1
Q
What is the sensitivity of industrial and precious metals demand related to?
A
Business cycles
These metals can typically be stored for long periods.
2
Q
What factors affect the production of grains and softs?
A
Weather
Livestock supply is sensitive to the price of feed grains.
3
Q
What does the life cycle of commodity sectors include?
A
- Time to produce
- Transport
- Store
- Process
Each commodity has specific production and processing requirements.
4
Q
How is crude oil produced?
A
- Drilling a well
- Extracting oil
- Transporting oil
Oil is typically stored for only a short period before refining.
5
Q
What does the insurance theory state regarding futures returns?
A
Futures returns compensate contract buyers for price risk protection
This theory implies that backwardation is a normal condition.
6
Q
What does the hedging pressure hypothesis suggest?
A
- Futures markets will be in backwardation when short hedgers dominate
- Futures markets will be in contango when long hedgers dominate
This theory expands on insurance theory by including both long and short hedgers.
7
Q
What are the components of the total return on a fully collateralized commodity futures contract?
A
- Collateral return
- Price return
- Roll return
Each component contributes to the overall return on the investment.
8
Q
What is the formula for price return?
A
price return = (current price - previous price) / previous price
This measures the change in spot prices.
9
Q
What is the roll return formula?
A
roll return = (price of expiring futures contract - price of new futures contract) / price of expiring futures contract
This return results from closing out expiring contracts.
10
Q
What is a total return swap?
A
Variable payments based on the change in price of a commodity
This is one way investors can increase or decrease exposure to commodities.
11
Q
What affects the returns on a commodity index?
A
- Index components
- Weighting method
- Methodology for rolling over expiring contracts
These factors influence which commodities impact the index return the most.
12
Q
What is the formula for debt service coverage ratio (DSCR)?
A
DSCR = NOI1 / debt service
Lenders use this metric to evaluate the ability to cover debt obligations.
13
Q
What is the formula for equity dividend rate?
A
Equity dividend rate = (NOI – debt service) / equity
Investors use this to evaluate their cash-on-cash return.
14
Q
What are the three approaches to valuation in real estate?
A
- Cost approach
- Sales comparison approach
- Income approach
Each approach has its own methodology and application based on property type.
15
Q
What is the formula for estimating the value of a property using the income approach?
A
Value = Estimated NOI / Cap rate
This approach applies a going-in cap rate to the estimated NOI.
16
Q
What do appraisal-based indexes calculate as return?
A
Current yield (from NOI) plus price appreciation (adjusted for capital expenditures)
These indexes appear to have lower volatility and lower correlations with other asset classes.
17
Q
List the disadvantages of investing in publicly traded real estate securities.
A
- Lower tax efficiency compared to direct ownership
- Lack of control
- Costs of a publicly traded corporate structure
- Volatility associated with market pricing
- Limited potential for income growth
- Forced equity issuance
- Structural conflicts of interests
These disadvantages can impact the overall returns and control investors have over their investments.
18
Q
How is Funds from Operations (FFO) calculated?
A
accounting net earnings
+ depreciation, amortization, impairments, and write-downs
− gains (losses) from sales of property
= funds from operations (FFO)
FFO is a popular measure of the continuing operating income of a REIT or REOC.
19
Q
How is the Price-to-AFFO approach calculated?
A
funds from operations (FFO)
− non-cash rents
− recurring maintenance-type capital expenditures
= AFFO
÷ shares outstanding
= AFFO / share
× property subsector average P/AFFO multiple
= NAV / share
This method provides a valuation based on adjusted funds from operations.
20
Q
The formula for the value of a REIT share in a discounted cash flow model is: value of a REIT share = _______.
A
PV(dividends for years 1 through n) + PV(terminal value at the end of year n)
This formula incorporates both expected dividends and the terminal value to estimate the share’s worth.
21
Q
What is the impact of a portfolio allocation to hedge funds?
A
Lower standard deviation, High sharpe and sortino ratio and lower the max drawdown
22
Q
what are benefits of a multistrategy over FofF
A
Diverse strategies under one roof, better fee structure and tactical allocation
23
Q
What are we looking for with life settlements
A
Low surrender value, low premiums likely to die soon
24
Q
What is the perceived mispricing formula?
A
IVanalyst - Price = (IV actual - Price) - (IVanalyst - IVactual)
25
What is the H-model
D0(1+gl)/(r-g) + D0 x H(gs - gl)/(r-gl)
26
What is the sustainable growth rate
retention rate x ROE
27
What is the formula for FCFF with NI
Net Income + Non-Cash Charges + [Int(1 -t)] - WCinv - FCINv
28
What is the formula for FCFE with NI
Net Income + Non-Cash Charges - WCInv - FCInv + net borrowings
29
What is the relationship between FCFE and FCFF?
FCFE = FCFF - [Int ( 1-t)] + Net borrowings
30
What is in noncash charges
Depreciation, amortization, impairments and write downs, provisions, change in DTL (if not expected to reverse), gains and losses on asset and debt retirement.
31
What is the WC
CA - cash investments) - CL - ST debt and dividends payable
32
What is fCInv
Sale and purchase of fixed goods
33
When is FCFF more appropriate
Proposed purchase of entire firm with a subsequent reorganization of the capital structure, firms where FCFE is negative, and firms with history of leverage changes
34
What is the leading P/E?
(1 - b)/(r - g)
35
What is the trailing P/E?
(1 - b)(1 + g)/(r-g)
36
What is the P/B ratio?
(ROE - g)/(r - g)
37
What is the P/S ratio?
(E0/S0) (1 -b) (1+g)/(r -g) or market value of equity / total sales
38
What is EV?
Enterprise Value = MV Equity + MV Debt + minority interests - cash and liquid investments - NPV of firm's earnings acitivity
39
How do you calculate EBITDA?
Net Profit + Interest + Taxes + Depreciation (non-cash charge)
40
What is the present value of growth opportunities?
V0 = E1/r + PVGO
41
What is the required rate of return from the Gordon growth model?
(D1 / P0) + g
42
What is the justified dividend yield?
(r - g)/(1 + g)
43
What is the P/CF?
(1 + g)/(r - g) or value of equity from FCFE model/chosen cash flow measure
44
What is the weighted harmonic mean?
1/sum(wi/Xi)
45
What is residual income using earnings?
EPS - (r x Bt-1) Net income - (equity or pre-levered figure x cost of equity
46
What is Residual Income using ROE?
(ROEt - r) x BVt-1
47
What is the single staged residual income formula?
B0 + [(ROE - r) x B0]/(r -g)
48
What is the Multistage Residual Income Model?
B0 + PV high-growth RI + PV cont. RI)
49
What is PV cont RI in yr T-1
RIT/(1 + r - w) w is persistence factor
50
What is the EVA formula?
NOPAT - (WACC x IC) or Net Operating Profit after Tax - WACC x Invested Capital
51
What is the total discount with both DLOC and DLOM
1 - [(1 - DLOC)(1 - DLOM)]
52
What is the formula for the excess earnings method
Normalized earnings - ROC (Return x working capital) - ROFA (Return x fixed assets)
53
What is the value of the firm
Working capital + Fixed Assets + Intangible assets
54
Using the direct capitalization model how do you find the value of intangible assets
(Residual Income using the excess earnings model x g)/ (discount rate of return - growth)
55
What is NOPAT
EBIT x (1-t)
56
How do you delever a Beta
Bpublic / [1 + (1-t)(D/E)]
57
What is the formula for DLOC
1 - [ 1/ (1 + Control Premium)]
58
What is the forward price of derivatives commodities?
FP0 = Spot - Direct storage Costs - convenience yield
59
What is the equity index forward price?
S0 e^(RFc - sigma) T
60
What is the value of the long forward contract?
St - (FP/(1+Rf)T-t)
61
What is the quoted futures price?
QFP = [full price x (1+ Rf)^T - FVC - AIT] x 1/CF
62
What is put call parity
Call - put = Stock Price - X(1 + R)^-T
63
What is a hedge ratio and how is it used?
H will be the units of stock per short call (c+ - c-)/(S+ - S-)
64
What does a Long FRA equal and what does it mean?
Pay-fixed, receive-floating, Long IR call + short IR put
65
What is a long cap/floor
Series of IR Call or puts
66
What is a payer swap
Long cap + short floor
67
For a hedged position what are the units of long stock
N(d1), units of long stock and N(d2) Units of short bond borrowing
68
For a hedge portfolio which is the units of long lending and short stock
N(-d2) units of long bond (lending)
E^(deltaT_) N(-d1) units of short stock
69
How do you delta hedge
Number of short calls required is the number of shares/call delta
70
What does a Receiver swap equal?
Long receiver swaption + short payer swaption
71
What is a synthetic Call
Put + stock - riskless bond
72
What is a synthetic put
Call - stock + riskless bond
73
What is the value of interest rate swap to fixed payer
Sum Z x (SFRNew - SFROld) x days/360 x notional
74
What is the value of a forward on dividend-paying stocks
St - PVDt - [FP/(1+ Rf)^(T-t)]
75
What is the futures price on equity forwards
(S0 - Present Value of Dividends) x (1 +rf)^T
76
What is a short FRA?
Pay-floating, receive fixed,
77
What is the PV equity side cash flows
Current index level/index level at last settlement x notional
78
What happens when you are long an interest rate call
Holder recieves payments if reference rate > strike price
79
What is the relationship between put and call deltas for non-dividend paying stocks
put delta = call delta -1
80
What happens to deltas when they are out of the money
Call deltas will approach 0 from above while put deltas will approach 0 from below
81
What is the private real estate index return
NOI - capex + (end mkt value - beg mkt value) / beginning market value
82
What is the value of R2
Regression Sum of Squares/Sum of squares total or explained variation = / total variation
83
What are we looking for for AIC and BIC
Lower AIC = better forecast
Lower BIC = Better fit
84
What is the joint hypothesis test
It helps to identify which independent variables are important it is (Sum of Squares Errors Restricted - Sum of Square errors Unrestricted)/number of variables excluded / (Sum of Square errors Unrestricted) / (n - k -1)
85
Is heteroskedasticity bad and what can be done?
It is and
1. leads to standard errors being wrong
2. type I errors
3. use the BP test to detect
4. use the white corrected errors to
86
Is serial correlation bad and what can be done?
It is when residuals are correlatedand leads to
1. large t-states
2. Type I errors
3. Test using the Durbin-Watson state
4. correct using Newey West corrected standard errors
87
Is multicollinearity bad?
Yes it is when two variables are highly correlated
1. coefficients are unreliable
2. leading to Type II errors
3. Use VIF = 1/ (1-R2) anything greater than 10 has severe multicollinearity
4. remove one of the variables
88
What is an influential observation?
One where cook's D > sqrt (k/n)
89
What is an Arch model?
Used when vairance of the error term is dependent on the size of earlier errors
90
What is the mean reversion formula?
b0/(1-b1)
91
What happens with a random walk?
It is an AR(1) model with b1=1 and it has unit root so we need to differentiate
92
What do we use Dickey Fuller test for
It is a way to test is a time series has a unit root
93
What is over fitting?
When the algorithm fits the training data closely but makes poor out of sample forecasts
94
What is the difference between bias and variance error
Bias - in-sample error and vriance - out of sample error from overfitting
95
What are the steps in data analysis
1. Conceptualization of problem
2. Data collection
3. Data prep and wrangling
4. Data exploration
5. Model training
96
What is data normalization?
Scales values between 0 and 1 (Xi-Xmin)/(Xmax - Xmin)
97
What are we looking for in Token Frequency
High and low TF values eliminated
98
What is the formula for accuracy
TP + TN / All
99
What is the formula for precision?
TP / (TP + FP)
100
What is the formula for recall?
TP / (TP + FN)
101
What is the F1 score?
(2 x P x R) / (P + R)
102
What is a logit model?
ln (p/(1-p))
103
What is R2 adjusted
1 - [(n-1/n-k-1) x (1-R2)]
104
What happens when investors roll down a yield curve?
Curve should be upward sloping, people purchase bonds longer than their investment horizon, and they perform higher than other bonds
105
What is a I and Z spread
I spread bond rate - interpolate swap fixed rate and z spead constant spread added to spot rate curve to for market value to equal
106
What is the ted spread
Market Reference Rate (3 month) - T-bill yield of same maturity
107
What is the MRR - OIS spread
It is the MRR - Overnight indexed swap rate
108
What is the difference between pure expectations and local expectations?
Pure expectations is where forward rates are unbiased predictors of future spots where local expectations are when short-term expected returns are assumed risk-free
109
What is the difference between segmented markets and preferred habitats?
Segmented markets are where premiums are determined by supply and demand; however for preferred habitat, they will deviate if they are given a premium.
110
What is the formula for sensitivity to level steepness and curvature?
-DLdeltaL-Dsdeltas-Dcdeltac
111
What leads to a bullish flattening
Flight to safety and demand for LT bonds may reduce and shifting from bullet to barbell
112
What leads to a bearish flattening?
Central banks raise rates to combat inflation with economic expansions
113
What leads to a bullish steeping
It happens during recessionary times as central banks cut rates
114
What is the formula to derive a upper rate from a lower node
Iupper = Ilower e^2standard dev
115
What is the CIR model?
It is a fundamental economic model it uses short-term interest rates and does not allows for negative values
116
What is the Vasieck model?
It is just like the CIR model, except it does allow for negative values
117
What is the ho-lee model?
It is a calibrated model that does not take into account interest rates
118
What is the KWF model?
Same as ho lee except it assumes the rates are log normal
119
When option values increase what happens to callable and putable bonds?
Callable values go down and putable goes up
120
What does the z-spread comprise of
The OAS and the option cost
121
What is the effective duration?
BV+ - BV-/ (2 x BV0 x change in y) Changes in price for small parallel shifts in yield curves
122
What is the effective convexity?
BV- + BV+ - (2 x BV0) / (BV0 x change in y^2)
123
What happens to callable bonds when they are near the money for their one sided duration?
Callable bonds will have lower one-sided down duration than one-sided up duration
124
What happens to putable bonds when they are near the money for their one sided duration?
Putable bonds will have higher one-sided down duration than one-sided up duration
125
What is the value of a capped floater?
Straight value - embedded cap
126
What is the valu/e of a floored floater
Straight floater value + embedded floor value
127
What is the minimum value of a convertible bond?
Greater of conversion value or straight value
128
How do you figure out a price change based on the modified duration of a bond
-(modified duration of the bond) x (change in spread)
129
What is the difference between a structural model and reduced form
Structural takes into account value of debt and equity and gives an economic reason why default occurs while reduced form uses macroeconomic variables to explain default and does NOT give a reason why a company defaults
130
What is the value of equity in a structural model
Long call option on assets with a strike equal to face value of debt
131
What is the value of a risky bond
Risk-free bond + short put option
132
When should we use the statistical based approach
When it is short-term granular (transparency) and homogeneous
133
When should we use the portfolio based approach?
If it is medium term granular and homogeneous
134
What is the upfront premium for CDS
(CDS Spread - CDS coupon) x Duration x notional principal
135
What is the profit for the protection buyer
Change in spread x duration x notional principal
136
What is interest rate risk
Longer dated and higher coupon payments are more sensitive to interest rate changes
137
Which has a higher OAS for higher volatility?
It results in lower computed OAS for a callable bond and higher computed OAS for a putable bond
138
What does the term structure look like for higher quality firms and ones that have bad financial conditions
Higher rate bonds have flatter term structures while they are steeper when expecting recessions
139
What are the sources of taxes for ETFs
They come from capital gains and dividends, and from shareholder sale. They distribute capital gains and are smaller than mutual funds. Capital gains arise from index reconstitution, re-balancing, bond ETF maturity of bonds
140
What are some components of maximum spread
Creation/redemption fees plus other trading costs, spread of the underlying securities, risk premium for carrying, profit margin
141
What are some ETF related risks
Counterparty risk, fund closures, and expectations-related risk
142
What is the annualized standard deviation formula?
sqrt(250) x daily standard deviation
143
What is the formula for change in value from change in YTM
- duration (delta Y) + 1/2 convexity (delta Y)^2
144
What is the main difference between macroeconomic and fundamental factor models?
Macroeconomic assumes that it is from surprises and the intercept is the return, while fundamental is standardized from multiple regression and has an undefined intercept.
145
What is the formula for active risk squred
Active factor risk + active specific risk
146
What is the ifnormation ratio
Portfolio Return - Benchmark Return / standard deviation of Risk Portfolio - Risk of Benchmark
147
What is active specific risk?
Sum of (Weight of Portfolio - Weight of Benchmark)^2 standard deviation of errors^2
148
When is bootstrapping used?
It is used when samples are drawn with replacement which is used if # of simulations > size of the data set
149
What is the inter temporal rate of substitution
Marginal utility of consumption in the future/marginal utility of consumption now
150
What is the formula for real risk-free rate of return?
1-P0/P0 or 1/E(m1) -1
151
What is the formula for default-free inflation-indexed zero-coupon bond?
E(P1)/(1+R) + Cov(p1,m1)
152
What is the nominal short term interest rate
Real risk-free rate + expected inflation
153
What is the nominal long-term interest rate?
Real risk free rate + expected inflation + risk premium for inflation uncertainty
154
What is the break even inflation rate?
Yield non-inflation indexed bond - yield inflation indexed bond or expected inflation _ risk premium for uncertainty
155
What is the formula for unconstrained portfolio optimal active risk?
(Information Ratio/Sharpe Ratio of Benchmark) x Standard deviation of Benchmark
156
What is the sharpe ratio of optimal portfolio?
sqrt (SRB^2 + IRP^2)m
157
What is the expected active return of the portfolio
1. Information Ratio x standard deviation of A
2. TC IC and sqrt(BR) and standard deviation A
158
What is the information ratio
Transfer Coefficient (Manager constraints) x Information coefficient (manager's skills) x sqrt Breath (number of bets)
159
What is information coefficient of market timer
2 x (% correct) - 1
160
What are the three factors of fama french
1. Market index - rf
2. Small - big returns
3. High B/M - low B/M
161
What is the z-score for 5%
1.65
162
What is the z-score for 1%
1.96
163
What will investors do if they expect higher incomes in future?
Utility of consumption in future relation to current consumption is lower and real rates will be higher and they will prefer current consumption
164
What does the Taylor rule imply?
Short-term policy rates are positively related to the inflation gap and output gap
165
Is equity a good or bad hedge?
It provides a poor hedge against bad consumption and it causes equity premiums to be positive
166
What is the active return from stock selection
Weight of Portfolio x (Portfolio Return - Benchmark Return)
167
What is the active return from asset allocation?
(Weight of Portfolio - Weight of Benchmark) x Benchmark return
168
What does IR mean in plain terms?
Active return/active risk
169
What is the main difference between SR and IRA
IR is affected by leverage and cash
170
What is the standard deviation of portfolio
Total portfolio return volatility = benchmark return volatility + volatility of active return
CFA II
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