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MindMap Gallery CFA Level 2 Portfolio Summary
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CFA Level 2 Portfolio Summary
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Edited at 2021-05-31 16:37:59
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- Outline
combination
R43 ETF (tracking index, passive) mechanics and applications
1.mechanics
two markets
primary (over the counter basis)
people
sponsor/issuer
APs (authorized participants)
motivation: arbitrage
transaction
in-kind
secondary
Trading intra day
2.best-managed ETFs feature
low and predictable investment costs
closely track the index
lowest possible tax exposure
3.ETF analysis
expense ratio
charge lower fees than mutual funds
The issuer does not need to track personal accounts and does not bear transaction costs (the AP bears them)
Passive (no need to do active research)
index tracking
periodic tracking
Tracking error (calculation: annualized) is reported as the annualized standard deviation of the daily differential returns of the returns of the ETF and its benchmark
Disadvantage: does not reflect the size relationship between Rb and Rp
daily differences
rolling holding periods
Mean changes over time; cumulative effect
tracking error source
change to the undering index securities (quartly basis, small impact
tax treatment
distribute less in capital gains than mutual fund
tax fair
Investors’ sales do not affect tax lia
tax efficiency（tax lot management
unrealized gains largest in-kind
montail costs and risks
4.cost
management fee
last year
ongoing cost
commission
trading cost（market cost）
bid-ask spread (liq, spread-)
size
hedging
t uncorrelated
transaction cost
ETF Premiuns and discounts involve calculations
end-of-day
(ETF price-NAV per share)/NAV per share
intra-of-day
(ETF price-iNAV per share)/iNAV per share
Generating factors: time difference; stale pricing (trade infrequently)
When ETF trading at premium (share price>iNAV) to intra NAV, AP buy creation basket, return to stock, sell in secondary market
Related concepts:
p30 table
5.risk
counterparty risk
settlement risk
security lending
ETN
No stock pledge
fund closures (sponsor is not operating)
regulation; cpmpetition; corporate action; soft termination: (creation halts; change in investment strategy)
investor-related risk (expectation-related risk)
6.application
R44Multifactor models
1.APT
E(RP)=Rf b1λ1 b2λ2...(no error term)
λ:factor risk permium/factor price
The risk premium brought by a certain market factor
In a perfect market, the theoretical rate of return is not real.
assumption: well-diversified portfolios; no arbitrage opportunity
Run: Arbitrage Calculation
2.Multifactor models
macroeconomic factor
Ri=E(Ri) b1F1 b2F2 .. ξ
Fi：surprise=actual value-predited(expected)value
Regression: time series; find bi based on F
fundamental factor model
Ri=ai b1F1 ..ξ
bi:standardized beta (binary variables);eg:b1={(P/E)1-P/E average}/σp/E
Regression: cross-sectional data
Find F based on b
b: How many units does the true value deviate from the mean; F: How much does the return rate change for each unit of deviation?
statistical factor model
advantage
minimal assumption
shortcoming
There may be no economic meaning, insufficient explanation, and low explanatory power.
Note: most sensitivity to the combined surprise is based on absolute value The coefficient is 0, surprise is not necessarily 0, and there is also a benchmark
3.application
active return/value addde(Rp-Rb
source
return from factor tilts;(Bp-Bb)F
Overweight and underweight b, reflect the manager skill in asset class selection
return from security selection
ξp-ξb,reflect the manager skill in individual asset selection
active risk
Standard deviation of active return: S(Rp-Rb)
The further Rp deviates from Rb, the higher the TE and the greater the risk.
information ratio
mean active return/active risk
best IR non-negative
active risk squared{unit: (%) squared}=active factor risk active specific risk
risk attribution
portfolio constrution
rules-based active management
E(Rp)=Rf B1F1 B2F2 B3F3 B3F4
R45Measuring market risk
1.VaR/downside risk/left-tail risk
Influencing factors: time horizon; probability; minimum loss
Minimum loss under small probability, maximum loss under high probability
limitation
failure to take into account liquidity; underestimate the loss
extension of VaR
conditional VaR(ave loss);incremental VaR;Marginal VaR;Relative VaR
2.VaR calculation method
analytical/variance-covariance/parameter method
assumption: normal distribution
VaR=|Rp-z*ξ|*Vp
Conversion (base annual): monthly12, weekly52
5%VaR=1.65;1%VaR=2.33
Advantages and Disadvantages
Disadvantages: Non-normal distribution does not apply. eg:option
historical method (essential quantile
advantage
does not assume a return distribution
shortcoming
History will repeat itself, but history does not equal the future
monte carlo method (data is simulated)
The greater the number, the closer it is to a normal distribution.
