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Portfolio Management Techniques > Portfolio Management Techniques > Flashcards

Portfolio Management Techniques Flashcards

2
Q

The bottom up approach to investing can take either a ___ or a ___ approach.

A

Value oriented or a Growth oriented

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3
Q

The portfolio manager who uses the ___ approach looks for undervalued securities, with little focused on overall economic and market conditions.

A

Value Orientated

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4
Q

As a bottom-up approach the ___ approach focuses on individual stock but where the ____ approach looks for undervalued securities the ____ approach focuses on earnings

A

Value orientatedGrowth orientated

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5
Q

The ___ approach begins with a macro and micro analysis of trends and market forecasts in a Global, American and Canadian economies.

A

top-down

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6
Q

Equity portfolio managers pursue a variety of investment strategies that have become known as ___.

A

management styles

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7
Q

___ is consistent with the view that securities markets are efficient, that is, that securities prices at all times reflect the relevant information concerning expected return and risk.

A

Passive portfolio management

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8
Q

With the,___ , for example the portfolio manager may construct an index consisting of most of the larger cap stocks, in the underlyingindex plus only a sample of the small-cap stocks.

A

Sampling model

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9
Q

A ____ may involve the use of historical data in order to construct a fund but does not follow all of the securities of the underlying index but nonetheless hopefully mimics the underlying index

A

Mathematical model

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10
Q

Lose of tracking an index is referred to as ___

A

Tracking error

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11
Q

___ was developed to solve the problem of structural return drag

A

Fundemental indexing

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12
Q

The 4 fundemental metrics were chosen to reflect a company’s business activity as accurately as possible:

A

Trailing 5-year cash flowTrailing 5-year salesTrailing 5-year gross dividendsBook value (book)

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13
Q

___ refers to the tendency of active managers to build a portfolio that is close enough to a performance so that the portfolio neither underperforms nor outperforms the benchmark by much.

A

Closest Indexing

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14
Q

Most medium to largeinstitutional investment firms divide fixed income portfolio management duties into two primary occupations roles: ___ and ___

A
  1. Portfolio Manager 2. Trader
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15
Q

The ____ position normally involves the following major roles and responsibilities… 1. Creates the mandate, investment goals and investment guidelines/restrictions 2. Developes and executes the fixed income portfolio strategy 3. Provides pertinent and timely information to head of fixed-income markets 4. Supervises all fixed-income portfolio management staff 5. Provides information to assist firm’s marketing

A

Fixed income portfolio manager

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16
Q

The ____ has a narrow range of responsibilities including: 1. Providing effective execution of trades 2. Remaining informed of detailed investment strategies 3. Keep the fixed income portfolio manager appraised of bond market conditions and trends 4. Maintaining good, professional relationships with sales staff and trading stadd of broker/dealers that the firm does business with

A

Trader

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17
Q

Starting at Trader, name the 4 levels of the org structure

A
  1. Trader 2. Portfolio Manager 3. Head of Fixed Income 4. Chief Investment Officer
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18
Q

The primary focus of the ___ is the area of analysis of the economy, monetary policy and the creation of overall fixed-income portfolio startegies.

A

Fixed-Income Portfolio Manager

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19
Q

The focus of ___ is the execution of transactions.

A

Trader

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20
Q

The majority of instititional fixed-income investment managers can invest their clients fund of a ____ and therfore cannot incorporate leverage and short selling.

A

Long Only

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21
Q

Name 3 types of instiututional investment managers that can incorporate leverage and short selling.

A
  1. Traders/Market makers at broker dealers 2. Proprietary traders at broker/dealers 3. Hedge fund Managers
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22
Q

Name the 4 main functions of the front office

A
  1. Portfolio management 2. Trade execution3. Sales and marketing 4. Client servicing
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23
Q

Portfolio management is often grouped with what other front office function in smaller offices?

A

Trade Execution

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24
Q

Client servicing is often grouped with what other front office function in smaller offices?

A

Sales and marketing

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25
Q

Head of equities and the Head of fixed income report into whom?

A

Chief Investment Officer

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26
Q

Replacing mature debt is called _____

A

Extension

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27
Q

Investment grade is ____ or higher.

A

BBB

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28
Q

With this instrument the coupon rate is adjusted if there is a change in the benchmark interest rate.

A

Variable rate note

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29
Q

When yields at a certain maturity range in the yield curve move up or down than yields at other terms in the yield curve, this results in a ____

A

Hump in the yield curve

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30
Q

What is the formula for modified duration?

