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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
information processing errors
> memory bias > overconfidence > confirmation bias > conservatism bias (too slow to updating beliefs) > sample-size neglect
26
decision making errors
> 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
financial amnesia reasons
> incentive structures (incentivize mngmt to take detrimental decisions) > moral hazard (wider economy carrying risk) > behavioural finance biases (cognitive dissonance: group think, overconfidence)
28
holding period return
> (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
MWRR
> 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
TWRR
> 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
standard deviation - correlation. at times of extreme global events
> correlations become more strongly positive
32
beta
change in return of portoflio / change in return of market portfolio covariance(R_jR_m)/var(R_m)
33
variance of portfolio return
beta^2*variance of return on mrkt + variance of unsystematic return
34
drawdown measure (difference be/een peak and subsequent trough) adv and dis
adv > easy to measure > easy to understand dis > longer time series tend to have greater drawdown > large and uncertain error distribution
35
VaR
> 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
SML
R_j=r_f + beta_j(R_m-r_f)
37
information ratio
ER/standard deviation_ER (ER - arithmetic mean of excess returns over the benchmark)
38
sharpe ratio
(R_p-R_f)/standard deviation_p
39
treynor ratio well diversified-fund
(R_p-R_f)/beta_p
40
jensen measure
R_p-R_capm benchmark beta for capm
41
decompsing jensen return to portoflio
risk-free return + benchmark return + market timing + stock selection
42
ex-post (look back at historic risk and performance) and ex-ante (sets visible target before event but many assumptions)
Treynor and Sharpe ex-post Jensen ex-ante
43
shift twist spread
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
risk adjusted returns also Treynor for bonds
(R_p-R_f)/(D_p/D_m) D_p weighted avg duration of the portfolio
45
CAPM in bond portoflios
ER_b=R_f+(D_b/D_m)(ER_m-R_f)
46
actively mnged bonds
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
passively mngd bonds
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
contigent immunisation
active mngrs change to passive mnged immunised portfolios until liability date
49
LDI strategy future liabilities must be predicted accurately use derivative products to reduce effects of interest rates and inflation
> 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
bottom up approach
focus is on stock selection event driven or tactical trading basis
51
closet index funds
> actively managed > active share close to 0
52
HPR , MWRR, TWRR do not account for
risk
53
autocorrelation of standard deviation
current returns correlated to future returns
54
total risk
specific risk + systematic risk
55
CAPM assumptions
> 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
arbitrage pricing model
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
dominance of a fund
where one fund achieves better return for the same level of risk or lower
58
duration of a bond
measure of the interest rate risk of that portfolio
59
relative duration
Dp/Dm
60
advantage of a cash-matching strategy
shifts in the yield curve do not have adverse effects.

Investment Practice (17 decks)

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