Q

Types of Risk

A

Financial

 - Credit: Debtor doesn't pay
 - Market: assets are hard t trade or can't be traded
 - Liquidity: Broad category including changes in currency, interest, commodities, etc.

Non-Financial

 - Operational risk- systems fail within company
 - Model risk- model fails or is misspecified
 - Settlement risk- the buyer fulfills his role but the counterparts fails to settle
 - Regulatory Risk
 - Legal/Contract risk
 - Tax Risk
 - Sovereign/Political Risk- government action
 - Accounting risk-uncertainty how to record a transaction
48
Q

Risk measurement and attribution can be helpful for…

A
  • investment policy definition
  • portfolio construction
  • portfolio analysis
  • Enterprise Risk
49
Q

Risk classification

A
  • Ex ante
  • Ex Post
  • Stand alone
    • idiosyncratic
    • systematic
  • Portfolio
  • Absolute
  • Relative
    • Difference between risk of asset and liabilities is relative and is called surplus risk
    • Difference between risk of investor trying to outperform bm and bm is relative and is called active risk
  • Symmetric
  • Asymmetric
50
Q

Risk distribution

A

If mean>median, positive skewness

If mean

51
Q

Total risk

A

Probability of extreme loss

52
Q

Downside risk

A

Potential for loss

53
Q

Problems with measures of downside risk

A
  • symmetric risk values are more familiar and usable
  • use only half available information so lack statistical power
  • If returns are symmetric around mean, the downside risk adds no new info and if they are not, downside risk is less stable over time
  • There are no ways to aggregate downside risk of multiple assets
  • Target semi variance requires specification so adds subjectivity
54
Q

Drawdown pros and cons

A

Pros

  • often used for hedge funds and commodity funds because other metrics are less valid with returns that diverge from a normal distribution
  • and because they often coincide well with the compensation plans of these vehicles

Cons

  • Does not tell us much unless coupled with other information
  • represents time series data into a single number so you get bad comparisons if you use different time-periods because ceteris paribus, longer periods can have larger drawdowns
55
Q

Value at Risk Methods

A
  • Analytical
    • just requires average return and standard deviation
    • assumes normality
  • Historical
    • assumes that past performance predicts future performance so new issunigs complicate calculation
    • simply derives a P value using ranked returns (there is a 10% chance you will get the 10th highest return in a list of 10 returns)
  • Monte Carlo
    • can be very complicated but are great for portfolios like hedge funds where other assumptions are not appropriate
56
Q

Investment Characteristics

A
  • Valuation measures
  • Interest rate sensitivity
  • Sector Industry Classification
  • Geographic Exposure
  • Type of Issuer
  • Investment Structure
  • Credit Quality
  • Liquidity
  • Leverage
57
Q

Types of Risk Appraisal

A
  • Bottom up (security managed contribution to risk)
  • Top Down
  • Factor Exposure
58
Q

Investment Appraisal Questions

A
  • Do returns sufficiently compensate investor for risk
  • How does portfolio compare to peers?
  • Is performance from luck or skill?
59
Q

Qualitative Considerations in Manager Selection

A
  • Suitability
  • Complementarity
  • Firm
  • People
  • Investment Process
  • Operational process
  • Transparency
  • Costs
60
Q

Approaches to benchmarking managers

A
  • Third party categorization
  • Returns based style analysis
  • Holdings based style analysis
  • Manager Experience
61
Q

Type 1 error

A

hire bad manager

62
Q

Type 2 error

A

fire/don’t hire good manager

63
Q

Manager evaluation parameters

A
  • relative performance to peers and benchmark
  • style drift
  • operational issues
64
Q

Manager Evaluation Questions

A
  • Is there a difference between hired and not hired managers
  • Are these differences consistent with investment philosophy?
  • Are there identifiable factors driving the hire/fire decision?
  • Are these factors consistent with investment philosophy?
  • What is the added value of the hire/fire decision?
65
Q

Implications of the hire/fire decisions

A
  • performance implications
  • transaction costs
  • redemption fees
  • hold backs
  • tax liabilities
  • portfolio implications
66
Q

4 Attributions of effective risk reporting

A
  • meaningful
  • accurate
  • consistent
  • Timely
67
Q

Active vsPassive Strategies

A

Passive- seek to capitalize on risk premiums

Active- Behavioral vs Structural inefficiencies

68
Q

Pros and cons of SMAs

A

Pros

  • ownership
  • customization
  • tax-efficiency
  • transparency

Cons

  • cost
  • tracking risk
  • investment behavior
69
Q

Operational Red Flags

A
  • Change in auditor
  • Affiliated broker/dealer
  • Inconsistent transparency
  • Unconfirmed work history
  • Legal issues

CIPM (1 decks)

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