Equity

Question 1

Fundamental
style :
decision making process :
primary resources :
information used:
analysis focus:
orientation to data:
portfolo construction:

Answer 1

style : subjective
decision making process : discretionary
primary resources : judgment, experience, human skill
information used: research (company/economy/industry)
analysis focus: conviction in stock, sector, region based selection
orientation to data: forecast future corporate parameters and establish views on companies
portfolo construction: use judgment and convition within permissible risk parameters
rebalancing: discretionary, at any time

Question 2

Give 3 disadvantage of hedging portfolio approach

Answer 2

information in the middle is not used
concentrated portfolio and crowded
hedged portfolio is not a “pure” factor portfolio

Question 3

Give 1 advantage and 1 disadvantage of long-only portfolio

Answer 3

Tracks benchmark index closely

Provide exposure to the chosen factor

Question 4

advantages of Atkins segmenting the investment universe based on size/style.

Answer 4

• Facilitate portfolio managers’ ability to construct an overall equity portfolio that reflects desired risk, return and income characteristics;
• Provide diversification across economic sectors or industries;
• Provide an appropriate benchmark for active portfolio managers to evaluate the managers’ performance; and

Question 5

3 requirements for an index in equity investment

Answer 5

must be rule based
must be transparent
must be investable

Question 6

Free float and weighted index

Answer 6

Similarities:
Low cost, rules-based construction, transparency, and investability

Differences:
Free-float weighted indices operate based on the validity of the efficient market hypothesis, whereas fundamental weighting operates to exploit possible inefficiencies in market pricing.

Question 7

Selecting a benchmark

Answer 7

Rule based: criteria for selection and rebalancing must be objective, consistent and predictable
Investable: can be replicated
Transparent: disclosure of rules and constituents

Question 8

Hedged portfolio approach

Answer 8

Select factor then rank stocks by that factor, divide into quartiles/quintiles/deciles

-
Info in the middle is not used
Concentrated and crowded portfolios
Not a pure factor portfolio

Question 9

Look ahead bias

Answer 9

Using information that was unknown or unavailble at the time the investment was made

Question 10

Data mining & overfitting

Answer 10

excessive search and analysis of past data to uncover patterns and to conform to a pre-determined model for potential use in investing

Question 11

ways to reduce cost for a fund

Answer 11

reduce administrative fees
reduce marketing and distribution cost
reduce trading costs
reduce frequency of trading