Exam Question Notes

• Memory Pool

• Waiting area for valid but not confirmed transactions

• Device linked to a network and maintaining a ledger copy

• Can update the ledger and share changes with the network

  
  

• Smart contract that lists digital asset ownership

• Outside real-world data onto blockchain

  
  

• Wallet storing keys and transaction capabilities

• Private trial phase where manager tests different strategy with own money before launch

• Focus on contribution for profit (economic), people (social), and planet (environmental)

• Excessive number of statistical tests until wished result appears

• Correlation of a single variable with its own past values

• Hours studied: 2 hours every day or an increase of 15 minutes every day

• Measures the strength and direction of the relationship between two variables, always ranging from −1 to +1:

• Number quantifies relationship (+1 = positive relationship (high follows high); 0 = no relationship, -1 = -1 negative relation (low follows high)

• Tells you how much one variable moves per unit of another — unbounded, can be any number.

• Tax-neutral jurisdiction -> only investor-level taxation in respective jurisdiction

• Whether result is real or just due to random chance

• Whether effect of result is large enough to matter in practice

• Bond Yield - Risk-free Rate

1 - Recovery Rate

Credit Spread / Loss Given Default

• Fund’s Back Office

• Safekeep and monitor securities

• Includes custodian functions + regulatory functions

• Trading Services Provider

• Hold and Safeguard assets

• Private, Customized Agreement between parties to buy / sell on a future date

• Standardized Agreement between parties to buy/sell on a future date on an exchange

• Model calculating expected return of asset based on risk relative to market

• Return only possible by market risk

Risk-free Rate + Market Risk Premium

Risk-Free Rate + Beta * (Exp. Market Return - Risk-Free Rate)

• Default statement of no effect which is tried to be rejected

• Suspected claim there is an effect -> accepted when null hypothesis is rejected

• False positive -> rejecting null when true

• Alternative Hypothese is accepted but null hypothesis should be accepted

• False Negative -> failing to reject null when false

• Accepting null but alternative should be accepted

• Constant variance (spread/vol) across observations

• Errors have constant variance

• Changing variance (spread/vol) across observations

• Errors have varying variance

• Measure of an asset’s sensitivity to market movements

• 1 -> moves with market

• >1 -> amplifies the market

• <1 -> moves less than market

• 0 -> uncorrelated to market

• >0 -> moves opposite to market

• Fund’s market exposure slowly rising over time as fund gets bigger

• Fund’s beta increasing due to economic changes

• Fact that beta is not constant

• Beta rising / falling aligned to economic cycles

• Measure of how much an asset’s price or return move

• Distribution leans to one side with longer tail

• Distribution with thin tails and flatter peak

• Distribution with fat tails and sharper peak

• Measure of average spread of values around their mean

• Small SD -> values cluster tightly around mean

• HIgh SD -> values are widely spread (unpredictable)

• Loan to purchase RE, secured by that property as collateral

• Repaid over time with principal + interest

• Default -> lender foreclosures collateral

Interest Rate + Origination Fees (upfront charges paid to lender prior loan)

(Probability of realizing CF * Potential 1. Year CF) / Discount rate + rate of decline in CF

• Assets that support economic activity and revenue dependent on economy

• Assets that provide public / social services and revenue backed by government

• Reduced spending in infrastructure due to funding gap

• Private players enter infra investments

• Company that owns, operates, finances income-producing RE

• Public & Private REITs

• Distribute 90%+ of their income

• Office

• Retail

• Industrial

• Residential

• Property types outside of traditional sectors

• Purpose-built properties requiring specialized management

• Model stating that shape of forward curve is based on costs and benefits of storing the commodity

• Prices reflect spot price + cost of carry

Storage Costs + Financing Costs - Convenience Yield

• Benefit of physically holding a commodity

• Negative cost as it rewards holding in times of shortage

• Lender’s right to pursue a borrower’s assets that can be executed after default

• Acquisition and Holding of land at various stages of readiness with expectation that value rises once infrastructure expands

• Capital intensive set up

• low operating costs

• natural monopolies

• high barriers to entry

• Agent makes decision in own interets rather than principals

• Timing risk in harvesting periods

• Risk of Recession

• Risk that Counterparty fails to meet obligations

• All investors hold the same risky market portfolio -> same % allocation

• Risk tolerance only changes the split between risky portfolio and risk-free assets

• Line that shows best risk-return combinations achievable by mixing risk-free assets with the market portfolio

• Fully-funded (upfront payment) bond whose payoff rides on a commodity's price - commodity exposure in a debt wrapper with no leverage

• Receives higher yield than plain bond

• Bears credit risk of reference entity

• Normalized NOI the property is expected to generate once stable conditions are reached

