Name: Score:
68 Multiple choice questions
Definition 1 of 68
The credit spread in Merton's structural model exhibits sensitivity to maturity.
However, as the time to the debt's maturity is increased, the probabilities of default (and credit
spreads) increase. Therefore, for firms with low leverage the term structure of credit spreads
tends to be upward sloping
Sensitivities exhibited by Merton's structural model
Describe the Global Reporting Initiative
Intuition of the Black-Derman-Toy interest rate model
Principal guaranteed commodity notes
Definition 2 of 68
While aggregating returns is an additive process from the bottom up, calculating and
aggregating risk measurements ultimately to the top level of a portfolio is not simply the sum
of the constituent risk measures. Due to the impacts of correlations between positions,
strategies, sectors, and other exposures, aggregating risk measures up to the portfolio level is
a nonlinear and more complex exercise.
Describe the Global Reporting Initiative
Aggregation depends on correlation:
Principal guaranteed commodity notes
The hedonic-pricing method (HPM)
,Definition 3 of 68
There is a 50% probability that the endowment's inflation-adjusted value will be maintained in
perpetuity
Stated quantitatively, intergenerational equity may be expressed by a 50% probability of
maintaining the real, or inflation-adjusted, value of the endowment in perpetuity.
Describe the Global Reporting Initiative
Artificial neural network software
Endowment intergenerational equity
Sensitivities exhibited by Merton's structural model
Definition 4 of 68
The PME method is a cash-weighted metric (like IRR) that considers multiple negative and/or
multiple positive cash flows. The intuition of the PME method is that it indicates the
attractiveness of a private investment by comparing the cash-weighted returns of two identical
cash flow streams: one invested in a specified private project and the other a hypothetical
investment of the same cash flows into and out of a public equity market index
Ho and Lee model
Exposure Inertia
PME method
Gatekeepers
,Definition 5 of 68
ESG ratings are compiled by major financial rating firms (e.g., Moody's and Fitch), major index
providers (e.g., FTSE Russell and MSCI) and companies specializing in ESG-related issues (e.g.,
Sustainalytics and ISS).
From the perspective of the employee saving for retirement, the following are typical
advantages of participation in an employer-sponsored defined-benefit pension fund
rather than investing directly.
The three steps of unsmoothing a return series that contains a first-order autocorrelation
An options analyst describes an implied volatility structure as exhibiting a smirk. What is
the distinguishing characteristic of this structure?
One type of firm that publishes ESG ratings is major financial rating firms. List the other
two types of firms that publish ESG ratings.
Definition 6 of 68
To normalize ratios of contracts with different pricing specifications and contract sizes, one
can study natural logs of the ratios of prices. The reason for this type of normalization is that
price distributions can be approximated by a lognormal distribution, and therefore the
distribution of the resulting ratio can be approximated by a normal distribution. This facilitates
the testing of the difference to see if it is statistically significant. For example, one might look at
the natural log of a series of ratios of heating oil to natural gas prices
Describe the structure of the SASB Materiality Map.
What is the "corpus" in the context of an endowment?
Ratios of the natural logarithms of substitutable commodities
Describe the purpose of the Global Reporting Initiative Standards.
, Definition 7 of 68
They are traded on stock exchanges and therefore offer liquidity
Watch out for "mutual" in the name
Closed-end real estate mutual funds (CEMFs) are exchange-traded mutual funds that have a
fixed number of shares outstanding and that represent only a small portion of the listed real
estate industry.
Aggregation depends on correlation:
Closed-end real estate mutual funds (CEMFs)
Principal guaranteed commodity notes
Sensitivities exhibited by Merton's structural model
Definition 8 of 68
I. False identification of factors
II. Potential sufficiency of the CAPM
III. Factor return correlation v. causation
• p263: First, widespread searches for statistically significant factors run the risk of false
identification of useful factors
• p264: A second potential difficulty is in differentiating between factors that are correlated
with returns and those that cause returns
• P264-265: A key challenge in using an empirical multi-factor model lies in justifying why it
should perform better than the CAPM in describing the tradeoff between risk and return
Three challenges of empirical multifactor models
Ratios of the natural logarithms of substitutable commodities
Mitigating Estimation Error Risk in Mean-Variance Optimization
Intuition of the Black-Derman-Toy interest rate model
68 Multiple choice questions
Definition 1 of 68
The credit spread in Merton's structural model exhibits sensitivity to maturity.
