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CFA 2 > Portfolio Management > Flashcards

Portfolio Management Flashcards

1
Q

Who creates an ETF?

Where do they receive shares from?

A

AP’s Authorised Participants create the shares.

They receive shares from the ETF issuer when creation units are delivered to the AP.

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2
Q

Which factors are required for ETF Arbitrage Gap to exist?

ETF Nav is based on what?

A

Trading costs and liquidity factors

ETF Nav is based on the creation basket value.

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3
Q

When would an AP redeem ETF shares early? at a discount or premium?

A

At a discount as the AP can make more money selling the shares individually in the open market for more than the ETF is offering.

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4
Q

Round trip cost for $50,000 shares
commission $39
Bid-ask 0.2%

A

$30/$50k x 2 + 0.5 x 0.2% x 2 = 0.32%

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5
Q

What is an ETN?

What happens if creation of the ETN stops?

A

ETNs do not hold underlying securities. They promise to pay the returns and have higher default risk.

Any stop in creation causes remaining shares to trade at a premium or discount to NAV.

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6
Q

How is counterparty risk mitigated with syhteitc etfs?

A

Regular settlement throughout the term.

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7
Q

Do ETFs keep track of investor accounts?

Can ETF Managers influence tax efficiency of shares?

A

No ETF investor accounts are not tracked.

Yes ETF managers for active ETFs can influence which shares to redeem managing tax efficiency.

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8
Q

ETF tracking error lest likely for what period? What is the period for tracking error?

A

Tracking error least likely over short periods. Tracking error is the standard deviation of ETF and benchmark on an annualised basis.

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9
Q

ETF Cash drag

ETFS used to reduce portfolio cash drag is know as what?

Active ETF

Vs

Passive ETF
Equity or bonds?

A

ETF cash drag is where ETF holds uninvested cash for a period before investing.

Cash equitization reduces portfolio cash drag through use of ETFs.

Active ETFs are usually fixed income

Passive ETFs are usually equity markets.

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10
Q

Factor (smart beta) ETFs are long or short term investments?

A

Factor ETFs are usually long term buy and hold and not tactical. They are usually risk management ideas including volatility ETFs.

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11
Q

Portfolio Completion =

A

Using ETFs to plug gaps in strategic exposures by country, sector, industry, theme or factor.

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12
Q

Multifactor models are for systematic only as unsystematic risk can be diversified away from how?

A

Unsystematic risk can be diversified away from with diversification.

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13
Q

Multifactor model

Given rf, sensitivity factor A, B and C and Factor risk premium A, B and C.

A

Expected return = rf + (sensitivity A x Factor Risk Premium A) + (sensitivity B x FRP B) + (sensitivity c x FRP C)

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14
Q

Arbitrage Theory assets have what relationship with risk factors? What are the three assumptions?

CAPM models which risk?

A

Arbitrage Theory assets have linear relationship with risk factors.

  1. A factor model describes asset returns
  2. There are no arbitrage opportunities within a well diversified portfolio
  3. Well diversified portfolios can eliminate asset specific risk.

CAPM models for systematic risk as unsystematic risk is assumed diversified.

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15
Q

A Pure Factor aka Factor portfolio =

A

Used to estimate factor risk for multifactor equations.

A sensitivity factor of 1 to a single factor and a sensitivity of 0 to all other factors.

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16
Q

Given:
Er 5.7 sensitivity 1.4
Er 6.1 sensitivity 1.9

What is Rf?

A

Er = Rf + (sensitivity factor x Risk premium)

5.7 = rf + (1.4 x Rp)
6.1 = rf + (1.9 x Rp)
Subtract
0.4 = 0.5 x Rp
Rp = 0.8

5.7 = rf + (1.4 x 0.8)

Rf = 4.58%

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17
Q

Carhart Model

A

Er = Rf + RMRF + SMB + HML + WML

RMRF = return to a value weighted index
SMB = Small minus big cap
HML = High minus low book value
WML = Winners Minus Losers
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18
Q

Factors used in:

Macroeconomic Model

Fundamental Model

Statistical Model

Which is best for analysing active managers?