• Expected unlevered stabilized return on the cost of development

• Return rate at which comparable properties are valued

• Lower market cap relative to development yield -> more profitable

• NOI / Property Value

• Gap between development yield and the market cap rate

• Stabilized Annual NOI / Total Development Costs

• Market Cap > Development Yield = dont build

• Hard Costs -> physical goods

• Soft Costs -> non-physical costs

• Projected Stabilized NOI / Market Cap Rate

• Ratio showing how much of a development total cost is funded by loan

• Loan Amount / Total Development Cost

• Lenders cap LTC to limit risk

• Publicly traded company sells privately stocks to private investors at discount

• Include a lock up period before tradeable

• Private investor buys shares at fixed price -> number of shares and dilution is known upfront

• Structured: Investor buys shares at floating conversion price -> number of shares and dilution is unknown upfront

• Toxic: Stock price drops -> conversion price drops -> investors converts into more shares -> dilutes other shareholders who are selling -> stock price drops further = death spiral

• PIPE shares are sold below market value to entice investors to commit capital privately

• Privately placed common stock

• Registered common stock

• Convertible shares

• Equity Line of Credit

• Agreement between company and investor

• Formula-based quantity stock sell at intervals to investors

• Seller can determine intervals and investor receives discount

• Time

• Performance

• Violations of Covenants

• Predefined goals a startup must reach for the next round of funding

• Rules written into a loan / bond that that borrower must follow

• Positive (Affirmative) -> borrower must do

• Negative (Restrictive) -> borrower must not do

• Decline in IPOs

• Increasing number of public firms going private

• Buy / Sell of Non-core division and spinning it off as standalone business

• Buying distressed company and restructuring back to health

• Buying a company and boosting its operational efficiency

• Buying a platform company and making multiple add-on acquisitions

• Private Placement to transfer risk from issuer to lender

• No disaster -> Principal back + interest payment

• Disaster -> Partial or full principal lose

• High Yield and Uncorrelated Returns -> Great Diversifier

• Unsecured tradable security where investors lends money to issuer

• Lender receives fixed coupons and princiapl at maturity

• Many investors and traded on exchange

• Issued by Corporations and Governments

• Direct Lending Agreement -> lender gives borrower money

• Borrower pays floating rate + principal portion

• Not traded, secured, one issuer / investor

• Issued by companies

• Insurance against a borrower’s default

• Protection buyer pays fixed premiums and recevies lump sum in default

• Protection seller collects premiums and pays out in default

• Insurance transfers risk exposure from balance sheet

• Unfunded

• Lump sum payout

  
  

• Single, one-time payment

• Legal separation that insulates one vehicle from anther one -> both ways

• The credit risk of the CDO's tranches depends only on the underlying assets in the SPV — Not on the health of the sponsoring bank that created it

• CDO sits bankruptcy remote -> bank can go bankrupt and CDO remains unaffected

• Structured product of bonds, loans, other debt that pools together many debt assets and repackages them into tranches with different levels of risks and returns

• Senior

• Mezzanine

• Equity

• 1: Balance Sheet vs. Arbitrage

• 2: Cash-funded vs. Synthetic

• 3: Cash Flow vs. Market Value

• CDO with no real bonds / loans inside -> uses CDS to copy credit risk -> collects premium to pay its tranche investors and pays out if default occurs

• Similar to cash flow CDO but with derivatives

• Sponsor Bank -> offloading risk and pays premiums

• SPV -> sells protection and issues tranches

• Investors -> tranche holders and protection sellers with risk bearing

• Professional (good for industry + society)

• Misaligned (good for industry + bad for society)

• Unnecessary (bad for industry + good for society)

• Absent (bad for industry + society)

• Individual investment account owned by single investor but managed by professional manager

• Investor directly owns the underlying assets

• Offered through brokerage and managed by independent manager

• Direct ownership

• Tailored objectives

• Transparency

• No limited liability -> losses can exceed contribution

• Higher minimums

• More complex

  
  

• Highest NAV recorded on an incentive fee computation date

• Ensures manager only earn fees on new profits

• Traditional: No fee at all while under mark

• Modified: Reduced fee on profits while under mark -> removes perverse incentive for extreme risk & shut down

Incentive Rate * Max (NAV - HWM - Hurdle)

• Entity that takes other side of every exchange-traded futures trade

• Acting as counterparty to reduce counterparty risk

• Novation -> contract is with clearinghouse; not other side

• Margin Collection -> demands & pools collateral

• Daily settlement -> marks to market

• Guarantees every contract -> diversifies risk

• Futures have clearinghouse security -> no counterparty risk

• Forwards have no clearinghouse security -> full counterparty risk

• Collateral required position opening set by the exchange

• <10% of contract’s value

• Reduces counterparty risk by ensuring daily losses can be paid

• Minimum collateral required on ongoing basis until closing

• c. 75% of initial margin -> if collateral falls below -> Margin Call

• Demand for additional collateral -> restore initial margin level

• Triggered when collateral below maintenance margin (due to mark-to-market losses)

