Questions and Answers of Equity Asset Valuation

What is the Valuation of Family Limited Partnerships
What is MACROENVIRONMENTAL ANALYSIS
• Who are the customers? Is that base growing? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and projected
• Is it a regulated industry? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and projected growth in the
• What are the barriers to entry? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and projected growth in the
• How much merger and acquisition activity is occurring? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and
• Are there many public companies in this industry? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and
• Is the industry dominated by a few large companies? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and
• How large is the industry? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and projected growth in the
• How attractive is the industry in terms of its prospects for above-average profitability? The industry analysis should provide a picture of where the industry is going and how the subject company
• What key factors will determine competitive success or failure? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at
• Which companies are in the strongest/weakest competitive positions? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at
• What are the drivers of change in the industry and what effect will they have? The industry analysis should provide a picture of where the industry is going and how the subject company fits in.
• What competitive forces are at work in the industry and how strong are they? The industry analysis should provide a picture of where the industry is going and how the subject company fits in.
• What are the industry’s dominant economic traits? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and
• What are the prospects for growth? The industry analysis should provide a picture of where the industry is going and how the subject company fits in. Look at historical and projected growth in
What is Financial Valuation
5. What is meant by a “self-financing” strategy?
4. How are cointegration and error correction models related?
3. Why is a t-test important when estimating a statistical arbitrage model?
2. What is the difference between a relative return strategy and an absolute return strategy?
1. What is the difference between “pure arbitrage” and “statistical arbitrage”?
5. How can different data sampling methodologies affect high-frequency portfolio allocation decisions?
4. How does irregular spacing in time influence high-frequency portfolio allocation?
3. How does the bid-ask bounce factor into the high-frequency portfolio allocation decisions?
2. How does the volume of high-frequency data impact estimation of optimal portfolio allocation?
1. What properties of high-frequency data affect portfolio management strategies?
5. Can you provide any insight into why shortfall constrained optimization performed better than mean-variance optimization in the empirical study?
4. Does constraining shortfall help protect against sharp daily losses?
3. By constraining shortfall beta, one tends to lower the standard beta of the portfolio, since the two are strongly correlated. Is the outperformance of shortfall constrained optimization for the
2. Discuss the difference between beta and shortfall beta.
1. There are different ways of computing the expected shortfall of a portfolio. A common approach is to use historical asset returns to simulate the portfolio return distribution. In the study
5. A limitation in the implementation of the mean-variance model for portfolio optimization is that one of the critical inputs in the model, the sample covariance matrix, is subject to considerable
4. Give an example of how the presence of taxes changes the concept of risk in portfolio optimization.
3. How are transaction costs typically incorporated in portfolio allocation models?
2. State the standard definition of tracking error and discuss why other definitions of tracking error may be used.
1. What are the most common constraints encountered in optimal portfolio allocation in practice?
6. What types of explanatory variables are used in models for forecasting market impact?
5. What is implementation shortfall?
4.a. What are the different approaches to measure market impact?b. What is meant by “VWAP” and how is it calculated?
3.a. How does a limit order differ from a market order?b. What are the advantages and disadvantages of a limit order?
2. Why is there market impact in the market?
1. Describe what market impact costs are.
5. What approach do we recommend for avoiding unintended country bets in stock portfolios?
4. How do these issues differ between developed and emerging markets?
3. Why do “country noise” bets arise and why is it impossible to avoid them without directly considering country membership?
2. What are the two types of country bets that may arise in stock portfolios and what are the drawbacks of each?
1. When constructing stock portfolios, what negative side effects can result from ignoring country membership?
5. Are stock portfolios simply a basket of the top ranked stocks?
4. Does the more frequent change of factors selected in recent years mean higher stock turnovers?
3. Why should a relatively small number of factors such as three factors be selected?
2. What’s the objective function used to select factors in the Alpha Repair strategy?
1. What is the motivation of using the Alpha Repair investment process?
5. How have financial innovations such as altered the way in which portfolio managers can express views in a portfolio?
4. Describe the empirical evidence on value and momentum strategies and explain how value and momentum may be used as complementary factors in portfolio management.
