CFA LES: PM Pathway

Which are considered more concentrated in terms of risk exposure: factor based strategies or market cap weighted indices?

Factor based strategies

Are factor based strategies considered concentrated?

Yes - they tend to be concentrated on specific risk factors

How does Morningstar mechanically categorize firms?

They take the growth score minus the value score to determine whether the fund is growth, value, or core

How does the Lipper method mechanically categorize firms?

They use a z score of six portfolio characteristics
(question didn’t say which specific characteristics)

What is a commonly used risk management strategy for statistical arbitrage trades?

Stop losses

What is the primary measure used to assess growth at a reasonable price strategies?

PEG ratio (lower = better)

If a question asks which company is more attractive from a GARP perspective, use PEG ratio to determine

Do quantitative funds have more or less stocks than fundamental funds?

Typically address a larger group of stocks

Are quantitative funds rebalanced more frequently or less frequently than fundamental funds?

More frequently due to rules based nature of strategy

Active share description and how to interpret

Active share are holdings different from benchmark

Active share of 100% = no similar holdings to benchmark
Active share of 0% = same holdings as benchmark

Active return formula from fundamental law of PM

Active return =
Info coefficient x transfer coefficient x sqrt breadth x active risk

What is the active risk profile of a sector rotating manager?

High active risk due to concentration in specific sectors

What is the correlation of explained risk and portfolio quality?

Positive

Lower unexplained risk = lower portfolio quality

Higher explained risk = higher portfolio quality

What is the maximum gross exposure of long short portfolios according to CFA?

100% of portfolio capital

Type 1 liabilities re cash flow amount and timing

What’s an example?

Cash flow: known
Timing: known

Option free, fixed rate bonds

Type 2 liabilities re cash flow amount and timing

What’s an example?

Cash flow: known
Timing: unknown

Callable or puttable bonds

Type 3 liabilities re cash flow amount and timing

What’s an example?

Cash flow: unknown
Timing: known

Floating rate bonds, TIPS

Type 4 liabilities re cash flow amount and timing

What’s an example?

Cash flow: unknown
Timing: unknown

P&C insurers, some DB plans

What are the two requirements to immunizing multiple liabilities?

Hint: money duration and convexity of assets and liabilities

1.) Money duration of asset and liability must match

2.) Asset convexity exceeds liability convexity

Which type of bond indices generally have higher credit risk: value weighted or equal weighted?

Typically value weighted, because if an issuer borrows a lot, they will have more representation in the index. These issuers tend to have higher leverage and resultantly lower credit quality

Why is enhanced indexing considered more ESG friendly?

Enhanced indexing allows for exclusion of specific companies from the index that might not meet investor ESG constraints

To immunize a liability, the manager must rely on matching the cash flow yield, YTM, or coupon rate. Which one is it?

Cash flow yield of asset matching that of liability immunizes

How often do valuations need to occur in a benchmark for it to meet benchmark requirements?

Daily valuation

Butterfly spread yield curve formula

Butterfly spread yield curve =

(medium term yield x 2) - short term yield - long term yield

Which duration measure is best for bonds with options such as MBS?

Effective duration

Which duration measures are best for option-free bonds?

Macaulay duration and modified duration

How to tell if a bond is optionable by looking at z spread and option adjusted spread?

They should both be equal if the bond is optionable

Interpolated spread description and formula

I spread =

Bond yield - swap rate

ASW acronym

Asset swap spread

ASW formula

ASW =

Bond coupon rate - swap rate

Are all markets correlated in regards to credit cycle?

No - one country may be going through a different phase of the credit cycle, meaning internationalizing the portfolio can increase diversification if done properly

What type of trade algorithm should be used when a trader needs to quickly exit or establish a position due to fear that the price will move in favor of their position quickly?

Arrival price algorithm

What type of trade algorithm should be used when a trader seeks to avoid information leakage regarding a position?

Dark aggregator algorithm

What type of trade algorithm should be used when a trader has a greater risk tolerance for trade time horizons and doesn’t have expectations regarding a large price movement during the trade time horizon?

Time weighted average price algorithm

Market adjusted cost formula

Market adjusted cost =

arrival cost - (stock beta x index cost)

Arrival cost formula

Arrival cost =

(average price - price at time of order) / price at time of order

Index cost formula

Index cost =

(index vwap - index arrival price) / index arrival price

When do traders use dark pools?

When they want to hide information regarding their trade

When do traders use brokers as the principal for transactions?

When they must complete the trade fast

What is a POV algorithm and why is it used?

POV = percentage of volume

Used to minimize market impact
-As orders increase, order execution increases and vice versa