Lecture 8

Question 1

Active vs Passive investing

Answer 1

Active:
Beat the benchmark, specialized in segment/style/asset class, discretionary, information limited to investor, expensive (management, performance, trading fees)

Passive:
Track market, belongs to segment, systematic, transparent model, small costs (management fee)

Question 2

Performance measurement of passive strategies

Answer 2

Tracking error TE

Question 3

Smart beta

Answer 3

Use other criteria than market capitalization, since large companies are prone to bubbles, volatility etc.

Use: diversification, risk based, factor based, fundamentals based etc.

Question 4

Active share

Answer 4

1/2 * SUM(fund - index)

Question 5

Tracking error vs Active share

Answer 5

pure indexing –> closet indexing –> factor bets –> diversified stock pics –> concentrated stock picks

Active share measures manager activity (–> direct performance and cost consequences)
tracking error measures market timing

sophisticated investors can pick superior funds

Question 6

Societal benefits of active investment

Answer 6

If nobody traded actively, market prices would move away from fundamentals
–> inefficiencies like no information edge, turnover + liquidity decreases)