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Level 3 course prep question

January 7, 2020, 8:48 am
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Hi all - i am sitting for Level 3 in June, unfortunately for the second time.  I used Schweser last year and was shocked at how bad it was (actual essay questions were actually nothing like the Schweser ones) - had relied on Schweser exclusively for Levels 1 and 2 so didn’t think there would be any issue)

Would greatly appreciate any guidance/feedback on other Level 3 prep courses.  Hard to believe that that this is an issue (I always understood Schweser, for better or for worse, to be the leading provider in this area), but here we are

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Cross-Currency Basis Swap

January 7, 2020, 9:23 am
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Referring to reading 16 example 7 cross currency basis swap. can someone confirm whether the exchange rate is fixed for the duration of the swap, or the exchange of loan principal depends of the exchange rate at the time of exchange. In the CFAI material, it says the exchange rate is assumed to be fixed but can it differ in practice? Thanks in advance.

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Starting in on Levelup Videos - any CFA L3 takers with advice on how to approach?

January 7, 2020, 7:00 pm
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i just started with my CFA L3 LevelUp videos. Wondering if anyone has advice on how to go about this process. I read somewhere we should be studying 2-3 hours a day, several days a week. Suggestions?

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Derivatives - volatility skew and volatility smile

January 8, 2020, 9:10 pm
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Hello,

I’m having some trouble with understanding the volatility skew and smile.

1. Volatility smile: volatility is higher for ITM and OTM, compared to ATM. Is that because of the possible gains (ITM) and losses (OTM)?

2. Skew: “to overpay for downside striked options on stocks. This meant that people were assigning relatively more volatility to the downside than to the upside, a possible indicator that downside protection was more valuable than upside speculation in the options market.”

why is that? why is there more volatility to the downside? And what is a “downside strike”?

thanks a lot!

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statistics and odds question

January 9, 2020, 9:43 pm
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Assume that player A has 70% chance to win any single match and player B has a 65% chance to win any single match.

What are the % chance that player A will win the match between player A and B? 

What are the % chance that player B will win the match between player A and B?

Anyone know a general math to do the above?

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Is it possible to pass exam after only 30 days of studying?

January 9, 2020, 11:09 pm
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Working and studying simultaneously is tiring especially after a 15 hour shift. Planning on going on a month and 6 days break from work in May to coop my self at home and focus on reading and solving questions. This strategy seems very appealing atm but not sure if it could help me pass

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Minimum expected return in Constructing Sub-Portfolios using Goals-Based approach

January 10, 2020, 1:00 am
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Hello

I have a question regarding the subject.

How Minimum expected returns for a given investment horizons and at specific probabilities are calculated ? It looks like the calc process is out the scope of the curriculum but I would like to get a general idea at least.

In the Reading 13, Exhibit 36 we’ve got “Annualized Minimum Expectation Returns” for each Time Horizons (5,10,15…) and at Required Success (Probabilities: 99,95…).

How the expected returns are different for different time horizons and probabilities ? I could guess that they may be different at different probabilities using corresponding number of Stdevs from the mean. But still in this case there would be a mismatch in the calculus !

TIA

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Reverse Optimization and Beta of an Asset Class

January 10, 2020, 1:30 am
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Hello

Is Beta of an Asset Class used during reverse-optimization process ?

According to curriculum: 

“Reverse optimization takes as its inputs a set of asset allocation weights that are assumed to be optimal and, with the additional inputs of covariances and the risk aversion coefficient, solves for expected returns.” and then

“…uses the weights associated with the asset classes to form a working version of the global market portfolio, and then uses the beta of each asset relative to our working version of the global market portfolio to infer what expected returns would be if all assets were priced by the CAPM according to their market beta”

If asset betas, risk-free rate and market risk premium are given then we can calculate E(Returns) using CAPM for each asset class, why would we need optimization process for solving for expected returns ?!

This statement may be a possible explanation but it is not clear for me: 

“By using reverse optimization, we are consistently relating assets’ expected returns to their systematic risk. If there isn’t a consistent relationship between the expected return and systematic risk, the optimizer will see this inconsistency as an opportunity and seek to take advantage of the more attractive attributes.”

Please explain!

TIA

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equity recap: rebalancing

January 11, 2020, 1:45 am
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Dear Forum,

or should I say dear Herb?

I have two less-than-intelligent questions, probably.

1. Why don’t market-cap and price-cap weightings need rebalancing, while the equal-weighting does?

For equal-weighting, if you choose 10 stocks, they will all be weighted 10%. So, why would you need rebalancing, even when their price changes? You’ll still have 10 stocks (so, looking at the NUMBER, not the price)

2. Why does equal-weighting have a bias towards small-cap?

Thanks a bunch,

C.

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Need more practice questions

January 11, 2020, 12:32 pm
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I use Schweser and CFAI study materials.  But the total # of practice questions between the books and the two sets of Qbank problems seems (to me) like nowhere near enough.