• Cash transferred each day between parties to settle mark-to-market gaisn / losses -> losers pay in, winners receive

• Daily process of revaluing open positions at current prices and settling day’s gains / losses via variation margin

• Margin call is issued

• If investor can’t meet -> futures commission merchant closes position at market price -> clearinghouse guarantees contract -> new counterparty steps in

• Broker holding client’s account

• Has right to liquidate investor’s position if margin call is not met

• Both are two threshold lines

• Initial margin is being posted at opening -> from there balance moves up / down

• Maintenance margin is bottom floor -> if balance drops below -> margin call

  
  

• For-cause removal of GP for wrongdoing

• Simple majority required and GP receives no compensation

• Investments shut down until new GP

• Without-Cause removal -> requiring 75%+ votes

• Framework for failing partnership

• GP may receive some compensation

• Lets LP suspend activities or terminate the fund

• If one / more person(s) quit, retire or don’t dedicate sufficient time

  
  

• Conditions are difficult to define and prove

• Rarely litigated due to process risk -> favors GP

• PE -> small, reputation world

• Removed GPs likely unable to raise further funds -> avoidance by agreeing to restructuring

• Provision specifying how/when an agreement can be ended -> such as bad- / or good-leaver clauses

• Provision allowing a party to end relationship for any reason without cause -> similar to good-leaver clause

• Institutions that buy / sell securities for their own portolios

• Example: HF, Pensions, Foundations

• Institutions that facilitate transactions and act as intermediaries

• Example: Banks, Advisors

• Deal-by-deal

• Fund-as-a-whole

• GP earns carry on each winning deal -> No fund netting

• GP receives earlier payment, higher payout, attracts talent

• LPs discourage it -> rarely seen

• GP earns carry on fund’s total return after LPs recovered capital

• Better GP/LP alignment, LP protection, discourages excessive risk & uses clawbacks

• Return Level LPs must receive before GPs earn any carry

• Every cash goes to LPs before threshold reached

• After hurdle is met -> GP receives large share of profits to catch up

• Earning carry on all profits -> not just above the hurdle

• Requires GP to return previously-paid carry to LPs if later losses exceed split

• Protects LPs -> associated with Fund-as-a-whole

• LPA provision specifying how distributions are split and prioritized between LP and GP -> details what must be achieved before GP profit taking

• Database disproportionately reflects managers who choose to report -> good performers opt to return -> inflates average return

• Losers don’t report voluntarily

• Selection bias of the manager choosing whether to be included in database

• Failed funds are dropped from the index -> disproportionately reflects surviving funds

• Inflates average returns by 2-5% p.a.

• When fund joins database -> prior performance is backfilled

• manager start reporting after good track record

• Pushes historical performance by c. 1-5% p.a.

• Dying funds stop reporting final (bad) performance -> misses large negative performance

• Inflates reported performance and flipside of participation bias

• Successful manager closes fund to new investors and stops reporting -> no need for capital -> returns drop out of database

• Distortion when fund changes its fee structure after success

• Fees are raised after good performance

• Reported returns don’t reflect performance / fee of new investor

• Proportion of Hedge Funds that drop out of database at a given fund age

• Highest dropout at 14 months old

• Tendency to over-rely on first piece of information (anchor) for decisions

• Tendency for one’s expectations to influence how information is interpreted -> skewing results to expectation

• Negative news about hedge funds cause economic losses

• Arising not from market impact but from association -> some investors don’t allocate for that

• Pattern in the market that shouldn’t exist in perfect efficiency

• Anomaly lets you earn higher risk-adjusted returns

• Investment strategies identifiable from publicly available information

• Price Momentum

• Prive Reversal / Mean Reversion

• Earnings Momentum

• Net Stock Issuance

• Accounting Accruals

• Insider Trading

• Anomaly test tests two things at once:

  • Market efficiency (is there an anomaly?)

