Tutorial 6 Flashcards
Describe the term ‘indexing portfolio strategy’, why do some investors use this strategy and what are the arguments in favour of indexing?
Index investing is a passive investment strategy where investors aim to replicate the performance of a specific financial market index by investing in funds that track the index
Discuss the potential issues with exchange-traded funds (ETFs).
- ETF closures
- Short-selling and redemption constraints
- Securities lending
- Flash Events and Systemic Risk
- Liquidity Mismatch
For both Manager A and Manager B calculate the expected return using the Capital Asset Pricing Model (CAPM).
Calculate the actual return minus expected return for each fund manager over the five year holding period and show where these alpha statistics would plot on the security market line (SML).
Explain, using the information from part (b), if either manager outperformed the other on a risk-adjusted basis.
Explain, using the information from part (b), if either manager outperformed market expectations in general.
Both managers underperformed the market.
For both Manager A and Manager B calculate the Treynor, Sharpe and
Sortino ratios. Are they consistent with observations in parts (b), (c) and
(d)?
If you were managing an institutional fund, which ratio would you prioritize and why?
Sharpe ratio. Institutional investors often prioritize consistent, risk-adjusted returns, and the Sharpe Ratio is widely understood and accepted in the industry. It is particularly useful for diversified portfolios where total risk (standard deviation) is a key concern.
If Portfolio B has the lowest standard deviation, does that make it the best choice for a conservative investor?
A conservative investor will indeed prefer a portfolio with low standard deviation but not if it is inefficient, i.e. other portfolios offer greater risk-adjusted returns.
Would the use of another benchmark change the conclusions?
It would affect the tracking error, the excess return of the portfolio relative to the benchmark and successively the information ratio
