Chapter 16- (7Qs) Portfolio Management Styles, Strategies and Techniques Flashcards
Asset Allocation
Mix of assets rather than individual stock returns is what drives performance
Stock, bonds, cash are most common asset classes
Strategic asset allocation
Standard model is Subtracting a persons age from 100 to find equities
Constant Dollar
Keeping a specified dollar amount in equities instead of a percentage
Active vs Passive management
Active- Relies on stock picking and market timing ability to outperform index
Passive- No particular management style will outperform the market consistently
Buy and hold technique
Passive strategy that is easiest to implement
Look for lower manager fee
Would sell if P/e ratio appreciates too high
Growth vs Value
Growth- Focus on stocks with high earnings growth, purchasing stocks on the higher end of 52 week price range
Looking for earnings momentum
Value- Look for undervalued/Out of Favor stocks. Sometimes find bargain with those producing a loss
Look for dividends and large cash surplus
Market Capitalization
Micro cap- under 300MM
Small Cap- 300mm to 2 billion
Mid- 2-10B
Large- 10+B
Income vs Capital Appreciation
Income- Usually will lead to foreign securities or high yield bonds
3 Different strategies when in debt securities:
- Barbell- Purchase bonds on both ends, active as you buy new bonds every year
- Bullet- Bond purchases at different times but at same maturity
- All bonds purchased at the same time but different maturities
Capital Appreciation- Mostly growth but can include options, futures, iPos and day trades
Capital Asset Pricing Model
Attempts to derive expected return by systematic risk
Developed by William Sharpe
Modern Portfolio Theory
Attempt to quantify and control portfolio risk
Looks to analyze risk return of entire portfolio instead of individual assets
Risk can be mitigated by building an uncorrelated portfolio
Concluded that less volatility produces greater return
Uses CAPM to find the securities within the overall portfolio
Produce most efficient portfolio (Least risk for given amount of return or most return for given risk)
Capital market assumptions
- All investors can borrow at the risk free rate of return
- All investors are rationale and evaluate investments in regards to expected return/variablity
- Equal time horizons
- No inflation
- Fractional shares may be purchased
- Markets are efficient
Markowitz (founder of MPT)
Capital Market Line
Line of expected return for a portfolio
Uses expected return, risk free rate, Standard deviation of market and portfolio, return of market
DOES NOT USE ALPHA OR BETA
Also use a security market line which focuses on: Expected return Risk free rate Return on the market Beta of asset
Risk free rate + Beta(expected - Risk free)= Security Market Line
Monte Carlo Simulations
Future events simulated to generate estimated returns
Used for wealth forecasting with estimated cash flows
Efficient market Hypothesis
Random Walk theory
Three Levels
Security prices adjust rapidly to new info and is fully priced in
Would more likely lend itself to a passive market outlook
Random walk- Throwing darts at board of stocks is just as efficient
Weak Efficient- Market reflects all currently available market data, technical analysis has no predictive power
Semi-strong- Market reflect all public info (past info and nonmarket info), technical and fundamental are both priced in
Strong- All Info is priced in, including insider information (best to use passive at this point), random walk
Portfolio Diversification
Reduces unsystematic risk to enhance return
Look to lower correlation coefficient
Enhanced by addition of international stocks
Fixed income products are a hedge against deflation
Equities are hedge against inflation
Diversification is not a synonym for asset allocation
