Emerging Topics Flashcards
Provide the benefits and challenges of Third-Party Custody exposure to Bitcoin
LO 1.1.1
The benefits to third-party custody include institutional grade trading,
relatively low costs, and capital efficiency opportunities.
The challenges include gaps in technical knowledge and experience, fragmented liquidity, and integration with traditional assets.
Provide the benefits of private placement in passive bitcoin funds
LO 1.1.2
Responsibilities of selecting trading and custody partners, as well as making decisions on security and risk, are left to the fund managers.
The tax and reporting benefits, as is the ability to classify the investment as equity and record it at fair value on the balance sheet.
Provide the challenges of private placement in passive bitcoin funds
LO 1.1.2
relatively high costs and
varying redemption mechanisms and frequencies.
How do open-ended private trusts provide exposure to bitcoin?
LO 1.1.2
Open-ended private trusts provide investors with exposure to Bitcoin through publicly traded shares which represent ownership in the trust.
List the benefits of open-ended private trusts as a source of exposure to bitcoin
LO 1.1.2
Benefits include access to investments via traditional brokerage firm channels and avoiding the complex logistics of physical Bitcoin ownership.
List the challenges of open-ended private trusts as a source of exposure to bitcoin
LO 1.1.2
Challenges include high management fees and trading premiums/discounts associated with secondary shares.
Describe the 2 types of regulated futures markets for bitcoin
LO 1.1.2
cash-settled and physical-
settled futures.
Describe Physical-settled Bitcoin Futures
Physical-settled Bitcoin futures deliver actual Bitcoin to buyers upon contract expiration.
Beneficial to those who want to hold the physical asset,
eliminates concerns about spot exchange manipulation that can impact cash-settled transactions. These futures have not produced the same open interest and volume as cash-settled futures.
Describe Cash settled Bitcoin futures
LO 1.1.2
Cash-settled Bitcoin futures offer a regulatory environment, trading
advantages, and the elimination of concerns over custody upon physical delivery.
Price manipulation is a concern with cash settlements and long exposure may be expensive, as cash-settled Bitcoin futures often trade at a premium to spot and
longer-dated futures trade at higher premiums than shorter-dated futures.
Trading costs are a concern when rolling the futures contracts is needed prior to expiration to maintain long exposure.
Discuss why the SEC previously did not approve a bitcoin ETF and benefits of the ETF structure
LO 1.1.2
Securities and Exchange Commission (SEC) has not approved any ETF applications due to concerns about custody, market size, surveillance, and market manipulation.
Three potential benefits of the ETF structure for Bitcoin investments are product acceptance, the redemption mechanism, and accessibility.
Why are Investors attracted to Bitcoin?
LO 1.1.3
Investors are attracted to Bitcoin as a liquid, transparent, and volatile asset that trades constantly and provides a global, real-time ledger with more data available to
investors than traditional investment vehicles.
Which investment channels are most economical for bitcoin investments of $5-$50m
LO 1.1.4
Given various assumptions across all three channels, the results showed that the most to least economical for both the $5 million and $50 million positions were CME Bitcoin futures, followed by spot trading and custody, and then private passive Bitcoin funds.
Name the 5 layers of the DeFi infrastructure
LO 1.2.1
- Settlement - includes bothe the blockchain (which is the foundation layer) and the native protocol asset.
- Asset - includes the native protocol asset and any additional assets (tokens) issued on the blockchain.
- Protocol - incorporates the standards typically implemented as a set of smart contracts.
- Application - includes user-oriented applications used to connect to individual protocols
- Aggregation - serves as an extension of the application layer and connects user-centric platforms to several protocols and applications simultaneously.
Describe Tokenization and tokens
LO 1.2.2
Tokenization is the process of adding new assets to the blockchain, with the token defined as the blockchain representation of the asset. Tokens are highly accessible, easily transferred among participants, and can be stored within smart contracts and used in several decentralized applications.
Describe stablecoins
LO 1.2.2
Stablecoins are digital currency linked to an underlying asset like a national currency (fiat-backed) or precious metals (commodity-backed).
list the backing (collateral) models for promise-based tokens
LO 1.2.2
- Off-chain collateral - underlying assets stored outside of the blockchain.
- On-Chain collateral - collateral assets are typically held in smart contracts and locked on the blockchain.
