Equities Flashcards
Overview of Equity Portfolio Management
what have the typical annual dividend yields been like?
1-3%
What is a more stable - dividend or return?
dividend
Negative Screening (or exclusionary screening)
excludes companies or sectors that do not meet client standards
Positive screening (best in class screening)
seeks to uncover companies or sectors that rank most favorably with clients
Thematic Investing
Screens equities based on a specific theme, such as climate change. Related to impact investing.
Impact Investing
Aims to meet investor objectives by becoming more actively engaged with company matters and/or directly investing in company projects
What is size and style investing?
matrix with one axis as size: large/medium/small and the other axis as style: value/blend/growth
What are the advantages of segmenting by size and style?
- portfolio managers can better address client investment characteristics in terms of risk and return characteristics
- potential for greater diversification benefits by investing across different sectors or industries.
- ability to construct relevant benchmarks for funds that invest in a specific size/style category
- ability to analyze how company characteristics change over time
What are the different types of segmentation by economic activity?
- market oriented approach
- production oriented approach
eg investing solely on companies that invest in oil production and transportation industries
Market oriented approach
Segments companies by markets served, how products are used by consumers, and how cash flows are generated
Production oriented approach
Segments companies by products manufactured and inputs required during the production process.
Optional stock dividend
Allows investors to choose between cash payments or stock dividends (ie new shares). The option has value for the investor and can also be immediately sold to monetize the option.
Covered call
involves writing a call option on a stock owned. writer loses upside of the security if the price increases above the strike price.
Cash covered put
Selling put options on stock and setting aside sufficient cash equivalents to pay for the stock if the put buyer exercises their right. the risk of the seller is the put buyer will only exercise the right of the stock declines in value
Dividend capture
investor buys a stock right before its ex-dividend date, holds the stock through ex-dividend date and then sells the stock
proxy fight
seeking to persuade other shareholders to support their proposals
A strategy that focuses on relatively new, fast-growing companies in emerging industries is most likely employing which strategy?
small cap growth
Free rider problem
when some shareholders do shareholder activism and other shareholders who do not participate in it also benefit.
Will adding bonds to a passive fund trading S&P500 reduce its risk?
No
Predictability of correlations is uncertain
If you lend out a stock, do you lose on the dividends?
No
Dividends on loaned stock are “manufactured” by the stock borrower for the stock lender - stock borrower ensures that the stock lender is compensated for any dividends that the lender would have received had the stock not been loaned.
Characteristic requirements for equity benchmarks (TRI RULES)
Must be:
1. Rules based: Rules for including and excluding stocks in the portfolio, the weighting scheme and the rebalancing frequency must be consistent, objective and predictable so investors can replicate the investment performance of the index
- Transparent: rules underlying the index are public, clearly stated and understandable to investors
- Investable: investors can replicate the return and risk performance of the index
Risk Factor Exposure of a passive portfolio
Expected sensitivity of portfolio returns to various risk factors
Methods of Index Weighting
- Market Cap Weighting
- Price Weighting
- Equal Weighting
- Fundamental Weighting
Market Cap Weighting
Based on total market cap (free float shares)
It is the market portfolio in CAPM