PM: Overview Flashcards
Portfolio Perspective =
evaluating individual investments by their contribution to the risk and return of an investor’s portfolio.
as opposed to looking at each stock individually.
Modern portfolio theory concludes that the concentration risk from holding a single security is not rewarded with higher return - diversification can reduce portfolio risk without necessarily reducing returns.
Markowitz =
unless investments in a portfolio are perfectly correlated then diversification reduces risk.
Modern Portfolio Theory =
Diversification Ratio
Treynor, Sharpe, Mossin, Lintner - equilibrium expected returns that are a linear function of each security’s market risk
Leading to the diversification ratio:
standard deviation of returns of an equally weighted portfolio of n securities to the standard deviation of returns of a single security selected at random
where STANDARD DEVIATION OF RETURNS = RISK
does not mean that an equally weighted portfolio provides the greatest reduction in risk.
Types of Investors: Individual =
save and invest for multiple reasons: retirement, education, houses
Defined contribution pension plans are populate - investor takes on risk/responsibility for returns.
Types of Investors: Institutions =
may have DB (defined benefit plans) obligations, typically over a long time horizon
will select investments to meet these long term obligations
Types of Investors: Endowments/foundations =
provides ongoing financial support for a specific purpose on an ongoing basis
foundation: fund for charitable purposes
Goal to fund the activity/research on a continuing basis without decreasing the real value of the portfolio’s assets
Typically long term horizon and little need for liquidity outside their planned spending
Types of Investors: Insurers, Investment companies, Sov Wealth Funds
Self explanatory
Investors and Risk Tolerance: CHEAT SHEET =
PM Process: Step 1 =
planning step : analyzing risk tolerance, return objective, time horizon, tax exposure, liquidity needs, income needs.
Investment Policy Statement - IPS :
created from the variables above, states benchmark, should be updated every few years.
PM Process: Step 2 =
Execution step: analysis of risk return of assets, asset classes are determined (top down) and securities are selected based on bottom up security analysis.
PM Process: Step 3 =
The Feedback Step: monitoring of changes in asset values/weighting
measurement of portfolio performance and evaluation vs BM in the IPS.
Mutual Funds =
Pooled investment, NAV of each share is the total net value of assets divided by # of shares.
Open end fund allows investors to purchase newly issued shares/redeen at NAV.
No load funds don’t charge ‘load fees’ for purchasing/redeeming shares
Closed end funds don’t allow new investors - they trade like equity shares
Ongoing mgmt fees are charged by both.
Types of MFs: Money market, bond, indes/passive, actively managed
ETFs =
similar to closed end funds.
Often passive.
Market prices typically stay very close to NAV (whereas closed end funds may vary due to supply/demand imbalances)
Most ETFs pay dividend income out, whereas open end MFs typically give the option of reinvestment
ETFs may produce less capital gains liability than open ended funds - as sales of of ETF securities don’t require sales by the fund.
Hedge funds =
pooled investment fund not regulated like MFs.
limited number of investors in the fund. often sold only to qualified investors with high minimums.
Strategies include
- long/short - buy outperformers, sell underperformers
- equity market-neutral funds - long and short positions offset each other in order to be profitable in up and down markets
- long/short bias - greater relative amount of long/short positions
- event driven - invest in one time corporate events such as M & A
- fixed income arbitrage funds - profit through pricing arbitrage in debt, via long/short positions
- convertible bond arbitrage funds
- global macro funds - specialize in intl FX and rates, often using derivatives and high leverage
Buyout funds (PE) =
typically buy out entire companies and take them private.
often funded with significan increase in debt - LBO
intention to restructure and increase equity value and sell the firm within 3-5 years via IPO or to an established firm.
