Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

asset management > Everything > Flashcards

Everything Flashcards

1
Q

How do you measure a manager’s performance?

A
  • Sharpe
  • Treynor
  • Information ratio
  • Jensen’s alpha
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How do you calculate the Sharpe Ratio?

A

(Rp-Rf)/stddevp

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How do you find the Treynor ratio?

A

(Rp-Rf)/beta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How do you calculate Jensen’s alpha?

A

(Ri-rf) - (RF + beta(rm-rf)) = alpha

Rp - (RF + beta(rm-rf)) = alpha

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the definition of asset management?

A

A (professional) asset manager makes the decisions regarding the client(s)’ portfolio according to the clients’ needs

Such an activity is rewarded by a fee (management fee)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What other management styles are out there?

A

Collective management (through collective investment programs)

Separate accounts or Individual management under (discretionary) investment mandates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How does collective management work?

A

Investors pool capital.

The company and their analysts made choices on how to run the portfolio.

The investors take a % of the returns, proportional to the % of their investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the main benefits for small investors who invest through collective management?

A

Record keeping and administration

Diversification and divisibility

Professional management

Lower transaction costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Explain β€œRecord keeping and administration β€œ as a benefit of collective management?

A

They issue periodic status reports

Keeping track of capital gains distributions, dividends, investments and redemptions

Reinvestment of dividends and interest income for the shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Explain β€œDiversification and divisibility” as a benefit of collective management?

A

By pooling their money, investment companies allows investor to hold fractional shares of many securities.

They can act and diversify like a large shareholder even that they as individual investors cannot.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Explain β€œProfessional management” as a benefit of collective management?

A

Due to its scale, the investment company can hire full time security analysts and portfolio managers to make better investment decisions compared to individual investors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Explain β€œLower transaction costs” as a benefit of collective management?

A

Because they trade large blocks of securities, they can achieve substantial savings on brokerage fees and commissions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the two retail clients of asset managers?

A

Households

High-Net-Worth Individual (HNWI)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does HNWI stand for?

A

High-Net-Worth Individual

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the institutional clients of asset managers?

A

Insurance companies

Pension Funds

Banks

Others: (foundations, charities, governments, central banks, etc.)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is a custodian in the fund industry?

A

An actor on the fund industry who is responsible for securing and managing the securities held within a mutual fund.

custodian also typically offers trade settlements, foreign exchange transactions, and tax services for its clients.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Who holds the securities of a mutual fund and why?

A

the securities owned by the fund are held with the custodian and not directly with the fund itself. This is done to reduce the risk of fraud.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a Distributor in the fund industry?

A

Mutual fund distributor is an individual or entity that helps investors to buy and sell mutual funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

How do you calculate the NAV?

A

𝑁𝐴𝑉= (𝐴𝑠𝑠𝑒𝑑𝑠 βˆ’ πΏπ‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘’π‘ )/(π‘†β„Žπ‘Žπ‘Ÿπ‘’π‘  π‘‚π‘’π‘‘π‘ π‘‘π‘Žπ‘›π‘‘π‘–π‘›π‘”)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What does NAV Stand for?

A

Net Asset Value, aka. the value of the share.

This is β€œcomparable” to the share price of buying equity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How do we calculate the Rate of Return?

A

π‘…π‘Žπ‘‘π‘’ π‘œπ‘“ π‘…π‘’π‘‘π‘’π‘Ÿπ‘›= (𝑁𝐴V1βˆ’π‘π΄π‘‰0+πΌπ‘›π‘π‘œπ‘šπ‘’ π‘Žπ‘›π‘‘ π‘π‘Žπ‘π‘–π‘‘π‘Žπ‘™ π‘‘π‘–π‘ π‘‘π‘Ÿπ‘–π‘π‘’π‘‘π‘–π‘œπ‘›π‘ )/𝑁𝐴𝑉0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are open end funds?

A

These funds are open to have new investors & open to have investors leave.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What happens when a new investor joins an open fund? And when it leaves?

A

The fund issue new shares to new investors (that wants to enter the fund)

Investors can redeem (sell back their shares to the fund) their shares at NAV at any point in time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Why do open funds have more cash on them than usual?

A

Meaning that they always have to have some cash on them incase people want to redeem their shares at the same moment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Explain open ended funds with cake analogy.

A

The portfolio is a cake.

And with new shareholders they need to make more cake with the newly gotten equity.

The shareholders are entitled to walk away with their pieces of the cake.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What are closed-end funds?

