IME cheat sheet

IPS core components: objectives (return requirement, risk tolerance), constraints (liquidity, time horizon, tax, legal/regulatory, unique), and governance/rebalancing policy.

Required return = (spending need + inflation + fees) net of expected contributions; compare to the return achievable at the client's stated risk tolerance and flag shortfalls.

Risk objective is stated as willingness (psychological) plus ability (financial capacity); the binding constraint is the lower of the two.

Return objective must be stated in real or nominal terms, pre- or post-tax, and net or gross of fees - ambiguity is an IPS defect.

Liquidity constraint covers both recurring cash needs and contingent calls (margin, capital commitments); it reduces the investable asset base.

Time horizon is single-stage (one goal) or multi-stage (overlapping goals); longer horizons raise ability to bear risk but do not change willingness.

Rebalancing policy should specify tolerance bands, review frequency, and whether rebalancing is calendar-based or threshold-based.

IPS is a living document: review on material life change (job loss, inheritance, marriage, health) or at a fixed interval, not only at market events.

Discovery sequence: quantitative facts (balance sheet, cash flow, tax) precede qualitative facts (goals, values, constraints, prior experience).

Goals-based planning funds each goal with a separate sub-portfolio whose asset mix matches the goal's horizon and priority; essential goals get lower-risk funding.

Goal priority tiers: must-fund (essential), should-fund (important), could-fund (aspirational); funding shortfalls are resolved by tier, not pro rata.

Risk profiling combines risk capacity (objective, balance-sheet based) and risk attitude (subjective); a questionnaire alone measures attitude only.

Behavioral biases to screen for: loss aversion, recency, overconfidence, anchoring, mental accounting, home bias, and herd behavior.

Risk tolerance questionnaires are subject to framing and order effects; corroborate with observed behavior and scenario questions.

Household balance sheet: human capital (present value of future earnings) is an asset that declines with age and behaves bond-like for stable earners.

Capacity for loss = ability to absorb a shortfall without abandoning the plan; it is reduced by high fixed obligations and illiquid holdings.

Expected return build-up: risk-free rate + inflation + risk premia (default, maturity, equity, illiquidity, currency); state the horizon and compounding convention.

CAPM required return: E(Ri) = Rf + βi × (E(Rm) − Rf); beta measures systematic risk only.

Grinsold-Kroner (building block) equity return ≈ dividend yield + expected earnings growth + valuation change (repricing) + inflation.

Covariance inputs drive diversification benefit: portfolio variance = Σ wi²σi² + ΣΣ wi wj σi σj ρij; lower correlation lowers total risk.

Strategic asset allocation is policy-driven and long-horizon; tactical asset allocation is a short-horizon deviation within policy bands.

Mean-variance optimization is sensitive to input error (especially expected returns); mitigate with constraints, resampling, or Black-Litterman.

Corner solutions and concentration are symptoms of estimation error; impose min/max weights and liquidity constraints.

Asset allocation dominates time-series timing and security selection in explaining long-run portfolio return variability.

Active return = portfolio return − benchmark return; decompose into allocation (sector/group) effect and selection effect.

Information ratio = active return ÷ tracking error; it measures active return per unit of active risk and is comparable across strategies.

Fundamental active share and tracking error are distinct: high active share with low tracking error implies diversified stock-specific bets.

Equity styles: value vs growth, large vs small cap, momentum, quality, low volatility; style drift is measured against a stated style benchmark.

Equity risk decomposition: market (beta), sector, style/factor, and idiosyncratic (stock-specific) risk; only idiosyncratic risk is diversifiable.

Dividend discount model: P0 = D1 ÷ (r − g); Gordon growth requires r > g and a stable payout.

Free cash flow to equity = net income + non-cash charges − capex − Δ working capital + net borrowing; use FCFF for firm-level valuation.

Portfolio construction constraints: position limits, sector caps, liquidity/ADV limits, and turnover/cost budgets.

Bond price-yield relationship is convex: price rises more for a given yield fall than it falls for an equal yield rise.

Macaulay duration = weighted average time to cash flows; modified duration = Macaulay ÷ (1 + y/m); approximate % price change ≈ −Dmod × Δy.

Convexity adjustment: %ΔP ≈ −Dmod × Δy + ½ × convexity × (Δy)².

Duration contribution of a holding = weight × holding duration; portfolio duration is the weighted sum (parallel-shift assumption).

Yield curve strategies: bullet, barbell, ladder; key rate duration measures sensitivity to non-parallel curve shifts.

Credit spread duration measures sensitivity to spread changes; total return = carry (coupon/accrual) + price change from rates and spreads.

Immunization requires matching duration (and convexity) of assets and liabilities and rebalancing as durations drift.

Liquidity and tax: municipal bond tax-equivalent yield = muni yield ÷ (1 − marginal tax rate).

Alternatives categories: private equity/venture, private credit, real assets (real estate, infrastructure, commodities), hedge funds, and digital assets.

Illiquidity premium compensates for lock-ups, capital calls, and limited secondary-market exit; it is not a free lunch.

Private equity return metrics: IRR (time-weighted money), TVPI (total value to paid-in), DPI (distributions to paid-in), RVPI (residual value to paid-in).

Hedge fund fee structure: management fee on AUM plus performance fee on gains, often with a high-water mark and hurdle rate.

Reported alternative returns suffer smoothing/autocorrelation, which understates volatility and overstates diversification benefit.

Commodities offer inflation sensitivity but no cash flow; futures-based exposure earns roll yield (positive in backwardation).

Real estate return = income return + capital appreciation; leverage magnifies both, and appraisal-based values lag market prices.

Diversification benefit requires low or negative correlation to the core portfolio; correlation often rises in stress (tail dependence).

Sharpe ratio = (Rp − Rf) ÷ σp; it penalizes total risk and suits undiversified or total-portfolio evaluation.

Treynor ratio = (Rp − Rf) ÷ βp; it uses systematic risk and suits a well-diversified sub-portfolio within a larger fund.

Jensen's alpha = Rp − [Rf + βp × (Rm − Rf)]; positive alpha indicates return above CAPM expectation.

M² = (Sharpe × σm) + Rf, then M² − Rm; it restates risk-adjusted return in benchmark-risk units.

Information ratio = active return ÷ active risk (tracking error); higher is better for a given benchmark.

Time-weighted return removes the effect of external cash flows; money-weighted return (IRR) reflects the client's actual cash-flow timing.

Value at risk (VaR) states a loss threshold at a confidence level and horizon but says nothing about the size of losses beyond it; CVaR/expected shortfall does.

Attribution: Brinson-style allocation, selection, and interaction effects sum to active return relative to a benchmark.

Asset location: place tax-inefficient assets (taxable bonds, REITs, high-turnover strategies) in tax-deferred accounts; tax-efficient equities in taxable accounts.

Tax drag = pre-tax return − after-tax return; it compounds over the horizon, so small annual differences matter greatly.

Taxable account: realized capital gains are taxed; unrealized gains are deferred, and step-up in basis at death can eliminate them for heirs.

Tax-deferred account: contributions may be pre-tax, growth is untaxed, and withdrawals are taxed as ordinary income (RMDs apply).

Tax-exempt (Roth) account: after-tax contributions, tax-free qualified withdrawals, and no lifetime RMDs for the original owner.

Retirement withdrawal sequencing interacts with bracket management, Social Security taxation, and IRMAA surcharges.

Required minimum distributions begin at a statutory age; failure to withdraw triggers a penalty on the shortfall.

Tax-loss harvesting: realize losses to offset gains/income, respect wash-sale rules, and track cost basis carefully.

Vehicle comparison: mutual fund (pooled, daily NAV, regulated), ETF (exchange-traded, intraday pricing, tax-efficient creation/redemption), separately managed account (direct ownership, tax management), closed-end fund (fixed share count, can trade at premium/discount).

Fee layers: expense ratio, sales loads, advisory fee, trading costs, and performance fees; compare on total cost of ownership.

Manager due diligence: philosophy, process, people, performance (risk-adjusted, over a full cycle), and portfolio characteristics.

Track record evaluation must use a consistent benchmark, appropriate risk adjustment, and awareness of survivorship and backfill bias.

GIPS compliance is firm-wide and voluntary; it requires defined composites, disclosure, and verification is optional.

Fiduciary vs suitability standard: fiduciary must act in the client's best interest and disclose conflicts; suitability only requires a reasonable recommendation.

Separately managed accounts allow in-kind transfers, tax-loss harvesting at the lot level, and direct voting; higher minimums typically apply.

Hedge fund and private fund vehicles are typically limited partnerships with lock-ups, capital calls, and accredited-investor eligibility rules.

Fiduciary duties: loyalty (avoid conflicts, act in client's interest), care (prudent, informed), and full disclosure of material conflicts.

Prudence is process-based: document the analysis, consider reasonable alternatives, and follow the IPS; outcome alone is not the test.

Conflicts of interest must be disclosed and managed or avoided; disclosure alone does not cure an undisclosed or unfair conflict.

Material nonpublic information (MNPI): do not trade or cause others to trade on it; use information barriers and restricted lists.

Fair dealing: treat all clients equitably; different service levels are permitted if disclosed and not disadvantageous.

Best execution obligation covers price, speed, and likelihood of execution, not merely lowest commission.

Recordkeeping and reporting: retain books and records per regulation, deliver required disclosures, and keep marketing claims accurate and not misleading.

Suitability/reasonable-basis and know-your-client duties require understanding the client's objectives, risk tolerance, and constraints before recommending.