Stage 4
48 questions
When does adding a holding lower portfolio volatility?
As soon as its correlation to the rest of the holdings sits below one.
What does the capital market line's separation tell us?
That efficient portfolios can be represented as a mix of the risk-free asset and a single tangency portfolio.
Why do simple rules often beat formal optimization?
Because optimizers react extremely sensitively to estimation errors in expected returns.
What does the correlation coefficient fail to capture?
Nonlinear dependencies, especially in the tails of the distribution.
Why do correlations rise in crises?
Through shared liquidity needs, forced selling of leveraged positions, and a dominant common risk factor.
How do you realistically check diversification benefit?
By additionally estimating correlations only over periods of severe decline.
What happens without rebalancing?
Weighting drifts toward the higher-returning asset, and portfolio risk rises unintentionally.
Does rebalancing always boost returns?
No. During sustained trends it acts as a drag, since the stronger position gets continually trimmed.
How do you implement it cheaply?
By directing new contributions into the underweighted position instead of selling.
Why is volatility an incomplete risk measure?
Because it measures symmetrically and doesn't capture permanent losses.
When does the usual calculation understate volatility?
For illiquid assets with smoothed valuation and the resulting autocorrelation.
What is volatility clustering?
Periods of high fluctuation get followed by more of the same, which makes volatility short-term forecastable.
What makes up an option's price?
Intrinsic value and time value. Time value falls to zero by expiration.
What is implied volatility?
The volatility expectation that explains the observed option price. It's the actual tradable quantity.
Why does permanent hedging reduce returns?
Because implied volatility on average sits above realized volatility, and the buyer pays that premium.
Does cost-free hedging exist?
No. You can only redistribute the payoff profile, for instance by capping the gain.
What's the simpler alternative for retail investors?
A permanently lower equity share.
What distinguishes a future from an option?
With an option, the buyer has a right; with a future, both sides carry an obligation.
What does daily gain-and-loss settlement mean?
Losses get settled daily, requiring continual top-ups of collateral.
What does your risk in a future depend on?
The contract size, not the collateral posted.
Why is the loss unlimited in a short sale?
Because the price can rise indefinitely, while it can only fall to zero.
What risk exists regardless of price?
The lender recalling the borrowed shares, forcing a close.
What triggers a short squeeze?
Covering purchases during a price rise amplify the rise, especially with high short interest and low liquidity.
Why does execution price worsen with order size?
Because the order gets worked through the order book's price levels.
What three components does a spread cover?
Processing costs, inventory risk, and the cost of adverse selection.
How does high-frequency trading behave during stress?
Liquidity often gets withdrawn, which can amplify short-term drops.
When is a strategy fully defined?
When a stranger could execute it without asking a single question.
Why does a rule need a rationale?
Without a nameable cause, a hindsight finding can't be told apart from a random one.
What is survivorship bias in a backtest?
The dataset only contains stocks that still exist today; the failed ones are missing.
Why are fundamental data problematic?
Because they get corrected after the fact, so today's datasets don't match what was known at the time.
Why isn't a once-separated test period enough?
Because it loses its independence once reused repeatedly.
Why does the number of variants tested matter so much?
Because with many attempts, apparently significant results turn up by chance alone.
What does a very smooth result curve suggest?
Usually that it was adjusted until the bad stretches disappeared.
What does a stability check test?
Whether the result holds up under a minor change to the parameters.
Where does automation's real benefit lie?
In eliminating the gap between a defined and an actually executed strategy.
What safeguards does an automated system need?
Caps on order size and count, position reconciliation, defined behavior on connection loss, and a kill switch.
Why is selling a trading system a warning sign?
Because a working strategy's earnings scale with capital, while software sales scale with customer count instead.
Where do staking returns mostly come from?
From the issuance of new units, meaning redistribution from non-participants.
What do audit reports cover, and what not?
They check code at a specific version, not price feeds, admin keys, or chained risks.
Why are returns paid in a project's own token misleading?
Because the payout increases the token supply, and the nominal return persists even as the price falls.
Why is the term impermanent loss misleading?
Because the loss is only temporary if prices return to their starting ratio.
What business does supplying liquidity resemble?
Selling volatility: many small gains, rare large losses.
How do you address smart-contract risk?
By diversifying across independent protocols and limiting the share deployed.
Why does a written plan work?
Because it moves the decision into a state with no emotional strain.
What absolutely needs to go in alongside your rules?
An explicit list of what you don't do, and a sentence for the crisis moment.
When is adjusting the plan appropriate?
For changed life circumstances or time horizons, not as a reaction to recent market performance.