active equity investing: port construction

Question 1

3 main blocks of portfolio construction

Answer 1

BRAP BRAP
+ rewarded factor weighting
+ alpha skills (timing)
+ position sizing
+ Breath of expertise

Question 2

idiosyncratic risk

Answer 2

endemic risk / specific risk / unsystematic risk

Question 3

information coefficient

Answer 3

correspond of which manager forecast active return and manager realized active return

Question 4

breath

Answer 4

number of truthly dependence decisions made every year

Question 5

transfer coefficient

Answer 5

the ability to translate from insight into investment decision without constraint
(unconstraint portfolio have TC = 1)

Question 6

systematic

Answer 6

seeking return from a balance exposure

Question 7

discretionary strategies

Answer 7

seek return form understanding in depth of:
+ firm governance,
+ business model
+ competitive lanscape
through successfull timing strategies

Question 8

timing strategies

Answer 8

timing buy/ sell order before it go up /down

Question 9

heuristic constraint

Answer 9

not formal constraint

Question 10

well constructed portfolio

Answer 10

consistent with investor risk and return expectation

Question 11

consideration between long-only and long/short strategy

Answer 11

RMCT P2L
+ regulatory constraints
+ management cost
+ capacity & scale
+ transaction comlexity
+ personal ideology
+ long-term risk premium
+ limited legal liability

Question 12

130/30 strategy

Answer 12

long 1.3 time the amount of capital
short 0.3 capital

Question 13

multi-factor manager

Answer 13

The manager concerned with balancing their factor exposure

Question 14

gross exposure of portfolio

Answer 14

absolute level of a fund’s investments

Question 15

3 Sources of Active Returns

Answer 15

(1) exposures to rewarded factors (lien quan den xay dung chien luoc dai han)
(2) . Tactical exposures to mispriced securities, sectors, and rewarded risks that generate alpha (lien quan den skill cua manager)
(3) Idiosyncratic risk (from concentrated active positions) that generates returns related to luck (an may)

Question 16

what is sizing position

Answer 16

+ concentrate / unconcentrate
+ reduce / increase idiosyncratic risk

Question 17

content of systematic top down

Answer 17

(1) emphasized rewarded factor
(2) factor timing possible but rare
(3) Formal portfolio organization used
(4) Diversification across broad universe
(5) Few managers in this category

Question 18

Discretionary top down

Answer 18

(1) emphasize macro rewarded factors
(2) Most likely use factor timing
(3) Diversified on broad universe or focus on smaller subset
(4) Less formal portfolio construction

Question 19

Systematic Bottom up

Answer 19

(1) Emphasize security specific factors
(2) No factor timing
(3) Diversified across board universe
(4) Formal portfolio optimization used

Question 20

content of discretionary bottom up

Answer 20

(1) emphasize security specific characteristic / factors
(2) Potential factor timing
(3) Diversified or concentrated depending onstrategy and style

Question 21

Description of pure indexing, active share, active risk

Answer 21

+ Description: No active position, porfolio = benchmark
+ Active share: = 0
+ Active risk = 0

Question 22

Description , active share, active risk of Factor neutral

Answer 22

+ Description:
* No active factor bet
* idiosyncratic risk low if diversify
+ Active risk: low
+ Active return: low

Question 23

Description , active share, active risk of Factor diversified

Answer 23

+ Description: balance exposure to risk factor, minimized of idiosycratic via high number of securities
+ Active share: reasonable low
+ Active risk: high from large security not form benchmark

Question 24

Description , active share, active risk of concentrate factor bets

Answer 24

+ Description: target factor bets, idiosyncratic high
+ Active risk: high
+ Active share: high

Question 25

Description , active share, active risk of concentrated stock picker

Answer 25

+ Description: targeted stock pick + Active risk: highest + Active share: highest

Question 26

when chose absolute risk ?

Answer 26

when the investment objective is expressed in terms of total returns

Question 27

when chose relative risk

Answer 27

when the investment objective is to outperform a market index.

Question 28

4 steps of An effective risk management process

Answer 28

+ S1: Determine which type of risk measure is appropriate given the fund mandate + S2: Understand how each aspect of the strategy contributes to risk + S3: Determine what level of risk budget is appropriate + S4: Properly allocate risk among individual positions/factors

Question 29

market impact cost

Answer 29

an implicit cost related to the price movement caused by managers executing trades in the market

Question 30

3 Factors that affect market impact costs

Answer 30

(1) Assets under management (AUM) versus market capitalization of securities: (2) Higher portfolio turnover and shorter investment horizons generally lead to higher market impact costs (3) Managers whose trades include “information” will likely have higher market impact costs

Question 31

well-constructed portfolio

Answer 31

(1) A clear investment philosophy and a consistent investment process (2) Risk and structural characteristics as promised to investors (3) Achieving desired risk exposures in the most efficient manner (4) Reasonably low operating costs, given the strategy.

Question 31

well-constructed portfolio

Answer 31

(1) A clear investment philosophy and a consistent investment process (2) Risk and structural characteristics as promised to investors (3) Achieving desired risk exposures in the most efficient manner (4) Reasonably low operating costs, given the strategy.

Question 32

Benefits of of Long/Short Strategies

Answer 32

+ Greater ability to express negative ideas + Ability to use the leverage generated by short positions to gear into high-conviction long ideas + Ability to remove market risk and act as a diversifying investment against other strategies + Greater ability to control exposure to risk factors

Question 33

Drawbacks of Long/Short Strategies

Answer 33

+ Unlike a long position, a short position will cause the manager to suffer losses if the price of the security increases + Some long/short strategies require significant leverage -> manified loss as well as gain + The cost of borrowing securities can become too high, particularly for securities that are difficult to borrow + Losses on the short position will increase collateral demands from stock lenders, particularly if leverage has been used.

Question 34

the reason of long/short strategies have higher IR

Answer 34

(1) Long only factor limit ability to short positions that not have desired characteristic (2) Add ability to leverage negative/positive should improve TC and increase potential excess return (3) Adding short can facilitate a more balance distribution of risk -> low cross correlations among factors -> reduce tracking error -> improving information ratio.

Question 35

gross exposure vs net exposure

Answer 35

gross exposure = |long exposure| + |short exposure| net exposure = long exposure + short exposure

Question 36

slippage cost

Answer 36

the difference between the execution price and the midpoint of the bid and ask quotes at the time the trade was first entered

Question 37

4 conclusion of slippage cost

Answer 37

(1) Slippage costs are usually more important than commission costs (2) Slippage costs are greater for smaller-cap securities than for large-cap securities (3) Slippage costs are NOT necessarily greater in emerging markets (4) Slippage costs can vary substantially over time, especially when market volatility is higher

Question 38

what drawdown measure

Answer 38

measures the portfolio loss from its high point until it begins to recover