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What are Pompian's four behavioral investor types?
Michael Pompian's four Behavioral Investor Types: (1) Passive Preserver — low risk, emotional (loss aversion); (2) Friendly Follower — moderate risk, cognitive (availability, recency); (3) Independent Individualist — moderate-high risk, cognitive (overconfidence); (4) Active Accumulator — high risk, emotional (overconfidence, regret aversion)...
What happens when a hedge relationship is discontinued?
Discontinuation of hedge accounting is common when the derivative expires or is sold...
What qualifies a derivative for hedging designation under ASC 815?
ASC 815 imposes strict designation criteria at hedge inception...
What is the T-forward measure and why is it useful?
The T-forward measure uses the zero-coupon bond P(t,T) as numeraire instead of the money-market account.
How does the Libor Market Model (BGM) differ from HJM?
BGM models discrete forward LIBOR rates L_i(t) — the rates underlying caps, floors, and swaptions — rather than instantaneous forwards.
What is the Heath-Jarrow-Morton framework for forward rates?
HJM models the entire forward rate curve directly. The drift alpha(t,T) is uniquely determined by the volatility structure sigma(t,T).
Auction vs dealer markets — how do they compare on cost and transparency?
Auction markets match buyers and sellers directly via competitive bidding; dealer markets use intermediaries who buy/sell from inventory. Equities favor auctions; bonds, FX, and swaps favor dealers.
How does the availability heuristic distort investor decisions?
Availability inflates the perceived probability of vivid or recent events, driving home bias, post-crash selling, and megacap overweighting. Remedies are quantitative frameworks and decision journals.
What's the difference between general obligation and revenue bonds?
GOs: full taxing power. Revenue bonds: project-specific cash flows only. Cascadia issues both; revenue spread is higher reflecting project risk and rate covenants.
How do I build an active risk budget at the fund level?
Active risk budgeting allocates a total tracking error target across strategies, controlling both total active risk and contribution per sleeve...
What is effective duration and when must I use it instead of modified duration?
Effective duration numerically reprices bonds after parallel curve shifts using an option model — required for callables, putables, and MBS where cash flows depend on rates.
Can fine wine actually work as a serious investment?
Fine wine is a small but established alternative asset class. Returns come from scarcity, quality evolution, critic scores, and fashion cycles.
What disclosures do issuers of municipal bonds provide?
Rule 15c2-12 requires official statement at issuance plus annual financials, operating data, and 10-day material event notices filed to EMMA.
How do I calculate the liquidity constraint in an IPS?
Liquidity = ongoing distributions (typically 1 year) plus one-time near-term outflows plus emergency reserve. Separate ongoing from one-time when writing the IPS.
How is the Kalman filter used in finance through state-space models?
A state-space model has two equations. The measurement equation y_t = Z_t alpha_t + epsilon_t links observables to the unobserved state alpha_t...
How do I immunize a portfolio against multiple future liabilities with different dates?
Match PV, duration, AND convexity/dispersion with cash flows bracketing each liability. Refine with key rate duration for non-parallel shifts.
How are interest-only (IO) strips priced and why do they behave inversely to most bonds when rates fall?
IO strips receive only interest payments whose value depends on outstanding principal. When rates fall, prepayments accelerate, shrinking the principal base and reducing future interest — causing IO values to drop. This creates negative duration, meaning IOs move in the same direction as rates.
What are the specific criteria for deep value investing and how does it differ from regular value investing?
Deep value investing targets companies trading at extreme discounts using screens like P/E below 8x, P/B below 0.7x, and price below net current asset value. It differs from regular value investing through uglier business profiles, higher value trap frequency, and the need for portfolio diversification.
How should analysts adjust financial ratios for off-balance-sheet items?
Analysts should adjust for off-balance-sheet items by capitalizing operating leases, consolidating unconsolidated entities, and adding back factored receivables to get accurate leverage, return, and efficiency ratios. The most common adjustment is adding the present value of future lease payments to both assets and liabilities, which typically increases leverage ratios and decreases return metrics.
How do stock dividends and stock splits affect the EPS calculation?
Stock dividends and stock splits are treated retroactively in EPS calculations, as if they occurred at the beginning of the earliest period presented. All prior-period EPS figures must be restated. This is because these events do not raise cash or change economic ownership. When combined with share issuances for cash, apply the split factor retroactively but weight the issuance from its actual date.
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