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CFA-2 > Quantitative and Economics > Flashcards

Quantitative and Economics Flashcards

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CFA flashcards
1
Q

Use linear equation to forecast results one quarter ahead

Salest=Bo + B1t + et

  1. Analysis done over 15 years
  2. Intercept coefficient 10
  3. Trend coefficient 16
  4. Time variable (quarter #) t
A

Yt = 10 + 16(61) = 986

  • Remember you are forecasting out an additional quarter plus the 60 quarters already studied.
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2
Q

Sample covariance (cov)

A

∑(x-xbar)(y-ybar) / n-1

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3
Q

Sample correlation coefficient (r)

A

Cov(x,y) / (Sx)(Sy)S = Standard Deviation

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4
Q

Limitations of Correlation Analysis

A
  1. Linear relationships (not quadratic)2. Outliers (news vs. noise)3. Not causation4. Spurious (Chance, mixed third variables)
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5
Q

Two-tailed “t-test” with n-2 degrees of freedom to tell if population correlation is 0 or not 0

A

t = r√n-2 / √1-r^2

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6
Q

Decision rule for two-tailed test

A

Reject H0 if1. t-stat > +ve tc (Positive critical value)2. t-stat < -ve tc (Negative critical value)3. t-stat > |Tc||Tc| = T critical value

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7
Q

Dependent Variable (which axis and description)

A
  1. Y-axis2. Seeking to explain or predict the Y variable
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8
Q

Independent Variable (which axis and description)

A
  1. X-axis2. Used to explain or predict the Y or dependent variable
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9
Q

Regression Model Equation

A

Yi = b0 + b1Xi+Ei1. i = 1,…,n2. This uses the estimates of Y (includes a carot above the Y and b)

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10
Q

Some of Squared Errors (SSE)

A

∑(Yi - Yi~ or (b0+b1Xi))^2

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11
Q

Calculation for b1

A

b1 = Cov(X,Y) / Var (X)

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12
Q

Calculation for b0

A

b0 = Yaverage - b1(Xaverage)

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13
Q

The midpoint of a regression series

A

= (Xbar, Ybar)1. will be plotted on the regression line

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14
Q

Standard Deviation

A

NAME?

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15
Q

Steps for calculating correlation coefficient

A
  1. calculate sum and mean of each variable2. Calculate cross product of (xi-xbar)(yi-ybar) for each variable (by row)3. Calculate squared deviation for each variable (by row)
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16
Q

Regression Line Equation

A

Yi~ = b0~+b1~Xi~ = ‘hat’ or estimate of these variables

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17
Q

Find correlation of two stocks using market model

A

Calcuate total risk (standard deviation) for both securities being compared. V’ is the common macro factor variance:Security 1 σ² = (β² x V’) + unsystematic risk²Calculate covariance:Beta(a) X Beta(b) X common macro factor varianceCalculate correlation: cov/totalriskA X total risk Y

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18
Q

Calculate a Cross Rate

A

Cross Rate = (F/USD) / (D/USD)

- Imagine that “usd” is a common denominator

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19
Q

Relative Purchasing Power Parity

A

ES1 = So X [(1+inflationF)^2 / (1+inflationD)^2]

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20
Q

International Fisher Relation (determine if projected inflation rates are consistent)

A

(1+rF%USD)/(1+rF%F) = 1+expectedinfUSD/1+infF = should equal exp infF

(1+rF%D)/(1+rF%USD) = 1+infD / 1+expinfUSD = should equal exp infD

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21
Q

Uncovered Interest Rate Parity Forecast

A

So[(1+rF%D)/(1+rF%F)] = Uncovered Interest Rate Parity Forecast

This is also how to calculate a no-arbitrage forward rate value.

DON’T FORGET TO BREAK THE RISK FREE RATE OUT BY THE TIME/360

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22
Q

Mundell Flemming Model (expansionary Monetary Policy and Fiscal Policy)

A

Expansionary Monetary Policy

  • Flexible exchange rates: lower interest rates and currency drops
  • Fixed exchange rates: expansionary policy is futile and limited to FX reserves

Expansionary Fiscal Policy

  • Flexible exchange rates: increases inflation&interest rates driving currency higher
  • Fixed exchange rates: To prevent currency appreciation currency will be sold and increase money supply
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23
Q

Average Cov of port approaches total average Cov when…

A

The number of assets in the portfolio are large.

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24
Q

Minimum Variance Portfolio

A

Portfolio that has the smallest variance among portfolios with identical expected returns.

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25
Q

Global Minimum Variance Portfolio

A

The portfolio that sits to the furthest left on the efficient frontier. All portfolios below are inefficient and all portfolios above may be efficient on the CAL.

