Chapter17-Investment management Flashcards
Framework
1 Active and passive investment management
2 Making a tactical asset switch
3 Define Risk budgeting
4 Define strategic risk, structural risk and active risk
5 Determining how much strategic and active risk to take
6 Conflicting objectives faced by investment funds
7 Reasons for monitoring an investment strategy
8 Setting investment performance objectives
9 Measuring active risk
10 Measuring other investment risk
11 Measuring fund manager performance against benchmark
12 Methods of measuring the rate of return on an investment portfolio
13 Disadvantage of each rate of return measurement method
14 Difficulty in assessing a CIS manager’s investment performance
Active and passive investment management
Active management is where the manager has few restrictions on the choice of investments, perhaps just a broad benchmark of asset classes.
This enables the manager to make judgements as to the future performance of individual investments, in both the long term and the short term.
Active management may be expected to produce greater returns (unless the market is efficient) but it carries greater risk and involves extra dealing costs.
Passive management is the holding of assets that closely reflect those underlying a certain index or specific benchmark.
The manager therefore has little freedom to choose investments.
Passive management is not risk-free as the index may perform badly or there may be tracking errors.
Measuring active risk
Historic (or backward-looking) tracking error, ie annualised standard deviation of difference between actual and benchmark returns
Forward-looking tracking error, ie estimated standard deviation of relative returns if current portfolio was unaltered