A

D/(1+y/k)

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31
Q

What are the main components of a collateralized debt obligation (CDO)?

A

A CDO has three main components, similar to an asset-backed security: 1. An originator (typically a bank) 2. Investors ready to buy the credit risk. 3. The special purpose vehicle (SPV). Text reference: Chapter 8, Managing Fixed-Income Portfolios.

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32
Q

The yield to maturity calculated on a bond assumes that the investor can reinvest their coupon income at the ____

A

Yield to maturity

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33
Q

When investors purchase high grade bonds and sell low grade bonds, the holder of the low grade bonds has been subjected to?

A

Credit spread risk

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34
Q

Which type of debt securities are deigned to meet specific targets and goals?

A

Dedicated

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35
Q

Does it take fewer or more bonds to diversify (AAA rated and government bonds) or (BBB rated and corporate bonds)?

A

Fewer for government and AAA.

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36
Q

This bond portfolio is a portfolio of one or more bonds with roughly equal durations.

A

Bullet

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37
Q

The price/yield relationship for a bond is?

A

Convex

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38
Q

The Macaulay Duration of Walmart 8% bond maturing in 10 years is 7.5. The yield to maturity on the bond is 10%, and the bond pays interest semi-annually. If there is a 250 basis point increase in yields for this level, how much should the bond price change due to duration?

A

-17.85%

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39
Q

The Macaulay Duration of National Bank 6% bonds is 10.7 years. The bond price is $90 and the bond has a yield to maturity of 8%. If there is a 1% decrease in yields, how much should the bond change in price?

A

$9.27

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40
Q

Great West Life bonds are trading at $102 and have a modified duration of 6.2 years. The yield to maturity on the bond is 9%. If yields increase 125 basis points, what should the bond price change to based on duration?

A

$94.09

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41
Q

Presently the yield to maturity on ABC bonds is 8%. These bonds have a modified duration of 4.5 years. If yields decrease by 2%, what is the estimated percentage price change on the ABC bonds?

A

9.00%

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42
Q

What happens to duration when a coupon rate drops?

A

It increases

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43
Q

___ essentially involves the movement of funds from suppliers of capital to users of capital.

A

Financial intermediation

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44
Q

The primary assumption of fundamental indexing is that Capitalization-weighted indexes ____ overpriced securities

A

Overweight

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45
Q

How does the auditing function accomplish their primary objective?

A

Routine audit examinations.

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46
Q

Growth in ____ business is driving the next level of growth in ETFs

A

Fee based

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47
Q

What is the difference between a cash collateralized debt obligation (CDO) and a synthetic CDO?

A

The range of reference assets that can be used in a synthetic CDO is vast and includes illiquid cash instruments, such as undrawn lines of credit and bank guarantees.

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48
Q

___ utilizes a mathematical model involving the use of historical data to construct a fund.

A

Index fund using tracking

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49
Q

For small to medium-sized pension plans and endowments, who often plays an integral role in the hiring of new investment managers?

A

Pension Consultant

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50
Q

From the private equity investor’s point of view, what type of investment typically has the highest risk of default in the debt spectrum?

A

Mezzanine capital.

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51
Q

Road shows for new funds typically have two primary focuses. What are they?

A

Marketing story, and investment manager’s skills.

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52
Q

A mutual fund manager wants to get synthetic exposure to a market index. The manager wishes to use a highly customized derivative. What meets the manager’s criteria?

A

Swaps are sometimes used to replicate the returns of an index, and might be attractive if the fund manager wants a product that is customized for the fund’s specific requirements.

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53
Q

What represents an end value?

A

End values include a sense of accomplishment, family security, self-respect, social recognition, and wisdom.

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54
Q

What is the first step in the straight-through processing (STP) system involving a security transaction?

A

A portfolio manager enters the details of a contemplated security transaction into the STP system

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55
Q

What is a main area of responsibilitiex for a middle office of an institutional investment management firm?

A

Compliance, Sales, Legal

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56
Q

What is the first step that should be undertaken in assessing and developing a new investment product?

A

Identifying potential market opportunities.

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57
Q

What is the minimum standard for performance records in order to be GIPS compliant?

A

Five years and six years of performance data.

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58
Q

Which type of investment industry participant provides retail investors with fund rankings for pooled investment vehicles?

A

Fund rating agencies.

