CAIA Book 1 Flashcards
What are the three super asset classes?
- Capital Assets
- Assets that are used as inputs to create value
- Assets that are used as a store of value
What is asset allocation?
Asset allocation refers to the selection of asset classes for a portfolio. The four primary asset classes are equity, fixed income, cash and real estate
What is strategic asset allocation?
A portfolios long term policy allocation that is derived from the investors risk aversion and the long term risk/ return characteristics of the primary asset classes
What is tactical asset allocation?
Tactical asset allocation refers to the short term portfolio allocations that differ from the strategic asset allocation in order to take advantage of current market conditions. Alternative assets fit into tactical asset allocation
What is constrained investing?
Constrained investing has restrictions that limit their efficiency. After the end of the prolonged bull market in 2000, institutional investors sought out un constrained alternative investments in order to increase returns
What is the distinct difference between the returns for mutual funds and the returns for hedge funds?
Mutual fund returns are primarily based on asset location, while hedge fund returns are primarily based on trading strategy. Risk exposures for mutual funds relate to asset location, while risk exposures for hedge funds relate to trading strategy
What are the three primary differences between alternative assets and domestic equities that affect efficiency?
Alternative assets must be purchased from a financial intermediary (limited liability company or a limited partnership)
Alternative assets are less liquid than equities
Alternative assets are unconstrained, while typical equity investments face constraints
What are beta drivers?
Beta drivers are exposures to market risk factors
What are alpha drivers?
Alpha drives are exposures to Active Return factors
What investment products are beta drivers?
Passively managed index funds
Semi active index funds
Active long only investments
130/30 funds
What are the six major categories of alpha drivers?
Long/short investments Absolute return investments Segmented Markets Non linear return distributions Alternative Beta Exposure Portfolio Concentration
What are long/short investments?
Market neutral investments (zero beta)
Long/short investments not fully hedged (non zero beta)
Ability to short stocks
What are absolute return vehicles?
Not constrained, manager can pursue alpha wherever he thinks it exists.
Totally unconstrained investment style
What are Segmented Markets?
These are investments that investors normally avoid ie below investment grade securities. Sometimes investment restrictions prohibit an IM from investing in these type of securities in the normal investment universe
What are non linear return distributions?
Includes investments with non linear return distributions. ie options
What are alternative beta exposures (cheap beta)
Includes a category of systematic risk exposures beyond stocks and bonds. Risk exposures include currencies and commodities
What is portfolio concentration?
Large bet on fewer securities. Concentrated portfolios assume greater tracking error in an attempt to produce larger active returns
What are the types of beta investments?
Classical Beta Bespoke Beta Alternative Beta Fundamental Beta Cheap Beta Active Beta Bulk Beta
What is Bespoke Beta
Considered custom beta because it can be divided many ways……ie sector, style, size, country.
ETF’s is an example of Bespoke Beta
What is Classical Beta?
Measures the exposure of a security relative to a major market index. ie index mutual fund tracking S&P 500
What is Alternative Beta?
Measure of exposure to alternative systematic risks
Low correlation to stocks and bonds
ie ETF’s that invest in currency futures
What is fundamental beta?
Based on new concept that capitalization weighted indices create increased demand for large cap stocks to the exclusion of smaller capitalized weighted indices.
This has led to the theory that large cap stocks are overvalued and smaller cap stocks are undervalued. Therefore new indices created based on dividend payout etc
What is the result of differing index construction methods on fundamental beta?
Endogenous alpha
What is endogenous alpha?
Excess returns relative to a standard index that is realized as a result of differing index construction