Chapter 16 - the portfolio management process

Question 1

what are the 3 broad categories of assets an investor’s money can be distributed amongst

Answer 1

cash - no expected return, no expected risk
fixed income - low expected return, low expected risk
equities - high expected return, high expected risk

Question 2

what the phases of economy cycle?

Answer 2

expansion - economic + profit growth
peak - max economic activity/profit in a cycle
contraction - economic + profit decline
trough - minimum economic activity/profit in a cycle

Question 3

active vs passive asset allocation

Answer 3

passive = fixed over the life of an investor
active: can change with the market cycles

Question 4

what’s high level asset allocation

Answer 4

called strategic
- generally fixed but may change with changing characteristics of an investor

Question 5

define tactical/dynamic/integrated asset allocation

Answer 5

shift the asset allocation based on short-term expectations for different asset classes

Question 6

what are some passive asset allocation strategies

Answer 6

does not attempt to time the market; holds one set of assets for a long period of time

1. buy + hold limited number of individual stocks
2. invest in a market index

Question 7

over time, which performs better? active or passive?

Answer 7

passive

Question 8

define cyclical stocks

Answer 8

grow/decline with the economy

Question 9

define defensive stocks

Answer 9

are stable regardless of economic conditions

Question 10

define stock/bonds that are interest rate sensitive

Answer 10

they’re directly impacted by changing interest rates - banks + life insurers, floating rate bonds/debentures

Question 11

what are the different type of equity manager styles

Answer 11

growth - focus on companies with high revenue growth, may pay high P/E for exposure to high growth
value - focus on mature companies with stable revenue, pay low P/E
sector rotation - macro driven industry selection

Question 12

what are the different bond manager styles

Answer 12

interest rate anticipators - bet on interest rates rising or falling
term to maturity - restricted to specific maturities
credit quality - identify the best yields for a given credit quality
spread traders - long-short bond strategy betting on yield spreads between bonds to rise/fall…

Question 13

how do we evaluate our performance

Answer 13

compare to a return of your investments to an alternative benchmark
- benchmark may blend different asset classes to reflect the investor’s asset allocation

Question 14

what’s the sharpe ratio

Answer 14

commonly used metric for evaluation of a portfolio’s risk-adjusted return
measures unit of return per unit of risk
- return = total return
- risk = standard deviation

formula: (Rp - Rf)/SDp

Question 15

what’s the point of a sharpe ratio

Answer 15

to show the volatility over time of the portfolio
- usually managed portfolios have a lower sharpe ratio

Question 16

How can we find the benchmark total return

Answer 16

the weighted average of 2 indexes
if our porfolio was 30% DJ with a 14% return and 70% sp500 with a 35% return

(30% * 14% (return)) + (70%*35%(return)) = 28.7%