Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA L3 > Portfolio Management Pathway (11.17.24) > Flashcards

Portfolio Management Pathway (11.17.24) Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Overlay

A

A derivative position(s) used to adjust a pre-existing portfolio closer to its objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Completion overlay

A

A type of overlay that addresses an indexed portfolio that has diverged from its proper exposure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Rebalancing overlay

A

A type of overlay that addresses a portfolio’s need to sell certain constituent securities and buy others

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Currency overlay

A

A type of overlay that helps hedge the returns of securities held in foreign currency back to the home country’s currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Program trading

A

A strategy of buying or selling many stocks simultaneously

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Tracking error

A

Indicates how closely the portfolio behaves like its benchmark and measures a manager’s ability to replicate the benchmark return

square root of variance of excess return

excess return = (return on portfolio - return on benchmark)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Excess return

A

Tell the investor ho the manager performed relative to the benchmark

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Sources of tracking error in an indexed equity fund

A

1) Fees
2) Number of securities held vs. the benchmark
3) Cash drag

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Cash drag

A

Tracking error caused by temporarily uninvested cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What could make net expenses negative in low cost index portfolio

A

Securities lending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Risks of securities lending

A

1) Credit quality of the borrower (credit risk)
2) Value of the posted collateral (market risk)
3) Liquidity risk
4) Operational risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Special situations investment style

A

Focuses on the identification and exploitation of mispricings that may arise as a result of corporate events such as divestitures or spinoffs of assets or divisions or mergers with other entities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Portfolio overlay

A

An array of derivative positions managed separately from the securities portfolio to achieve overall intended portfolio characteristics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Factor-mimicking portfolio (FMP)

A

Theoretical long/short portfolio that is dollar neutral with a unit exposure to a chosen factor and no exposure to other factors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Fundamental investment process

A

1) Define the investment universe and the market opportunity (investment thesis)

2) Prescreen the universe to obtain a manageable set of securities for further analysis

3) Study screened set by performing industry, competitive, and financial report analysis

4) Forecast company performance, in terms of cash flows or earnings

5) Covert forecasts to valuations and identify ex ante profitable investments

6) Construct a portfolio of these investments with the desired risk profile

7) Rebalance the portfolio with buy and sell disciplines

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Value trap

A

Stock that appears to be attractively valued (low P/E, etc.) because of a significant price fall but that may still be overpriced given its worsening future prospects

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Growth trap

A

Stock that is overpriced and so above average or in-line earnings/cash flow growth does not cause the price to move higher

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Categories of data used in quantitative investing

A

1) Company mapping
2) Company fundamentals
3) Survey data
4) Unconventional data

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Company mapping

A

Used to track many companies over time and across data vendors (names, tickers, and other identifiers that change across different data vendors)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Survey data

A

Details of corporate earnings, forecasts and estimates by various market participants, macroeconomic variables, sentiment indicators, and information on funds flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Unconventional data

A

Also known as unstructured data

Include satellite images, measures of news sentiment, customer-supplier chain metrics, and corporate events

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Pearson IC

A

Simple correlation coefficient between the factor scores (essentially standardized exposures) for the current period’s and the next period’s stock returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Spearman rank IC

A

Pearson correlation coefficient between the ranked factor scores and the ranked forward returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Implicit vs Explicit trading costs

A

Explicit is commissions, fees, and taxes

Implicit is bid-ask spread and market impact

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Two types of active equity management approaches

A

1) Fundamental
2) Quantitative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Two approaches to style analysis

A

1) Returns-based
2) Holdings-based

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Holdings based approach

A

Aggregates the style scores of individual holdings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Returns based approach

A

Analyzes the investment style of portfolio managers by comparing the returns of the strategy to those of a set of style indexes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

4 main building blocks of portfolio construction

A

1) Factor weightings
2) Alpha skills
3) Position sizing
4) Breadth of expertise

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Three factors that describe the sources of manager’s active returns

A

1) Exposure of rewarded risks
2) Timing of exposures to rewarded and unrewarded risks
3) Position sizing and its implications for idiosyncratic risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Information coefficient

A

Correlation between forecast return and actual return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What does information coefficient measure

A

Effectiveness of investment insight

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Breadth

A

The number of truly independent decisions made each year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Transfer coefficient

A

The ability to translate portfolio insights into investment decisions without constraint

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Expected active portfolio return formula

