CFA Level II Portfolio Management – Flashcards
54 test answers
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???????Portfolio,expected return??beta,???well diversified,???????????????
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??well diversified portfolio,????????? lumda,????not diversified portfolio?beta??expected return,?????????????????????portfolio????????return?8%??????rentun?7.25%,?construct?short???portfolio (build from the combination of well diversified portfolios),???7.25%??????short??????portfolio,?8%??
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Multifactor model-Macroeconomic fatcor
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??=???+factor return+firm specific risk F=surprise, beta-factor senstivity F(gdp) surprise in GDP rate,F(qs) surprise in credit quality spread (Actual value - predicted value) ---X ??Inflation-predicted inflation ????return???????GDP,credit quality spread surprises,regression??sensitivity-time series data Bi1,Bi2 are surprise sensitivity of assets error term-firm specific surprise which not be explained by model E(Ri)-expected return derived from the APT equation alpha epislon??????? beta i=(PE-PE average)/sigma PE
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slope coefficients-Factor sensitivity
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measure of the response of return to each unit of increase in a factor holding all other factors constant
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Multifactor model-Fundamental fatcor
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bi1, bi2?x?standardized P/E or Size,?return, b1,b2???F(p/e),F(size) F(p/e),F(size)?additional return associated with one increase corresponding to b value Cross sectional data,???????????????return ?????????????????????????b???????F, surpris??
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Security selection return
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Security selection return = active return - factor return active return(Rp-Rb)= factor return (?????????(beta-beta') lumada1) +security selection return (b0-b0')
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Active Risk/Active return(Value added)/
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Active return-differences in returns between a managed portfolio and its benchmark Active risk-tracking error volatility Standard deviation of active returns S(Rp-Rb)
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Information risk
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evaluating mean active returns per unit of active risk ??????active risk???active return, information risk assess active return, sharp ratio assess total return Only active fund manager uses information risk
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Active risk squared=
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active risk squared= active factor risk + Active specific risk Active factor risk-over weight a specific kind of stock/sector, eg. overweight tech stock in the portfolio Active specific risk-asset selection risk-overweight one specific stock in the sector, overweight microsoft in tech stocks
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Value added -2
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Ra=sum of wi x Rai wi-???weight Rai-???????????? ?????????????????????
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Value added -3
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????asset allocation??, rb rp?? Value added=Value added (asset allocation) + value added (security selection) ??? Asset allocation value added of one asset=asset allocation difference comparing to benchmark (%) * benchmark return Security selection =Actual asset allocation (%) * active return difference comparing to benchmark
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Active return
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active return=security selection return+factor return ?multifactor model????? active return= security selction-expected return difference + factor return- (beta1-beta0)×lumda
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Sharp ratio?cash
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Reward per unit of risk in absolute returns Risk free rate is the bench mark, thus it is unaffected by the addition of cash or leverage in a portfolio. Sharp ratio?cal?slope, ????risk free asset like cash,??????????????????
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Information ratio??benchmark portfolio
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Measures reward per unit of risk in benchmark relative returns. Benchmark is benchmark portfolio,???sharp ratio ? benchmark ??risk free??benchmark portfolio, ?????benchmark portfolio,?sharp ratio???????????IR *UNAFFECTED BY AGGRESSIVENESS OF ACTIVE WEIGHTS* ?????benchmark portfolio???asset????investment return??????cash,ir??
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Correlation Triangle-new ??????
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signal quality: information coefficient-correlation between the foretasted active returns and realized active returns VA: Value added Portfolio construction:The transfer coefficient measures how well the anticipated (ex-ante), risk adjusted returns correlate with the risk-adjusted active weights. ???(0,1)??
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Constructing Optimal Portfolios, level of active risk-new-?????
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Optimal portfolio-?????? 1.??active risk=IR/SRb*benchmark risk 2. total risk of actively managed portfolio is sum of benchmark return variance and active return variance
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Constructing *optimal* portfolio-?????
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Principal-finding the single risky asset portfolio with maximum sharp ratio Property in active management theory: squared sharp ratio of actively managed portfolio equal to squared sharpe ratio of benchmark plus the information ratio squared ?????? SRp=(SR(b)^2+IR^2)^1/2 Portfolio with highest information ratio will also have the highest sharp ratio
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Information coefficient
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Nc-?????? N-?????
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Grinold rule-?expected return
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???expected return IC-expected information coefficient Si-a set of standardized forecasts of expected returns across securities-scores Sigma-volatility
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Basic fundamental law of active management
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Information ratio ????????????? Constraint-many investors are constrained to be long only
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Full fundamental law of active management-??
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??TC: cross sectional correlation between the foretasted active security return and actual active weights (?????return????
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Discount rate ????
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1.real risk rate 2.inflation 3.Risk premium
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Performance measurement
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expected value added conditional on the realized information coefficient ICr actual performance vary from expected value in a range determined by the benchmark tracking risk E(ra)=Ra+Noise, noise>0 noise ????1-tc^2,Ra ???? Tc^2
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Present value model
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?? 1.real risk rate 2.inflation 3.Risk premium
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Risk free rate-l
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Mt=Utility future/Utility Current=Ut/U0 <1 ????? Mt-inter-temporal rate of substitution-????? ????????????Mt??utility l=(Pt-P0)/P0=1/Mt - 1 P0=E(Mt) Mt=Ut/U0 GDP growth and volatility of GDP growth---????l
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BR??
