Equity 22-25 Flashcards
(111 cards)
1
Q
equity in overall portfolio
A
- capital appreciation
- dividend income
- diversification with other asset classes
- hedging against inflation
- client considerations for equities in a portfolio
2
Q
negative screening
exclusions screening
A
positive screening best-in-class screening
3
Q
thematic investing
A
screens equity based on a specific theme
-impact investing related approach that seeks to achieve targeted social or environment objectives, along with measurable financial returns through engagement with a company or buy direct investment in projects or companies
4
Q
segmentation by size and style
A
adv:
1. reflects risk, return and income characteristics clearly
2. diversify by investing across sectors
3. easier to construct a bak by type
4. allows a portfolio to reflect a firm’s maturity and potentially changing orientation
disadvantage:
1. the categories may change over time and maybe defined differently among investors
5
Q
segmentation by Geography
A
based on stage of market’s macroeconomic, development and wealth
DM, EM, frontier mkt
adv: easier to diversify disadvantage: 1. may provide lower-than-expected exposure to that market 2. presence of currency risk
weakness:
targeting large companies domiciled in developed countries, the actual exposure to a specific geographic market may be lower than expected
6
Q
segmentation by economic activity
A
industries/sector:
production oriented or market oriented approach
production oriented: group companies that produce similar products or use similar inputs
market oriented: group companies based on their target market, the way revenue is earned and the way customers use companies’ product
adv:
1. allow portfolio managers to analyze,conpare, and construct performance benchmark based on specific sectors/industries
2. diversification benefits are enhanced when investment span across different sector/industries
disadvantage:
not easily assigned to any sectors/industries
7
Q
risk reduction through diversification is likely to be less than expected:
A
- the correlation are likely to move towards 1.0
2. the volatility of the assets is likely to increase
8
Q
dividend income
A
- consider taxation
- cash dividend, stock dividend, optional dividend
- regular dividend and special dividend
9
Q
Securities lending income
A
a form of collateralized lending
- can facilitate short sale
- stock lending: security transfer transaction stock loan 0.2-0.5% fee
generate further income by reinvesting the cash collateral received
transfer voting rights
10
Q
ancillcing investment strategies 附属的
A
additional income generated from trading strategy
- dividend capture purchase stocks just before ex-dividend date and sell subsequently
- writing options, covered call, cash-covered/secured pmt
11
Q
fees/costs
A
- mgmt fees
- performance fees, high water-mark fee threshold
- administration fees (Processing corp. action, rights issue)
- external fees (custody, registration)
- marketing & distribution cost
- trading cost (explicit & implicit)
12
Q
Shareholder engagement
A
actively interact with companies on:
- strategy
- allocation of capital
- corp. governance and regulatory & political risk
- remuneration (compensation of directors, senior mgmt)
- composition of BOD
Benefit from companies perspective:
- can assist in developing a more effective corp. governance culture, better company performance
- free rider
- other stakeholders may benefit from the active mgmt
-
disadvantage:
- timing consuming and costly to both shareholder and companies
- pressure on company mgmt to meet near-term share price or earnings target could be made at the expense of LT corp. decisions
- potential conflict of interest
- potential insider trading
13
Q
active management rational:
A
confidence, client preference, suitable benchmark (sufficient liquidity) mandate
risk: reputation risk
key person
taxes: higher portfolio turnover lead to higher tax burden
14
Q
Empirical evidence suggest equity provide LTD protection against inflation.
A
equity is a claim on real earnings, however doesn’t hold all the time.
in ST and inflationary environment, often do not provide a hedge and have native correlation with inflation.
15
Q
passive equity investing
A
adv:
- low cost
- broad diversification
- tax efficiencies
- rule-based
- transparent and investable strategy that does not involving identifying imispriced individual securities
- can include investing in a change set of market segments that are selected by pM
MOTIVATION:
- COST OF PASSIVE < cost of active
- asset allocation > security selection (does not justify cost)
- efficient market hypothesis hold, stock price incorporate all relevant info
- lower fee
- seek to take an index, achieve beta return not alpha (outperformance)
16
Q
buffering:
packeting
A
can be used to smooth stock migration between indexes and improve the investability of an equity index.