A

IC * Sq(BR) * manager’s active risk * TC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Active share

A

A measure of how similar a portfolio is to its benchmark

A manager who precisely replicates the benchmark will have active share of zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Active risk

A

The standard deviation of active returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Absolute approach objective

A

maximize sharpe ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

relative approach objective

A

maximize information ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Risk budgeting

A

Process by which the total risk appetite of the portfolio is allocated among the various components of portfolio choice

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Incremental VAR (IVAR)

A

Change in portfolio VaR when adding a new position to a portfolio, thereby reducing the position size of current positions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Marginal VAR (MVAR)

A

Effect of a very small change in the position size; in a diversified portfolio, marginal VaR may be used to determine the contribution of each asset to the overall VaR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

3 Rules of thumb for slippage

A

1) Slippage costs are more important than commission costs
2) Slippage costs are greater for smaller-cap securities than for large-cap securities
3) Slippage costs can vary substantially over time, especially when market volatility is higher

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

2 Inherent limitations of market neutral strategies

A

1) Difficult to maintain zero beta, as correlations between exposures are continually shifting

2) Limited upside in a bull market unless they equitized

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Benefits of long/short strategies

A

1) Ability to more fully express short ideas than under a long-only strategy
2) Efficient use of leverage and of the benefits of diversification
3) Greater ability to calibrate/control exposure to factors, sectors, geography, or any undesired exposures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Inherent risk of a short strategy

A

1) Unlike a long position, a short position will move against the manager if the price of the security increases

2) Require significant leverage

3) Cost of borrowing can be prohibitive, especially if the security is hard to borrow

4) Collateral requirements will increase if a short position is squeezed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Systematic vs. discretionary approach

A

Systematic strategies incorporate research-based rules across a broad universe of securities, while discretionary strategies integrate the judgement of the manager on a small subset of securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

How much of global financial assets by market value does fixed income make up

A

75%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

Immunization

A

An asset/liability management approach that structures investments in bonds to match (offset) liabilities’ weighted-average duration; a type of dedication strategy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Expected fixed-income portfolio returns

A

Coupon income +/- rolldown return +/- expected change in price due to investor’s view of benchmark yields +/- expected change in price due to investor’s view of yield spreads +/- expected change in price due to investor’s view of currency value changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Primary factors that affect yield curve and how much they account for changes in yield curve

A

1) Level (parallel “shift”) - 82%
2) Slope (flattening or steeping “twist”) - 12%
3) Shape or curvature (“Butterfly movement”) - 4%

52
Q

Butterfly spread

A

A measure of yield curve shape or curvature equal to double the intermediate yield-to-maturity less the sum of short- and long-term yields-to-maturity

= - (short-term yield) + (2 * medium-term yield) - long-term yield

53
Q

Bullet portfolio

A

a fixed-income investment strategy that focuses on the intermediate term (or “belly”) of the yield curve

54
Q

Barbell portfolio

A

A fixed income strategy combining short and long-term bond positions

55
Q

When is convexity a valuable metric

A

when interest rate volatility is expected to rise

56
Q

Two basic ways a manager may actively position a bond portfolio versus a benchmark index to generate excess return from a static yield curve

A

increase risk by adding either duration or leverage to the portfolio

57
Q

Futures Basis point value (BPV)

A

BPV (CTD) / CF (CTD)

CF = conversion factor
CTD = cheapest to deliver

58
Q

Swap BPV

A

ModDur (Swap) * Swap Notional/10,000

59
Q

Bull Steepening

A

An increase in the yield spread between long and short-term maturities across the yield curve, which is largely driven by a decline in short-term bond yields-to-maturity

60
Q

Bear Steepeing

A

An increase in the yield spread between long and short-term maturities across the yield curve, which is largely driven by a rise in long-term bond yields-to-maturity

61
Q

Bear flattening

A

A decrease in the yield spread between long and short-term maturities across the yield curve, which is largely driven by a rise in short-term bond yields-to-maturity

62
Q

Bull flattening

A

A decrease in the yield spread between long- and short-term maturities across the yield curve, which is largely driven by a decline in long-term bond yields-to-maturity

63
Q

Butterfly strategy

A

A common yield curve shape strategy that combines a long or short bullet position with a barbell portfolio in the opposite direction to capitalize on expected yield curve shape changes

64
Q

Negative butterfly

A

An increase in the butterfly spread due to lower short and long-term yields-to-maturity and a higher intermediate yield-to-maturity

