AIS — CSI Advanced Investment Strategies Cheat Sheet

This independent Cheat Sheet is for candidates preparing for the Canadian Securities Institute CSI Advanced Investment Strategies (AIS) exam, code AIS. Use it as a last-pass review before topic drills, mock exams, and detailed explanations.

The exam rewards more than product memorization. For each strategy, ask:

1. What problem is the strategy solving?
2. What risk is being reduced, transferred, leveraged, or introduced?
3. What is the payoff pattern?
4. What client constraint could make it unsuitable?
5. What are the liquidity, tax, fee, leverage, and disclosure implications?

Fast rule: advanced strategies are tested through suitability, risk trade-offs, payoff logic, and implementation details—not just definitions.

High-Yield Strategy Framework

    flowchart TD
	    A[Client objective] --> B[Constraints]
	    B --> C[Risk tolerance and capacity]
	    C --> D[Strategy selection]
	    D --> E[Payoff and scenario testing]
	    E --> F[Costs, tax, liquidity, leverage]
	    F --> G[Suitability and documentation]
	    G --> H[Monitoring and rebalancing]

Use this order in scenario questions. If you jump directly to a sophisticated product, you may miss the constraint that makes it inappropriate.

Advanced Strategy Approval Checklist

Before choosing a derivative, alternative investment, or structured product, confirm:

• The client can explain the basic payoff in plain language.
• Maximum loss, liquidity limits, and margin or funding obligations are understood.
• The strategy addresses a documented objective, not just a product feature.
• The recommendation considers tax character, costs, and account type.
• The strategy does not create hidden concentration, currency, counterparty, or leverage risk.
• The benchmark used to evaluate the strategy matches the strategy’s risk exposures.

Put-Call Parity

For European-style options with the same underlying, strike, and expiry:

Option Strategy Selection

Options Exam Traps

Options Cheat Sheet

Options questions often turn on rights vs obligations, net premium, and maximum gain/loss.

Option Building Blocks

Moneyness

Option premium has two components:

• Intrinsic value: value if exercised immediately.
• Time value: extra value from remaining time, volatility, rates, and dividends.

Option Greeks

Put-Call Parity

For European options on a non-dividend-paying stock:

With expected dividends, adjust for the present value of dividends:

Exam use:

• If parity is violated, arbitrage may be possible.
• Dividends reduce call value and increase put value, all else equal.
• Do not apply simple parity mechanically to American options without considering early exercise.

Option Strategy Recognition

Equity Index Futures Hedge

Where:

• \(N\) = number of futures contracts.
• \(\beta_T\) = target portfolio beta.
• \(\beta_P\) = current portfolio beta.
• \(V_P\) = portfolio market value.
• \(V_F\) = futures contract value.

Hedge Risk Terms

Swaps and Credit Derivatives

Derivative Comparison

Hedging Decision Rules

Futures and Forward Traps

• Futures are marked to market daily; forwards usually settle at maturity.
• Hedging reduces targeted risk but may introduce basis risk.
• A perfect hedge is rare because asset, maturity, amount, and timing may not match exactly.
• Margin is not the same as a down payment; it is performance collateral.
• Leverage magnifies gains and losses.
• Closing a futures position requires taking the opposite position.

Swaps

Bond Portfolio Strategies

Fixed-Income Traps

Bond Price Sensitivities

Bond prices move inversely with yields. Duration estimates sensitivity to yield changes.

Including convexity:

Interpretation:

• Higher duration means greater price sensitivity.
• Longer maturity generally means higher duration.
• Lower coupon generally means higher duration.
• Convexity improves the duration estimate for larger yield changes.
• Callable bonds often have negative convexity when rates fall because upside is limited by call risk.

Fixed-Income Strategy Table

Yield Curve Decision Rules

Fixed-Income Traps

• Current yield is not total return. It ignores price change and reinvestment.
• Yield to maturity assumes holding to maturity and reinvestment assumptions.
• High yield means higher risk, not free income.
• Callable bonds favour the issuer, especially when rates decline.
• Duration changes over time and after yield movements.
• Credit risk and interest rate risk are different. A short-duration bond can still have high credit risk.

Hedge Fund Strategy Matrix

Alternative Investment Due Diligence

Alternative Investments

Alternative investments are often tested through their role in the portfolio and their non-traditional risks.

Alternatives Overview

Hedge Fund Strategy Types

Alternative Investment Traps

• Reported volatility may be understated because assets are infrequently valued.
• Low correlation in normal markets may rise during stress.
• Lockups, gates, and redemption limits matter.
• High fees require strong gross performance just to deliver acceptable net returns.
• Manager selection risk is often larger than asset-class label risk.
• Illiquidity can be acceptable for long-horizon capital but unsuitable for near-term needs.
• “Absolute return” does not mean guaranteed positive return.

Structured Product Traps

Asset Location Logic

Currency Hedge Direction

Rebalancing Rules

Manager Evaluation

High-Yield Scenario Decision Rules

Quick Calculation and Logic Checklist

Before the exam, make sure you can do these quickly:

1. Calculate option intrinsic value and time value.
2. Identify option moneyness for calls and puts.
3. Compute breakeven for long calls, long puts, covered calls, and protective puts.
4. Estimate bond price change using modified duration.
5. Explain how convexity changes the duration estimate.
6. Match a futures/forward hedge direction to a future purchase or sale.
7. Interpret Sharpe, Treynor, information ratio, and tracking error.
8. Calculate active return relative to a benchmark.
9. Explain how correlation affects portfolio risk.
10. Identify whether a strategy increases, decreases, transfers, or transforms risk.

Risk Tolerance vs Risk Capacity

Suitability Traps

• Recommending leverage to a client with near-term liquidity needs.
• Using illiquid alternatives for emergency reserves.
• Ignoring tax consequences in a non-registered account.
• Assuming capital preservation and high income can both be achieved without trade-offs.
• Recommending complex notes or derivatives without explaining downside scenarios.
• Treating past high returns as proof of suitability.

Portfolio Return and Risk

Expected portfolio return is the weighted average of component expected returns:

For a two-asset portfolio:

Key interpretation:

• If correlation is +1, diversification benefit is minimal.
• If correlation is less than +1, diversification can reduce risk.
• If correlation is negative, diversification benefit is stronger.
• Correlations can rise during market stress, so diversification is not guaranteed protection.

Asset Allocation Decision Rules

Performance Formula Review

Sharpe ratio:

Treynor ratio:

Information ratio:

Jensen’s alpha:

Metric Selection Rules

• Use Sharpe when total portfolio risk matters.
• Use Treynor when the portfolio is well diversified and market risk is the focus.
• Use information ratio when evaluating active management versus a benchmark.
• Use tracking error for benchmark-relative risk.
• Use VaR for loss threshold monitoring, but remember it is not a worst-case loss.
• Use drawdown when client behaviour and capital preservation are central.

Fundamental vs Technical Analysis

Active Management Traps

• Comparing active return to the wrong benchmark.
• Ignoring fees and taxes when evaluating skill.
• Mistaking factor exposure for manager skill.
• Using short track records to infer persistent alpha.
• Ignoring capacity limits: some strategies stop working when too much money follows them.
• Treating concentrated portfolios as “high conviction” without acknowledging higher idiosyncratic risk.

Short Sale Exam Points

• Short seller borrows and sells securities, hoping to repurchase lower.
• Maximum gain is limited because the security cannot fall below zero.
• Maximum loss is theoretically unlimited because price can rise without limit.
• Short sellers may owe dividends or distributions to the lender.
• Buy-ins, recalls, liquidity stress, and borrowing costs can affect outcomes.

Leverage Traps

• A “small” market move can create a large capital loss.
• Volatility drag can hurt leveraged products over time.
• Margin calls can force selling at poor prices.
• Leverage can make a diversified portfolio unsuitable if liquidity is weak.
• Hedging with derivatives can still create cash-flow risk through margin.

Contango vs Backwardation

Real Asset Decision Rules

• Use real estate/infrastructure for income and potential inflation linkage, not guaranteed stability.
• Use commodities carefully; they can diversify but may be volatile and cash-flow poor.
• Assess leverage at the asset and fund level.
• Check liquidity terms, valuation frequency, and redemption mechanics.
• Match asset life and liquidity to the client’s time horizon.

Structured Product Analysis Steps

1. Identify the issuer and credit exposure.
2. Identify the reference asset or index.
3. Determine whether returns are based on price return, total return, average level, or point-to-point change.
4. Check participation, caps, floors, buffers, barriers, and call features.
5. Identify the maturity date and liquidity before maturity.
6. Compare payoff to simpler alternatives.
7. Assess fees, tax treatment, and client understanding.

Product Traps

• Principal protection may apply only at maturity.
• Protection depends on issuer ability to pay.
• Early redemption may occur when the product is most favourable to the issuer.
• Complex payoff formulas can hide low expected return.
• Secondary market liquidity may be limited.
• A product can be unsuitable even if the payoff seems attractive.

Fee Review

Liquidity Review

Exam point: illiquidity can be acceptable if compensated and suitable, but it is dangerous when the client needs flexibility.

Portfolio and Risk Mistakes

• Choosing the highest expected return without considering risk capacity.
• Using standard deviation for illiquid assets without questioning valuation smoothing.
• Assuming historical correlation will hold during crises.
• Ignoring benchmark selection when evaluating alpha.
• Comparing pre-fee or pre-tax performance to after-fee alternatives.
• Treating low beta as low risk in all scenarios.
• Ignoring concentration risk from employer stock, real estate, business ownership, or sector tilts.
• Forgetting that currency can add or reduce portfolio risk.

Suitability Mistakes

• Recommending illiquid strategies to clients with near-term cash needs.
• Recommending leverage to clients who cannot meet margin calls.
• Recommending complex products without client understanding.
• Overweighting alternatives because of past performance.
• Ignoring the client’s investment policy or stated constraints.
• Confusing willingness to take risk with ability to take risk.