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Asset Allocation > principle of AA > Flashcards

principle of AA Flashcards

1
Q

MVO

A

Mean-variance optimization:
+ common approach to asset allocation
+ assume: investors are risk averse
+ identifies the portfolio allocations that maximize return for every level of risk
Um = E(Rm) − 0.005 × λ × Var
λ = the investor’s risk aversion coefficent

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2
Q

constrant of MVO

A

+ budget constraint or unity constraint: asset weights must add up to 100%
+ nonnegativity constraint: all weight must be positive between 0% to 100%

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3
Q

Constraints of MVO

A

(1) GIGO
(2) concentrate in some subset of asset class
(3) focus of mean/variance of return
(4) source of risk is not diversified
(5) single pediod, not take account taxes, cost
(6) not connect to liability, consumtion series

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4
Q

corner portfolios

A

all the set of portfolio in frontier line

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5
Q

6 Criticism of MVO

A

(1) The output (asset allocation) are highly sensitive to small changes in the input
(2) The asset allocations tend to be highly concentrated in a subset of available asset classes
REMEDI:
+ Reverse optimization
+ Black – Litterman Model
+ Resampled MVO
(3) Many investors are concerned about more than mean and variance of returns
(4) Although the asset allocations may appear diversified across assets, the source of risk may not be diversified
Remedy: USE FACTORS
(5) Most portfolios exist to pay for a liability or consumption series and MVO allocations are not directly connected to what influences that value of the liability or consumption series
Remedy: liability relative or goal-based asset allocation
(6) MVO is a single period framewok and it does not take into account trading/rebalancing cost and taxes
Remedy: simulation

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6
Q

ACTR

A

Absolute contributioin to risk (measures how much the asset class contributes to σp)
• ACTR = wi * MCTR = wi * βi * σp

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7
Q

Quasi

A

payments that are expected to be made but are not liabilities such as endowment

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8
Q

Characteristics of liabilities can effect asset allocation

A

(1) Fixed vs. contigent flows
(2) Legal vs quasi-liabilities
(3)  Duration and convexity of liability cash flows
(4)  Value of liabilities as compared with the size of the sponsoring organization
(5)  Factors driving future liabilities cash flows such as inflations, economic conditions, interest rates, premiums
(6)  Timing consideration such as longevity risk
(7)  Regulations affecting liability cash flow such as rate`

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9
Q

variant 2-portfolio approaches

A

(1) Liability
(2) Surplus

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10
Q

longevity risk

A

live longer than forecast
+ annuity
+ pension

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11
Q

method for liability relative approach

A

(1) surplus optimization
(2) Hedging/Return seeking portfolio
(3) Integrated asset – liability approach

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12
Q

liability return

A

measures the time value of money for the liabilities plus any expected changes in the discount rate and future cash flows over the planning horizon

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13
Q

2 portfolios in Hedging/Return seeking portfolio

A

(1) hedging portfolio
(2) return seeking portfolio

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14
Q

the portion hedge in Hedging/Return seeking portfolio approach

A

+ fully hedge
+ partial hedge

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15
Q

Limitations of hedge/return seeking portfolio approach

A

(1) Could not creat a fully hedge portfolio if funding ratio < 1
(2) True hedging portfolio may not be available and if the portfolio is not perfectly hedged there will be basis risk

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16
Q

Dynamic in hedge/return seeking portfolio approach

A

means increase the allocation to hedging portfolio as funding ratio increases

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17
Q

more critical the goals, the ……… prob of success required

A

higher

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18
Q

The higher prob archieve goal = …….. discount rates

A

lower

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19
Q

The lower discount rates = …. capital allocation to that goal

A

greater

20
Q

definition of Risk parity

A

each asset class should contribute equally to the total risk of the portfolio to be well diversified

21
Q

Formula of risk parity

A

wi×Cov(ri rp)= 1/n σp^2

22
Q

3 methods to incoprate client risk reference into asset allocation

A

(1) specifying additional constraints,
(2) specifying a risk aversion factor for the investor,
(3) using MCS

23
Q

3 approach of liability-relative asset allocaiton

A

(1) Surplus efficient frontier approach
(2) Integrated asset-liability approach
(3) Two-portfolio approach.

