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PM Flashcards

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CFA flashcards
1
Q

Describe the process of ETF share creation

A

The authorized person (market maker) buys all the underlying securities, then gives them to the ETF issuer in exchange for ETF shares. Then these shares get sold on the open market

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2
Q

What is an AP

A

Authorised person

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3
Q

How does an AP make an arb profit (say if the ETF price is above the underlying price of the underlyings)

A

So, the market maker will go out and buy the underlying securities, and then trade them for an ETF worth MORE than what they paid, then sell that on the open market. Boom profit.

Alternativley, the AP could take an ETF ticket they have, and recieve a redemption baset, then sell them instantly for a profit. Boom

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4
Q

What is smart beta

A

Smart beta is like quant. It is a long term risk management strategy that take out, or cater toward certain charecteristics, like quality, or dividend growth or credit duration

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5
Q

How do you calc tracking error

A

Annualised daily standard deviation

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6
Q

What are the tax benefits of ETFs

A

Cheaper capital gains laws that mutual funds, mutual fund redemptions effect other shareholders, Return of capital is not taxed, ETFs distribute less capital gains

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7
Q

What is the difference between rebalancing and completion

A

Rebalancing is ensuring that all target weights are satisfied

Completion is ensuring you have no cash drag. Making sure you’re fully invested.

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8
Q

Why is there a buy/sell spread

A

Reduce liquidity risk, creation and redemption process or ETFs, market maker compensation

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9
Q

Does NAV = Price?

A

No, not on ETFs

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10
Q

What is the Arb Pricing Theory formula

A

it is the same as the multifactor model
Return = a + beta1 + beta2 + error etc.
OR
Expected return = risk free + beta 1 + beta 2 + error

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11
Q

What is a factor risk premium in arb pricing model

A

It is the Lambda, so like in multiple regression, not the beta, but the X variable

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12
Q

Name the 3 types of multifactor models, and what each one does

A

Macroeconomic, Fundamental and Statisitcal

Macro does macro factors, fundamental does fundamental and stat is a regression (which is not easily interperted.

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13
Q

What is the formula for a macroeconomic multifactor model

A

Return = expected return + beta1 variable + beta2 variable + error

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14
Q

What are the x variables in a macro model?

A

The suprises/ differences in the expected results from the actual results. Everything before that is already priced in

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15
Q

How do you determine the beta/sensetivities of a fundamental model

A

It is the value - average / sample SD

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16
Q

If the benchmark has a 1% weight to Scotland, and you have a 0% weight to scotland stocks, are you taking an active position?

A

Yes

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17
Q

Formula for tracking error

A

Sample SD (Portfolio return - BM return)

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18
Q

Formula information ratio, do you want it high or low

A

HIGH

Av Return Portfolio - Av return BM / Tracking error

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19
Q

What does profit do to equity?

A

Increase equity yoy

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20
Q

WHat is VAR

A

The amount one could lose of a portfolio in a certain amount of time

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21
Q

What are the three methods of calculating VAR, give me a quick 411 on how they work

A

Paraemteric Method - USES PARAMETRES, like mean (expected return) and SD. Takes the mean, and subtracts standard deviation times number of standard deviations UNDER the mean to get VAR . e.g. -1.65 to get 95%

Histortic - Get the distribution, what is the 5th percentile? Thats the VAR

Monte carlo - get the computer to do it

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22
Q

How to do VAR calculation, first 2 steps

A

Convert all data to risk data, then get all historic data

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23
Q

Limitation of Parametric VaR

A

Cant calculate options

24
Q

The god and bad of VAR?

A

Good:
Easy, reliable, accepted by regulators, good for asset allocation
Bad:
Subjective, does not take right tail events into consideration, oversimplified

25
Q

What is conditional and incremental VAR

A

Conditional is VAR if normal VAR is breached,

Incremental is VAR is portfolio size increases

26
Q

Parametric Method formula

A

Mean - (omega * z) = VAR

27
Q

What does increased correlation do to standard deviation?

A

Increase

28
Q

If expectations are future times will be good (pay rises etc.) what will this do to current interest rates and why?

A

Current interest rates will INCREASE because current consumption will INCREASE because people arent concerned about the future

29
Q

High volatility does what to interest rates?