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26
Q

Sharpe Ratio (formula and slope of what?)

A
  1. Sharpe ratio = (ErP - Rf%) / SdP
  2. Sharpe ratio = Slope of Capital Markets Line
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27
Q

Expected Return of Portfolio

A

ErP = W₁(Er₁) + W₂(Er₂)…

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28
Q

Market Portfolio has Highest Possible Sharpe Ratio, Therefore….

A

All other portfolios must have a sharpe ratio below the market’s sharpe ratio.

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29
Q

A Factor Portfolio (definition)

A

A portfolio with a beta of 1 to a single factor and a beta of zero to other factors. Will have more active factor risk than a tracking portfolio.

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30
Q

Y-Axis Intercept for Multifactor Model

A

= Expected value of multifactor model. The start calculation is the intercept because multifactor models are based on sensitivity to surprises.

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31
Q

Ex-post Information Ratio

A

IR = (α / standard error of α) / √n

  • √n: The number of periods covered by the past α
  • α: Estimated coefficient of alpha
  • α / Standard error of α: the t-statistic of α
  • Standard error of α = SDα / √n
32
Q

Annualized Value Added for Portfolio

A

Anualized VA = α - (ƛ X ω²)

Step 1: Annualized α = α(n)

Step 2: Annualized ω = ω(√n)

    • ω: Residual risk*
    • α: Residual return*
33
Q

Optimal Annual Residual Risk (for portfolio)

A

ω* = IR/2ƛ

    • ω*: Optimal annual residual risk*
    • IR: Information ratio*
34
Q

Information Coefficient for Market Timing

A

IC = (2 X Winning%) - 1

35
Q

Information Ratio for Market Timing

A

IR = IC X √BR

    • BR = Breadth (number of trades, which is like n-periods for managers)*
    • IC = Information coefficient*
    • BR may be independent bets on individual stocks which would then be BR/#of independent stocks*
36
Q

Combined Information Ratio

A

Step 1: IRcom² = IRx² + IRy²

Step 2: IRcom = √IRcom²

- IRcom: Information ratio for both strategies

37
Q

Capital Deepening (economics)

A
  1. An increase in the capital to labor ratio.
  2. More foriegn investment can drive this.
  3. Moves economy further along the productivity curve
38
Q

GDP Growth Rate attributable to Total Factor Productivity

A

GDP = ΔTFP + α(LT growth rate in capital) + [(1-α)(LT growth rate in labor)]

    • α: 1 - (labor cost/total factor cost)*
    • TFP is equal to the growth rate of technology*
39
Q

Problem Predicted by Classical Economic Model (dismal)

A

Technology will not lead to individual wealth because it will increase population growth until only subsistence is possible.

Wrong because….

  1. Technology correlated with slowing population growth
  2. Technologies growth greater than population growth
40
Q

Exogenous Economic Growth Models Predict…

A

Technological advances will benefit multiple sectors of the economy as new investments are made within and across companies.

41
Q

Covered Interest Rate Parity / Covered Interest Arbitrage

A

Covered parity: F/S = (1+Rf%”A”)/(1+Rf%”B”)

Covered arbitrage:

  • If F/S < rate calculation then short A
  • If F/S > rate calculation then short B
  • F/S: Forwardrate/Spotrate*
  • A/B: Units of A per B ie: USD/GBP = 2*
42
Q

Proper transformation for dependant variable in linear equation if there is a exponential rate of growth

A

Logarithmic transformation

  • You may be able to multiply each side by its natural log.
43
Q

Using an AR model of Order 1

  1. Find mean reverting value?
  2. Will next period be higher or lower than previous?
A
  1. Mean Reverting Value = Intercept coef / 1 - (Lag 1 coef)
    A. If MRV is lower than prior value then next value expected to fall (revert)
    B. If result of linear model is lower than prior value then next is expected to fall
44
Q

P-Value

A

The smallest level of significance at which the null hypothesis can be rejected.

If p=.02 then null is rejected for .05 level of significance

45
Q

Auto Regressive Heteroskedasticity

  1. What does it mean?
  2. Is it exhibited in the model?
A
  1. ARCH tests to see if variance of error terms is constant
  2. If lagged residual squared coefficient p-value is below significance level (<.05) then it is in the model
46
Q

Sunset provisions in regulation

A

A law will cease unless other laws are implemented to extend it.

47
Q

Regulatory Burden

A

the costs to the regulated entity from regulations.

48
Q

r Squared

A
  1. how much of the movement of the dependent variable can be explained by the dependent variable.

