Bullet point style notes interested, additional, execution, structure, anything

NakedPuts

I am making some short notes (mostly in bullet points). If people are interested I would post them here. Asking because most people probably have their own notes and might not need anything additional. Let me put one as sample.

Reading 44: Execution of Portfolio Decisions
? Market order has price uncertainty. Limit order has execution uncertainty.
? Market structure
o Quote driven (dealer market)-Traders transact with dealers.
o Order driven-Traders transact with other traders
a. Electronic crossing network: Typical trader is an institution. Orders are batched and crossed. Cost of trade is low. Identity is hidden. No price discovery and unfilled order book.
b. Auction Market: Traders put fourth their orders to compete against other orders for execution. Can be periodic or continuous. Provides price discovery.
c. Automated Auctions: Also known as electronic limit-order markets. E.g. ECN. Trade throughout the day and trades are executed on a set of rules. Counterparty is not known and provide price discovery.
o Brokered market-brokers act as traders agents to find counterparties.
o Hybrid market-Combination of the other 3
? Market characteristics-1. Liquidity 2. Transparency 3. Assurity of completion
? Difficult to calculate implementation shortfall if market is illiquid. Difficult to calculate implementation shortfall, VWAP and effective spread if market is not transparent.
? VWAP- Advantages: 1. Easily understood 2. Computationally simple 3. Can be applied quickly 4. Appropriate for comparing small trades in nontrending markets Disadvantage-1. Not informative for trades that dominate trading volume 2. Can be gamed 3. Does not evaluate delayed or unfilled orders 4. Does not account for market movement or trade volume
? Implementation shortfall- Advantages: 1. Managers can see cost of implementing ideas 2. Demonstrate the tradeoff between quick execution and market impact 3. Decomposes and identifies costs 4. Can be used in an optimizer to minimize trading costs and maximize performance 5. Not subject to gaming Disadvantage: 1. May be unfamiliar to traders 2. Required considerable data and analysis.
? Econometric models judge trade effectiveness by comparing actual trading cost to forecasted trading costs. It can assist in determining size of the trade.
? Types of traders
o Information motivated- Prefers less time and uses market order. Likes to hide information.
o Value motivated-Prefers less price and uses limit order
o Liquidity Motivated- Prefers less time and uses market order. Does not hide intention. Counterparty to information motivated traders.
o Passive- Prefers less price and uses limit order. Trades on crossing networks to reduce commissions, lower market impact, increase price certainty and eliminate bid ask spread..
? Trade tactics
o Liquidity at any cost- Quick certain execution. High costs and leakage. Information motivated.
o Costs are not important- Quick certain execution at market price. Loss of control of costs (market orders). Variety of motivation.
o Need trustworthy agent- Broker uses skill & time to obtain lower price. High commission & potential leakage. Not information.
o Advertise to draw liquidity- Market determined price. High admin costs & possible front running. Not Information.
o Low cost whatever the liquidity- Low trading costs. Uncertain timing of trade & possible trading into weakness. Passive and value.
? Algorithmic trading
o Logical participation- Simple: Trade with market flow. Types include VWAP [order broken up] , time weighted average[ trading spread evenly over time] and % of volume[order is traded 5-20% of normal trading volume]. Implementation shortfall strategies: Minimizes implementation shortfall. Trades earlier in the day.
o Opportunistic-Trade passively but increase trading when liquidity is present
o Specialized strategies-Passive and others.
? Use Implementation shortfall strategy for high urgency trades. Use logical participation strategies for low urgency trades. Use skilled broker or crossing system for trades of large volume and high spread.

bboo

Please Asif, send me your complete notes to my email (ala.ziad@hotmail.com)

thnx

mcmc

Hi Asif,

Please send notes to docdeji@yahoo.co.uk

Thanks

nannan66

I have my own paper notes, but would be interested in seeing yours as well

c6_vette_37@yahoo.com

pennyless

Post everything you've got in this forum, please.

strikethree

Readings 7-13 basically were prepared by someone else on this forum. I do not remember his/her name so cannot give credit. These are just bullet points of the major themes. I am still in the process of preparing these stuff so you need to wait for the whole of it. Instead of mailing I am posting them here.