A

A fund that does an IPO to gather capital and then it does not redeem or issue shares.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What happens when a new investor joins an closed fund? And when it leaves?

A

investors in closed end funds must sell their shares to other investors to exit

shares of closed end funds usually traded on exchange by brokers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Explain a closed fund with the cake analogy

A

Either you were there to bake the cake, or you will have to pay someone to get their cake slice.

The closed funds have one cake and it never grows from external equity after the IPO (besides the returns of the investments).

If the management fees are bigger than the returns the cake becomes smaller.

The stocks listed are valued for 1 cake piece.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Why are closed end funds traded at a discount compared to their Net Asset Value?

A

They account for manager fees

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Active management’s goal is to outperform benchmarks with a focus on:

A

Strategic asset allocation: making a portfolio w good assets & weights -> taking into account investor objective

Tactical asset allocation: timing the short term adjustments

Security selection: Find undervalued securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What is an actively managed fund?

A

As the name implies the fund actively buys and sells on the market to make strategic allocations, attempting to exploit mispricing, with the desire to outperform the market returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is an passively managed fund?

A

Focus on holding an efficient portfolio
No attempt of market timing or security selection

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What are the different types of funds?

A

Mutual Funds

Commingled Funds

ETFs

Funds of Funds

Real Estate Investment Trusts (REITS)

Hedge Funds

Private Equity/Debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What are mutual funds?

A

the common name for open-end investment companies

Accounting for roughly 87% of the investment company assets in the U.S.

A management company usually manage several funds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are the different investment policies mutual funds have?

A

Fixed income

Equity

Combined

Index funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What are the sub sections of mutual funds focused on β€œFixed income”?

A

Money market funds

Bond funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What are the sub sections of mutual funds focused on β€œEquity”?

A

Equity funds

Sector funds

International funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

What are the sub sections of mutual funds focused on β€œCombined”?

A

Balanced funds

Asset allocation funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What are money market funds?

A

They are a substitute to holding cash, but offers some β€œrisk-free” return.

investments in short horizon fixed income investments with low risk exposure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Seeing money market funds want to be a substitute to cash the funds’ investments should therefore have low exposure to:

A

Credit risk

Market risk

Liquidity risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Why invests on money market funds?

A

They are held by retail investors, Corporations and institutional investors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Who are the biggest players of money market funds?

A

USA => 82.5% of the total market with 5 Billion

EU=> 9.2% of the total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

What are the types of money market?

A

Government money funds

Prime money funds

Municipal money funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Explain what a β€œGovernment money funds” is.
(W context of money markets)

A

Invests in short term government issued securities

-Cash

-Treasuries

-Repurchase agreements (usually from the central bank for 24-48 hours)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Explain what a β€œPrime money funds” is.
(W context of money markets)

A

Invests in short term non-government debt

-Commercial papers (CPs, unsecured short term corporate debt)

-Certificate of deposits (CDs, fixed period bank deposit)

-But also some government securities and cash to ensure liquidity in case of redemptions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Explain what a β€œMunicipal money funds” is.
(W context of money markets)

A

Invest in short term papers issued by municipalities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

What is the proportion of money market fund types?

A

82% are Government money funds

16% Prime money funds

2% Municipal money funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

What are bond funds? And what are the different specialization?

A

Bond funds invests in fixed income securities.

Issuer types

Maturities

Risk profile

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What are the possible securities purchased by a bond fund focused on β€œIssuer types”?

A

Corporate bonds

Mortgage-backed securities

Government bonds

Municipal bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

What are the possible securities purchased by a bond fund focused on β€œMaturities”?

A

Short (1-3 years)

Intermediate (3-10 years)

Long-term (>10 years)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

What are the possible securities purchased by a bond fund focused on β€œRisk profile”?

A

Low risk funds (>BB+)

High-yield (Junk, <BBB-)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What are Equity funds?

A

Invests primarily in stocks.

but needs to keep some funds in liquid assets (money market securities) to provide liquidity to meet potential redemptions.

Usually around 4-5% of Assets under Management.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

What are the different focuses of Equity funds?

A

Cash flows
–Current income funds
–Growth funds

Firm size
–Large/Mid/small cap

Geography

Sector

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

What are Income Equity funds?

A

Focuses more on current income instead of capital gains.

They invest in stable companies in firms with high dividend yield (annual dividend/price) supplying steady dividend streams.

investments of the fund would have cash flows in the near future (dividends)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What are Growth Equity funds?

A

Willing to forego current income for capital appreciation stemming from growth potential (cash flows in the future).

