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FINA 411: Portfolio Management > class 4: equity management > Flashcards

class 4: equity management Flashcards

1
Q

what does an equity analyst do?

A

does a lot of research on companies and valuate them

–> they recommend whether portfolio manager should buy or sell the shares

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2
Q

what does an equity portfolio manager do?

A

he looks at the equity analyst recommendations and he chooses the asset allocation, and security selection

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3
Q

roles of equity in a portfolio

A

capital appreciation

dividend income

diversification with other asset classes

hedge against inflation

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4
Q

investment process

A
  1. understanding the client + IPS
  2. asset allocation

–> gotta make a call about markets

  1. security selection
  2. portfolio execution
  3. perfomance evaluation
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5
Q

equity portfolio: size and style

A

size = what kind of companies we want to buy (large, medium, small)

style = value investing, or growth investing, or a blend of both

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6
Q

the safest companies to invest

A

large companies because they are stable and pay gyu dividends

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7
Q

do small companies pay dividends?

A

nah boy

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8
Q

why should we care about style and size

A
  1. client’s needs, risk tolerance, and return needs
  2. diversification benefits
  3. construct relevant benchmark
  4. analyze how firm characteristics change
  5. overall portfolio risk
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9
Q

disadvantage od using the size and style matrix

A

companies switch categories over time

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10
Q

equity P fees and costs

A
  1. Management fees based on % of assets managed
  2. performance fees: 10 - 20% based on appreciation threshold return/high-water mark
  3. administration fees
  4. trading costs

5.

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11
Q

what do we do after asset allocation?

A

which choose our investment strategy

–> Passive or active

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12
Q

passive strategy

A

trying to follow the equity market index or benchmark

–> ETF

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13
Q

active strategy

A

seeking to outperform the benchmark and add value

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14
Q

market segment (passive stagey)

A

broad vs focused

domestic vs international

developed, emerging, or frontier

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15
Q

capitalization

A

size facture

large cap

mid cap

small cap

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16
Q

choosing an index (passive strategy)

A

market segment

capitalization

growth value vs. (***)

other risks

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17
Q

capitalization weighted index

A

(total market cap at 1) / total market cap at 0)

a way to measure performance

–> the best one to use because there won’t be anything misleading

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18
Q

price weighted index

A

each company’s stock is weighted by its price per share, and the index is an average of the share prices of all the companies

find the sum of the share prices of the individual companies, and divide by the number of companies

–> In some averages, this divisor is adjusted in order to maintain continuity in the event of stock splits or changes to the list of companies included in the index

a way to measure performance

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19
Q

equal weighted index

A

we find the arithmetic average HPR for the period and add it to the initial index value of 100

a way to measure performance

–> worst one to use because can give there are a bunch of misleading

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20
Q

down jones uses which performance measure

A

price weighted index

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21
Q

S&P uses which performance measure

A

capitalization weighted index

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22
Q

why do we use the Dow jones to measure stock performances instead of S&P?

A

because it is one of the oldest ones

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23
Q

how to build a passive portfolio

A

pooled investments: open end mutual funds

–> rattiest

ETFs

derivatives-based

–> riskiest

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24
Q

portfolio construction methods

A
  1. full replication

–> closely matches index return

  1. stratified sampling
  2. optimization
  3. blended approach
25
Q

disadvantages of the full replication portfolio construction method

A

transaction costs

regular reconstitution and rebalancing required

26
Q

stratified sampling portfolio construction method

A

initially less costly than full replication as only a subset of all stocks is used

sampling could be base don dimensions such as industry style, or country

we don’t need to buy as many stocks so we save on commission and time

27
Q

optimization portfolio construction method***

A

lower tracking error

explicitly consider covariance between constituent stocks

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective

–> The objective typically maximizes factors such as expected return, and minimizes costs like financial risk.