- no-collateral - the promise is based on trust alone
Describe the positive and negatives of on-chain and off-chain collateral
LO 1.2.2
Although off-chain collateralized tokens can help mitigate exchange rate risk, they can also create external dependencies and counterparty risk.
Although on-chain collateral offers claims secured by smart contracts and high levels of transparency, because the collateral is typically held in a native protocol asset, it will be vulnerable to price fluctuations.
Define decentralized exchanges
LO 1.2.3
Decentralized exchanges are exchanges that facilitate transactions without the
involvement of an intermediary. Users maintain full control of their assets until
trades are executed through smart contracts, which reduces counterparty credit risk.
Define Decentralized order book exchanges
LO 1.2.3
Decentralized order book exchanges settle transactions using smart contracts and use order books which may be on-chain or off-chain. On-chain order books are fully decentralized, with smart contracts storing every order.
Describe a Constand function market maker (CFMM)
LO 1.2.3
Constant function market maker (CFMM) is a smart contract-liquidity
pool which holds multiple cryptoassets in reserve and facilitates token deposits in one type along with token withdrawals of a different type. The exchange rate is based on the smart contract’s token reserve ratio.
Describe a peer-to-peer or over-the-counter exchange protocol
L.O 1.2.3
With peer-to-peer (P2P) (a.k.a. over-the-counter, OTC) protocols, participants use an automated process to find counterparties in the network interested in trading a cryptoasset pair and negotiate the exchange rate in a bilateral manner, with the trade executed using a smart contract on-chain.
Describe a Smart Contract-based reserve aggregation exchange
L.O 1.2.3
Smart contract-based reserve aggregation involves the consolidation of liquidity reserves within a smart contract that serves as the hub for users and liquidity providers.
List advantages of a decentralized lending platform
1.2.4
A decentralized lending platform allows for anonymity for both the borrower and the lender. Anyone can access the platform to borrow money or provide liquidity and DeFi loans are not reliant on trusted relationships.
List the two approaches to protect the lender on a decentralized lending platform
LO 1.2.4
- flash loans may be used and if the borrower does not repay with interest, the transaction and its results are nullified,
- loans may be fully secured using collateral which is locked in a smart contract and released only when the debt is repaid.
List the three variations of the of dentralized lending platforms
LO 1.2.4
- Collateralized debt positions
- pooled collateralized debt positions
- P2P collateralized debt markets
Describe how collateralized debt positions work
LO 1.2.4
Collateralized debt positions (CDP) are loans which use newly created tokens. The number of new tokens created is dependent on the target collateralization ratio, the value of the collateral (the cryptoassets), and the target price of the tokens generated. New tokens serve as loans which are fully collateralized, do not involve a counterparty, and allow user access to a liquid asset with the collateral providing
market exposure.
Describe decentralized derivatives
LO 1.2.5
Decentralized derivatives are tokens whose value comes from the performance of an underlying asset, the outcome of an event, or the development of another observable
variable. The price of an asset-based derivative token is a function of the
performance of an underlying asset. Stocks, commodities, and cryptoassets can all be tokenized.
Inverse tokens where price is based on an inverse function of underlying asset performance offer short exposure to cryptoassets.
What is the relative advantage and risk of decentralized derivatives?
LO 1.2.5
Although this platform offers the advantage of redemption independent of the issuer, users bear the risk associated with their debt position being impacted by others’ asset allocations.
Describe on-chain funds?
LO 1.2.6
On-chain funds provide investors with a basket of cryptoassets (along with myriad investment strategies) without requiring an investor to hold individual tokens. Rather than going through a
custodian, cryptoassets are contained within smart contracts where investors can observe their balances, withdraw, or liquidate them at any time. Fund tokens are issued from smart contracts and transferred into investor accounts. The tokens serve as evidence of partial fund ownership and allow for the redemption or liquidation by token holders of their share of fund assets.
What does closing out of an investment in an on-chain fund involve?
Lo 1.2.6
Closing out an investment involves burning fund tokens, selling the underlying assets through a decentralized exchange, and compensating investors with the ETH-equivalent of their ownership portion of the basket of assets.
What are the most significant opportunities of the DeFi infrastructure
LO 1.2.6
- transparency - all transactions are publicly observable and financial data are publicly available
- efficiency - smart contracts allow for the quick settlement of transactions,
- composability - myriad investment possibilities due to the interconnection of protocols and applications
- accessibility - an open and accessible financial system
What are the most significant risks of the DeFi infrastructure?
