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4A EDHEC > Asset Management > Flashcards

Asset Management Flashcards

1
Q

Market risk premium calcul

A

Rm-Rf

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2
Q

Calcul required return on equity (CAPM)

A

Rf+β*(Rm-Rf)

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3
Q

Calcul risk premium of the stock

A

β*(Rm-Rf)

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4
Q

CAPM

A

Capital Asset Princing Model

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5
Q

Net asset value calculations

A

(Assets- Liabilities)/ Shares outstanding

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6
Q

Rate of return formula

A

(NAV1-NAV0+Income & capital distributions) / NAV0

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7
Q

Open end Funds examples

A
  • The funds issue new share for new investors (they want to enter the funds).
  • Investors can sell their shares at any point of the time.
  • Potential redemptions force open end funds to hold cash.
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8
Q

Closed end funds examples

A
  • Raise funds to IPO
  • Following the IPO, new capital is usually not injected to the fund
  • It does not issue new funds or redeem
  • If investors want to go out, they have to sell their shares to other investors to exit.
  • Shares: Traded on exchange by brokers
  • Often actively managed with narrow focus
  • Use leverage
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9
Q

Active management

A

Active management goal is to outperform benchmark with a focus on:
- Strategic asset allocation
- Tactical asset allocation
- Security selection

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10
Q

Active management goal is to outperform benchmark with a focus on:

A
  • Strategic asset allocation
  • Tactical asset allocation
  • Security selection.
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11
Q

Passive management involves:

A
  • Focus on holding an efficient portfolio
  • No attempt of market timing or security selection.
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12
Q

Investment policies

A
  • Fixed income (secure): Bond funds, Money market funds;
  • Equity (riskier): Equity/ Sector/ International funds;
  • Combined: Balanced funds, Asset allocation funds;
  • Index funds.
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13
Q

Examples of Fixed income investment policies

A
  • Bonds funds,
  • Money market funds.
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14
Q

Money market funds

A
  • Offers some “risk-free” return,
  • Institutional investors
  • Investments in short horizon fixed income investments with low risk exposure.
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15
Q

Different types of money market funds

A
  • Government money fund (invest in short term government issued securities),
  • Prime money funds (invest in short term non-government debt),
  • Municipal money funds (invest in short term papers by municipalities).
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16
Q

ETFs

A

Exchange Traded Funds
Introduced in 1993
Allows investors to trade index portfolios just like they trade regular stock.

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17
Q

P0=

A

∑ Div/ (1+r)^t

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18
Q

P0 with no grow in dividends formula=

A

P0= Div1/ r

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19
Q

P0 with a constant growth (g) in dividends formula=

A

P0= Div1/ r-g
P0= Div0(1+g)/ r-g

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20
Q

Who issued the Modern Portfolio Theory (MPT)?

A

Markowitz (1952).

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21
Q

MPT

A

Modern Portfolio Theory

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22
Q

What is the objective of the Modern Portfolio Theory?

A

Maximize the Sharpe ratio (return-risk trade-off) for risk averse investors. The higher is the Sharpe ratio, the better.

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23
Q

Expected return of a portfolio formula

A

∑ E(Ri) * wi

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24
Q

Variance of a portfolio

A

σ^2=∑wi^2σi^2+∑wiwjσij

σ^2= ∑wiwjσij

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25
Q

Sharpe ratio

A

Sp= (Rp-Rf)/ σ

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26
Q

Duration formula

A
  1. [CFt/ (1+y)^t] / bond price
  2. ∑ wt*t
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27
Q

Variance risk

A

σi^2= βi^2*σm^2 + σ^2(εi)

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28
Q

Treynor ratio

A

(Rp-Rf) / β

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29
Q

Compound Annual Growth Rate

A

(Final Cap/Initial Cap)^(1/n)-1

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30
Q

Open-end fund

A

Investment vehicle that uses pooled assets which allows for ongoing new contributions withdrawals from investors of the pool.

