Portfolio management

Question 1

ETF premium

Answer 1

(ETF price-NAV per share)/(NAV per share)

Question 2

Effective transaction price = Effective spread in bid-ask vs actual price

Answer 2

Trade size*(actual trade price-(bid+ask)/2)

Question 3

Effective bid ask spread

Answer 3

2*(actual trade price-(bid+ask)/2)

Question 4

VWAP (volume weighted average price)

Answer 4

Trade size * (trade VWAP- VWAP Benchmark)

Question 5

Break-even inflation rate (BEI)

Answer 5

difference between country’s x year default bond and ZCB default free
yield on non-inflation-indexed bonds − yield on inflation-indexed bonds

=inflation + risk premium

Question 6

Output gaps

Answer 6

Output gaps
>0–> economy is producing beyond sustainable capacity, Associated with high and rising inflation

Actual GDP – Potential GDP

Question 7

Credit spread

Answer 7

yield – BEI - rf

Question 8

Inside bid ask spread

Answer 8

Highest bid – Lowest ask

Question 9

value added = active return

Answer 9

value of portfolio − benchmark return

Composed of asset allocation return and security seleciton return

Question 10

Expected return of asset

Answer 10

∑(wprp-wbrb)

Question 11

Return from asset allocation

Answer 11

∑ (wp-wb)*rb

Question 12

Return from security selection

Answer 12

Portfolio allocation * Value added

Question 13

VAR

Answer 13

o Value of portfolio*(yearly mean / (n. of trading per year) – 1.65 *(yearly st. dev/ √(n. of trading per year))

Se voglio trasformare invece tutto monthly
Monthly return = Daily return * 30
Monthly standard deviation = daily standard deviation * √30

estimate of minimum loss that will occur with a given probability over a specified period
o expressed as a currency amount or as percentage of portfolio value.
o NOT applicable to portfolios with option

Estimated with
o Parametric method. –>normal distribution (I need mean and st. dev)
o Historical simulation–>historical values for risk factors over some prior lookback period to get a distribution of possible values.
o Monte Carlo simulation. –>each risk factor change drawn from assumed distribution and calculates pf values based on a set of changes in risk factors; repeated thousands of times to get a distribution of possible portfolio values.

Advantages:
o Widely accepted by regulators.
o Simple to understand.
o Expresses risk as a single number.
o Useful for comparing the risk of portfolios, portfolio components, and business units

Disadvantages:
o Subjective, in that the time period and the probability are chosen by the user.
o Very sensitive to the estimation method and assumptions employed by the user.
o Focuses only on left-tail outcomes.
o Vulnerable to misspecification by the user.

Question 14

active risk squared = variance of active return

Answer 14

active factor risk + active specific risk
dove active specific risk = security selection= ∑(Wp−Wb)^2*σ^2

Question 15

Weight of portfolio

Answer 15

optimal level of active risk / active risk

Question 16

Optimal portfolio = Unconstrained pf optimal active risk

Answer 16

(IR/SRb) σb

Question 17

Sharpe ratio portfolio

Answer 17

√(SR(benchmark)^2+IR(portfolio)^2)

Question 18

Sharpe ratio

Answer 18

NOT affected by cash and leverage
(Rp-Rf)/σp

Question 19

Info ratio

Answer 19

affected by cash or leverage
Measure consistency of active return

(Rp-Rb)/(Tracking error)=Ra/σa=(active return)/(active risk)

Question 20

Info coefficient (IC) –> Fundamental law

Answer 20

2 × (% correct) − 1

Question 21

Information ratio (fundamental law)

Answer 21

ALWAYS choose investor with higher info ratio (no matter of target active risk, etc.)
(TC)IC√BR
Dove IC = # of stock followed *probability che sia corretto
TC correlate ex ante returns with active weights
IC = manager ability to forecast future–> correlate ex ante forecast with realized returns

Question 22

Expected return

Answer 22

(TC)IC√BR σ

Question 23

o ETF risks:

Answer 23

 counterparty risk (common for ETNs),
 fund closure, and
 expectation related risk

Question 24

o APT assumption

Answer 24

 Unsystematic risk can be diversified (systematic no)
 Returns are generated using a factor model
 No arbitrage opportunities exist

Question 25

o During recessions

Answer 25

 yield curve is upward sloping and steepening
 Bonds with higher ratings outperform bonds with lower ratings
 Marginal utility is high during economic contractions–> inter-temporal substitution high
 Credit spread widens
 Spreads for issuers in consumer cyclical sector widen
 ST rates are low (because CB wants policy rate low because output gap is negative). LT rates impact not so strong, they are a bit rising –> upward slope
 Risk premium of investors may increase on default bond–> price of these bonds will decrease

Question 26

o leapfrogging algorithms

Answer 26

dealers quotes a wide spread, but then offers a better price in response to other traders offering better price

Question 27

o flickering quotes

Answer 27

orders that electronic traders submit and then cancel shortly thereafter

Question 28

o front running

Answer 28

: a trader has info on large buy side order, and trades ahead of that order to profit from market impact

Question 29

o wash trading

Answer 29

on commonly controlled accounts

Question 30

o spoofing

Answer 30

–> with standing limit orders

Question 31

o gunning the market

Answer 31

: strategy used by market manipulators to cause other traders to enter into disadvantageous trades  ti punto la ppistola e entri a disadvantageous trading

Question 32

o squeezing/cornering

Answer 32

manipulator obtains control over resources necessary to settle trading contracts, that unexpectedly withdraws those resources from market