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What are the main components of market liquidity risk?
Market liquidity has four parts: tightness (spread), depth (size at mid), resilience (price recovery), immediacy (execution time). All worsen in crises.
How does a credit card master trust work and what is the revolving period?
Credit card ABS use master trusts with a revolving phase (interest-only) and amortization phase. Early-amortization triggers protect investors if pool performance deteriorates.
What is correlation risk in dispersion trading?
Dispersion trading sells index volatility and buys single-stock volatility, profiting when realized correlation among constituents is lower than implied...
What should ongoing model monitoring look like between validations?
Ongoing monitoring surveils models between validations. Three tracks: performance (KS/Gini/backtests), input stability (PSI), process (run completeness). Tiered green/amber/red responses.
How is a floorlet different from a caplet in terms of payoff and pricing?
Floorlet pays max(K-L, 0), priced as Black put on rates. Put-call parity: Caplet - Floorlet = discounted forward minus strike.
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 does DBSCAN handle outliers and irregular-shaped clusters?
DBSCAN groups dense regions and labels sparse points as noise; it handles irregular cluster shapes and outliers without requiring K in advance.
When comparing firms, which profitability margin matters most?
Each margin answers a different question. Using only one leads to misjudgment; use them in sequence to triangulate.
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.
How do I use the sovereign bond adjusted CAPM for international valuations?
Sovereign-adjusted CAPM: ke = Rf + β × ERP_mature + λ × CRP. For Varejo Azul in Brazil with 275bps sovereign spread, 0.90 lambda, and 1.05 beta: ke = 4.25% + 5.25% + 3.27% = 12.77% USD...
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...
How do I construct an interest rate collar to hedge a floating-rate loan?
A collar combines a purchased cap with a sold floor. The sold floor's premium partially offsets the cap premium, creating a corridor of acceptable rates...
What characterizes mid-cycle sector performance and which names lead?
Mid-cycle favors Technology, Communication Services, and Industrials. Materials, Utilities, and REITs lag as rates rise and cyclical momentum fades.
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 the retail inventory method estimate ending inventory at cost?
Compute cost-to-retail ratio (goods available at cost / at retail), subtract sales from goods available at retail for ending retail, then multiply by ratio. Harborlight ends with $419.5K cost inventory from a 57.46% ratio.
How does survivorship bias inflate historical returns?
Survivorship bias excludes failed entities, overstating returns. Mira Kaltenbach's study shows 34% of 2016 funds gone; correction reduces returns 0.8-1.5% annually.
When should I use a three-stage DDM instead of a two-stage and how is the middle stage modeled?
Three-stage DDMs linearly taper growth from high to stable over a declining stage, producing more realistic valuations for maturing growth firms.
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