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CFA > Portfolio Management > Flashcards

Portfolio Management Flashcards

1
Q

What is the role of Authorised Partner?

A

Market maker

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2
Q

What role does Authorised Partner play when
a) ETF>NAV
b) ETF<NAV

A

a) Creation of units
b) Redeem units

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3
Q

Who is liable to pay CG tax
a) Authorised Partner
b) Individual

A

Individual

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4
Q

What is creation basket?

A

List of securities that ETF wants to own.

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5
Q

Who guarantees performance of parties in US while trading of ETF?

A

NSCC

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6
Q

Tracking Error

A

It is the annualised SD of daily tracking difference.

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7
Q

Which of the following leads to more error?
a) Full replication vs representative sampling
b) ADR vs Local shares
c) Securities lending

A

a) Representative sampling
b) ADR
c) If no securities lending

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8
Q

Which is the smallest contributor of sources of deviation between ETF and Index return?

A

Index rebalance and reconstitution

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9
Q

True or False
ETF tend to distribute more in CG than Mutual fund do.

A

False, ETF tend to distribute less in CF than MF

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10
Q

ROC is generally
a) taxable
b) not taxable

A

Not taxable

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11
Q

ETF spread are ____ related to cost of creation/redemption, AP NP margin and cost of carrying trade and ____ related with probability of offset in secondary market.
a) Negatively
b) positively

A

ETF spread are positively related to cost of creation/redemption, AP NP margin and cost of carrying trade and negatively related with probability of offset in secondary market.

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12
Q

What risk is common for -
a) Inverse or leveraged ETF
b) Change in regulation, issuer merger or competitive pressure
c) OTC derivative

A

a) Expectation related risk
b) Fund closure risk
c) Settlement risk

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13
Q

True or False
ETF generally underperform the benchmark by their expense ratio.

A

True

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14
Q

True or False
Factor smart beta- Performance of these ETFs depends on whether the ETF was successful in gaining exposure to that factor, and whether the chosen exposure was rewarded by the market.

A

True

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15
Q

True or False
ETFs selected for short term tactical strategies are selected based on lower management fees rather than low trading cost and liquidity.

A

False,

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15
Q

True or False
ETFs selected for short term tactical strategies are selected based on lower management fees rather than low trading cost and liquidity.

A

False,
ETFs selected for short term tactical strategies are selected based on lower trading cost and liquidity rather than low management fees. (Liquidity is evaluated using the ratio of average dollar volume to average assets – higher the better)

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16
Q

True or False
Arbitrage pricing theory is non-linear model with multiple systematic risk factors priced by market.

A

False
Arbitrage pricing theory is linear model with multiple systematic risk factors priced by market.

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17
Q

What is a pure factor portfolio?

A

Factor sensitivity is equal to 1 for one factor and equal to 0 for the remaining factors. Used for speculation and hedging purposes.

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18
Q

What is fundamental factor model?

A

Assume asset return are explained by returns from multiple firm specific factors (fundamental).
Achieved through regression analysis.

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19
Q

What is Macroeconomic factor model?

A

Assume asset return are explained by surprises or shocks in macroeconomic risk factors. Achieved through regression analysis.

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20
Q

What is statistical factor model? What is the disadvantage?

A

Use statistical method to explain-
a) Principal component models
b) Factor analysis
This model do not lend themselves well in economic interpretation, they are mystery factors, but make minimal assumptions.

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21
Q

What are the attribution of
a) Active return
b) Active risk

A

a) Factor return and stock selection
b) Factor risk and risk selection

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22
Q

Active managers go long and short on
a) Tracking portfolio
b) Factor portfolio

A

Factor Portfolio

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23
Q

What are the 3 factors of fama fench model?

