SS17, Reading 47: Global Performance Evaluation. - No panic. 1, Local Currency = Foreign Currency(FC); Base Currency = Domestic Currency(DC). 2, Currency Effect = Return in DC - Return in FC. 3, Rj=pj+dj+cj, Global Return decomposition, and Attribution. 1-2-3! [use Ij instead of Bj] 4, Currency Allocation: (wj*cj-wjb*cjb), cj=sj*(1+pj+dj) So, Currency Exposure can arise from Asset Selection & Market Allocation 5, Multi-period performance attribution…(ABAP) 6, Risk Measures (SD, Tracking Error, Information Ratio != Sharpe Ratio), Risk Allocation. 7, Global and International Benchmarks 8, Potential Biases in Return and Risk: (iOS) - Infrequently traded assets - Option-like investment strategies - Survivorship bias: return & risk. 9, GDP-weighted index and Market Cap-weighted index. 10, Why risk decomposition can be complex? risks are correlated; currency risks.
Time to promote this thread again.
Thanks to markCFAIL for the great job on GIPS…What’s special in his post is the way to organize GIPS items, it make us easy to pull them out on exam day…I found it’s very helpful, so I customized it to fit my needs. The original post from markCFAIL is: http://www.analystforum.com/phorums/read.php?13,1241629,1246166#msg-1246166 --------------GIPS--------------------------- Investment Firm Balanced Growth Composite 1 Jan 2002 thru 31 Dec 2011 Year, Gross R(%), Net R(%), Bmk R(%), 3-Yr SD, Bmk 3-Yr SD, # of Portf, Internal Dispersion(%), Composite Assets(), Firm Assets() ------------------------------------------------------------------------- Hierarchy: Firm-Composite-Benchmark-Portfolio. ------------------------------------------------------------------------- Firm: 1, GIPS for FIRMs, not for individuals, pension funds or consultants. 2, FIRM-wide basis, no partial complaince 3, DISTINCT BUSINESS ENTITY 4. claims and reports: 5+/10 years of annual performance 5, disclose FIRM definition; redefined; past firm or affiliation linked? Composite: 1, Asset Weighted: A-2006-Q-2010-M. 2, Asset Weights: BMV or BMV+CF 3, disclose Composite descripion; CREATION DATE; redefined; name change; Benchmark: 1, disclose Benchmark description; 2, disclose why not exist; change date/reason; 3, disclose custom BENCHMARK or multiple benchmark(components, wi and rebalancing); Portfolio[Valuation]: 1, TWRR: Q-2001-M-2010-All Dates of Large External CFs(pay tax); 2, < 1-year, not annualized; 2, disclose valuation policy; minimum asset level; -2010: if not valued at month end or last business day of the month. Fees: 1, Groos-of-fee returns, disclose fees deducted in addition to Trading Expenses. 2, Net-of-fee returns, disclose fees deducted in addition to trading&mgmt fees; – if model/actual mgmt fees used? net of performamnce-based fee. 3, disclose FEE SCHEDULE; BUNDLED FEES; Other Disclosures: 1, Misc discloures: - Currency; - DISPERSION measure; - withholding taxes; - significant events, significant CF policy -2000: non-compliant; -2010: cash to CARVE-OUTS; 2006-: SUB-ADVISOR and the periods; 2011-: subjective unobservable inputs; 3-year SD 2, If Material: leverage; local law; 2011-: diff in exchange rates & valuation hierarchy 3, Available upon request: Complete list of COMPOSITE DESCRIPTIONS ------------------------------------------------------------------------- Internal Disprsion: 1, disclose which measure of INTERNAL DISPERSION is presented. 2, <= 5 Portfs for the full year, measure is not REQUIRED. 3, within a COMPOSITE; H/L, Range, SD (asset weighted or equal weighted). Cash and Cash Flow(CF): 1, Cash return included in PORTFOLIOS return. 2, 2010-: disclose the policy to allocate cash to CARVE-OUTS. Carve-out: 1, -2010: disclose the policy to allocate cash. 2, 2006-2011: disclose carve-outs/composite(%). 3, 2010-: carve-out only if managed separately with its own cash balance. Real Estate: 1, Valuation: A-2008-Q.(A=Annually, Q=Quarterly) 2, External Valuation: 3Y-2012-A Private Equity: 1, Both Gross&Net 2, Valued at least annually 3, SI-IRR: (Montly-2011-Daily CF) 4, disclose the VINTAGE YEAR Wrap/SMA: 1, Always Net of ENTIRE WRAP FEE. 2, Style-defined Composite: include all the portfs. 3, Sponsor-specific Composite: to win business from existing sponsor, - disclose sponsor anme, may not net of wrap fee, confidentiality Major Years: -2000: non-compliant data. 2005-: 1) TRADE DATE ACCOUNTING, 2) PORTFOLIO Returns(mod dietz, MIRR). 2006-: COMPOSITES have consistent beg/end annual valuation dates. 2010-: value PORTFs on the date of LARGE CF, month-end/last b-day of month. 2011-: 1, TOTAL FIRM ASSETS = aggregate FAIR VALUE of all (discretionary + non-discretionary, fee-paying + non-fee-paying) AUM, which includes assets assigned to SUB-ADVISOR. 2, disclose if 3-yr SD of Composite AND Bmk is not presented. 3, if SD is not relevant, tell why and give the add. risk measure presented. # of portfolios: <= 5 Portfs: no need to report dispersion <= 5 Portfs: no need to list # ports ------------------------------------------------------------------------ Formulas: Calculation Methods: 0, wi=(CD-Di)/CD, CD=Calendar Days, Di=ith day CF occurs. 1, Original Dietz (-2005): R=(V1-V0-CF)/(V0+0.5*CF) 2a, Modified Dietz (2005-2010): R=(V1-V0-CF)/[V0+sum(wi*CFi)], 2b, Modified IRR (2005-2010): V0=Sum[CFi*(1+R)^wi], R=? 3, Daily Valuation(2010-), use TWRR and Geometrically Linked Note: 2a & 2b approximates TWRR that adjusts for daily weighted external cash flows. Real Estate: 0, Capital Emplyed:=Ce=C0+sum(wi*CFi) 1, Capital Return:=(V1-V0-CapEx+S)/Ce – like Balance Sheet 2, Income Return:=(G-E-I-T)/Ce – like Income Statement 3, Total Return:=Capital return + Income Return