65
Q

Positive butterfly

A

A decrease in the butterfly spread due to higher short and long-term yields-to-maturity and a lower intermediate yield-to-maturity

66
Q

Effective Duration formula

A

((PV-) - (PV+)) / (2 * delta curve * PV0)

67
Q

Effective convexity formula

A

((PV-) + (PV+) - 2*PV0) / (delta curve^2 * PV0)

68
Q

Swaption

A

An instrument that grants a party the right, but not the obligation, to enter into an interest rate swap at a pre-determined strike (fixed swap rate) on a future date in exchange for an upfront premium

69
Q

Uncovered interest rate parity

A

The proposition that the expected return on an uncovered (unhedged) foreign currency (risk-free) investment should equal the return on a comparable domestic currency investment

70
Q

Forward rate bias

A

An empirically observed divergence from interest rate parity conditions that active investors seek to benefit from by borrowing in a lower-yield currency and investing in a higher-yield currency

71
Q

What does the yield curve slope measure

A

Difference between the yield-to-maturity on a long-maturity bond and the yield-to-maturity on a shorter-maturity bond

72
Q

What are stand-alone interest rate put and call options generally based on

A

Bond’s price, not yield-to-maturity

73
Q

What strategy is commonly used to capitalize on expected yield curve shape changes

A

Butterfly strategy

74
Q

Credit valuation adjustment (CVA)

A

The present value of credit risk for a loan, bond, or derivative obligation

75
Q

Credit loss rate

A

the realized percentage of par value lost to default for a group of bonds equal to the bonds’ default rate multiplied by the loss severity

76
Q

Empirical duration

A

Estimation of the price-yield relationship using historical bond market data in statistical models

77
Q

I-spread

A

Interpolated spread

Yield spread measure using swaps or constant maturity Treasury YTMs as a benchmark

78
Q

Asset swaps

A

Convert a bond’s fixed coupon to MRR plus (or minus) a spread

79
Q

Asset swap spread (ASW)

A

The spread over MRR on an interest rate swap for the remaining life of the bond that is equivalent to the bond’s fixed coupon

80
Q

Z-spread

A

Zero-volatility spread

A constant spread which is estimated using the market prices of comparable bonds for issuers of similar credit quality of a bond over the benchmark rate

81
Q

Quoted Margin (QM)

A

Specified spread of a floating rate instrument over a market reference rate or benchmark

82
Q

Discount margin (DM)

A

The discount (or required) margin is the yield spread versus the MRR such that the FRN is priced at par on a rate reset date

83
Q

Zero-discount margin (Z-DM)

A

A yield spread calculation for FRNs that incorporates forward MRR

84
Q

Spread duration

A

The change in bond price for a given change in yield spread

Also referred to as OAS duration when the OAS is the yield measure used

85
Q

Duration Times Spread (DTS)

A

Weighting of spread duration by credit spread to incorporate the empirical observation that spread changes for lower-rated bonds tend to be consistent on a percentage rather than absolute basis

DTS = (Effective spread duration) * (spread)

86
Q

Excess spread

A

Surplus difference of yield remaining after payments to bondholders are made after expenses are made and losses are covered

Excess spread = spread(0) - (effective spread duration * delta spread)

87
Q

Expected excess spread return

A

spread(0) - (Effective spread duration * delta spread) - (POD * LGD)

88
Q

Effective Rate Duration of FRN

A

((PV-) - (PV+) / (2 * delta MRR * PV0)

89
Q

Effective Spread Duration of FRN

A

((PV-) - (PV+) / (2 * delta DM * PV0)

90
Q

Portfolio manager’s motivations to trade

A

1) Profit seeking
2) Risk management / hedging needs
3) Cash flow needs
4) Corporate actions / index reconstitutions / margin calls

91
Q

Trade urgency

A

a reference to how quickly or slowly an order is executed over the trading time horizon

92
Q

Alpha decay

A

In trading context, alpha decay is the erosion or deterioration in short term alpha after the investment decision has been made

93
Q

Arrival price

A

In trading context, arrival price is the security price at the time the order was released to the market for execution

94
Q

Principal trades

A

A trade in which the market maker or dealer becomes a disclosed counterparty and assume risk for the trade by transacting the security for their own account

Broker risk trades

95
Q

Agency trades

A

A trade in which the broker is engaged to find the other side of the trade, acting as an agent; the broker does not assume any risk for the trade