A

Three factors-
a) Market cap
b) Size
c) Value

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24
What are the factors in Carhart model?
Four factors a) Market cap b) Size c) Value d) momentum
25
Information ratio of index which meets its investment objective is- a) 0 b) 1
0
26
Factor sensitivities are generally specified first in ____ factor model and last in ____ model. a) fundamental b) Macroeconomic
Factor sensitivities are generally specified first in fundamental factor model and last in macroeconomic model.
27
True or False A tracking portfolio that claims to outperform the benchmark, it is due to low active factor risk and high active specific risk.
True
28
What are the z values for - a) 0.95 b) 0.975 c) 0.995
a) 1.65 b) 1.96 c) 2.58
29
What is monte carlo stimulation VAR?
It calculates the probability of number of risk factors and how two factors are related. makes several combinations by changing factors to get a distribution of possible values. It is complex and involves subjectivity. Not dependent on historical data and helps in what if analysis.
30
On which side tail does VAR focuses and does it account for liquidity?
Left side and does not account for liquidity
31
How does VAR behaves during financial stress?
It is seen thar 'r' increases during financial stress due to which VAR underestimates risk due to increasing correlation.
32
What is conditional VAR and which method of VAR is complex to calculate conditional VAR?
Expected tail loss or expected shotfall VAR is the expected loss given loss exceeds VAR. For parametric VAR it is mathematically complex.
33
What is relative VAR?
Relative VAR or ex-ante tracking error is the difference between return on portfolio and benchmark.
34
What are position limits?
Maximum currency amount or portfolio % allowed for individual securities based on their risk factor exposures.
35
What are stop loss limit?
That an investment to be closed out when losses exceeds given amount over a specified time period.
36
True or False VAR supplements Scenario analysis.
False, Scenario analysis supplements VAR since it accounts for liquidity.
37
What is stress test?
Extreme change to examine the expected effect on portfolio to determine firm equity or solvency.
38
What is reverse stress test?
Designed to identify scenario that would resuly in business failure.
39
What is Active Share?
Difference between the weight of security in asset manager portfolio vs benchmark index
40
What is Maximum drawdown?
The largest decrease in value over prior periods of specific lengths.
41
What is surplus at risk?
It estimates how much the assets might underperform the liability with a given confidence level.
42
What is the measure of interest rate risk?
Duration
43
An index tracking portfolio has delta of - a) 0 b) 1
1
44
Which method to compute VAR is suitable to measure risk for portfolios that include options?
Historical Simulation
45
True or False Marginal VaR is the slope at a point on the curve not the slope for a 1% change in weight.
True
46
There is ____ relation between E(mt) and risk free rate.
Inverse
47
What is diminishing MU of wealth?
Investor MU of consumption declines as wealth increases. This suggests that MU of consumption is higher during period of scarcity.
48
What is the covariance for Risk averse investors?
Negative
49
Interest rate are ____ related to GDP growth?
Positively
50
What is the slope of yield curve- a) when economy is in recession b) when economy predicts future recession
a) Upward Sloping b) Downward sloping
51
What does positive and negative output gaps signifies?
Positive = y-y*>0 = High Inflation since current employment is more than sustainable employment Negative = y-y*<0 = High level of unemployment since current employment is less than sustainable employment
52
Which bond outperforms (high rate or low rated) when- a) credit spread widens b) credit spread narrows
a) High rated bond b) Low rated bond
53
Which bond are good hedge against bad consumption outcome?
Short dates default free government bond
54
True or False Risk premium for commercial real estate is closer to equity than fixed income.
True
55
What is market impact/price impact?
For quickly executing the order, the extra price paid.
56
True or False Large order have price impact as they move down the order book
True
57
Who prefers the VWAP?
VWAP or Internal VWAP are preferred by Investment manager since transaction cost for large orders are 0.
58
Which method of transaction cost measures price impact, delay and opportunity cost?
Implementation shortfall
59
When is effective spread equals to quoted spread?
When dealer buys at ask price and sells at bid price.
60
What helps overcoming market fragmentation?
a) Liquidity aggregation b) Smart order routing
61
Leapfrogging?
Practice of beating best bid or ask price. Makes market effecient.
62
Flickering quotes?
Exposed limit orders that are submitted and cancelled almost immediately.
63
When can we not use machine learning?
WHen volatility in the market is high.
64
Spoofing or layering
Make fake limit order to show/create positive or negative figure of securities.
65
Gunning the market
forcing other traders into bad trades
66
True or false Due to low round-trip transaction costs in electronic markets, news traders can make a profit even if their analysis is right only a fraction of the time.
True
67
True or False While rumormongering is generally legal, biased reporting (highlighting one side of the story) is not.
False While rumormongering is generally illegal, biased reporting (highlighting one side of the story) is not.
68
Who uses backtesting?
a) Technical/Quantitative Analyst b) Fundamental analyst
69
What is rolling window backtesting?
We take historical data let say from Jan-Dec. As we move forward we will skip one month and add one month i.e. Feb-Jan. Now the out sample data for one period becomes in sample data for the other.
70
What is survivorship bias and how is it solved?
Data includes entries that have persisted till today. To solve - Point in time data Represents specific data that was available at particular point in history. Now test this in sample data on out sample data and evaluate return.
71
What is Data Snooping?
Also known as p-hacking, When a model is choosen based on backtesting performance. We should also check whether statistically data correct is logical or not.
72
What is cross validation?
When a model is first tested on training data and then its performance is assessed over other testing data. It can also be done on difference geographic regions data.
73
What is scenario analysis in back testing?
Historical stress testing is done to check how strategy works in extreme events like recession, volatility and evaluate their performance. Asset return distribution often has negative skewness and excess kurtosis.
74
What is historical simulation?
Pick history data and check strategy working or not + Bootstrapping, that is random samples drawn with replacement. Useful when company needs large number of simulations relative to size of historical dataset.
75
What is monte carlo simulation?
Based on multi-factor model. It is complex and less reliable. Compute possible range of all factors and assign statistical distribution to each variable then draw random observations. Used when factors are correlated.
76
Which analysis is best to account for multivariate skewed t distribution?
Sensitivity Analysis
77
Data-mining trap
Which occurs when many different factors are considered, and those that perform well in a backtest are incorporated into the strategy—even if they don’t have any logical or economic reason to be included.
78
At what point of sharpe ratio, re the weights at optimal level?
WHen sharpe ratio is maximum.
79
How to measure consistency of security or portfolio?
Higher Information Ratio
80
True or False Information ratio of actively managed portfolio and blended portfolio with benchmark will be different.
False, will be same.
81
What is closet index fund?
It is purported to be actively managed but in reality closely tracks the underlying benchmark. IR = 0 SR = SRb
82
A fund with 0 systematic risk which uses Rf as benchmark would have- a) IR?
IR = SR
83
Which of the following will change by use of cash or leverage a) IR b) SR
IR
84
Who has higher IC and breadth a) Investor b) Trader
a) Higher IC b) higher Breadth
85
What does Information Coeffecient tells?
Measure of manager skills Correlation of forecasted return and relaised active return adjusted for risk.
86
What does expost Information Coeffecient implies?
It measures the correlation between active return and expected active return.
87
What does Transfer coeffecient implies?
It is the cross sectional correlation between forecasted active return and actual weight adjusted for risk. Correlation between actual weights and optimal active weights.
88
How is active return calculated if the beta of the actively managed portfolio is different than the beta of the benchmark?
Alpha

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