16 - Portfolio Mgmt Flashcards
What 5 types of securities make up the Cash component of a portfolio?
Currency Money Mkt Canada Savings Bonds Redeemable GICs Bonds w/ <1yr to maturity
What are 5 fixed-income securities?
Bonds due in >1 yr Strip bonds Mortgage backed securities FI ETFs Preferred shares* (but not convertible)
What asset class do derivatives fall under?
Equities
What asset class do convertible bonds fall under?
Equities
What asset class do preferred shares fall under?
Fixed Income for regular
Equities for convertible
What asset class do hedge funds fall under?
“Other”
What asset class do Canada Savings Bonds fall under?
Cash
What is the typical range of cash % in a portfolio?
5-10%
During a contraction phase what strategy makes sense?
Lengthen bond holdings (mid to long term bonds)
Avoid or reduce stock exposure
What strategy makes sense for the stock market trough phase?
Sell long term bonds, buy common stocks
What strategy makes sense for expansion phase?
Increase common stocks
What strategy makes sense for the equity cycle peak?
Sell stocks, but short term interest-bearing paper.
What does the DDM predict about stock prices during each phase of the economic cycle?
Contraction: Prices - (r+, g-) Trough: prices + (r--,g-) Expansion: Prices - (r++, g+) Peak: prices + (r+, g++) [r = return on stock; g = growth of dividends] Price = div / (r - g)
What are three equity manager styles?
Growth manager (bottom-up) Value manager (bottom-up focused on research of specific stocks) Sector rotator (top-down focus on overall economy)
What are the risk features and key valuations for a growth manager?
Risks: dropping EPS, EPS not matching analysts’ expectations, vulnerable to market cycles
Valuation: high P/E, high Price/Book Value, high price/cash flow
What are the risks and valuations of a value manager’s approach?
Risks: lower standard Dev, lower beta
Valuation: low P/E, low price/book value, low price/cash flow, high dividend yield
What risks are associated with sector rotation?
High volatility due to industry concentration and rotation, risk that the manager’s economic scenario is wrong.
What three factors govern fixed-income manager styles?
Term to maturity
Credit quality
Interest rate anticipation
What is strategic asset allocation?
The long-term mix that will be adhered to by monitoring and rebalancing when necessary.
What is dynamic asset allocation and when does it help/hinder returns?
Adjusting asset mix and rebalancing portfolio back to its original strategic asset mix.
Dampens returns in a strong market
Enhances returns in a weak mkt
What is tactical asset allocation?
Short term deviations from strategic mix to capitalize on opportunities in one asset class b4 reverting back to the long term strategic alloc.
What is integrated asset allocation?
Takes into account changes in cap mkts or client risk tolerance (encompasses all the other approaches).
What type of management style uses Indexing?
Passive management.
What two portfolio factors must be monitored?
- Changes in investor’s goals, financial position and preferences
- Expectations for cap mkts and individual securities
What does the Sharpe Ratio compare?
Compares the return of a portfolio to the risk less rate of return, taking the portfolio’s risk into account.
(PortfolioReturn - RiskFreeReturn) / standard Dev of portfolio
What does a Sharpe ratio less than the benchmark indicate compared to a negative Sharpe ratio?
Less than bm: under-performed the benchmark
Negative: under-performed the risk free return
What is the formula for the Sharpe Ratio?
(Return of Portfolio - Risk-Free Rate) / Std Dev of Portfolio
What is assumed in the pre-tax total return for a portfolio?
There are no contributions or withdrawals
What is the benefit of interest rate anticipation if the yield curve is flat vs normal vs inverted?
Flat = no benefit Normal = best (wide gap between short and long term rates) Inverted = bad (short term > long term rates)
