@cfachris
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Up11
@Hardik_Parikh, I remember getting confused with this too, as it’s pretty counterintuitive.
When there is high correlation between an asset class with the rest of the portfolio, this means that the returns tend to move together. While that is riskier, there is less risk for the asset allocation as a percentage to deviate from what investors choose it to be. Therefore risk tolerance is higher and a wider corridor is acceptable.
In other words, highly correlated assets’ target weights/allocations stay roughly the same since everything is moving together. This implies there is less deviation from the target weights and thus you can have a wider corridor before rebalancing.
So using an extreme example, if you have 2 asset classes that are perfectly correlated, when one goes up, the other will follow. Thus, weighting of the 2 asset classes will remain similar since they both moved in the same direction.
Just to add some stuff from my notes:
3 factors positively-correlated with corridor:
- higher transaction costs
- higher risk tolerance
- high positive correlation with other asset classes (no need to rebalance if they move up/down together)
2 factors negatively-correlated with corridor:
- high volatility of the asset class;
- high volatilities of the other asset classes (highly volatile asset class means increasing risk, so you can set narrower ranges to control that risk)
Hope these makes sense?
Up8jasdev – good summary of Mark Meldrum, took me a while to go through although seems quite hyped up on Reddit. May be tempted to try it out except his website isn’t the clearest at explaining things at times 🙂
You’re absolutely right about Arif’s tip though, thanks for sharing! I’ll definitely incorporate that for the exams. Thanks dude!
Up6With the put-call parity equation, a (long) call option should equal: Long put option, long underlying asset, short risk-free bond
Up5Hey, I remember bitching about this back in L2. I’ve dug out and copied my notes below, hopefully I got it right….
International parity conditions shows the relationship between expected inflation, interest rate differentials, forward exchange rates, and expected future spot exchange rates, and forms the basis of our understanding of long term equilibrium value of exchange rates.
Covered interest rate parity (CIRP)
CIRP basically states that the interest rate differential between two currencies should equal the differential between the forward and spot exchange rates, so that an investor would earn the same return investing in either currency:Fwd/Spot = (1 + i FC)/(1 + i DC), where Fwd and Spot exchange rate are expressed as Foreign Currency (FC) per Domestic Currency (DC), i = interest rate.
CIRP holds because if it does not hold, arbitrageurs would capitalize and exploit any arbitrage opportunity and make risk-less profit.Uncovered interest rate parity (UIRP)
UIRP states that the expected movement in exchange rate should equal the interest rate differential.E(Spot t=1)/Spot = (1 + i FC)/(1 + i DC), where E(S1) is the expected spot rate.
Key difference between CIRP and UIRP is that UIRP deals with expected future exchange rates, and expectations are not market traded, so it is not bound by arbitrage. UIRP tends to hold over the long-term but not over shorter periods, because it assumes that capital markets are efficient. And this can happen when, e.g.capital flows are restricted or currency forwards are not available. CIRP on the other hand is based on arbitrage.Purchasing Power Parity (PPP)
Mind you, there are a few versions of this (absolute, relative, ex-ante), but the main gist of it is that it links changes in exchange rates to changes in inflation rates between countries, based on the law of one price. Relative PPP is based on actual changes in exchange rates and inflation rates, whilst ex-ante PPP is based on expected changes in exchange rates and inflation rates.
Up5Haha, that’s some cliff hanger :p Hopefully we all have done enough to pass else all the sedentary studying (and tummy flab) is all for nothing…
Up5Hey @jasdev, sorry to hear that man… I just managed to scrape through on my 2nd try, so there’s hope.
When this happened to me last year, I felt slightly angry actually as I was hoping to pass and “be done with this”. But i feel it’s so close to that 3 letters behind my name I actually was really motivated to have another go – it’s kinda like the double down mentality (terrible gambler :# ). Second time around felt less intimidating as I’ve experienced the written nature of the exam before, and I forced myself to make/type succinct notes as I study along to speed up last minute revision this time. Kinda just about work, so just sharing my thoughts –> have a think about it during your holiday, but I definitely get that the time cost with family/friends/social life sucks though.
Up5Hi, I assumed you had a typo in your original question for S1, that it should be 5.5% as I don’t seem to get your exact answers with S1=5% (an answer of 1014 instead of 1009).
Assuming that S1=5.5%, the correct answer is B, i.e. 1009.
This is derived as:
1009 = 100/[(1.055)] + 100/[(1.055)*(1.0763)] + 100/[(1.055)*(1.0763)*(1.1218)] + 1100/[(1.055)*(1.0763)*(1.1218)*(1.155)]
In your calculation (which yielded 996), you have assumed that the S4 spot rate is the same each year i.e. S1=S2=S3=S4, which is not true.
S2 = (1.055*1.0763)^(0.5)-1 = 6.56%
S3 = (1.055*1.0763*1.1218)^(1/3)-1 = 8.4%
And you already have S1 and S4. So if you discount each cashflow with their respective period’s spot rate, you’ll get the same answer, i.e. 1009 = 100/(1.055) + 100/(1.0656^2) + 100/(1.084^3) + 1100/(1.1013^4)
Up4Yes please, that would be great jasdev. Appreciate it. I don’t know if I’ve got 90 hours to spare given how far behind I am with materials, but keep me posted!
Btw, which is the trickiest topic you found so far jasdev? For me it’s fixed income…
Up4Well, CME is quite important I guess, keep at it as I remember lots of practice questions to come from that (based on previous L3 attempt). It’s a long road jasdev, but hopefully it’d be over soon!