buffering:
involves establishing ranges around breakpoint that define whether a stock belongs in one index or another
packeting: involves splitting stock position into multiple parts
(60% large cap, rest in mid-cap)
17
Q
constraints when choosing a bmk
A
1. exposure capitalization style exposure factor
- risk-factor exposure
index construction methodologies
- exhaustive (select every constituent of a universe)
-selective (target only those securities with certain characteristics)
18
Q
market weighted
A
market cap weighted index based on efficient market hypothesis, low cost
adv:
- reflect a strategy’s capacity, can be thought of as liquidity weighted
- a reasonable proxy for the market portfolio, the tracking portfolio maybe close to mean-variance efficient
most common form- free-float weighting
reflect actual liquidity
- adjust each consitunent’s shares outstanding for closely held shares that are not generally available to the investing public
- can be comped since the index provider have to reach out to the firm’s shareholder securities unit or to rely on analytical judgements
19
Q
price-weighted index
A
wi = share price/ sum of all share prices
interpret as a portfolio that consists of one/same share of each constituent company
disadvantage:
- when stock split, calculations become complex
- assumption that the same # of shares each is held in each company stock is a shortcoming
20
Q
equal-weighted index
naive strategy
A
=1/#shares in the index
adv:
- produce the least concentrated portfolio, result in reduction of style stock concentration risk and slow changing sector exposure
- factor-indifferent, and the weighting randomize the misplacing
disadvantage:
- produce higher volatility than cap weighted, deviate from market weight most dramatically for large-cap indexes
- require frequent rebalancing
- limited investment capacity
- in case that any of the constituent stocks are misplaced, it will experience return superiority as the stock prices move up and down toward their correct value.
21
Q
fundamental weighted index
A
philosophy:
- it’s weighted based on such attributes as a stock’s fundamental characteritics
- market price will eventually converge to a level implied by fundamental attributes
22
Q
HHI= weight ^2 # of stock =
A
1/ HHI
as HHI increase, concentration risk decrease
23
Q
Defensive or volatility ready strategies
A
- income oriented investor
dividend yield - volatility weighting calculates the volatility of each constituent stock and weights the index based on the inverse of each stock’s relative volatility
minimum variance index using mean-variance optimization
24
Q
period rebalancing & reconstitution
A
reconstitution - add/delete of index constituents
rebalance - reweighing of constituents
25
factor based strategies
size value
quality
momentum
- smart beta
can be used to place of or to complement a market cap-weighted index portfolio
- concentrate on risk exposures
- transparent in factor selection, weighting & rebalancing
- higher mgmt fees
- trading commission more than market-cap indexes
0provide pure exposure to specific market segments (fact rotation)
26
return-oriented
dividend-yield strategy
momentum strategies
fundamental weighted strategies
27
risk oriented
seek to reduce downside volatility and overall portfolio risk
using std of price return for the past 252 trading days
- volatility weighting
- minimum variance investing, requires access a mean-variance optimizer
adv:
simple to understand and provide a way to reduce absolute volatility & downside returns
disadvantage:
- based on past returns, may not reflect futures
-investor will not always achieve their objectives
disadvantage:
- less accurate than holdings because they do no t utilize actual portfolio holdings
- most return-based models impose unnecessary constraints that make it difficult to detect more aggressive positions such as deep value or micro-cap
28
diversification oriented
include equally weighted indexes and maximum diversification strategies
29
approaches to passive equity investing
pooled investment
most convenient
open ended mutual fund/ ETF
mutual fund: as of purchase
low cost
convenient of fund structure
ETFs: ease of trading
low mgmt fee
tax efficiency
may in short borrowing position
disadvantage:
transaction cost from commission and bid-ask spread liquidity ETF secondary market
30
Derivative-based approach
- low cost, easy to implement, provide leverage
- however present risk such as counterparts default risk for derivatives that are not traded on exchanges
- difficult to access by investors
- not used for passive, but are used to adjust pre-existing portfolio to move closer to meeting objectives (overlay)
31
completion overly
address an indexed portfolio that has diverged from its proper exposure
32
rebalancing overlay
address a portfolio's need to sell certain constituent securities and buy others
33
currency overlay
assists a portfolio manager in hedging the returns of securities that are held in a foreign currency back to the home country's currency
34
advantages of using equity index derivations
| options/ futures, swaps over cash-based techniques
adv:
- can be used to quickly adjust factor exposure at low costs
- trade in liquid market
- marke it easy to average the portfolio
disadvantage:
- basis risk increase tracking error
- some contracts have position limits
- OTC derivatives introduce counterpart risk
- market to market: small change in index value can result in margin call
- they must be rolled, out/or near expiration
35
full replication
adv:
- matching index performance
- easy to comprehend
disadvantage:
- requires that asset size of the mandate is sufficient
- index constituents are available for trading
36
stratified sampling
subset based on key risk
- higher tracking error
- limited postion/size
- liquidity
dealing with small asset
to stratify is to arrange a population into distinct subgrouping
arranged correctly, the various strata will be mutually exclusive and also exhaustive and they should closely match the characteristics and performance of the index.