What’s the next best source for more practice questions?  (I.e. - not looking for mock exams but for questions organized around each SS.)

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Interactive Excel Planner for L3

January 12, 2020, 10:21 am
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Hi,

Does anyone have an interactive excel planner for level 3?

Much Appreciated!

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Anyone Else Signed up for ML Bootcamp in NYC?

January 12, 2020, 5:52 pm
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I am looking to find out if anyone else is going to the LevelUp Bootcamp in NYC? Starting to get nervous about being ready by the time I go.

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Active Share & Active Risk

January 13, 2020, 12:38 am
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Good morning everyone, 

Yes, I know there are a lot of posts on this thread already, still find it unclear.. 

Active risk: volatility of the portfolio´s returns, in relation to benchmark (standard deviation of active return)

Active share: difference in weights relative to benchmark

So: 

1. Diversification means: low idiosyncratic risk -> low active risk, low active share?

2. Sector rotator: large deviations permitted, so it has a high active risk

Diversified sector rotator: high active risk, low active share

Concentrated sector rotator: high active risk, high active share

3. stock picker: also high active risk

However when diversified: low active risk(??? isn´t it supposed to have high active risk), and high active share? 

Concentrated stock picker: high active risk, high active share

4. diversified multi-factor investor: high active share, low active risk?

How to remember all this? To me, diversification would always mean low active risk, low active share.. 

Thank you!

C. 

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Active risk

January 13, 2020, 12:45 am
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Active risk is affected by:

1. cross-correlation: lower correlation between stocks or sectors = more active risk

Why exactly is it like that? Is the correlation considered between the stocks in your portfolio, or between the stocks in your portfolio and the ones in the benchmark? 

If the correlation is LOW, they move in opposite directions.. why does this lead to high active risk? Because you need to deviate more, to achieve risk reduction?
2. idiosyncratic risk: low idiosyncratic risk (from DIVERSIFICATION) = low active risk

Is this because your benchmark is also diversified? So, your return aren´t very dispersed compared to the benchmark..
3. net exposure to a risk factor: high net exposure leads to high level of active risk

Number 3 is clear. a portfolio with no net factor exposure (single factor, with factor exposure being neutralized) will have
active risk attributed entirely to Active Share. What does this exactly mean? Factor exposure being neutralized meaning your long & short positions to only one factor exactly match? So why is active risk attributable entirely to active share?

Thank you so much!

C.

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Kaplan for Level 3?

January 13, 2020, 1:36 pm
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I passed L1 and L2 first time using Kaplan and MM. For L3, I’d heard from various people that Kaplan isn’t great for L3 and I should stick with the CFAI texts, so that’s what I intended to do. My wife gave birth to twins 6 weeks ago, so to say that my time is limited would be an understatement, but I’ve got less time even than I realized. I’m watching MM vids, but the CFAI text is just too dense and I’m just not making progress. That being said, I don’t want to go with Kaplan if it’s going to be an absolute waste of time. So, any advice here? Is Kaplan sufficient at L3? My plan would be the same as L2…MM, Kaplan, and CFAI just for the Blue box and EOCs. 

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Active Share and correlation between positions

January 14, 2020, 7:00 am
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Dear All,

An overallocation to one security, and an underallocation to another security will have the same impact on Active Share, whether these two securities are in the same sectors or different sectors.

But how come? If you over- and under-allocate by the same amount, but thill it´s an over-or underallocation relative to the benchmark, why is your active share the same?

Thank you!

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Alternative Investments: unsmoothing

January 14, 2020, 7:12 am
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on page 126 of Asset Allocation for Alternative Investments, paragraph 7.1.1 “Stale Pricing and Unsmoothing”:

“Because our returns are serially correlated, we want to unsmooth the returns to get a better estimate of volatility. The volatility calculated on the unsmoothed return series is 14.0%, significantly higher than the volatility estimated from the unsmoothed data.”

I assume there is a typo in the bold part, shouldn’t it say “from the smoothed data”?

Thanks

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S2000magician’s Command Word Guide

January 14, 2020, 11:54 am
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Hi,

I would like to share my thoughts on the command word guide prepared by S2000magician to help clarify or guide the level 3 candidates.

 I found this guide to be very useful. It analyzes the command words found in the AM papers and guides candidates on what is expected of them to score well.

Seven most frequently appearing command words found mention in this guide. This guide is very detailed yet it is Upto the point. 

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Growth, Inflation & Bond Yields

January 14, 2020, 4:39 pm
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The below fact is stated in both readings 10 and 11 of the CFAI text. Why is this? Does someone understand it enough to give a practical example? What is a demand/supply driver?

When growth and inflation are primarily driven by aggregate demand, nominal bond returns tend to be negatively correlated with growth. When driven by aggregate supply, nominal bond returns are positively correlated.

Thanks

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Chalk & Board thoughts on effectiveness for level III?

January 14, 2020, 7:15 pm
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