Chapter 16- (7Qs) Portfolio Management Styles, Strategies and Techniques Flashcards

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1
Q

Asset Allocation

A

Mix of assets rather than individual stock returns is what drives performance

Stock, bonds, cash are most common asset classes

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2
Q

Strategic asset allocation

A

Standard model is Subtracting a persons age from 100 to find equities

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3
Q

Constant Dollar

A

Keeping a specified dollar amount in equities instead of a percentage

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4
Q

Active vs Passive management

A

Active- Relies on stock picking and market timing ability to outperform index

Passive- No particular management style will outperform the market consistently

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5
Q

Buy and hold technique

A

Passive strategy that is easiest to implement

Look for lower manager fee

Would sell if P/e ratio appreciates too high

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6
Q

Growth vs Value

A

Growth- Focus on stocks with high earnings growth, purchasing stocks on the higher end of 52 week price range

Looking for earnings momentum

Value- Look for undervalued/Out of Favor stocks. Sometimes find bargain with those producing a loss
Look for dividends and large cash surplus

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7
Q

Market Capitalization

A

Micro cap- under 300MM
Small Cap- 300mm to 2 billion
Mid- 2-10B
Large- 10+B

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8
Q

Income vs Capital Appreciation

A

Income- Usually will lead to foreign securities or high yield bonds

3 Different strategies when in debt securities:

  1. Barbell- Purchase bonds on both ends, active as you buy new bonds every year
  2. Bullet- Bond purchases at different times but at same maturity
  3. All bonds purchased at the same time but different maturities

Capital Appreciation- Mostly growth but can include options, futures, iPos and day trades

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9
Q

Capital Asset Pricing Model

A

Attempts to derive expected return by systematic risk

Developed by William Sharpe

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10
Q

Modern Portfolio Theory

A

Attempt to quantify and control portfolio risk

Looks to analyze risk return of entire portfolio instead of individual assets

Risk can be mitigated by building an uncorrelated portfolio

Concluded that less volatility produces greater return

Uses CAPM to find the securities within the overall portfolio

Produce most efficient portfolio (Least risk for given amount of return or most return for given risk)

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11
Q

Capital market assumptions

A
  1. All investors can borrow at the risk free rate of return
  2. All investors are rationale and evaluate investments in regards to expected return/variablity
  3. Equal time horizons
  4. No inflation
  5. Fractional shares may be purchased
  6. Markets are efficient

Markowitz (founder of MPT)

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12
Q

Capital Market Line

A

Line of expected return for a portfolio

Uses expected return, risk free rate, Standard deviation of market and portfolio, return of market

DOES NOT USE ALPHA OR BETA

Also use a security market line which focuses on:
Expected return
Risk free rate
Return on the market
Beta of asset

Risk free rate + Beta(expected - Risk free)= Security Market Line

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13
Q

Monte Carlo Simulations

A

Future events simulated to generate estimated returns

Used for wealth forecasting with estimated cash flows

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14
Q

Efficient market Hypothesis

Random Walk theory

Three Levels

A

Security prices adjust rapidly to new info and is fully priced in

Would more likely lend itself to a passive market outlook

Random walk- Throwing darts at board of stocks is just as efficient

Weak Efficient- Market reflects all currently available market data, technical analysis has no predictive power

Semi-strong- Market reflect all public info (past info and nonmarket info), technical and fundamental are both priced in

Strong- All Info is priced in, including insider information (best to use passive at this point), random walk

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15
Q

Portfolio Diversification

A

Reduces unsystematic risk to enhance return

Look to lower correlation coefficient

Enhanced by addition of international stocks

Fixed income products are a hedge against deflation
Equities are hedge against inflation

Diversification is not a synonym for asset allocation

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16
Q

Sector Rotation

A

Overweighting or underweighting based on where a sector is in their cycle

Hold at least three sectors

17
Q

Dollar Cost Averaging

A

Investing consistent amounts of money at periodic intervals

Reduces timing risk and average cost per share over a course of time

18
Q

Dividend Reinvestment Plans

A

Specifically related to individual corporation