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CFA Level 3 > Equity Portfolio Management And Passive And Active Equity Investing > Flashcards

Equity Portfolio Management And Passive And Active Equity Investing Flashcards

1
Q

Administrative fees

A
  • Custody fees
  • Depository fees
  • Registration fees
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2
Q

Trading costs

A
  • Bid–offer spread
  • Market impact
  • Delay costs (also called slippage)
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3
Q

Shareholder engagement

A
  • Strategy
  • Allocation of capital
  • Corporate governance
  • Remuneration
  • Composition of the board of directors
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4
Q

Segmentation of the equity universe

A
  • Size and style
  • Geography
  • Economic activity
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5
Q

Sources of equity portfolio income

A
  • Dividends
  • Securities lending fees and interest
  • Dividend capture
  • Covered calls and cash-covered puts (or cash-secured puts)
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6
Q

Sources of equity portfolio costs

A
  • Management fees
  • Performance fees
  • Administration fees
  • Marketing/distribution fees
  • Trading costs
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7
Q

Rules for an index to become the basis of an equity investment strategy

A
  • Rules-based
  • Transparent
  • Investable
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8
Q

Buffering

A

Involves establishing ranges around breakpoints that define whether a stock belongs in one index or another

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9
Q

Packeting

A

Involves splitting stock positions into multiple parts around a breaking point between two indexes

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10
Q

Herfindahl–Hirschman Index (HHI)

A
  • wi is the weight of stock i in the portfolio
  • The HHI can range in value from 1/n, where n is equal to the number of securities held, to 1. An HHI of 1/n would signify an equally weighted portfolio, and a value of 1 would signify portfolio concentration in a single security
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11
Q

The effective (or equivalent) number of stocks, held in equal weights, that would mimic the concentration level of a chosen index

A
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12
Q

Tracking error

A
  • Rp is the return on the portfolio
  • Rb is the return on the benchmark index
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13
Q

Types of derivatives overlay

A
  • Completion
  • Rebalancing
  • Currency
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14
Q

Program trading

A

A strategy of buying or selling many stocks simultaneously

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15
Q

Excess returnp

A

= Rp – Rb

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16
Q

Cash drag

A

The tracking error caused by temporarily uninvested cash

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17
Q

Weighting methods

A
  • Market-cap weighting
  • Price weighting
  • Equal weighting
  • Fundamental weighting
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18
Q

Broad-market-cap weighting versus passive factor-based strategies

A

Passive factor-based strategies tend to concentrate risk exposure, leaving investors vulnerable during periods when the risk factor (e.g. momentum) is out of favor

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19
Q

Top-down strategies

A
  • Country and geographic allocation to equities
  • Sector and industry rotation
  • Volatility-based strategies
  • Thematic investment strategies
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20
Q

Factor-based strategies

A
  • Value
  • Price momentum
  • Growth
  • Quality
  • Unconventional factors based on unstructured data
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21
Q

Bottom-up strategies

A
  • Relative value
  • Deep-value
  • High-quality value
  • Contrarian investing
  • Income investing
  • Restructuring and distressed investing
  • Special situations
  • Growth-based approaches
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22
Q

Factor/alpha for bottom-up and top-down approaches

A
  • Bottom-up
    • Factor: security specific
    • Alpha: security selection skills
  • Top-down
    • Factor: macro
    • Alpha: factor timing
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23
Q

Examples of heuristic constraints

A
  • Exposure concentrations by security, sector, industry, or geography
  • Net exposures to risk factors, such as beta, size, value, and momentum
  • Net exposures to currencies
  • Degree of leverage
  • Degree of illiquidity
  • Turnover/trading-related costs
  • Exposures to reputational and environmental risks, such as actual or potential carbon emissions
  • Other attributes related to an investor’s core concerns
24
Q

Examples of formal constraints

A
  • Volatility
  • Active risk
  • Skewness
  • Drawdowns
  • Value at risk (VaR)
  • Conditional Value at risk (CVaR)
  • Incremental Value at risk (IVaR)
  • Marginal Value at risk (MVaR)
25
Q

VaR

A

The minimum loss that would be expected a certain percentage of the time over a specific period of time (e.g., a day, a week, a month) given the modeled market conditions. It is typically expressed as the minimum loss that can be expected to occur 5% of the time.