37
optimization
use covariance
involve maximizing a desirable characteristic or minimizing an undesirable characteristics, subject to one more more constraints using computed algorithm
adv:
a lower amount of tracking error than stratified sampling
- accounts explicitly for covariance amount the portfolio constituents
disadvantage:
- the constituents and weights of a such portfolio is determined based on past market data
- the optimization need to be run frequently which is costly
38
tracking error
indicate how closely the portfolio behaves like its benchmark and measure a manager's obligation to replicate the benchmark return
= square root of variance rb
potential causes
- fees charged
higher fees, lower excess return, lower tracking error
- # of securities held by the portfolio vs. the benchmark
- intra-day trading of the constituent stocks of an index portflio also presents an important issue to consider such attributing tracking error
- cash drag
- producing TE involves a trade off between higher trading cost of full replication and the increase potential for tracking error that comes withs sampling
39
excess return
rp-rb
40
securities lending
credit collateral market risk
41
proxy voting
investor activism
increase options, better manage risk or provide better broad oversight and corp. governance
return to index stock increase
42
fundamental
```
subjective
discretionary
human skill, judgment
research
conviction in stock, sector, region
forecast future corp. parameters and establish view
use judgment and conviction with risk parameters
rebalance
bottom up, top-down value/growth
intrinsic/relative value
```
prescreen to identify potential investment
perform in-depth analysis
determine buy/see
allocation asset by determine industry/country/ region exposure
set limits or max selection country, individual stock position
determine by/see list
monitor portfolio holdings continuously
43
bottom up strategies
begin the asset selection process with data at the individual asset and company level, such as prices momentum and profitbility
44
value-based approaches
aim to buy stocks that are trading at a significant discount to their estimated intrisinc value
45
relative value
price multiple vs. industry average
46
constrain inesting 逆势的
rely on market sentiment and sharpe price movements
purchasing or selling against prevailing market sentiment, buy securities of depressed cyclical stocks with low or negative earnings
47
high quality value
warren buffet value investing
intrinsic alue
48
deep value investing
low P/B
| undervalued stock
49
special situations
event driven strategies
event driven mispricing
spin-off
merger
restructuring announcement
share buyback
special dividend
50
growth-based approaches
focus on companies that are expected to grow faster than industry as measured by revenues, earnings, or cash flow
- less concerned about high price multiple, but source and persistence of growth rates of the firms
- consistent LT growth
- ST earnings movements
- GARP (Growth at a reasonable price)
peg growth
51
top-down strategies
factor timing
macroeconomic, environment, demographic, trends, government policies
- country and geographic AA to equities
- secret and industry rotation
0 volatility based strategies (vix futures) straddle strategy
- thematic investment strategies
focus on opportunities prevented by new tech, and change in regulation and economic cycle
LT: cloud computing, blockchain technology, clean energy
ST: political vote
52
Factor based strategies
variable/ characteristic with which individual asset returns are correlated
53
unrewarded factors:
offer persistent return premium
- aims to identify significant factors that can predict future stock returns and to constraint a portfolio that tilts towards such factors
54
equity style rotation strategies
use in both fundamental & quantatitive (more domain)
55
hedged portfolio approach
construct portfolio that represent factors through ranking securities by the factor and buying top quantile securities and shorting bottom quantile securities.