multiple input variable changes
Disadvantages: Costly, complex process, subjective
3.Other risk measures
stress test: one single variable extreme change
scenario analysis(multiple input variable
historical
hypothetical
sensitivity advantages and disadvantages
Advantages: Comparison of specific features. Disadvantages: Different features cannot be compared
4.application
Related concepts
drawdown;surplus at risk;
risk budgeting;position limits;liquidity limits;stop-loss limits;economic capital
Combination 2
R46Economic and investment markets
Ri=Rf Rp (specific factor of economic impact)
f r
real default-free bond(TIPs):P0U0 and U1(consumption theory)
m=p0=U1/U0:Inter-temporal rate of substitution
It indicates that the future economy (money) will be good, U0,U1-,m-
one period
rf real=(1-p0)/p0=1/m-1
rf,m reverse relationship (return, current consumption)
s-period
p=risk neutral present value covariance term
covariance term
>0
The economy is poor and the war is going on. Buy gold.
<0
for most risky assets with risk-averse investor
relationship
cov(r real or GDP, m)<0
cov(GDP orξ(GDP), rf real)>0
θ ∏
nominal interest rate
θ ∏:break-even inflation rate(BEI)
θ:inflation ∏：uncertainty of inflation
short term
There is θ but no ∏
long term
cov(GDP,∏)>0
Yield curve
an inverted yield curve is often read as being a predictor of recession
γ
credit spread=yield on corporate bond-yield on gov bond
economy, spread-
Influencing factors
Rating: If the economy is good, choose one with poor rating; if the economy is poor, choose one with good rating.
Cyclical industry, high risk
k
the equity premium relative to credit risky bonds
good consumption hedge:gold, short-term U.S. dollar treasury bonds
bad-: real estate, derivatives
Φ
liquidity premium
real-estate:both bond-like and stock-like
R47Active portfolio management
1.value added
active return=portfolio return-benchmark return
decomposition drawing calculation
Security selection in the picture above
Asset allocation in the picture below
2.construct optimal portfolio
Related concepts:
Overweighting and underweighting cash (rf related) does not affect sharp ratio
Over-configuring or under-configuring benchmarks does not affect the unconstrained information ratio
Construct
Under optimal conditions, SR squared p=SR squared b IR
Under the optimal combination, σA new =IRp/SRb*σb
Wp=σA new/σA
3.IR
IR=TC*IC*root number BR
BR, IC cannot rise alone
TC can rise independently
TC, invest in a market with good liquidity and few restrictions.
IC Information coefficient: reflects predictive ability
correlation between the forcasted active returns and the realized active return
TC transfer coefficient: reflects execution ability
correlation between active weight and forcasted active return
basic (full) fundamental law, perfect market TC=1 (TC is not equal to 1)
TC square=explained/total variation
1-TC squared=unexplained/total variation
[-1,1], the closer it is to 1, the stronger the ability
BR：independence of investment decision
BR=N/[1 (N-1)ρ]
ρ represents the correlation between two predictions, the interval [0,1]; approaches 0, BR; approaches 1, BR-
Reflects the effort of the fund manager, BR, the more independent forecasts are made in a period of time
R48Trading costs and electronic markets
1.trading cost
type
fixed
variable (related to volume)
explicit
implicit
bid-ask spread;market impact;delay cost;opportunity costs
Related concepts
market bid-ask spread (inside spread)
best ask - best bid
midquote price=(bid ask)/2
implicit transaction cost estimation
Basic
buy：transaction cost=price-benchmark;sell:TC=B-P(B=Midquote price)
effective spread
effective spread=TC*2
Disadvantages: delay cost and opportunity cost are not considered
implementation shortfall
=paper returnTheoretical return - actual return
Considered market impact costs, delay costs, opportunity costs
VWAP
calculate
1.Doallor volume of benchmark and portfolio; 2.Doallor volume/# =VWAP.3 subtraction
Advantages and Disadvantages
Applies to multiple transactions
Disadvantages: Trader transactions require direct placing of large buy orders.
2.electronic trading
market fragmentation
same instrument in multiple venues
types
high-frequency traders (place more orders) VS low-latency traders
major type:5
Hidden order uses IOC (Immedicate or cancel) to discover
front running mouse barn
wash trading reverse position
gunning the market short price