Chapter 7 Flashcards
Fondamental investing uses?
Top 1000 stocks, ABCD, Annual sales, Book value, Cash flow, Dividend. A: not for service industry, B not for accounting firm, C not for cyclical, D not for growth stock
When a PF has lower risk?
When the assets held are less than perfectly correlated
Selection dimension
Identifies securities that are mispriced by the market (L or S)
Superficial loss (avoid)
Selling investment 30 days before or after the sale
Closet indexing is manage?
Passively
Information ratio =
Alpha /tracking error
In a taxable environment we use
Passively managed growth fund
Market neutral strategy use
Short position
Long short strategy uses :
Information more efficiently
Fundamental indexing was developed for
To solve the structural return drag
Alpha engine
Low embedded betas to generate positive return, should be consistant and sustainable, meet the investor’s objectives
Risk budgeting prevent and what’s doing ?
Being surprised by negative returns and process to maximize returns while keeping the total portfolio risk to a minimum
Full replication is ideal
With large cap stocks
Portable alpha can divorce, separate
The security selection decision from the asset allocation decision
Portable alpha cannot be issued with
Real estate/private equity
Fees for a 120-20 portfolio
,10%
Timing dimension is?
The general movement of the market
3 ways to create a index fund
Replicating, tracking(mimic, the overall index with subsets, ) fondamental indexing
Closet indexing
Alpha close to zero
SMA do not permit short position. How can a manager can hedge.
Inverse ETF
With a short futures contract strategy, what’s the initial margin .
5% of the value of the underlying stocks
10 basic analytical tenets of WBuffett
Equities outperform other investments
Soundness and potential of a security is the true measure of value
Concentrated PF of well performing stocks
Investors are not always rational and process information correctly
Risk is not based on price but on economic value
Focus on 10 to 12 stocks
Most important measure weighted average cost and intrinsic value
Minimize transaction cost
Measure return after tax basis
Power of componding returns
4 steps of enhanced indexing process
Select benchmark portfolio
Establish the maximum acceptable tracking error
Identify and take advantage of active mgt opportunities
Build portfolio that does not exceed the tracking limit
What’s the primary method for weighting a security with fundamental indexing
Market capitalization