This leads growth funds to invest in younger, riskier firms in the earlier stages of their life-cycles.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

What are Sector Funds?

A

mutual funds specialized in an industry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

What are the different types of international funds?

A

Global, Regional, Emerging countries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

What are the characteristics of a balanced fund?

A

Holds a mix of equity and bonds in stable proportions
They are designed to be an investor’s entire portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

What are the two types of lifecycle funds?

A

Aggressive strategy (for young investors)
less risky for older investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

What is the difference between balanced funds and flexible funds

A

The balanced funds hold a stable mix of equiyty and bonds whereas flexible funds try to time the market in their asset allocation & and risk profile

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

What are the two types of allocation

A

Static allocation (stable mix of equity and debt)

targeted maturity funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

What does the excess return of a flexible fund depend on?

A

The manager’s skill and luck

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What are ETFs?

A

You trade index portfolios like regular stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

What is the difference between mutual funds and ETFs

A

An ETF can be sold at any time unlike a mutual fund which can only be sold at the end of the day when NAV is calculated

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

Are ETFs closed end or open end funds?

A

They are closed end for smaller investors and open end for big investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

What is the stucture of an ETF?

A

large institutional investors receive creation units (from the unit) and then give elementary units to the retail investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

What are some different types of ETF?give examples

A

Actively managed
Leveraged
Industry-based
International

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

What are the advantages of ETFs?

A

Can be sold short
Continuous trading
Sold thru brokers (lower management fees)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

Disadvantages of ETFs

A

Transaction costs
Market prices can deviate from NAV which can swamp the ETF’s cost advantages

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

Differences between closed-end funds and ETF

A

Closed-end funds trade at a discount while ETFs trade close to their NAV

Closed end funds are actively managed while ETFs often track the market

Closed end funds report quarterly, ETFs need daily disclosure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

Types of alternative investements

A

Hedge funds
PE
Real Estate
Commodities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

Four types of main fees

A

Back end
Front end
Operating expenses
12b-1fees

72
Q

How high are operating expenses usually?

A

Between 0.2% and 2%

73
Q

What is a front-end load?

A

commission charged when you purchase fund shares

74
Q

How high are front end loads usually?

A

between 3% and 6%

75
Q

What is a back end load?

A

A redemption fee.

Meaning that when the investor decides to leave their position they get charged a % after the compounding.

76
Q

traditional investment make up 77% of what?

A

Assets Under Management

77
Q

What is the difference between strategic asset allocation and tactical asset allocation?

A

Strategic asset allocation makes long-term changes in asset allocation depending on risk profile

Tactical allocation times the marekt

78
Q

How do you find the optimal portfolio according to Markowitz?

A

You maximize the sharpe ratio

79
Q

What are the imputs in the Markowitz framework

A

risk aversion
expected returns
risk (var, stddev)
weights
covariances

80
Q

What are the assumptions of the Markowitz portfolio?

A

Returns are independent over time
Security returns follow a normal distribution

81
Q

What is the formula of the expected return?

A

r’ * w

r’ = Transposed return
w = Weights

82
Q

What is the formula of the portfolio variance(πœŽπ‘^2)?

A

w’ * VarCovar * w

83
Q

What is the Capital allocation line (CAL)

A

It’s the line that has an intercept equal to the rf and a slope equal to the sharpe ratio of the optimal portfolio

84
Q

How do you determine the client’s ideal portfolio holding risk-free and risky assets?

A

The risk preference allows us to place the portfolio somewhere on the CAL

85
Q

What is the Utility formula?

A

E(r)-0.5A(var)

Where A is the risk aversion

86
Q

How do you calculate the weight of the risky portfolio?

A

(1/A)*((Rp-rf)/varp))

87
Q

What is the case for overweighting stocks?

A

The equity premium
For longer holding periods, stocks are less risky than debt securities

88
Q

What is the equity premium puzzle?

A

The models used to calculate the equity premium show a premium of 1% whereas in real life it is much higher and nobody knows exactly why

89
Q

What are the risk based explanations of the equity premium puzzle?

A

Rare disaster risk that didn’t take place
Structural uncertainty outside the model
Long-term risk is difficult to measure

90
Q

What are the 2 main reasons to allocate a heavy weight to bonds in a portfolio?

A

Lower risk
non-perfect correlation

91
Q

What can we observe from the Utility function?

A

Utility is increasing with E(R)

Utility is decreasing with Variance

The Variance induced ”penalty” increases with risk aversion

92
Q

Are there times where there’s been a high positive correlation between bonds and equity?

