Volume 1 Flashcards
Describe the first three elements of the capital markets expectation framework? Expectations needed, research historical record, specify methods/models?
Describe elements 4,5,6?
Sources of info, interpret current environment, provide expectations, monitor actual outcomes?
High quality forecasts have what?
What are the limitations of economic data and what are the data and measurement biases?
What are the limitations of historical estimates, what may be different going forward and using long data series may result in?
Why can ex-post risk be a biased measure of ex-ante risk?
Challenges in high quality forecasts (includes past two cards): What are the biases in analysts estimates, the failure to account for conditioning information, the misinterpretation of correlation?
Describe these psychological traps: anchoring, status-quo, confirming evidence trap, overconfidence, prudence, availability ?
availability bias - tendency of forecasts to be overly influenced by events that have left a strong impression
What is model uncertainty, parameter & input uncertainty? What is an exogenous shock and what can drive trend growth?
What are the 6 types of exogenous shocks,
What is economic trend growth analysis and what growth be decomposed into?
Equation for capital appreciation of market value of equity and return on equity?
Describe the econometric and economic indicators methods of economic forecasting and what types of models they commonly are?
Diffusion index can be an indicator model
What is the checklist approach and describe the pros and cons of each of three methods of economic forecasting?
Business cycles: describe the initial recovery and early upswing phases and the CME effects of each?
Up swing :CME effects/ * short rates begin to move up, long rates stable
* stocks - rising
Describe late upswing and slowdown phases and the CME effects of each
Describe recession stage and CME effects, inflation and inflation expectations are what?
Describe the asset classes of Cash, Bonds, Stocks and Real estate in terms of how inflation and inflation expectations affects them?
Cash is Rf bond
What is the aim of Central banks, in CME what do monetary and fiscal policy each impact, what is the taylor rule?
GDP trend is long term expectations
What is Quantitative easing, in CME what should LR and SR rates consider?
What happens to rates when M/F policy is T/L and how to the business cycle phases effect the shape of the yield curve?
Explain the international macro-economic linkages and what is the trade deficit/surplus formula?
What are the interest rate/ exchange rate linkages and what 3 things can a country not do at the same time?
Expected return on equity equation
How does a higher trend growth vs lower trend growth impact when actual growth increases?
Describe the YTM approach of forecasting fixed income returns?
What happens when MacDur is greater, equal or less than investment horizon?
What is the basic building block aproach - 4 components and the risk premium with each component?
What is the one period default rate, what are the four main drivers of the term/maturity premium?
What are the components of the credit premium? What are credit spread primarily driven by and what do IG and HY credit premiums reflect?
Liquidity premium: When is the liquidity premium lower?
In emerging market bonds what are the economic risks?
In EM bonds what are the political and legal risks?
What is the historical statistics approach of forecasting equity returns?
What is the DCF method of forecasting equity returns and what is the Grinold -kroner model?
What is the equity risk premium approach to forecasting equity returns?
What is the equilibrium risk premium approach and what two models it is a combo of?
What is the combined equilibrium model equation?
What are the risk in EM equities?
What are the characteristics of RE as an asset class? What is the historical approach to forecasting RE returns? RE cycles are what?
How does cyclicality differ between RE types?
What is the boom-bust cycle?
What is the cap rate?
Difference between short and long term expected return to real estate?
What are the common cap rates for property types and what must be consider when forecasting a cap rate?
What is the risk premium perspective for RE?
In terms of term, credit and equity risk?
Describe RE in an equilibrium framework?
What are the difference in E(r) by property types?
Forecasting exchange rates: Explain the trade flows and PPP methods?
How can competitiveness and CA sustainability impact forecasting FX rates?
For fx rates to affect CA imbalances what must happen?
What are the implications of capital mobility on forecasting FX rates?
Portfolio balance, portfolio composition and sustainability: What happens to countries with trade deficits and balances are large and persistent over time?
What are the short/medium term currency effect and long term effect?
Forecasting volatility: What are the sample statistics - constant VCV matrix and VCF multi factor model methods? What is portfolio variance formula? What are downside of constant VCV sample statistics?
what are the characteristics of VCV from factor models and compare to sample statistics method? What is the shrinkage estimator model?
Describe the smoothed returns and time varying volatility models for estimating volatilty?
How do trend growth and global integration impact returns and how would it effect asset allocation?
How doe business cycle phases, M&F policy, CA balances and Capital account & currencies impact asset returns and asset allocation?
Explain the links between the IPS, strategic asset allocation and investment governance?
What are the three levels for effective governance?