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59
Q

What is the risk that the difference between the futures and the spot price will not behave as expected over the life of a hedge?

A

Basis risk.

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60
Q

What is an over-the-counter contract for hedging interest rates over a period of 6 to 12 months settled by a cash exchange to satisfy the closing position?

A

Forward rate agreement.

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61
Q

At time of issue, the term to maturity of a PPN typically ranges from ___ to ___ years.

A

five to twelve

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62
Q

For most institutional investors, who normally has final approval in hiring an institutional investment manager?

A

Board of Trustees

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63
Q

A ____ arrangement is one in which an investment firm purchases services through commission dollars rather than through an invoice for goods or services.

A

Soft Dollar

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64
Q

For an investment fund, what primary services are typically provided by third parties (some party other than the fund manager)?

A

Custodial Services

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65
Q

Who is responsible for financing the cash flow mismatch between the up-front sales commission payment to the distributor and the incremental additional investment management fees that are charged to investors that opted for the deferred sales charge option?

A

The fund manager.

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66
Q

How do alternative investments align their interests with those of their investors?

A

Performance Fees

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67
Q

In the past 40 years there has been a large shift in market share of financial intermediaries from life insurance companies to whom?

A

Pension Plans

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68
Q

What investment strategy works well in a portable alpha program?

A

Small Cap equity

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69
Q

What is the one educational requirement that all individuals must attain to be registered as a Portfolio Manager - Chief Compliance Officer?

A

Partners, Directors, and Senior Officers Course.

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70
Q

A portfolio manager with a number of smaller accounts who has concerns regarding counterparty risk wants to minimize the cash drag on his portfolios’ performance. What solution would best meet his needs?

A

EFTs

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71
Q

Which two front-office functions are often done by the same person in small institutional investment management firms

A

Portfolio management and trade execution.

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72
Q

Why are segregated account structures preferred by investors over pooled fund structures?

A

First, for safety reasons, certain investors stipulate that their assets remain with the custodian of their choice

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73
Q

What is the formula for information ratio?

A

IR = Alpha/Tracking Error

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74
Q

____ supervises the activities of a firm that are directed towards ensuring compliance with securities legislation by the firms, and each individual acting on the firm’s behalf

A

Ultimate Designated Person.

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75
Q

Who determines the valuation and pricing of an alternative investment fund’s non-publicly traded investments when there are not realistic and independently sourced values or prices available?

A

The fund’s investment manager.

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76
Q

According to NI 81-102 the minimum allowable credit rating of counter parties to OTC derivative contracts is ____

A

A(Chapter 9)

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77
Q

Under NI 81-102 the maximum exposure to an individual OTC derivatives counterparts allowed is ___ of the fund’s net assets.

A

10%

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78
Q

Which national instrument was introduced in 2002 and is designed to permit commodity pools to operate without contravening the restrictions of NI 81-102?

A

NI 81-102

79
Q

What is the primary use of derivatives by Canadian mutual funds?

A

To reduce exchange-rate exposure from holding foreign currency-denominated securities.

80
Q

How is the income taxed that typically accrues to mutual fund holders as a result of the fund’s futures and forward contracts?

A

As Income

81
Q

A Canadian mutual fund’s net asset value is calculated in Canadian dollars (CAD).What is a currency cross-hedge that may qualify as a hedge transaction for this mutual fund?

A

USD/EUROGeneral Feedback: A currency cross-hedge is a transaction in which the mutual fund substitutes its exposure to one currency risk for exposure to risk from another currency, as long as neither is the currency in which the mutual fund’s net asset value is determined, and the aggregate amount of currency risk to which the mutual fund is exposed is not increase by this substitution. Text reference: Chapter 9, The Permitted Uses of Derivatives by Mutual Funds.

82
Q

How is cash accounted for on a Canadian mutual fund’s balance sheet if it uses cash to meet the margin required on a futures position?

A

Accounts Receivable

83
Q

What effect does the market value of the written call option have on a Canadian mutual fund’s net asset value if the fund writesa covered call option on a stock in its portfolio?

A

It immediately decreases the fund’s net asset value.When a mutual fund writes a covered call option, National Instrument 81-102 stipulates that the market value of the call option be categorized as a deferred credit that is deducted from the underlying stock’s value when calculating the net asset value of the fund.

84
Q

What is the price sensitivity of an option known as?

