Portfolio Management Flashcards
Why is risk key in objective setting and fund evaluation?
As funds can’t be enhanced without taking additional risk.
How can risk be broken down?
Systematic and unsystematic components.
According to portfolio theory how can Systematic and unsystematic be managed?
Systematic can only be reduced with associated reduction in expected return. While unsystematic can be eliminated by holding a well diversified portfolio.
When are portfolios said to dominate other investments?
When portfolios have higher return for given level of risk, or lower risk for given level of return.
What is a key measure when selecting investments that will create more efficient portfolios?
Correlation coefficient.
What does a correlation coefficient of -1 mean?
That the offsetting factor of risk can be achieved when the two assets are combined.
What does value at risk estimate?
The capital loss of a portfolio over a given time that will be exceeded within a given frequency.
What is tracking error?
The difference between a portfolios return and and the benchmark or index it was meant to follow or beat.
What technique is used by fund managers to illustrate the risks taken by FM in managing a portfolio over specific period?
To plot the realised return and the standard deviation of the fund, plus the realised return and standard deviation of any relevant benchmark portfolio.
What are the other types of investment risk?
Inflation, currency, interest rates, fraud and counterparty risk.
What is important when constructing portfolios?
Correlation between asset class returns, often measured using five years of monthly data.
What is observed during times of financial stress in terms of asset returns?
Correlations vary overtime but returns become highly correlated.
What is CAPM?
Model that states the expected relationship between return and. systematic risk on an investment.
What is the measure of systematic risk?
Beta. Is the systematic risk of a security relative to the average market risk.
What is expression of security market line?
ER= Rf + beta (Rm-RF).
What is the beta of a portfolio?
Weighted average of the component securities betas.
What is the efficient market hypothesis?
The idea that security prices instantaneously reflect all available information.
What does efficient market hypothesis imply?
That the market prices of secunties will always equal the fair or fundamental values of those securities
What are the 3 versions of efficient markets?
Weak, sene strong and strong.
What evidence is there about pricing?
Evidence of anomalies in markets with some prices exhibiting some element of predictability.
Where does behavioural finance start
From the proposition that investors are not always rational and instead exhibit biases in decision making.
What is financial amnesia?
Refers to the situation whereby market participants forget the lessons of financial history leading to extreme overvaluation of assets relative to fundamental a situation describe as a bubble.
What is fair value?
Price at which an asset could be willingly exchange in a current transaction excluding an exchange during a liquidation sale. Often contrasted with valuing an asset based on historical cost.
What is top-down system?
Investors decide in which classes to invest the strategic proportions to hold (longer term) and the shorter term tactical asset allocation from these proportions. Individual asset selection strategies then take place within chosen asset classes.
What is bottom up portfolio formation?
Involves selecting individual assets on their own merits. Style of fund management is determined by strategic and t tactical asset allocation. Requires specification of the ranges around strategic proportions.
What does active management involve ?
Regular reassessments of asset allocation and stock selection decisions in an effort to outperform a benchmark
What does passive fund management involve?
Tracking rather than trying to beat a particular financial market index.
What does style refer to?
Investment portfolios with similar characteristics and performance patterns. Equity styles include growth, value, and small cap. Growth stocks will include those with high PE ratios, white value stocks typically have high dividend yields and low PE ratio.
What is immunisation?
Immunising fixed income portfolio to minimise impact that changes in interest rates will have on value of fund given stream of liabilities the fund is designed to meet.
What is the purest form of immunisation theory?
Cash matching but in practice can be very difficult to achieve.
What is a more practical way of immunising a portfolio?
Duration matching but involves immunisation risk.
What is contingent immunisation?
Where manager takes active decisions in bond management bat switches to passive immunisation strategy should the active returns not be high enough to meet objectives.
What is a barbell strategy?
Portfolio of bonds of dispersed durations constructed to target a particular liability
What is bullet strategy?
Contains bonds of more concentrated durations to target the same liability.
What is liability driven investment?
Framework which seeks to match pension fund assets to obligations using swaps and derivatives to hedge out inflation and interest rate risk.
How do you calculate PV of investors liability?
Using discount rate from either bond yields or swap rates. Movements in the swap spread may lead to an increase in funding volatility because different rates may be used to discount the assets and liabilities.
What is an important measure of risk?
Volatility of the plan surplus.
What does impact investing and ESG investing involve?
Screening investment decisions to make sure they are ethical.
What is impact investing?
Intentional investment in a company specifically to have a positive impact on environmental and/or social issues.
What does the stewardship code offer?
Published by financial reporting council offers principles for investment decisions which are considered to enhance long term shareholder value.
Which is the principle of responsible investment?
Independent organisation which aims to encourage responsible investment to enhance returns and better manage risk.
What is integrated analysis?
Use of ESG information in investment analysis including ESG information in estimation of company’s fundamental value. Can treat ESG factors in the same way as any other financial factors using existing methodologies
How is development of ESG factors as part of investment analysis changed?
Growing as empirical evidence continues to support the positive relation between corporate financial performance and performance on ESG issues.
What can impact investing involve?
Affordable housing, sustainable agriculture, healthcare, clean energy, improving education and creating job opportunities.
