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Asset Allocation > overview > Flashcards

overview Flashcards

1
Q

investment governance

A

organization of decision-making responsibilities and oversight activities

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2
Q

governance structure

A

+ governing investment commitee
+ investment staff
+ third-party resources

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2
Q

Effective governance models

A

+ articulate long, short-term objectives of investment program
+ Allocate decision rights & responsibilities among functional units; take account of knowledge, capacity, time, position in the governance hierachy
+ Specify processes for developing & approving IPS
+ Specify processes for developing & approving SAA
+ Establish framework to monitor program towards goals - objectives
+ preodically audit

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3
Q

decision-reversal risk

A

the risk of reversing a chosen course of action at exactly the wrong time, the point of maximum loss

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4
Q

economic balance sheet

A

include:
+ Conventional assets & liabilities (financial asset & liability)
+ Extended portfolio assets & liabilities

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5
Q

extended portfolio assets & liabilities of individual investors

A

Extended portfolio assets:
+ human capital (PV of earnings)
+ PV of pension income
+ PV of expected inheritances
Extended portfolio liabilities:
+ PV of future consumptions

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6
Q

extended portfolios assets & liabilities of institutional investor

A

Extended portfolio assets:
+ underground mineral resources
+ PV of future interllectual property royalties
Extended portfolio liabilities:
+ PV of payouts for foundation

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7
Q

3 broad approaches to AA

A

(1) Goal-base
(2) Asset-only
(3) liability-relative

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8
Q

objective of Asset-only approach

A

maximize Sharpe ratio in
+ acceptable level of risk
+ constraints of IPS

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9
Q

owner of asset-only

A

+ Foundation, endownment
+ sovereign wealth fund
+ Individual investors

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10
Q

objective of liability - relative approach

A

+ fund liailities
+ invest excess for growth

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11
Q

owner of liabilities relative approach

A

+ banks
+ insurers
+ Define benefit pensions

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12
Q

objective of goal-based approach

A

archive goals with specified required probabilities of success

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13
Q

strategic asset allocation

A

an asset allocation in long-term investment planning

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14
Q

decision-reversal risk

A

+ is the risk of reversing investment decisions at the worst possible time
+ Effective investment governance aims to minimize decision-reversal risk

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15
Q

content of IPS

A

(1) • Introduction
(2) investment objectives
(3) • Investment constraints
(4) • Duties and responsibilities\
(5) • Investment guidelines
(6) • Reporting

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16
Q

in decision rights and responsibilities of effective governence, what is the most important

A

• delegation to those (1) who are best qualified (2) to make informed decisions

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17
Q

governance audit, what is the most should conduct

A

conducted by an independent 3rd party

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18
Q

Characteristics of asset-only approach

A

Focus solely on the asset side of the investors’ BS

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19
Q

Characteristics of liability relative approach

A

Choose an asset allocation in relation to the objective of funding liabilities

20
Q

Characteristics of goal base approach

A
  • Used primarily fod individuals and families
  • Specify asset allocation for sub-portfolios, each of which aligned to specific goals
  • Each goal include: cashflow, time horizon and risk tolerance.
21
Q

Example of asset only approach

A

MVO

22
Q

example of liability relative approach

A

Surplus MVO

23
Q

Risk metric of asset only approach

A
  • Volatility of return: standard deviation of portfolio
  • Risk relative to benchmarks: tracking risk
  • Downside risk: semi-variance, VaR
  • Monte Carlo simulation: tail risk
24
Q

Risk metric of liability relative approach

A
  • Risk of having insufficient assets to pay obligations when due (shortfall risk)
  • Volatility of contribution needed to fund current and future liabilities
25
Q

risk metric of goal based approach

A
  • Risk of failing to achieve goals: max accetable prob of not achieveing goal
  • Overall profolio risk = weighted sum of the risks associated with each goal
26
Q

Criteria for specifying asset classes

A

(1) relatively homogenuous
(2) mutually exclusive
(3) bring diversification benefit (low correlation between different asset classes)
(4) make up the majority of world investable wealth
(5) have the capacity to absorb a meaningful proportion of an investor’s portfolio

27
Q

3 super classes of assets

A

(1) Capital assets:
+ Source of value (interest/dividend)
+ Value by NPV
(2) Consumable/transformable assets
+ Can be comsumed/transformed
+ Do not yield ongoing stream of value
(3) Store of value assets
+ Neither income generating nor valuable as a consumable or an economic input
+ Value is realized through sale/exchange
+ Eg: currency, art,…

28
Q

Process of asset allocation

A

(1) quantify:
+ objectives
+ risk tolerance
(2) Determine
+ investment horizon
+ requirements and constraints
+ suitable asset allocation approach
(3) Specify asset classes + CME
(4) combination of asset allocation choices
(5) Test/simulat potential stress cases

29
Q

goal classification system of Brunel 2012

A

• Personal goals
• Dynastic goals
• Philanthropic goals

30
Q

goal classification system of Chhabra 2005

A

• Personal risk bucket
• Market risk bucket
• Aspirational risk bucket

31
Q

Disadvantage of goal based

A

• Sub-portfolios add complexity
• Goals may be ambiguous or may change over time

32
Q

 Higher transaction cost of an asset class will result in……rebalancing ranges

A

wider

33
Q

More risk averse investors will result in …… rebalancing ranges

A

tigher

34
Q

Belief in momentum will result in …… rebalancing ranges

A

wider

35
Q

 Beief Mean reversion will result in …… rebalancing ranges

A

narrow

36
Q

Taxes (is cost) discourage rebalancing will result in …… rebalancing ranges

A

wider

37
Q

 Low correlate will result in …… rebalancing ranges

A

narrow

38
Q

High volatility of the rest of portfolio will result in …… rebalancing ranges

A

narrow coridor

39
Q

nondiversifiable risk

A

+ market risk or
+ priced risk or
+ systematic risk

40
Q

other name of Diversifiable risk

A

+ non-market risk
+ non-priced risk
+ company-specific risk
+ unsystematic risk

41
Q

Type of investors

A

(1) Barnewall Two-Way Model: Passive - Active
(2) Bailard, Biehl, and Kaiser Five-Way Model:
Individualist - Celebrity - Gardian - Adventure - Straight arrow
(3) Behavioral investor type:
PFIA: Passive preserver - Friend follower - Independent individualist - Active accumulator

42
Q

Distinguish SAA - TAA - DAA - GTAA

A

SAA = related to long term
TAA = deviate from SAA
DAA = TAA + motivated by longer-term valuation signals or economic views
GTAA = opportunistic investment strategy that seeks to take advantage of pricing or valuation anomalies across multiple asset classes, typically equities, fixed income, and currencies

43
Q

what side the goal-based focus on ?
(1) Asset side
(2) Liability side

A

(2) liability side

44
Q

Liability-hedging portfolio (definition)

A

focused on funding liabilities and, for any remaining balance of assets, a risky-asset portfolio

45
Q

2 kind of rebalancing approach

A

(1) proportional range
(2) cost-benefit approach

46
Q

what kind of manager get out of constraint to employ complex strategies ?
A. Internal manager
B. External manager

A

A. Internal manager

47
Q

what constraint the internal manager get out of ?

A

(1) employing complex strategies
(2) the oversight committee lack individuals with sufficient investment understanding

48
Q

Tax rate apply for Municipal fixed income

A

tax exempt -> tax rate = 0

Asset Allocation (3 decks)

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