Equity

Question 1

What is buffering?

Answer 1

A buffer zone that a stock must overcome before moving into the index. Reduces index transaction costs.

Question 2

What is reconstitution?

Answer 2

Removing and replacing stocks that no longer fit index criteria. Will induce trading costs for the index.

Question 3

What is packeting?

Answer 3

A portion of the stock will move into a new index. Reduces index transaction costs.

Question 4

What is the HHI index? What is the effective number of stocks?

Answer 4

Measures stock concentration risk in a portfolio, calculated as the sum of constituent weights squared. Effective number of stocks is the reciprocal.

Question 5

What is the value trap and how to mitigate?

Answer 5

Low P/E or P/B multiple due to a deteriorating business. Look at cash flows and profitability.

Question 6

What is the growth trap?

Answer 6

When a stock is expensive and underperforms forecasts.

Question 7

What is a con to fundamental investing?

Answer 7

The value and growth trap.

Question 8

What is a con to quantitative investing?

Answer 8

Look-ahead and survival bias, data-mining.

Question 9

What are the three sources of active returns and what is the equation?

Answer 9

Rewarded factors, exposure to mispriced securities, and idiosyncratic risks. Active return = ∑ factor return (difference in sensitivities) + (alpha skill + luck).

Question 10

How does alpha skill change for top-down and bottom-up managers?

Answer 10

Top-down alpha is from market timing and bottom-up is from security selection.

Question 11

What is the active share equation?

Answer 11

0.5 ∑ |portfolio weight - BM weight|

Question 12

A sector rotator has ____ active share and ____ active risk?

Answer 12

Low, high

Question 13

A concentrated stock picker has ____ active share and ____ active risk?

Answer 13

High, high

Question 14

A closet indexer has ____ active share and ____ active risk?

Answer 14

Low, low

Question 15

A diversified stock picker has ____ active share and ____ active risk?

Answer 15

High, low

Question 16

What is the difference between the Pearson and Spearman rank correlation coefficients?

Answer 16

Pearson uses raw data and Spearman rank uses ranked data.

Question 17

Order of calculating liquidity constraints for a portfolio?

Answer 17

Minimum market cap, minimum daily trading volume, liquidity constraint, answer / max position weight.

Question 18

What is the active return equation (that includes IC)?

Answer 18

IC √BR σ TC

Question 19

What is the market turnover equation?

Answer 19

The lower of purchases or sales divided by average monthly net assets.

Question 20

What are slippage costs?

Answer 20

Trading costs due to market movements.

Question 21

How do the BHB and BF model allocation effects differ?

Answer 21

BF model uses total benchmark return. BF model is more accurate. BHB model will under or overestimate the allocation effect for a given region but the total allocation effect will be the same.

Question 22

What ratio do GARP look at and what direction is favourable?

Answer 22

Low PEG ratio.

Question 23

What are the four buildings blocks of the active portfolio construction?

Answer 23

Over- or under-weight rewarded factors, alpha skill, position sizing, breadth of expertise.

Question 24

What are 3 factors to consider before engaging in securities lending?

Answer 24

Admin costs of securities lending will reduce total income earned.
Cash collateral is subject to credit risk and market risk.
Additional income may be earned by reinvesting the cash collateral.