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CFA Level III Updated
How do defined benefit pension plans differ from other institutional investors?
DB plans promise fixed benefits; the sponsor bears risk. Liabilities are interest-rate-sensitive, driving LDI-based allocations shaped by funded status and sponsor financial strength.
How does multiperiod portfolio choice differ from single-period mean-variance optimization?
Multiperiod choice adds intertemporal hedging demand, human capital, consumption smoothing, and predictable returns to static Markowitz...
How does a 130/30 long-short equity strategy enhance returns vs long-only?
130/30 lets managers short overvalued names, raising transfer coefficient and IR by ~50%. Costs: shorting, fees, short squeeze risk.
What can and can't a firm say in advertisements under GIPS advertising guidelines?
The GIPS Advertising Guidelines allow firms to reference their GIPS compliance in marketing materials without presenting the full compliant performance report. However, there are strict requirements about what must be included and what is prohibited.
How does the total return spending approach work for endowments?
Spends a target percent of a smoothed market value (3-year average or weighted blend of prior spending and target rate). Yale-style w=0.7-0.8 is common under UPMIFA.
How is the 5% foundation minimum distribution actually calculated?
5% of prior-year monthly-average investment FMV. Grants, direct program costs, and PRIs count; investment fees don't. Five-year excess carry-forward applies.
How do taxes change asset allocation and rebalancing decisions?
Taxes affect asset allocation through asset location (placing tax-inefficient assets in tax-advantaged accounts), after-tax return adjustments that tilt toward equities, and wider rebalancing corridors to avoid triggering capital gains. Cash flow rebalancing and tax-loss harvesting help manage the tax drag.
What are the Stambaugh-Yuan mispricing factors?
Stambaugh-Yuan combines 11 anomalies into MGMT and PERF factors reflecting shared mispricing signals.
When is a concentrated manager structure (few managers) preferable?
Concentrated (1-3 mgrs) works with high conviction, fee leverage, strong governance — risk of style/key-person exposure...
How many managers should a portfolio have for adequate diversification?
5-8 managers per asset class hits most diversification benefit; beyond that correlations dilute active returns...
What makes the Heston model different from local vol?
Heston treats volatility as a second random factor with its own mean-reverting dynamics. Unlike local vol, Heston has realistic forward smile dynamics...
How does portable alpha work when you use index futures to transport alpha?
Put $500M in market-neutral fund plus S&P futures overlay. Total return = SOFR + alpha + S&P excess. Watch beta drift, margin, and basis risk.
What is the difference between operating and non-operating private foundations?
Non-operating foundations grant to others and face 5% payout; operating foundations run their own programs and don't face the 5% rule but must pass activity tests.
How do community foundations work and what's unique about their investment policy?
Community foundations pool donor funds under one public charity, offer pooled investment options, manage DAF liquidity, and avoid the 5% private foundation payout rule.
How do I optimize GST exemption allocation using a Dynasty Trust?
Dynasty Trusts compound wealth across generations shielded from estate/gift/GST taxes by allocating GST exemption at funding to create a zero inclusion ratio.
What is a fund-of-funds manager structure and when is it appropriate?
FoF = invest in multiple manager funds via one vehicle; appropriate for smaller allocations, access, expertise gaps...
Which quantitative metrics are most important in manager due diligence?
IR, Sharpe, capture ratios, TE, factor attribution — distinguish true alpha from factor exposure...
How does the Dupire local volatility model work?
The Dupire model assumes volatility is a deterministic function of spot and time: sigma(S, t). It's the unique diffusion consistent with today's vanilla smile surface...
How do I build an alpha budget for an enhanced indexing mandate?
Alpha budget = TE × IR. Allocate TE across signals by IC-squared, enforce position and turnover limits, and monitor realized TE weekly.
What is execution shortfall (implementation shortfall) and how do you decompose it into components?
Implementation shortfall (IS) — also called execution shortfall — measures the total cost of implementing an investment decision by comparing the actual portfolio return to the return of a hypothetical 'paper portfolio' that executed instantly at the decision price.
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