A

Delta

85
Q

Information provided to an institutional investor, in an investment management firm’s quarterly report to clients, that includes return data, holdings data, attribution analysis and market commentary, represents?

A

Portfolio management information

86
Q

Generally the 4 middle office functional heads report to whom? Note this person is the ultimately responsible person (URP).

A

President

87
Q

In small to medium investment firms, some of the middle of the senior functions are consolidated or even outsource. Only exception by regulation, where the position must be staffed by employee of the firm is?

A

Chef Compliance Officer

88
Q

___ attempts to ensure that all of the investment guidelines and restrictions that are agreed upon with investors prior to the execution of trades, are met.

A

Pre-trade compliance testing

89
Q

This type of security traded processing and portfolio management software provides one continuous real-time investment management database that links the front, middle and back offices of the firm. This is referred to as?

A

Straight through processing

90
Q

The primary objective of this area is to verify that all functions of the firm conduct their affairs and activities in conformance with the operational procedures established for the firm (basically, that the rules established by the compliance and legal functions are being followed). This areas is?

A

Audit

91
Q

This area calculates and records the proportionate share or portion of a pooled fund that is owned by each individual investor at any point in time. The percentage ownership is usually expressed in terms of the number of shares or units of the fund that each individual investor owns of the fund. This is which area?

A

Unitholder record-keeping

92
Q

Industry best practices require the fund accounting function organizationally separated and independent from both the ___ and ___?

A

Front and back offices

93
Q

This refers to the role that active security trading plays in executing investment management strategy for the particular fund. This is?

A

Trading Philosophy

94
Q

In the case of the fund accounting function, this type of portfolio management database information flow tool is critical to ensuring efficient fund accounting operations.

A

Straight-through processing

95
Q

You expect no changes in the yield curve over the coming year and have decided the best strategy is to ride the yield curve. Calculate the expected total one-year return for a 21-year semi-annual coupon bond currently trading at par with a yield to maturity of 4.0% when a 20-year semi-annual coupon bond has a yield to maturity of 3.8%.

A

6.78

96
Q

What are internal credit enhancements for asset-backed securities?

A

Reserved funds, Overcollateralization, Senior/subrdinated structures

97
Q

What is a characteristic of a broad equity index fund built using replication?

A

It is likely to be over-diversified. In replicating an index, the manager selects an appropriate index to replicate in a fund, holding each stock within the fund portfolio in exact proportion to its weighting within the index. For practical purposes, a portfolio replicating the Composite is likely to be over-diversified. Text reference: Chapter 7, Managing Equity Portfolios.

98
Q

Why might an investment management firm that is new, and has just launched its first mutual fund be at a slight competitive disadvantage to more established fund managers when it comes to the management expense ratio (MER)?

A

New firms will not be able to negotiate the same fees with third-party service providers as the fees charged to investment firms which have an existing relationship with the service providers.

99
Q

An annual pay 5% coupon bond matures in 30 years. If this bond is currently priced at $950 with a yield to maturity of 5.34%, calculate the contribution to the Macaulay duration of the coupon payment made in Year 25.

A

50/(1.0534)^25 = 13.6188. Next, (13.6188/950) x 25 = 0.3584.

100
Q

Which aspects describe the job function of a fixed-income trader at a broker/dealer?

A

I.Primary occupational goal is absolute performance. II.Leverage with regulatory limits. III.Responsibility for a broad range of securities.

101
Q

Why would a bank sell a credit derivative?

A

To add income to the returns generated by their loan portfolio.

102
Q

How are ETFs legal organized in Canada?

A

ETFs are legally organized as mutual fund trusts.

103
Q

What is the most common performance benchmark in the Canadian institutional investment management marketplace?

A

Peer performance results.

104
Q

As a percentage of net asset value, what is the short selling limit for a Canadian mutual fund?

A

20%

105
Q

What characteristics are used to create cells when replicating a bond index using cellular sampling?

A

Maturity, Coupon, Credit Risk

106
Q

According to best practices, who should the investment management firm’s head of audit report to?

A

President and Board of Directors

107
Q

When comparing bonds with the same coupon, what will happen to the duration if the maturity increases for deep-discounted bonds of long maturity?

A

Decrease duration.

108
Q

Longer-term lockup periods tend to be associated with what type of alternative investments?

A

Private equity funds.

109
Q

What is an example of the type of financial intermediary that grew after the mid -1960s?

A

Endowments.

