Volume 5 Flashcards
Common characteristics of insto investors: Scale/size and long term horizon
Common characteristics of insto investors: Regulatory frameworks, governance framework and principal agent issues?
Describe the norway and endowment models as methods of portfolio implementation?
Describe the Canada and Liability driven models as methods of IPS implementation?
Pension funds: what is the benefit payments, contributions, investment decision making, investment/longevity risk for DC and DB ?
Who are the relevant stakeholders for a DC and DB pension plan?
DB: What does the liability = and what assumptions are required to calculate?
What is the main objective of DB plans, what is the funded ratio?
For DB and DC: What will the investment horizon be and when will it be longer?
For DC what is the liability equal to?
What are the liquidity needs for pensions driven by and how does this influence investment horizon?
What are the legal and regulatory constraints for pensions and what are the tax & accounting effects?
Risk considerations (DB): How does planned funded status impact risk tolerance - under vs over funded? How does sponsor financial strength impact risk tolerance?
Risk considerations (DB): How does sponsor and pension plan common risk exposures impact risk tolerance? How does plan design and workplace characteristics impact risk tolerance?
What are the common risk objectives for pensions?
What are the return objectives for DC and DB?
Explain the role of equities, FI and AI in pension portfolios and how the allocation has changed historically?
Sovereign wealth funds: What are the 5 broad types?
Who are the stakeholders for SWF’s and how does the liability and IH differ by SWF type?
What are the liquidity needs for each SWF type?
What are the external constraints?
What are the investment objectives for each SWF type?
What is the usual asset allocation for equity, bonds, other and cash for each SWF type?
What are Uni endowments and foundations?
What are the four different types?
Endowments: who are the stakeholders, what is the investment horizon and the liability? What are the three methods for spending policy?
Endowments: What other things must be considered for the liability? What are the liquidity needs?
Foundations: Who are the stakeholders, what is the IH, how is the liability measured, and what are the liquidity needs?
What are the external constraints for both, and primary, secondary and tertiary investment objectives for endowments?
What are the primary and secondary investment objectives for foundations?
What is the asset allocation usually for endowments and how does size affect it?
Asset allocation for foundations, compare to endowments, and how does size affect AA?
Banks/Insurance: Who are int and ext stakeholders? Who are the stakeholders in terms of assets and liabilities?
What is the liability for banks?
What are the banks IH?
What are the liquidity needs for banks?
Who are the internal and external stakeholders for insurance companies?
Insurers: What are their liabilities and what is their IH for life and property/casualty? What are their liquidity needs for each type?
Insurers: how are their investment portfolio split? What are the legal regulatory constraints, what is the focus usually?
What is capital adequacy and what is usually required?
Banks: what are the objectives in managing securities portfolio (4)? Insurers: What are their investment objectives?
What are the three types of accounting systems? What are the investment objectives for banks?
What is the investment strategy for banks/insurers?
Explain how leverage affects changes to A’s or L’s?
How to derive the duration of equity ?
What is the volatility of equity capital a function of?
Moderate differences between Da and Dl imply what? The higher the leverage the more critical it is to have what equal what?
How to lower Da ?
How to raise Dl?
Formula for volatility of change in equity?
If correlation is 1 (between A & L) what does volatility of change in equity tend to?
What happens as correlations between A and L drop?
Discuss the motivation to trade of profit seeking? Who does this refer to usually?
Describe the motivations to trade of risk management/hedging and cash flow needs?
Describe the motivations to trade cash flow needs (continued) and corporate actions/index reconstitution and margin calls?
Trade strategy strategy/inputs: Describe the order characteristics of side and size and how buying & selling and big & small size differ in their effect?
Security characteristics: How do security type, short-term alpha and price volatility impact trade execution and risk?
How does security liquidity affect execution risk and trading costs?
Market conditions: How does lower/higher liquidity in markets affect trading horizons and execution risk/trade costs?
