I’d like to ask some Portfolio Mgmt questions, please help me! 1/ CFAI textbook, page 575, reading 68, question 1B, why is spending rate not considered liquidity requirement? 2/What is the residual standard deviation for an asset? Is it the unsystematic risk? I thought unsystematic risk should be residual variance. 3/ Why is systematic risk sometimes Beta, but sometimes B square times variance of market portfolio? 4/ When calculate expected spot rate, use inflation differential, when calculating forward rate, use interest rate differential. Is that correct? 5/ CFAI textbook, page 515, reading 66, Question 15, when you regress Australian stock index with USD per $A, you get the LC exposure of Australian stock of -0.5. How about when you regress Australian stock index with $A per USD, do you get 0.5 and does that mean something? 6/ CFAI textbook, page 466, reading 64, Question 18, why an investor w/o a job wants to invest in recessive sensitive stocks? I can’t wrap my head around this concept at all. Thanks very very much!!!

- Your spending rate is initially what you intend to spend off of the assets, your drawdown. You have to factor in the incoming cash flow (divis, interest) and net it against the outflows to figure out the liquidity requirement. The spending rate is just an assumption from your base plan. 2) Residual variance measures unsystematic risk. My understanding is that residual variance arises from taking an allocation away from the full market. At work. I;ll have to come back later.

freakingout Wrote: ------------------------------------------------------- > I’d like to ask some Portfolio Mgmt questions, > please help me! > > 1/ CFAI textbook, page 575, reading 68, question > 1B, why is spending rate not considered liquidity > requirement? Not 100% sure, but I think you just incorporate spending rate into the required return rather than a liquidity constraint. Liquidity is when you have a specific payment for something like college, or a home, or a charitable donation coming due, or you just want to keep a pool available as an emergency. There’s an argument that spending rate is a liquidity need, but usually you just incorporate that into a required return because it is ongoing, rather than a one-time expense. > > 2/What is the residual standard deviation for an > asset? Is it the unsystematic risk? I thought > unsystematic risk should be residual variance. Variance and SD are both measures of risk. Just take the square root of the residual variance and then you have the residual standard deviation. The key idea is that you use variance to do your addition and subtraction of risk (i.e. use variance to see how risky stuff adds up or not), and you use SD to do interpretation of risk (build confidence intervals, etc.). > > 3/ Why is systematic risk sometimes Beta, but > sometimes B square times variance of market > portfolio? The systematic variance is beta squared times variance of market portfolio. You’ll take the square root of that to find out the SD that can be attributed to market risk. Beta is an indicator of systematic risk because the higher beta, the higher the systematic variance and SD, so often you don’t need to go all the way to calculating (beta*SDmkt)^2, so it is sufficient just to reference the beta for a stock, since the SDmkt doesn’t change when you change the stock. > > 4/ When calculate expected spot rate, use > inflation differential, when calculating forward > rate, use interest rate differential. Is that > correct? Yes, although that does assume there is no change in real exchange rates. If real exchange rates change, then the change in the spot rate reflects more than just inflation changes. > > 5/ CFAI textbook, page 515, reading 66, Question > 15, when you regress Australian stock index with > USD per $A, you get the LC exposure of Australian > stock of -0.5. How about when you regress > Australian stock index with $A per USD, do you get > 0.5 and does that mean something? I don’t have the problem in front of you, but the point is that if you invest in a stock on a foreign exchange, then you will get different gammas depending on whether you are regressing the stock return in the stock’s own currency or the investor’s own currency. The gamma in the investor’s own currency will be 1 plus the gamma in the stock’s currency. The gamma if regressed in the stock’s own currency is called the “foreign currency gamma” and can be interpreted to tell you whether the company is mostly an importer or an exporter with respect to that currency pair. You only need to worry about the 1 + gamma thing for the pair of currencies representing the cross between the investor currency and the stock’s currency. > > 6/ CFAI textbook, page 466, reading 64, Question > 18, why an investor w/o a job wants to invest in > recessive sensitive stocks? I can’t wrap my head > around this concept at all. This seems silly, but I guess the idea is that you want your investments to be uncorrelated to your professional career. Therefore if your job is highly recession sensitive, then you will want stocks that are uncorrelated to your career so that you don’t get whacked by a stock collapse and unemployment at the same time. > > Thanks very very much!!!

The answers above are excellent. To perhaps clarify #6 a bit: Suppose you are a worker who invests. As a worker, you are inherently exposed to the economic cycle. In a recession, your probability of job loss increases and your probability of raises/big bonuses goes in the tank. To diversify away this risk, you will want your basket of risky assets to be weighted towards non-cyclical assets. Now suppose that you are independently wealthy and therefore a non-worker. The fact that workers who invest are bidding up non-cyclicals relative to cyclicals leads to cyclicals being relatively undervalued. You don’t care about cycle risk, because you are rich. In a recession, if your stock portfolio takes a bigger-than-average hit, that’s okay, because you aren’t relying on it for liquidity purposes. You do, on the other hand, care about your long-run average return (as just about everyone does). So you are happy to scoop up the relatively undervalued cyclical stocks. Just another example of why it is good to be rich. Hopefully with all this hard work I will get there some day!

Experts indeed, thanks so much my friends. I’m gonna ace PM now