Portfolio Management

Question 1

Performance attribution

Answer 1

Key drivers that generated the account performance

Question 2

Performance appraisal

Answer 2

Determines whether the performance was affected primarily by investment decisions, overall market or by luck

Question 3

What is the investment decision making process?

Answer 3

Idea generation
Idea implementation
Portfolio construction
Portfolio monitoring

Question 4

Give 5 points on return based style analysis

Answer 4

• RSBA estimates the portfolios sensitivities to security market indexes for a set of risk factors
• The approach is top down in nature
• Little additional data is needed
• It can determine the key risk factors and return drivers for basic and complex strategies
• uses objective data and allows compatibility

Question 5

Hsba

Answer 5

• Looks at the actual securities included in the portfolio
• is bottom up
• most appropriate for equity based investment
• drawback is increased computational requirement
• complexity increases and transparency decreases

Question 6

Define decision price

Answer 6

The price at the time the investor made the investment decision

Question 7

Arrival price

Answer 7

The price of the security when the order is sent to the market for execution

Question 8

VWAP

Answer 8

The average price of all trades weighted by volume, over the trading horizon
- managers mast use the VWAP benchmark when they want to participate in volume patterns over a day

Question 9

Short term Alpha

Answer 9

Urgency - high
Reference price - liked to estimate of fair value combined with an arrival price benchmark for orders
Execution method - computer algorithm

Question 10

Long term Alpha

Answer 10

Urgency - low
Reference price - difficult to use in practice
Execution method - sell shares gradually in small parts

Question 11

Risk rebalance - to hedge risk exposure

Answer 11

Urgency - low since trader is both buying and selling
Reference price - TWAP
Execution method - algorithmically Target TWAP over the next couple of days

Question 12

Principle trades

Answer 12

The dealers assume the risk relating to executing the order

Question 13

Agency trades

Answer 13

Broker finds the other side of the trade

Question 14

What is execution risk?

Answer 14

The risk of adverse price movements over the time horizon, is caused by trading too slowly

Question 15

Drawbacks of SMAs

Answer 15

• higher costs
• limited liquidity
• complex
• performance variability

Question 16

Problems with unconstrained MVO

Answer 16

Unconstrained mean–variance optimization (MVO) often leads to portfolios dominated by cash and fixed income at the low-risk end of the spectrum and by private equity at the high-risk end of the spectrum.

Some investors impose minimum and maximum constraints on asset classes. Slight changes in the input variables could lead to substantial changes in the asset allocations.

Question 17

Key elements in monitoring alternative investments

Answer 17

key person risk,
alignment of interests, style drift,
risk management,
client/asset turnover,
client profile,
service providers.

Question 18

Budget stabilization fund

Answer 18

Set up to insulate the budget and economy from commodity price volatility and external shocks.

Question 19

Developement funds

Answer 19

Established to allocate resources to priority socio-economic projects, usually infrastructure.

Question 20

Savings fund

Answer 20

Intended to share wealth across generations by transforming non-renewable assets into diversified financial assets.

Question 21

Reserve funds

Answer 21

Intended to reduce the negative carry costs of holding foreign currency reserves or to earn higher return on ample reserves.

Question 22

Pension Reserve funds

Answer 22

Set up to meet identified future outflows with respect to pension-related, contingent-type liabilities on governments’ balance sheets.

Question 23

which sovereign wealth fund has highest and lowest liquidity respectively?

Answer 23

Budget stabilization fund and savings funds

Question 24

Advantages and disadvantages of traditional approaches

Answer 24

• Easy to communicate
• Relevance for liquidity management and operational considerations
• Over-estimation of portfolio diversification
• Obscured primary drivers of risk

Question 25

Advantages and disadvantages of risk based approaches

Answer 25

• Common risk factor identification
• Integrated risk framework
• Sensitivity to the historical look-back period
• Implementation hurdles
• Determining which risk factors should be used and how to measure them
  in different asset classes

Question 26

Wealth life cycle

Answer 26

1. Education Phase
   
   • Occurs before entering the workforce.
   • Individuals are often financially dependent on parents or guardians.
   • Focus is minimal on savings, with little accumulated financial capital.
2. Early Career Phase
   
   • Begins upon workforce entry, typically in late teens to early thirties.
   • Individuals may marry, start a family, incur debt (e.g., purchasing a home), and begin saving for children’s education.
3. Career Development Phase
   
   • Typically spans ages 35–50.
   • Marked by skill development, upward career mobility, and income growth.
   • Significant family and housing expenses may limit savings, with human capital forming a large part of total wealth.
4. Peak Accumulation Phase
   
   • Usually occurs between ages 50–60.
   • Represents a period of maximum earnings and wealth accumulation potential.
   • Focus shifts to retirement income planning and tax minimization, while other goals may still be funded.
5. Pre-Retirement Phase
   
   • Covers the years just before planned retirement, often around age 65.
   • Characterized by maximum career income and peak wealth accumulation.
   • For those forced into early retirement (e.g., due to injury or unemployment), this phase may require adjusting lifestyle expectations.
6. Early Retirement Phase
   
   • The most active retirement period, with fewer cognitive or mobility limitations.
   • Maintaining appropriate investment risk is crucial to ensure continued asset growth.
7. Late Retirement Phase
   
   • Defined by its uncertain duration, introducing longevity risk (the risk of outliving financial resources).
   • May involve cognitive decline, mobility limitations, long-term health care needs, or caring for disabled dependents.