A

Today’s climate: high inflation + slowing world economy

93
Q

What does it mean that dividend yield (dividend/price) is mean reverting?

A

When Dividend yield is low, prices are high, expected returns are low and viceversa

94
Q

Why is the dividend yield mean reverting?

A

Dividends are stable over time while equity prices are rather volatile

95
Q

What is the single index model?

A

E(r) = alpha + beta(risk premium) + error

The model only describes the link between market returns and the return of 1 stock

96
Q

What is a cyclical stock?

A

A stock that tend to rise and fall with the overall economy, beta close to 1

97
Q

What is the CAPM model

A

E(r) = rf + beta*risk premium

98
Q

What are the theoretical assumptions behind CAPM

A

Investors are always rational
The horizon is just 1 period
All investors have the same portfolio securities and the same expectations
All assets are traded publicly
No tax
No transaction costs
Can borrow/lend at a common rf

99
Q

What is the optimal portfolio in the CAPM model?

A

the market portfolio

100
Q

What happens to the CAL in the CAPM model?

A

It becomes the SML, where the slope is now given by E(rm)-rf and not E(rp)-rf

101
Q

According to CAPM, what does the risk premium depend on?

A

risk of the market portfolio and risk aversion
E(rm)-rf = A(VARmarket)

102
Q

How do you measure the weight of the market portfolio according to risk aversion?

A

wm = (1/A)*((E(rm)-rf)/VARm)

103
Q

What are the traditional risk adjustment techniques?

A

Sharpe ration
Treynor ration

104
Q

What is the information ratio?

A

appropiate reward to risk measure for an actively managed portfolio, what the manager earns not attributed to the market

105
Q

What is the tracking error?

A

Basically the information ratio but the benchmark portfolio is given by fund mandate

106
Q

How do you calculate the tracking error?

A

π‘…π‘βˆ’π‘…π΅π‘’π‘›π‘β„Žπ‘šπ‘Žπ‘Ÿπ‘˜/𝜎(π‘…π‘βˆ’π‘…π΅π‘’π‘›π‘β„Žπ‘šπ‘Žπ‘Ÿπ‘˜

107
Q

What is the case for passive management?

A

Diversification
It’s difficult to beat the market
(CAPM) it’s optimal to hold the tangency portfolio

108
Q

What is the theory on active management?

A

Net of fees, active managers have a similar performance to passive managers, however with fees they underperform

109
Q

What is a prime money market fund?

A

They invest in short-term securities and issue monthly dividends

110
Q

What is a money market fund?

A
  • fund that invests primarily in highly liquid, near-term instruments
  • includes cash, cash equivalents, high-rating debt securities with short-term maturity (US Treasuries)
  • Intended to offer investors high liquidity with a very low level of risk
111
Q

What is the disposition effect?

A
  • Behavioral anomaly (irrational)
  • sell assets that have increased in value to lock in the revenue instead of keeping them to make more money
  • keeping losing assets instead of closing their position because they don’t wanna realize their losses
112
Q

Explain pension fund underfunding?

A
  • Only happens in defined benefit scheme (not defined contribution): aka the fund has already committed to pay pensions in the future so they need to have assets to offset the liabilities
  • Underfunding: returns are lower than fund’s expectation
  • pension fund assets < PV(liabilities)
113
Q

What is the main risk in merger arbitrage?

A

D) the main risk with merger arbitrage is that the deal falls through and you lose money

Reasons deal fails:
anti-trust (competition) law: regulators may block transactions
the acquiring firm withdraws
target firm rejects the bid

114
Q

What does it mean that CAPM is an equilibrium model?

A

CAPM is an equilibrium model because we assume the market functions perfectly (no assymetries or mispricings). Therefore, under CAPM there is no way to outperform the market

115
Q

Why use High Water Marks (HWM)?

A

Ensure that the fund manager only gets rewarded for reaching a NAV one time in the fund’s history

116
Q

What are the pros and cons of incentive fees?

A

Pros
motivate personnel and attract talent

Con
It’s pretty expensive, they may also lead to increasing risk taking because of their option-like structure

117
Q

What are some of the most famous indexes?

A

Dow Jones
S&P 500
Nasdaq
CRSP
Russell
CAC40
FTSE100
DAX

118
Q

What are the 2 ways for a passive manager to track an index?

A

Full replication
Optimization

(ETFs do Synthetic Replication using derivatives)

119
Q

What does the full replication strategy entail?

