Active Equity Investing : Strategies Flashcards
Contrast Fundamental vs Quantitatives Apporoaches
Fundamental :
Style : Subjective
Decision-making process : Discretionary
Primary resources : Experience, judgement, human skills
Information used : Reasearch (industry, economic,company)
Analysis focus : Deep dive in stock, sector selection
Orientation to data : Forecast future corporates parameters and views on company
Portfolio construction : Use judgement within permissible parameters
Quantitative :
Style : Objective
Decision-making process : Systematic
Primary resources : Statistical Modeling
Information used : Data and statistics
Analysis focus : Selection of variable are applied to a broadly large numbers of securities
Orientation to data : Attemps to draw conclusion from historical data
Portfolio construction : Use optimizers such has information ratio, alpha.
Contrast bottom-up vs top-down fundamental strategies
Bottom up - more focus on company specific attributes (Financial statement) to analyze profitability, leverage, etc.
Top-down : focuses more on region, sector, country information.
Contrast bottom up quantitative vs fundamental approaches
Quantitative : focus more on quantifiable relationship between company speciffics metrics such as PE ratio and expected returns
Fundamental : Focus also on quantitative metrics but also on qualitative metrics such as corporate governance, ESG valuation, competitive advantages, etc.
Explain Value based and the different sub styles of value based approaches
Value based approaches - focus on investing in stocks that are trading below the estimated intrinsic value.
Sub-styles :
Relative Value : Comparing price multiple such as PE and PB to peers. undervalued company = multiple that are low vs industry average.
Contrarian investing : Buy/sell securities based on market sentiment. Exemple, buy company of depressed cyclical stocks that have low earnings.
High-quality value : Warren Buffet Approach - emphasis is based on intrinsic value and financial strenght, high quality management and profitability.
Income investing : Investing on high dividend yields and positive growth rate.
Deep value investing : Focus on extreme low valuation relative to assets (low P/B), often due to financial distress
Restructuring and distressed debt investing : invest prior to or during a bankruptcy.
Special situations : Identifies mispricings due to corproate events such as spin off, mergers.
Explain growth based approached and the components that should be the focus for analyst
Attempt to identify company with revenues, cash flow and earnings that are expected to growth faster than industry or overall market.
Focus is on :
- Shorter term earnings momentum
-consistent long term growth - GARP - PE ratio / expected earnings growth
Contrast growth based approach with high quality value investing
Growth based investing approaches will be less focus on relative multiple such as P/E, P/B ratio.
Explain the Top-down strategies investment process
Managers will use derivatives and ETF to overweight the best markets and underweight the least attractive markets. They will focus on :
-Region
-Country
-Factor
-Volatility
-Thematic investment
What’s a rewarded factors ?
Factors that offers a persistent long term positive risk premium.
Identify the process of the hedge portfolio Approach
- Rank the investable universe of stock by the factor.
- Divide the universe into quantile. Exemple, top 10% quantile represent the 10% smallest company.
- You do a long/short portfolio. Long the best quantile and short the worst.
- Performance from this long/short portfolio will be tracked over time and represent the performance of the factor
Identify drawbacks of the hedge portfolio approach
- Information in the middle quantile is lost in the approach.
- Assumed that the relationship between factors and returns are linear.
- Portfolio can appear diversified when in reality it is not.
- Approach assumes that managers can short stock.
Define a factor mimicking portfolio
Theoritical long/short portfolio that will be dollar neutral with one factor in particular and will not have exposure to the other factors.
Explain the use of statistical arbitrage
Manager will make extensive use of volume data and technical stock price to exploit price inefficiencies. Aim to profit from mean reversion and take advantage of opportunities from market micro structure.
Explain the event driven strategies approaches and identify one related approach
Event driven strategies focus on exploiting market inefficiencies related to corporate events such as mergers and acquisitions, spin offs, earnings announcements
One type of event driven strategies is risk arbitrage. The manager will seek to invest in a company that is getting targeted in a mergers events. The risk is that the event doesn’t take place. Thats why the price of the stock will be slightly below the targeting price.
Explain pitfalls of fundamental investing
Behavioral biases : Confirmation bias, illusion of control, availability bias, loss aversion, overconfidencebias, etc.
Value trap : When you invest in a company that you think in undervalued based on low P\E, but instead the company was actually overvalued and continue to decrease.
Growth trap : The company has a really high future growth rate predicted but in fact the realized growth rate was high but lower then expected, company will still declinded since the growth thas was reflected in the market price was based with the higher growth rate.
Define the process of a quantitative investment strategy
- Define the market opportunity
- Acquire and process the data
3.Backtest the data
4.Evaluate the strategy - Construct the portfolio