The AMC source post is: http://www.analystforum.com/phorums/read.php?13,728074,1241942#msg-1241942 Here is an updated version. [Note: This is only a summary for easy review…all contents are from on AMC standards, so please refer to AMC if any question.] General Principles of Conduct: [created for firm; act for clients]. 1. Act in a Professional and ethical manner at all times. 2. Act for the benefit of clients. 3. Act with Independence and objectivity. 4. Act with Skill, competence, and diligence. 5. Communicate with clients in a timely and accurate manner. 6. Uphold the applicable Rules governing capital markets. A. Loyalty to Clients ----------------------------------------------------------------- 1. client interests before their own. 2. confidentiality of client’s information.[not if illegal] 3. no business relationship, no gift. [independence, no cash, disclosed] B. Investment Process and Actions ----------------------------------------------------------------- 1. use reasonable care and prudent judgment. 2. do not distort prices or inflate trading volume [VWAP gaming; false rumor] 3. deal fairly with all clients [info/recomm/acting; diff service levels disclosed & available] 4. have a reasonable basis for decisions.[due diligence; communicate with client & stress testing] 5. when managing a portfolio or pooled fund. [act consistently and disclose proposed change]. 6. when managing separate accounts and before advice/action. - [evaluate RRTTLLU; determine SUITABILITY] - IPS be reviewed with client at least annually and whenever circumstances dictate - IPS specify schedules for review and evaluation - IPS should serve as basis for strategic asset allocation - agree on appropriate benchmark - evaluate the investments in context of clients’ total assets and liabilities. C. Trading [SS16: execution] ----------------------------------------------------------------- 1. not act or cause others to act on material nonpublic info. - information is non-public until it is widely disseminated in the marketplace - information is material if a reasonable investor would consider it important - Mosaic theory combines material public info with non-material non-public info. 2. give priority to client’s over managers’ own interests. - no front runner. - in some pooled funds or limited partnerships, does not disadvantage clients - require employees to obtain approval for any personal investments in IPOs or private placements - require employees to provide compliance officer with copies of trade confirmations each quarter 3. use commissions to pay for only investment-related products/services, and not in the management of firm. - disclose soft dollar arrangements. 4. maximize client portfolio value by seeking best execution. - commissions, anonymity, timeliness/delay cost, market impact, missed trade opportunity cost. 5. establish policies to ensure fair and equitable trade allocation among client accounts. - block trades or allocations on pro-rata basis. - ensure that all suitable clients can participate in the IPOs or secondary offerings. - trade allocation policies should address how IPOs and secondary offerings are handled. D. Risk Management, Compliance, and Support [SS14: risk management] ----------------------------------------------------------------- 1. develop/maintain policies/procedures to comply with code provisions and all legal requirements. - document detailed, firm-wide compliance policies. 2. appoint a compliance officer to administer policies and investigate complaints - existing employees can serve as compliance officers - be independent from investment and operations personnel - report directly to the CEO or Board - regularly convey to employees the requirements to adhere to compliance policies - require all employees to acknowledge receipt/understanding of the code, and comply with it. - implement appropriate employee training and continuing self-evaluation of manager’s compliance practices - review firm and employee transactions to ensure the priority of client interests. - document and act expeditiously to address any compliance breaches and work with management to take appropriate disciplinary action. 