Reading 7: Heuristic-Driven Bias: The First Theme
Representativeness
? Winner-loser effect (past winners become today’s losers)
? Gambler’s fallacy – think law of averages apply to small samples (i.e. it’s ‘due’)
Overconfidence
Anchoring-and-adjustment (Conservatism)
? React too conservatively to new information (with respect to original forecasts)
Aversion to ambiguity

Reading 8: Frame Dependence: The Second Theme
Loss Aversion – ‘get evenitis’
Mental accounting (using separate mental accounts)
Hedonic editing – framing things in a ‘better’ way
? House-money effect - more likely to gamble when up
? Prefer dividends as ‘silver lining’ (frame editing)
Self-control – controlling emotions
? “Don’t dip into capital” – OK to spend dividends … another type of hedonic editing
Regret
Money Illusion – people usually consider nominal, not REAL returns

Reading 9: Inefficient Markets: The Third Theme
Representativeness- Stereotypes
Anchoring-and-adjustment- Earnings surprises
Frame dependence-People stay away from bearish market and jump in bullish markets
Overconfidence-Unjustified bets and greater trading

[Myopic loss aversion – reluctance to hold stocks due to loss (typically a result of too short horizon), also due to too frequent monitoring]

Reading 10: Portfolios, Pyramids, Emotions, and Biases
Heuristic Biases and Portfolio Selection:
Optimism
Overconfidence – excess trading, think they have higher skills, and suffer from illusion of control
Failure to diversify – primitive understand of diversification requirements
Na?ve diversification – 1/n diversification, 50/50 stock bonds
Familiarity/Home bias

Reading 11: Investment Decision Making in Defined Contribution Pensnsion Plans
Biases in defined contribution plans:
Bounded rationality – limits to efficient decision-making (heuristics)
Status quo bias – do nothing or remain with original choices
Myopic loss aversion – try to avoid s/t loss despite long horizon of plan
1/n diversification
Endorsement effect

Reading 12: Folly of forecasting
Forecaster defense mechanisms
If then
Ceteris Paribus
Almost right
Has not happened yet
Single Predictor

Reading 13: Alpha Hununters and Beta Grazers
Chronic Inefficiencies:
Process vs Outcome
Convoy Behavaiour
Bayesian Rigidity/Rigid views
Price Target Revision
Ebullience cycle

bkballa

Reading 14: Managing Individual investor portfolios
? Situational profiling
o Source of wealth: 1. Active wealth creation 2. Passive wealth creation
o Measure of Wealth
o Stage of life
? Traditional finance- 1. Risk Aversion 2. Rational Expectation 3. Asset integration
? Behavioral finance- 1. Loss aversion 2. Biased Expectation 3. Asset segregation
? Personality types- 1. Cautious 2. Methodical 3. Individualistic 4. Spontaneous

? Return Objectives (client education is risk return does not match)- Spending and growth objectives
? Risk Objective (counseling if ability and willingness does not match)
o Ability-1. Time horizon 2.Portfolio size 3. Goal importance 4. Flexibility 5. Spending needs
o Willingness-Situational profiling
? Time horizon-
o State number of stages and years.
o Look for stages defined by people other than client (inheritance).
o Bequests (multigenerational)
? Taxes
o Identify if taxable
o If uncertain include legal counseling
? Liquidity
o Only focus on liquidity that portfolio has to meet (exclude if salary is sufficient)
o Deduct any outlay within the next 6 months from investment portfolio
o Include positive liquidity events
? Legal and regulatory
o If no legal concerns mention prudent investor rule applies
o If client has desire for a trust then the manager must balance the interests of the income beneficiary and remainder men. Legal counsel for trusts encouraged.
? Monte carlo vs deterministic- Advantages-1. Probabilistic forecasts 2. Graphical 3. Better at incorporating tax effects 4. Compounding effects Disadvantages-1. As good as the inputs

Reading 15: Taxes and private wealth management in a global context
? Accrual taxes: Return and time horizon increase -> Tax drag % increases. Tax drag> Tax Rate
? Deferred taxes: Return and time horizon increases ->Tax Drag % is unchanged and value of deferral increases. Tax Drag=Tax Rate.
? Wealth taxes: Time horizon increase-> Tax drags % increases. Return increases->Tax drag % decreases. Tax drag>tax rate.
? If current taxes>future taxes then TDA>TEA
? Put equity in taxable accounts and bonds in TDA.
? Tax Alpha=Capital Loss*Tax Rate
? If high b4 tax return not possible it is better to be passive investor

