Pm question

wyantjs Wrote: ------------------------------------------------------- > I think an example of a specific question from > this past exam would be helpful. A PM question > was “What would be the effect on the stability of > the minimum variance frontier if short-selling was > prohibited?”. WTF??? You could read the 200 > pages on PM over and over and over again, and have > absolutely no idea what the answer is. umm, so what is the answer. sorry, level 2 newby here. all i know is that short selling leads to negative beta, but that is not what this question is asking…

This was on the 2008 L2 exam. Prohibiting short selling will increase the stability of the MVF. But I can’t remember the reason why.

Me neither but maybe because you can’t benefit from all deviations between fair and market price i.e. if market price is above fair value what to do if short selling banned. It’s times like this I think I’ve forgotten everything from L1 and L2.

mwvt is the only one i know who got over 70 in pm last year… i chose b.

I believe the reason it makes the MVW more stable is that it constrains the weights. So, the composition of the optimal portfolios can’t vary as much.

thanks guys. im 8 months away, did ethics, doing quant right now, regression stuff, st error and t tests, etc…how sad, sat night and instead of making it rain, Im at home chatting on facebook and spilling dominos on my cfa books. lord help me.

Slow and steady, man. Better a bit of pain now than a panic later.

daj224 - do you really make it rain? Like charitable or just for the sake of precipitation?

the funniest thing was this was only HALF of the question- all of PM was a series of BRUTAL 2 parters about the min variance frontier. i somehow went over 70% on PM this year but i consider it an act of lucky/semi-informed guessing more than skill. PM on L2 is brutal in terms of what they could test and what they do test. At least last year was and people said the same thing the year before when they got 6 questions on Treynor-Black.

Echoing Bannisja’s comment: There’s a lot of material in the PM section relative to the weight. One suggestion is to spend a lot of time on the concepts. While there’s some plug-n-chug, most folks were more ambushed by the non-quant stuff on the exam. The study guides (if you’re using one) seem to have more of a bias towards the problems rather than the concepts. So try not to neglect the latter.

busprof Wrote: ------------------------------------------------------- > I believe the reason it makes the MVW more stable > is that it constrains the weights. So, the > composition of the optimal portfolios can’t vary > as much. Bingo. If you don’t have any constraints you can get some really wacky results from the optimizer. It will massively overweight whatever assets have done really well in the time period in question. Conversely, if during the time period you had some asset that performed poorly the optimizer will have you short the hell out of it going forward. In the real world using one of those things is much more art than science. In the wrong hands an optimizer can be very dangerous.

PM is by far the topic with which i m having the worst time in level II. But if I remember the exam well, they rather tested the general understanding of the 130 models and most importantly how to link them together and when to use them, etc. For example : " In the following situation, […2 pages of description…], Sarah X claims that the model A should be used because of reason 1, 2 and 3; whereas Robert Y claims that the reasons 1 and 3 given by Sarah X are wrong, therefore requiring the use of model B. Who is right ?" This is the lovely impression that PM left me, as I was walking out of exam room.