SOA - Examination and Other Requirement Details(8)

Spring 2007 Basic Education Catalog

Examination and Other Requirement Details

Advanced Portfolio Management Exam (Investments) Exam Spring 2007

This examination consists of six hours of written-answer questions. A read-through time will be given prior to the start of the exam, 15 minutes in the morning session and 15 minutes in the afternoon session.

Learning Objectives:

  1. Pricing Theory and Practice
  2. Learning Outcomes
    The candidate will be able to:

    1. Demonstrate mastery of option pricing techniques and theory for equity (including exotic options) and interest rate derivatives.
    2. Derive the Black Scholes pricing formula
    3. Identify limitations behind various option pricing techniques.
    4. Describe how option pricing models can be modified or alternative techniques that can be used to deal with option pricing techniques limitations
    5. Explain how numerical methods can be used to effectively model complex assets or liabilities

  3. Portfolio Benchmarks and Risk Measures
  4. Learning Outcomes
    The candidate will be able to:

    1. Define and describe Coherent Risk Measures: translation invariance, subadditivity, positive homogeneity, and monotonicity.
    2. Distinguish relative VaR, marginal VaR, increment VaR and CTE
    3. Calculate and apply the hedge ratios
    4. Establish appropriate benchmarks for a portfolio and understand how to measure performance against those benchmarks.

  5. Advanced Portfolio Management
  6. Learning Outcomes
    The candidate will be able to:

    1. Evaluate key considerations in developing investment policies for financial institutions and pension plans.
    2. Incorporate the parameters affecting the client's needs in an asset-liability management framework including funding objectives, risk/return tradeoffs, regulatory and rating agency requirements, concerns about solvency, capital, tax and accounting considerations, and management constraints.
    3. Develop a portfolio appropriately supporting liabilities. Set portfolio policy and objectives, specifying asset selection criteria, incorporate capital market expectations, and risk management strategies including hedging
    4. Apply different types of asset allocation strategies and evaluate traditional alternative asset classes
    5. Portfolio Rebalancing: Identify investment strategies that do not currently achieve portfolio management objectives and recommend appropriate changes. Improved strategies may include shifts in asset allocation, use of swaps, forwards, and futures, and use of options
    6. Embedded Options: Complete analysis that may include calculation of hedging cost, deterministic and stochastic analysis of cash flow, reserves, and capital levels under a range of economic environments
    7. Review case studies of actual or hypothetical situations and show how to develop and implement an appropriate risk management strategy to meet the portfolio requirements.
    8. Choose between alternative strategies and justify such choices.

  7. Behavioral Finance
  8. Learning Outcomes
    The candidate will be able to:

    1. Identify and apply the concepts of behavioral finance with respect to option holder behavior, including the assessment of optimal behavior, real behavior, model behavior, and empirical studies.
    2. Explain how behavioral characteristics of individuals or firms affect the investment or capital management process.
    3. Compare intrinsic value to market value and explain how behavioral finance could account for the difference.
    4. Explain why a historical equity risk premium may not be indicative of future expectations

  9. Financial Markets Modeling Techniques
  10. Learning Outcomes
    The candidate will be able to:

    1. Criticize the following modeling methods:
      1. deterministic vs. stochastic
      2. single period vs. multiple period
      3. one vs. multiple factors
      4. realistic vs. risk-neutral
      5. equilibrium vs. arbitrage-free
      6. actuarial vs. capital markets
      7. simulation vs. formula-based
      8. mean-reversion

    2. Recommend a modeling method for a given situation
    3. Define and apply the concepts of martingale, market price of risk and measures in single and multiple state variable contexts.
    4. Describe commonly used equity and interest rate models (and their limitations), including:
      • normal, lognormal, regime-switching, stochastic volatility, Cox-Ingersoll-Ross, Heath-Morton-Jarrow, compound Poisson, GARCH, inflation models, copulas
    5. Contrast the models listed in the previous learning outcome
    6. Recommend an equity or interest rate model for a given situation
    7. Describe issues in the estimation or calibration of financial models

  11. Credit Risk
  12. Learning Outcomes
    The candidate will be able to:

    1. Define and evaluate credit risk as related to fixed income securities
    2. Define and evaluate spread risk as related to fixed income securities
    3. Describe best practices in credit risk measurement, modeling and management
    4. Describe the use of credit and underwriting policies, diversification requirements
    5. Define credit risk as related to derivatives Define credit risk as related to reinsurance ceded counter party risk . Describe the use of comprehensive due diligence and aggregate counter-party exposure limits
    6. Describe risk mitigation techniques and practices: credit derivatives, diversification, concentration limits, and credit support agreements
    7. Describe the role of rating agencies in evaluating credit risk

Textbooks for Advanced Portfolio Management Exam

Asset/Liability Management of Financial Institutions: Maximising Shareholder Value Through Risk-Conscious Investing, Tilman, L.M., Euromoney Institutional Advisor, 2003, Chapters 6, 13, 14, 16

Handbook of Fixed Income Securities, Fabozzi, F., Seventh Edition, 2005, McGraw Hill, Chapters, 1, 2, 10, 13, 16, 20, 22-25, 27-31, 47, 48

Investment Guarantees-Modeling and Risk Management for Equity-Linked Life Insurance,Hardy, M., 2003, John Wiley and Sons, Chapters, 1-4, 7-9, 12

Investment Management for Insurers,Babbel, D., Fabozzi, F. J.,1999, Frank J. Fabozzi & Associates, Chapters 3, 8, 11, 13, 19-21, 25, 26