A

Macroeconomic Model - GDP, Interest rates, Inflation

Fundamental Model - P/E, Mkt Cap, Leverage ratio, Standardised beta. Best for analyzing active managers.

Statistical Model - Factors defined by weights of security portfolio.

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19
Q

Two Factor Macroeconomic Model

A

R = Rf + (Actual Interest - Forecast interest) x b + (Actual GDP - Foreast GDP) x b

*Actual Minus Forecast

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20
Q

Information ratio =

A

Information ratio = active return / active risk

Excess returns / Tracking error

IR = Information Coefficient x Sq rt BR

Breadth will say some like “there are 20 actively selected forecasts in the portfolio.”

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21
Q

1% VaR =
5% VaR =
16% VaR =

A

1% VaR = 2.33 standard deviations
5% VaR = 1.65 standard deviations
16% VaR = 1 standard deviaitons

22
Q

Step 1 of estimating VaR

Three methods of estimating VaR

A

Step 1 = Risk decomposition

Three methods:

  1. Parametric method
  2. Historical simulation
  3. Monte Carlo simulation
23
Q

Required parameters to estimate parametric var =

A
  1. Expected value

2. Standard deviation

24
Q

Portfolio SD =

Cov =

Annual portfolio SD =

A

Sq Rt / Wa^2SDa^2+ Wb^2SDb^2+2WaWbCovab

Cov = CC x Wa x Wb x SDa x SDb

Annual portfolio SD = 12.57% / 250 days

Note 250 days*

25
Q

5% VaR =

Daily portfolio return =

Daily portfolio SD =

A

(Daily Portfolio return - 1.65 x Daily portfolio SD) x $value

Daily portfolio return = 15% / 250

Daily portfolio SD = 15% / Sq/rt 250

26
Q

Which type of distribution of around factors:

  1. Parametric method
  2. Historical simulation
  3. Monte Carlo simulation
A
  1. Parametric method - Only normally distributed risk factors
  2. Historical simulation - Many types of distribution whatever occurred in the past.
  3. Monte Carlo simulation - Many types of distribution of factors. Very flexible model.
27
Q

VaR Limitations

VaR Positives

A

VaR Limitations = can accomodate for small cumulative losses
Takes into account only left tail events
Underestimates extreme events.
LIQUIDITY is NOT taken into account.

VaR Positives = Widely accepted by regulators, Easily communicated.

28
Q

Delta =

Gamma =

Delta vega and gamma measure small or large sensitivities?

A

Delta = Change in option price given a change in underlying share = N(d1) - 1

Gamma = Rate of change of delta. Highest when option is exactly at the money.

Delta vega and gamma measure only small sensitivities in price change not extreme events

29
Q

Duration assumes correlation of fixed income exposure and rf =

A

One

30
Q

Scenario risk measure

vs

Sensitivity risk measure

A

Scenario risk measures multiple factor movements of a size larger than a typical sensitivity test.

Sensitivity risk measures include things like ‘duration’

31
Q

Economic capital

A

Actual capital must always be more than economic capital. Economic capital is the capital a firm must hold to survive severe losses. Ie how much equity can be lost by a portfolio in unfavorable circumstances?

32
Q

Risk Budgeting

vs

Scenario limits

A

Risk budgeting uses VaR limits or ex-ante tracking error limits to set a total risk appetite.

Scenario analysis sets estimated loss for a given scenario and takes corrective action if limit is exceeded.

33
Q

Present Value Model =

A

Price = Expected cash flow / (1+YTM of Rf + Expected inflation +risk premium)^n

34
Q

Incremental VaR

vs

Marginal VaR

Vs

Conditional VaR

A

Incremental VaR in $ terms for a specified change in weight ie 2% increase in weight of a security will increase VaR by $216,000.

vs

Marginal VaR is estimation of the slope. IVaR estimates a very small change in price for just a 1% change in weight of a particular position although not fully accurate it can be used to test each factors effect on VaR.

Conditional VaR shows expected loss if VaR is exceeded.

