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CFA3 > Concepts > Flashcards

Concepts Flashcards

1
Q

Zero-replication

A

weighted avg macauley duration equals investment horizon for a single liability

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2
Q

Portfolio Structural Risk

A

risks that arise from choice of portfolio allocation, from twists and non-parallel shifts in yield curve
- reduced by minimizing dispersion

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3
Q

Complexity of immunization strategies

A

bond tender offer > cashflow immunization > duration matching

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4
Q

LDI risks

A
  • model risk
  • spread risk
  • counterparty risk
  • collateralization risk
  • asset liquidity risk
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5
Q

Total return swap

A

receive - gets index CF + appreciation

pays - libor + spread, index depreciation + default loss

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6
Q

Bums problem

A

value weighted indexes assign greater share to borrowers with alrge leverage

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7
Q

I-spread

A

uses swap rates denoted in same currency

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8
Q

duration times spread (DTS)

A

attempt to capture both OAS and SD

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9
Q

Emerging market FI

A
  • concentration in commodities and banking
  • government ownership
  • credit quality: sovereign ceiling
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10
Q

Production vs market oriented equity

A
  • production: group by products manufactured or inputs used

- market: based on markets they serve, way revenue is earned, consumers that use product

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11
Q

Management fee, admin fee, performance fee effects on performance

A
  • management fee unknown
  • performance fees pay for research, can benefit fund
  • admin fees lower performance
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12
Q

Primary risk of security lending

A
  • credit quality of borrower and market value risk of collateral
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13
Q

Fundamental vs Quantatitive

  • Style
  • decision making
  • primary resource
  • analysis focus
  • portfolio construction
  • orientation data
A

style: subjective vs objective
decision making: discretionary vs systematic
primary resource: human judgement vs models
informatino used: research vs variables
analysis: small selection vs large
data: forecast IV vs forecast price

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14
Q

Event driven: Merger arb, risk profile and liquidity

A
  • relatively liquid
  • likely to fail in stress markets, left tail risk
  • friendly deals lower spread
  • highest sharpe ratio
  • med to high leverage
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15
Q

Event driven: distressed security, risk profile and liquidity

A
  • long, generally illiquid
  • higher return with higher volatility
  • attractive during early stages of economic recovery
  • results in either liquidation or re-organization
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16
Q

Relative value: fixed income arb, risk profile and liquidity

A
  • high leverage
  • issues in short selling, credit basis risk (bond vs convertible), time decay, extreme conditions (hightened credit risk, less liquidity, redemption risk)
  • credit and interest rate risk can be hedged out
17
Q

Relative value: Convertible arb, risk profile and liquidity

A
  • liquidity issue on thinly traded
  • works best during high convertible issuance, moderate volatility and reasonable market liquidity
  • high leverage used
  • hard to borrow shares, credit issue on convetible, time decay
18
Q

Opportunistic: Global macro, risk profile and liquidity

A
  • discretionary, lower liquidity than managed future
  • benefits from volatility, mean reverting
  • anticipatory and sometimes contrarian
  • usually top down, fundamental
  • high leverage, lumpy returns
19
Q

Opportunistic: Managed futures, risk profile and liquidity

A
  • uncorrelated with stocks and bonds
  • returns positively skewed
  • majority of capital in short-term gov debt
  • systematic, higher liquidity, quant driven
  • crowding aspects cause execution slippage
20
Q

Firm and investment risk in AI

A
  • key person risk
  • alignment of interest
  • style drift
  • risk management
  • client / asset turnover (too many new clients, too many clients leaving)
  • client profile (long term? risk averse?)
  • service providers (admin, custodian, auditors)
21
Q

Econometric model: pro vs cons

A 
pros:
- robust
- new data quickly integrated
- considers change in exogenous variable
- impose discipline / consistency
cons:
- time consuming, complex
- relationship between variables can change
- false sense of precision
- rarely forecasts turning points
22
Q

economic indicator: pro vs con

A 
pros:
- intuitive, simple
- focused on turning points
- easily available, easy to track
cons:
- subject to revision, overfitting
- provide false signals
- only binary directions
23
Q

checklist approach: pro vs con

A

pro:
- limited complexity
- flexible: any method, regime, source, structural changes
- large breadth, cover variety of topic, perspective, theory or assumption
cons:
- subjective, arbitrary, judgemental
- time consuming
- no clear mechanism for combining disparate information
- no consistency

24
Q

initial recovery

A
  • large output gap, inflation decelerating
  • short-term rates and gov bond yields low
  • curve is steep
  • cyclical and riskier assets do well
25
Q

early expansion

A
  • unemployment starts to fall, output gap still negative
  • yield curve flatten, stocks trend up
  • short rates move up
  • inventory rising
  • increase demand for housing and consumer durables
26
Q

late expansion

A
  • output gapclosed
  • wages and inflation rising
  • debt coverage ratio deteriorate as interest rate rises
  • yield curve continue to flatten, bond yields rise but slower than short interest rate (due to credit spreads narrowing)
  • stock market more volatile
  • cyclical assets underperform while inflation hedges outperform
27
Q

slowdown

A
  • gov bond yield top out
  • yield curve may invert
  • inflation still rising
  • inventory falling
  • credit spreads start to widen
  • stock market fall, interest sensitive stocks such as utilities and quality stocks with stable earnings outperform
28
Q

contraction

A
  • eases monetary policy
  • short term interest rate drops
  • yield curve steepen
  • credit spreads widen
29
Q

Inputs for determining captial requirements of goal

A
  • discount rate, time horizon, probability of success
30
Q

synthetic long

A

long call + short put

31
Q

synthetic short

A

long put + short call

32
Q

trading costs with 100% hedged strategy

A 
bid/ask
frequent rebalancing
options upfront cost
forwards roll cost
tech and personnel cost

CFA3 (1 decks)

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