Equity

Question 1

Equity Benefits

Answer 1

1. dividend inc
2. diversification
3. inflation hedge

Question 2

Equity Segmentation

Answer 2

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

Question 3

Active Management Risks

Answer 3

1. reputational risk
2. key person risk
3. higher turnover

Question 4

Benchmarks

Answer 4

rules based, transparent, investable

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

Question 5

Passive Factor Based Strategies

Answer 5

​smart beta

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

Question 6

Derivatives in Passively Managed Acounts

Answer 6

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

Question 7

Tracking Error

Answer 7

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

Question 8

Fundamental Active Management Portfolios

Answer 8

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

Question 9

Quantitative Active Management Portfolios

Answer 9

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

Question 10

Statistical Arbitrage Strategies

Answer 10

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

Question 11

Event Driven Strategies

Answer 11

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

risk = merger will fail

Question 12

Fundamental Investing Pitfalls

Answer 12

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

Question 13

Quantitative Investing Pitfalls

Answer 13

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

Question 14

Pearson IC

Answer 14

correlation between factor exposure and holding period return

Question 15

Spearman IC

Answer 15

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

Question 16

Holdings-Based Style Analysis

Answer 16

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

Question 17

Returns-Based Style Analysis

Answer 17

regression of returns against passive style indices

+ don’t need holdings data, easy, universal

• detect style drift slower, backward looking

Question 18

Sources of Active Returns

Answer 18

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

Question 19

Portfolio Construction Process

Answer 19

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

Question 20

Expected Active Return

Answer 20

E(r_A) = IC √(BR) σ_RA TC

BR = # active decisions/ year

Question 21

Active Share

Answer 21

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

0.5 Σ |W_p - W_b|

Question 22

Active Risk

Answer 22

tracking error b/c factor exposure and idiosyncratic risk

√ [( Σ R_A² )/ ( T - 1 )]

Question 23

Factors in Determining Level of Risk

Answer 23

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

Question 24

CAV

Answer 24

contribution of asset to portfolio variance

( w_p - w_b ) cov

Question 25

CV

Answer 25

contribution of factor to portfolio variance

Σ w_i w_j cov_ij

w_i cov_ip

Question 26

Market Impact Cost Factors

Answer 26

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

Greater for: small cap, emerging markets, high volatility

Question 27

Long Only Inv

Answer 27

• long risk premiums
• scalable
• limited legal liability
• less complex

Question 28

Long/ Short Portfolios

Answer 28

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

Question 29

Value Manager

Answer 29

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

Question 30

Growth Manager

Answer 30

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

Question 31

Factor Based Portfolio Approach

Answer 31

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