35
Q

Ex Ante tracking error =

A

Relative VaR measure of a manager vs benchmark.

36
Q

Intertemporal rate of return =

Low rate =

High rate =

A

Marginal utility of consuming 1 unit in future / Marginal utility of current consumption

Low rate = Low wealth today, spend today

High rate = High wealth today save and invest for later which pushes up bond prices.

“If marginal utility of spending 1 unit in the future is going to be worth more in the future you will invest and save for the future”

37
Q

Taylor rule =

Interest rates are set below equilibrium level if:

A

Central bank rate = Rf + 0.5 x current inflation + 0.5 x target inflation.

If output gap is negative and inflaiton is below target interest rates will be below equilibrium rate.

38
Q

Bond Risk Premium =

A

= Yield on nominal govt bond - yield on real govt bond.

Bond risk premium strips out expected inflation from Breakeven inflation rates to show additional return required for inflation uncertainty.

39
Q

Liquidity and inflation high or low for a high discount rate?

A

Low liquidity and high inflation will require a higher discount rate to represent increased risk.

40
Q

Value added =

A

Value added = (Asset weight in portfolio - Asset weight in benchmark) x Asset return = (WP - WB) x Return

*A more simple calculation comparing returns from the portfolio.

Value added stock selection = (Asset return - Benchmark return) x Asset weight in portfolio

41
Q

Sharpe ratio is unaffected by what?

A

Cash and leverage does NOT effect the sharpe ratio

42
Q

Information ratio =

Active return =

TC = Transfer coefficient 
IC = Informaiton coefficient aka skill or signal quality
BR = Breadth aka no of forecasts
A = Active risk
A

Information ratio = Active return / Active risk

IR = TC x IC x sq rt BR
Active return = TC x IC x sq rt BR x A

TC = Transfer coefficient
IC = Informaiton coefficient
BR = Breadth
A = Active risk

= Rp - Benchmark / SD portfolio - benchmark

43
Q

Sharpe ratio of portfolio =

SR^2 =

A

SRp^2 = SRb^2 + IR^2

SR^2 = SRb^2 + TC^2 x IR^2

44
Q

Unconstrained transfer coefficient =

A

one

45
Q

Implicit trading cost

vs

Explicit trading cost

A

Implicit trading cost = bid/ask
Market impact = demanding liquidity
Delay cost/slippage = lag in executing trade
Opportunity cost = unfilled order cost

vs

Explicit trading cost = Broker commission and taxes such as stamp duty
Exchange fees.

46
Q

Effective spread =

Opportunity cost =

A

Effective spread = 2 x (trade price - mid point bid/ask)

Opportunity cost = (mkt close - Ask price) x no shares not traded

47
Q

Electronic front runners =

HFT =

Long or short term holders?

A

Low latency trading are long term holders

High frequency trading = short term holders

48
Q

Superbook orders highlight?

Pinging =

Leapfrogging =

A

Superbook orders Highlight market depth

Pinging = Small immediate or cancel limit to detect hidden orders. A type of hidden order.

Leapfrogging = Placing wide bid offer and changing quickly to gain priority inside other deals if the market responds.

49
Q

Latency =

Flickering =

A

Latency = Time between an action and another dependent action taking place.

Flickering = Indicating to the market a price you are willing to trade at.

50
Q

Gunning the market =

Malovent order streams

Runaway algorithms

A

Gunning the market = aims to trigger stop orders with rapid trades

Malovent order streams = intentionally disrupting the marketing to create international manipulation

Runaway algorithms = multiple runaway unintended orders such as 2010 flash crash.

51
Q

Wash trading =

Spoofing/layering =

Trading for market impact =

A

Wash trading = trading between your own accounts to give an impression of fale liquidity.

Spoofing/layering = fake transparent limit orders create fake optimism at prices you want the market to aim at.

Trading for market impact = Trades deliberately aimed at raising or lowering market price sometimes at large cost.

52
Q

Average rerutn given Er = b0 + B1X1 x B2X2

A

Weighted average of B0 is the expected return

Ie weighted average of the intercept.

CFA 2 (10 decks)

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