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CFA Level III > Equity > Flashcards

Flashcards in Equity Deck (31)
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1
Q

Equity Benefits

A
  1. dividend inc
  2. diversification
  3. inflation hedge
2
Q

Equity Segmentation

A
  1. size/ style
  2. geography
  3. econ activity (market vs production oriented approach)
3
Q

Active Management Risks

A
  1. reputational risk
  2. key person risk
  3. higher turnover
4
Q

Benchmarks

A

rules based, transparent, investable

select based on exposure (segment, capitalization, growth vs value) and maintenance (weighting method, stock conc, rebalancing, reconstitution)

5
Q

Passive Factor Based Strategies

A

​smart beta

  1. return oriented
  2. risk oriented
  3. diversification oriented
6
Q

Derivatives in Passively Managed Acounts

A
  1. completion overlay: aligning risk exp
  2. rebalancing overlay: reconstitution
  3. currency overlay: adj for FX changes

lower costs, more liquid; expire, limits, credit risk, basis risk

7
Q

Tracking Error

A

SD of excess return vs index; passive managers; identified w/ attribution analysis

causes: fees/ commissions, sampled portfolios, cash drag
prevention: full replication, min cash w/ futures or netting inflows/ outflows

8
Q

Fundamental Active Management Portfolios

A
  • subjective
  • higher conc in fewer stocks
  • risk = miscalc intinsic value
  • continuously monitoring and rebalancing
9
Q

Quantitative Active Management Portfolios

A
  • objective
  • calc regressions to predict return w/ historical data (risky)
  • smaller positions on more holdings
  • optimizer to set weights
  • automatic rebalancing
10
Q

Statistical Arbitrage Strategies

A
  1. pairs trading - sell high spread, buy low spread; profit from mean reversion
  2. market microstructure-based - profit from mispricing, very short
11
Q

Event Driven Strategies

A
  1. buy target after merger annoucement
  2. share for share - short acquirer, long target at ratio of share exchange

risk = merger will fail

12
Q

Fundamental Investing Pitfalls

A
  1. behavioral biases
  2. value trap - low price multiples b/c firm deteriorating; overvalued even w/ dec in price
  3. growth trap - above avg growth already factored into valuation
13
Q

Quantitative Investing Pitfalls

A
  1. survivorship bias
  2. look ahead bias
  3. data mining
  4. turnover constraints
  5. lack of availability
  6. transaction costs
14
Q

Pearson IC

A

correlation between factor exposure and holding period return

15
Q

Spearman IC

A

correlation between factor expsoure and holding period return, controlling for outliers

16
Q

Holdings-Based Style Analysis

A

style box to classify holdings by growth and value

+ accurate, detects style drift faster

  • needs lots of data, diff def of classifications
  • style score > 0: value
  • style score = 0: core
  • style score < 0: growth
17
Q

Returns-Based Style Analysis

A

regression of returns against passive style indices

+ don’t need holdings data, easy, universal

  • detect style drift slower, backward looking
18
Q

Sources of Active Returns

A
  1. rewarded factors - LT pos risk premiums
  2. mispriced securities
  3. idiosyncratic risk - luck
19
Q

Portfolio Construction Process

A
  1. over/ underweight rewarded factors
  2. alpha skills - identify mispricings, factor timing (top-down)
  3. sizing positions
  4. ** breadth of expertise
20
Q

Expected Active Return

A

E(rA) = IC √(BR) σRA TC

BR = # active decisions/ year

21
Q

Active Share

A

diff between size of the position and benchmark; want higher active share b/c paying for active management

0.5 Σ |Wp - Wb|

22
Q

Active Risk

A

tracking error b/c factor exposure and idiosyncratic risk

√ [( Σ RA2 )/ ( T - 1 )]

23
Q

Factors in Determining Level of Risk

A
  1. constraints
  2. limited diversification opp - eventually run out of high return inv
  3. leverage - point where inc lev, dec exp return
24
Q

CAV

A

contribution of asset to portfolio variance

( wp - wb ) cov

25
Q

CV

A

contribution of factor to portfolio variance

Σ wi wj covij

wi covip

26
Q

Market Impact Cost Factors

A
  1. AUM
  2. turnover/ inv horizon
  3. using trades as a signal

Greater for: small cap, emerging markets, high volatility

27
Q

Long Only Inv

A
  • long risk premiums
  • scalable
  • limited legal liability
  • less complex
28
Q

Long/ Short Portfolios

A
  1. long extension - net exposure of 100%
  2. market neutral - net market beta of 0; low volatility, low corr, harder b/c changing betas

+ express neg ideas, leverage, remove market risk

  • unlimited loses,cost of borrowing, loses cause inc collateral demand
29
Q

Value Manager

A
  1. high div yield
  2. low P/E or P/B
  3. low forecasted growth
30
Q

Growth Manager

A
  1. low div yield
  2. high P/E or P/B
  3. high forecasted growth
31
Q

Factor Based Portfolio Approach

A
  1. screening large number of stocks to select widely distributed portfolio
  2. selection based on obj public data such as P/E and P/B
  3. emphasis on big data
  4. standardized approach to rebalancing