Questions to Review Flashcards
Implementation Shortfall
- Measures total impact of portfolio performance attributable to implementation costs - Compares actual portfolio performance to hypothetical portfolio based on value of positions with when decisions are reached - Can be used to analyze different components of implementation costs - Requires more extensive transaction data to evaluate trading
VWAP
- Average price (weighted for corresponding volume) at which a security trades during a given day - Used as a benchmark measure for evaluating trading costs - Ignores opportunity costs if orders are not filled
Buy-and-Hold Strategy
- Passive strategy that combines risk free assets with risky assets, “do nothing” strategy - Linear payoff diagram
Constant Mix Strategy
- Dynamic strategy, rebalance asset mix to initial weightings - Concave payoff diagram
CPPI
- Buy high/sell low dynamic trend following strategy - Good for investors with: zero risk tolerance if portfolio falls to floor/high risk tolerance when cushion is positive - Convex payoff diagram
Future value of investment after-tax (accrual)
Tax drag
Future value of investment after-tax (capital gains tax)
B = cost basis/asset balue at start of period n
Future value of investment (wealth tax)
Weighted average realized tax return (wartr)
Return after realized taxes (r*)
= r(1- wartr)
Effective capital gains tax rate (T*)
Future value of investment (total taxation)
Accrual equivalent return (RAE)
Accrual equivalent tax rate (TAE)
= 1 - (RAE / r)
Tax deferred account (TDA)
FV of $100
Tax exempt account (TEA)
FV of $100
RV of tax-free gift
RV of taxable gift, receiver pays taxes
FV of taxable gift, donor pays taxes
RV of charitable donation
Discretionary Trust
Trustee determins how the assets are to be distributed