  • Is the risk model correct (e.g., CAPM)

• Any found anomaly can just be a model misspecification

• Anomalies with reasoned explanation are more trustworthy than purely empirical ones

• Once discovered & traded -> anomaly tends to disappear (alpha decay)

• Valid anomaly explain who you earn excess return from and why they keep trading against you

• Price trend continues

• Securities that have done well keep doing well (losers lose)

• Price trend flips

• Prices that moved far from their average revert back

• Prices keep drifting (slow continuation) after initial jump in the surprise’s direction after earnings momentum

• Firms with strong earnings growth tend to keep outperforming

• Related: Earnings Surprise, Standardized Unexpected Earnings (SUE), Post-Earnings-Announcement Drift

• Firms issuing shares tend to underperform

• Firms buying back shares tend to outperform

• Management Market-Timing Signal Mechanism:

  • Issuance -> management thinks stock is overvalued

  • Buyback -> management thinks stock is undervalued

• Firms with high accruals (accounting entries, no cash) tend to underperform -> market corrects firm when cash doesn’t hit

• Accrual-heavy earnings are lower quality, less sustainable, and easy to manipulate

• Low accruas tend to out perform -> trustworthy as cash hits

• Legal insider trading -> insiders disclosed trades signal future performance

• Illegal insider trading -> recognized anomalies

  • Predictor -> insiders profit from undisclosed information

• Gap between target’s current price and the deal’s offer value

• Arbitrageur’s potential profit if deal closes

• Risk that an announced merger fails -> target price crashes

• Main risk in merger arbitrage

• Example: regulator block, shareholder rejection, failed financing

• Merger arbitrageur buys target at small discount to deal price due to completion risk

• Wants to collect the merger spread by bearing the risk until deal closes

• Like selling a put / insurance option

• Arbitrageur collects small steady spread (=premium) but suffers large loss if deal fails

• Short vol, negative skew, excess kurtosis

• Cash Deal

• Stock Deal (stock-for-stock)

• Acquirer pays cash for the target (no share swap)

• Arbitrageur just buays target at current discounted price and receives fixed offer price at closing

• No need to short acquirer -> acquirer stock price irrelevant as fixed payment and no swap

• Acquirer buys target by swapping own shares for target shares

• Arbitrageur buys the target -> will receive acquirer shares when deal closes

• Short the acquirer to hedge any acquirer stock price volatility before deal closes

• Ratio tells you how many acquirer shares to short per target share

• Exchange ratio = hedge ratio

• Example: 50 acquirer shares for 100 target shares -> short 50 acquirer shares; deal closes you receive 50 acquirer shares which cancel out with 50 shorted shares -> locked-in merger spread

• Signed contract locking in merger terms

• Point at which deal becomes official

• Penalty one party pays if it walks away from the deal

• Can partly cushiosn the arbitrageur if deal collapses

• Third party enters merger with higher bid -> sparking bidding war

• Source of upside for arbitrageur as target’s price increases and the long position benefits

• Risk that regulators block merger on antitrust grounds -> deal recuces competition too much

• Major cause of deal failure -> deal announced but regulators refuse

• Risk that acquirer can’t secure funding needed -> cash deals

• 1st -> Mean

• 2nd -> Variance

• 3rd -> Skewness (cubed deviations)

• 4th -> Kurtosis

• Average value

• Centre point data clusters around

• Sum of values / number of values

• How spread out are the values around the mean

• Small variance (tightly clustered) & high (wide spread)

• Average of squared deviations -> standard deviation

• Measure of how asymmetric a distribution is

• Which side has longer tail of rare, extreme outcomes

• Bell distribution -> zero skew

• Positive Skew (right long tail) -> many small losses, chance of rare large gain

• Negative Skew (left long tail) -> many small gains, risk of rare large losses

• Statistical measure of distribution asymmetry

• Is the data lopsided and which way leans it -> named after direction of rare extreme tail (not common outcome)

• Skew = general term; skewness = quantified measure

• Dislike negative skew (crashes) & like positive skew (upside potential)

• 0 = symmetric (bell distribution)

• >0 = positive -> right long tail

• <0 = negative -> left long tail

• Measures fatness of tails -> how often do extreme events occur

• High kurtosis -> leptokurtic; low kurtosis -> platykurtic

• Normal distribution Kurtosis of 3

• >3 fat tails (more extremes); <3 thin tails (fewer extremes)

• Kurtosis measured relative to normal distribution

• Formula: Kurtosis - 3

• >0 -> fat tails; <0 -> thin tails

• Long, stretched-out part of the distribution where rare, extreme values sit

• Opposite to peak -> thin, trailing edge stretching away from mass

• Mean - Average of all values combined

• Median - Middle value when all values are sorted in order

• Tendency of futures prices and spot price to move toward each other and become equal

• Future contract gets to maturity -> price closes price to spot price as spot comes nearer

• Backwardation (futures below spot) -> future price converges up to spot -> long gains

• Contango (futures above spot) -> future price converges down to spot -> long loses

• (Value Strong - Price) / (Value Strong - Value Weak)

• Cap rate and property value move inversely

• Cap rate = yield investors demand for holding the property with yield reflecting risk

• Property value goes up (lower holding risk) -> investor accept lower yield -> lower cap rate

• Calculate ex-post tax income: $100 * (1-0.3)

• Discount tax rate: 8% * (1-0.3)

