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Study Session 17: Portfolio Management: Economic Analysis, Active Management, and Trading

Connection between ITRS and bond prices

11th hour states that “if the price of a risk-free bond is less than the investors ITRS, then they would purchase more of the bond. This increase of investment leads to a decline in current consumption, which brings an increase in MUc and a decrease in MUf. Consequently, the ITRS falls until it equals the price of the bond”

I dont understand this. If ITRS is falling, it means times are good. Which means rates should be rising. But how would rates be rising if bond prices are being pushed up by investors that continue to buy them?

Portfolio Management Question - Active Management

This is the last question from Konvexity Mock One PM

Relevant info,
Fund A: IR=.5, active risk=10%
Benchmark: Sharpe=.8, total risk=15%

In order to achieve optimal level of active risk, the investor invests 6.25% in the Benchmark and 93.75% in Fund A. What is the excess return over risk-free rate that is expected to be generated by the portfolio of the investor?

A) 12.69%
B) 14.69%
C) 16.69%

Marginal utility and future payoff

Can someone help me comprehend this phrase:

Asset’s risk premium is high when negative relationship between its future payoff and investor’s marginal utility for future consumption.

Need some help on PM

Ok this EOC is tripping me up…

Blake inherited a sizable amount of money-

  1. Holding all else constant, the change in Blake’s income will most likely result in:

    1. an increase in his marginal utility of consumption. 

    2. an increase in his intertemporal rate of substitution.

    3. a decrease in his required risk premium for investing in risky assets

Bond A outperforms bond B

Guys, please, help me understand this…
What means bond A outperforms bond B?
Interest rates change so that the yield of bond A is greater now than the one of bond B?

Thoms Investment Advisory Case Scenario, CFA Level II Mock Exam B: Afternoon Session, question #60

In the Thoms Investment Advisory Case Scenario, CFA Level II Mock Exam B: Afternoon Session, question #60,

Why did we rely on the highest tracking error not the highest Information risk which indicates the highest active management?

The question is stated below;



Inter-Temporal Rate of Substitution

Can someone explain why this 1. is is a true statement and 2. is a false statement?

1. The higher the RF rate, the more important current consumption becomes vs. future consumption.

2.For an asset to serve as a hedge against bad consumption outcomes, the covariance between the investor’s expected ITRS and the future price of the asset must be negative. 

Effect of cash on IR?

I don’t understand why adding cash would cause a shrink in the information ratio of a portfolio of risky assests?

Three confusing Concepts

What is the difference between the below three concepts as they are all have the same effect from my point of view:

1. Painting the tape

2. Wash Trading

3. Quote Stuffing

For me they all inflate the price of a stock before selling it, am I right!

Optimal Active Risk

Can someone please help me understand what is the intuition behind the optimal active risk formula?

Std dev(A)* = (IR/SRb)* std dev(b)

Can’t seem to wrap my head aroud it.