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What does GIPS require in a composite performance presentation?
GIPS requires composite presentations with 5-10 yr returns, benchmark, portfolio count, composite and firm assets, 3Y std dev, dispersion, plus disclosures (firm/composite defs, benchmark, fees, errors)...
How do I evaluate market timing risk in active bond management?
Silverpeak's +4.3yr duration bet creates asymmetric risk: -4.3% if rates rise 100bps vs +2.15% if rates fall 50bps. Frame for IC with probabilistic scenarios, position limits (+/-2yr typical), exit triggers, and recovery time analysis.
How do I calculate an after-tax return objective for an individual investor?
After-tax return: divide spending by assets for real return, add inflation for nominal, then gross up by (1 - tax rate) if portfolio is taxable. Show steps for partial credit on exam.
What are the main components of an investment policy statement (IPS)?
IPS has two sections: objectives (return, risk) and constraints (liquidity, time horizon, tax, legal/regulatory, unique circumstances). Foundational document for portfolio management.
How does a fund-of-funds structure work and what are its fee layers?
A fund of hedge funds (FoHF) invests in a portfolio of underlying hedge funds. Investors gain diversification across managers and strategies, access to closed funds...
How should portfolio managers evaluate cybersecurity risk as an investment factor, and what frameworks exist for assessing a company's cyber resilience?
Cybersecurity risk is a material investment factor. Portfolio managers can assess it through governance indicators, spending ratios, incident history, insurance coverage, and third-party security ratings. Major breaches cause average stock declines of 5-8% with sustained underperformance.
How does royalty financing work as an alternative funding mechanism, and what types of assets generate suitable royalty streams?
Royalty financing provides capital in exchange for a percentage of revenue from a specific asset — a drug, patent, or mineral resource. Unlike revenue-based financing on total company sales, royalties are tied to a named product's performance over its commercial life.
What are the differences between filter, wrapper, and embedded feature selection methods for financial factor models?
Filter methods rank features by statistical metrics independently of any model. Wrapper methods evaluate subsets by training the actual model. Embedded methods perform selection during training. A cascaded approach — filter first, then embedded, then wrapper — is most practical.
What determines the shape of the credit spread term structure, and under what conditions can it invert?
The credit spread term structure normally slopes upward because cumulative default probability, forecast uncertainty, and liquidity premiums all increase with maturity. Inversion occurs when near-term default risk is elevated relative to long-term survival probability — typically for distressed issuers facing imminent refinancing risk or covenant triggers where surviving the near term materially improves long-term prospects.
What is dynamic asset-liability management, and how does it differ from a static LDI approach?
Dynamic ALM adjusts the LHP/RSP allocation based on pre-defined triggers tied to the funded ratio, interest rate levels, credit spreads, and market drawdowns, rather than maintaining a fixed split with calendar-based rebalancing. This event-driven approach captures hedging opportunities in real time, prevents funded ratio overshoot, and follows a non-linear glide path that accelerates de-risking near full funding.
How does surplus optimization differ from traditional mean-variance optimization, and what does the surplus efficient frontier look like?
Surplus optimization maximizes the expected change in surplus (assets minus liabilities) for a given level of surplus volatility, rather than optimizing asset returns in isolation. The surplus efficient frontier is anchored at the minimum-surplus-variance portfolio of long-duration bonds with high liability correlation, and slopes upward as return-seeking assets are added.
How should the return-seeking portfolio be allocated within an LDI framework, and what determines its size relative to the liability-hedging portfolio?
The return-seeking portfolio's size is driven by the funded ratio — underfunded plans allocate more to RSP for growth, while overfunded plans shift toward the LHP to protect surplus. The RSP typically includes global equities, private equity, real estate, and high yield credit, and follows a glide path that systematically increases LHP allocation as funded status improves.
What is a liability-hedging portfolio, and how is it constructed to immunize a pension plan's funded status against interest rate movements?
A liability-hedging portfolio is constructed by matching the liability's key rate durations across the yield curve using long corporate bonds, STRIPS, swaps, and futures, while also matching credit spread exposure to the discount rate methodology. Duration matching alone is insufficient — KRD matching protects against non-parallel curve shifts, and AA corporate exposure matches the spread sensitivity of GAAP-discounted liabilities.
How does the securitization waterfall work? I need to understand the cash flow priority structure.
Securitization creates a waterfall structure where cash flows from an underlying asset pool are distributed in priority order: senior tranches first, then mezzanine, then equity. Losses are absorbed in reverse order, with the equity tranche taking the first hit.
What are the three main categories of limits to arbitrage, and how do they explain persistent market anomalies?
The three limits to arbitrage are fundamental risk (no perfect hedge, possibility of being wrong), implementation costs (transaction costs, short-selling constraints, margin requirements), and model risk (valuation uncertainty). These interact to sustain anomalies, especially in illiquid or complex markets.
How do UK inflation-linked gilts work mechanically, and how does the 3-month indexation lag affect pricing and analysis?
UK inflation-linked gilts adjust principal and coupons using the RPI with a 3-month indexation lag, meaning the Reference RPI for any settlement date comes from three months prior. This lag causes investors to miss the final period's inflation at maturity and creates partially known near-term cash flows that affect duration and pricing.
How can option pricing theory be used to value equity in a distressed company, and what is the Merton model's practical application?
The Merton model treats equity as a call option on firm assets with the face value of debt as the strike price. For distressed companies where assets are near or below debt levels, this framework captures the option value of potential asset recovery that traditional balance sheet analysis assigns as zero.
What are the revenue disaggregation requirements under IFRS 15 and ASC 606, and how should analysts use this information?
IFRS 15 and ASC 606 require disaggregation of revenue into categories reflecting how economic factors affect the nature, timing, and uncertainty of revenue. Categories include product type, geography, transfer timing, and customer type. Analysts should use this data to assess revenue quality, concentration risk, and mix shifts.
Under what conditions is capital structure irrelevant to firm value according to Modigliani-Miller, and why do these conditions matter?
Modigliani-Miller Proposition I shows that firm value is independent of capital structure when there are no taxes, bankruptcy costs, agency costs, information asymmetry, or transaction costs. Relaxing each condition systematically explains why real-world firms have optimal capital structures and forms the foundation of modern capital structure theory.
What are the key differences between listed and unlisted infrastructure investments for CFA candidates?
Listed infrastructure offers daily liquidity and transparent pricing but correlates highly with equity markets. Unlisted infrastructure reports lower volatility and correlation, but much of this advantage reflects appraisal-based smoothing rather than genuinely lower risk. After unsmoothing adjustments, the risk-return gap narrows considerably.
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