• Calculate PV income: 70 * 1 - (1.056)^-10 / 0.056

• Calculate PV lump sum: 1,000 / (1.056)^10

• Assets gradually losing value over time due to lmited/finite lifespan

• Wastes away as it approaches end of useful life

• IP

• Options (Theta)

• Leases

• Natural resources

• Equipment

• Taxes

• Insurance

• Management fees

• Maintenance / repairs

• Utilities / Day-to-day

• Financing costs

• Income tax

• Depreciation

• CapEx

• Measures how many times NOI covers debt payments

• NOI / Debt Service (loan amount * debt cost)

• >1 -> covers debt; <1 -> can’t cover debt

• 10-15 years lifespan (due to capital intensive setup and slower repayment)

• 60%-90% leverage (can take more due to inflation prected repayments)

• 4-5 year investment period

• Lower volatility & correlation to equities

• Net Operating Income: Operating expense only

• Net Income: NOI + Financing

• Investment providing exposure to a single, specific asset, sector or risk factor

• Bet on one thing (no unwanted side exposure)

• Right to use property for a fixed period of time without owning the property

• Ground rent paid and after lease reverts to freeholder

• Leaseholder can finance the land at 100%

• No stable returns -> term adjustments, wasting asset, reversion risk (when lease ends)

• Owner of the property and land, indefinitely

• Elastic -> Demand changes based on economy / necessity

• Inelastic -> Demand independent of economy / customer styles

• Investment that holds up well in bad times

• Stable, reliable returns

• Low sensitivity to business cycles

• Backwardation -> Future is backed down

• Instant demand

• High Convencience yield and low inventory

• Contango -> Costs more in future

• Low convience yield and high inventories

• 90%+ distributions are being funded by proceeds from issuing new units -> secondary offerings

• Artificial valuation increase as distribution and valuation is cycle dependent on raising new capital instead of underlying business performance

• (Probability of Success * Cash Multiple) - Rate of Decline

• Liquidity Risk

• Business Risk

• Poor Diversification

• Organization Formation Costs

• Expensed immediately to the fund

• Cause for Negative J-Curve effect

• Provisions in growth equity contracts that give investor recourse when company defaults

• Springing Board remedy -> investor appoints majority of board

• Forced Sale remedy -> investor initiates a liquidating transaction

• Written, legally binding promise to pay a specified amount to a lender, on demand or by a set date

• Company can issue to satisfy a redemption obligation when lacking cash

• Existing shareholders convert private shares to public shares and can decide to hold or sell in public market

• Able to sell them directly without lockup period

• No new shares -> now new capital raised as in IPO

• No underwriter -> cheaper & faster

• Derived from different measurements such as Accounting / TAM, …

• Often used in term sheets or funding discussions (no fluctuations as in Post-Money)

• NAV -> Actual per-share value of fund’s underlying holdings (what are the assets worth)

• Market Price -> Price at which fund’s share trade on exchange (what investors are willing to pay)

• Financial market with enough distinct securities to satisfy needs and preferences of all participants

• Many investors are doing the same

• High concentration / positioning

• Syncratic -> Prepayment based on interest rates / economic activity

• Idiosyncratic -> Prepayment not based on interest rates / economic activity but rather on the individual

• Increase size of subordinated tranches

• Diversifying reference portfolio

• Obtaining external credit enhancement

• Coupon rate is always paid on par value -> not market value

• Coupon payment = coupon rate * par (face) value

• Par and not market value as yields move -> price adjusts to narket’s required return

• Only long position has counterparty risk -> only in long position there is a claim on underlying

• Short position has already paid for premium whereas long waits to get paid

• IO -> dependent on rates and used as hedge to prepayment -> rates rise: interest rises and loan goes longer (wants to live young)

• PO -> loses at interest rate hikes as repayment slows -> pushes principal repayment in future (wants to die young)

• Rating factor summarizing the average credit quality of a CDO’s collateral pool in a single number (1, 20, etc.)

• Par-weighted average -> how likely is the average to default and

• Rating is mapped to a rating factor

• Higher WARF = lower credit quality = higher expected defaults

• How many independent credits are in a pool -> grouping by industry / region

• Higher diversity score = lower correlation = thinner tail risk

• Measures how likely are default to arrive at once

• Spreads widen -> protection buyer gains / protection seller loses

• Spreads widen as reference gets higher probability of default assigned

• Terms under which lender’s position gets repaid or replaced by other capital

• Conditional arrangement, allowing mezzanine holder to receive interest payments while senior debt is outstanding

• Permission evaporates on triggers -> senior default or covenant breach

• Prohibits Mezzanine holder from receiving any payments as long as senior debt is outstanding

• Remedy that if i.e., borrower defaults or misses payment —> lender can demand the full loan to be paid back immediately

