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Investment Practice > portfolio theory > Flashcards

portfolio theory Flashcards

1
Q

correlation summary table

A

table 20

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2
Q

commission on equity and gilts

A

equity
> 10-20bps for large institutional trades
> 100-150bps for smaller trades
gilts
> 0.5%-1% for trades lower than £5k nv
> 0 for trades £1mill nv

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3
Q

stamp duty on certified shares and SDRT on dematerialised shares

A

0.5% to the nearest £5
0.5% to nearest 1p
MM exempt
AIM securities exempt

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4
Q

PTM (panel on takeover and mergers)

A

£1 charge for trades over £10k
MM exempt

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5
Q

capacity of fund, Vangelisti 2006

A

threshold capacity
wealth maximizing capacity
terminal capacity

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6
Q

threshold capacity

A

level of AUM beyond which the fund cannot achieve its objectives

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7
Q

wealth maximizing capacity

A

level of AUM that maximises the amount of wealth created in both returns to the investor and the mngmnt

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8
Q

terminal capacity

A

level of AUM that reduces the investor’s return, net of transaction costs, to 0

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9
Q

tracker funds methods

A

> replication
stratified sampling (buying the most influential shares within each sector)
synthetic (buying futures and holding cash in the bank)
optimisation (using historic analysis to determine which stocks have most accurately tracked the index)

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10
Q

tracking error causes

A

> inexact replication (weightings, investment style, characteristics, volatility or beta)
costs
changes in constituents

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11
Q

TE

A

TOTAL RETURN OF PORTFOLIO - TOTAL RETURN OF BENCHMARK
=(SUM(Rp-Rb)^2/N-1)^1/2
+/-50bps

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12
Q

top-down management

A
  1. asset allocation
  2. sector selection
  3. stock selection
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13
Q

asset allocation

A

strategic - long-term allocation
tactical - small changes to take advantage of short-term market shifts

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14
Q

technology and financial markets
utilities

A

high betas and are aggressive stocks perform well in rising markets
low betas and are defensive stocks performing less badly in falling mrkts

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15
Q

fundamental analysis and technical analysis

A

identifying stocks that are undervalued
the focus is on market behaviour rather than features of the stock e.g. trends in price movements , predicting these trends helps them outperform the market

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16
Q

value funds: contrarian investors

A

firms with low share price to book value
> expect to experience cyclical rebound or company turnaround

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17
Q

value funds: conservative approach

A

high yielding stocks expected to maintain or increase dividends

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18
Q

smartbeta

A

way to create weghtings

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19
Q

decomposing excess returns: total return

A

return on
asset allocation
+
stock selection
+
currency
+
interaction (impact of trading stocks actively - timing and selection)

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20
Q

bonds : total return

A

yield to maturity
+
interest rate effect
+
sector/quality
+
residual effect

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21
Q

stock market perfectly efficient

A

> perfect info
all info is public
market already price info
no transaction costs
no earnings surprises

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22
Q

weak EMH

A

> current market price reflects historic share price info
contradicts technical analysis

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23
Q

semi strong EMH

A

> current market prices reflect historic prices + all other public info

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24
Q

strong EMH

A

> current market prices reflect historic prices + all other public info + private info

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25
Q

information processing errors

A

> memory bias
overconfidence
confirmation bias
conservatism bias (too slow to updating beliefs)
sample-size neglect

26
Q

decision making errors

A

> framing bias
regret avoidance
loss aversion (take on more risk to avoid loss)
endowment rate (expect a higher selling price than what they bought)

27
Q

financial amnesia reasons

A

> incentive structures (incentivize mngmt to take detrimental decisions)
moral hazard (wider economy carrying risk)
behavioural finance biases (cognitive dissonance: group think, overconfidence)

28
Q

holding period return

A

> (end value - start value)/start value *100%
does not account for timing of cash flows
not useful for OEIC, unit trusts , pension funds money goes in and out often

29
Q

MWRR

A

> performance measure for a fund that experiences withdrawals and deposits
comparing portfolios : both portfolios received/withdrew at the same time
can overstate returns when fund does well and vv because affected by timing and size of CF
affected by timing and size of flows into fund

30
Q

TWRR

A

> unaffected by timing and size of cashflows
change in value of fund b4 cash * change in value after cash
equal weighting to timing and cash flows

31
Q

standard deviation - correlation. at times of extreme global events

A

> correlations become more strongly positive

32
Q

beta

A

change in return of portoflio / change in return of market portfolio
covariance(R_jR_m)/var(R_m)