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31
Q

Mutual fund

A

Investment vehicles that allow retailization of Asset Mana.

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32
Q

Small investments are pooled in order to ensure:

A
  • Diversification,
  • Professional management,
  • Reduce fees through economies of scale.
33
Q

True/ False: Passive funds are always closed end funds or ETFs

34
Q

True/ False: Passive funds management fees are lower than active funds

35
Q

True/ False: Passively managed funds often hold cash

36
Q

True/ False: Passive funds often tracks an index

37
Q

Which of the following assets are prime money market funds least likely to hold?

a. An energy company’s commercial papers
b. An industrial firm´s bonds with 24-month maturity
c. Bank CDs
d. Secured commercial papers

A

b. An industrial firm’s bonds with 24-month maturity

38
Q

Consider a fund with the following cost structure: front-end load 4%, annual management fee 2% and back-end load of 2%. If you invest €1000 into the fund, how much will you have when you withdraw your funds after 4 years? The fund’s return is 10% per annum.

39
Q

You have analysed an input list of securities and found an optimal portfolio that is expected to yield 10% with a standard deviation of 18% per year. The risk-free security has an expected return of 4%. Given that your risk aversion coefficient is 5, what portfolio weight will you allocate to the optimal risky portfolio.

A

37% in the risk portfolio

40
Q

You are considering investing equal proportions in a portfolio consisting of SPDR (S&P500) and a passive fund that tracks Bloomberg aggregate bond index. Given that the variance of the SPDR is 0.04 and the variance of the Bloomberg aggregate is 0.02, the correlation between the two assets is 0.2. Calculate the standard deviation of the portfolio.

41
Q

If you believe the yield on long government bonds will increase in the near future due to inflationary pressure. Which of the following strategies would you propose?

a. Long position in growth stocks,
b. Long position in government bonds,
c. Long position in value stocks and a short position in growth stocks,
d. Long position in equities and a long position bonds.

A

c. Long position in value stocks and a short position in growth stocks.

42
Q

Is “Stock returns experience time-series predictability, i.e. you can predict future returns with today’s return” a violation of the assumptions behind Modern Portfolio Theory (Markowitz, 1952)?

43
Q

Is “Stocks do not have expected return of zero” a violation of the assumptions behind Modern Portfolio Theory (Markowitz, 1952)?

44
Q

Is “Stocks experience more extreme events than what is predicted by a normal distribution” a violation of the assumptions behind Modern Portfolio Theory (Markowitz, 1952)?

45
Q

Is “It is sufficient for MPT to work if returns experience some skewness” a violation of the assumptions behind Modern Portfolio Theory (Markowitz, 1952)?

46
Q

Which of the following statements is not a violation of the assumptions behind Modern Portfolio Theory (Markowitz, 1952)?

a. Stock returns experience time-series predictability, i.e. you can predict future returns with today’s return.
b. Stocks do not have expected return of zero.
c. Stocks experience more extreme events than what is predicted by a normal distribution.
d. It is sufficient for MPT to work if returns experience some skewness

A

b. Stocks do not have expected return of zero.

47
Q

True/ False: There could be several authorized participants in the ETF structure

48
Q

True/ False: Authorized participants help to keep up the liquidity in the ETF

49
Q

True/ False: A large financial institution that can purchase or redeem units

50
Q

True/ False: Small investors can become authorized participants

51
Q

What is not true about authorized participant in the ETF structure?

a. There could be several authorized participants
b. They help to keep up the liquidity in the ETF
c. A large financial institution that can purchase or redeem units
d. Small investors can become authorized participants

A

d. Small investors can become authorized participants

52
Q

Which of the following statements are not true for the Treynor ratio.

a. It is suitable to for fund of funds (mixing many portfolios to form a risky portfolio)
b. You scale the portfolio’s excess return by its beta
c. Treynor only accounts for non-diversifiable risk
d. Treynor adjusts for at least the same risk as the Sharpe ratio