• Bond that pays no periodic interest

• Bond is offered at discount to face value and face value is realized at maturity

• Straight Bond + an embedded call option

• Value: Straight Bond + Value of embedded call options

• Value of Straight Bond -> face value (bind floor)

• Value of option -> Options number * Value per option

• Volatility / Correlation strategy betting on differences between volatility of an index and its individual stocks

• Classic: short index + long stock

• Highest returns when low levels of realized correlation

• Study of how transactions take place in a market

• Includes costs, bid and asks, execution of orders

• Firms split into two and shareholders automatically become shareholders in both firms -> receive pro-rata shares of newly independent company

• No election or cash-out required

• Interest paid to the short seller (securities borrower) on their posted collateral

• Rising stock price forces short seller to buy back shares to cover their position and limit losses -> pushing price even higher due to buyback

• Securities lender recalls the borrowed shares -> forcing short seller tu buy back shares

• When borrowed stock pays dividend -> short seller must pay dividend to lender

• Long target / short acquirer

• For long: Buy call on target or sell put

• For short: Buy put or sell call

• Gap between long and short-term yields narrows -> long-term yield falls relative to short-term yield

• Yield falls -> Bond price rises

• Flattening -> longer-duration bonds gain the most -> buy long-term & short short-term

• Hedge against parallel shift -> need to be duration-neutral

• Bond pays fixed cash flow (i.e., 10% p.a.)

• When market yields change -> bond price must adjust for return to match new market rate

• Yield up -> Price down and vice versa

• Bond Price = present value of its future cash flows

• 3-year Bond face value: $1000 / 10% Coupon

• Cash flows: $100 in Y1 / $100 in Y2 / $1,100 in Y3

• Calculate Present Value -> Payment / (1 * Interest)^Year

• Add all of the present values of cash flows to determine duration

• Macaulay Duration / (1 + Yield)

• 2.74 / 1.10 = 2.49 years -> 1% in yield change decreases duration of 10%-Coupon from 2.74 years to 2.49 years

• Measure of how much a bond’s price will change for a 1% change in its yield

• Modified duration = Multiplier

• Mod. duration of 8 -> if yield changes by 1% -> bond price changes by 8%

• 5-year bond MD of 4 & 10-year bond MD of 8 -> Hedge ratio 2:1 to be duration neutral

• Weighted-average time until you receive a bond’s cash flows -> measured in years

• Zero-coupon bond -> duration = maturity as cash flow is lump sum

• Investment whose performance is measured relative to a benchmark

• Goal to track / beat benchmark

• Example: Equity mutual funds relative to S&P 500

• FoF -> different hedge funds by different managers

• Multistrat -> different strategies by one manager / firm

• Price / Face Value

• 1 - (Price / Face)

• Nominal interest rate = real interest rate + premium for expected (anticipated) inflation

• Determines investment style / factor exposure by analysing what asset class or style the fund resembles

• Valuation technique used to price assets by breaking them into their characteristics / attributes

• Significance level -> required threshold in advance to reject null hypothesis

• P-Value -> actual strength of evidence against null hypothesis

• P > Significance -> fail to reject H0

• P < Significance -> reject -> reject H0

• Continuos -> Simple: e^return-1

• Simple -> Continuous: ln (1+Return)

• Lower volatility -> should be higher

• Lower correlation to other assets

• Higher autocorrelation

• Inflated Sharpe Ratio

  
  

• Statistical check to check if dataset is normally distributed

• Measured by skewness and kurtosis together

• Big JB values means not normal

• JB > Critical Value -> rejct normality

• JB < Critical Value -> fail to reject normality

• Statistical test detecting autocorrelation in the errors of a regression

• DW = 2 -> no autocorrelation (errors are uncorrelated)

• DW > 2 -> negative autocorrelation (positive followed by negative)

• DW < 2 -> positive autocorrelation (follow together = positive followed by positive)

• Order Correlation -> lag distance

• First-Order Correlation -> correlation with 1 period ago

• Second-Order Correlation -> correlation with 2 periods ago

• Measures strength and direction of a linear relationship between two different variables

• +1 -> Perfect positive linear relationship (X&Y rise together)

• 0 = No relationship

• -1 -> Perfect negative linear relationship

• High outliers and normality assumption

• Measures strength of a monotonic relationship between two different variables

• Is Pearson but ranks the variables to catch any upward or downward trends

• Applies for linear & non-linear

• Less outliers due to ranking

• Fund A & Fund B Return Comparison

• Durbin Watson: Compare Fund A returns to historic returns -> is the fund correlated with itself

• Pearson/Spearman: Compare Fund A with Fund B returns -> do they move together?

