Compiled: "Don't miss this" thread

Source: http://www.analystforum.com/phorums/read.php?13,967038 ------------------------------------------------------------------------------- If our Human Capital is Bond-like, we should invest more aggressively (equity) and our demand for life insurance increases. A short position in an option is either out-of-the-money and no payment is due, or it is in-the-money and the short owes payment to the long. Therefore the short position bears NO CREDIT RISK. Honour willingness as long as it is below or equal to ability – except for the wealthy independent! Additional compensation arrangement requires both clients and employer give the written approval. Box Spread: combo of a Bull Call and Bear Put Spread; a non-directional strategy. . . seeks to exploit arbitrage opportunities between options prices of the same underlying. Taylor Rule: gives an estimate for central bank interest rate decisions: R target = R Neutral + 0.5*(GDP expected - GDP trend) + 0.5*(Inflation expected - Inflation target) When distinguishing between Type I and Type II errors, remember “Type I HORN.” Type I HO (Null Hypothesis) RN (Reject Null) Null = Manager adds no value; Reject and conclude that manager adds value when he actually does not. SAMURAI (For properties of a valid benchmark): Specified in advance, Appropriate, Measurable, Unambiguous, Reflective of manager’s current opinions, Accountable (Manager), Investable. Types of benchmarks - MBS FRAC! Manager Universe - Broad Mrkt indices - Style indices Factor model - Returns based - Absoute - Custom If only defense - lack of action or inaction Ceteris paribus - because of unexpected action/event, all else same Legal / Regulatory Constraints for Endowments and Foundations: UMIFA and Prudent Investor ERISA prohibits investment of more than 10% of DB plan assets in the company stock, but NO such law applies to DC plans Durations: Dfixed-Dfloating>0. To shorten duration take floating Asset (i.e. receive floating and pay fixed) Claw back provision: If PE sponsor received early distribution but failed to deliver the expected profit; he has to give back money. Private equity has low liquidity and allocation to this class should be 5% or less with a plan to keep the money invested for 7-10 yrs Adding REITs to stock / bond --> higher return --> marginally lower sd --> higher sharpe ratio Adding direct real estate investment to stock / bond --> lower return --> significantly lower sd --> higher sharpe ratio Going long a pay-fixed swap will lower your portfolio duration, while going long a pay-floating swap will increase your portfolio duration. For a domestic investor, currency risk is about half the risk of foreign stocks and about twice the risk of foreign bonds. There are four main reasons not to trade bonds - “please stop bothering susan” please = Portfolio constraints (biggest cause of inefficiency in bond markets) stop = story disagreements bothering = buy and hold susan = seasonality There are eight main reasons to trade bonds - “really can cook, no salt you say?” really = relative value pick up (biggest reason) can = credit upside cook = credit defence no = new issue trades salt = secot-rotation trades you = yield curve pickups say? = structure trades Distressed Debt Arbitrage = long debt and short equity of the same company. Total Active Return = True active return + Misfit active return true = Manager return - Normal port return misfit = Normal port return - Benchmark Increase in Age -> Lower demand for life insurance Higher risk aversion -> Higher demand for life insurance Greater initial wealth -> Lower demand for life insurance Stronger Bequest Motive -> Higher demand for life insurance Stock-based compensation and bonuses: Complements Explicit Incentives and Implicit Incentives: Substitutes In a non-trending market, Constant Mix outperforms Buy-and-Hold outperforms CPPI In a trending market, CPPI outperforms Buy-and-Hold outperforms Constant Mix Investor’s Utility Adjusted Return = Expected Return Portfolio - 0.005 * Risk Aversion Score * Portfolio Variance “(Insert name of firm) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).” Total commodity return = collateral return + roll return + spot return *For roll return it is the futures differential minus the spot return Without rebalancing, classical immunization only works for a 1-time instaneneous change in i-rates. We cease to be immunized when (1) i-rates change and (2) Time passes Currency Management Strategies: Balanced Mandate - Asset Manager also manages currency Currency Overlay - Currency managed within IPS by another currency manager Seperate Asset Class - Currency managed under its own seperate guidelines (Note - CFAI says it’s a suboptimal strategy if managed in two-steps. Simultaneous management would be better.) For Grinold/Kroener: always look for real or nominal g! - real should be used, as inflation is a separate component; thus, do not sum nominal g and i Beta of A = standard deviation of A / standard deviation of market * correlation Covariance of A and B = Beta of A * beta of B * square of standard devation of market Jensen’s Alpha: Portfolio Return - Expected Portfolio Return based on SML IR: Active Return / Standard Deviation of Active Returns * Note: IR doesn’t capture all portfolio variability, just the variability of excess returns * Sharpe: (Return Portfolio - Rf) / (Standard Deviation Portfolio) Treynor: (Return Portfolio - Rf) / Beta Portfolio M2: Rf + Sharpe * Standard Deviation Market Implication of cyclical and secular changes in the corporate bond market include: 1. securities with embedded options will command a premium due to their scarcity 2. the percentage of long-term issues will decline - effective duration and aggregate interest rate risk sensitivity will also decline. Moral Hazard Problems (Corporate Governance): a) Insufficent effort results when company execs are too occupied with various non work related interests (i.e. golf game, buying expensive art, etc.) instead of focusing and putting enough effort to get the job done b) Exravagant projects is when management continue to invest in high profile or pet projects even though the return on the investments is not in the best interest of the company and its shareholders c) Entrechement – when managers invest in bad projects but in projects where they have a strong understanding so that they become more valuable to the company d) Self-Dealing – I am not 100% sure, but I think when they funel business to companies they own or family and friends. Corridor Widths Factor…(Value - effect on corridor widths) Transaction Costs…(higher-higher) Risk tolerance…(higher-higher) Correlation…(higher-higher) Volatility…(higher-lower) Volatility of the rest of the portfolio…(higher-lower) A contango commodity market occurs when the lease rate is less than the risk free rate. Cross Default Provision: issue considered in default if defaulted on another credit agreements Jump to Default: AKA current credit risk Grinold and Kroner: R(i) = Div1/P0 + i + g - (DELTA) S + (DELTA) P/E Ri = expected return on stock i Div1 = dividend next period P0 = current stock price i = expected inflation rate g = real growth rate in total earnings (DELTA) S = change in shares outstanding (DELTA) P/E = change in P/E ratio Market Neutral Strategy has a Beta of Zero. Manager can add Beta exposure using futures, swaps, etc. Short Extension Strategy: Net Portfolio beta=Beta Long+Beta Short, hence can outperform long only strategy as it exploits benefits of short-selling Payer’s Swaption–gives the buyer of the option the right to enter into a swap where the option buyer pays the fixed rate . Converts a future FRN into fixed rate obligation. Receiver’s Swaption–gives the buyer of the option the right to enter into a swap where the option buyer receives the fixed rate. Converts a future fixed rate obligation into floating rate obligation.

