S11+12 Flashcards
tracking ratio =
active return / tracking risk
return based analysis
regressing returns on a managers portfolio AGAINST the returns of various security indices
holdings based analysis
evaluating characteristics of securities from the portfolio
value =
- low PE,
- low PB,
- high div,
- small EPS growth,
- high earnings volatility (cyclicals),
- utility and financials (not tech and health)
return based analysis - advantages
characterizes entire portfoli enables comparison of entire portfolios summarizes the result of the investment process methodology backed by theory low information requirements different models resutls in same conclusions low cost fast speed
return based analysis - disadvantages
may be innacuratge due to style drift
misspecified indices can lead to misleading conclusions
holdings based analysis - advantages
characterizes each security
enables comparison of securities
quick in detection of style drift
holdings based analysis - disadvantages
is not consistent with methods used by managers to select securities
requires subjective judgement to clasify securities
requires more data
style drift
when PM stRAYs from his original/STATED style objective
pricing inefficiencies on the short side
barriers exist to short sales
firm management is more likely to promote stock via accounting manipulation
analysis on the sellside are more likely to issue buy recommendation
analysts face pressure from management against issuing sell recommendations
instruments for equitizing market neutral strategies
futures
ETFs
short extension strategies
120/20
advantages of short extension strategies
perceived as an equity strategy
can exploit short ideas
can be implemented without derivatives
disadvantages of short extension strategy
higher transaction costs
return is generated just via finding long/short ideas (no futures, interest as present in equitized market-neutral long-short portfolio)
selling discipline - 6 types
price target SD deteriorating fundamentals SD opportunity cost SD valuation level SD down from cost SD up from cost SD
fundamental law of active management =
InfoR = InfoC * Sq Root (Investor Breadth)
true active return =
total return - normal return
misfit active return =
normal - benchmark
total active risk =
SqRoot (True active risk ^2 + Misfit active risk^2)
true information ratio
True active return / true active risk
equities are a good
inflation hedge especially when firm can pass inflation on the consumer
passive equity strategy recommended to investors which are
taxable
have informational disadvantage
in informationally efficient large cap market
avoiding high transaction costs of small cap market
tax efficiency ETF vs Mutual funds
ETFs are more efficient
cost of holding ETF vs mutual funds
ETF are less expesnve
ETF better than futures due to
infinite life
easier to manage
forms of passive investment
full replication
stratified sampling
optimisation using a factor model
socially responsible investing
ethical investing
biased to GROWTH and small caps
why one would weight stocks in an index based on PEs
to prevent overweighting the overvalued stocks in that index
optimisation less convenient vs stratified sampling due to
more frequent rebalancing
investors more risk averse when facing total OR active risk?
active
price weighted indexes
Dow Jones Ind / Nikkei
float weighted indexes
CAC DAX FTSE RUSSEL S&P MSCI
3 goals of corporate governance
and for resolving principal-agent problem
affecting behaiviour of agents
reducing asymmetry of information
removing agents who misbehave or violate ethics
examples of unethical behaviour
self dealing - converting corporate funds to personal use
info manipulation - to hide health of firm
anti-competitive behavior
opportunistic exploitation of suppliers
substandard working conditions
environmental degradation
corruption - using bribery to gain illegal advantage
origins of unethical behavior
flawed personal ethics failure to realize profit/growth culture flawed business culture with unrealistic goals unethical leadership
purpose of stakeholder impact analysis
force the company to make choices among stakeholders and identify which groups are most critical to the company
principal-agent problem
agents of the company (mgmt) not acting in a way that achieved the goals of the principals of the company (shareholders)
friedman dorctrine
increasing profits within the rules of the game
flaw: too vague and broad
utilitarianism
businesses must weight consequences to the society and seek to produce highest good for the largest number of people
flaw: many costs and benefits are difficult to measure, can lead to exploitation of a small group of people
kantian ethics
people are different from other production factors, so they deserve dignity and respect
flaw: not sufficient to be a complete philosophy
rights theories
all individuals have rights and privileges
flaw: greatest good of utilitarianism cannot come at the expense of violation of the rights of others
justice theory
focus just on distribution of economic input
justice met if all participants agree on fair rules
4 tradeoffs for tracking international indices
- breadth vs cost (liquidity)
- liquidity vs cost of altering portfolio tracking a popular index at each reconstitution
- making precise float adjustment vs cost of reconstituting a portfolio
- investing in popular index vs cost of lack of objectivity in construction of the index
proprietary index models are ___ to reconsitute
more expensive
causes of contagion
currency may be devalued to keep exports competitive in line with other country which devalued
drop in exports to a contracting country
initial devaluation serving as a wake up call for investors
crisis in one country can lead to credit crunch in another
initial crisis cause investors to liquidate their investors in other countries.
negative attributes of corporate governance in emerging countries
- mgmt has larger voting power
- infrequent takeovers do not discipline mgmt
- firm shares can be owned by another which is concentrating control
- gov capital controls to benefit favored firms
- strong creditor rights = greater frequency of bankrupcy filings
- weaker governance firms may suffer more inmarket crises
- lower CEO turnover can leave poor management in place
what is driving the pricing of newly liberalized market vs unliberalized
smaller covariance risk instead of higher variance risk
style of a quan OR qual itative factor in researching investors
quantitative
why performance based compensation is bad for staff
volatility in compensations creates problem in retaining staff
investors total return in equitizing long short portfolio =
=
+ pl from LongShort position
+ PL from Futures
+ Interest earned on cash from short sale
