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Equity > passive equity investing > Flashcards

passive equity investing Flashcards

1
Q

buffering

A

+ establishing a threshold level for the change in firm capitalization rank that must be met before move from one index to another index on a reconstitution index.
+ If in buffer zone -> not change
+ if ablove/under bufer zone -> change
EG: conpany rank 150 up then move to the next constitution date
+ Identify: the holdings of the fund may exceed the holdings of the index

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2
Q

packeting

A

+ move a half first on the reconstitution date,
+ the remain move at the next reconstituion date if the stock still meet criteria

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3
Q

exhaustive method

A

every stock in a defined universe. Eg: the CRSP U.S. Total Market Index

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4
Q

selective method

A

a subset of stocks within a universe
Eg: the S&P 500 Index or the Dow Jones Industrial Average [DJIA]

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5
Q

factor-based strategies

A

benchmark return is driven by factors, which are risk exposures can be identified and isolated

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6
Q

pooled investment

A

look like mutual fund and ETF

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7
Q

rebalance overlay

A

addresses a portfolio’s need to sell certain constituent securities and buy others

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8
Q

currency overlay

A

assists a portfolio manager in hedging the returns of securities that are held in a foreign currency back to the home country’s currency

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9
Q

program trading

A

strategy of buying or selling many stocks simultaneously

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10
Q

full replication

A

occurs when a manager holds all securities represented
by the index in weightings that closely match the actual index weightings

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11
Q

stratified sampling

A

index stocks are divided into strata (subsets) based on key risk characteristics.
Random samples of stocks within each strata are selected for inclusion in the portfolio.
The weight of the stocks selected for each strata are such that the portfolio risk factor exposures match those of the index portfolio
Use:
+ khi số lượng cp lớn, ko full replicate
+ Các cp kém thanh khoán
Ưu: đỡ tốn kém
Nhược:
+ Sai số mô phỏng lớn
+

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12
Q

blended approach

A

with some index have many heterogenous stock, should use blended approach, include:
+ full replication for large liquid index
+ stratified / optimization for the stock thinly traded.

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13
Q

cash drag

A

uninvested cash in portfolio

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14
Q

optimization method

A

+ use multi factor model to match the risk exposure of index and individual securities: market cap, beta, industry, interest rate
+ Use when minimize tracking risk but full replication face high transaction cost

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15
Q

basis risk

A

Basis risk results from using a hedging instrument that is imperfectly matched to the investment being hedged.
Basis risk can arise when the underlying securities pay dividends, while the futures contract tracks only the price of the underlying index.

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16
Q

security lending

A

related to proxy right

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17
Q

Characteristic of equity index used as a benchmark

A

(1) rules based
(2) transparent, and
(3) investable

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18
Q

Rules-based when building

A

(1) including and excluding stocks in the portfolio,
(2) the weighting scheme
(3) the rebalancing frequency
the characteristics:
+ consistence,
+ objective,
+ collectable

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19
Q

4 Methods of index-weighting

A

(1) market-cap weighting
(2) price weighting
(3) equal weighting
(4) fundamental weighting

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20
Q

Herfindahl - Hishman Index (HHI)

A

HHI = Total (weighted)^2
Note: only include securities, not include cash
(đã hỏi trong đề mock test)

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21
Q

effective number of stocks

A

effective number of stocks = 1/HHI

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22
Q

3 types of passive factor-based strategies

A

(1) Return-oriented strategies
(2) Risk-oriented strategies
(3) Diversification-oriented strategies

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23
Q

Return-oriented strategies

A

focus on:
+ dividend yield,
+ momentum, and
+ fundamentally weighted

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24
Q

Risk-oriented strategies

A

focus on:
+ volatility weighting
Advantage:
+ simple to understand
+ provide risk reduction
Disadvantages:
+ based on past return data
+ not reflect future conditions & outcomes

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25
Q

Diversification oriented strategies

A

equally weighted portfolios + maximum diversification

26
Q

Advantage & disadvantage of passive factor base investing

A

Advantages:
+ less costly
Disadvantages:
+ management fees and trading commissions are typically higher.