How does individual risk aversion affect trade urgency?
What is temporary market impact cost?
How to minimise information leakage from trades?
How does speed of trading affect execution risk? Effect of trading too fast vs too slow?
Reference prices: What are pre-trade benchmarks - decision price?
What is previous close, opening price and arrival price? Who usually uses each and for what?
Intraday benchmarks - who is mostly interested in these?
What is VWAP and TWAP and when is each used or most useful?
What are post-trade and price target benchmarks and who uses them?
What determines trade strategy?
What are the four trade strategies?
What is the higher touch approach and how would an urgent block trade usually be done?
For large block trades that are non urgent or very liquid what does broker usually do?
For large standardized securities with order driven markets how are trades done?
For large standardized securities not withorder driven markets how are trades done, why is high touch inefficient?
What is algo trading and what are scheduled/participation algos
Scheduled algo classification: what is VWAP and TWAP trading?
What/when are scheduled algos appropriate?
What are liquidity seeking algos and when/what are they appropriate for?
What are arrival price algos?
When/what are arrival price algos appropriate for?
What are dark strategy/liquidity aggregator and when/what are they appropriate for?
What are smart order routers (SORs) and when are they appropriate?
Equity markets: Where are most trades done, what type of trades are most common?
For large & urgent, large & non urgent, and small trades what trading method is usually used?
FI: Where are most trades done, what type of trades are most common? For small and large urgent and large & urgent which trading method is used?
ETD: What is used for non urgent and urgent trades?
OTC derivatives: Describe the market and what is used for non urgent and urgent trades?
FX: describe the market?
What is implementation shortfall and the formula?
What is IS decomposed into (3 components)?
Trade cost measurement example
Expanded implementation shortfall into delay and trading?
What does delay refer to and why does it occur?
What process can help improve execution performance and this allows for determining what?
Evaluate trade execution by measuring what and what?
What is Market adjusted cost and formula?
What is index cost?
What is added value and formula to calculate?
What should good trade governance include? What is the objective of a trade policy? Trade policies: What does meaning of best execution refer to and what trade offs does it make?
Trade policy: factors determining the optimal execution approach includes what?
List of eligible brokers and execution venues refers, what factors are considered?
Process used to
Process used to monitor execution arrangements includes what?
all brokers and execution venues used should be subject
to ongoing monitoring for reputational risk, irregularities,
criminal actions and financial stability
Explain performance measurement, attribution and evaluation and how they link to eachother?
An effective performance evaluation process will include …..?
What is return, risk and micro attribution?
What macro attribution and does it measure?
What is returns based attribution and its pros/cons?
What is holdings-based and transaction-based attribution and what are pros and cons of each?
What is the BHB and BF method of equity attribution and how do they differ?
BHB and BF when will each reward and how do each treat allocation?
BHF and BF example cal,
If top down want to be BF but if bottom up dont really mind but likely BHB
How to factor base models decompose returns? What is carhart 4-factor?
FI attribution: What is exposure decomposition for top down approach? And example of active decisions? What is this primarily used for?
Compares benchmark to active decision
Example FI exposure decomposition
Risk attribution: What are absolute mandates and relative ones?
What are the considerations for relative and absolute when using top-down, bottom up and factor based?
FI attribution: yield curve attribution -duration based, % total return equal to?, and how to determine effect of active PM decision? What is required and how is it usually used?
What is YC decomposition - full repricing and how is it different from above?
Macro attribution sponsor level: What are the two decisions to make?
How to break down into allocation, selection and interaction for value?
Micro attribution level - example with Brinson model
What portfolio benchmarks and liability based indexes and how do they differ?
What are the properties of a valid asset based index
What are absolute return, broad market, style and factor based indexes?
What are returns-based, manager universe and custom-security-based benchmarks?
What is active and style return?
What is the problems with benchmarking for AI?
