Portfolio Management Pathway (11.17.24) Flashcards
Overlay
A derivative position(s) used to adjust a pre-existing portfolio closer to its objectives
Completion overlay
A type of overlay that addresses an indexed portfolio that has diverged from its proper exposure
Rebalancing overlay
A type of overlay that addresses a portfolio’s need to sell certain constituent securities and buy others
Currency overlay
A type of overlay that helps hedge the returns of securities held in foreign currency back to the home country’s currency
Program trading
A strategy of buying or selling many stocks simultaneously
Tracking error
Indicates how closely the portfolio behaves like its benchmark and measures a manager’s ability to replicate the benchmark return
square root of variance of excess return
excess return = (return on portfolio - return on benchmark)
Excess return
Tell the investor how the manager performed relative to the benchmark
Sources of tracking error in an indexed equity fund
1) Fees
2) Number of securities held vs. the benchmark
3) Cash drag
Cash drag
Tracking error caused by temporarily uninvested cash
What could make net expenses negative in low cost index portfolio
Securities lending
Risks of securities lending
1) Credit quality of the borrower (credit risk)
2) Value of the posted collateral (market risk)
3) Liquidity risk
4) Operational risk
Special situations investment style
Focuses on the identification and exploitation of mispricings that may arise as a result of corporate events such as divestitures or spinoffs of assets or divisions or mergers with other entities
Portfolio overlay
An array of derivative positions managed separately from the securities portfolio to achieve overall intended portfolio characteristics
Factor-mimicking portfolio (FMP)
Theoretical long/short portfolio that is dollar neutral with a unit exposure to a chosen factor and no exposure to other factors
Fundamental investment process
1) Define the investment universe and the market opportunity (investment thesis)
2) Prescreen the universe to obtain a manageable set of securities for further analysis
3) Study screened set by performing industry, competitive, and financial report analysis
4) Forecast company performance, in terms of cash flows or earnings
5) Covert forecasts to valuations and identify ex ante profitable investments
6) Construct a portfolio of these investments with the desired risk profile
7) Rebalance the portfolio with buy and sell disciplines
Value trap
Stock that appears to be attractively valued (low P/E, etc.) because of a significant price fall but that may still be overpriced given its worsening future prospects
Growth trap
Stock that is overpriced and so above average or in-line earnings/cash flow growth does not cause the price to move higher
Categories of data used in quantitative investing
1) Company mapping
2) Company fundamentals
3) Survey data
4) Unconventional data
Company mapping
Used to track many companies over time and across data vendors (names, tickers, and other identifiers that change across different data vendors)
Survey data
Details of corporate earnings, forecasts and estimates by various market participants, macroeconomic variables, sentiment indicators, and information on funds flow
Unconventional data
Also known as unstructured data
Include satellite images, measures of news sentiment, customer-supplier chain metrics, and corporate events
Pearson IC
Simple correlation coefficient between the factor scores (essentially standardized exposures) for the current period’s and the next period’s stock returns
Spearman rank IC
Pearson correlation coefficient between the ranked factor scores and the ranked forward returns
Implicit vs Explicit trading costs
Explicit is commissions, fees, and taxes
Implicit is bid-ask spread and market impact