- a long-short hedged portfolio is typically forward by going long the best quantile and short the worst quantitive
drawback:
1. middle quantities are not utilized
2. assumes a linear relationship between the factor and future stock returns
3. portfolio built using this approach trends to be concentrated
4. no constraints on taking the short positions
5. hedged portfolio is not a "Pure" factor portfolio since LT has significant exposures to other risk factors
56
factor tilting portfolio
long only portfolio withe exposures to a given factor can be built with controlled tracking error
57
factor-mimicking portfolio (FMP)
a pure factor portfolio, theoretical long/short portfolio that is dollar neural with a unit exposure to a chosen factor and no exposure to other factors
- very expensive to trade
add trading, liquidity and short availability constraint
58
activists strategies
specialize in taking takes in listed companies and advocating changes for the purpose of producing again on the investment
to initiate, strategies, operational or financial structure changes
process:
- screening and analysis of activist opportunities
- buy initial stake in the target company <10 %
- submit a public proposal for change to the company,usualy in the form of an open letter to the company
- if no agreement, threatening a proxy contest
- if no agreement, launching a proxy contest
- continue to negotiate with mgt, but with no agreement eventually taking the matter to a proxy contest
59
popularity of shareholder activism
influence operation unlock value
- cause distraction and negative impact input perforate
tactic use:
seek BOD
engage with mgmt
purpose company changes
target company: ensure slow earnings and revenue growth than market
negative share price momentum, week corp government
- lead to high debt level
60
statistical arbitrage
use statistical and technical analysis to explore pricing anomalies
analytical tool:
1. traditional technical analysis
2. sophisticated time-series analysis and economic weeks
3. machine-learning techniques
61
pair trading
use statistical technique to identify 2 securities that are historically high correlated with each other
- bet on mean-reversion pattern in stock prices, but it's might due to structural changes an the mean reversion is not temporary
62
market microstructure based
mispricing due to inbalance in supply and demand
| high frequency trading
63
pitfalls in fundamental investing:
behavioral bias
value trap
growth trap
64
value trap
stock appears to be attractive valued, low p/e
| due to deteriorating fundamental business condition
65
growth trap
favorable future growth prospects are already reflected or over reflected in the price
the trap is that growth stocks generally trade at a high p/e and even modest shortfalls in growth can lead to significant declines in p/E and stock price
66
holding-based approach
are done bottom up, look at attributes of each individual stock in a portfolio and aggregate these attributes to conclude the overall style of the portfolio
67
```
survivorship bias
look ahead bias
data mining and overfitting
turnover
transaction cost
and short availability
```
look ahead bias:
is a type of bias that occurs when a study or simulation relies on data or information that was not yet available or known during the time period being studied.
68
return-based style
find the style concentration of underlying holdings by identifying the style indexes that provide significant contributions to fund returns
rt= a+brt+error
beta >0 for long only
1. inefficient in characterisc current style
2. difficult to detect more aggressive positions
adv:
1. require less info
2. cost efficient
3. can be executed quickly
4. widely applied
69
source of active return
1. level of strategic LT exposures to rewarded factors.
2. tactical exposures to misplaced securities, sectors, and rewarded risks that generate alpha (manager skill)
3. idiosyncratic risk that generates returns related to luck
70
building blocks used in portfolio construction
breadth of expertise
1. factor weighting - smart beta, exposure to rewarded risk
2. alpha skills - factor timing
- thematic exposure, exploit ST event driven return, applying to unrewarded factor as well.