26
Q

CVaR

A

The average loss that would be incurred if the VaR cutoff is exceeded. It is also sometimes referred to as the expected tail loss or expected shortfall. It is not technically a VaR measure

27
Q

Constrained multivariate regression on selected investment styles

28
Q

Active return

A
  • Ri = the return on security i
  • ΔWi = the difference between the portfolio weights WPi and the benchmark weights WBi (also referred to as the active weight)
29
Q

Ex post active return

A
  • βpk = the sensitivity of the portfolio (p) to each rewarded factor (k)
  • βbk = the sensitivity of the benchmark (b) to each rewarded factor (k)
  • Fk = the return of each rewarded factor
  • (α + ε) = the part of the return that cannot be explained by exposure to rewarded factors. The alpha (α) is the active return of the portfolio that can be attributed to the specific skills/strategies of the manager
30
Q

Active risk (also called tracking error)

A
  • RAt represents the active return at time t
  • T equals the number of return periods
31
Q

Expected active return

A
  • IC = Expected information coefficient of the manager—the extent to which a manager’s forecasted active returns correspond to the managers realized active returns
  • BR = Breadth—the number of truly independent decisions made each year
  • TC = Transfer coefficient, or the ability to translate portfolio insights into investment decisions without constraint (a truly unconstrained portfolio would have a transfer coefficient of 1)
  • σRA = the manager’s active risk
32
Q

Information ratio (IR) relation to IC and Breadth

33
Q

Level of covariance that will reduce active risk when adding a new investment to a portfolio

A

Because active measures the volatility of portfolio returns relative to that of a benchmark, high covariance with the existing portfolio will reduce active risk (it will however reduce overall portfolio volatility)

34
Q

Active share

A
  • n represents the total number of securities that are in either the portfolio or the benchmark
  • If a portfolio has an Active Share of 0.5, we can conclude that 50% of the allocation positions of this portfolio are identical to that of the benchmark and 50% are not
  • Portfolio with fewer securities will have a higher level of Active Share than the highly diversified portfolio
35
Q

Information ratio (IR)

A
  • = Active return / Active risk
36
Q

Information coefficient (IC)

A
  • μi = E(RAi)
  • σi is the volatility of the active return on security i
37
Q

Risk-efficient active management evaluation

A
  • Lower active risk obtained with fewer securities demonstrate efficiency
  • Active share and active risk are more relevant to active management evaluation than annualized volatility and Sharpe ratio
38
Q

Active risk as a function of factor exposure and idiosyncratic risk

A
  • βpk is the portfolio exposure to factor k
  • βbk is the benchmark exposure to factor k
39
Q

Objective functions and constraints example

A

The absolute approach seeks to maximize the Sharpe ratio; the relative approach seeks to maximize the information ratio

40
Q

Portfolio variance (absolute risk) and individual asset’s contribution to portfolio variance

A
  • xj = the asset’s weight in the portfolio
  • Cij = the covariance of returns between asset i and asset j
  • Cip = the covariance of returns between asset i and the portfolio
41
Q

Variance attributed to factor exposure (absolute risk) and variance unexplained

42
Q

Variance of the portfolio’s active return (relative risk)

A
  • xi = the asset’s weight in the portfolio
  • bi = the benchmark weight in asset i
  • RCij = the covariance of relative returns between asset i and asset j
43
Q

Contribution of each asset to the portfolio active variance

A

RCip is the covariance of relative returns between asset i and the portfolio

44
Q

IVaR

A

The change in portfolio VaR when adding a new position to a portfolio, thereby reducing the position size of current positions

45
Q

MVaR

A

The effect of a very small change in the position size. In a diversified portfolio, marginal VaR may be used to determine the contribution of each asset to the overall VaR

46
Q

A well-constructed portfolio guidelines

A
  • A clear investment philosophy and a consistent investment process
  • Risk and structural characteristics as promised to investors
  • A risk-efficient delivery methodology
  • Reasonably low operating costs given the strategy
47
Q

Impact of leverage on the IR

48
Q

The four main building blocks

A
  • Rewarded factors weightings
  • Alpha skills: Timing factors, securities, and markets
  • Sizing positions to account for risk and active weights
  • Breadth of expertise
49
Q

The four most recognized factors known to offer a persistent return premium

A
  • Market
  • Size
  • Value
  • Momentum
50
Q

Implicit costs

A

Delay and slippage

51
Q

A well-constructed portfolio specific characteristics

A
  • Low idiosyncratic risk
  • Lower absolute volatility and lower active risk
  • Higher active shares
52
Q

GARP (growth at a reasonable price)

A

A strategy which seeks out companies with above-average growth that trade at reasonable valuation multiples. Many investors who use GARP rely on the P/E-to-growth (PEG) ratio

  • * for companies with similar PEG ratio, the one that exceeds its sector long-term growth forecast by a larger margin is preferred.
53
Q

P/E-to-growth (PEG)

A

= P/E ratio/EPS growth forecast

  • * EPS growth forecast is the integer percentage (i.e. 10% and not 0.10)
54
Q

Style analysis of a hedge fund using short positions and derivatives

A

For non-standard hedge fund that extensively uses short positions and derivatives, the description in the fund’s prospectus becomes the key source of information for those assigning a style (self-identification)

55
Q
  • Value trap
  • Growth trap
A
  • A value trap is a stock that appears to be attractively valued because of a significant price fall but that may still be overpriced given its worsening future prospects
  • A growht trap is a stock which expectations of above average earnings growth fail to materialize

CFA Level 3 (19 decks)

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