6 - Portfolio construction and planning Flashcards
Fact find questions
client driven process
objectives- income or growth? both? - asset allocation and tax
horizon - implications for liquidity, inflation and risk
risk appetite - willingness and ability?
background? assets? responsibilities? dependentS?
Modern portfolio theory
2 main factors - risk and return -optimize asset mix to maximize return and minimise risk (mean variance optimization)
strategic vs tactical sset allocation
strategic - long term view
cash/bond/eq%
tactical - short term advantage given macro picture
portfolio modelling
2 approaches
deterministic - forecasting returns using probabilities
gives exact results based on input data
stochastic - changeable results with uncertainties built into model
methods of passive investment management (3)
full replication - buying each constituent of an index by market cap (expensive, transaction costs, rebalancing )
stratified sampling - buying sample of index (sampling error, less expensive)
optimization - modelling characteristics of index e.g with equity swaps
methods of passive investment management (3)
full replication - buying each constituent of an index by market cap (expensive, transaction costs, rebalancing )
stratified sampling - buying sample of index (sampling error, less expensive)
optimization - modelling characteristics of index e.g with equity swaps
adv and dis adv of passive strat
- Few active approaches consistently outperform passive benchmark indices
- Passive approach is cheaper
dis adv
- lots of rebalancing
- Indexed portfolios cannot meet all the investment objectives of all investors
- In bear markets, following the index inevitably means generating losses all the way
down
smart beta funds
create own bench - consisting of stocks with desirable properties - then tacks bench passively
active investment management
want to outperform bench
top down
- asset allocation
- sector selection
- stock selection
bottom up
- focus on individual stocks
combing active and passive approaches
core-satellite management
passive core, niche active management
enhanced indexing - over/underweight certain areas of bench
stock selection by fundamental or technical analysis
fundamental analysis - intrinsic value
- industry, company financials management, competition, multiples, econ environment, divi, cash flows
intrinsic val = fair value
underpriced if market price < fair val
overpriced if market price >fair val
technical analysis
uses past prices to identify predictive price patterns
use these to identify buy and sell signals
assumes -
- market discounts everything
-price moves in trends
- history tends to repeat itself
bond portfolio strategy
buy and hold - passive
hold to mat, low transaction cost, less risk
index matching - quasi passive
aim to match bond index - transaction costs to rebalance
immunization - active and passive
hedges inflate rate risk, defines returns for set period via duration matching or cash flow matching
active
view on interest rate anticipation, timing and relative valution, spreads, speculation, arbitrage
LDI - liability driven investing
pension fund assets - pension liabilities = surplus
surplus used for more risky strats
often duration matching in long term and cash flow matching in short term
LDI - liability driven investing
pension fund assets - pension liabilities = surplus
matching the current and future liabilities of the pension plan
surplus used for more risky strats
often duration matching in long term and cash flow matching in short term
RIY
shows impact of all charges (initial and ongoing) on investors return
UK - mandatory to show in effect of charges tale