2.

49
Q

Determine F Value that tests the hypothesis that all coefficients equal zero

A

F = Mean regression sum of squares / Mean error sum of squares

F = (R²/total dependent variables) / (ESS / Degrees of Freedom)

50
Q

Conditional Heteroskedasticity

A

Variance of the regression errors are not constant and related to regression independent variables

51
Q

If stock value based on CAPM is greater than forecasted expected returns…

A

The stock is overvalued.

52
Q

Country most likely to benefit from capital deepening

A

The country with the highest α

α = Share of capital to GDP or cost of capital to Total Factor Cost

53
Q

Factors that affect the growth rate of labor

A
  1. Increase in labor participation rate
  2. Increase in hours worked
  3. Higher population growth (or immigration)
54
Q

In steady state (equilibrium) economy “rent” or marginal price of capital is?

A

r = αY/K

Y = GDPo

K = Capital base

55
Q

Active Factor Risk

A

Deviations of a portfolio’s factor sensitivity from the benchmark’s (like the S&P 500) sensitivities.

56
Q

Arbitrage Pricing Model

A
  1. Need to know factor sensitivities and the risk premium for factors.
  2. Risk premium equals Rf% - The return of a factor portfolio to each factor
  3. Re = Rf% + β1(ƛ1) + β2(ƛ2)
57
Q

Calculate Standard Error from slope estimate

A

= slope estimate / t-stat

58
Q

Calculate Confidence Interval from slope estimate

A

= Slope Estimate +/- (crit-t X standard error)

59
Q

When using t-table with 99% confidence which column should be used?

A
  1. one tailed (ie greater than or equal to): .01
  2. two tailed (not zero): .005
60
Q

Asset Market Approach focuses on?

A
  1. Fiscal not Monetary Policy
61
Q

Fisher Effect (not Fisher relation)

A

Real interest rates are a combination of expected inflation and interest rates.

62
Q

Covered Interest Rate Parity / Arbitrage (correct)

A

1+rf%D = (1+rf%F)F / Spot rate

Work through borrowing and paying back the currency expected to drop and profiting from the currency expected to rise (both currency values will go up with interest accumulation but the borrowed currency will be negative)

63
Q

Alpha in the GDP Growth Equation

A
  1. 1 - (total labor cost/total factor cost)
  2. 1 - (GDP paid to labor/GDP)
64
Q

Endogenous Growth Model (GDP)

A

Economic growth due to savings and productivity do not reach a steady state or equilibrium because technological growth externalities.

Neoclassical asserts that the economy only grows above equilibrium in brief spurts.

65
Q

Relative Version of PPP (currency rates)

A

Determined solely by the difference in expected inflation rates.

So - ((InfA% - InfB%) X So) = Forward Rate

  • Predicts that A will grow in value against B if B’s inflation rate is greater
66
Q

Club Convergence (which economic Growth Model?)

A
  1. Neoclassical
  2. Lower per capital income members of a “club” will converge to the average for the club.
  3. Lower level club members will converge as they borrow or imitate technologies of higher level members.
67
Q

Conditional Heteroskedasticity

A

The error term has a constant variance with the INDEPENDANT variable

68
Q

Steady State rate of Economic Growth

A

Y/Y = (TFP% / 1-a) + n

  • TFP%: Growth in total factor productivity
  • 1-a (this is the % of labor cost to total factor productivity)
  • n: growth rate in labor force
69
Q

Growth rate in potential GDP

A

= Growth rate of labor + Growth rate of labor productivity

= n +

70
Q

International Fischer Effect (real interest rates)

A

R% = N% - EXPECTEDInf%

71
Q

Taylor Rule

A

i = rn + π + α(π-π*) + β(y-y*)

i = prescribed interest rate

rn = Neutral real policy rate

π = Current inflation

π* = Target inflation

y = log of current level of output

y* = log of economy’s potential/sustainable level of output

72
Q

Bo and B1 if regression is a random walk

A

Bo will be close to 0 and B1 will be nearly 1.

73
Q

Best forecast for a random walk variable into the next period

A

The current period’s value is the best forecast for the next period of a random walk variable.

74
Q

Test whether regression series is ARCH by what?

A

B1 (or C1) will be significantly different from 0

75
Q

When analyzing two time series in regression you need to ensure 2 things…

A
  1. Neither the dependent variable series nor the independent variable series has a unit root… or
  2. That both series have a unit root and are cointegrated.
76
Q

Cointegrated variables

A

Two or more time series are cointegrated if they share a common stochastic drift. Like futures and stock indexes.

CFA-2 (6 decks)

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