3. ensure accurate information to clients and arrange for independent 3rd-party confirmation. - audit/review, or copies of account statements and trade confirmations from custodian bank. 4. maintain records for an appropriate period of time in an easily accessible format. - maintain records that substantiate investment actions, scope of research and basis for conclusions - must also retain compliance related records and any records of violations - maintained either in hard copy or electronic form - managers must determine the appropriate minimum time frame - in the absence of regulation, records should be maintained at least 7 years 5. employ qualified staff and sufficient resources to deliver services promised to clients 6. establish a business-continuity plan to address disaster recovery or periodic disruptions. - adequate back-up, preferably off site, for all account information - alternative plans for monitoring, analyzing and trading investments if primary systems are disabled. - plans for communicating with mission-critical vendors and suppliers - plans for employee communication and coverage of critical business functions in the event of disruption - plans for contacting and communicating with clients during period of extended disruption 7. establish a firmwide risk management process to identify, measure, and manage the risk.—NEW in 2010. - market risk, credit risk, liquidity risk, counterparty risk, concentration risk, operational risk. - risk management process must be objective, independent, and insulated from influence of portfolio manager. - consider outsourcing risk management activities. - identify risk factors for individual portfolios AND for managers’ activities as whole. - stress test, scenario tests, backtest as part of developing risk models. - risk models should be continuously evaluated and challenged. - be prepared to describe the models to clients. E. Performance and valuation [SS18: GIPS] ----------------------------------------------------------------- 1. present performance information that is fair, accurate, relevant, timely, and complete. - not misrepresent the performance of individual portfolios or of their firm. - not cherry picking[time periods or carve-out]. - clearly disclose if simulated/back-tested. 2. use fair-market prices to value client holdings and apply, in good faith, methods to determine the fair value of any securities for which no independent, third-party market quotation is readily available. - fees depends on AUM: conflict of interest in determining end-of-period valuations - valuation by independent 3rd party - for pooled funds, independent board members or 3rd parties to approve valuation policies. - use widely accepted valuation methods and apply them consistently. F. Disclosures ----------------------------------------------------------------- 1. Communicate with clients on an ongoing and timely basis. 2. truthful, accurate, complete, and understandable disclosures. 3. include any material facts 4. disclose: a. conflicts of interests due to relationships with brokers, other clients, fee structures. - soft dollars or bundled commissions - referral and placement fees - trailing commissions - sales incentives - directed brokerage arrangement - allocation of investment opportunities among similar portfolios - personal holdings in the same securities as clients - co-invests alongside clients - use of affiliated brokers. b. regulatory/disciplinary action against manager related to professional conduct. c. investment process - lock-up periods, strategies, risk factors, use of derivatives/leverage. - [NO need to disclose specific/proprietary investment formulas or models] d. management fees and other investment costs, and fee schedule. - provide clients with gross AND net-of-fees returns. - disclose any unusual expenses - in plain language, clearly explain the methods. - provide itemization of charges when requested by client. - disclose the specific management fee, incentive fee, and commissions. - disclose the average or expected expenses to prespective clients. e. the amount of any soft/bundled commissions along with a description of: - the goods/services received in return; - how those goods/services assist in decision-making[benefits the client]. f. the performance on a regular and timely basis. - at least quarterly, when possible, within 30 days of quarter end. g. valuation methods used to make investment decisions and value client holdings. - by asset class - [NO need to disclose proprietary valuation methods for investment decisions] h. shareholder voting policies. - vote shares in the best interests of clients. i. trade allocation policies. j. results of the review or audit of the fund or account. - [NO need to disclose regulatory examinations] k. significant personnel or organizational changes.[timely] l. risk management processes.[material changes]
-------------------------------------------------------------------- Without Pension: OA*beta(OA) = E*beta(E) Case I: beta(E) constant, if adding pension asset/liability, WACC=? 1) OA*beta1(OA) + PA*beta(PA) = E*beta(E) 2) beta1(OA) < beta(OA) ==> WACC1 is lower than the original WACC. Case II: beta1(OA) and beta(E) constant, if beta(PA) increasing, D/E=? 1) OA*beta1(OA) + PA*beta(PA) = E*beta(E) 2) If beta(OA) increses, total asset beta increases, equity capial(E) increase, ==> D/E decreases. (D+E=OA)
Anchoring Status quo Confirming evidence Prudence Recallability Overconfidence ----------------------------------- ASC-PRO: [AS/PR] encourage an analyst to place too much weight on past info in Shrinkage estimation.