96
Q

Scheduled algorithmic trading types

A

1) Percentage of volume (POV)
2) Volume-weighted average price (VWAP)
3) Time-weighted average price (TWAP)

97
Q

Multilateral trading facilities

A

European dark pool

98
Q

Systematic Internalisers (SI)

A

Single-dealer liquidity pools in Europe

99
Q

Alternative trading system

A

trading venues in the US that function like exchanges but do not exercise regulatory authority over their subscribers except with respect to the conduct of the subscribers’ trading

must be approved by the SEC

100
Q

Implementation Shortfall (IS)

A

The difference between the return for a notional or paper portfolio, where all transactions are assumed to take place at the manager’s decision price, and the portfolio’s actual return, which reflects realized transactions, including fees and costs

Paper return - actual return

101
Q

Execution cost

A

The difference between the (trading related) cost of the real portfolio and the paper portfolio, based on shares and prices transacted

102
Q

Arrival cost (bps)

A

Side * (average execution price - reference price) / reference price * 10^4 bps

side = 1 for buy; -1 for sell

103
Q

VWAP cost (bps)

A

Side * (average execution price - VWAP) / VWAP * 10^4 bps

side = 1 for buy and -1 for sell

104
Q

TWAP cost (bps)

A

Side * (average execution price - TWAP) / TWAP * 10^4 bps

side = 1 for buy and -1 for sell

105
Q

Index cost (bps)

A

Side * (index VWAP - index arrival price) / index arrival price * 10^4

106
Q

Market-adjusted cost (Bps)

A

Arrival cost (bps) - stock’s beta * index cost (bps)

107
Q

Aspects included in trade policy

A

1) Meaning of best execution
2) Factors determining the optimal order execution approach
3) Listing of eligible brokers and execution venues
4) Process to monitor execution arrangements

108
Q

The most common way to immunize the interest rate risk on a single liability

A

buy a zero coupon bond that matures on the obligation’s due date

109
Q

Immunized portfolio convexity formula

A

(MacDur^2 + MacDur + Dispersion) / (1+ Cash flow yield)^2

110
Q

Structural risk

A

risk that arises from portfolio design, particularly the choice of the portfolio allocations

111
Q

Accounting Defeasement

A

A way of extinguishing a debt obligation by setting aside sufficient high-quality securities to repay the liability

In-substance defeasance

112
Q

Contingent immunization

A

Hybrid approach that combines immunization with an active management approach when the asset portfolio’s value exceeds the present value of the liability portfolio

113
Q

Relationship for full interest rate hedging

A

Asset BPV * change in asset yields + Hedge BPV * change in hedge yields = liability BPV * change in liability yields

114
Q

Enhanced indexing

A

matching market index but purchasing fewer securities than the full set of index constituents, but matches primary risk factors

115
Q

Key rate duration

A

(Partial duration), measure of bond’s sensitivity to a change in the benchmark yield at a specific maturity

116
Q

Present value of distribution of cash flows methodology

A

Method used to address a portfolio’s sensitivity to rate changes along the yield curve

Seeks to approximate and match the yield curve risk of an index over discrete time periods

117
Q

Risk to immunization

A

As the yield curve shifts and twists, the cash flow yield on the bond portfolio does not match the change in the yield on the zero-coupon bond that provide for perfrect immunization

118
Q

Conditions to immunize multiple liabilities

A

1) Market value of assets is greater than or equal to the market value of the liabilities

2) Asset basis point value (BPV) equals the liability BPV

3) Dispersion of cash flows and the convexity of assets are greater than those of the liabilities

119
Q

Reduced form credit models

A

Credit models that solve for default probability over a specific time period using observable company-specific variables such as financial ratios and macroeconomic variables

120
Q

Structural credit models

A

Credit models that apply market-based variables to estimate the value of an issuer’s assets and the volatility of asset value

121
Q

Default intensity

A

POD over a specified time period in a reduced form credit model

122
Q

Authorized participants

A

A special group of institutional investors who are authorized by the ETF issuer to participate in the creation/redemption process

Large broker dealers, often market makers

123
Q

Hazard rate

A

the probability that an event will occur, given that it has not already occurred

124
Q

CDS price at contract inception

A

1 + ((fixed coupon - cds spread) * effective spread duration of the CDS)

125
Q
A

CFA L3 (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions