Chapter 8 Flashcards
Under which approach to asset allocation are optimal portfolios created from sets of asset classes using historic data for returns and volatility?
Theoretical
Under which approach to asset allocation does the manager use forward-looking judgements of likely returns and volatility to determine portfolio weightings?
Pragmatic
Which fund management style is in evidence where a core portfolio is held, and derivatives are used to alter currency and market exposures?
Overlays
What are assumptions which needs to be made in the process of portfolio optimisation?
Forecasts
Costs
Risks
(not Taxation)
What are the two ways to construct a portfolio?
Top Down
Bottom Up
Why might a portfolio lying on the efficient frontier deliver less than optimal performance over the next 5 years?
Actual return and volatility over the investment period do not correspond to this assumed in the portfolio modelling process
What is Stochastic portfolio modelling?
From a range of factors (e.g. interest rates between 1% & 5% and inflation between 1% & 4%) generate thousands of scenarios with random combinations, changing one variable.
Plot the outcomes to see the most common / likely scenario
What are the main criteria for fund selection
Fund Objective Costs and charges strength and reputation of management group skill and reputation of manager type and structure of fund performance
Fund Management Styles
VALUE - (pick undervalued stock and hold them - popular for equity income)
GAARP - (pick a quality stock worth a premium - active growth)
MOMENTUM - middle of road manager friendly!
CONTRARIANISM - hedge fund managers
What does the Total Expense Ratio exclude?
Does not include
Initial charges
Exit costs
Certain fund expenses such as dealing costs
Strategic asset allocation
For long term. Only adjusted in extreme conditions or if requirements/circumstances change.
Tactical asset allocation
Advisers can vary holdings as their outlook changes.
