Section 6

Question 1

What is a top down asset allocation approach to fund management?

Answer 1

chooses the assets classes and allocations first and leave stock picking until last

wide asset classes are initially specified with long term strategic portfolio proportions, giving way to short-term tactical deviations depending on the expectations of the investment manager.

Question 2

what does a bottom up approach to fund management use?

Answer 2

Uses fundamental analysis an construct a portfolio of opportunities (anomalies) .

Question 3

What is passive investing also known as?

Answer 3

index tracking

Question 4

what are benefits to passive

Answer 4

• low cost

- low tracking error - do not deviate too far from tracker being followed

Question 5

what is tracking error for a passive fund?

Answer 5

Difference between the performance of the fund and the performance of the index selected for tracking

Question 6

what is the success of a tracker fund based on

Answer 6

costs of managing the fund and the fund’s tracking error

Question 7

what are the main advantages of a tracker fund?

Answer 7

lower maintenance costs (transaction costs and management charges)

this is because once securities have been selected only an occasional adjustment is required to maintain the fund’s ability to tack.

Question 8

what is an issue with tracker funds / passive?

Answer 8

the risk/return characteristics of the market than an investor wishes to track may change - in this case the portfolio may need to be changed radically in order to achieve a new mix of risk and return.

-although these funds may produce adequate returns for investors in a bull market, in a bear market this strategy is not easy to justify.

Question 9

what is active fund management

Answer 9

seeking mispriced opportunities (over or under priced securities) and adjust their portfolios to take advantage of this.

Question 10

what are risks of active

Answer 10

risks involved in this approach to management are greater than in the simpler passive technique, because the fund manager will expose their portfolio periodically to the specific risk of a single security.

Question 11

what are benefits of active

Answer 11

could potentially yield much larger returns than that of passive (but could also yield much lower)

Question 12

What is portfolio tilting?

Answer 12

combines elements of both passive and active fund management

Question 13

how does portfolio tilting work

Answer 13

constituents of a particular index are held however these are not held in proportion to their market values and instead are ‘tilted’ in the direction of the managers view of market potential

Question 14

what is the main difficulty with combining active and passive strategy (tilting)

Answer 14

determining the degree to which the fund should be actively versus passively managed.

Question 15

what is a value style of investing?

Answer 15

value fund managers aim to identify shares that are perceived to be undervalued

Question 16

what companies would fund managers with a value style of investing look at?

Answer 16

• low absolute (or relative) price earnings ratios and high dividends yields
• price-to-book and price-to-sales ratios

Question 17

what are the three sub-categories in value style investing?

Answer 17

1) Undervalued securities
2) contrarian
3) High yielding

Question 18

what is investing in Undervalued securities

Answer 18

investing in stocks with low price earnings ratios focus on companies selling at low prices relative to current or future earnings. Including stocks in defensive and cyclical sectors or sectors which are currently out of favour.

Question 19

What is investing contrarian

Answer 19

companies with low share prices relative to book value. these firms may have little or no current earnings or dividend yield but are expected to experience a cyclical rebound or benefit from a firm-specific turnaround

Question 20

what is high yielding investing

Answer 20

high yielding stocks offering maintained or increasing dividends.

Cost is low compared to dividend being paid

Question 21

what is growth investing

Answer 21

managers attempt to identify companies with above-average growth prospects.

Question 22

what will investors be prepared to do for growth investing

Answer 22

pay higher current year PE for companies whose earnings are expected to grow faster than the market, or for those which have better visibility of earnings growth.

Question 23

what are market-oriented funds?

Answer 23

these do not have strong or persistent leaning to either growth or value stocks but are generally closer to the market average of the business cycle.

May tilt occasionally with no strong restriction on their portfolio selection process

Question 24

what are small cap portfolio construction

Answer 24

focusing on small companies

Question 25

what are characteristics of typical small cap portfolio

Answer 25

• below market dividend yields
• high betas
• high firm-specific risk
• paucity of stock researchi

Question 26

what is a PE ratio?

Answer 26

Price / Earnings ratio

price = future growth prospects 
earnings = actual performance

Question 27

what are PE ratios like in a growth fund?

Answer 27

high PE ratios

Question 28

what is momentum investing in terms of growth investing?

Answer 28

going with the trends and starting to buy as others by

Question 29

what are PE ratios like in a value fund

Answer 29

low PE ratios (finding something that the market has missed)

Question 30

what is large cap investing

Answer 30

investing in blue chip companies