10. Unconventional Wisdom Flashcards
Do outperforming fund managers continue to outperform?
Yes - however, probability that outperforming manager this year outperforms the next year is around 60%
Statistical description of stock market
random walk - volatile equal chance of it going up or down
What type of investor is Warren Buffet?
Value investors - takes long position in under-priced securities
Value investors do not do well in _____ markets
bullish
When stock markets down, ____ stocks survive
value
Majority of active equity managers have ____ the benchmark after fees over the 2003-2018 period
underperformed
Active fund managers have _______ success in less efficient markets (e.g. China) than in the US
more
Do skilled asset managers exist? Is it easy to find them? If you find them, will your results reflect their outperformance?
Yes, no, not necessarily
Why do investors want to invest in active funds when they know there is a higher probability that their active fund will underperform the benchmark? (6)
- Rare skill - you think that a fund manager is a skilled stock picker
- Wrapper restrictions - your employer offers you a retirement savings scheme that does not include any passive investing
- existence - you want exposure to benchmark equity risk in some regions (e.g. emerging markets)
- legal - you are legally not allowed to trade funds directly in a market
- factor based investing - wanting exposure to CAPM’s market portfolio
- trading for your own account - for personal asset allocation
more than _____ of funds underperform the benchmark after taking into consideration fees
90%
B-share market
illiquid chinese share market open to international investors
A-share market
Chinese share market for locals
If the management of a company is poor, what happens to share price?
decreases
If you expect share price to decrease, what should you do?
short sell (sell and buy back at decreased price)
Market portfolio
portfolio of all risky assets in the world
If you invest in a fund, do you get exposure to all risk?
No - only exposed to the risk of the companies in the fund
Is it impossible to invest in all risky assets?
Yes
Factor-based investing
Use different weights than market capitalisation weighted fund –> fundamental categories
Bad reasons for holding active funds (3)
- chase recent returns
- bad advice
- overconfidence
How do active managers add value to the economy? (4)
- chase mispriced securities - trading improves market efficiency
- shareholders’ activism can monitor and improve corporate governance
- active managers provide greater liquidity/depth to financial markets
- active managers in better position than passive managers to satisfy socially responsible demands of modern investors (easy to exclude certain securities)
top-down risk focuses on the macroeconomic environment and its impact on_____
risk factors that drive most asset returns
* strategical asset allocation
* asset allocated based on investors level of risk aversion and investment horizon
Bottom-up component focuses on ______
relative value of individual securities and firms
* sector-based choices
* tactical asset allocation
Personal asset allocation should take into account ____
both top down and bottom up
top-down focuses more on the _____
short term economic state
bottom up focuses more on the _____
long-term horizon
Real estate should be about _____ of your total personal asset allocation
20-25%
You bank account should be about _____ of your total personal asset allocation
2-3%
Passive funds should be about _____ of your total personal asset allocation
25%