A

Hold all the assets in the index with the same weight as the index

120
Q

What are the pros and cons of the full replication strategy?

A

Pro: minimizes the tracking error

Con: can be costly, involves trading many small and illiquid assets (some that haven’t been traded for years like some bonds)

120
Q

What is the optimization strategy in index tracking?

A

Buying the securities that provide a representative sample of the index to reduce tracking error

120
Q

Tilted ETFs

A

Hold well well-diversified benchmark index with tilted weights in certain categories (Value, Growth, etc) by overweighing and underweighting some assets

121
Q

What are some arguments against ESG investing?

A

Lower Sharpe ratio due to a smaller list of assets
Low expected returns due to the amount of funds going to ESG because of high demand

122
Q

What sources of value can ESG have?

A

Positive externalities
ESG characteristics have proved to enhance value and not be fully priced on the stock market

greater employee satisfaction = positive alpha
good governance = positive alpha (think Credit Suisse’s LBTQ portfolio)

123
Q

What are the 3 investor types considered by Pedersen (ESG)

A

ESG unaware: optimize solely on mean-variance, don’t care about positive returns from ESG

ESG aware: have mean-variance preferences but use ESG indicators to value their risk and return

ESG motivated: portfolio optimizing mean-variance relation but also high ESG scores

124
Q

Take a break soldier. Stand aside me on this campfire.

A

You’ve done well so far. But the journey continues.

125
Q

What are the ESG investment implications on pricing?

A

If you have mostly ESG motivated investors, you will see higher returns on β€œsin” stocks (tobacco) since they will increase demand on ESG stock

If you have ESG unaware investors, then the ESG stocks will have higher expected returns

ESG aware investors take into account the benefits of ESG and everything will be priced accordingly (stays the same, see graph)

126
Q

What is the difference in the mean-variance frontier between normal portfolios and portfolios with ESG stock?

A

The risk-return trade-off in ESG portfolios will be worse due to the smaller input list

127
Q

What are the return and statistical characteristics of alternative investments?

A

Diversification: low correlation with trad. inv.
Illiquid: many alt. inv are illiquid, which can give them lower prices but a higher return (risk premium)
Inefficiency: less competition can cause mispricing, you can do arbitrages on that
Non-normalities: short term alt. inv. can be characterized using a normal distribution but mid-to-long term can’t because of:
- infrequent trading
- use of securities
- trading structures

128
Q

What are the implications of non-normal distribution?

A

Returns can’t be characterized only by mean and variance, need to take into account skewness and kurtosis, huge implications for risk management

129
Q

What are the goals of alternative management?

A

Adding value through active management
Achieving absolute and relative returns
Pursuing arbitrage and return enhancement
Lower risk thru diversification
Avoiding obsolescence (first comers have higher returns)

130
Q

What is the absolute return standard?

A

Returns evaluated relative to 0 or the risk free rate. Independent from performance in equity, debt, other markets

131
Q

What is the relative return standard?

A

Returns evaluated relative to a benchmark to be surpassed. Goal is to take advantage of equity premium + superior security selection

132
Q

What is the difference between arbitrage and β€œpure” arbitrage?

A

pure arbitrage is free of risk whereas arbitrage has risk due to differing assets and time frames

133
Q

What is the difference in performance between alt inv and trad inv. ?

A

On average there’s not much difference however there’s much more variation of returns in alt. inv. The best ones far outperform the market

134
Q

Alt. Inv. Why chose PE?

A

Enhance returns

135
Q

Alt. Inv. Why choose Hedge Funds?

A

Diversification of returns

136
Q

Alt. Inv. Why choose Real Estate?

A

Inflation hedge

137
Q

Alt. Inv. Why choose Private debt & structured products?

A

Enhanced yield

138
Q

How can Pension funds (under defined benefit and not defined contribution) deal with underfunding?

A

Cut benefits
Increase pension contributions
find new sources of returns: Alt. Inv.

139
Q

What are the 3 primary elements of a Hedge Fund?

A
  • privately organized (less regulated)
  • performance-based fees to managers
  • allows more investment flexibility (use of derivatives, leverage, private securities)
140
Q

What are the 2 types of fees a hedge fund has?

A

Management (on NAV of fund)
Incentive fee (on performance)

141
Q

What strategies do Managed Future Hedge Funds follow?

A

Trend-following strategies (especially time-series momentum)

142
Q

What is time-series momentum?

A

Take a long position in a market with positive returns and go short otherwise

143
Q

What is the reasoning behind time-series momentum?

