Monthly Archives: February 2012

Establish a Relationship with your Mentors

I have a very close relationship with the battalion commander that I served under in Afghanistan. I had no idea how important and close our relationship would become, especially after I left the service. Almost everything in civilian life requires a letter of recommendation or at least a reference.

If anything, I wish I established more lasting mentor-mentee relationships while I was in the Army. I always had great relationships with my company or battalion commander, but when I PCS’ed (moved), I didn’t keep in touch with these men. I’m not suggesting that you start sucking up to every superior officer before you leave the service. I’m suggesting that you think about the key people who have made an impact on you during your military career and reach out to them letting them know that you are separating. Ask if you could use them as a reference.

Keep your old evaluation reports as a starting point for what your mentor will write about you because they will probably have forgotten what occurred two or three years ago, and tons of junior officers separate and ask for recommendations or references. You don’t really need to coach them for general job references, but you really should have a phone conversation about MBA applications. MBA letters of recommendations are so unique that they need to be tailored to each particular school. The story on the letter of recommendation needs to match the story in your essay.

Veterans tend to get similar letters of recommendations extolling their combat service so you need to differentiate. What did you do in the military that wasn’t related to the military? I know we were all busy due to a heavy operational tempo but if you think really hard you might think of a few things that you did non-military related. A personal story for me is when I went through  mediation training as part of what my commander wanted me to do. However, since I liked mediation, I went beyond the mandatory training and actually volunteered for a mediation organization for a few months before I deployed. Things like that.


Why Veterans Should Aim for a 700 GMAT

One of the biggest myths that I want to bust is that the GMAT isn’t that important for veterans. I’m sure there isn’t a big difference between having a 740 and a 760, but I sincerely believe that 700 is a good cut off score. This is based on my experience traveling to 14 of the top 16 schools in the U.S. and meeting with members of their veterans associations or clubs. The majority of veterans in top schools tend to have more than 700, although that is not always the case.

Scoring a 700 isn’t as hard as you think. There are variations of 100-hour GMAT study plans all over the internet and the basic premise is that you need to get the official GMAT guide books off of Amazon and then get access to and doing as many practice tests as you can; rinse and repeat for 100 hours. I mailed myself the books in Afghanistan but honestly, I didn’t get much studying done. When I came back from my deployment, I started studying for a month and got a 680. I incorrectly believed that this figure is “good enough.” The problem is that veterans are becoming like a commodity. Every school wants some veterans: perhaps half a dozen Army, a couple of Navy, and sprinkle some Marines and Air Force on the top. Being a commodity, numbers and statistics matter. If you are somehow stationed to a larger city that provides a GMAT class, I would take it. In fact, I just signed up for one myself in hopes of beating my 680 and using that as an update for the schools I am waitlisted on. I personally do not like online GMAT classes, but you may find success in that.

Based on my personal experiences, I can tell you that having a high GMAT is not only necessary for entrance to a top business school, but necessary to compete for some top jobs after business school. I was at a cocktail party the other night and someone mentioned to me that he had a 720 on his GMAT and his friend had a 740 on his GMAT and during that year, McKinsey had 740 as the cut-off score to even try for an interview with that firm. And then he detailed how their lives have diverged just based off of those 20 points. There certainly could be the case where although he did get an interview, had he scored a 740, he still may not have passed the interview. Also, I’m still a firm believer that he could have done other things to make his own career more successful than the other person. However, I keep discovering these anecdotes of 20 points here and 20 points there making a significant impact on one’s life.

In addition, I really don’t think it is that hard to score a 700. I’ve become a test-taking machine since I left the Army and most tests are not necessarily about intelligence – they are about just knowing how to take that particular test. If you do a few thousand practice questions for any exam, I cannot foresee someone not excelling on that exam.

To summarize:

  1. It’s hard to study during a deployment, so don’t.
  2. You need to give a solid-100 hours when you get back to home station to study for the GMAT
  3. The GMAT is more important than you think, because veterans are becoming commoditized. Aim for a 700+.
  4. Take an in-person GMAT class if one is available near you.

CFA: Portfolio Management

The first key lesson of study session 12, Portfolio Management, is that two stocks decrease overall risk (standard deviation), if the correlation (ρ) between the two stocks is less than one. The example that will be used in all the graphs below show Asset A has having a return of 8% but having a lower standard deviation than Asset B which has a return of 12% but has a greater standard deviation. These diagrams are not to scale.

If ρ = 1, there are no benefits to diversification as each increase in return leads to greater risk. The opposite, equally unlikely, situation is when ρ = -1. As you can see, if this were true, the investor could receive a 10% return for having zero risk. The realistic case is having -1 < ρ < 1, which would create the curved line.

Points A through E are portfolios that hold different combinations of Asset A and Asset B. When you compare Point E to Point A, it is evident that you can get a higher return for taking the same amount of risk if you choose Point E. That is the same situation between Point D and Point B and every other portion of the curve above Point C versus the portion of the curve below Point C. The portion of the curve below point C is inefficient. Point C is called the Minimum Variance Portfolio (MVP).


So far, you have seen the efficient frontier for two assets. When you start graphing the efficient frontier for every asset, you get multiple efficient frontiers which apparently can be regressed into a global efficient frontier and global minimum variance portfolio.


In theory, since everyone has access to the same historical data, everyone should come up with the same global efficient frontier. This is using historical data as input into forward-looking models which the makers hope will generate expected returns. Assuming that the future will look like the past is a huge assumption.




The next step is to introduce the effect of having a risk free asset. Nothing is truly “risk free” but the 3-month U.S. Treasury bill serves as the most appropriate proxy for a risk free asset (Rf). There is no linear relationship between the risk free asset and the risky portfolio. There is one point where Rf intersects the GMVP, labeled Point A in this diagram.

Recall the earlier situation when everything below the top portion of the efficient frontier was inefficient. The same situation applies here; everything below the point in which Rf intersects the tangent of the GMVP is inefficient.

The remaining line is the Capital Allocation Line, which measures the risk to return for combining portfolios with risk free asset and a portfolio. When the portfolio in question is the market portfolio, the line is called the Capital Market Line, with Point M being defined as having 100% allocation in the market portfolio.

Different investors have different indifferent curves which reflect different combinations of Rf and the market portfolio. In this theory, if you want more risk, put more M in your portfolio. If you want less risk, put less M in your portfolio. In practice, the market portfolio is the S&P 500. In theory, it should be every asset, including international assets.



The slope of the CML is the Sharpe Ratio. The second key lesson of study session 12 is that investors are only compensated for systematic (market) risk, because all unsystematic risk will be diversified away. Therefore, we need to change the total risk to market risk, β. β = covi,mkt / σ2m. The change from CML to SML is out of scope so I won’t even pretend to understand it or discuss it.


The slope of the SML is the Treynor Ratio. The SML is the graphical representation of the Capital Asset Pricing Model (CAPM). CAPM is a one factor model that uses market risk as the input and spits out expected return as the output. CAPM doesn’t care about skew and kurtosis, which is more relevant in real life.


CML / SML Comparison Table

Risk σ β
Slope Sharpe Ratio Treynor Ratio
Prices Market Portfolio Assets, which could include portfolios


CAPM: E(R)= β(Rm-Rf)+Rf

Excess market return = Market Risk Premium =  Rm-Rf


The above graph can be useful when you are asked to determine the expected return of an analyst, through whatever method (probability trees, etc.) vs. the returns of the CAPM. If the analyst expected returns are greater than the CAPM computed returns, then the portfolio is underpriced and should be bought. If the expected returns are lesser than the CAPM computed returns, then the portfolio is overpriced and should be sold.


Portfolio planning for clients, if their willingness > ability, go with ability
If ability > willingness, go with willingness, but educate the client


I’ve got to do more reading on Jensen’s alpha and M2 and I’ll post on that later



My Level 1 Status as of 2/20/2012:

Hours studied: 28

Practice questions taken: 129


-QBank- Quiz 1: 23/30; Quiz 2: 25/30


-QBank- Quiz 1: /60; 38/60
-SchweserNotes: Technical Analysis- 6/9


Here’s my latest post on BTG.


My first post describes why junior military officers should consider an MBA. This post will focus on all the things you need to do in the next seven to eight months before some Round 1 applications are due:

1. Collecting Stories

2. Acing the GMAT

3. Talking with Mentors

4. Link up with MBA Veteran Clubs/Associations


This week, I’m going to talk about storytelling. Storytelling is perhaps the most powerful skill I think anyone can possess in any industry. This is also an area that you control. You can’t control some things in your life, like your undergraduate GPA. But you can control how you convey your experiences to convince people to hire you or to let you into a top school.