Reading 16: Estate planning in a global context
? Avoid probate through rights of survivorship, living trusts, retirement plans, life insurance etc.
? Gifts-Lifetime Bequest-After death.
? Property rights-
o Community property rights- half of the estate earned during marriage
o Forced Heirship- % of total assets
o Separate property rights-
? Mortality tables use average values. Incorrect 50% of the time.
? Monte carlo simulation shows both expected value as well as probability of falling short of expected value (shortfall risk)
? Better to transfer high return assets to those that have lower tax rates
? When donor pays the gift tax the FV of the gift is increased by the sum of estate and gift tax rates and the value of the gift
? Trusts- 1. Fixed 2. Discretionary 3. Spendthrift
? Tax jurisdiction
o Source(Income) - Taxes on all income generated within border.
o Residence (Income)-Taxes on all income generated by citizens.
o Source (Wealth)- Assets located or transferred within a country
o Residence (Wealth)- Citizens and residents pay transfer tax.
? Conflicts
o Residence-Residence: Both parties claim residence over same individual
o Source-Source: Two countries could claim tax on same income (multinational company)
o Residence-Source: One country asks for source income and another asks for residence income.
? Tax avoidance is legal. Tax evasion is illegal.

Reading 17: Low basis stock
? Types of investors with low basis stocks-
o Entrepreneurs (Market, specific risks [if not diversified. Not really concerned if in control] and residual risks[counterparty, regulatory])
o Executives
o Investors- a. diversified investor b. indexing stage
? Diversification techniques
o Sale
o Exchange funds-Investors combine their low basis holding in a single portfolio.
? Public: At the end of period each partners received proportional share of the whole fund. Adv-Can borrow against the position Disadv-Inflexibility, lockup (7 years), management fee.
? Private: Same security. Actively hedge risk using derivatives and borrow to diversify. Adv- Hedged so monetizing is easy. Also original holding retained. Dis- New.
o Completion portfolios- Manager diversifies using existing funds, borrowings or portfolios cash flows. Disad- Need for large portfolio. Time Consuming.
o Hedging
o Equity collars-Must be set wide enough
o Variable pre-paid forwards-Investor must remain exposed to 15% of the value

Reading 18: Goals based investing: Integrating traditional & behavioral finance
? Lifestyle protection strategies
o Absolute
o Cash flow matching- Used if cash flows are certain. Large portfolio size required and values may deviate before maturity.
o Asset allocation approach (Monte Carlo)-
? Fixed planning horizon insured strategy- Place PV of minimum acceptable outcome in ZC bonds and remainder in risky assets.
? If reaching the minimum is critical and outside funding not available then fixed planning horizon insured strategy might be appropriate. If retaining the potential to reach maximum objective is important or additional funds can be raised then asset allocation approach might be preferred.

Reading 19: Lifetime financial advice: Human capital, asset allocation and insurance
? Social security and other employment related pensions are part of human capital. As investor ages human capital declines.
? Portion of human capital dependent on future income is known as implied assets. This falls to zero as investor retires. Retirement expenses are called implied liabilities. Implied liabilities are greatest at retirement and falls as investor ages.
? As financial capital increases less risky investments should be chosen.
? Risks
o Earnings risk- Disruption in income. Solutions are 1. Higher savings rate 2. Minimizing correlation of human and financial capital 3. Offsetting the risk of human and financial capital
o Mortality risk- Use life insurance to hedge.
o Longevity risk- Solution is lifetime payout annuity. It is of two types
? Immediate annuity- Can be structures
? Deferred payment annuity- Selects date of annuity
? Demand for life insurance
o Financial wealth and life insurance (-ve)- Already have trust funds for heirs
o Human capital volatility and life insurance (-ve relationship)- If human capital bond like then financial assets can be invested riskily. Thus demand for life insurance goes up.
o Risk aversion and demand for life insurance (+ve)-
o Probability of death and demand of life insurance (+ve)
? Longevity hedges-1. Fixed annuity- Real values fall over time/based on current interest rates/illiquid 2. Variable annuity-Volatile cash flows and may be zero even
? Financial capital risk-1. Savings risk 2. Earnings risk 3. Financial market risk
Stages of life cycle- 1. Preparation 2. Accumulation 3. Retirement

infinitybenzo

Thanks a lot. Huge help.

ll11

The alignments are not working perfectly when I paste stuff here. Please be very careful regarding sub-points because in certain areas I have subpoints under subpoints. But it is not possible to understand that from here. Once I am done with all readings (except Ethics, GIPS and Corporate Governance because I will skip those) I will put everything in a word document and upload them.

NakedPuts2011

This is really useful, please continue