A

A catalyst causes the value of an asset to change, the market underreacts, trend buyers and momentum traders come in (price gets closer to FV), trend continuation, ends when prices go way beyond FV and investors start investing against the trend

144
Q

What can cause the underreaction in time-series momentum?

A

anchor-and-insufficient-adjustment
the disposition effect
non-profit seeking activities
frictions snd slow moving capital

145
Q

What can cause trend continuation (overreaction)?

A

Herding
Confirmation bias
fund flows and risk management

146
Q

How does time-series momentum perform?

A

High significant alphas
best to diversify over strategies and time frames

147
Q

Do Managed future strategies provide diversification benefits?

A

Because they perform well when equities are high or low, they are great for pension funds to offset the loss from equities

148
Q

What are event-driven hedge funds?

A

opportunistic strategy investing around corporate-specific events or/and market wide events.

149
Q

What are the most common types of event-driven funds?

A

Activist
Merger Arbitrage
Distressed Securities fund

150
Q

What do event-driven funds do?

A

search for mispriced securities during the anticipation and realization of events like M&A and spinoffs?

They usually long one position and short another

151
Q

How do relative value funds function?

A

They take long and short positions that relatively equal in size, vol, and risk exposure
Ideally they have low net market risk
They go long on the undervalued leg and short on the overvalued leg which will later converge into a single price

152
Q

What is the classic relative value strategy based on?

A

The idea that the relationship/spread between two prices has become abnormal and will therefore return to normal

153
Q

What are 2 examples of relative value strategy?

A

Convertible bond arbitrage: long position in undervalued convertible bond and hedge with a short position on the underlying equity

Fixed income arbitrage: simultaneous long and short position over FI asset that will converge over the holding period

154
Q

What is factor investing in long-short equity funds?

A

Systematically taking long positions in in one group of stocks and short another group of stocks.

155
Q

What are the strats of factor investing?

A

Value: long val, short growth
Momentum: long past winners, short past losers

156
Q

What is the issue with momentum strategies?

A

High turnover of stocks in the portfolio, huge need for rebalancing (constantly changing)

157
Q

Why do value and momentum strategies make a good combination in a portfolio?

A

They are negatively correlated

158
Q

What is the idea of value investing?

A

find stocks with high FV relative to market value, sort stocks according to their Book Value/Market Value

159
Q

What do dedicated short bias funds focus on?

A

Problems that stocks may have:
overstated earnings
aggressive accounting methods
incomprehensible SEC filings

160
Q

How do dedicated short bias funds make money?

A

They investigate irregularities in their stock and when they find something of note they take a big short position on them and then publish their findings to get an even bigger price reaction

161
Q

What benefits do commodities offer to a portfolio?

A

Diversification: lower volatility

162
Q

How do you calculate Incentive net of assets?

A

Max(0,(Gross HWM-mngmnt-hurdle)*incentive fee)

163
Q

How do you calculate the Gross over HWM after the 1st year?

A

(NPV (t)*(1+return))/HWM(t-1) - 1

164
Q

What is the Fama-French 3 factor model?

A

They added 2 additional factors to the CAPM model: Small Medium Business, High Minus Low to better adjust the market risk.

165
Q

When do you use Jensen’s alpha?

A

All types of investment, always want a positive one if you’re active

166
Q

When do you use the Sharpe?

A

When you have to evaluate the entire portfolio (total risk)

167
Q

When do you use the information ratio?

A

When you evaluate active strategies and portfolio

168
Q

When do you use Treynor?

A

Evaluate well-diversified portfolios: which one of these portfolios would fit better in your well-diversified portfolio

169
Q

What does a R-square show in a regression?

A

How much of the stock’s volatility is explained by market movements

170
Q

What does beta show in a regression?

A

The market risk

171
Q

How do you find firm-specific risk in a regression?

A

Excess standard deviation

172
Q

What is a tilted ETF?

A

ETFs designed to overweight their holdings towards a soecific factor

173
Q

TSMOM formula?

A

sign of excess returns over a period of time (long or short position)

Weight of the position

sign * (target vol/asset vol) at t *Revenue at t+1 = TSMOM t+1

174
Q

How do you calculate the deal spread in merger arbitrage?

A

(offer price - target price)/target price

175
Q

What can you say about multi-manager funds in comparison to traditional funds

A

They outperform other types of funds, they have high alphas that are closer to being the true alpha and their performance does not come from market factors

176
Q

What is a multi-manager fund?

A

Many specialized hedge fund managers and strategies functioning as a unit

asset management (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions