Lecture 2 Flashcards
Portfolio Construction Process
- Assessment of the client
- Assessment of the Capital Markets
- Strategic Asset Allocation
- Tactical Asset Allocation
- Security and/or Manager Selection
- Monitoring
- Rebalancing
- Performance Evaluation
Passive Investing
- No outperformance target.
- Captures the benchmark performance (‘beta’).
- Benchmark replication ( buy all securities in benchmark) or stratified sampling/optimization.
Active Investing
- Often explicit outperformance target.
- Aim to outperform the benchmark (‘alpha’).
- Active stock selection (higher turnover, transaction costs). S
There’s higher fees so you’re expecting a higher alpha to justify those higher fees.
Active Investing: Discretionary vs Systematic
Discretionary approach involves the use of judgement and personal expertise to make investment decisions. Decisions are made based on personal interpretation of market conditions, company financials and other factors.
Systematic approach: Data driven approach. Involves following a set of predetermined rules or strategies for making investment decisions. Doesn’t rely on personal judgement but instead follows a set of predetermined rules or strategies based on market data and analysis
Conventional beta vs smart beta
Conventional beta is calculated using historical market data to measure an investment’s sensitivity to the market. It assumes that an investments returns move in line with the market and therefore provides a measure of systematic risk.
Securities are weighed proportionally to their market capitalization.
Smart beta is a measure of risk that is not based on the traditional market index approach. May use different factors, such as fundamentals (such as revenues or cashflows for companies) or technical analysis, to identify investments that are likely to outperform the market.
Active Equity Investment Strategies
Aim: to outperform a specific equity benchmark.
Active share: % of stock holdings different from benchmark.
Top down (macro>micro) or bottom up (start at company level) approach
Fundamental analysis: concentrates on examination of micro economics which may include a company’s financial statement, analyzing its competitive position in the market and evaluating macro economic factors such as interest rates and economic growth.
Goal is to determine the intrinsic value of a security and whether it is undervalued or overvalued relative to its current market price.
Technical analysis: involves analyzing price and volume data to identify patterns and trends in securities.
Goal is to identify trading opportunities based in historical price movements and patterns.
Momentum investing: this strategy involves buying stocks that have recently outperformed the market and selling those that have underperformed. The idea is that stocks that have been performing well will continue to do so in the short term.
Quantitative modeling: using statistical models to determine which shares, sectors, or countries are relatively expensive and which are cheap. Can be used to design systematic strategies or as input to discretionary managers.
Value investing: this strategy involves seeking undervalued stocks by using valuation metrics such as P/E ratio or P/B ratio. The idea is that the market may have undervalued these stocks, so investors can buy them at a discount and sell them when they reach their intrinsic value.
Growth investing: focuses on investing in companies that have above-average earnings growth expectations. The idea is that these companies will continue to grow and generate higher earnings, which will translate into higher stock prices.
Growth at a Reasonable Price investing: seeks to identify companies that are growing at a faster pace than the market average but are still priced at a reasonable valuation. The idea is to find a balance between growth potential and value.
Takes into account factors such as P/E ratio P/S ratio P/B ratio and if the company’s valuation is lower than that of its peers, it may be considered a good candidate for investment.
Low volatility investing: investment strategy that aims to achieve stable returns by investing in stocks or other securities with low volatility (iow stocks that experience relatively smaller fluctuations in price compared to the broader market) so that investors can reduce their exposure to market risk while still participating in the potential growth of the market.
Style Analysis
Style analysis is a technique used in finance to identify and evaluate the investment style of a portfolio manager or investment strategy. It involves breaking down the returns of a portfolio into different factors, such as size, value, and momentum, and analyzing how each factor contributes to the overall performance of the portfolio.