awesome, dwight. thank you.

wow! you the man

Another spectacular effort by dwight, thanks.

wanderingcfa Wrote: ------------------------------------------------------- > Another spectacular effort by dwight, thanks. Nothing to it at all. Only takes 5 seconds of initiative + 5 minutes of work + several hundred thousand (millions?) hours of combined AF study time.

Well done Dwight.

Dwight, Udman .

I think your age is positively correlated with your remand for life insurance. I.e. The older you are, the greater the demand, no?

this is very very helpful! thanks Dwight!

PhillyBanker Wrote: ------------------------------------------------------- > I think your age is positively correlated with > your remand for life insurance. I.e. The older you > are, the greater the demand, no? No, this was debated on the thread. It’s counter-intuitive, based on the amount of human capital remaining in the investor’s life. “The primary driver of insurance demand is human capital. The assumption is that as the investor ages, their human capital decreases therefore reducing the need for insurance.”

I checked everything for accuracy so if you see anything that looks funny please speak up.

>>A contango commodity market occurs when the lease rate is less than the risk free rate. I had contango market when storage cost + risk free rate > convenience yield. So lease rate = convenience yield less storage cost?

Correct Buck.

Buckhead Wrote: ------------------------------------------------------- > >>A contango commodity market occurs when the > lease rate is less than the risk free rate. > > I had contango market when storage cost + risk > free rate > convenience yield. > > So lease rate = convenience yield less storage > cost? There is another thread on this topic: http://www.analystforum.com/phorums/read.php?13,985726,986175#msg-986175 The lease rate includes the storage cost and the convenience yield: Forward( 0, T ) = Spot(0) * e [( Rf + Lease Rate ) * Time] ***Lease rate = Convenience yield - Storage cost (Lease rate can be positive or negative depending on the interaction of its components) Given the above, as stated the relationship does hold. It looks to me like it is the same thing you are saying stated differently.

^ Buckhead - yes!

where is this: Lease rate = Convenience yield - Storage cost coming from? any reference page?

thx Dwight - what about your disclosures?

dpak Wrote: ------------------------------------------------------- > thx Dwight - what about your disclosures? They are on this thread: http://www.analystforum.com/phorums/read.php?13,983129 ------------------------------------------------------------------ Required Disclosures (ALWAYS) - ACIDIC DRAFT A-vailability of list and description of composites C-reation date of composite I-nternal dispersion and measure used D-escription of composite I-nconsistencies in exchange rates C-urrency used to express performance D-efinition of “firm” in determining assets and compliance R-eturns are gross-of-fees or net-of-fees A-dditional information on calculating and reporting returns is available F-ee schedule T-reatment of withholding taxes ------------------------------------------------------------------ Required Disclosures (Conditional) - 4 3 2 2 (4 fee related, 3 change related, 2 holdings related, 2 external) Bundled-fee portfolios percentage of composite assets in (if any) Fee types included in bundled fees (if any) Gross-of-fees returns - fees in addtition to direct trading expenses (DTE) Net-of-fees returns - fees in addition to management fees and DTE Name change of composite Redefined firm - date and reason (cannot be applied retroactively) Redefined composite - date and nature of the change (cannot be applied retroactively) Minimum size (if any) for portfolio to be included in the composite Derivatives - presence, use, and extent of leverage of (if material) Significant events that would help interpret performance Conflicts of local laws and regulations with GIPS ------------------------------------------------------------------ Required Disclosures (Date Dependent) - no mnemonic yet How any presentation prior to 1/1/2000 is non-compliant with GIPS From 1/1/2006 the use of a subadvisor(s) and the periods Prior to 1/1/2010, how cash is allocated to the carve-outs Prior to 1/1/2010 whether calendar or business month-end valuations are used

Dwight Wrote: ------------------------------------------------------- > -------------------------------------------------- > ---------------- > Required Disclosures (Date Dependent) - no > mnemonic yet > Actually I got one for this… Required Disclosures (Date Dependent) how any "P"resentation prior to 1/1/2000 is non-compliant with gips from 1/1/2006 the “U"se of a subadvisor(s) and the periods prior to 1/1/2010, how ca"S"h is allocated to the carve-outs prior to 1/1/2010 whether calendar or bu"S"iness month-end valuations are used"Y”

Well done guys! MH