Deck 1 - Ethics, Econ, Quant Flashcards
What are the standards of professional conduct
I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Action
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate
What is the mosaic theory
There is no violation when a perceptive analyst reaches an investment conclusion about a corporate action or event through an analysis of public information together with items of nonmaterial nonpublic information.
How do members maintain their membership
- Sign the PCS annually
- Pay CFA Institute Membership dues annually
What are the eight sections of the GIPS standards
- Fundamentals of Compliance
- Input Data and Calculation Methodology
- Compositie and Pooled Fund Maintenance
4./5. Composite Time and Money Weighted Return Report
6./7. Pooled Fund Time and Money Weighted Return Report - GIPS Advertising Guidelines
How can a firm claim compliance with GIPS
- GIPS must be firmwide, where the firm is the distinct business entity that is held out to clients and prospects for discretionary portfolios.
What must a third party verify for GIPS
- the firm has complied with all GIPS requirements for composite construction on a firmwide basis
- The firm’s processes and procedures are established to present performance in accordance with the calculation methodology required by GIPS, the data requirements of GIPS, and in the format required by GIPS
What is the fisher effect
Nominal interest rate = Real risk-free rate + expected inflation rate
What is the required rate of return on a security
Real risk-free rate + expected inflation + default risk premium + liquidity premium + maturity risk premium
What is EAR
Effective annual rate -
(1 + stated annual rate/m)^m - 1
What is a frequency polygon
It plots the midpoint of each interval on the horizontal axis and the absolute frequency for that interval on the vertical axis, and it connects the midpoints with straight lines.
What is harmonic mean
N / ∑1/xi
What is the difference between a trimmed and winsorized mean?
A trimmed mean removes a certain percentage of the smallest and largest values, and a winsorized mean replaces those values with a certain value.
What is sample variance?
(∑(Xi-X)^2)/n-1
What is the Coefficient of Variation
CV = Standard Deviation/Mean
What is target downside deviation
It is when we see the risk of the portfolio falling below a certain level. Starget = sqrt(∑(for all below B)(Xi-B)^2)/n-1
What is the difference between positive kurtosis and negative kurtosis
Positive values indicate leptokurtic - fat tails and more peaked
Negative values indicate platykurtic - thin tails and less peaked
What is the multiplication rule of probability
P(AB) = P(A|B) x P(B)
How to measure variance of probability weighted
It is the probability weighted sum of the squared deviations from the mean or expected value
What is the variance of a two asset portfolio
W1^2σ1^2 + W2^2σ2^2 + 2w1w2σ1σ2σ1,2
What is the covariance of joint probabilieis
∑P(Xi,Yj) [Xi - E(X)] [Yi - E(Y)]
What is Bayes formula
P(A|B) = P(B|A)/P(B) x P(I)
What are the number of ways to choose a subset of size r from a set of size n when order doesn’t matter and when it does matter?
Doesn’t matter - n!/(n-r)!r!
Does matter n!/(n-r)!
What is the binomial distribution formula
p(x) = P (X = x) = P (n!/((n-x)!x!)) p^x (1-p)^(n-x) nCr x p^x(1-p)^n-x
What is the Safety first ratio
Chose a target return Rp SFRatio = (E(Rp)-Rr) / σp
What is the continuously compounded rate
ln(1 + HPR)
When is it appropriate to use the t-distribution
It has n-1 df - It is appropriate when σ is not known and the population is small. When paired, it should come from two independent samples from normally distributed populations.
When is it appropriate to use the chi-squared distribtion and what is the test statistic
It compares the results of an experiment in line with the other expected amount. It has n-1 df. It is used to check if the means are the same. When comparing a normally distributed population, it is sum of (observed - expected)^2/Expected value
The F-distribution and what is the test statistic
It is asymmetric, and it checks to see if the variances are the same standard dev1^2/standard dev2^2
df is n1 + n2 - 2
What is the standard error
σx = σ/sqrt(n)
What are statistical properties of an estimator
- Unbiasedness (sign of estimation error is random), efficiency (lower sampling error than any other unbiased estimator), and consistency (variance of sampling error decreases with larger sampling size)
What is the value value of a test statistic
Sample statistic - Hypothesized value/Standard eror of the sample statistic
What is the difference between a Type I and Type II error
Type I Null hypothesis is actually true, but we are rejecting it. Also known as the significance level
Type II Alternative hypothesis is actually true, but we are rejecting
Power of test = 1 - P(type II error)
How to reject a test with multiple samples
Rank their p-values and if a certain percentage are less than a critical value then reject
What is a t-statistic
tn-1 = (X - mean0)/ (s/sqrt(n))
When do we use a paired comparisons test
It is used with the mean of the differences between the paired observation of two dependent, normally distributed samples. The t-stat is d/sd where sd = sd/sqrt(n) where d is the average difference of the n paired observations.
What is the difference between parametric and nonparametic tests
Parametric tests - make assumptions regarding the distribution of the population from which samples are drawn. Nonparametic test make few assumptions about the sample population.