28
Q

blended approach portfolio construction method

A

full replication best if small number or liquid stocks

stratified sampling or optimization best if large number of stocks or illiquid stocks

large indexes that have all of the above characteristics could use a combination of approaches

29
Q

tracking error

A

difference between our portfolio return and the index return

30
Q

tracking error causes

A

management fees

sampled portfolios vs replicated portfolios

index based and end-of-day stock prices

brokerage commissions

cash drag

currency exchanges

31
Q

cash drag

A

cash held for redemptions. dividends, and sale proceeds

–> does not earn a return

32
Q

ongoing adjustments of choosing a benchmark

A

rebalancing

reconstitution

33
Q

rebalancing when choosing our benchmark

A

updating constituent stock weights to reflect changes in market cap

ex: when equities go up, they have a higher proportion in our portfolio, so we have to sell some to keep our initial asset allocation

34
Q

reconstitution

A

removing and replacing constituent stocks that no longer fit the index market exposure

ex: small cap becomes mid-cap

35
Q

why does a company want to be par tof an index?

A

all of passive managers will have no choice but to buy it

36
Q

what if don’t choose companies but we choose factors

factor investing***

A

involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns

The approach is quantitative and based on observable data, such as stock prices and financial information, rather than on opinion or speculation

37
Q

risk factors in factor investing

A

growth factor: high P/E, high P/B

value factor: low P/E, low P/B

size factor:

yield factor

momentum factor:

quality factor:

volatility factor:

38
Q

smart beta

A

defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization-based indices

emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way

Smart beta investment portfolios offer the benefits of passive strategies combined with some of the advantages of active ones, placing it at the intersection of efficient-market hypothesis and factor investing

39
Q

advantage to passive factor based strategies

A

less costly than active management

still allows factor exposure based on market view

40
Q

disadvantage of passive factor based strategies

A

higher management fees and trading commissions

41
Q

7 strategies for active investing strategies

A
  1. fundamental
  2. quantitative
  3. top down

bottum uo

factor based

activism

other

42
Q

fundamental

A

use research, skill, and experience to estimate intrinsic value of securities

–> subjective

larger positions and fewer holdings

higher manager conviction ideas receive higher eight

continuous monitoring and rebalancing

risk if misestimated intrinsic value or market fails to recognize misplacing

43
Q
  1. fundamental investment process (check screenshot)
A

define investment universe in accordance with fund mandate

prescreen universe to obtain a manageable set of sucritirw

44
Q
  1. top down strategies
A

focus on overall macro and broad market variables

matters can use ends and derivatives to overweight best markets and underweights worst markets

  • -> according to
    1. country/geography
  1. industry/sector
  2. volatility
  3. thematic investment strategies
45
Q
  1. bottom-up
A

value based approaches

growth based approaches

46
Q

value based approaches

A

identify securities trading below estimated intrinsic values

we pick the best companies of the best

–> we don’t worry about the economy

47
Q

growth based approaches***

A

check google

48
Q

factor based strategies

A

a factor is a variable or characteristic with which asset returns are correlated

reward factors have positive association with long term positive risk premiums

managers must avoid unrewarded factors that don’t over persistent returns

49
Q

implementing factor based portfolios

A

hedged portfolio approaches

50
Q

the factors (check screenshot)

A

size

value

price momentum

growth

quality

unstructured data

51
Q

factor timing

A

equity style rotation

could investigate market condition that lead to factor outperformance

52
Q

equity style rotation

A

check google

53
Q

activist strategies

A

specialize in taking stakes win companies and pushing for change to enhance value

identifying opportunities, buying stake in public company, submitting proposal for change, threatening and launching a proxy contest for …

54
Q

sattistical arbitrage

A

pairs trading: long7sgort two securities that have historically had a high correlation but have deviated from this long-term relationship

–>

55
Q

market microstructure-based arbitrage

A

imbalances between buy/sell orders may trigger temporary (milliseconds9spikes in the market

56
Q

even driven

A

exploit market inefficiencies around corporate events

–> ex: during merger/acquisition involving share of share exchange

57
Q

active investing, portfolio construction process

3 main building blocks

A

overweight, underweight reward factors

alpha skills (identifying mispricings)

position sizing (confidence in Alpha and factor insights vs concentration risks)

58
Q

market neutral approach (active stagey)

A

remove market exposure with long and short exposures

target beta of 0

59
Q

long-only vs long/short investing

A

influenced by long term risk premiums (could be negative)

capacity and scalability (short tselling requires borrowing)

limited legal liability (higher risk for long/short)

regulation (some countries ban it)

transaction complexity (higher for long/short)

costs (higher for long/short

personal ideology (some investors object to it)

FINA 411: Portfolio Management (13 decks)

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