Ch11 Equity Portfolio Management Strategy

Question 1

Tax efficiency

Answer 1

Most tax efficient fund: low tax-cost ratio

Least tax efficient: high tax-cost ratio

Question 2

Portfolio turnover

Answer 2

Turnover= sales/assets

Low turnover : passive management
High turnover: active management

Question 3

Tax cost ratio

Answer 3

[1 - (1+TAR)/(1+PTR)] x 100

Question 4

Active share

Answer 4

= 0.5 x{sum(|weight of fund-weight of benchmark|) }

-> use stat mode, because it’s for each and it’s absolute value

Measures the degree of active management in an investment portfolio

Question 5

Tracking error

Answer 5

Definition: extent that portfolio return fluctuations are not correlated with the benchmark

Find standard deviations of changes -> sample s.d. (4:sx in CALC)

To annualise: 12months ^1/2

Question 6

Passive strategies (the most accurate indexing strategies)

Answer 6

Full replication
Sampling
Quadratic optimisation
Completeness funds

Question 7

Full replication:

Answer 7

All securities in the portfolio are bought proportionally to their weight in the index.

Question 8

Sampling

Answer 8

A PM buys only a sample of the stocks in the benchmark index

Question 9

Quadratic optimisation

Answer 9

Uses computer programs that analyze historical security info to develop a portfolio with minimum tracking error

Question 10

Completeness funds

Answer 10

A specialised index whose purpose it to provide diversification to the total portfolio by excluding the segments where the clients active managers invest