27
Q

2 method to chose bechmark

A

(1) passive factor-based investing
(2) passive cap-weighted investing

28
Q

3 common approaches to passive equity investing

A

(1) pooled investments,
(2) derivatives-based strategies, and
(3) separately managed index-based portfolios

29
Q

compare ETF and MF

A

in mind map

30
Q

Derivatives-based strategies: advantages & disadvantages

A

Advantages:
+ Can be used to quickly adjust a portfolio’s factor exposures at low cost
+ Trade in liquid markets.
+ Make it easy to leverage the portfolio.
Disadvantages:
+ Derivative positions have finite expirations -> must be rolled over at or near expiration
+ Some contracts have position limits
+ existing offerings of exchange traded derivative contracts (ko co hang)
+ OTC derivatives introduce counterparty risk
+ Basis risk can increase tracking error

31
Q

Adv and disadv of Separately managed equity index-based portfolios

A

Advantages:
+ smallest management fee
+
Disadvantages:
+ cash drag

32
Q

4 method of construct portfolio:

A

(1) full replication
(2) stratified sampling
(3) optimization
(4) Blended Approach

33
Q

Full Replication (adv and dis adv)

A

Advantages:
+ closely matches the index return (before transaction costs)
DisAdvantage:
+ costly
+ regularly reconstituted and rebalanced

34
Q

Stratified Sampling (adv & dis adv)

A

Adv: lower cost than full replication
Disadv:
+ No correlation between dimensions assumption but actually is
+ Higher tracking errors than full replication

35
Q

Full replication use when ?

A

+ Number of stock less than 1000
+ Stocks are liquid
+ More fund to invest

36
Q

Stratified sampling use when ?

A

+ Number of stock > 1000
+ Stock are illiquid

37
Q

Optimization use when

A

Minimize tracking risk BUT full replication face high transaction cost

38
Q

Adv and disadv of optimization method

A

Adv: minimize tracking error
Disadv:
+ Costlly
+ Complex

39
Q

Causes of Tracking Error

A

(1) Management fee
(2) commission trades
(3) Cash drag
(4) Intraday trading ( but NAV base on closing price)
(5) Sampling, not full replication

40
Q

Derivatives overlay

A

Derivatives are typically used to adjust a pre-existing portfolio to move closer to meeting its objectives

41
Q

completion overlay

A

addresses an indexed portfolio that has diverged from its proper exposure

42
Q

rebalancing overlay

A

addresses a portfolio’s need to sell certain constituent securities and buy others

43
Q

rebalancing

A

refer to the periodic reweighting of the constituent

44
Q

reconstitution

A

involves the addition and deletion of index constituent

45
Q

Description of Growth factor

A

Growth stocks are generally associated with high-performing companies with:
+ an above-average net income growth rate
+ high P/Es

46
Q

Description of Value factor

A

Value stocks are generally associated with mature companies that have stable net incomes/ are experiencing a cyclical downturn.
Value stocks frequently have:
+ low P/B
+ low P/E
+ high dividend yields D/P

47
Q

Description of Size factor

A

A tilt toward smaller size involves buying stocks with low float adjusted market capitalization
- Low float adjusted market capitalization: làm rõ các công ty có vốn hóa nhỏ, đồng nghĩa với việc công ty có market cap nhỏ

48
Q

description of yield factor

A

Yield is identified as dividend yield relative to other stocks.
High dividend-yielding stocks may provide excess returns in low interest rate environments.

49
Q

Description of momentum factor

A

Momentum attempts to capture further returns from stocks that have experienced an above-average increase in price during the prior period

50
Q

Description of Quality factor

A

Quality stocks might include those with consistent earnings and dividend growth:
+ high CF/E
+ low D/E

51
Q

Description of Volatility factor

A

Low volatility is generally desired by investors seeking to lower their downside risk. Volatility is often measured as the standard deviation of stock returns

52
Q

RMRF factor description

A

gives the excess return of the market return over the risk-free rate at time t

53
Q

SMB factor description

A

Small minus big: relates to the size factor, which is based on the difference between the return of a portfolio of small stocks minus the return of a portfolio consisting of large stocks

54
Q

HML factor description

A

High minus low: shows the spread in returns between the firms that have high B/P and the companies that have a low B/P.

55
Q

WML factor description

A

Momentum, Winner minus loser: the difference between returns on one-year winners (i.e. stocks with the highest returns in the previous 12 months) and returns on one-year losers (i.e. stocks with the lowest returns in the previous 12 months).

56
Q

Fundamental weighting

A

weighting index stocks by their proportions of the
total index value of a fundamental factor, such as sales, income, or dividends
Eg: Dividend weight index: a stock of a firm pay 3% dividend will have 3% weight

57
Q

what method less concentrate:
A. Market Cap weighted
B. Equally weighted
C. Price weighted

A

B. because equally concentrate in small cap
Price weight + Market cap weight tập trung vào large cap

58
Q

what has higher volatility
A. Market Cap weighted
B. Equally weighted
C. Price weighted

A

B because it focus on small cap, small cap has higher volatility

59
Q

what has higher turnover
A. Market Cap weighted
B. Equally weighted
C. Price weighted

A

B because it must rebalance to keep equally weighted

60
Q

compate ETF and mutual fund about cost

A

ETF higher cost because bid/ask spread of intraday trading
MF can be trading at closing price

61
Q

completion overlay

A

like cash equitizaion

Equity (4 decks)

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