Multifactor models, risk management, performance attribution, real estate, hedge fund and private equity valuation.
41 cards · basic cards · AI-written, checked twice. Edit anything.
- Name the three factors in the Fama-French three-factor model.
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Market risk, size (SMB - small minus big), and value (HML - high minus low)- What factor does the Carhart four-factor model add to Fama-French?
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Momentum (WML - winners minus losers), capturing the tendency of recent outperformers to continue outperforming- In a multifactor model, what does a factor loading measure?
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The sensitivity or exposure of a security or portfolio to a particular systematic risk factor- What is a factor risk premium?
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The excess return an investor expects to earn for bearing exposure to a particular systematic factor- State the core premise of the Arbitrage Pricing Theory (APT).
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Expected return equals the risk-free rate plus the sum of premiums for exposure to multiple systematic factors- What is Roll's critique of the Arbitrage Pricing Theory?
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APT is not testable because the true set of factors is unknown and unobservable, making it unfalsifiable- In a multifactor model, what does the residual or unexplained return component represent?
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Unsystematic (idiosyncratic) risk specific to the security, which can be diversified away- When factors in a multifactor regression are orthogonal, what does this indicate?
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The factors are uncorrelated with each other, so each factor's explanatory power is independent and isolated- Define Value at Risk (VaR) at a 95 percent confidence level.
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The maximum expected loss on a portfolio over a given time period such that there is a 95 percent probability actual losses will not exceed this amount- What is Expected Shortfall and how does it differ from Value at Risk?
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Expected Shortfall (also called Conditional VaR) is the average loss conditional on loss exceeding VaR, capturing tail risk beyond the VaR threshold- What is the primary purpose of stress testing in portfolio risk management?
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To assess how a portfolio would perform under extreme but plausible market scenarios and identify vulnerabilities- How do asset correlations typically behave during financial crises?
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They tend to move toward one (approaching perfect positive correlation), reducing diversification benefits when needed most- Define liquidity risk.
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The risk that an asset cannot be sold quickly enough at its fair market value without incurring significant loss- What is counterparty risk?
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The risk that the other party to a financial contract or transaction fails to meet their contractual obligations- Define basis risk.
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The risk that a hedge does not correlate perfectly with the position being hedged, leaving residual unhedged exposure
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