What are the first two elements for effective governance (L&S objectives, Allocate decision rights)?
Describe elements 3 and4 and their features?
Developing IPS, developing SAA,
Describe elements 5&6 and their features?
Establish reporting framework, periodically undertake governance audit
Describe the economic balance sheet for the portfolio, what does it include, what should asset allocation consider?
What are the 3 broad approaches to Asset allocation?
What are the objectives of each approach?
What are the liabilities of insto investors compared to goals?
What are the relative risk concepts of each approach?
What is the definition of asset class and what are the three superclasses of assets?
What are the five criteria for specifying asset classes?
What are the 4 main asset classes and what comes under SAA vs implementation?
How does a factor-based approach differ in terms of portfolio construction and what of the investor it focuses on? When using factors as the unit of analysis you should specify….. and acknowledge……?
What are the 8 steps in SAA?
What are the important risk factors/metrics for asset only and for liability relative?
How do goals based usually set SAA?
Describe the two goal classification systems from Brunei (2012) and Chabra (2005)?
What is the global market portfolio and its baseline uses?
Describe the implementation choice of asset class weights? What is TAA and DAA?
Describe passive and active strategy in allocation to asset class decision?
Whats is involved in portfolio rebalancing?
What is calendar rebalancing?
What is percentage range rebalancing?
What are the strategic considerations and how do they impact rebalancing ranges?
What are cost-benefit ranges?
Describe mean-variance optimisation?
What is required?
What is the objective function?
What does optimisation involve?
What are the constraints for MVO?
What is an efficient asset mix?
What are the effects of sensitising inputs?
Kinks/corner portfolios are where asset classes leave/enter the allocation
What are the two treatments of cash?
Human capital is usually modelled as 70% bonds and 30% equity
Describe monte carlo simulation and its properties, and the first criticism?
What is the second critique of monte carlo and what are the remedies for both critiques?
What does the black-littman allow for and remedy?
What are the two methods for accepting views?
What other constraints can be added beyond budget constraint?
What is the remedy of resampled MVO?
What are the tools developed to help investor concerns beyond mean and variance of returns?
What are the MVO criticisms of sources of risk not being diversified, MVO not being directly connected to a liability e.g pension, MVO is a single period framework, and the remedies for each critique?
What are the problems and remedies for allocating to less liquid assets?
Final remedy for less liquid asset classes?
What is involved in the process of risk budgeting?
What is MCTR?
What is absolute contribution to risk (ACTR)?
When is an allocation optimal?
What is factor-based asset allocation?
What is the true risk of. a portfolio that is designed to fund a liability? Describe the difference between fixed vs contingent cash flows?
What are the different characteristics for liabilities and the effects on how to model them? Legal vs quasi, duration & convexity, factors driving liability, value of L compared to sponsoring Org, Timing considerations, Regulations?
What is the funding ratio?
What is the surplus optimisation approach?
What do you need for it?
Difference in asset allocation produced by surplus optimisation vs asset only?
What is hedging/return seeking porfolio? What is the basic and variants for it?
Who would basic and variants be more appropriate for?
How to form the hedging portfolio, what are the limitations of the approach and what is it complicated by?
What is the integrated asset-liability approach? Which type of firm might use this?
What is involved in goals based asset allocation? Why are there pre-established set of risk-return modules or models?
How/why are sub-portfolios introduced?
Describe minimum expectations and what this rate is used for? How do changes in this rate impact the portfolio?
Example of adjustments to to select the portfolio with highest probability/time adjusted return
Probabilities for needs, wants and desires?
Describe Heuristic AA?
Describe the 60/40, endowment model, risk parity AA approaches?
What us the 1/N AA approach?
What are the benefits/costs of rebalancing and adjusting weights back to SAA to reflect price drift?
What is calendar rebalancing, what factors percentage rebalancing?
Describe the constraint of asset size and explain economies and diseconomies of scale in this context?
What are the size constraints on equity, cash, bonds, RE and Alt Investments?
Describe the liquidity and time horizon constraint
Describe regulatory and other external constraints
Discuss tax constraints and how they may differ between investors and assets?
How to account for after-tax returns in portfolio optimisation?
How do taxes affect rebalancing and the ranges?
What are the strategies to reduce tax impact?
What usually triggers a revision in the SAA?
Describe TAA, the objectives, what usually causes an investor to undergo it, how to measure performance of it?
What are potential downside to TAA?
What are the two broad approaches?
What are the biases of loss aversion and illusion of control and they might affect AA?
How do mental accounting, representative bias, framing bias and availability bias impact AA?