LO 1.2.6
- operational security - internal and external attacks from malicious parties
- smart contract execution - security and coding errors in smart contracts.
- dependencies - between smart contracts and decentralized blockchains
- scalability - capacity of a blockchain to meet growing demand for its usage
- illicit activity - related to minimal regulations within a decentralized environment
- External Data - Oracles and the risk of highly centralized contract executions
How does Web 3.0 build upon previous generations of the internet
LO 1.3.1
Web 3.0 builds upon previous generations of the internet by allowing for a read-write-execute interface.
Describe Defi in terms of Web 3.0
LO 1.3.1
Decentralized finance (DeFi) is a component of Web 3.0 that democratizes access to financial services through peer-to-peer (P2P) networks.
Blockchain removes the need for financial intermediaries to be involved in financial transactions. DeFi enables algorithms to automate some traditional finance tasks and users to connect directly with others in an anonymous way.
Describe tokenization
LO 1.3.1
Tokenization is the process of associating an asset with a digital identifier and metadata. Through this innovation, an asset can be broken down into smaller parts to facilitate storage and transferability. Fungible tokens are interchangeable, while non-fungible tokens (NFTs) are unique assets.
Describe the difference between the digital economy and traditional economy in terms of resource allocation
LO 1.3.1
In terms of resource allocation, the traditional economy uses technology to assist humans in allocating resources; while in the digital economy, algorithms streamline the resource allocation process.
Describe the difference between the digital economy and traditional economy in terms of location independence
LO 1.3.1
In terms of location independence, the traditional economy is reliant on physical locations, but the digital economy is free from the constraints of a storefront.
Describe the difference between the digital economy and traditional economy in terms of growth
LO 1.3.1
In terms of growth, the traditional economy has some scalability issues that cap growth; while in the digital economy, growth can be accelerated through better management of data and resource allocation.
Describe the difference between the digital economy and traditional economy in terms of balancing supply & demand curves
LO 1.3.1
The digital economy allows for near-real-time adjustments to supply and demand, while the traditional economy has built-in lags.
List the 6 types of blockchain tokens
LO 1.3.1
- Asset tokens
- Payment tokens
- Security token
- Utility tokens
- Governance tokens
- Reward tokens
List the 4 critical innovations of Web 3.0 technology
LO 1.3.1
- Smart contracts - enable a pre-coded algorithm to ensure that a specified condition is met before a tansaction is finalized.
- decentralized identifiers - digital fingerprints to identfy an asset or a person in a digital environment
- Tokenizations - large datasets and assets with a large file broken down into smaller pieces (known as an interplanetary file system)
- Distributed ledgers - a database that is shared and synchronized across multiple locations
List the functional infrastructure and functional building blocks of the DeFi technology stack
LO 1.3.1
Blockchain technology makes the infrastructure.
there are four layers of functional building blocks:
1. Application layer - a P2P application for an individual service.
2. Aggregation layer - connects related services together
3. Protocol layer - introduces the software necessary to conduct the DeFi action
4. Asset layer - unit of value used to enact a given transaction
List some of the challenges of tokenized electronic tading
LO 1.3.1
- lower liquidity
- slower trading speeds
- higher fees
- a need for growth in blockchain interoperability
- potential for fairness concerns
- infrequent smart contract errors
- regulatory ambiguity
- experimentation with user interfaces
- potential for market manipulation
How does tokenization have the potential to enchance the way start-ups are brought to market.
LO 1.3.1
by increasing liquidity and risk management options while decreasing settlement times and transaction costs.
List some ideas for Defi and token regulations
LO 1.3.1
- Creating a regulatory sandbox for new product exploration
- offering regulatory guidance on desired behaviours
- reviewing existing legislations and adjusting where feasible
- enforcing existing laws
- creating new DeFi solution that are specicially designed to be regulatory friendly
- building DeFi RegTech tools that can use technology to search for bad actors
List the core areas were risk may be pooling relative to decentralized finance according to the WEF
LO 1.3.1
- consumers - high asset price volatility and the potential for fraud
- financial markets - market risk, counterparty risk and liquidity risk
- software failures that could introduce transaction risk and smart contract risk
- operational errors including human errors and governance issues
- regulatory issues - DeFi is currently borderless which makes regulation complex
- emerging issues - new concerns that could impact the stability of financial markets that periodically emerge.