Any plans post exams, just to lift the spirits and have something to look forward to? (Not studying is definitely a GOOD start!) 🙂
Up4Hey @jasdev, what about your mock plans? Are you taking time off to cram? I kinda gave up reading as I’m still behind, and moving straight to mocks for a whole week to see how badly I get destroyed, before moving back to cram the remaining bits I miss. Not looking good 🙁
Up4So far, I’ve attempted CFAI 2015 AM, 2016 AM, and 2017 AM, but limited to answering those questions on topics I’ve read through. Not marking scores at all, just reading the specimen answers and trying to learn the correct style and focus of their answers.Seems like good progress on the mocks! Yes, I’m not gonna mark/score it either as it gives me anxiety :#
I’m strangely looking forward to the end of it all (hopefully), despite feeling super ill prepared. Need to have a life soon. YOLO :p
Up4Hey, charterholder here. I don’t think it matters much to employers in how long you took to do the CFA exams, it’s just bragging rights (rightly so probably) for those who managed to achieve it quickly.
That said, there are specific ways of stating your CFA status in your CV which should be factual rather than implying any superiority.
You’re still young, so I think focusing on getting a graduate job and obtaining job experience is more important, so it is totally fine to have a break in between CFA exam levels as it makes sense for you. Getting a job and building up work experience is key especially in the current market, and you can continue Level 2 & 3 later on in your career where it packs the most punch anyway. Even if you decided to go for the CFA exams now and passed all of them in around 2 years, you will still have to wait to satisfy the work experience requirements for the CFA charter.
just my 2 cents 🙂
Up4@daved10 – is there any specific field in finance you want to go for? It is important to understand your motivation here for a career in finance (and which part). Getting a CFA charter is not a golden ticket to jobs, so I’m worried you’re spending extra time and money and not getting what you really want to achieve with this.
Honestly speaking – and I don’t mean to be a naysayer – the current employment market is not looking great for all, and finance is an extremely competitive field as is. The 4 year unemployment gap can be an easy target to discount your application, and age may be an issue too with graduates flooding the market.
Switching career and/or job function is never a one-step thing, and usually people achieve one change at a time (i.e. switch job function but different sector, or switch sector but holding the same job function). I wonder whether you would be able to leverage your math/programming background to get into the finance sector to start (but not your ideal job function)?
Lots of food for thought here, and not enough information.
Up4Hi @pcunniff , when you increase the number of stocks in your portfolio, unsystematic risk (diversifiable risk) reduces, but at a slower/decreasing rate. I presume you meant this chart below.
As you can see below, to take an extreme, if you add infinite number of stocks, there comes a point where adding 1 extra stock to your portfolio doesn’t do much to reducing your unsystematic risk, i.e. the impact of adding 1 stock to unsystematic risk decreases at a DECREASING rate. If it were to decrease at an INCREASING rate, you wouldn’t see the shape of the red curve below, but instead a mirror image where the curve hits zero eventually as stocks are added to portfolio – which doesn’t make sense.
Does this help?
Up3Hey jasdev, do you know how many hours are his videos going on for? I presume it’s just specific/tricky topics only that he covers? Never actually heard of him so just curious. Have you started some practice papers?
I think my failure was due to time management and confidence in my knowledge. I dwelled on too long in uncertainty about answering things, that just compounded and consumed me during the exam 🙁 Hopefully better luck this time heh
Up3hey @fabian, how did you feel it went?
I’m a 2nd time L3 candidate as well, hopefully I did enough to pass for charterholdership. Blanked out on 2 whole questions though, but rushed through to finish them and came back in a calmer manner to wrote something, hoping to get partial points for those instead of 0.
@jasdev – how did it go for you? I know you’re the well prepared one! 🙂
Up3We all have those days @DylanOwen – it was worse having to fail one level (L3 for me) and repeat the process again.
Definitely lots of moments questioning myself and what on earth I’m doing where I could be doing other more interesting things…
What do you currently do, and why are you studying for the CFA qualification then?
Up3If it is DB pensions, the ‘risk’ aspect is to minimize the downside of needing to top-up the fund with cash contributions, if the assets of the fund is lower than the future defined obligations (liability).
The DB pension fund sponsors want to maximize returns (to improve and maintain a surplus status), but also have downside protection and reduce the volatility of that funded status. One of the ways they do the latter is by matching the liability risk with longer duration bonds, i.e. Portfolio D, which shows a shift to the left. Ideally they want low risk, high return portfolio mix, i.e. top left of the chart if feasible, but there is a trade off.
I would imagine they use monte carlo simulations with various market assumptions to run complicated scenario modellings for this and build this efficient frontier.
Up3Hey fellow lefty – it is in the L3 curriculum, volume 1.
Hidden under GIPS (Reading 6), section 3.3 under “3.3. Calculation Methodology: Time-Weighted Total Return”.
Don’t panic, there is still time!
Up3hey J, not sure if I’m right here, but time weighted return should have a square root in this case, as it is over 2 period, i.e. ^1/2
Time weighted return for portfolio should be (1.1 * 1.1)^(0.5) – 1 = 10%
Time weighted return for underlying assets over 2 months:
asset A: (1.04*1.021)^(0.5) – 1 = 3.05%
asset B: (1.03*1.0157)^(0.5) – 1 = 2.28%
asset C: (1.02*1.0105)^(0.5) – 1 = 1.52%
asset D: (1.01*1.0052)^(0.5) – 1 = 0.76%
asset E: (1.0475)^(0.5) – 1 = 2.35%
The total is 9.96%, probably due to rounding as I used 2 d.p. input rather than the usual 4 decimals.