24
Q

encounter restriction

A

gặp hạn chế

25
Q

commingled investment vehicle

A

like mutual fund, ETF, …

26
Q

MCTR when portfolio optimal

A

= sharpe ratio

27
Q

what is optimum risk budget

A

An optimum risk budget allocates risk efficiently

28
Q

measuring the success of TAA relative to SAA

A

Sharpe ratio

29
Q

3 steps in Process of MVO

A

S1: Do inputs:
+ expected return of each asset
+ Variances
+ Covariances (correlations) between asset (pairwise)
+ Risk averse factor
+ Constraints
S2: Do MVO:
+ Maximize Utility
+ Subject to constraint
S3: Do output
+ Asset Allocation (Port weight)
+ Port expected return
+ Port variance

30
Q

Step of reverse optimization

A
  1. S1: do input:
    + Assumed optimal AA
    +Variances
    + Covariances (correlations)
    + Risk averse factor
    + Constraints
  2. reverse MVO
    + Maximize MVO
    + Subject to constraint
  3. Output: implied returns
  4. Do MVO again
    + Implied returns
    + Variances
    + Covariances (correlations)
    + Risk averse factor
    + Constraints
  5. Do MVO
    + Maximize utilities
    + Subject to constraint
  6. Outputs:
    + revise AA
    + port expected return
    + port variance
31
Q

step of Black Litterman do

A

It is extension of reverse MVO, not only implied return, but also reverse implied return

32
Q

resample MVO

A

S1: start with basic MVO
S2: Do Monte Carlo, generate thousands of random variations for the inputs around the initial estimates, resulting in efficient frontier
S3: The resampled efficient frontier is average of all the simulated efficient frontier
S4: Do AA base on the average efficient frontier

33
Q

Key rate Duration (truoc gio bi hieu sai)

A

+ 1 danh mục có 3 position P1, P2, P3, va P la tong danh muc
+ Mod Du cua tung position la D1, D2, D3
Khi do:
+ KRD1 = D1 x P1/P
+ Danh muc co KRD = KDR1 + KRD2 + KRD3
+ Bien dong gia cua danh muc Delta P = KDR1 x DeltaP1 + KRD2 x DeltaP2 + KRD3 x DeltaP3

34
Q

tangency portfolio

A

portfolio tiep tuyen, is corner portfolio

35
Q

Roy’s Safety first

A

+ = (Re - Rm)/sigma
+ provides a probability of getting a minimum-required return on a portfolio

36
Q

Adv & Dis adv of MVO

A

Adv:
+ widely understood & accepted
+ modeling of EF can be simplified with the use of corner portfolio
Disadv:
+ Estimate errro -> use Resample EF
+ Static -> use MCS
+ Input base on historical bases

37
Q

Adv & Dis adv of resample EF

A

Adv:
+ More stable than MVO
-> Able to judge the need for rebalancing
-> less port. turnover & lower transactio cost
+ Better diversification than MVO
Dis Adv:
+ No theoretical basis
+ Static
+ Input base on historical data

38
Q

Adv & Dis adv of Black litterman

A

Adv:
+ More stable than MVO
+ Better diversification than MVO
+ Incorporate manager view
Dis adv:
+ Complicated
+ Static
+ Input base on historical data

39
Q

Adv & Dis adv of MCS

A

Adv:
+ use to complement to others approach
+ Model path dependency
Dis adv:
+ complicated
+ output is as accurate as input

40
Q

Adv & dis adv of ALM

A

Adv:
+ same as MVO but add liabilities
Dis Adv:
+ Sames as MVO

41
Q

Experiance base

A

Adv:
+ Incoporate asset allocation experiance
+ Easy to understand
+ Not expensive
Dis adv:
+ too simple

42
Q

Active accumulator va independence individualist khac nhau ntn

A

II is:
(1) lower active
(2) some bias is different

43
Q

When asset classes move in sync, further divergence
from target weights is less likely, which favor …………. rebalancing ranges

A

wider

44
Q

When asset classes move in sync, further divergence
from target weights is more likely, which favor …………. rebalancing ranges

A

narrower

45
Q

the most comprehensive method:
A. The two portfolio approach
B. Surplus optimization/ Surplus efficient approach
C. Intergrate asset-liability

A

C. Because it is multiple period

46
Q

how the funded position of 3 method to use:
A. The two portfolio approach
B. Surplus optimization/ Surplus efficient approach
C. Intergrate asset-liability

A

All of them can be use for over/under/in funded
but with the two portfolio, only for basic

Asset Allocation (3 decks)

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