- timing of exposure to rewarded and unrewarded risks
3. position sizing
balance managers confidence in alpha and factor insights while mitigate idiosyncratic risk
- position sizing and its implications for idiosyncratic risk
71
fundamental law of active mgmt
increase breadth lead to higher return
E(RA) = IC * sqr(BR) * std(RA) * TC
success is a function of a pm's breadth of expertise
72
active share
swap security in bmk with a nonbmk name
active share increase more than active risk
only change if total of the absolute value of the portfolio's active weights change
- active risk affected by cross correlation with benchmark
correlation decrease, active risk increase
active risk和correlation反比
leverage the active risk will not proportionally increase active return in the presence of constraints and added costs
73
systematic
seeking return premium from rewarded factor
research based
reduce exposure to idiosyncratic risk
74
discretionary
seek return premium by building a greater depth of understanding of governance, business model
- judgement
- more concentrated portfolios
75
closet indexing
a fund that advertise itself as being actively managed but is substantially similar to an index fund in its exposure
76
absolute framework
objective:
maximize sharpe ratio
constraints
sector/security weights: maximum size in portfolio
risk: max portfolio volatility specified as multiple of bmk volatility
market capitalization: max/mins set by mandate
77
relative framework
objective:
maximize information ratio
constraints:
sector/security weights:
max deviation from benchmark
risk:
max tracking error (active risk)
market capitalization:
max/min set by mandate
78
effective risk mgmt process
- determine which type of risk measure is most appropriate to her strategy
- understand how each aspect of the strategy contribution to its overall risk
- determine what level or risk budget is appropriate
- properly allocate risk among individual postion/ factors
79
absolute vs. relative measure of risk
- driven by mandate of the manager and the goals of investors
- indexing: active risk
- investment objective is expressed in terms of total returns
volatility of portfolio return
80
absolute risk measure
whatever the risk threshold, the portfolio risk must remain at or below that level
81
relative risk measure
with wide based around a central target implies a bmk-relative approach with significant degree of freedom to diverge from the characteristics of the benchmark
82
cause & source of absolute risk:
high covariance, increase total portfolio risk
```
CV= Xi- Cip
=sum of XiXjCij
ABSOLUTE contribution to portfolio variance of asset A
%WEIGHT
= %A*%A * Cov A,A +
%A*%B * COV A,B +
%A*%C * COV A,C
```
relative contribution on portfolio variance of A =
CVA/(CVA+CVB+CVC)
factor based:
CV1=bicip
=coefficifnt of F1 * coeffcient of F1 * covered 1 to 1 +
coefficifnt of F1 * coeffcient of F2 * covered 1 to 2 +
coefficifnt of F1 * coeffcient of F13* covered 1 to 3
total portfolio variance = std^2
relative contribution on portfolio variance of 1
= CV1 /total portfolio variane
Cij = covariance of return b/w asset and portfolio
83
cause & source of absolute risk:
high covariance, increase total portfolio risk
```
CV= Xi- Cip
=sum of XiXjCij
ABSOLUTE contribution to portfolio variance of asset A
%WEIGHT
= %A*%A * Cov A,A +
%A*%B * COV A,B +
%A*%C * COV A,C
```
relative contribution on portfolio variance of A =
CVA/(CVA+CVB+CVC)
factor based:
CV1=bicip
=coefficifnt of F1 * coeffcient of F1 * COV 1 to 1 +
coefficifnt of F1 * coeffcient of F2 * COV 1 to 2 +
coefficifnt of F1 * coeffcient of F3* COV 1 to 3
total portfolio variance = std^2
relative contribution on portfolio variance of 1
= CV1 /total portfolio variane
Cij = covariance of return b/w asset and portfolio
84
IR=
active reture/active risk
85
determine appropriate level of risk
1. portfolio:
may face implementation constraints that downgrade the IR if active risk increase beyond a specific level
2. portfolio with high absolute risk targets face limited diversification opportunity which may lead to decrease in the sharpe ratio
3. there is a level of leverage beyond which volatility reduces decrease expected compounded returns
86
risk & return concave not linear
exp(r) increase with risk but at a declining pace
decrease sharpe ratio
a linear relationship b/w absolute risk & return in an one-period setting
leverage eventually leads to a reduction of expected compounded return in a multi-period setting
87
heuristic constraints
based on experience or practicer, rather than empirical evidence of their effectiveness
limits on exposure to individul positions, sectors or region
limits on leverage or measures designed to control the degree of illiquidity and return over in the portfolio
88
formal constraints
often statistical in nature and directly limit to the distribution of returns for the portfolio
volatility, active risk, skews, drawdown ,VAR, CVAR, ICAR,MVAR
-require manager to estimate or predict risk, forecast of return distribution
-introduces estimation error
CVAR - expected tail loss/shortfall
IVAR: change from adding a new position
MVAR: impact of a small change in position size
89
implicit cost
reduce by:
1. limit AUM by not accepting new funds
2. reduce turnover will result in decrease in trading volume
3. construct trading strategy to mitigate market impact cost.
market impact function of liquidity and trade size of the security
AUM -
the lower absolute level of trading volume for small cap securities can be a liquidity barrier to manage with higher AUM
- High portfolio turnover and shorter investment horizons generally lead to higher market impact costs
- managers whose trades include "information" will likely have increased market impact cost
90
impliciti cost
market impact function of liquidity and trade size of the security
AUM - large AUM trade small cap
the lower absolute level of trading volume for small cap securities can be a liquidity barrier to manage with higher AUM
- High portfolio turnover and shorter investment horizons generally lead to higher market impact costs
- managers whose trades include "information" will likely have increased market impact cost
91
the well-concentrate potfolio
-a clear investment philosophy and a consistent investment process,
-risk and structural characteristics as promised to investors,
a risk-efficient delivery methodology, and
-reasonably low operating costs given the strategy.
