Quantitative Foundations Flashcards
What is the general term denoting compound interest when the interest is not continuously compounded.
Discrete compounding
What is the primarsy challenge that causes difficulty in calculating the return performance of a forward contract or other position that requires no net investment? How is that addressed?
If the forward contract has a starting value of zero, it would cause division by zero. One solution is to base the return on a notional principal. Another is to exclude collateral.
An IRR is estimated for a fund based on an initial investment when the fund was created, several annual distributions and an estimate of the fund’s value prior to termination - what type of IRR is this?
Since Inception IRR
An investment has two solutions for its IRR. What can be said about the investment and the usefulness of the 2 solutions.
There are 2 sign changes in the cash flow stream of the investment. None of the IRRs should be used.
Two investments with simplified cash flow patterns on an initial cost followed by positive cash flows. Why might IRRs of the investment provide an unreliable indication of which adds more value?
The major challenge when comparing IRRs across investments is when investments have scale differences. Scale differences are when investments have unequal sizes or timings of their cash flows.
An analyst combines cash flows from a 20% IRR and a 30% IRR into a single investment, will the IRR of the combination be the average of the two IRRs?
No. The IRR of a portfolio can vary substantially from an average IRR of the underling investments.
What is dollar weighted return?
The dollar-weighted return is the rate of return at which the discounted cash inflows and discounted cash outflows are equal.
What is a time weighted return?
Time weighted return strips out cash flows and measures the results of the overall strategy.
IS an IRR a dollar-weighed return? Why?
IRR is a dollar weighted return because it factors in cash flows.
What is the primary cause of the J-curve shape?
Combination of:
- early expense recognition
- early loss recognition
- deferred gain recognition
In which scenario will a clawback clause lead to payments?
When incentive fees paid to GPs are returned to LPs when early profits are followed by losses.
Difference between hard hurdle and soft hurdle?
Hard hurdle - limits fees to profits in excess of hurdle rate
Soft hurdle - earn fees on all profits once the hurdle rate is achieved.
