Chapter 21: Portfolio management (1) Flashcards

1
Q

List nine investment management styles

A
Active
Passive
value
growth
momentum
contrarian
rotational
top-down
bottom up
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Describe the general characteristics of growth stocks, and list 5 factors that you might use to identify them

A

Growth stocks that are expected to experience rapid growth of earnings, dividend and hence price

Five factors use to identify growth stocks

Return on equity
earnings growth
earnings revisions
forecast earning growth
sales growth
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Describe the general characteristics of value of stocks, and list five factors that you might use to identify them

A

Value stocks are stocks that seems to represent good value in terms of certain key accounting ratios

Five factors use to identify value stocks

Cashflow yield
Book to yield
earnings yield
dividend yield
sales to price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Distinguish between active and passive investment management

A

Active investment management

Seeks to actively identify mispriced securities, which can then be traded to generate large returns
stock selection, sector selection, switching, market timing
Requires inefficient market
Passive investment management

Involves selecting securities that beset meet investor’s objectives and/or make up investor’s benchmark portfolio
securities then held passively and changed only in reaction to change in objectives and/or benchmark portfolio
eg index tracking, liability matching/hedging
Appropriate if market efficient

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Explain briefly what is meant by each of the following investment management styles

Momentum
contrarian
Rotional

A

Momentum

Momentum investors purchases(sell) stocks that have recently risk (fallen) significantly in price on belief that they will continue to rise (fall) owing to an upward (downward) shift in their demand curves, thereby taking advantage of momentum effects

Contrarian

Investors do opposite to most other investors in belief that investors, and hence share prices, tend to overreact to news

Rotational

Rotational investors move between countries, sectors, industries or value and growth stocks depending on which style is believed to be attractive at any particular point in time, ie growth when market rising, value when market falling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Outline the top - down and bottom up approaches to portfolio construction and state their relative merits

A

Top down approach

First consider asset allocation between different asset classes

next considers, how to distribute available fund between different sectors (eg different industries for equities) within each asset class

Finally selects individual assets within each sector
better control of risk of portfolio, as it ensures diversified portfolio and matching of liabilities focuses more on asset class choice, which has greatest overall effect on investment performance

Bottom up approach

Selects best value individual securities, irrespective of geographical or sectoral spread
Focuses on choice of individual securities, whose performance actually dictates that of portfolio as whole

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define the following types of analysis

Fundamental analysis
quantitative analysis
technical analysis

A

Fundamental analysis

Analysis of company’s share value and potential for future profits and dividends based accounting and economic information

Quantitative analysis

Modern mathematical techniques used to aid stocks and sector selection, ie asset pricing models in Chapter 18

Technical analysis

Analysis of historical market date on prices, yields and/or trading volumes to predict future market movements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

List the three ways of replicating an index

A

Full replication - holding all securities in index in proportion to index weighting

Sampling or partial replication - holding representative sample of securities in index, which behaves in same way as index

Synthetically replicating index using derivatives and cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Outline four potential advantages and five potential disadvantages of index tracking compared to active portfolio management

A

Four potential advantages of index tracking

+Risk of under performance index (and indirectly competitors) reduced
+lower dealing and research costs
+appropriate if market believed to be efficient
+tracking well diversified index ensure fund is well diversified, reducing specific risk and volatility of returns

Four potential disadvantages of index tracking

+Chance of over - performance index (and indirectly competitors) reduced
+Full replication involves forced buying/selling when index constituents changed and fragmented portfolio
+Resulting strategy may pay insufficient regard to investor’s objectives
+May prove difficult to find appropriate index to track
+May prove difficult to accurately track chosen index

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

State

2 conditions required in order for active investment management to be appropriate

One potential advantage and two difficulties with active management

A

Appropriate if

+Market inefficient
+possible to identify skilled investment managers who can exploit market inefficiencies

Advantage

+Offers possibility of higher returns

Difficulties

+Selecting out-performing investment managers
+timing changes to line up of active managers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Outline the two types of mandates under which active investment managers typically operate

A

+Multi - asset or balanced mandates - manage funds invested across a variety of different asset categories and will take decisions on:
Weightings across asset categories
And stocks within each asset category

Specialist mandates - specialise in particular asset category and employed to manage funds invested in that asset category only

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Describe the core satellite approach to portfolio management

A

Majority of fund (‘core’ portfolio) managed on passive , low cost basis

Specialist satellite, active managers employed to provide increased performance (in excess of fees paid) in respect of balance of fund

Number of competing managers may be employed in respect of specialist asset classes

Satellite managers may include hedge fund and private equity specialists

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

List circumstances in which an individual bond will outperform its peers and outline why the return on a bond will pronounced negative skew

A

A bond could outperform its peers

If the issuer’s (relative) perceived creditworthiness improves

If the issue’s term, liquidity or other trading aspects improve
If there is a supply/demand imbalance

bond returns have a negative skew because

a bond’s out performance is bound (by highest rating category, and realistic interest rate changes)

A complete loss of value could occur

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Describe

Anomaly switching
policy switching

A

Anomaly switching

involves moving between stocks with similar volatilities
take advantages of temporary anomalies in price
relatively low risk strategy
profits likely to be small
Policy switching

Involves taking view on future changes in shape and/or level of yield curve and moving into bonds with different volatilities
eg if yields expected to fall, switch into longer dated, more volatile stocks
Potentially high risk, high return approach
need to consider matching

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Give 3 techniques for identifying anomaly switches

A

Compared current yield idfference between two similar bonds to recent avaerage value to determine if one of bonds seems cheap or dear relative to other
Compare price ratios in similar way to yield differences, allowing for any differences in coupon level
Use price and yield models. If actual price of yield differs from model prediction, then may be mis-pricing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Give 3 factors that can be examined to help identify potentially profitable policy switches

A

Volatility or duration calculations, together with forecasts for changes in yields, can be used to estimate percentage changes in value and so to determine the area of the market that will give the best returns

Examination of reinvestment rate between two bonds of different terms may indicate areas of yield curve that seem cheap or dear, suggesting future possible yield movement

Examination of forward rates and/or spot rates may reveal apparent oddities in term structure that give rise to policy switch opportunity

17
Q

List ten alternatives to government bonds

A
\+Investment grade corporate bonds
\+Agency bonds
\+High yield bonds
\+Event linked bonds
\+Convertible bonds
\+Distressed Debt
\+Interest rate or inflation swaps
\+Credit default swap
\+Asset Backed securities
\+Mortgaged backed securities