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Quantitative Analysis > General > Flashcards

General Flashcards

1
Q

What is Quantitative Analysis (QA)?

A

Using mathematical and statistical modeling, measurement, and research to understand behaviour

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2
Q

What is the aim of quants and how do they attempt to achieve it

A

Quants aim to forecast where the market is headed by using mathematical and statistical techniques to analyse financial data

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3
Q

What is Regression Analysis

A

A statistical analysis technique which helps in understanding relationships between variables

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4
Q

What is time series analysis

A

A statistical analysis technique which looks at data points collected or recorded at a specific time

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5
Q

What are Monte Carlo simulations

A

A statistical analysis technique that allows you to account for uncertainty in your analyses and forecasts

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6
Q

What is Risk Modeling? List 3 methods

A

Involves creating mathematical models to measure and quantify various risk exposures within a portfolio

  1. Value at Risk (VaR)
  2. Scenario Analysis
  3. Stress Testing
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7
Q

What are derivatives and what is derivatives pricing?

A

Derivatives are financial contracts whose value is derived from other underlying assets such as stocks or bonds.

Derivatives pricing involves creating mathematical models to evaluate these contracts and determine their fair prices and risk profiles

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8
Q

What is Portfolio Optimisation

A

Constructing a portfolio in such a way that yields the highest possible expected return for a given level of risk

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9
Q

What does Qualitative Analysis focus more on compared to QA

A

Qualitative analysis focuses more on the underlying aspects of a company or a financial instrument, which may not be immediately quantifiable

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10
Q

Give examples of qualitative data

A
  • reputation
  • regulatory insights
  • employee morale
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11
Q

Common uses of qualitative analysis

A
  • Management evaluation
  • Industry analysis
  • brand value and company reputation
  • regulatory environment
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12
Q

List some drawbacks and limitations of QA

A
  • Data dependency
  • complexity
  • lack of subjectivity
  • over-reliance on historical data
  • overfitting
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13
Q

What Is Value at Risk (VaR)?

A

A statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame

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14
Q

How does one measure VaR? Give an example

A

One measures VaR by assessing the amount of potential loss, the probability of occurrence for the amount of loss, and the time frame.

For example, an asset that has a 3% one-month VaR of 2% represents a 3% chance of the asset declining in value by 2% during the one-month time frame

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15
Q

What is the Historical VaR Method?

A

Looks at one’s prior returns history and orders them from worst losses to greatest gains - following from the premise that past returns experience will inform future outcomes

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16
Q

What is the Variance-Covariance VaR method?

A
  • Assumes that gains and losses are normally distributed.
  • potential losses can be framed in terms of standard deviation events from the mean
  • works best for risk measurement in which the distributions are known and reliably estimated
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17
Q

What is the Monte Carlo VaR method?

A
  • Use of computational models to simulate projected returns over thousands of possible iterations
  • assesses the impact of loss occurrences across the varying occurrence probabilities
18
Q

Advantages of VaR?

A
  • it is a single number, expressed as a percentage or in price units
  • easily interpretable and widely used by financial industry professionals
  • VaR computations can be compared across different types of assets or portfolios
19
Q

Disadvantages of VaR

A
  • no standard protocol for the statistics used to determine risk
  • the assessment of potential loss represents the lowest amount of risk in a range of outcomes
20
Q

What is a Black Swan

A

An extremely rare event with severe consequences

21
Q

What is an Investment Time Horizon (Time Horizon)

A

the period of time one expects to hold an investment until they need the money back

22
Q

What is marginal VaR?

A
  • a calculation of the additional risk that a new investment position will add to a portfolio or a firm
  • simply, an estimate of the change in the total amount of risk
23
Q

What Is Scenario Analysis?

A

the process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio’s securities or key factors take place, such as a change in the interest rate

24
Q

What does the technique of scenario analysis involve

A

computing different reinvestment rates for expected returns that are reinvested within the investment horizon

25
Q

Advantages of Scenario Analysis

A

Its biggest advantage is that it acts as an in-depth examination of all possible outcomes, which allows managers to test decisions, understand the potential impact of specific variables, and identify potential risks

26
Q

Disadvantages of Scenario Analysis

A
  • incorrect assumptions lead to incorrect models
  • susceptible to biases of the user
  • tends to be heavily dependent on historical data
27
Q

What is Stress Testing

A

A computer-simulated technique to analyse how banks and investment portfolios could fare in drastic economic scenarios

28
Q

What is a Hedge?

A

An investment that is made with the intention of reducing the risk of adverse price movements in an asset

29
Q

How does a hedge works

A

Using a hedge is somewhat analogous to taking out an insurance policy

30
Q

What is the risk-reward tradeoff inherent in trading with Hedges

A

While it reduces potential risk, it minimises potential gains

31
Q

What is a “perfect hedge”

A
  • One that eliminates all risk in a position or portfolio.
  • the hedge is 100% inversely correlated to the vulnerable asset
  • more an ideal than a reality on the ground
32
Q

What is Basis and Basis Risk?

A

Basis Risk refers to the risk that an asset and a hedge will not move in opposite directions as expected.

“Basis” refers to the discrepancy

33
Q

What is delta with regards to hedging with derivatives?

A

The effectiveness of a derivative hedge is expressed in terms of its delta, sometimes called the hedge ratio.

Delta is the amount that the price of a derivative moves per €1 movement in the price of the underlying asset.

34
Q

Total value of AIB’s assets (2023)

A

$142 billion

35
Q

What is Historical Stress Testing

A

The business, asset class, portfolio or individual investment is run through a simulation based on a previous crisis

36
Q

What is Hypothetical Stress testing

A

It is more specific, focusing on how a particular company might weather a particular crisis

37
Q

What is Simulated Stress Testing

A

Used for modeling probabilities of various outcomes given specific variables

38
Q

What is the Modern Portfolio Theory (MPT)?

A

A practical method for selecting investments in order to maximise their overall returns within an acceptable level of risk

39
Q

What is a key idea in understanding MPT?

A

The theory argues that any given instrument’s risk and return characteristics should not be viewed alone but should be evaluated by how it effects the overall portfolio’s risk and return

40
Q

What is the Acceptable Risk assumption in MPT?

A

assumes that investors are risk-averse, meaning they prefer a less risky portfolio to a riskier one for a given level of return

41
Q

Benefits of MPT

A
  • diversified portfolios
  • more efficient portfolios
42
Q

List criticisms of the MPT

A
  • portfolios are evaluated based on variance rather than downside risk

Quantitative Analysis (2 decks)

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