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row- correlation
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????
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??????BR??IR? BR???IC TC???IR??????
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P0??????
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1. zero coupon 2. ?inflation 3. ?default ?? 4. payout??????
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Real risk free rate ???utility, investor wealth, investor's future income expectation??
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1.??utility???real risk free rate ?? Mt??? P0???1/P0 - 1?? 2.???????real risk free rate?? ????utility???????ut,u0?? 3.????????????real risk free rate ?? Mt??,real risk free rate ??
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Risk averse investor's covariance of the inter-temporal rate of substitution with asset price
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For risk-averse investors, when the expected future price of the investment is high (low), the marginal utility of future consumption relative to that of current consumption is low (high). Hence, the covariance of the inter-temporal rate of substitution with asset price is expected to be negative for risk-averse investors.
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flight to quality
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???????? Good consumption hedge
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GDP Growth and RFR
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if GDP growth ????GDP growth????Ut???Mt??????? RFR ?? ??: GDP??RFR?? GDPJ??RFR??
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Risk free, ignore inflation, zero interest bond, risk seeking and risk aversion investor's co-variance between price and mt (inter temporal rate of substitution) and risk premium (+,-) covariance term??risk aversion
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P bond ?? *risk aversion* COV(p1,mt)0 (??????????premium????????? ?????covariance;0,????? interest rate???bond????
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risk free rate and inter temporal rate of substitution
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inversely related the higher the return of investor, more important current consumption becomes relative to future consumption
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real risk free rate and gdp growth and gdp volatility
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???
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Inflation discount rate
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Inflation rate ?? ???? CF/(RFR+inflation rate+Risk Premium) Inflation rate??????? ?=expected inflation rate risk free rate + ? = nominal risk free free short term inflation=risk free rate + ? long term inflation = risk free rate + ? + ? (? is uncertainty of inflation)
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Breadth
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BR, or breadth, conceptually equal to the number of independent decisions made per year by the investor in constructing the portfolio.
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active return vs alpha
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RA = RP - RB, while ?P = RP - ?P × RB. alpha is actual return on portfolio - expected return
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Taylor's rule
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?????0.5??target
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? + ?
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? + ? = Breakeven inflation rate = yield of noninflation index bond - yield of inflation index bond *reading55 is new chapter this year, the test will be mostly from the book's exercise*
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Risk premium and business cycle-contraction, scarcity and recession
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credit spread goes up default rate goes up and recovery goes down default rate (1- recovery rate)= expected loss%
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real default free bond
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P0=Ut/U0
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Discount rate of equity vs high risk bond
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equity:R+ ? + ?+?+? ?+?????equity premium bond: R+ ? + ?+? ?-credit risk premium ?-additional risk premium for equity comparing to high risk bond
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economic ? P/E P/B???
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P/E P/B ??? ?????+? ???discount rate ??? equity price??
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growth stock attributes
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growth stock high growth rate, small earning, dividend low growth stock?????????p/e?
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Commercial real estate discount rate
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R+ ? + ?+?+?+? ?-illiquidity risk premium ????? ?+?-risk premium?????? 1. rent, tenet credit risk 2. sales, value uncertainty
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portfolio management-identifying investor's objective and constraint
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planning -objective (RR: Risk and return)and constraint (TTLLU: tax, time horizon, legal, liquidity, unique circumstances) execution feedback -monitor balance -performance evaluation
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cyclical?non cyclical sector?senstive?????
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The sensitivity of a corporate bond's spread to changes in the business cycle and the level of cyclicality tend to be positively correlated. The greater the level of cyclicality, the greater the sensitivity of the bond's spread to changes in the business cycle. During an economic downturn, the spreads of corporate bonds can be expected to widen, as the risk premium that investors demand on risky financial assets will increase. When spreads widen, the spreads on bonds issued by corporations with a low credit rating and that are part of the cyclical sector will tend to widen most. During recessions, cyclical companies are likely to experience sharp declines in earnings, more so than non-cyclical companies. In contrast, while coming out of a recession, cyclical companies are likely to generate higher earnings growth relative to non-cyclical companies.
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bad consumption outcomes hedge
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depends on the relative certainty about the amount of consumption that the investor will be able to undertake with the payoff, which is short-dated, default-free government bonds
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Risk-averse investors demanding a large equity risk premium are most likely expecting their future consumption outcomes and equity returns to be •uncorrelated. •positively correlated. •negatively correlated. ?
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B is correct. If investors demand high equity risk premiums, they are likely expecting their future consumption and equity returns to be positively correlated. The positive correlation indicates that equities will exhibit poor hedging properties, as equity returns will be high (e.g., pay off) during "good times" and will be low (e.g., not pay off) during "bad times". In other words, the covariance between risk-averse investors' inter-temporal rates of substitution and the expected future prices of equities is highly negative, resulting in a positive and large equity risk premium. This is the case because, in good times, when equity returns are high, the marginal value of consumption is low. Similarly, in bad times, when equity returns are low, the marginal value of consumption is high. Holding all else constant, the larger the magnitude of the negative covariance term, the larger the risk premium.
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ips
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ips ?planning step
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