Equity

Question 1

What is optimisation

Answer 1

It uses mean variance analysis to minimize tracking error. It typically maximizes a desirable result or minimises an undesirable characteristics

Question 2

Process of fundamental active investment process

Answer 2

1) Define the investment universe in accordance with fund mandate
2) prescreen the investment universe to obtain manageable set of securities for detailed analysis
3) analyse the industry, competitive position and financial reports to the companies
4) forecast performance, most commonly based on cash flows or earnings
5) convert forecast to valuations
6) construct portfolio with desired risk profile
7) rebalance portfolio as needed

Question 3

What is the process of quantitative active investment strategy

Answer 3

1) Define the market opportunity
2) Acquire and process data
3) back test the strategy
4) evaluate the strategy
5) construct the portfolio

Question 4

What is active share

Answer 4

Active share measures the degree to which the number and sizing of the positions in a manager’s portfolio are different from those of the benchmark

Question 5

What is active risk?

Answer 5

Active risk is the standard deviation of active returns

Question 6

What is thematic screening

Answer 6

Thematic investing focuses on investing in companies within a specific sector or following a specific theme such as energy efficiency or climate change

Question 7

Rationale for choosing active management over passive

Answer 7

Confidence the manager has the expert knowledge and skill
Client preferences
Mandate from clients to invest in certain companies

Question 8

Risks of active management

Answer 8

• reputation risk
• key person risk
• higher portfolio turnover

Question 9

Market oriented approach

Answer 9

Segments companies by markets served, how products are used by consumers and how cash flows are generated

Question 10

Production oriented approach

Answer 10

Segments companies by products manufactured and inputs required during production process

Question 11

Define tracking error

Answer 11

Tracking error refers to the standard deviation of the differences between index portfolio returns and published index futures

Question 12

Causes of tracking error

Answer 12

• management fees
• commissions on trades
• sampling
• intra day trading
• cash drag

Question 13

Morningstar style box

Answer 13

In a style box - 2 factors - value and size - are each split into 3 groups

Question 14

value based approaches

Answer 14

• Relative value
• Contrarian investing
• High quality investing
• Income investing
• Deep value investing
• Restructuring and distressed debt investing
• special situations

Question 15

Growth based approaches

Answer 15

• Consistent long term growth
• Shorter term earnings momentum
• GARP (often uses peg ratio)

Question 16

merits of long only investing

Answer 16

• long term risk premiums
• capacity and scalability
• limited legal liability laws
• regulations
• transactional complexity
• costs
• personal ideology

Question 17

benefit of long short strategy

Answer 17

• greater ability to express negative ideas
• ability to use leverage
• ability to remove market risk
• greater ability to control exposure to risk factors

Question 18

drawback of long/short strategy

Answer 18

• loss if market price increases
• some strategies require significant leverage
• cost of borrowing can become too high

Question 19

Slippage

Answer 19

the differecne between the execution price and the midpoint of the quoted market bid/ask spread at the time the trade was entered

Question 20

Heuristic risk constraints

Answer 20

Based on experience or general ideas of good practice

Question 21

Formal risk constraints

Answer 21

statistical in nature.