• Comparable Sales (for non-income producing properties)

• Cost Approach (for new properties)

• Income Approach (for income-producing properties)

• X-Axis: Time to Maturity

• Y-Axis: Futures/Forwards Price

• Curve rises (contango) / falls (backwardation) from spot

• Increases risk -> risk that losses eat through subordination until senior

• Long 1x 8-Year Treasury -> match duration on short; 4-Year Treasury available

• 1*8 = 4x

• X = 2 -> short 2 units of 4-Year

• Risk-Free Rate

• Systematic Risk

• Searching / exploring large datasets for patterns

• Model is too closely tailored to historical data

• Capturing noise instead of signal

• Averaging / dampening data to reduce noise

(Value * (Discount + Decline)) / Cash Flow 1

• Allows borrower to use property or assets as joint collateral for one or multiple loans

• Lender can disallow sale of properties

• Interest Rate

• Origination Fees

• Servicing Fees

• Fixed Expenses

• Variable Expenses

• Vacancy Loss Rate

• Government investments in infrastructure sectors -> digital & renewable energy

• Transportation during 1990s-2000s

• 2010s onward -> digital & renewables

• Venture Capital (10x+)

• Growth Equity (2x-5x)

• Buyouts (<2x)

• Order in which claimants are paid

• Private placements

• Transfer risk from issuers / sellers to buyers

• I/O -> Interest Only

• P/O -> Principal + Interest

• Bond that repays principal in a single lump sum at maturity -> no amortization

• Loans extended to highly leveraged borrowers

• Mezzanine investor has right to buy out senior debt

• Underlying equity's realized volatility exceeds the convertible bond's implied volatility

• Short vol -> position profits from stable markets and loses when volatility spikes -> negatively skewed with fat tails

• Long vol -> position profits from increased volatility and loses in calm markets -> positively skewed

• Long only without leverage

• Convertible Bond with very high conversion premium

• Community untrusts -> user departs & value destroyed

• Enablement of smart contracts

• FoF -> double layer of fee

• Multistrat -> fee netting

• Hurdle rate is applied per year

• Recurring bar -> re-cleared each year

• Linked to HWM

• Option contract whose payoff is linked to credit quality or credit spread of a reference entity

• Buyer pays upfront premium for right (not obligation) to a payoff if specified credit-event occurs

• Event: spread widens and credit quality deteriorates -> receives lump sum or option expires

• Symmetric = Gains / losses are balanced in both directions -> you can profit or lose proportionally to each side

• Asymmetric = Gains / losses are lopsided -> capped to one side but open to the other

• Short equity -> sell, write a call

• Long equity -> buy call

• Naked call -> Call is written without owning underlying equity to cover the call

• Positive skew -> many small gains, rare large losses -> value can only go to 0 therefore upside is capped

• Selling credit protection on a referenced basket

• Investor sells protection to earn risk yield

• Synthetic CDO -> referenced basket

• Measures how much the option’s price changes for $1 change in the underlying asset’s price (delta of 0.5 means option gains 0.5 for every 1 in price increase)

• 0 to +1 -> calls

• -1 to 0 -> puts

• Approximates probability of option finishing in the money & hedge ratio

• Measures how much delta changes for a $1 change in the underlying’s price

• Highest for at-the-money options near expiry

• Long gamma -> profit from big moves in either direction / short -> small moves

• Measures how much the option’s price changes as time passes (per day) -> time decay

• Negative for option buyers -> options lose value as expiry approaches

• Positive for option sellers

• Accelerates as expiration nears

• Measures how much the option’s price changes for $1 change in implied volatility of underlying

• Positive for option buyers (calls / puts gain value when volatility rises)

• Long vega -> profit when volatility increases i.e., arbitrage strategies

• Measures how much the option’s price changes for a 1% change in the risk-free interest rate

• Positive for calls / negative for puts

• Matters more for long duration options

• Long vega/gamma -> buying options & profiting from rising moves

• Short vega/gamma -> writing options & profiting from calm markets

• Long convertible call

• Delta Hedged

• Loss level at which the tranche starts to absorb losses

• Losses below this are absorbed by moer junior tranches

• Loss level at which the tranche is wiped out

• All losses are absorbed and tranche ceases to have any value

• Performance moves horizontally within a range but no clear upwards/downwards trend

• Prices repeatedly move back and forth between floor and ceiling

• Entity operating a pooled investment vehicle -> commodity pool

• Fund of funds for commodities with double layer of fees

• CPO raises capital from investors and then allocates to one or more CTAs

• Professional manager who advises and trades commodoties via futures, fwds, etc.

