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What is Bridgewater's All-Weather portfolio philosophy?
All-Weather balances stocks, bonds, gold, commodities across 4 growth/inflation regimes. Levered version institutional. 2022 exposed stagflation vulnerability.
How do TIPS (Treasury Inflation-Protected Securities) mechanically work?
TIPS adjust principal daily using CPI-U. Indexed Principal = Original × (Current CPI / Base CPI). Coupons are paid on indexed principal, so both coupons and maturity repayment rise with inflation. Deflation floor at maturity guarantees return of original face value...
What is the core-satellite approach and how do I determine the allocation split?
The core-satellite approach combines a low-cost passive core providing market beta with concentrated active satellites targeting alpha in less efficient markets. The allocation split depends on efficiency beliefs, risk budget, fee sensitivity, and alpha conviction.
How does taxation affect investment portfolio construction?
Taxation affects nearly every portfolio decision for taxable investors — asset allocation, security selection, trading cadence, and location of holdings...
How are fixed income indices constructed?
Bond indices define universe, inclusion criteria, market-value weighting, monthly rebalancing, and evaluated pricing. Market-value weighting creates the 'bums problem' favoring largest debtors; sampling replaces full replication.
How do I quantify drag from taxes and fees on a portfolio?
Tax and fee drag compound dramatically over time. 3% total annual drag can reduce terminal wealth by 57% over 30 years. Mitigation includes low fees, tax loss harvesting, asset location...
How do splines work in regression and what's the difference between natural vs cubic splines?
Spline regression joins polynomial pieces at knots to create smooth flexible curves. Natural cubic splines add linearity constraints at boundaries for stable extrapolation...
What do investor utility functions look like for different risk aversion levels?
Risk aversion A in mean-variance utility shapes indifference curves. Low A gives shallow parabolas; high A gives steep ones. Typical A values range 1-2 for aggressive to 6-10 for conservative investors...
What does GIPS require in a composite performance presentation?
GIPS requires composite presentations with 5-10 yr returns, benchmark, portfolio count, composite and firm assets, 3Y std dev, dispersion, plus disclosures (firm/composite defs, benchmark, fees, errors)...
How do I evaluate market timing risk in active bond management?
Silverpeak's +4.3yr duration bet creates asymmetric risk: -4.3% if rates rise 100bps vs +2.15% if rates fall 50bps. Frame for IC with probabilistic scenarios, position limits (+/-2yr typical), exit triggers, and recovery time analysis.
How do I calculate an after-tax return objective for an individual investor?
After-tax return: divide spending by assets for real return, add inflation for nominal, then gross up by (1 - tax rate) if portfolio is taxable. Show steps for partial credit on exam.
What are the main components of an investment policy statement (IPS)?
IPS has two sections: objectives (return, risk) and constraints (liquidity, time horizon, tax, legal/regulatory, unique circumstances). Foundational document for portfolio management.
How does a fund-of-funds structure work and what are its fee layers?
A fund of hedge funds (FoHF) invests in a portfolio of underlying hedge funds. Investors gain diversification across managers and strategies, access to closed funds...
How should portfolio managers evaluate cybersecurity risk as an investment factor, and what frameworks exist for assessing a company's cyber resilience?
Cybersecurity risk is a material investment factor. Portfolio managers can assess it through governance indicators, spending ratios, incident history, insurance coverage, and third-party security ratings. Major breaches cause average stock declines of 5-8% with sustained underperformance.
How does royalty financing work as an alternative funding mechanism, and what types of assets generate suitable royalty streams?
Royalty financing provides capital in exchange for a percentage of revenue from a specific asset — a drug, patent, or mineral resource. Unlike revenue-based financing on total company sales, royalties are tied to a named product's performance over its commercial life.
What are the differences between filter, wrapper, and embedded feature selection methods for financial factor models?
Filter methods rank features by statistical metrics independently of any model. Wrapper methods evaluate subsets by training the actual model. Embedded methods perform selection during training. A cascaded approach — filter first, then embedded, then wrapper — is most practical.
What determines the shape of the credit spread term structure, and under what conditions can it invert?
The credit spread term structure normally slopes upward because cumulative default probability, forecast uncertainty, and liquidity premiums all increase with maturity. Inversion occurs when near-term default risk is elevated relative to long-term survival probability — typically for distressed issuers facing imminent refinancing risk or covenant triggers where surviving the near term materially improves long-term prospects.
What is dynamic asset-liability management, and how does it differ from a static LDI approach?
Dynamic ALM adjusts the LHP/RSP allocation based on pre-defined triggers tied to the funded ratio, interest rate levels, credit spreads, and market drawdowns, rather than maintaining a fixed split with calendar-based rebalancing. This event-driven approach captures hedging opportunities in real time, prevents funded ratio overshoot, and follows a non-linear glide path that accelerates de-risking near full funding.
How does surplus optimization differ from traditional mean-variance optimization, and what does the surplus efficient frontier look like?
Surplus optimization maximizes the expected change in surplus (assets minus liabilities) for a given level of surplus volatility, rather than optimizing asset returns in isolation. The surplus efficient frontier is anchored at the minimum-surplus-variance portfolio of long-duration bonds with high liability correlation, and slopes upward as return-seeking assets are added.
How should the return-seeking portfolio be allocated within an LDI framework, and what determines its size relative to the liability-hedging portfolio?
The return-seeking portfolio's size is driven by the funded ratio — underfunded plans allocate more to RSP for growth, while overfunded plans shift toward the LHP to protect surplus. The RSP typically includes global equities, private equity, real estate, and high yield credit, and follows a glide path that systematically increases LHP allocation as funded status improves.
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