Portfolio management

Question 1

ETFS creation/redemption process: what happens in the primary OTC market?

Answer 1

Question 2

How can the authorised participant get arbitrage

Answer 2

Question 3

What is the dealer b/a spread determined by, by AP absorbing all the TC’s of the securities in the basket this means that ………, what does this then result in?
What happens in the secondary market with ETFs?

Answer 3

Question 4

The expense ratios for ETFs vs MFs are ……?
What is the expectation of under performance compared to the benchmark, what is tracking error?

Answer 4

Question 5

What are the sources of tracking error?

Answer 5

Question 6

What are the tax issues of ETFs with tax efficiency and fairness?

Answer 6

Question 7

What are the differences in trading costs between ETFs and MFs

Answer 7

Question 8

What are the ETF b/a spread width factors

Answer 8

Question 9

Explain ETF premiums and discounts

Answer 9

Question 10

How can timing differences affect premiums and discounts

Answer 10

Question 11

Summarise the cost of ownership for ETFs and MFs

Answer 11

Question 12

What are the risks associated with ETFs?

Answer 12

Question 13

Explain how ETFs are used in PM in terms of liquidity management, portfolio rebalancing, portfolio completion and manager transition activity

Answer 13

Question 14

Explain how ETFs are used in PM in terms of a core asset class, an equity style or sector, an industry or investment theme

Answer 14

Question 15

Explain how ETFs are used in PM in terms of factor exposure, risk management, leveraged and inverse exposure , alternative weighting, active strategies within asset class, Dynamic asset allocation and multi-asset strategies?

Answer 15

Question 16

Explain a singe and multi-factor model

Answer 16

Question 17

What is arbitrage pricing theory and what are the three underlying assumptions

Answer 17

Question 18

If all Arb theory assumptions hold then what?
Explain the carhart model and what each factor is?

Answer 18

Question 19

What are the three types of multi-factor models

Answer 19

Question 20

Explain the structure of fundamental factor models and how to put one together

Answer 20

Question 21

What are three types of factors used in fundamental factor models and what are the factors used in fixed-income factor model

Answer 21

Question 22

Describe macroeconomic factor models?

Answer 22

Question 23

What are the applications of mult-factor models?
How can mf models attribute active returns?

Answer 23

Question 24

How can mf models be used for risk attribution?

Answer 24

Question 25

How are mf models used in passive, active and rules-based active mangement?

Answer 25

Question 26

How can mf models be used for strategic portfolio decision

Answer 26

Question 27

What is VAR?

Answer 27

Question 28

Before estimating VAR what three things must be done?

Answer 28

Question 29

What is the parametric method of estimating VAR and the formula?

Answer 29

Question 30

What does the parametric method assume and what are the pros and cons, (5% Var 1.65,1% VAR 2.33)

Answer 30

Question 31

What is the historical simulation method?

Answer 31

Question 32

What is the monte-carlo method?

Answer 32

Question 33

What are the advantages of using VAR?

Answer 33

Question 34

What are the limitations of using VAR?

Answer 34

Question 35

What is conditional and incremental VAR

Answer 35

Question 36

What is marginal and relative VAR

Answer 36

Question 37

What are sensitivity risk measures? What are the equity, fixed income and option exposure measures?

Answer 37

Question 38

What are scenario risk measures and how does it differ to sensitivity?

Answer 38

Question 39

Scenario risks: explain historical scenarios?

Answer 39

Question 40

Explain hypothetical scenarios?

Answer 40

Question 41

Compare VAR to sensitivity measures and scenario measures?

Answer 41

Question 42

What are the pros and cons of scenarios

Answer 42

Question 43

Explain the constraints of risk budgeting, position limits and scenario limits?

Answer 43

Question 44

What are stop-loss limits? When is the measurement of economic capital relevant?

Answer 44

Question 45

What three things influence the type of risk measure used?

Answer 45

Question 46

What risk measures do banks focus on?

Answer 46

Question 47

What risks in general to asset mangers focus on? What would traditional asset managers (no leverage) focus on ?

Answer 47

Question 48

What would hedge fund managers focus on?

Answer 48

Question 49

What would pension funds focus on?

Answer 49

Question 50

What would insurers focus on?

Answer 50

Question 51

What is the objective of backtesting and what is the implicit assumption?

Answer 51

Question 52

What is step 1 of back testing?

Answer 52

Specify investment hypothesis and goal(s)

Question 53

Describe step 2: historical investment simulation

Answer 53

Question 54

Describe step 3: analysis of backtesting output

Answer 54

Question 55

BT multifactor models describe step 1 : strategy design

Answer 55

Question 56

BT multifactor models describe step 2: historical investment simulation

Answer 56

Question 57

Describe survivorship and look ahead bias?

Answer 57

Question 58

Describe data snooping

Answer 58

Question 59

Describe backtesting for historical scenario analysis and for historical simulation

Answer 59

Question 60

Describe monte carlo simulation and what are the 8 general steps to simulation?