Collecting Stories

Resumes, Interviews, and MBA applications are all about storytelling – crafting stories, telling stories, and selling stories. We all have combat experiences and while they may seem unique to us, they are actually pretty similar if you talk to other veterans. The first step is to collect your stories. Look through your Officer Evaluation Reports (or other service equivalent) and other documents to really reflect on what you have done. If you are currently deployed, I would even advise writing a diary or journal of what you are doing. I’ve been out of the Army for 14 months and I still find myself remembering new stories that could help me highlight my accomplishments.


a) Resume: I recommend a one-page resume because the resume isn’t a detailed explanation about your life. The resume is like an appetizer that entices the hiring manager or MBA admission committee to learn more about you. I went through a JMO recruiter and they helped a lot with translating my military experiences into a language that civilians can understand. If you plan to go straight into an MBA, which I advocate, there are a lot of resources out there for you. The best resource is the MBA Veterans Club of the schools you are applying to. They will show you what format their school uses and provide some advice on what has worked for them.


b) Interview: This will probably sound extreme but I have a spreadsheet of the top 40 or so commonly asked questions that could be asked during an interview. In the second column, I have detailed stories and in the third column, I have one or two sentences that could trigger the detailed story from my memory. Then I purchased a tape recorder and recorded myself answering these questions. I was so surprised to hear some weird things I would do with my speech that I wouldn’t have noticed without recording myself. Obviously we all sound great in our own ears, but it is good to hear what you sound like to the outside world. I also started interviewing in front of a mirror and once again, I found weird things that I would do like not maintaining eye contact or a bunch of other things. Finally, I bugged my wife to interview me and videotaped the whole thing. This might sound like overkill, but it works. I’ve been through over 30 interviews in the last 14 months and nothing can really throw me off now. Interviewing is a skill and you should practice it.


c) MBA applications: This is really the mother lode of storytelling. You will have a certain word limit to tell a story to answer a question that the particular school is asking. The most common mistake JMOs make is to recycle their essays. I was guilty of this too. Schools just know if you recycle an essay. They read hundreds, thousands of essays per year, so generic or recycled essays are very easily spotted and boring to read. Some questions may seem similar, but that is just what I said – “similar,” not “same.” By now, you should have tons of stories at your disposal and it is all about picking the right story to answer the right question. You also need to research the school and work with the Veterans Club in reviewing your essays.


Next week, I’ll cover the importance of the GMAT, especially to veterans.

Darden Visit Report

Had my interview at Darden yesterday and it went great. I was scheduled for a 30-minute interview but I hit it off with my interviewer and we ended up talking for around an hour. The two main components of the interview was to walk through your resume and why Darden/MBA. Interviewer would throw in a few questions here and there when he was interested in something I said. Darden is huge on entrepreneurship. Check out their website. The whole Darden experience has been very pleasant…one essay and a blind interview. GI Bill pays off everything if you qualify and yellow ribbon will cover the extra costs of being an out-of-state student. I don’t see any reason why any veteran wouldn’t apply to Darden. One negative aspect that I heard was about the lack of network on the West Coast, the Darden network is obviously strongest in the Atlantic, Northeast region.


Met up with a current student who is also an Army vet, had only great things to say about Darden. The tight-knit community aspect of Darden is very similar to the Tucks, the Fuquas, and the Sterns of the business school world. Charlottesville is as pleasant as ever, spent around an hour driving around. I spent a day here last July as well.


It’s going to be a real tough choice if I had to choose between Stern and Darden.

Be Proactive

I lurk the BTG MBA Watch comment pages frequently and invariably, there is always an applicant who is scared to email or call the admissions office because he or she thinks the admissions committee will be “angry” at them for wasting their time. To some degree, I agree that you should limit communication unless it is important. After all, if every applicant called them even once every week, none of them can get any work done.


But beyond that, I feel that the approach you should take during your MBA odyssey is to be proactive. If a school really wanted to reject me because I was too proactive then I don’t want to go to that school in the first place. Real life requires picking up the phone, getting on the ground, hitting the pavement, and a whole assortment of other clichés. If you’ve ever worked in sales in your life, you know what I am talking about. Customers don’t just magically call you and want to buy stuff from you.


In an earlier post, I talked about applicants being products and admissions committees being the customers. This analogy fits right in with that one as well. You need to reach out to as many people as you can: alumni, current students, clubs, admissions staff, the dean, the president, and anyone else who will talk to you. The objective part of your application is what it is. That cannot change. The only thing you can control is your effort.

CFA Study Update

There are 110 days until the June 2012 CFA Level 1 exam. There are 4,168 QBank questions, when combined with the questions within SchweserNotes and the original text, we are looking at 4,500 questions. If you wanted to do all 4,500 questions, you would need to do 41 questions a day. That actually doesn’t seem that bad. Let’s see how far I get. I’ve done 99 so far and they have been more helpful than reading any text. I think I’m half way through reading the original text on Ethics and I can’t wait until I’m done reading that.


I’m also going to update my QM post because I’ve learned some more interesting stuff in the past week.



My Level 1 Status as of 2/13/2012:

Hours studied: 22.0

Practice questions taken: 99


-QBank- Quiz 1: 23/30;


-QBank- Quiz 1: /60; 38/60
-SchweserNotes: Technical Analysis- 6/9

Tuck Waitlist, Decision Time…

Current status:

Accepted: NYU

Waitlisted: Ross, Duke, Tuck

Upcoming interviews: Darden

Pending interview or decision: Wharton,  Booth, Harvard


As you all know, I’m taking the CFA Level 1 exam on June 2nd. My strategy so far has been passing the CFA and using that as an update. However, I just got a terrific idea to totally destroy my remaining free time: retake the GMAT before June 5, 2012 when the new format comes. Therefore, I just registered to take the GMAT on June 1. If you think about it, it is almost impossible to get any great updates within a few months beyond increasing your GMAT score, which I could use some help on- 680. I was pretty weak on the quant. Can’t really get a promotion at work since my plan is to leave my company shortly and get a pre-MBA internship anyways.


I also signed up for a GMAT prep course through Veritas Prep. The reason I choose them over the competition was a combination of convenient time and location, good reviews off Beat the GMAT , and I also met the founder of Veritas this week in a chance encounter. We were talking about MBA admissions, not about the GMAT or anything, but I liked his approach to things so I’m going to give his firm a shot. Just like the CFA, I’ll be tracking my hours on this as well.


I don’t want to make it seem like NYU is a horrible choice, in fact, it is the most logical choice for me in terms of a lot of practical reasons. I just don’t want to attend NYU because it is the only option I have, I want to attend NYU when I am presented a range of options and then I’ll know which is the right choice. Also, retaking the GMAT is useful because my backup plan is still finance or management consulting, and they do ask for your GMAT. Any little thing helps.


June 1: GMAT, June 2: CFA 1


Let’s get it on!

Darden Invite

It seems like forever since I visited Darden back in July of 2011. I really should have applied in Round 1 as a lot of the information I received during the visit was still fresh in my mind. Anyways, I got too busy and applied in Round 2 and I’m happy to get an invite to interview today.


It is a little out of the ways compared to some schools so I had to spend around an hour figuring out the best way to get there. I decided to fly after work from New York’s JFK airport into Richmond International airport using some free Delta points I have. Then I rented a car through Avis, and found a hotel (Aloft Richmond) on I-64W which I reserved using my Starwood points. Sometimes it pays to be a consultant….hehe.


Scheduled an early interview so I can hopefully meet with someone from the Darden Military Association so I can get the inside scoop from my some other vets. I’ve always had tremendous success getting the good, the bad, and the ugly from veterans because we always look out for each other. Even the Navy guys. Darden seems like a no-nonsense place as they only had one essay. I’ll assume for now that the interview will play a larger role, which is good for me because I’ve already had 7 MBA interviews since October and 2 job interviews within the last two weeks so I’m in pretty good interviewing shape.

CFA: Quantitative Methods

I’ve found that writing these posts have been instrumental to my own studying and knowledge retention because I’m looking at the information through frameworks rather than brute force reading as much as I can. Also it is a form of a commitment trap to say that I will write a post every week so I’m forced to go over my notes.


Quantitative Methods is broken down into two study sessions, 2: Basic Concepts and 3: Application. Another way of looking at this is study session 2 is descriptive and study session 3 is inferential. Inferential is what is most important in real life as you try to draw conclusions from a sample size rather than having the whole population of data.


However, for the CFA level 1 exam, I am deliberately choosing to focus on study session 2 and adding study session 3, except for technical analysis, to my ignore list. Frankly, I just find study session 3 boring and difficult. That is my personal choice. Technical analysis may be boring as well, but the types of questions you get from it are so easy, it would be silly to throw those points away. Also, it is only 15 pages to read in the Schweser Notes. What are the basic concepts of study session 2? Time value of money, discounted cash flow applications, statistical concepts and market returns, and probability concepts. With that being said, I want to focus on some of the key points or confusing points, at least for me, in Quantitative Methods.


One of the key components to remember is the conversion and relationship between Holding Period Yield (HPY) < Bank Discount Yield (BDY) < Money Market Yield (MMY) < Effective Annual Yield (EAY). Another relationship is Bond Equivalent Yield (BEY) < EAY. EAY is king as it accounts for full compounding by exponents. BEY is accounting for 6 months of compounding and then multiplied by 2, so you can understand why that is less than EAY. MMY is compounding by multiplication. HPY is usually for a period less than a year. Rate and yield are interchangeable, rate is from the borrower’s perspective and yield is from the lender’s perspective.


HPY = (Ending value – Beginning Value) / Beginning Value (not including dividends for now)
MMY= (HPY)*(360/t)
EAY = (1 + HPY)365/t – 1

The HPY is the common factor between all four so it is useful to determine that first before transforming between.

BDY = (Discount/Face)*(360/t)
BEY = [(Face Value-Price)/Price]*(365/d); d=days to maturity


P opulation (Greek, upper case letters) S ample (English, lower case letters)
a μ: Population mean t x̄: Sample mean (x bar on top)
r σ: Population standard deviation a s: Sample standard deviation
a ρ: Population correlation t r: Sample correlation
m σ²: Population variance i s²: Sample variance
e N: Population size s n: Sample size
t   t  
e   i  
r   c  
s   s  


N Nominal – Categories, but no order; ex. Colors
O Ordinal – Ordered categories, ex. Bond ratings, AAA, AA+, AA. AAA is better than AA+, but the change from AAA to AA+ vs AA+ to AA isn’t the same, there is no defined value
I Interval – Ordered categories with defined intervals, ex. temperature: 40 degrees is twice the amount of 20 degrees, 0 doesn’t mean absence of temperature, it is only a reference point
R Ratio – Money


Risk Adjusted Return

Risk = variation; Return = central tendency

Risk adjusted return = CV, Sharpe Ratio, Roy’s Safety First Ratio

A) Coefficient of variation (CV) = s (risk)/ x̄ (return). Low CV = good

B) Sharpe Ratio = (Rp-Rf)/ σp = (Return of portfolio – risk free rate) / portfolio standard deviation. High Sharpe Ratio = good

Rf = Nothing is technically risk free, but 3-month U.S. T-bill is close enough to serve as a proxy for Rf

Sharpe Ratio assumes normal distribution so it is unsuitable for alternative investments

Sharpe Ratio is a specific case of Roy’s Safety First, with the Rl being the Rf

C) Roy’s Safety First = (Rp-Rl)/ σp = (Return of portfolio – personal lower bound return rate) / portfolio standard deviation. High Roy’s Safety First Ratio = good.


Statistical Concepts

Harmonic mean < Geometric mean (time-weighted rate of return) ≤ Arithmetic mean

The ≤ is due to the fact that if the annual returns are constant, i.e. 50% every year, the arithmetic and geometric returns will be the same

Harmonic mean is used with the average cost per share, i.e. if you purchase 1000 shares at $20 and later, another 1000 shares at $30, the average cost isn’t $25. It is slightly less, $24 in this case. 2/[(1/20)+(1/30)]

Arithmetic mean is upward biased and deceiving

Example, you invest $100 today, gain 50% in year 1, and lose 50% in year 2, what is the arithmetic and geometric mean?

Arithmetic mean: x̄=[1.5+(1-.5)]/2=100; However, you have $75 in your pocket, not $100
Geometric mean: (1.5)(.5)^1/2=0.866, which means -13.39% return per year

The units for variance is %² so that is useless for interpretation purposes, which is why standard deviation is more useful, it uses % which matches returns.

Sample uses n-1, reason = unbiased, real reason = too mathematically complex for me to understand

Chebyshev’s Inequality – for any distribution, 1-[1/(k^2)] = amount of area covered under the distribution, with k = # of standard deviations. Example, for any distribution, two standard deviations will cover at least 75% of the distribution. 1-[1/(2^2)]=.75. For a normal distribution, two standard deviations will cover ~95% of all the distribution.

Skew = left and right lean of a distribution, skewed to the right means mean > median > mode, skewed to the left means mode > median > mean

Many hedge funds are built upon skew

Kurtosis = up and down, excess >1 kurtosis = leptokurtic, excess <1 kurtosis = platykurtic

Risk management more concerned with tails

Real life stock market is leptokurtic, does not use normal distribution

Normal distribution: μ=0, σ²=1, skew=0, kurtosis=3

Modern portfolio theory assumes μ=0, σ²=1 and ignores skew (and kurtosis? To be determined)

Covariance is an unscaled measure, -∞ < cov < ∞

Correlation is the scaled version of covariance -1 < ρ < 1

Anything -.7 < x > .7 is considered a “strong” correlation



If order matters – Permutations

If order doesn’t matter – Combination


My Level 1 Status as of 2/08/2012:

Hours studied: 14.5

Practice questions taken: 30

Ethics: Quiz 1: 23/30;