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Study Session 16: Portfolio Management: Process, Asset Allocation, and Risk Management

Factor Sensitivities, Factor Surpise and Factor Return

In the curriculum, they say that for multifactor macroeconomic model, we estimate the factor surprises first and then find the factor sensitivities after, whereas for fundamental multifactor model, we estimate the factor sensitivities first and then the factor returns after. 

I am not sure why is that. Can someone help

Yield Curve

One of the problems in the portfolio management is explaining that a country is going to a recession in the next 12 months and that currently the yield curve is flat . The question is asking what would happen to the yield curve if the country goes into a recession. The answer is B because of the below explanations which to me makes not much sense because i thought that when a country enters a recession , yield curve is downward sloping.

  1.  If Carlisle’s prediction about the economy of Country #3 is realized, the yield curve in Country #3 will most likely:

PE Ratio

One of the problems in portfolio management is trying to explain why the PE ratio went from 16 to 18.4

The answer is 2 which I get why. However, why wouldn’t 3 be the answer as well? Because in theory when we decrease the earnings growth, the PE ratio goes up.

  1. Which of the following changes in market conditions best supports Carlisle’s comment regarding the equilibrium P/E for Country #3?

    1. A  An increase in the equity risk premium

    2. B  A decrease in uncertainty about future inflation

Risk Free Rate and GDP growth and GDP Volatility

I cant get my head around the positive relationship of risk free rate and the GDP growth and GDP volatility.

I think I may have gotten the fact when there is uncertainty about GDP volatility, investors demand higher rate, but wouldn’t the rate be lower when there is GDP growth?

Risk Premium and Marginal Utility of Future Consumption

I don’t get why the answer is C.

1 An asset’s risk premium is high when:

A there is no relationship between its future payoff and investors’ marginal utility from future consumption.

B there is a positive relationship between its future payoff and investors’
marginal utility from future consumption.
C there is a negative relationship between its future payoff and investors’
marginal utility from future consumption.

This is the explanation:

C is correct. An asset’s risk premium is determined by the relationship between

Value at Risk and Correlation

The curriculum explains the difference between VAR and Scenario Analysis and one of the statements affirms that VAR is vulnerable to the difference between past and future correlations and that it largely focuses on recent historical correlations and volatilty. However, isnt VAR just looking at the probability of losing a certain amount of money in your portfolio? Where is the correlation in this case?


I have hard time trying to understand why we say that delta for calls can be only between 0 to 1 and the delta for puts can be -1 to 0.

Why cant we say that delta can be 2 for example?

Is there a trick to remember what the greeks mean?

Effect of Inflation and GDP growth

Can someone explain me the below?

In of the end of chapters questions, we are asked to find which fund had the most effect of the surprises in inflation and GDP growth on the returns of three funds. 

These are the combined effects for the three funds .

Fund A: 0.10% + (–0.50%) = –0.40%
Fund B: 0.32% + (0.00%) = 0.32%
Fund C: 0.20% + (–0.55%) = –0.35%

The answer is A.

My question is why isn’t it fund B given that its positive 0.32%

Information Ratio

What does the information ratio on its own tell you? Is it supposed to be in relation to something usually?