A

Raises them

30
Q

Investor breadth pretty much means I correlated returns

A

Not a question

31
Q

Formula for allocation return and then portfolio return

A 
Allocation = (Wportfolio - Wbm) * Return bm
Security = (Rp - Rbm) * Weight portfolio
32
Q

Sharpe ratio formula to make ideal combination of passive and active portfolio

A

Sharpe sqaured * Info ratio squared = New standard deviation squared (improved?)

33
Q

from alts, exaplin spot, roll and collateral yield

A

Total return = Spot return + Roll return + Collateral return + Rebalancing return
The spot return is simply the price appreciation in the spot price, which is based on immediate delivery, of the commodity.
The roll yield is how the VALUE OF THE CONTRACT CONVERGES TO THE FUTURE PRICE AS THE CONtrACT COMES TO EXPORATION. UP IN BACKWARDATION AND NEG in Contango
Collateral return is the return accruing to any margin held against a futures position and which is normally the U.S. T-bill rate.

34
Q

Which type of portfolio has a higher info ratio? Constrained or unconstrained

A

Unconstrained, because the transfer coefficient is always 1, whereas a constrained portfolio has a transfer coefficient of less than 1

35
Q

If i increased the active share of a portfolio , would it effect the info ratio

A

No

36
Q

Does cash effect the sharpe ratio

A

No

37
Q

What are the 3 components to the EX ANTE (predictive) info ratio?

A

Transfer coefficient
Investor Breadth
Info coefficient

38
Q

What is investor breadth

A

How many active investment decisions are made

39
Q

What is the formula for the ex ante information ratio

A

Info coefficient (the regression coefficient) * sqaure root Investor breadth * transfer coefficient

40
Q

What is the formula for the optimal amount of active risk?

A

Active risk = (Info ratio / Sharpe of BM) * omega BM

41
Q

Does rebalancing effect the information ratio

Does adding cash effect the sharpe ratio

A

No No

42
Q

What is the fundamental law of active management, and what is its output

A

Information coefficient * Transfer coefficient * square root of investor breadth = Information ratio

43
Q

What is the fundamental law of active management, and what is its output

A

Information coefficient * Transfer coefficient * square root of investor breadth = Information ratio

44
Q

Name and describe all the implicit costs in electronic trading

A

Buy sell spread (yes it is implicit)
Market Impact (buying liquidity and making the price go up)
Slippage (doing smaller trades instead of big ones, meaning your price may not be constant)
Opportunity Cost

45
Q

What is the effective spread, and what if it is less than the bid ask spread

A

it is a good calcualtion of transaction costs. It is 2*(execution price - midpoint). That is for a buy. If it is less than the actual buy sell spread, there is a liquid market or you are an effective trader

46
Q

Which two IMPLICIT costs are inversly related (as one goes up, the other goes down) and why

A

The market impact and slippage. It is because if you buy in a big quantity and one transaction (market impact), you are not trading over time when the prices could change.

47
Q

Which two IMPLICIT costs are inversly related (as one goes up, the other goes down) and why

A

The market impact and slippage. It is because if you buy in a big quantity and one transaction (market impact), you are not trading over time when the prices could change.

48
Q

What are the 3 ways of measuring transaction costs, explain them

A

Effective spread
Volume Weighted Average Price (average price of the day based on volume, if you bought for lower, you did well)
Shortfall implemendation. Imagines you invested under ideal conditions and compares that investment against what actually happened. The difference in performance reflects ALL explicit and implicit transation costs

49
Q

which is the best measure of transaction costs?

A

Shortfall implementation

50
Q

How can VWAP be manipulated

A

Trading at times during the day that suit you to make you look like you got the best deal

51
Q

What is the Taylor rule? Hard

A

i* = rneutral + inflation expectation + 0.5(GDP expected - GDP trend) + 0.5(Inflation expectation - inflation target)

This is the policy rate the central bank should implement

52
Q

Is a lower or higher shortfall implementation better and why

A

Lower shortfall implementation is better because you operated closer to the paper portfolio (imaginary portfolio) meaning you did well

53
Q

Derivatives - does implementing a delta neutral strategy hedge out large moves in the underlying?

A

No, only small moves, you need a gamma neutral strategy to account for large moves

54
Q

What does market impact mean

A

Change in trade price

55
Q

What is market fragmentation?

A

Having a securiy trade on multiple different exchanges. It increases the arb potential and decreases transaction costs

56
Q

Are low latency or high latency traders better?

A

Low

57
Q

Is VAR the min or max loss>

A

Min

Cfa GM (11 decks)

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