GIPS Disclosure(35): available upon request. 1, Disclose that the FIRM’S list of COMPOSITE DESCRIPTIONS is available upon request. 2, Disclose that policies for valuing PORTFOLIOS, calculating performance, and preparing COMPLIANT PRESENTATIONS are available upon request. 3, If the firm is verified, the verification report is available upon request. 4, If the COMPOSITES of a verified FIRM have also had a PERFORMANCE EXAMINATION, The verification and performance examination reports are available upon request.
I remember posting that. Enjoy! deriv108 Wrote: ------------------------------------------------------- > Re: Neumonics Thread > Posted by: Aimee (IP Logged) > Date: June 2, 2010 12:20AM > > Someone gave this one earlier for forecasting > traps: OCRAPS > > Overconfidence > Confirming evidence > Recallability > Anchoring > Prudence > Status quo
deriv108 Wrote: ------------------------------------------------------- > It’s not from CFAI Book…You can prove it by > youself. The notation is from Schweser. it is in cfai book 6…(1st period excess return * second period benchmark return ) + (second period excess return * 1st period portfolio return)…easily testable worst case in case u forget
deriv108 you have just shattered the small bit of faith i had. just looking at this thread makes me sweat! Do you really think we need to know all of this for L3?
sk22, agreed. I don’t think we need to know or memorize all those to pass L3…I uses it for review…Our goal is simple, and let’s all pass it.
This topic does not look hard, but I may have to review it June 3. ---------------------------------------------------------------------------------------------- Qualitative Questions on International/Global Investment 1. Why currency risk should not be a significant barrier? * Currency risk can be Hedged away * Foreign asset risk and currency risk are not Additive (due to correlation) * SDs reduced for long time horizen (N) * Currency risk can be Diversified away. 2. Three ways to hedge currency risks * using Forwards/Futures, Options, borrow in foreign currency. 3. Why not work? * Correlation increase over time; [free trade, integrated CM, corporation activity, mobility of capital] * Correlation among markets increase when volatility is high. [Statistical Aberration] 4. Barriers and the impact[Return/Risk: ATTRACTIVE]. * Transaction Cost: ADR * Regulation * Tax * Currency Risk * Political Risk * Market Efficiency [Liquidity Risk] * Lack of familiarity 5. Why emerging market is ATTRACTIVE. * Returns: higher return and higher volatility; negatively skewed; higher growth; * Risks: standalone risk is higher [due to political, infrastructure, education and government] * “One-way” correlation: contagious in emerging markets only, not spreading to developed countries. * Currencies are more volatile * Correlation between stock returns and currency return are Positive. (like an importer?) * Segmented markets. 6. Why emerging market may not be Investable. * Restriction on stock ownerships * Free Float is low; * Repatriation restriction; * Discrimination tax; * Currency Convertibility Restriction; * Authorized investors(institutional) * Liquidity is low. — Correlation is the key.
yes deriv108…dance puppet! make my post the best Level 3 post of allll timmmmeeee!!!
Skip, why not create “List a formula you have memorized… (part 2)” or something? This thread has grown too big…
ha haaaaa. hilarious. made me laugh on my birthday! nah man I check this one out enough on my phone in long lines or in the stalls. i was thinking it would be nice for us to make a word document that we could post to google docs on specific subjects. the trick would be not to get busted for copyright info so i am not sure its even worth it at this point.
Happy birthday…I’m using google-docs also…That’s why the growth of this thread is diminishing. Another factor is June Day is closing, so better be safety-first. Sharing [or promoting] GIPS is probably fine if acknowledging the source, which is CFAI.
Just wanted to list it out there in case anyone needs it. I know this is easy… Charecteristics of a good Benchmark(BM): SAMURAI Specified in advance (start of evaluation period) Appropriate w.r.t. manager’s approach and style Measurable on a frequesnt basis Unambigious - clearly defined identities and weights of securities in BM Reflective of manager’s current investment opinions Accountable w.r.t manager should accept the applicability of BM be accountable Investable - possible to replicate and forgoe active management
CFAI’s is SAMUROI…lol First time I have ever seen the word “ownable”
chompd: capacity homeogenous mututally exlusive preponderance diversifying
Great - Criteria for specifying asset classes. Some of them are also in return-based style analysis.