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How do cross-sectional regressions estimate factor returns?
Cross-sectional regression estimates factor returns by regressing asset returns on characteristics each period—the monthly slope IS that period's factor return.
What rebalancing approach should the IPS specify?
Four rebalancing approaches: calendar, threshold, calendar+threshold (most common), tactical. Bands typically 25% of target. Use cash flows first, harvest losses, avoid short-term gains.
How is scenario analysis different from sensitivity analysis?
Sensitivity analysis flexes inputs one at a time and treats them as independent. Scenario analysis changes a coherent set of inputs together...
When should a client use a revocable trust instead of just a will?
Revocable trusts avoid probate costs, handle incapacity, preserve privacy, and enable complex distributions - but cost more upfront...
How do I build an emerging market debt portfolio across hard and local currency?
Blend hard/local sovereign, hard corporate, frontier. Target 50/30/15/5. Currency and liquidity are main risks; active adds 100-250 bps.
What are Euro Medium-Term Notes (EMTNs) and how does the EMTN program structure work?
EMTNs are debt instruments issued under a pre-established program allowing continuous, flexible issuance. The program structure reduces time-to-market from weeks to days, allows any currency or structure, and supports reverse-inquiry deals tailored to specific investor needs.
Why do some companies maintain stable payout ratios while others let them fluctuate with earnings?
Payout ratio stability is explained by Lintner's dividend smoothing model, signaling theory, and clientele effects. Stable-dividend companies trade at higher multiples, while cyclical firms with volatile payouts are better valued using FCF models rather than constant-growth DDMs.
How are deferred taxes handled for undistributed earnings of a foreign subsidiary?
A deferred tax liability may be required for undistributed earnings of a foreign subsidiary when the parent will owe additional domestic tax upon repatriation. However, both IFRS and US GAAP allow an exception when earnings are considered indefinitely reinvested. This creates an off-balance-sheet liability that analysts must consider when assessing financial position.
When should borrowing costs be capitalized under IAS 23?
IAS 23 requires capitalizing borrowing costs for qualifying assets that take a substantial period to prepare for use. For specific borrowings, capitalize the actual interest cost. For general borrowings, calculate a weighted average capitalization rate and apply it to expenditures on the qualifying asset.
How do IO and PO strips work and why do they have opposite sensitivities to interest rates?
IO and PO strips are created by splitting a mortgage-backed security's cash flows into interest and principal components. Their opposite sensitivities to prepayment speed — driven by interest rate changes — make them powerful hedging tools.
How do pre-money and post-money valuations work in venture capital?
Pre-money valuation is what a company is worth before a new investment; post-money equals pre-money plus the investment. The investor's ownership percentage equals their investment divided by post-money valuation. VCs work backward from expected exit values and required returns to determine acceptable pre-money valuations.
Why is the P/B ratio linked to ROE, and how do I use this relationship?
The justified P/B ratio equals (ROE - g) / (r - g), derived from the Gordon Growth Model. When ROE exceeds the cost of equity, the justified P/B exceeds 1.0, indicating the company creates shareholder value. When ROE equals the cost of equity, P/B should equal 1.0.
How do you determine the primary beneficiary of a Variable Interest Entity?
The primary beneficiary of a VIE must consolidate it. Determination requires meeting both prongs: the power to direct the VIE's most significant activities AND the obligation to absorb significant losses or receive significant benefits.
When should a company capitalize interest costs instead of expensing them, and how does it affect financial ratios?
Both IFRS and US GAAP require capitalization of borrowing costs for qualifying assets that take a substantial period to prepare for use. Capitalizing interest increases assets and current-period income, but shifts costs to future periods through higher depreciation.
What is operational resilience and how does it differ from traditional operational risk management?
Operational resilience assumes failures will happen and focuses on the organization's ability to continue delivering critical services through disruption. Unlike operational risk management (which prevents failures), resilience sets impact tolerances and tests scenarios against them.
How does bootstrapping work for constructing confidence intervals in risk analysis?
Bootstrapping is a resampling technique that estimates the sampling distribution of a statistic by repeatedly drawing samples with replacement from the observed data. It doesn't require assumptions about the underlying distribution, making it ideal for complex risk metrics.
What is the ICAAP under Pillar 2, and how does it differ from Pillar 1 minimum capital?
The ICAAP is a bank's own comprehensive assessment of whether its capital is adequate for ALL material risks — not just the risks captured by Pillar 1 formulas. It covers IRRBB, concentration risk, business risk, and more.
What is key rate duration and when should I use it instead of regular modified duration?
Key rate duration (KRD) solves one of the biggest limitations of traditional duration: the assumption that the entire yield curve shifts in parallel. It measures sensitivity to yield changes at specific maturity points.
What are the main strategies for hedging tail risk, and what are their costs and tradeoffs?
Tail risk hedging strategies range from protective puts (expensive but direct) to variance swaps (convex payoff), put spreads (cost-reduced), trend following, and dynamic hedging. Each involves a fundamental cost-protection tradeoff.
What is country risk beyond sovereign default, and how do banks measure transfer and convertibility risk?
Country risk goes beyond sovereign default to include transfer and convertibility risk, political risk, and economic risk. Banks use proprietary scorecards, set country exposure limits, and employ mitigation techniques like political risk insurance and offshore escrow accounts.
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