P -portfolio return
A - active return
M - market return
S - Style return
B - benchmark return
What are benchmarks for hedge funds usually and why is benchmarking difficult for hedge funds?
What are the limitations for RE benchmarks?
PE benchmarks are usually what and what are their limitations?
What are indexes and limitations for commodity investments, managed derivatives and distressed securities?
Private Equity - mostly peer group benchmarks
Limitations/ - valuation methodologies may differ
* fund’s IRR depends on timing of gains/losses/CFs
What is the formula for true active return, misfit active return? What can misspecifictaion lead to and are appraisal ratios and are they supposed to achieve?
What is formula for sharpe ratio, information ratio and treynor ratio?
What is the appraisal ratio?
What is the sortino ratio formula?
What is the benefit of sortino ratio?
What are capture ratios, what do they measure and is upside and downside capture?
What is the formula for UC and DC?
What is upside downside ratio, what does it measure and how to interpret?
What is drawdown, formula for max drawdown, what is drawdown duration?
What are capture ratios useful for why is positive asymmetry a desirable trait, and thus what should UC/DC ratio be?
Manager responses to large drawdown can provide evidence of …what?
Investment manager selection: What is the manager universe, what is quantitative and qualitative manager assessment?
What is the null and alternative hypothesis for manager selection and what are type 1 and type 2 errors in selecting managers?
Why is there a general predisposition to focus on type 1 errors?
What does a consistent pattern of type 2 errors suggest? What is a cost of type 1 error (holding a manager without skill)?
Quantitative elements: How is style analysis done? What is returns-based style analysis?
What are pros/cons of RBSA?
What is holdings-based style analysis?
What are pros/cons of holdings based style analysis?
What does investment due diligence attempt to do? What is involved in the managers investment philosophy, what can inefficiencies be?
What are other relevant investment philosophy assumptions? What are the main questions that should be asked of the manager (to the person selecting the manager)?
Investment philosophy: Are the return sources linked to credible and consistent inefficiencies?
Investment personel: Two key questions to ask?
Investment decision making process: What is signal creation and capture?
What are the questions to be asked of portfolio construction?
What are the pros and cons of individual separately managed accounts?
Separately managed accounts cons (continued) tracking risk and investor behaviour?
What are pooled or comingled investment vehicles and what are the pros and cons?
Pros and cons for comingled are opposite of SMA
What are the terms of the investment?
How does liquidity differ between the different types of vehicles? What liquidity provisions do hedge funds usually have (redemption freq, notification period and lock up?
What is lock up (soft & hard) and gate?
Describe liquidity for PE/VC?
What are cons of an LP arrangement?
What are the pros of LP?
What does manager fees cover?
What is AUM fee?
What are performance based fees?
What is the symmetrical performance-based fee structure?
What is the bonus structure with downside limit?
Describe the structure which downside and upside limited but not symterical?
Common observations of performance fees?
Why are symmetrical fee structures not favoured by managers?
What can happen if managers have varying fee structures across different clients?
If managers can control the timing of profit realisation then they may…?
What is the balance for the uni endowment between? What is liquidity management and does it aim to avoid?
Describe the tool of liquidity profiling and time-to-cash tables. What is a liquidification classification schedule and liquidity budgets?
Example of LCS and LB
Assessing liquidity is a …. exercise?
Rebalancing commitments: What are systemic policies and automatic adjustment mechanisms?
What are the private market funds commitments?
What does manageing private market commitments require? What does stress testing help with?
How can derivates help with LM?
What is the illiquidity premium?
What are the reasons for higher allocations to illiquid assets
What are the M/C requirements for Independance and Objectivity, Misrepresentation and Misconduct
What are the M/C requirements for performance presentation, preservation of confidentiality and Loyalty?
What are the M/C requirements for Dilligence and Reasonable basis and Disclosure of Conflicts?
General rule for rebalancing: If going back to range use…., if going back to target use….?