• Primarily in the managed futures space

• Investment strategy actively trading futures, options and other derivatives across different global markets

• Independent of assets, sectors and geographies

• Both long and short positions

• Derivative contract trading on future realized volatility

• Unfunded and starts at zero cost as swap and FWDs

• Realized variance > strike -> buyer (long) profits

• Realized variance < strike -> seller (short) profits

• Notional * (Realized Variance - Strike Variance)

• Implied volatility -> volatility expectation priced into the option

• Realized volatility -> volatility that actually occured over a period

• Scalability (handle high transaction volume)

• Security (network integrity & attack resistance)

• Decentralization (no central control)

• Value-adding crypto assets

• Value-storing crypto assets

• Stablecoins

• Security tokens

• Governance tokens

• NFTs

• Memecoins

• Value driving from providing useful function or service

• Platform or smart-contract tokens like ETH

• Value tied to usefulness and adoption

• Held as store of value similar to gold -> BTC

• Coins maintaning a stable value by being pegged to an external reference -> USDC

• Purpose is price stability and act as safe haven or gas for transactions

• Security Tokens -> Ownership of real-world asset on the blockchain

• Governance Tokens -> Voting rights on protocol decisions

• NFT -> unique, non-interchangeable digital assets (one-of a kind each such art)

• Memecoin -> crypto with little intrinsic function -> driven by community and speculative

• VaR: maximum expected loss over a given time horizon at a given confidence level (95% chance that losses won’t exceed $1M)

• CVaR: Expected shortfall on value at risk -> Average expected loss when loss exceeds VaR threshold (average of all losses within the 5% tail)

• VaR as edge of tail; CVaR as average depth of the tail beyond it

• Hybrid security -> corporate bond with embedded option allowing holder to convert into a predetermined number of the issuer’s common shares

• Value = Bond floor + Value of embedded conversion option

• Risk of imperfect hedge -> price of hedging instrument and underlying asset do not move perfectly together

• Basis = spot price - futures price

• Basis Risk -> Gap between spot and future price moves

• Structured Product combining zero-coupon bond with call option on underlying asset

• Goal is to guarantee the return of principal at maturity while offering upside participation if the index rises

• Principal (guaranteed return) + Index Gains * Participation Rate)

• Zero-Coupon Bond of $1000 maturity value / $900 face value -> $100 as call option on index

• Index rises -> get principal + share of index gains

• Index falls -> get principal back

• European -> Fund as a Whole

• American -> Deal-by-Deal

• Incentive fee * 40% * NAV * volatility

• IRR -> Rate of Return at which every positive cash flow gets reinvested at the IRR itself until project ends

• MIRR -> Rate of Return at which positive cash flows get reinvested at a realistic reinvestment rate

• RR -> Reinvestment Rate

• CC -> Cost of Capital

• Variance * Time

• Variance: 0.1 and 5 days for business week -> 0.1 * 5 = 0.5

• Variance * Square root of time

• 0.1 * √5 = 2.24%

• Calculate Payoff (Max value - strike price) -> $30 - $20 = $10

• Calculate Payoff/Stock Ratio (Payoff - Max value) -> $10 / $30 = 1/3

• Option Price = Payoff * Payoff Ratio = $10 x 1/3 = $3.33

• Designing compensation to align interests in cost-effective manner

• Cost-effective = marginal benefit > marginal cost

• Manager’s incentive fees as a call option on fund’s performance

• Manager receives payoff when above threshold but loses nothing when below

• Can create perverse incentives for risk-taking

• Percentage Rent -> base rent + percentage of sales

• Exclusive use -> prevents competing tenants in the space

• Co-tenancy -> lease dependent on other tenants

• Go dark -> tenant stops operating but keeps lease

• Risk-Free Rate + Liquidity Premium + Risk Premium

• X-Axis: Time

• Y-Axis: Cash flows / investment returns

• Strategic Merger -> operating company buys portfolio company due to strategic synergies

• Secondary Sale -> Fund B buys portfolio company from Fund A

• Large company that owns multiple businesses in different, often unrelated industries

• Unable to sell an investment quickly at fair value

• Binary -> all or nothing

• Option that pays fixed, predetermined amount if asset’s price is above strike price or zero if its below

• Vanilla Call -> Payoff increases scaled to how far above the strike

• Binary Call -> Fixed amount

• Stock = Bond + Binary Call

• Bond = floor price of stock

• Costs of the Binary Call Option

• Current Stock Price - Bond

• Stock Price if successful - Bond

• Costs from conflict of interests between shareholders and managers

• Include monitoring, bonding and residual costs

  
  

• Costs of structuring and enforcing corporate oversight

• Parallel Shift -> Every point on the curve means (i.e., interest rises +1% across all maturities) -> Curve stays same just different interest rate

• Nonparallel Shift -> Short-term and long-term rates move differently / inversely

• Strategy to match duration of long and short positions to make vlaue insensitive to interest rate changes

• Intracurve -> Hedged Positions within the same yield curve

• Intercurve -> Hedged Positions using securities with different yield curves