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CFA Level III Updated
How do I manage a floating-rate note portfolio for interest rate and credit risk?
FRN rate duration 0.1-0.3 years but spread duration = maturity. Diversify issuers, cap names, hedge tail credit with CDX, monitor liquidity.
How does prospect theory and loss aversion actually affect portfolio construction decisions?
Prospect theory, developed by Kahneman and Tversky, fundamentally challenges the classical assumption that investors evaluate outcomes based on final wealth levels. Instead, people evaluate outcomes relative to a reference point — typically their purchase price or a recent portfolio peak.
What is a completion portfolio and when is it used in equity management?
A completion portfolio fills the gap between a client's existing equity holdings and their target allocation. It is most commonly used when concentrated stock positions or multiple manager mandates create sector, factor, or geographic gaps relative to the desired exposure.
How does the Sortino ratio use target return for risk-adjusted performance?
The Sortino ratio divides excess return over target by downside deviation only, rewarding upside volatility while penalizing below-target drawdowns.
How is semivariance-based portfolio optimization implemented?
Semivariance optimization substitutes semicovariance for covariance, implemented via fixed-target shortcuts, iterative algorithms, or sample-based linear programming.
What spending policy formulas do endowments use and how do they trade off stability vs responsiveness?
Endowment spending formulas translate asset values into annual payouts — simple rate, moving-average, or Yale-rule hybrid.
How is an endowment's investment policy statement structured and what unique constraints apply?
An endowment's IPS codifies the dual mandate of supporting current spending while preserving purchasing power indefinitely.
How do equity factor strategies travel across international markets?
Equity factors travel internationally with typically higher premiums in EM than developed markets (value 4.6% EM vs 2.0% US). Multi-region factor diversification adds meaningful Sharpe improvement.
What is sector neutrality in cross-border portfolio construction?
Sector neutrality matches portfolio sector weights to the benchmark to isolate pure factor exposure. Without it, value and momentum tilts become sector bets. Implementation via within-sector ranking or constrained optimization.
Asset-Only vs Liability-Relative vs Goals-Based: when do you use each approach?
Asset-Only optimizes risk-return without liabilities (best for endowments). Liability-Relative focuses on funding specific obligations (best for pensions). Goals-Based divides wealth into sub-portfolios per goal (best for HNW individuals). The vignette's investor description usually makes the right choice clear.
How do top PE firms source proprietary deals?
Proprietary deal flow comes from executive networks, family office relationships, thematic outreach, add-ons, and sector conferences — built over years.
How do options on credit indices (credit index options) work?
Credit index options give the right to enter a CDS index position at a predetermined spread. Payers profit when spreads widen; receivers profit when spreads tighten...
How do variable annuities with guaranteed living benefit riders work?
Variable annuities invest the premium in subaccounts inside an insurance wrapper. Living benefit riders add insurance guarantees on top.
What is a factor-mimicking portfolio and how is it constructed?
A factor-mimicking portfolio is a long-short portfolio engineered to track a specific factor's return while minimizing exposure to other factors. Constructed via sorting, regression, or optimization...
How do I isolate spread duration from rate duration in a credit portfolio?
Buy the credit bonds and short Treasury futures sized to neutralize rate DV01. The residual P&L is pure spread exposure.
How do you manage an Active Accumulator?
The Active Accumulator (AA) has high risk tolerance and emotional biases — overconfidence, self-control failure, regret aversion. Example: Kenji Halloran-Park, 41, $48M post-exit. Advisor approach: MODERATE via goals-based segmentation — security/market/aspirational buckets, behavioral budgeting, policy constraints...
How do regret aversion and herding connect, and why do they amplify bubbles?
Regret aversion pushes investors toward herd behavior because shared losses sting less than lone ones. This amplifies bubbles and concentrated positioning. Systematic rules and dissent reduce the effect.
What is the HSA triple tax advantage and how to maximize it?
HSAs uniquely offer three tax advantages: deductible contributions, tax-free growth, and tax-free qualified withdrawals. Maximize by treating as stealth retirement account...
What is surplus at risk (SaR) and how is it calculated for a pension plan?
SaR is the potential decline in plan surplus (assets minus liabilities) at a confidence level. For Vintry Halewood at $980M surplus standard deviation, 95% SaR is $1.61B. It captures liability volatility, unlike asset VaR, giving sponsors a true risk view.
How should pension plans approach asset liability management?
Pension ALM matches the gap between assets and projected benefit obligations. Use a hedging portfolio (LDI) plus return-seeking split. For Argent Pinehurst, 60% LDI hedges duration and inflation; 40% RS seeks excess returns. Glidepaths de-risk as funded status improves.
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