# The "Be careful to:" Thread

Calculate the FUTURE VALUE of the interest rate option call premium when calculating effective interest Make sure you consider time horizon when calculating breakeven spread Remember the correlation between EMC currency returns and stock returns is positive In terms of security selection: for micro attribution, use benchmark weights for security selection, use active weights for allocation/selection interaction. For global portfolio attribution, skip that step alltogether and just use portfolio weights In terms of market/sector allocation: for micro attribution, use (benchmark sector return - total benchmark reutrn). For global portfolio, just use benchmark sector/market return Remember the multiplier in CPPI when readjusting the portfolio Remeber Roy’s safety first uses standard deviation, sortino uses downside deviation For utility-adjusted return, use 0.5 when using percentages, 0.005 when not. Look for duration of cash and yield beta! Let’s keep in going…

Total Firm assets in GIPS include non-discretionary assets.

For contingent immunization, don’t forget to decrease the “n” if they state that rates will change next year.

Z score: 95% = 1.65, 99% = 2.33

Smarshy Wrote: ------------------------------------------------------- > Z score: 95% = 1.65, 99% = 2.33 For this: If you have 95% in VAR, assuming 100 trading days, is it 2.5 days or 5 days? I thought it was 2.5 days because it only captures the lower tail, but CFAI had other ideas

I believe it’s five days…i think when you say 95% VAR it already takes into account the lower tail only otherwise it’d be 90%? Jscott24 Wrote: ------------------------------------------------------- > Smarshy Wrote: > -------------------------------------------------- > ----- > > Z score: 95% = 1.65, 99% = 2.33 > > > For this: > > If you have 95% in VAR, assuming 100 trading days, > is it 2.5 days or 5 days? I thought it was 2.5 > days because it only captures the lower tail, but > CFAI had other ideas

Null Hypothesis: Manage does not add value Alt. Hypothesis: Manger adds positive value Type I Error: Rejecting the Null hypothesis when it is actually true - Keeping a manager that does not add value Type II Error: Failing to reject the Null hypothesis when it is actually false - Firing a good manager that is adding value

Jscott24 Wrote: ------------------------------------------------------- > Smarshy Wrote: > -------------------------------------------------- > ----- > > Z score: 95% = 1.65, 99% = 2.33 > > > For this: > > If you have 95% in VAR, assuming 100 trading days, > is it 2.5 days or 5 days? I thought it was 2.5 > days because it only captures the lower tail, but > CFAI had other ideas 5 days. 95% VaR means there are 5 percent in the left tail (below VaR value).

Accrual accounting for dividends in GIPS: Recommendation -not Requirement

Make sure that you enter your candidate number correctly on the answer sheet… Don’t forget to return back from the break for the PM session…

Black Litterman reverse engineers the expected returns implicit in a diversified market portfolio and combines them with the investor’s own views (if any) on expected returns in a systematic way that takes into account the own investor’s confidence in his or her own views. Only weakness is that you have to utilize historical volatility but that assumption is less important than returns, so it is a better method… Mean Variance: unconstrained. generates single EF. number of estimates needed can be overwhelming. can lead to input bias. Resampled: Specify returns on the vertical axis. Using historical returns, std dev, and corr for all assets, computer generates a set of MV efficient portfolios that generates each of the specified returns. More stable than MV optimization. Contains all assets in NON-negative weights. No statistical rationale for process. Monte Carlo: incorporates effects of capital market factors such as inflation, yield spreads, recession and their associated expected returns in the next period as well as their compounding effects over several future periods. Can incorporate varying tax rates and cash flows.

mumukada Wrote: ------------------------------------------------------- > Null Hypothesis: Manage does not add value > Alt. Hypothesis: Manger adds positive value > > Type I Error: Rejecting the Null hypothesis when > it is actually true - Keeping a manager that does > not add value > > Type II Error: Failing to reject the Null > hypothesis when it is actually false - Firing a > good manager that is adding value Forget about it. We have done that thing in L2, i do not want to see it again. If they put it, I am working out the exam. I know they freaking put in the book, i skipped altogether.

Smarshy Wrote: ------------------------------------------------------- > Z score: 95% = 1.65, 99% = 2.33 Thought it was 2.32?

smokin’hot Wrote: ------------------------------------------------------- > Black Litterman reverse engineers the expected > returns implicit in a diversified market portfolio > and combines them with the investor’s own views > (if any) on expected returns in a systematic way > that takes into account the own investor’s > confidence in his or her own views. > Only weakness is that you have to utilize > historical volatility but that assumption is less > important than returns, so it is a better > method… > > Mean Variance: unconstrained. generates single > EF. number of estimates needed can be > overwhelming. can lead to input bias. > > Resampled: Specify returns on the vertical axis. > Using historical returns, std dev, and corr for > all assets, computer generates a set of MV > efficient portfolios that generates each of the > specified returns. More stable than MV > optimization. Contains all assets in NON-negative > weights. No statistical rationale for process. > > Monte Carlo: incorporates effects of capital > market factors such as inflation, yield spreads, > recession and their associated expected returns in > the next period as well as their compounding > effects over several future periods. Can > incorporate varying tax rates and cash flows. I’d add one more disadvantage to BL, in that it’s also static (one output)

When converting Returns or Standard Deviation into Monthly/Daily figures for VAR calculations: Annual to Daily = 250 Annual to monthly = 12 Remeber! Converting Risk: Standard Deviation / [(# of periods)^(0.5)] Converting Return: Return / (# of periods)

SRIs have a bias towards growth and small-cap stocks

great thread, i agree. cash and carry = short future, long spot (discounted at lease rate) fed model = EY vs. treasury yield (10 year???) constant mix is concave… i think of nightclub “the cave has great mix” anyway, there was one earlier pointer that was absolute gold. can’t remember what it actually was. watch the signs on your calculations too… i tend to do calc and then say “short” or “long” at end. probably safer to use the sign (although it can confuse too)

> Include inflation BEFORE adjusting an after-tax > return to a pre-tax return fantastic one… i don’t want to have to be thinking on exam, “inflation is taxed so…”. guaranteed to confuse