However, as the time to the debt's maturity is increased, the probabilities of default (and credit
spreads) increase. Therefore, for firms with low leverage the term structure of credit spreads
tends to be upward sloping
Sensitivities exhibited by Merton's structural model
Describe the Global Reporting Initiative
Intuition of the Black-Derman-Toy interest rate model
Principal guaranteed commodity notes
Definition 2 of 68
While aggregating returns is an additive process from the bottom up, calculating and
aggregating risk measurements ultimately to the top level of a portfolio is not simply the sum
of the constituent risk measures. Due to the impacts of correlations between positions,
strategies, sectors, and other exposures, aggregating risk measures up to the portfolio level is
a nonlinear and more complex exercise.
Describe the Global Reporting Initiative
Aggregation depends on correlation:
Principal guaranteed commodity notes
The hedonic-pricing method (HPM)
,Definition 3 of 68
There is a 50% probability that the endowment's inflation-adjusted value will be maintained in
perpetuity
Stated quantitatively, intergenerational equity may be expressed by a 50% probability of
maintaining the real, or inflation-adjusted, value of the endowment in perpetuity.
Describe the Global Reporting Initiative
Artificial neural network software
Endowment intergenerational equity
Sensitivities exhibited by Merton's structural model
Definition 4 of 68
The PME method is a cash-weighted metric (like IRR) that considers multiple negative and/or
multiple positive cash flows. The intuition of the PME method is that it indicates the
attractiveness of a private investment by comparing the cash-weighted returns of two identical
cash flow streams: one invested in a specified private project and the other a hypothetical
investment of the same cash flows into and out of a public equity market index
Ho and Lee model
Exposure Inertia
PME method
Gatekeepers
,Definition 5 of 68
ESG ratings are compiled by major financial rating firms (e.g., Moody's and Fitch), major index
providers (e.g., FTSE Russell and MSCI) and companies specializing in ESG-related issues (e.g.,
Sustainalytics and ISS).
From the perspective of the employee saving for retirement, the following are typical
advantages of participation in an employer-sponsored defined-benefit pension fund
rather than investing directly.
The three steps of unsmoothing a return series that contains a first-order autocorrelation
An options analyst describes an implied volatility structure as exhibiting a smirk. What is
the distinguishing characteristic of this structure?
One type of firm that publishes ESG ratings is major financial rating firms. List the other
two types of firms that publish ESG ratings.
Definition 6 of 68
To normalize ratios of contracts with different pricing specifications and contract sizes, one
can study natural logs of the ratios of prices. The reason for this type of normalization is that
price distributions can be approximated by a lognormal distribution, and therefore the
distribution of the resulting ratio can be approximated by a normal distribution. This facilitates
the testing of the difference to see if it is statistically significant. For example, one might look at
the natural log of a series of ratios of heating oil to natural gas prices
Describe the structure of the SASB Materiality Map.
What is the "corpus" in the context of an endowment?
Ratios of the natural logarithms of substitutable commodities
Describe the purpose of the Global Reporting Initiative Standards.
, Definition 7 of 68
They are traded on stock exchanges and therefore offer liquidity
Watch out for "mutual" in the name
Closed-end real estate mutual funds (CEMFs) are exchange-traded mutual funds that have a
fixed number of shares outstanding and that represent only a small portion of the listed real
estate industry.
Aggregation depends on correlation:
Closed-end real estate mutual funds (CEMFs)
Principal guaranteed commodity notes
Sensitivities exhibited by Merton's structural model
Definition 8 of 68
I. False identification of factors
II. Potential sufficiency of the CAPM
III. Factor return correlation v. causation
• p263: First, widespread searches for statistically significant factors run the risk of false
identification of useful factors
• p264: A second potential difficulty is in differentiating between factors that are correlated
with returns and those that cause returns
• P264-265: A key challenge in using an empirical multi-factor model lies in justifying why it
should perform better than the CAPM in describing the tradeoff between risk and return
Three challenges of empirical multifactor models
Ratios of the natural logarithms of substitutable commodities
Mitigating Estimation Error Risk in Mean-Variance Optimization
Intuition of the Black-Derman-Toy interest rate model
