Equity Flashcards
Equity Benefits
- dividend inc
- diversification
- inflation hedge
Equity Segmentation
- size/ style
- geography
- econ activity (market vs production oriented approach)
Active Management Risks
- reputational risk
- key person risk
- higher turnover
Benchmarks
rules based, transparent, investable
select based on exposure (segment, capitalization, growth vs value) and maintenance (weighting method, stock conc, rebalancing, reconstitution)
Passive Factor Based Strategies
smart beta
- return oriented
- risk oriented
- diversification oriented
Derivatives in Passively Managed Acounts
- completion overlay: aligning risk exp
- rebalancing overlay: reconstitution
- currency overlay: adj for FX changes
lower costs, more liquid; expire, limits, credit risk, basis risk
Tracking Error
SD of excess return vs index; passive managers; identified w/ attribution analysis
causes: fees/ commissions, sampled portfolios, cash drag
prevention: full replication, min cash w/ futures or netting inflows/ outflows
Fundamental Active Management Portfolios
- subjective
- higher conc in fewer stocks
- risk = miscalc intinsic value
- continuously monitoring and rebalancing
Quantitative Active Management Portfolios
- objective
- calc regressions to predict return w/ historical data (risky)
- smaller positions on more holdings
- optimizer to set weights
- automatic rebalancing
Statistical Arbitrage Strategies
- pairs trading - sell high spread, buy low spread; profit from mean reversion
- market microstructure-based - profit from mispricing, very short
Event Driven Strategies
- buy target after merger annoucement
- share for share - short acquirer, long target at ratio of share exchange
risk = merger will fail
Fundamental Investing Pitfalls
- behavioral biases
- value trap - low price multiples b/c firm deteriorating; overvalued even w/ dec in price
- growth trap - above avg growth already factored into valuation
Quantitative Investing Pitfalls
- survivorship bias
- look ahead bias
- data mining
- turnover constraints
- lack of availability
- transaction costs
Pearson IC
correlation between factor exposure and holding period return
Spearman IC
correlation between factor expsoure and holding period return, controlling for outliers