Portfolio Management Flashcards
Performance attribution
Key drivers that generated the account performance
Performance appraisal
Determines whether the performance was affected primarily by investment decisions, overall market or by luck
Performance measurement
calculates both return and risk of the fund over specified time periods
What is the investment decision making process?
Idea generation
Idea implementation
Portfolio construction
Portfolio monitoring
Give 5 points on return based style analysis
- RSBA estimates the portfolios sensitivities to security market indexes for a set of risk factors
- The approach is top down in nature
- Little additional data is needed
- It can determine the key risk factors and return drivers for basic and complex strategies
- uses objective data and allows compatibility
HBSA
- Looks at the actual securities included in the portfolio
- is bottom up
- most appropriate for equity based investment
- drawback is increased computational requirement
- complexity increases and transparency decreases
Define decision price
The price at the time the investor made the investment decision
Arrival price
The price of the security when the order is sent to the market for execution
VWAP
The average price of all trades weighted by volume, over the trading horizon
- managers mast use the VWAP benchmark when they want to participate in volume patterns over a day
Principle trades
The dealers assume the risk relating to executing the order
Agency trades
Broker finds the other side of the trade
What is execution risk?
The risk of adverse price movements over the time horizon, is caused by trading too slowly
Drawbacks of SMAs
- higher costs (trading costs are higher too)
- limited liquidity
- complex
- performance variability
Problems with unconstrained MVO
Unconstrained mean–variance optimization (MVO) often leads to portfolios dominated by cash and fixed income at the low-risk end of the spectrum and by private equity at the high-risk end of the spectrum.
Some investors impose minimum and maximum constraints on asset classes. Slight changes in the input variables could lead to substantial changes in the asset allocations.
Key elements in monitoring alternative investments
key person risk,
alignment of interests, style drift,
risk management,
client/asset turnover,
client profile,
service providers.
Budget stabilization fund
Set up to insulate the budget and economy from commodity price volatility and external shocks.
Developement funds
Established to allocate resources to priority socio-economic projects, usually infrastructure.
Savings fund
Intended to share wealth across generations by transforming non-renewable assets into diversified financial assets.
Reserve funds
Intended to reduce the negative carry costs of holding foreign currency reserves or to earn higher return on ample reserves.
Pension Reserve funds
Set up to meet identified future outflows with respect to pension-related, contingent-type liabilities on governments’ balance sheets.
which sovereign wealth fund has highest and lowest liquidity respectively?
Budget stabilization fund and savings funds
Advantages and disadvantages of traditional approaches
- Easy to communicate
- Relevance for liquidity management and operational considerations
- Over-estimation of portfolio diversification
- Obscured primary drivers of risk
Advantages and disadvantages of risk based approaches
- Common risk factor identification
- Integrated risk framework
- Sensitivity to the historical look-back period
- Implementation hurdles
- Determining which risk factors should be used and how to measure them
in different asset classes
Wealth life cycle
-
Education Phase
- Occurs before entering the workforce.
- Individuals are often financially dependent on parents or guardians.
- Focus is minimal on savings, with little accumulated financial capital.
-
Early Career Phase
- Begins upon workforce entry, typically in late teens to early thirties.
- Individuals may marry, start a family, incur debt (e.g., purchasing a home), and begin saving for children’s education.
-
Career Development Phase
- Typically spans ages 35–50.
- Marked by skill development, upward career mobility, and income growth.
- Significant family and housing expenses may limit savings, with human capital forming a large part of total wealth.
-
Peak Accumulation Phase
- Usually occurs between ages 50–60.
- Represents a period of maximum earnings and wealth accumulation potential.
- Focus shifts to retirement income planning and tax minimization, while other goals may still be funded.
-
Pre-Retirement Phase
- Covers the years just before planned retirement, often around age 65.
- Characterized by maximum career income and peak wealth accumulation.
- For those forced into early retirement (e.g., due to injury or unemployment), this phase may require adjusting lifestyle expectations.
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Early Retirement Phase
- The most active retirement period, with fewer cognitive or mobility limitations.
- Maintaining appropriate investment risk is crucial to ensure continued asset growth.
-
Late Retirement Phase
- Defined by its uncertain duration, introducing longevity risk (the risk of outliving financial resources).
- May involve cognitive decline, mobility limitations, long-term health care needs, or caring for disabled dependents.
Latency
The elapsed time between the occurrence of an event and a subsequent action that depends on that event.
Why low-latency is important to electronic traders.
need a comparative speed advantage to
1) take advantage of market opportunities before others do
2) receive time precedence that would allow them to trade sooner when offering liquidity to others
3) ensure order cancellation when they no longer want to fill the order.
How are institutional investors different from individual investors
- Scale (asset size) - Larger
- Long term investment horizon (more)
- Regulatory frameworks (multiple regulatory framework)
- governance framework (proper governance framework)
- principle-agent issues
