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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
Diversification oriented strategies
equally weighted portfolios + maximum diversification
26
Advantage & disadvantage of passive factor base investing
Advantages: + less costly Disadvantages: + management fees and trading commissions are typically higher.
27
2 method to chose bechmark
(1) passive factor-based investing (2) passive cap-weighted investing
28
3 common approaches to passive equity investing
(1) pooled investments, (2) derivatives-based strategies, and (3) separately managed index-based portfolios
29
compare ETF and MF
in mind map
30
Derivatives-based strategies: advantages & disadvantages
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
Adv and disadv of Separately managed equity index-based portfolios
Advantages: + smallest management fee + Disadvantages: + cash drag
32
4 method of construct portfolio:
(1) full replication (2) stratified sampling (3) optimization (4) Blended Approach
33
Full Replication (adv and dis adv)
Advantages: + closely matches the index return (before transaction costs) DisAdvantage: + costly + regularly reconstituted and rebalanced
34
Stratified Sampling (adv & dis adv)
Adv: lower cost than full replication Disadv: + No correlation between dimensions assumption but actually is + Higher tracking errors than full replication
35
Full replication use when ?
+ Number of stock less than 1000 + Stocks are liquid + More fund to invest
36
Stratified sampling use when ?
+ Number of stock > 1000 + Stock are illiquid
37
Optimization use when
Minimize tracking risk BUT full replication face high transaction cost
38
Adv and disadv of optimization method
Adv: minimize tracking error Disadv: + Costlly + Complex
39
Causes of Tracking Error
(1) Management fee (2) commission trades (3) Cash drag (4) Intraday trading ( but NAV base on closing price) (5) Sampling, not full replication
40
Derivatives overlay
Derivatives are typically used to adjust a pre-existing portfolio to move closer to meeting its objectives
41
completion overlay
addresses an indexed portfolio that has diverged from its proper exposure
42
rebalancing overlay
addresses a portfolio’s need to sell certain constituent securities and buy others
43
rebalancing
refer to the periodic reweighting of the constituent
44
reconstitution
involves the addition and deletion of index constituent
45
Description of Growth factor
Growth stocks are generally associated with high-performing companies with: + an above-average net income growth rate + high P/Es
46
Description of Value factor
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
Description of Size factor
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
description of yield factor
Yield is identified as dividend yield relative to other stocks. High dividend-yielding stocks may provide excess returns in low interest rate environments.
49
Description of momentum factor
Momentum attempts to capture further returns from stocks that have experienced an above-average increase in price during the prior period
50
Description of Quality factor
Quality stocks might include those with consistent earnings and dividend growth: + high CF/E + low D/E
51
Description of Volatility factor
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
RMRF factor description
gives the excess return of the market return over the risk-free rate at time t
53
SMB factor description
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
HML factor description
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
WML factor description
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
Fundamental weighting
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
what method less concentrate: A. Market Cap weighted B. Equally weighted C. Price weighted
B. because equally concentrate in small cap Price weight + Market cap weight tập trung vào large cap
58
what has higher volatility A. Market Cap weighted B. Equally weighted C. Price weighted
B because it focus on small cap, small cap has higher volatility
59
what has higher turnover A. Market Cap weighted B. Equally weighted C. Price weighted
B because it must rebalance to keep equally weighted
60
compate ETF and mutual fund about cost
ETF higher cost because bid/ask spread of intraday trading MF can be trading at closing price
61
completion overlay
like cash equitizaion

Equity (4 decks)

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