Has anyone prepared a topic analysis of the AM exam from lets say 10 years ago and identified which topics in particular subjects have been heavily tested over the years?
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AM exam topic analysis
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Incorporating non-normality into the utility function
Hi all,
The Kaplan text states that the non-normality issues of the MVO can be addressed in the utility function by incorporating skewness/kurtosis.
Could someone explain or give an example of how exactly this is done in reality?
Many thanks
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Active Share
Hi, in the curriculum, Book 4, Reading 29, Section 3.1.4 Active Share and Active Risk, there was a closing paragraph for Active Share (just before the reading starts for Active Risk):
“If two portfolios are managed against the same benchmark (and if they invest only in securities that are part of the benchmark), the portfolio with fewer securities will have a higher level of Active Share than the highly diversified portfolio. A portfolio manager has complete control over his Active Share because he determines the weights of the securities in his portfolio.”
Institute, CFA. 2019 CFA Program Curriculum Level III Volume 4. CFA Institute, 5/2018. VitalBook file.
After trying out with an example myself: Benchmark holds 6 stocks, Port X holds 4, Port Y holds 5, based on the above paragraph, Port X should have higher Active Share than Port Y.
But if one were to construct the example in this way:
Benchmark stock weights:
– A: 2%
– B: 3%
– C: 10%
– D: 15%
– E: 30%
– F: 40%
Port X weights
– A: 0%
– B: 0%
– C: 15%
– D: 15%
– E: 30%
– F: 40%
Hence active share of X = (2+3+5)/2 = 5%
Port Y weights:
– A: 2%
– B: 3%
– C: 10%
– D: 15%
– E: 70%
– F: 0%
Hence active share of Y = 40/2 = 20%
Which means active share of the supposedly more concentrated port X is lesser than the less concentrated port Y
Are my calculations for Active Share wrong?
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PM vs. AM exam prep split
Hi all. How are people splitting their time prepping for AM vs. PM? I have done 4 of the CFA AM past papers available through Kaplan so far as people have consistently recommended significant exam practice for the morning (doing questions under timed exam conditions etc.) but wondered what others were doing for PM prep and what proportion of their revision time is being dedicated to it? Thanks!
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Why are equity market neutral strategies relative value strategies?
Can someone explain why equity market neutral hedge fund strategy a relative value strategy? Since we are getting rid of market’s ups and downs and concentrating on stock picking skill, i thought this should be an absolute return strategy, as our outcome will not depend on a benchmark, no?
CFA text confuses me, 1 sentence on reading 30 says it’s absolute, the other says relative. Please see below:
Text 1: Market-neutral long–short hedge funds consider themselves to be absolute return vehicles, in that their performance should not be linked to that of the stock market
Text 2: Because relative value strategies (e.g., equity market neutral) are sensitive to different return factors from those to which hedged equity strategies and the S&P 500 are sensitive, they are expected to have low correlations with the S&P 500 and may be considered as more effective risk diversifiers.
Thanks
Kind regards,
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R23: Exhibit 5: Summing Cash Flows to the Investment Horizon under an Immunization Strategy
As part of the discussion on immunization strategy, Exhibit 5 presents 3 interest rate scenarios- base case, a 100bp downward shift in the yield curve, and a 100bp upward shift in the yield curve. All 3 of these scenarios sum their respective cash flows to an amount in excess of EUR250mm, which is presented as “more than enough to pay off the EUR250mm liability.”
The problem is that the investment horizon is 6 years, requiring a cash outflow of EUR250mm on 15 FEB 2023. Yet, the sum of the values of the cash flows (as of the horizon date of 15 FEB 2023) is far less than the EUR250mm required. For the base case scenario, the amount sums to EUR95,213,665.
I understand that this bond portfolio was chosen since its Macauly Duration matches the investment time horizon, but I do not understand how the actual “cash-in / cash-out” accounting is structured so that the liability outflow of EUR250mm can be matched with a cash inflow of at least EUR250mm on 15 FEB 2023
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Reading 21 EOC #17
Can anyone explain the answer the CFA provides for this question?
Q 17.
Subscriber 2
“I have observed that many of the overseas markets for Korean export goods are slowing, while the United States is experiencing a rise in exports. Both trends can combine to possibly affect the value of the won (KRW) relative to the US dollar. As a result, I am considering a speculative currency trade on the KRW/USD exchange rate. I also expect the volatility in this exchange rate to increase.”
For Subscriber 2, and assuming all of the choices relate to the KRW/USD exchange rate, the best way to implement the trading strategy would be to:
write a straddle.
buy a put option.
use a long NDF position.
Answer:
C is correct. Based on predicted export trends, Subscriber 2 most likely expects the KRW/USD rate to increase (i.e., the won—the price currency—to depreciate relative to the USD). This would require a long forward position in a forward contract, but as a country with capital controls, a NDF would be used instead. (Note: While forward contracts offered by banks are generally an institutional product, not retail, the retail version of a non-deliverable forward contract is known as a “contract for differences” (CFD) and is available at several retail FX brokers.)
A is incorrect because Subscriber 2 expects the KRW/USD rate to increase. A short straddle position would be used when the direction of exchange rate movement is unknown and volatility is expected to remain low.
B is incorrect because a put option would profit from a decrease of the KRW/USD rate, not an increase (as expected). Higher volatility would also make buying a put option more expensive.
How was I supposed to know that Korea was implementing capital controls? Is it tacitly said and I missed it or is this purely a deduction exercise?
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Zero Coupon Bond - No Price Risk
I have a really stupid question…. it says in Reading 23 p. 50 that zero coupon bond has no price risk because bond is held to maturity. Why do we assume zero coupon bond are held to maturity? Assume I purchase a 5 year ZCB to immunize my single obligation due in 5 years. One year has passed and interest rates fell, wouldn’t I want to sell to lock its higher price before it matures?
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ZCB: Structural risk vs. Interest rate risk
Can someone confirm the following:
- structural risk: arises from non parellel shifts and twists in the yield curve causing cash flow yields to change and as a result perfect immunization is not achieved
- interest rate risk: arises from fluctuation in bond prices due to changes in interest rates.
If the above is true, can I state the following:
zero coupon bond has no structural risk and has higher interest rate risk than a coupon bearing bond? …thx!
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Advice for the Level III Essay Exam
The Level III exam is made up of two parts. The first is a structured response (essay) exam and the second, a vignette multiple choice exam. This post focuses on the structured response, which, in my opinion, is the greatest obstacle lying between you and the CFA charter.
Until now, you’ve only been answering multiple choice questions in your CFA exams. At Level I and II, if you had an idea of what the question was about, there was a reasonable chance of you picking the right answer.
Level III is an entirely different story. Suddenly, not only do you need to know your concepts well, but you need to communicate those concepts in a clear and precise manner. Every year approximately 50% of students who have cleared Level II, fail the Level III exam. This is primarily due to insufficient preparation and poor exam-taking approaches.
Exam Prep
- Know your concepts. There is no excuse for not knowing the core concepts before the exam. Create summary notes or watch summary or High-Yield videos.
- Practice, practice, practice. This includes examples and practice problems. As part of your practice, work through past essay exams. The CFA releases past exams yearly. Get your hands on these and go through them thoroughly. If you’re pressed for time, doing the past papers takes precedence over the curriculum exams and practice problems. As you practice, you’ll automatically understand which mistakes to avoid. (Note: the curriculum changes every year so if a question looks unfamiliar check the reading and learning outcome reference in the guideline answers.)
Pre-Exam Tips
Log on to the CFA Institute website > Candidate resources and go through the resources there. These include exam tips, mock and essay exams, documents of LOS command words and acronyms that are common in the CFA exams. It is important that you familiarize yourself with the exam, its structure and its execution.
Though it seems tedious, practice writing. It’s a three-hour exam of just penning down answers on paper, and you don’t want your hand to start cramping or your handwriting to become illegible mid-exam.
During the Exam – Manage your time & follow instructions.
On the first page of the exam, you are told what topic each question is based on, and how many questions there are. Spend the first few minutes jotting down the start time and end time for each question. It sounds inconvenient, but a plan will make you more likely to stay on track and not stress out about how much time is left towards the end of the exam.
You don’t have to do the questions in order, although it is highly recommended.
Exam Questions
Each question typically has two to six parts. Each question will be preceded by a short text explaining the scenario. First, scan the question and understand what is being asked. Then as you read, underline key information that you will need to solve the question.
Each question comes with a footnote telling you how long to spend on the question and where to answer it. It’s a good idea to stick to the time advised by the examination. Another thing to note is that the time allotted tells you how many marks a question is worth. For example, 5 minutes means 5 marks - so allocate your time accordingly.
When answering the questions:
- Pay attention to command words. Words such as formulate, calculate, etc., all mean different things, and these words determine how you should answer the questions. The command words document on the CFA Institute website, is a must-read for every student.
- Answer everything. Answer all subparts of all questions. Understand what the question is asking and state your answers clearly. Even if you are stuck, don’t skip the question, but write down the best answer you can think of. Best case scenario, you’ll get a few marks for it.
- Don’t get hung-up on a question you can’t answer. If your allotted time for that question is over, jot down the best answer you have and move on. If you have time in the end, come back and take another look.
- Keep your answers short and to the point. Bullet points are strongly recommended. Avoid irrelevant or tangential information. If the question asks you for 2 points and you write 4, the third and fourth points will be struck out by the examiners.
- Within a question your assumptions should be consistent. State important assumptions you make, and avoid contradictory statements.
I have made a video blog of this same post, so be sure to watch that too!
All the best,
Arif Irfanullah, CFA
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Practicing for AM
What is the best way to prepare for the AM session (other than study hard)? Currently I have past AM exams from 2007-2016 for practice but cannot tell whether it will be enough - seems unlikely.
