16 - Portfolio Mgmt

Question 1

What 5 types of securities make up the Cash component of a portfolio?

Answer 1

Currency
Money Mkt
Canada Savings Bonds
Redeemable GICs
Bonds w/ <1yr to maturity

Question 2

What are 5 fixed-income securities?

Answer 2

Bonds due in >1 yr
Strip bonds
Mortgage backed securities
FI ETFs
Preferred shares* (but not convertible)

Question 3

What asset class do derivatives fall under?

Answer 3

Equities

Question 4

What asset class do convertible bonds fall under?

Answer 4

Equities

Question 5

What asset class do preferred shares fall under?

Answer 5

Fixed Income for regular

Equities for convertible

Question 6

What asset class do hedge funds fall under?

Answer 6

“Other”

Question 7

What asset class do Canada Savings Bonds fall under?

Answer 7

Cash

Question 8

What is the typical range of cash % in a portfolio?

Answer 8

5-10%

Question 9

During a contraction phase what strategy makes sense?

Answer 9

Lengthen bond holdings (mid to long term bonds)

Avoid or reduce stock exposure

Question 10

What strategy makes sense for the stock market trough phase?

Answer 10

Sell long term bonds, buy common stocks

Question 11

What strategy makes sense for expansion phase?

Answer 11

Increase common stocks

Question 12

What strategy makes sense for the equity cycle peak?

Answer 12

Sell stocks, but short term interest-bearing paper.

Question 13

What does the DDM predict about stock prices during each phase of the economic cycle?

Answer 13

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)

Question 14

What are three equity manager styles?

Answer 14

Growth manager (bottom-up)
Value manager (bottom-up focused on research of specific stocks)
Sector rotator (top-down focus on overall economy)

Question 15

What are the risk features and key valuations for a growth manager?

Answer 15

Risks: dropping EPS, EPS not matching analysts’ expectations, vulnerable to market cycles
Valuation: high P/E, high Price/Book Value, high price/cash flow

Question 16

What are the risks and valuations of a value manager’s approach?

Answer 16

Risks: lower standard Dev, lower beta
Valuation: low P/E, low price/book value, low price/cash flow, high dividend yield

Question 17

What risks are associated with sector rotation?

Answer 17

High volatility due to industry concentration and rotation, risk that the manager’s economic scenario is wrong.

Question 18

What three factors govern fixed-income manager styles?

Answer 18

Term to maturity
Credit quality
Interest rate anticipation

Question 19

What is strategic asset allocation?

Answer 19

The long-term mix that will be adhered to by monitoring and rebalancing when necessary.

Question 20

What is dynamic asset allocation and when does it help/hinder returns?

Answer 20

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

Question 21

What is tactical asset allocation?

Answer 21

Short term deviations from strategic mix to capitalize on opportunities in one asset class b4 reverting back to the long term strategic alloc.

Question 22

What is integrated asset allocation?

Answer 22

Takes into account changes in cap mkts or client risk tolerance (encompasses all the other approaches).

Question 23

What type of management style uses Indexing?

Answer 23

Passive management.

Question 24

What two portfolio factors must be monitored?

Answer 24

1. Changes in investor’s goals, financial position and preferences
2. Expectations for cap mkts and individual securities

Question 25

What does the Sharpe Ratio compare?

Answer 25

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

Question 26

What does a Sharpe ratio less than the benchmark indicate compared to a negative Sharpe ratio?

Answer 26

Less than bm: under-performed the benchmark

Negative: under-performed the risk free return

Question 27

What is the formula for the Sharpe Ratio?

Answer 27

(Return of Portfolio - Risk-Free Rate) / Std Dev of Portfolio

Question 28

What is assumed in the pre-tax total return for a portfolio?

Answer 28

There are no contributions or withdrawals

Question 29

What is the benefit of interest rate anticipation if the yield curve is flat vs normal vs inverted?

Answer 29

Flat = no benefit 
Normal = best (wide gap between short and long term rates)
Inverted = bad (short term > long term rates)