33
Q

variance of portfolio return

A

beta^2*variance of return on mrkt + variance of unsystematic return

34
Q

drawdown measure (difference be/een peak and subsequent trough) adv and dis

A

adv
> easy to measure
> easy to understand
dis
> longer time series tend to have greater drawdown
> large and uncertain error distribution

35
Q

VaR

A

> max potential change in value of a portfolio of financial instrument with a given probability
evaluates performance of risk takers ad used for regulatory requirements
no info on severity of loss
3 ways :
historical return approach (identifies probabilities)
variance-covariance method (assumes normal distribution and uses standard deviation to assess probabilities)
monte carlo approach (simulations on random variations of historical data, outcomes used to generate probabilities)

36
Q

SML

A

R_j=r_f + beta_j(R_m-r_f)

37
Q

information ratio

A

ER/standard deviation_ER
(ER - arithmetic mean of excess returns over the benchmark)

38
Q

sharpe ratio

A

(R_p-R_f)/standard deviation_p

39
Q

treynor ratio well diversified-fund

A

(R_p-R_f)/beta_p

40
Q

jensen measure

A

R_p-R_capm
benchmark beta for capm

41
Q

decompsing jensen return to portoflio

A

risk-free return
+
benchmark return
+
market timing
+
stock selection

42
Q

ex-post (look back at historic risk and performance) and ex-ante (sets visible target before event but many assumptions)

A

Treynor and Sharpe
ex-post
Jensen
ex-ante

43
Q

shift
twist
spread

A

incr. or decr. of yield curves across maturities
yield curve steepened or flatened
differnece in yield be/een issuers yield and gvnments risk-free rate

44
Q

risk adjusted returns also Treynor for bonds

A

(R_p-R_f)/(D_p/D_m)

D_p
weighted avg duration of the portfolio

45
Q

CAPM in bond portoflios

A

ER_b=R_f+(D_b/D_m)(ER_m-R_f)

46
Q

actively mnged bonds

A

policy switch - switching be/een two different bonds
anomaly switch - switching be/een two similar bonds to take adv of mispricing
riding the yield curve
credit risk mngmnt

47
Q

passively mngd bonds

A

to protect against interest rate risk and re-investment risk :
> cash matching
> immunisation (larger range of bonds) - need to match duration of bonds to duration liabilities
assumptions:
flat yield curve
shifts only parallel
shift occurs before first cash flow payment
1. bullet portfolios (duration of bonds within portfolio same to the duration of the portfolios liabilities
pos: more available bonds
neg: need rebalancing to maintain immunisation effect
2. barbell portfolios (average duration of bonds match duration liabilities)
pos: even more bonds available
neg : greater re-balancing
>contingent immunisation (for active mngrs if failed to achieve returns …. switch to passively mnged immunised portfolios until liability dte)

48
Q

contigent immunisation

A

active mngrs change to passive mnged immunised portfolios until liability date

49
Q

LDI strategy
future liabilities must be predicted accurately
use derivative products to reduce effects of interest rates and inflation

A

> CF forecasts
acceptable risk specified by trustees
mngmnt ability to outperform mrkt
implementation of LDI strategy - can use derivatives - and consideration of additional investment vehicles
risk:
duration difference be/een target return and actual return
volatility of surplus measures the probability of a shortfall

50
Q

bottom up approach

A

focus is on stock selection
event driven or tactical trading basis

51
Q

closet index funds

A

> actively managed
active share close to 0

52
Q

HPR , MWRR, TWRR do not account for

A

risk

53
Q

autocorrelation of standard deviation

A

current returns correlated to future returns

54
Q

total risk

A

specific risk + systematic risk

55
Q

CAPM assumptions

A

> borrow and lend at the same risk free rate
same investment period
well diversified investors
no tax or transaction costs
max return for min risk
same expectations about returns and standrd deviation

56
Q

arbitrage pricing model

A

using market risk factors to predict and judge the performance of an asset
> for each firm the sensitivity to market factors is different
> each investor has a unique portfolio of betas
> goal: derive rate of return which will be used to to price asset

57
Q

dominance of a fund

A

where one fund achieves better return for the same level of risk or lower

58
Q

duration of a bond

A

measure of the interest rate risk of that portfolio

59
Q

relative duration

A

Dp/Dm

60
Q

advantage of a cash-matching strategy

A

shifts in the yield curve do not have adverse effects.

Investment Practice (17 decks)

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