How to test a population correlation equals to zero
Use the t-statistic with n-2 df calculated (r(sqrt(n-2))/sqrt(1-r^2))
How to test if we are using a contingency table
Use chi squared test with (r-1)(c-1) df. The test is ∑r∑c (Oi,j - Ei,j)^2/Ei,j
What is the MSR for regression and error
MRS = SSR/K = SSR for regression
MSE = SSE/n-2 for error
The standard error is sqrt (sse/n-21
What is R2 for a regression
it is 1 - [SSR (Sum of Squares) / SST (Sum of Square Total)] = SST-SSE/SST
When looking at lin and log models which is the relative change
Logs are always the relative change
What is the t-test for estimated regression parameters?
df n-1 t = bhat1 - b1/Sbj
What is the elasticity of products
% change in quantity demanded/% change in own price can sub denominator % change in price of related goods or % change in income
How to figure out if demand is elastic
if price elasticity is greater than 1 is elastic. Elasticity is % in quantity/% change in price
How to figure out if substitute or complement
If cross-price elasticity is greater than 0 it is a substitute and if it is less then it is a complement
How to figure out if it is an inferior good
If the income elasticity is less than 0 inferior good and greater than 0 then normal good
Difference between income and substitution effect
The income effect is the change in the consumption of goods by consumers based on income and purchasing power.
The substitution effect occurs when consumers replace cheaper goods with more expensive items due to price changes or an improved financial condition, and vice versa.
What is a giffen good
A giffen good is an inferior good where a decrease in the price has a new result of decreasing the quantity consumed
What is a veblen good
A good where an increase in price results in an increase in quantity consumed and not suooirted by the axioms of the theory of demand
What is considered short run and long run marginal costs curves
Only for firms in perfect competition where the short-run marginal cost curve is above the AVC while long-run is above the TC curve. For all other firms they do not have well-defined supply functions.
What do competitive firms use to determine pricing strategy?
competition is where marginal revenue equals marginal cost
What is a concentration and HH Index for firms?
Concentration ration is the percentage of the market held by N firms and HH index measures as the sum of the squared market shares of the largest N firms which better reflects the effect of mergers
What is the formula for GDP?
C+I+G+(X-M) - Consumption, Investment, Government, Exports - Imports)
What is the balance of trade formula?
(G - T) = (S - I) - (X - M)
What is an inflationary gap
An increase in Aggregated demand can result in a short-run equilibrium with a GDP greater than full employment GDP
What is a recessionary gap
A decrease in AD where GDP is less than full employment
What are the components of an economic production function
It relates to the supply of labor, the supply of capital, and a total factor productivity.
What is a credit cycle?
It is cyclical fluctuations in interest rates and credit availability.
What is the relationship between durable goods, spending on services, and nondurable goods to the business cycle?
Durable goods - sensitive
Services - somewhat sensitive
Nondurable goods - insensitive
Neoclassical
Believe that cycles are temporary and driven by changes in technology.
Keynesian and New Keynesian
Optimism or pessimism among managers causes the cycle and persist because of sticky wages while new Keynesian also believes other things such as prices are sticky
Monetarists
Inappropriate changes in the rate of money supply
Austrian School
Caused by government intervention
Real Business cycle theory
Utility-maximizing actors responding to real economic forces and policymakers should not intervene in business cycles
Laspeyres Index
Cost of specific basket of goods and services that represent actual consumption in base periods. It is biased upwad
Paasche price index
Use current consumption weights for the basket of goods and services for both periods reducing substitution bias.
What are the functions of money
- Medium of exchange
- Store of value
- Unit of account
Three qualities of central banks?
Independence, credibility, and transparency
What is the real trend rate
It is the long-term sustainable real growth rate of an economy.
For and against worrying about size of fiscal deficit
For being concerned - disincentive to work, financed by the market, crowding out
To not be concerned - debt financed by domestic citizens, boost the productive capacity, needed tax reform, Richardian equivalence - private savings rise
What happens to interest rates, output, private and public spending when the goals of each monetary and fiscal is different
Monetary Tight Fiscal Easy - Higher Interest rates, Output, and Public Spending, Lower Private Spending
Monetary Easy, Fiscal Tight - Lower Interest rates and Public Spending, higher Private Sector Spending and Output Varies
What are tools of geopolitics?
They are national security tools, economic tools and financial tools.
Difference between Ricardian model and HO model
Ricardian - one factor of production labor
HO - Two factors of production capital and labor
What is the different between customs union and common market
Customs Union - Adopt a common set of trade restrictions with non-members
Common Market - Customs Union + Member countries remove all barriers to the movement of capital and labor
What is in the current account
Imports and exports of merchandise and services, foreign income from dividends on stock holdings and interest on debt securities, and unilateral transfers
Current Account = Capital Account + Financial Accounts
What is in the capital account
This includes debt forgiveness, assets migrants take away from the country, purchases and sales of fixed assets, purchases of non-financial assets,
What is in the Financial account
Govt-owned assets abroad, direct foreign investments and claims, Direct investment in the domestic country
What is the formula for the real exchange rate
Nominal exchange rate x (CPI base currency/CPI Price Currency)
How to calculate appreciation and depreciation
Can only calculate based on base currency and then need to be flipped to calculate the price currency which is the new base
What is the difference between points and exchange given as percentage
Points you will add +1 point add .0001 to the state rate and then when doing percentage then just do the percentage gain
What is formal dollarization
It is when a country uses the currency of another country
What is a currency board arrangement
It is an explicitly commitment to exchange domestic currency for a specific foreign currency at a fixed exchange rate
What is the difference between convention fixed peg and the ones with horizontal bands
Conventional is +/- 1% and are wider +/- 2%.
What is a managed floating exchange rate
It is the monetary authority that attempts to influence the exchange rate in response to specific indicators
What is the marshall-Lerner Condition?
In order for a deprication of the domestic currency to reduce and existing trade deficit is WxEx + Wm(Em-1) > 0
