Monte Carlo simulation and scenario analysis for robustness CFA Flashcards - Medical Study Cards
Master Monte Carlo simulation and scenario analysis for robustness with Oncourse flashcards. These spaced repetition flashcards are designed for medical students preparing for NEET PG, USMLE Step 1, USMLE Step 2, MBBS exams, and other medical licensing examinations.
Monte Carlo simulation and scenario analysis for robustness Flashcard Deck - 9 Cards
Flashcard 1: Resampled Efficient Frontier\
*Asset Allocation*
Answer: A drawback of efficient frontiers created through MVO is the sensitivity of the frontier to changes in the inputs. Usually we have little confidence in the results of a single MVO so professionals run multiple to gauge the results sensitivity to changes in inputs.
Michaud developed a variation of this based on a simulation exercise using MVO and a data set of historical returns. Averaging the results of these simulations creates the resampled efficient frontier.
Flashcard 2: Dynamic and Static Asset Allocation
Answer: Dynamic asset allocation takes a multi-period view of the investment horizon. In other words, it recognizes that asset performance in one period affects the required rate of return and acceptable levels of risk for subsequent periods.
Static asset allocation ignores the link between optimal asset allocation across different time periods.
Dynamic asset allocation is difficult and costly to implement. However, investors who have significant liabilities, especially those with uncertain timing and/or amount, find the costs acceptable.
Flashcard 3: Rebalancing Strategy Risk
Answer: Constant Mix
- Risk tolerance varies proportionally with wealth
- Constant relative risk tolerance
Buy and Hold
- Increase with wealth but is passive
CPPI
- Increases with wealth but is active
Flashcard 4: Rational Economic Man
Answer: Maximizes utility given budget constraints & available information. Governed by:
- Perfect Rationality - Ability to reason and make beneficial judgements
- Perfect Self Interest
- Perfect Information - Perfect knowledge of every subject
Those who challenge REM do so by attacking these assumptions.
Flashcard 5: Rebalancing Disciplines
Answer: Calendar Rebalancing
- Periodic rebalancing to target weights
- Simple approach, no continuous monitoring required
- Allocations could differ significantly between rebalancing dates
Percentage-of-Portfolio Rebalancing
- Rebalancing thesholds or trigger points stated at % of portfolio value
- Requires frequent monitoring
- Tighter control of divergence from target allocation
Flashcard 6: Three Rebalancing Strategies
Answer: 1. Buy and Hold
2. Constant Mix
3. Constant Proportion
Flashcard 7: Constant-Mix Strategies
Answer: - Reacts to market movements
- Target investment in stocks = m x portfolio value
- Where 0\<m\<1
- Decrease stock proportion when markets increasing, increase when they are decreasing
- Maintains portfolios systematic risk exposure
- Underperforms other two in upward trending markets due to selling winners
- Outperforms other two in downward due to selling losers
- Produces concave payoff curve
Flashcard 8: Buy-and-Hold Strategies
Answer: - Passive do-nothing strategy
- Floor = amount invested in t-bills
- Outpeforms Constant Mix in trending markets
- Remains neutral in flat and oscillating markets
- Target stock proportion = actual stock proportion (m=1)
- Results in linear payoff curve
Flashcard 9: Commodity Characteristics
Answer: - Used to manage portfolio risks
- Provide inflation hedge
- During financial and economic crisis, commodity prices tend to increase
- Determinants of commodity returns are economic cycle related demand, convenience yield and real options.
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