Answer 60

Question 61

Describe the simulation process and steps when using benchark portfolio and risk parity portfolio

Answer 61

Question 62

How do the steps to simulation differ for monte-carlo and what inputs are critical

Answer 62

Question 63

Explain sensitivity analysis in simulation

Answer 63

Question 64

Explain the relationship between production, consumption, investment and savings

Answer 64

Question 65

Describe how the economy affects the cashflows of securities (bonds, equities) and thus price? What will unexpected information affect?

Answer 65

Question 66

Real risk-free rate: explain inter-temporal rate substitution in terms of utility and expected future conditions? What is formula for real RF rate (I)

Answer 66

Question 67

Explain in words previous slide

Answer 67

Question 68

How do absolute risk aversion, investment in risky assets and premium for given risk change as income changes and therefore what happens to equilibrium return as income rises and thus what happens to real risk free rate

Answer 68

Question 69

What is the price of a one period bond vs two period, what does this imply

Answer 69

Question 70

Summary: expectations about future affect what? Savings affects ...? longer time periods means what ? As income rises what happens?

Answer 70

Question 71

As growth in real GDP increases what happens to (I)? Thus economies with high gdp growth to low gdp growth should have ..... real interest rates? The more volatile GDP growth is then the forecasts are what?

Answer 71

Question 72

Incorporating inflation what is the price of a T-bill? The formula for nominal interest rate? The formula for policy rate?

Answer 72

Question 73

What is the relationship between longer term bonds and business cycles? What is the BE inflation rate and what does it reflect?

Question 74

What happens to the default free yield curve in recession and peak

Answer 74

Question 75

What is the credit spread, what happens to it in recessions, which bonds have more volatile spreads?

Answer 75

Question 76

What is the price equation for equities and what is k?

Answer 76

Question 77

In terms of deferred consumption what does the ERP compensate for? How does earnings change with the business cycle?

Answer 77

Question 78

Why is ERP positive? What do higher P/E and P/B ratios mean in terms of the price equation? When to do growth or value based on business cylce?

Answer 78

Question 79

The nominal rate of interest will equal...?

Answer 79

Nominal rate of interest will equal the real interest rate that is required to balance the requirements of savers and investors plus investors expectations of inflation over the relevant borrowing or lending period. It follows that short-term nominal interest rates will be positivley related short-term real interest rates and to short-term inflation expectations.

Question 80

What is the objective of active management and how is a benchmark chosen (3 aspects)?

Answer 80

Question 81

What is active return and what is alpha?

Answer 81

Question 82

How is positive value added from active managment?

Answer 82

Question 83

Active return calculation example

Answer 83

Question 84

How is valued added decomposed into asset allocation and security selection and the formula for it?

Answer 84

Question 85

Example of asset allocation and security selection value example?

Answer 85

Question 86

What is the is the sharpe ratio and is it affected by cash and leverage

Answer 86

Question 87

What is the information ratio and how is it affected by cash and leverage and the aggressiveness of active weights

Answer 87

Question 88

What is a property of active management theory and what is the optimal amount of active risk?

Answer 88

Question 89

Deriving active return using property of active management theory

Answer 89

Question 90

What is the fundamental law and the relationship between forecasted active return, realised active return and active weights

Answer 90

Correlation between triangle

Question 91

Explain forecasting ability, value added and the ability to put ideas into action?

Answer 91

Question 92

What is the formula for the mean variance optimal portfolio weights and then rearraged

Answer 92

Question 93

Optimal active weight calculation example

Answer 93

Question 94

What is the basic fundamental law and thus how can active return be rearranged to be, and example calc ?

Answer 94

Question 95

Active risk calc using fundamental law

Answer 95

Question 96

What is TC and the full fundamental law

Answer 96

TC is transfer coefficient

Question 97

Active return calc using full fundamental law

Answer 97

Question 98

Ex-post performance breakdown and manager skill

Answer 98

Question 99

Active management strategy,

Answer 99

Question 100

Limitations

Answer 100

Question 101

Trading costs: What are the fixed costs, what are the variable (explicit and implicit), what are delay costs and what are opportunity costs?

Answer 101

Question 102

What is the effective spread, implementation waterfall, and VWAP? Formula and calculation for effective spread?

Answer 102

Question 103

VWAP calculation example

Answer 103

Question 104

What is the implementation waterfall and how to calculate it

Answer 104

Question 105

What are the benefits of electronic trading

Answer 105

Question 106

What is the effect of market fragmentation

Answer 106

Question 107

What are the 5 types of electronic traders

Answer 107

Question 108

What are the 2 characteristics of electronic trading systems and what are their three uses

Answer 108

Question 109

What does speed in systems bring, what are the risks of electric trading systems and what are the solutions

Answer 109

Question 110

Abusive trading practices, what is front running and market manipulation? Examples of market manipulation

Answer 110

Question 111

Real short-term interest rates are positively related to what?

Answer 111

Real GDP growth and volatility of real GDP growth