Describe how DeFi and tokenization have the potential to improve the way that venture capital operates.
LO 1.3.1
Tokenization has the potential to increase liquidity by making units more
easily tradeable and lock-up periods less important. It has the potential to
reduce settlement times because blockchain can connect deals very quickly.
Using the blockchain can also increase risk management while reducing
transaction costs.
List the five golden rules for developing effective investment management metrics
LO 1.4.1
-
Function/task-relevant: metrics are aligned with goals and objectives of the
organization. - Flexible and adaptive: metrics are revised based on investment experience, market risk, and market uncertainty.
- ** Consistent:** the performance of an organization can be assessed by viewing the metrics of its individual parts.
- Transparent and parsimonious: metrics should be simple to understand and apply.
- Mutually exclusive and collectively exhaustive (MECE): metrics should be available for key resources and activities while reinforcing responsibilities and motivating employees.
List some of the institutions categorized as long-term investors
LO 1.4.1
- Endowments
- Foundations
- Insurance Companies
- Pension Funds
- Sovereign Wealth Funds
- Family Offices
- Superannuation funds
Differentiate between measurements and metrics
LO 1.4.1
Measurements represent observable facts while metrics are measurements put into a broader context to provide information.
Metrics which are actionable across many contexts become knowledge.
List the three main advantages that LTIs have over for-profit asset managers and third-party services providers
LO 1.4.1
- idiosyncratic advantages
- time horizon
- organizational ambidexterity
Describe environmental enablers
LO 1.4.1
Environmental enablers are the intangible or untraded advantages derived from an organization’s given environment.
These enablers include culture, governance, and technology.
List the 4 key production inputs required for investor production functions
LO 1.4.1
- People
- Process
- Capital
- Information
Describe intermediate outputs
LO 1.4.2
Intermediate outputs connect environmental enablers and productions inputs to results.
They include:
- alignment
- commitment
- knowledge management
List environmental enabler metrics and the corresponding measures
LO 1.4.2
- Culture - measures: investment beliefs, success focused, net promoter rankings
- board engagement - measures: delegations utilized, opportunities reviewed
- Technology - measures: percent of budget, technology satisfaction
List Production inputs metrics and corresponding measures
LO 1.4.2
- Peoples - measures: work product, personnel matters
- process - measures: risk governance
- capital leverage - measure: capitalizing on capital
- information - measure: data ready
Intermediate output metrics and corresponding measures
Lo 1.4.2
- Alignment - measures: goal focused, goal consistency
- commitment - measure: time horizons
- knowledge management - measure: knowledge sharing, knowledge quality
Investment result metrics and corresponding measures
LO 1.4.2
Investment performance - measures: portfolio health, cost efficiency
What are the three main advantages that LTIs have over other investors
LO 1.4.1
- Idiosyncratic advantages
- time horizon
- organizational ambidexterity
list the key factor tilts provided in private equity portfolios
LO 1.5.1
- Equity risk
- illiquidity premium
- size (small-cap bias) premium
- value premium
Why is the equity risk of PE higher than implied?
LO 1.5.1
The equity risk of PE is higher than implied by smoothed returns; PE investors may overpay for PE due to a preference for smoothed returns.
Which equity index is a more appropriate benchmark for PE
Lo 1.5.1
A small-cap equity index is likely to be a more appropriate benchmark for PE than a large-cap index because buyout targets typically have smaller capitalizations.
Why should PE investors expect a higher rate of return than for public equity?
LO 1.5.1
Even if the illiquidity premium is offset by overpayment for PE investments (i.e., because investors overpay for smoothed returns), PE investors should still expect a higher rate of return than for public equity due to the small-cap bias (size tilt) and the higher equity beta (equity risk tilt).
Why is a public benchmark compariosn innapropriate for PE?
LO 1.5.2
A public benchmark comparison is inappropriate because PE has more equity risk. Private equity (PE) is more leveraged than the average publicly traded stock (100%–200% debt-to-equity ratios, versus about 50% debt to equity for public companies).
What is a better public benchmark to evaluate PE returns against?
