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CFA Level III Updated
How do endowments manage liquidity given heavy illiquid allocations?
Endowments manage liquidity through tiered asset buckets, credit lines, pacing models, and stress tests to avoid forced illiquid sales.
Why did endowments shift from income-focus to total-return investing?
UPMIFA abolished the income-only rule, letting endowments spend from total return and construct portfolios based on risk-adjusted return.
How do convexity trades work in fixed income?
Convexity trades position the portfolio to profit from expected interest rate volatility. Buy convexity (barbell, STRIPS) when expecting large moves; sell convexity (MBS, callables) to harvest yield pickup in stable environments.
How is a butterfly yield curve trade constructed?
Butterfly trades bet on curvature: positive butterfly (long body, short wings) profits when belly richens; negative butterfly (short body, long wings) profits when belly cheapens. Duration-neutral construction via dollar-duration weighting.
Is dollar-weighted return the same as money-weighted return?
Dollar-weighted and money-weighted returns are the same concept — both are the IRR of portfolio cash flows. Terms are used interchangeably in CFA materials...
What is the financial value of delaying Social Security claiming to age 70?
Social Security benefits grow from the full retirement age by roughly 8% per year of delay until age 70.
How do I compute the duration effect in fixed income attribution?
Duration effect = -(Port Dur - Bench Dur) x Yield Change. Halcyon's +0.4yr bet against -40bps rally produced +16bps. Must be combined with curve, spread, currency, and selection effects for complete attribution.
What is a Napoleon option?
Napoleon option pays coupon plus the worst monthly return in a year, floored at zero. Extreme negative vol-of-vol exposure; notorious for bank losses in 2008.
How does a cliquet option work and what is the ratchet feature?
Cliquet options are chained forward-start options that lock in periodic gains and reset the strike. Often capped and floored; expensive due to vol-of-vol exposure.
What are the GIPS private equity provisions?
Private equity GIPS provisions require IRR, fair value valuations, TVPI/DPI/RVPI multiples, vintage year composites, and sub-line disclosures.
How does a Qualified Charitable Distribution (QCD) work and who benefits?
A QCD directs up to $105,000 per year from an IRA directly to charity, satisfying RMDs while excluded from gross income entirely...
How do I construct the return-seeking portfolio to complement the LDI sleeve?
RS portfolio generates excess return above liability growth. Target return depends on funded status and LDI yield. Typical mix: 40% developed equity, 15% EM, 15% PE, 10% private credit, 10% infrastructure, 10% hedge funds. Cap illiquids at 25-50% based on liquidity needs.
What is factor investing and how is it implemented in equity portfolios?
Factor investing systematically targets documented risk/return drivers like value, size, momentum, quality, and low volatility. It sits between pure indexing and fundamental active management, offering a transparent, rules-based way to capture specific return premiums.
What are common tail risk hedging strategies for institutional portfolios?
Tail hedges: OTM puts, VIX longs, Treasuries, CTAs, gold, CDX protection. Trade off cost vs convexity. Typical budget 0.5-2% of portfolio.
What does intergenerational equity mean for an endowment and how is it measured?
Intergenerational equity requires each generation receives substantially the same real support, measured by real-value-per-beneficiary over time.
What constraints shape non-profit foundation investment policy beyond spending?
Non-profit foundations face 5% distribution rules, mission alignment, donor restrictions, and UPMIFA prudence shaping their IPS.
Bullet vs barbell strategy — which outperforms under which curve scenarios?
Bullet wins on stable curves and steepening; barbell wins on parallel shifts (convexity advantage) and flattening. Barbell sacrifices ~10–15bps of yield for ~0.3 extra convexity at equal duration.
How do I calculate the return from riding the yield curve?
Ride-the-curve return = yield earned + price gain from rolling down to lower yield. Example: buying 5Y at 4.75% and selling as 3Y at 4.20% after 2 years yields ~5.54% annualized vs 3.85% on 2Y directly.
What is a modern tontine and why are some researchers proposing revival?
A tontine is a pooled longevity arrangement where participants contribute capital to a collective fund; when a member dies, their share is forfeited to surviving members.
What is a forward-start option and where is it used?
Forward-start options set the strike at a future date, typically at-the-money on that date. Priced in closed form under Black-Scholes; used in executive comp and cliquet structures.
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