Modern Investment Management: An Equilibrium Approach, Litterman, R., 2003, John Wiley and Sons, Chapters 10, 26 -28

Options, Futures, and Other Derivatives,Hull, J.C., Sixth Edition, 2006, Prentice-Hall, Chapters 3 (section 3.4 only), 10, 13, 14, 16, 17 (17.1-3, 17.6, 17.7 background only), 19-22, 24 (24.1-24.4), 25, 30

Risk Management,Crouhy, M., Galai, M.R., 2001, Irwin/McGraw Hill, Chapters, 7-12

The Following Textbooks are Covered in the Syllabus but may be Available as Study Notes, Check this Page for Updates

Benchmarks and Investment Management,Siegel, L., 2003, Research Foundation of AIMR (CFA Institute), Chapter 9: V-C108-07

Handbook of Portfolio Management,Fabozzi, F., 1998, Frank J. Fabozzi Associates, Chapters 20, 21: V-C107-07

Managing Investment Portfolios, A Dynamic Process,Maginn, J.L., Tuttle, D.L., Third Edition, Chapters, 11 and 12.: V-C129-07

The New Corporate Finance: Where Theory Meets Practice,Chew, D., Third Edition, 2001, Irwin/McGraw Hill, Chapter 5.32: V-C100-07

Stocks for the Long Run,Siegel, J. K., 2002, Third Edition, McGraw Hill, Chapter 7: V-C124-07

Value at Risk,Jorion, P., Second Edition , 2001, McGraw Hill, Chapter 7: V-C105-07

Advanced Portfolio Management Online Readings

The Online readings listed below are part of the required Course of Reading for this Exam. These readings are articles that are available online from the SOA, CCA, CIA, AAA and the ASB.

"Equity Risk Premium: Expectations Great and Small" NAAJ, January 2004. PDF

"Application of Coherent Risk Measures to Capital Requirements in Insurance", NAAJ, April 1999. PDF

Advanced Portfolio Management Study Note Listings

The study notes listed below are part of the required Course of Reading for this exam. These Study Notes are not available electronically and must be ordered by using the
PDFStudy Note Information Form located on the Study Note Information Page. Candidates should be sure to check this site periodically for additional corrections or notices.

V-C05-07Introductory Study Note 
V -C13-07Case Study 
V-C100-07Chapter 5.32 of The New Corporate Finance 
V-C101-07Quantitative Strategies Research Notes, "Model Risk"formerly 8V-202-00
V-C102-07Current Issues: Options-What Does An Option Pricing Model Tell Us About Option Prices? 
V-C103-07Efficient Stochastic Modeling Utilizing Representative Scenarios: Application to Equity Risks 
V-C104-07Use of Stochastic Techniques to Value Actuarial Liabilities Under Canadian GAAP, CIA Research Paper 
V-C105-07Chapter 7 of Value At Risk: The New Benchmark For Managing Financial Risk 
V-C106-07Life After VAR 
V-C107-07Chapters 20 & 21 of Handbook of Portfolio Management 
V-C108-07Chapter 9 of Benchmarks And Investment Management
V-C109-07Performance Measurement Using Transfer Pricingformerly 8V-314-01
V-C110-07A Note On Common Interest Rate Risk Measuresformerly 8V-321-05
V-C111-07Creating Value In Pension Plans (Or, Gentlemen Prefer Bonds)formerly 8V-320-05
V-C112-07Financial Reporting Developments-Accounting for Derivative Instruments and Hedging Activities: A Comprehensive Analysis of FASB Statement 133, As Amended and Interpreted (Overview and Appendix C Only)formerly 8V-121-03
V-C113-07Asset Allocation In A Downside-Risk Frameworkformerly 8V-113-00
V-C114-07The Real Estate Portfolio Management Processformerly 8V-123-04
V-C115-07The Longevity Bondformerly 8V-325-06
V-C116-07Chapters 9, 18 and 19 of The Handbook of Mortgage Backed Securities, Fourth Editionformerly 8V-119-00
V-C117-07Valuing The Option Component Of Debt And Its Relevance To DCF-Based Valuation Methodsformerly 8FE-503-05
V-C118-07High-Yield Bond Analysis: The Equity Perspectiveformerly 8V-124-04
V-C119-07From Efficient Markets Theory To Behavioral Finance 
V-C120-07The Efficient Market Hypothesis and Its Critics 
V-C121-07Anomalies: Risk Aversion 
V-C122-07Anomalies: The Law Of One Price In Financial Markets 
V-C123-07Assessing High House Prices: Bubbles, Fundamentals and Misperceptions 
V-C124-07Chapter 7 of Stocks For The Long Run: The Definitive Guide To Financial Market Returns and Long-Term Investment Strategies, Third Edition 
V-C125-07Chapters 5 & 6 of The Oxford Guide To Financial Modelingformerly 8E-713-05
V-C126-07Derivatives: Practices and Principles;formerly 8V-114-00
V-C127-07Liability-Relative Strategic Asset Allocation Policiesformerly 8V-323-05
V-C128-07Financial Decision-Making in Markets and Firms: A Behavioral Perspectiveformerly 8V-201-00
V-C129-07Chapters 11 and 12 of Managing Investment Portfolios 
V-C130-07Total Return Approach to Performance Measurementformerly 8V-311-00
V-C131-07IFRS & US GAAP: A Pocket Comparison 
V-C132-07IFRS In Your Pocket 
V-C133-07International Financial Reporting Standards Checklist (IAS 39 only) 
V-C134-07Overview of Recent Prepayment Behavior and Advances in its Modelingformerly 8V-122-04