Mutual Funds Flashcards
Briefly explain how mutual funds operate and what is their NAV.
Mutual funds are pools of investment managed by the fund’s managers. Investors buy shares of the fund. The NAV is equal to assets minus liabilities divided by nbr of shares.
What is an Open-end Fund?
OEF can issue an unlimited number of shares at NAV price daily, or redeem them.
What is a Closed-end Fund?
CEF have a fixed number of shares and the share price can differ from the NAV. They are traded on organized exchanges.
How is return on mutual fund calculated?
Provide some basic facts about fund flows and expense ratio.
Flows are strongly correlated with asset performance. Expense ratios have been on a downward trend. Exp. Ratios of actively managed funds and equity funds are higher.
Give one measure of Passive Equity manager’s ability to track its benchmark index.
Tracking Error: StdDev(r_p - r_i)
Provide 2 reasons as to why index managers might not be so passive in their investments.
- Changes in index composition
- Fund purchases/redemption force some trading.
Explain why having an exact Match with respect to an index is difficult.
Securities must be actively traded to minimize liquidity concerns. It must be feasible to match inflows and outflows closely to minimize the need for trading, i.e. big funds perform better.
What is Cell Matching w.r.t index investing?
A technique to reduce liquidity and trading concerns when benchmarking to an index.
1. Group securities with similar characteristics together.
2. For each group, purchase liquid securities that match the characteristics.
What is Factor Matching w.r.t index investing?
Compute the index’s factor exposure and buy securities to match such exposure.
What are Exchange Traded Funds and how do they differ from Mutual Funds.
They are just like Opend ended mutual funds, but traded continuously (instead end-of-day) on major stock exchanges.
Also, they can be sold short.
What are Malkiel’s findings w.r.t mutual fund performance?
- Alpha generation spread around zero.
- Alpha’s mode just under zero.
- Percentage of 1 year repeat winner around 50%.
What is Carhart’s evidence on manager’s skills. What technique does he use to arrive at such a conclusion?
He uses the three factor model, adding excess returns on a portfolio long past winners and short loosers. He finds that alpha disappears for the high performing funds when taking this into account.
Explain Briefly how DGTW analyze portfolio styles and returns.
What does Wemers say about Fund performance over benchmarks?
They underperform net of expenses and cash holding. But otherwise overperform.