110
Q

What is a problem associated with performance benchmarking when it comes to alternative investments?

A

Alternative fund managers provide their fund and return information on a voluntary basis.

111
Q

When speaking of the principal-agent relationship, the institutional model adds what intermediary to the principal-agent relationship for individual investors?

A

Asset management company.

112
Q

The modified duration of a bond is 7.0. What will be the percentage price change for the bond if the bond’s yield to maturity increases by 0.75%?

A

-5.25%

113
Q

Calculate the implied yield of a three-month bankers acceptance (BA) futures with a price of 97.50.

A

2.5% Futures price = 100 - the annualized discount yield (expressed in percentage form). Implied yield = 100 - 97.50 = 2.50%

114
Q

A Canadian mutual fund manager using derivatives as a proxy for owning the individual securities benefits from lower transaction and administrative costs. Under what conditions is this particularly true?

A

In international markets.

115
Q

If you expect the yield curve for Government of Canada bonds to flatten versus the yield curve of US government bonds, what strategy should you execute?

A

Intra-market box swap.

116
Q

What is typically included in a quarterly portfolio management report?

A

II.Detailed explanation of the manager’s investment strategy. III.Detailed performance attribution. IV.Relative performance ranking.

117
Q

What does a fund manager not receive if they use futures or forwards as a proxy for securities?

A

Dividend income earned by security holders.

118
Q

In fundamental indexing, what is a weakness of the cash flow metric?

A

Over- or underexposure to highly cyclical companies.

119
Q

What is a difference between endowment funds and retirement funds?

A

Range and type of fund objectives.

120
Q

What is the biggest disadvantage of securitization?

A

Lack of transparency could hide bad risks. The two biggest disadvantages to securitization are the lack of transparency of the underlying assets and the pricing of the securitization. The lack of transparency of the underlying assets makes it difficult for credit analysts to gauge a proper credit rating on the securitization. Bad credit risks could easily hide in the pool of assets. Second, at the best of times, CDOs and ABSs are extremely difficult to price. Text reference: Chapter 8, Managing Fixed-Income Portfolios.

121
Q

A mutual fund uses a derivative to offset more than the expected changes in the value of the position being hedged. The value of the amount being hedged is under $100,000. Does this qualify as a hedge?

A

No, as the position being hedged is more than offset by the derivative.

122
Q

The underlying interest for all derivatives can be classified as which of the following?

A

Commodity or financial asset.

123
Q

Parker is a portfolio manager who seeks to be Global investment Performance Standards (GIPS) compliant. He has been running his portfolio since its inception on January 1, 2004. What is the minimum frequency that he has to value his portfolio?

A

Monthly

124
Q

What type of bond has cash flows supported by receivables such as auto loans or student loans?

A

Asset-backed securities.

125
Q

At the product development stage, in what case is it important to assess whether a Canadian fund can actually access the various securities for the fund?

A

A fund investing in foreign equities.

126
Q

What is Benjamin Graham’s formula for maximum stock price?

A

[((Current Assets - Total Liabilities) / Shares Outstanding) x 0.6667].

127
Q

Who is the primary internal interface for an institutional investment management firm’s client servicing staff?

A

portfolio managers and the fund accounting staff

128
Q

What is one result of the existence of a fiduciary duty?

A

The imposition of a higher standard of care.

129
Q

Rob wants his composite to be Global Investment Performance Standards (GIPS) compliant. His firm has had the portfolio that he manages for 16 years. What is the minimum standard for his performance records in order to be GIPS-compliant?

A

After presenting five years of performance, the firm has to provide additional performance of up to ten years. On the firm’s tenth anniversary, and every year thereafter, the firm would present five-and ten-year records.

130
Q

What key assumption underlying standard mean-variance optimization is not applicable to most alternative asset classes?

A

Asset returns are normally distributed.

131
Q

You are a portfolio manager and your firm is having a sales contest this month. The month’s top-producing portfolio manager will win a weekend trip to an expensive resort. What type of value conflict will the sales contest most likely create?

A

With a short term versus long term value conflict, immediate needs or desires run counter to future goals or prospects. Text reference: Chapter 2, Ethics and Portfolio Management.

132
Q

In an investment management firm, what is the responsibility of the project management committee?

A

Enforcing project management guidelines and approved budget.

133
Q

____ values represent something a person strives. They include a sense of accomplishment, family security, self-respect, social recognition, and wisdom.

A

End value

134
Q

___ values are the actions taken in the present to achieve a future goal. These include ambition, competence, honesty, independence and responsibility.

A

Means

135
Q

A ____ is when ends and means mutually reinforce and support each other.

A

Unified value system

136
Q

Within NI 81-102 mutual fund managers may employ a range of derivatives including ___, ___, ___, and ____

A

Options, forwards, futures and swaps

137
Q

What is the minimum standard of credit rating for a mutual fund to purchase a bond from a counter party?

A

A rating

138
Q

What is the maximum exposure to an INDIVIDUAL OTC derivative counterparts?

A

10%

139
Q

What is the value of a forward or a swap

A

is the gain or loss on the contract that would be realized if the position in the forward contract or swap were closed out on the valuation date.

140
Q

NI 81-104 was designed to permit a broader use of derivatives by funds that fall into the definition of ____, which are funds that buy and sell ___ contracts.

A

Commodity pools, futures contracts

141
Q

A currency ______ is a transaction in which the mutual fund substitutes it’s exposure to one currency risk from another currency, as long as neither is the currency in which the mutual fund’s net assets value is determined.

A

Cross-hedge

142
Q

Because mutual funds are not allowed to take short positions in securities, the only security positions they will be hedging a long positions. What positions that are opposite long position can they take?

A
  1. Short forward, future and swaps
  2. Long put options
  3. Short call options
143
Q

Under NI 81-102 the total amount that can be invested in derivate contracts is ___% of the maximum of the net fund assets.

A

10%

144
Q

___ refers to when execution of a transaction causes subsequent prices to worsen.

A

Execution slippage

145
Q

The price sensitivity of a option is called a ____

A

Delta

146
Q

Income that typically accrues to fund holders from futures and forwards contracts is taxed as ____

A

Income

147
Q

In small institutions the fixed income manager performs the duties of both ____ and ____.

A

Manager and Trader

148
Q

The primary focus of the ___ is the are of analysis of the economy, monetary policy and the creation of overall fixed income portfolio strategy.

A

Fixed income portfolio manager

149
Q

___ risk is the risk associated to bond values due to changes in market yields.

A

Interest rate risk

150
Q

___ risk is the risk due to the variation in market value.

A

Price risk

151
Q

For the same maturity, the higher the coupon rate, the ____ duration.

A

Lower

152
Q

There are two portfolio structures that achieve the goal of receiving a yield to maturity that equals the original coupon rate. What are they?

A

Laddered portfolio

Barbell portfolio

153
Q

The indexes most often replicated are the ___ indices from ____

A

DEX indices from PC-Bonds

154
Q

There are two methods used to replicate bond indexes they are

A
  1. Cellular / Stratified / Sampling

2. Tracking Error minimization

155
Q

___ normally involve the purchase of one bond and simultaneously selling another.

A

Box trade

156
Q

The process of turning relatively illiquid assets into tradable securities is known as ____

A

Securitization

157
Q

___(A) are very similar to ___(B) except in the type of assets securitized. ___(A) are supported by a discrete pool of receivables, such as home equity loans, car loans and credit card receivables. ___(B) are supported by mortgage back securities, other ___(A), leveraged bank loans, REITs, corporate bonds or even other ___(B).

A

A. Asset backed securities (ABS)

B. Collateralized Debt Obligations (CDO)

158
Q

A largely interbank market exists for ____, which are over the counter contracts for hedging interest rates; the majority of contracts are for 6 to 12 month periods.

A

Forward rate agreements (FRA).

159
Q

____ are contracts used by banks, corporations and individuals to hedge interest-rate risk for future payments.

A

Interest rate futures

160
Q

What is the implied yield of a 94.60 Bourse’s bankers acceptances (BAs)?

A

100 - 94.6 = 5.4%

161
Q

___ are agreements made between two parties to exchange interest payments on loans for the same amount, each guaranteeing to pay the others interest.

A

Interest rate swaps

162
Q

____ are financial instruments that derive their value from an underlying credit asset or pool of credit assets, such as bonds or mortgages and are designed to transfer credit risk.

A

Credit derivatives

163
Q

A ___ is the exchange of two cash flows: A fee payment and a conditional payment, made only if a credit event occurs.

A

Credit default swap

164
Q

Warren Buffett was profoundly influenced by 2 professors. ___ who wrote the Intelligent Investor and ___ who co-wrote Security Analysis.

A

Benjamin Graham

David Dodd

165
Q

Benjamin Graham criteria called for selecting stocks selling for ___ % or less of the current asset value.

A

66%

166
Q

Warren Buffett focused on __ to __ securities and stash with these for the long term.

A

10 to 12

167
Q

Warren Buffett feels that the most important measuring stick is a company’s ___ and it’s ___.

A

Intrinsic value

Weighted average cost of capital (WACC).

168
Q

There are 3 approaches to constructing an index fund. Name them

A
  1. Replicating an index
  2. Tracking an index
  3. Fundamental indexing
169
Q

___ attempts to hold each stock within a fund in the exact proportion to its weighting.

A

Replicating an index

170
Q

An alternative to replicating an index is ___. With this approach, the manager constructs a subset of the benchmark that faithfully mimics the index.

A

Index tracking

171
Q

With the ___ model, for example, the portfolio manager might construct an index consisting of most of the large caps and a sample of the smaller caps. A ___ model may involve the use of historical data in order to construct a fund that doesn’t hold all the securities of the underlying index but never less faithfully mimics the underlying index.

A

Sampling

Mathematically

172
Q

___ is a process that limits the deviations of a portfolio’s return from a benchmark.

A

Risk budgeting

173
Q

___ results in portfolios that are designed to provide index-like performance with some excess return net of cost. Active risk is introduced by slightly overweighting and underweighting securities.

A

Enhanced indexing

174
Q

One widely used measure of growth expectations is the ___, which is equal to the return on equity multipled by the retention rate.

A

Sustainable growth rate

175
Q

___ stocks can be simply characterized as those expected to grow at superior rates, whereas ___ can be characterized as growing at rate that matches the growth of the overall economy.

A

Growth

Non-growth

176
Q

The smallest firms generated consistently higher returns on a conventional risk-adjusted basis. This is the called ___.

A

The size effect

177
Q

There are 2 strategies to use in market-neutral investing: ___ and ___.

A

Absolute return

Alpha portability

178
Q

Market risk is also referred to as ___. Active risk is also referred to as ___.

A

Beta

Alpha

179
Q

___ is the process of using derivatives or shirt selling to separate alpha and beta return decisions and to apply the alpha to portfolios of other asset classes.

A

Portable alpha

180
Q

Name the 3 ways an investor may err in one of three ways when selecting an alpha engine:

A
  1. Selecting an inconsistent, unsustainable alpha engine
  2. Using an alpha engine that is inappropriate to meet desired objectives
  3. Erring when estimating the magnitude and volatility of betas embeddedin the alpha engine.
181
Q

A manager of $25 million portfolio of Canadian stocks wants to hedge the portfolio. March S&P/TSX 60 index futures are trading at $400 and the multiplier for each is $200. Given a portfolio beta of 1.2, how many futures contracts are required?

A

1.2 x $25,000,000/(400x$200)=375 futures contracts

182
Q

Name 2 methods for transforming a portfolio from one asset mix to another.

A

Stock index futures

Equity swaps

183
Q

ETF shares are created when an ___, typically an institutional investor or broker/dealer deposits the daily ___ and/or ___ with the ETF.

A

Authorized Participant
Creation basket
Cash

184
Q

In return for the ___ and/or ___, the ETF trust issues to the authorization participant a ___ that consists of a specified number of ETF shares.

A

Creation Basket
Cash
Creation Unit

185
Q

When ETF shares are returned to an ETF trust, the ___ receives the daily ___.

A

Authorized participant

Redemption Basket

186
Q

There are 5 dimensions to practicing active portfolio management. Name them

A
  1. Sector rotation
  2. Timing
  3. Value
  4. Growth
  5. Capilization
187
Q

A ____ invests in ousted financial and commodity futures markets and currency markets around the world.

A

Managed futures fund

188
Q

The process of combining the characteristics of traditional investments (such as stocks and bonds) or alternative investments (such as hedge funds and commodities) with financial derivatives (such as options, future contracts and swaps agreements) is referred to as ____.

A

Financial engineering

189
Q

____ risk refers to the risk incurred by investors’ limited access to information about their alternative investments.

A

Transparency

190
Q

A ___ refers to the time period that initial investments cannot be redeemed from an alternative investment fund or product.

A

Lockup

191
Q

What is the formula for Sharpe ratio? (* must know well).

A

(Expected Return - Risk Free)/standard deviation

Portfolio Management Techniques (1 decks)

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