Equity Flashcards
What is buffering?
A buffer zone that a stock must overcome before moving into the index. Reduces index transaction costs.
What is reconstitution?
Removing and replacing stocks that no longer fit index criteria. Will induce trading costs for the index.
What is packeting?
A portion of the stock will move into a new index. Reduces index transaction costs.
What is the HHI index? What is the effective number of stocks?
Measures stock concentration risk in a portfolio, calculated as the sum of constituent weights squared. Effective number of stocks is the reciprocal.
What is the value trap and how to mitigate?
Low P/E or P/B multiple due to a deteriorating business. Look at cash flows and profitability.
What is the growth trap?
When a stock is expensive and underperforms forecasts.
What is a con to fundamental investing?
The value and growth trap.
What is a con to quantitative investing?
Look-ahead and survival bias, data-mining.
What are the three sources of active returns and what is the equation?
Rewarded factors, exposure to mispriced securities, and idiosyncratic risks. Active return = ∑ factor return (difference in sensitivities) + (alpha skill + luck).
How does alpha skill change for top-down and bottom-up managers?
Top-down alpha is from market timing and bottom-up is from security selection.
What is the active share equation?
0.5 ∑ |portfolio weight - BM weight|
A sector rotator has ____ active share and ____ active risk?
Low, high
A concentrated stock picker has ____ active share and ____ active risk?
High, high
A closet indexer has ____ active share and ____ active risk?
Low, low
A diversified stock picker has ____ active share and ____ active risk?
High, low
What is the difference between the Pearson and Spearman rank correlation coefficients?
Pearson uses raw data and Spearman rank uses ranked data.
Order of calculating liquidity constraints for a portfolio?
Minimum market cap, minimum daily trading volume, liquidity constraint, answer / max position weight.
What is the active return equation (that includes IC)?
IC √BR σ TC
What is the market turnover equation?
The lower of purchases or sales divided by average monthly net assets.
What are slippage costs?
Trading costs due to market movements.
How do the BHB and BF model allocation effects differ?
BF model uses total benchmark return. BF model is more accurate. BHB model will under or overestimate the allocation effect for a given region but the total allocation effect will be the same.
What ratio do GARP look at and what direction is favourable?
Low PEG ratio.
What are the four buildings blocks of the active portfolio construction?
Over- or under-weight rewarded factors, alpha skill, position sizing, breadth of expertise.
What are 3 factors to consider before engaging in securities lending?
Admin costs of securities lending will reduce total income earned.
Cash collateral is subject to credit risk and market risk.
Additional income may be earned by reinvesting the cash collateral.