A

d. Treynor adjusts for at least the same risk as the Sharpe ratio

53
Q

True/ False: Treynor ratio is suitable to for fund of funds (mixing many portfolios to form a risky portfolio)

54
Q

True/ False: Treynor ratio: You scale the portfolio’s excess return by its beta

55
Q

True/ False: Treynor adjusts for at least the same risk as the Sharpe ratio

56
Q

Consider a mutual fund with a realized excess return of 8%, beta of 0.8, the market risk premium is 6%. What was the Jensen’s alpha for this stock?

57
Q

Which statement is not true about the single index model.

a. The model takes the form: R_(i,t)^e=α_i+ β_i R_(m,t)^e
b. It is usually estimated using OLS (Ordinary Least Squares)
c. a non-zero α_i can be seen as a pricing error for individual stocks and managerial skill for a fund manager.
d. The expected value of the firm specific error is greater than zero.

A

d. The expected value of the firm specific error is greater than zero.

58
Q

Which is the widest U.S. stock index?

A

The CRSP index

59
Q

What is the equity premium puzzle?

A

That stocks have outperformed treasury bonds and treasury bills more than expected.

60
Q

What is the equity premium puzzle?

a. That stocks have outperformed treasury bonds and treasury bills
b. That stocks have outperformed treasury bonds and treasury bills more than expected
c. That stocks have higher expected return than bonds
d. That bonds have outperformed stocks

A

b. That stocks have outperformed treasury bonds and treasury bills more than expected.

61
Q

What is the duration of a 4-year zero-coupon bond with yield=4% and principal of 100,000.

62
Q

Which of the following statements are not correct about the Capital Asset Pricing Model (CAPM)?

a. The market portfolio is the portfolio with the highest ex-ante sharpe ratio.
b. The market portfolio is on the efficient frontier.
c. CAPM demands that all investors use the same input list of securities in their analysis.
d. CAPM prices all risk, both firm specific and market wide.

A

d. CAPM prices all risk, both firm specific and market wide.

63
Q

Benefits of teaming up

A
  • Record keeping and administration,
  • Diversification and divisibility,
  • Professional management,
  • Lower transaction costs.
64
Q

Consider a fund with $120 million assets under management (AUM).
Suppose the fund owes $4 million to its investment advisors and $1 million in rent.
The fund has 5 million shares outstanding

Calculate the NAV

A

23 dollars

65
Q

If a fund has initial NAV of €20 at the start of the month
Makes income distributions of €0.15
Makes additional capital gain distributions of €0.05
The end of month NAV is €20.10

Calculate the fund’s return.

66
Q

Who is the dominant player in money market funds?

67
Q

The U.S. money market funds holds how much of the total market?

68
Q

The European money market funds holds how much of the total market?

69
Q

Which type of money market fund dominates?

A

Government money funds with 82% of the market.

70
Q

What was the first ETF?

71
Q

SPIDR

A

Standard and Poors Depositary Receipt

72
Q

Cubes

A

Tracks the NASDAQ 100 Index

73
Q

WEBS

A

Tracks World Equity benchmark shares

74
Q

Diamonds

A

Tracks the Dow and Jones industrial average

75
Q

Advantages of ETFs

A
  • Continous trading (unlike mutual funds),
  • ETFs can be sold short,
  • Since it’s sold through brokers (instead of from the fund), the fund saves marketing expenses, which leads to lower management fees.
76
Q

Disadvantages of ETFs

A
  • Brokers charge transaction costs
  • Market prices can deviate from NAVs (sold at discount), which could swamp up the cost advantages of ETFs.
77
Q

Alternative investments

A
  • Hedge funds,
  • Private equity/ debt,
  • Real estate,
  • Commodities.
78
Q

Four main fees of investing in mutual funds

4A EDHEC (5 decks)

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