LO 1.5.2
To properly evaluate the illiquidity premium and alpha for PE returns, a leveraged, small-cap index is a better match. The Russell 2000, levered by a multiple of 1.2, is a more appropriate benchmark.
when analysing PE returns against public benchmarks between 1986-2017 what were the results?
LO 1.5.2
PE outperformed large- cap and small-cap stocks by approximately 2.3% based on arithmetic means. That is a 9.9% PE return versus 7.5% S&P 500 return and a 7.6% Russell 2000 return.
P/E outperformed an unlevered Russell 2000 value index by 1.4% and underperformed an unlevered basket of small-cap value stocks by 1.6%.
After adjusting PE returns for leverage and analysing against public benchmarks between 1986-2017 what were the results?
LO 1.5.2
After adjusting for leverage, PE outperformed small-cap equities (i.e., the Russell 2000 return, multiplied by a leverage factor of 1.2) by a mere 0.7%.
How do Public Market Equivalents provide a better relative performance comparison metric vs IRR when comparing PE to public markets?
LO 1.5.2
PE cash flows, in the same amounts and at the same times, are deployed into a public stock market index (PME) to understand how the benchmark would have performed with the same investment amounts and same timing of investment. The amount of capital generated by the PE strategy is compared to that generated by the public market investment.
IRR is not time weighted (the siming and size of cash flows influence the IRR.
What are the two primary problems with IRRs that make gaming possible?
LO 1.5.2
- IRRs are not time weighted. The timing and size of cash flows influence the IRR.
- IRR assumes that all cash flows can be reinvested at the IRR rate, (This is the faulty reinvestment rate assumption problem).
General partners can time both capital calls and deal exits to increase IRRs. The reinvestment rate assumption means that IRRs can be over- or understated, relative to true returns.
List some of the factors that have contributed to a decline in PE performance since 2006.
Lo 1.5.2
- more capital committed to PE as a result of strong pre-2006 PE performance, higher allocations to the asset class, and positive press, such as David Swensen’s promotion of Yale’s endowment model;
- lower levels of leverage following regulatory changes that came out of the 2007–2009 financial crisis;
- a greater competition for deals, as cash-rich companies seek acquisitions that would once have been available for PE investments.
provide the formula used to estimate the expected return of PE using a yield-based approac
LO 1.5.3
Provide the yield equation for public equity expected returns
LO 1.5.4
When netting the PE vs public net-of-fee ER what is noticed?
LO 1.5.4
When netting the two equations (PE vs. public net-of-fee ER) it becomes clear that a richening of PE and declining leverage largely explain the deteriorating edge PE has over public equities.
Describe a Value Creation Plan (VCP) in private equity
LO 1.6.1
A value creation plan (VCP) is a formal plan for a private equity firm to unlock value for investors when they purchase a company.
List the 5 main categories of action items in a VCP
LO 1.6.1
- Operational Improvements
- Top-line growth
- Governance engineering
- Financial engineering
- Cash Management
What factors effect the category of VCP employed
LO 1.6.1
The category of VCP employed varies based on deal type, fund ownership interest (i.e., minority or majority stake), growth strategy (i.e., organic or inorganic growth), and geographic focus. Different combinations of action items are needed depending on the goals of the strategy.
List the five types of private equity deals
LO 1.6.1
- Early-stage firms
- Growth-focused firms
- Buyouts
- Secondaries
- Turnarounds
What action items do early-stage firm deals place more emphasis on
LO 1.6.1
Deals involving early-stage firms also place significant emphasis on top-line growth and modest use of governance engineering.
What action items do growth-focused deals place more emphasis on
LO 1.6.1
Growth-focused deals emphasize top-line growth, but they also focus more on governance engineering than early-stage deals.
What action items do buyout deals place more emphasis on
LO 1.6.1
buyout firms have the highest emphasis on top-line growth, governance engineering, and financial engineering.
What action items do Secondary deals place more emphasis on
LO 1.6.1
top-line growth and governance engineering.
What action items do Turnaround deals place more emphasis on
LO 1.6.1
Financial Engineering
What causes the success rate of the VCP to decrease
Lo 1.6.1
As the number of action items pursued at the same time increases, the success rate of the VCP decreases. Taking on too many action items at the same time will spread PE managers too thin and lower the chances of success when the deal is exited.
