Index Based Equity Strategies

Question 1

Explain what are the differents strategies that includes a Returns-oriented factor based equity strategies

Answer 1

Dividend Yield Strategies
Fundamental Strategies
Momentum strategies

Question 2

Describe a stratified sampling strategy to construc an index based equity portfolio

Answer 2

• reduce the costs of full replication
• index stocks are divided in strata based on key characteristics.
• Random sample are then selected.

Question 3

Contrast factor based strategy vs market cap weighted index strategy

Answer 3

Advantages of factor based strategy –> less costly than active management but still allow investor to take different exposure to factors

Disadvantages –> management fees and trading commissions are generally higher.

Question 4

Identify and describe the different approaches to implement a factor index based equity strategy.

Answer 4

1. Full replication : Take exact same holdings and position than the benchmark

2- Sampling : Take only a sample of the holdings of the benchmark

3- optimization : use mean variance analysis to minimize tracking error.