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Mark meldrum - Exam 1 C part
Why was inflation part excluded from calculating before take nominal ?
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Portfolio Management Question
In the question, it mentioned the there is a pretax payment upon Lima’s retirement of 1,000,000 and she needs to have 3,000,000 to buy annuity at age of 60. It also mentioned that there is a flat tax rate of 25%.
However in the final answer, the calculation didn’t apply the income to the retirement payment. Why?
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Cash Flow Matching R23 P. 64-65
Can someone explain the rationale behind discounting the obligation for only period?
ex: June 2021 SEK 5,250,000 obligation can be funded with a 4 year 5.5% coupon bond with par value 4,980,000 (5,250,000/1.0550)
why is the par value 4,980,000?
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clear definition of durations e.g. modified, macaulay...
Hi,
Just wondering if anyone knows where I can find the clear definitions of the durations?
Going through the fixed-income, I have just realised that I need to address the right terms in the essay questions…
thanks in advance.
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2012 Morning Exam Q4
In part A, the 3rd diagnostic question, the answer is anchoring.
I chose representativeness under the impression that you want to see whether the investor will update their believes based on this recent info.
What is the cue here to choose anchoring over representativeness?
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Reading 24 - Question 11 - Money Duration VS Duration for a yield curve strategy
Dear all
i am a little confused with Question 11 of the reading. there maybe a misunderstanding from my side with regards to MD VS Money Duration
The Question is as follows:
Hirji reviews Canadian government bonds for a Malaysian institutional client. Prégent and Hirji expect changes in the curvature of the yield curve but are not sure whether curvature will increase or decrease. Hirji first analyzes positions that would profit from an increase in the curvature of the yield curve. The positions must be duration neutral, and the maximum position that the Malaysian client can take in long-term bonds is C$150 million. Hirji notes that interest rates have increased by 100 basis points over the past six months. Selected data for on-the-run Canadian government bonds are shown in Exhibit 2.
Exhibit 2. On-the-Run Canadian Government Bonds As of 1 July
Maturity
YTM (%)
Duration
PVBP (C$ millions)
2-year
1.73
1.97
197
5-year
2.01
4.78
478
10-year
2.55
8.89
889
Long-term
3.16
19.60
1,960
Based on Exhibit 2, the amount that Hirji should allocate to the 2-year bond position is closest to:
C$331 million.
C$615 million.
C$1,492 million.
The answer i thought right is the following:
to have a Duration Neutral strategy, you will need to have the following pair of ptf:
- Long 2y, short 5y => This couple will have a duration of (1.97 - 4.78) = -2.81years
- Long LT, Short 10y => this couple wiill have a duration of 10.71
the maximum long position for LT Bonds is 150M hence
2 years position = 10.71 x 150M / 2.81 = 571M
The answer provided is the following:
C is correct. In order to take duration-neutral positions that will profit from an increase in the curvature of the yield curve, Hirji should structure a condor. This condor structure has the following positions: long the 2-year bonds, short the 5-year bonds, short the 10-year bonds, and long the long-term bonds. Hirji’s allocation to the 2-year bond position is calculated as follows:
The C$150 million long-term bonds have a money duration of C$150 × 1,960 = C$294,000
Allocation to 2-year bond = Money duration of long-term bonds/PVBP of 2-year bond
2-year bond position = C$294,000/197 = 1,492.39 or C$1,492 million
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LOS 24 - Yield Curve Strat - Practice Pb 15 - Ride the curve VS Buy and Hold strategy
Hi all
so here is the question as per the book:
Exhibit 1. Cefrino Sovereign Bond Fund Current Fund Holdings of On-the-Run Bonds
Maturity
Coupon/YTM
Market Value
Modified Duration
1-year
0.78%
$10,000,000
0.99
3-year
1.40%
$10,000,000
2.92
5-year
1.80%
$10,000,000
4.74
10-year
2.34%
$10,000,000
8.82
30-year
2.95%
$10,000,000
19.69
Portfolio
1.85%
$50,000,000
7.43
Based on Exhibit 1 and Abram’s expectation ( Abram expects a stable yield curve) for the yield curve over the next 12 months, the strategy most likely to improve the Fund’s return relative to the benchmark is to:
buy and hold.
increase convexity.
ride the yield curve.
For me, both A and C are valid answer. the decision will be made on the transaction costs, the holding period etc..
For the book, the answer is C.
Can someone tell me why C is better than A? a ride the Yield Curve is always better than a buy and hold for stable curves?
thanks
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The Morning Session of the 2010 QUESTION 1
Question 1A asks for formulating liquidity constraints of Lima’s IPS. Why the answer does not have the liquidity need to purchase the annuity (USD 3000000) at age 60? While, in question Bi, purchasing the annuity is the return objective. It does not seem to be consistent.
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pension plan
What is the different between “plan closed to new participant” and “plan being frozen”?
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