Which two VCP categories benefit the most from specialization (a singular focus)
LO 1.6.1
Governance engineering and operational improvements
What other factors impact the deal success
LO 1.6.1
Deal duration (longer is better), deal size (larger is better), and majority ownership all have a positive effect on the chances of success. Focus on inorganic growth often decreases the chances of success.
What factors have an impact on deal implementation
LO 1.6.1
Resource constraints, specialization, and diminishing returns from elevated deal complexity all have an impact on deal implementation.
What are the primary concerns of PE deals at the fund level
LO 1.6.1
Primary concerns are a portfolio of a smaller number of deals that are homogenous in size coupled with a minority stake. Vintage year also has an impact, but it is less able to be controlled due to time-period sensitive macroeconomic factors.
What are the two different ways to consider returns with PE funds
LO 1.6.1
net positive return on investment and benchmark-relative returns. The key to unlocking above average returns is using the right combination of action items.
What are the common themes that earned above and below average returns
LO 1.6.1
The common themes that earned above average returns were
- combining top-line growth
- governance engineering.
Below average returns often resulted from combining:
- cash management or operational improvements with other VCPs
- or by focusing on more than three VCPs at the same time.
There is no single strategy that will consistently produce superior returns.
List the four company-level items that can lead to superior long-run returns for investors
LO 1.6.1
- Increased employment
- Sales
- EBITDA
- Capital intensity
Why is it difficult to manage liquidity and opportunity costs incurred on committed but uncalled capital?
LO 1.7.1
Limited partners (LPs) are typically unable to invest their entire capital at once and must do so in separate installments over several years.
When managing liquidity, LPs must consider how to invest uncalled capital while dealing with the uncertainty surrounding future capital calls.
Define cash drag
LO 1.7.1
When part of a portfolio is invested in cash or cash-equivalent securities, as opposed to securities which are the portfolio’s main focus, the cash component has no market exposure.
In a situation where markets are rising, cash tends to underperform markets and cash drag is negative. Conversely, where markets are falling, cash will tend to outperform the market and cash drag will be positive.
Why could overcommitting capital be necessary?
LO 1.7.1
Given that only a portion of capital is actually drawn and invested at a given time, overcommitting capital may be necessary to reach the desired investment alocation.
In practice why is diversification for call risk complicated?
LO 1.7.1
Diversification is complicated due to minimum investment amounts, the size of illiquid allocations, the number of investment horizons required, and the number of managers required per investment horizon
How could higher returns be sought in an attempt to mimic relatively illiquid exposure?
Lo 1.7.1
Using public market equivalent (PME) assets that possess risks and returns close to those illiquid investments, had the funds been invested immediately upon commitment.
Why does the sequence of asset returns become increasingly important for portfolios that are withdrawn over time?
LO 1.7.1
Significant drawdowns at an early stage may permanently impair a portfolio and increase shortfall risk. Furthermore, this situation is exacerbated if the drawdown occurs simultaneously with cash outflows required for capital calls.
describe a liquidity tiering framework
LO 1.7.1
A liquidity tiering framework involves having the risk and investment horizon associated with each allocation match the commitment rate. Liquidity tiering attempts to benefit from the upside capture of PME assets while
avoiding the downside aspects of fully investing in PME assets.
What is the aim of liquidity tiering?
LO 1.7.1
Returns can be maintained at a similar level to PME assets (i.e., higher returns than cash), but the risk associated with missing capital calls resulting from unexpected market downturns will be reduced (i.e., lower risk than PME assets). Tiering is a systematic way to invest uncalled capital, manage future capital calls, and minimize cash drag. In addition, tiering involves ongoing adjustments to reduce losses, especially during market downturns, by reducing the size of higher-risk tiers.
List the four liquidity management strategies for managing uncalled capital
LO 1.7.1
- Fully invested in cash or cash equivalent (highest cash drag)
- Fully invested in PME assets (lowest cash drag, highest returns with significant volatility and high shortfalls)
- Liquidity tiering based on average call rates (lower returns than PME, reduced shortfalls than PME, more cash drag than PME)
- Liquidity tiering based on the highest 10th perccentile of annual call rates (large reduction in shortfalls vs average tiering, more cash drag than average tiering)
Why is Tiering often successful?
LO 1.7.1
- matches the investment horizon of the assets to the timing of the estimated liabilities.
- It involves ongoing adjustments to reduce losses, especially during market downturns, by reducing the size of higher-risk tiers.