3. Discuss how individual stocks may be of less importance to a portfolio manager employing a factor-based approach.
2. Explain how traditional approaches to portfolio management based on individual security selection are nested in the concept of a factor-based view of the portfolio.
1. Discuss some of the developments that led to the rise of dynamic factor models and their growing role in portfolio management.
6. What is the contribution of each stock to total portfolio risk?
5. What is the correlation between the total return of the two stocks?
4. What are the systematic risk, idiosyncratic risk, and the total risk of the portfolio?
3. What is the isolated risk of the portfolio coming from each systematic factor?
2. What is the total risk of each stock?
1. What is the systematic risk of each stock?
5. What is the difference between in-sample and out-of-sample testing?
4.a. What are factor portfolios?b. What methodologies can be used to build these portfolios?
3. Explain some of the common inference problems that arise in crosssectional regressions where the dependent variable is a stock’s return.
2. How is the interpretation of a factor model using stock returns influenced by the specification of time lag of the (or no time lag) dependent variable?
1.a. Why is the portfolio sorts methodology used?b. What is an application of the portfolio sort methodology?
5.a. What are outliers?b. Why do outliers occur in financial data?
4. How are financial data organized?
3. Explain some of the major data issues encountered when working with financial data.
2. What areas of finance use factor models?
1. List and define the typical risks of an investment strategy.
7.a. What does the marginal contribution to tracking error mean?b. Suppose that the marginal contribution to tracking error for some factor is negative. What does that mean?c. Why is the marginal
6. Why is there no guarantee that the forward-looking tracking error at the start of a quarter will exactly match the backward-looking tracking error calculated at the end of that quarter?
5. In practice, how is forward-looking tracking error calculated?
4. Why is backward-looking tracking error not a good indicator of future risk?
3. Suppose that a manager whose benchmark is the S&P 500 pursues an enhanced indexing strategy allocating 10% of the portfolio to be actively managed and 90% indexed. Assume further that the tracking
2. Assuming active returns are normally distributed, calculate the expected returns about the benchmark at various at the 67%, 95%, and 99%confidence levels assuming the following data:Expected
1. Calculate the annualized alpha, tracking error, and information ratio based on the 12 monthly returns below:Month Active Return (%)1 0.37 2 –0.31 3 –0.55 4 0.09 5 0.37 6 –0.05 7 –0.62 8
6. Why would it be prudent to test a quantitative model before it is implemented against an artificial data set formed from independent and identically distributed returns?
5. What is meant by “data snooping”?
4. What are the steps in the process for converting quantitative research into an implementable trading process?
3. What is the common objective of all quantitative processes?
2. How are the methodologies utilized in economics different from those employed in the physical sciences?
1. What is the extent and purpose of human intervention in a quantitative investment management process?
7. How has the execution process undergone important changes in recent years?
6. What is meant by “performance decay”?
5.a. Why are adaptive modeling techniques used by quantitative equity managers?b. Describe several examples of adaptive modeling techniques and the challenge in using them.
4. What are meant by a fundamental, quantitative, and hybrid investment processes?
3. What are some of the reasons for the greater use of optimization techniques?
2. How is behavioral modeling used?
1. What is the purpose of estimating model risk?
6. How do the breadth of coverage and depth of analysis provided by a complex, unified approach improve the likelihood of successful investment results?
5. Why is it important to have portfolio construction and performance measurement processes that are congruent with the stock selection process?
4.a. What is “disentangling”?b. What advantages does disentangling offer over simpler, univariate analysis of return-related variables?c. Give an example of disentangling at work.
3. What advantages does a complex, unified approach offer?
2. Is the stock market segmented or integrated?
1. In what ways is the stock market a complex system?

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