the product with the lower absolute volatility and lower active risk will likely be preferred
- if 2 funds have similar active and absolute risk, similar costs, similar manger alpha skills, t
hen the portfolio with the highest active share is preferable because this will leverage the alpha skill of the manager and have higher return `
- low idiosyncratic (unexplained) risk
92
long extension
| enhanced active equity
are constructed long/short strategies, net exposure of 100%
130% long 30% short
hybrid of long only and long-short
- allow portfolio to benefit no only from insights on companies forecasted to perform well but also from insights on companies to perform poorly
- long-only managers are limited in their ability to under allocation to securities that have a small initial allocation in the benchmark.
this allow strength of the positive/negative views to be expressed more symmetrical
drawback:
- short position will cause the manager to suffer losses if the price of the security increase potential losses are unlimited. all means the manager is reducing long-term exposure to the market risk exposure
- some long/short strategies require significant leverage which magnifies losses as well as gains
- cost of borrowing securities can become too high ,particular from securities that are difficult to borrow
- losses on short position will increase collateral demands from stock lender, particularly if average has been used. this may force te manager to liquidate positions at unfavorable prices.
- Manager may also be vulnerable to a short squeeze when a sudden increase in price of a heavy-shorted security force short-sellers to cover positions, buy back shares and potentially force the share price higher
93
market neutral
risk factor=0
beta= 0
specialized term of long/short portfolio construction
-portfolio with zero net investment dollar neutral
- hedge out most market risk, attempt to exactly match and affect the systematic risks of the long positions with those of the short position
- generate postive information ratio
-seek to remove major sources or systematic risk, less volatile than long-only strategies
pair trading
imitation:
1. not easy to maintain a beta of zero, not all risks can be efficiently hedge and correlation between exposure are continuously shifting
2. have a limited upside in a bull market unless they are "equitized"
94
long-only investing
generally offers greater investment capacity than other approaches, particularly when using strategies that focus on large-cap stocks
1. LT risk premium
- market risk premium earned by investor going net long securities
2. Capacity and scalability
of a long only strategy is set by the liquidity of the underlying securities
capacity of short-selling strategies is set by the availability of security to borrow to facilitate short-selling
capacity of long/short is likely to be lower than for long-only strategy, particular those large-cap funds that face few long-only capacity issues.
3. limited legal liabiltiy
- max long investor can lose is amount of the security
loss for short-seller is unlimited
4. regulatory allow some countries to ban short-selling in the interest of financial market stability
5. transactoinal complexity
higher for long-short strategy
short position needs to borrow shares. provide collateral, and faces other risk
counterpart risk when appoint a prime broker
6. cost long/short > long only
7. personal ideology
naive investor object short-selling due to felling that gain from the losses of other is mortally wrong and short-selling requires greater expense of risk
95
long/short portfolio construction
gross exposure : absolute (long) + abs(short) = 80+30 =110
net exposure = v long and v short =80-30=50= cash balance
benefit: ability to move full express short ideas than under a long-only strategy
- efficient use of leverage and the benefits of diversification
- greater ability to calibrate/ control exposure to factors -such as market and other rewarded factors
- short position can reduce market risk
- shorting potentially expands benefits from other risk premium & alpha
- the combination of long short position allow for a greater diversification potential
cost:
- short position might reduce the market return premium
- shorting may amplify the active risk
- there are higher implementation costs & greater complexity associated with shorting and leverage relative to a long only approach
other benefits:
- conviction of negative views can be more strongly expressed the short-selling is permitted than in long-only approach
- short-selling can help reduce exposures to sectors, regions, or general market movements and allow managers to focus on th eir unique skill set
- full extraction of the benefits of risk factors requires a long-short approach
96
long-short produce higher information ratio
factor returns are usually build from a long portfolio having the desired factor characteristic against a short portfolio.
a long-only factor investor is limited in his ability to short position that do not have the desired characteristics.
adding the ability to leverage positive as well as negative research insights should improve the transfer coefficient and increase the potential to generate better express return.
market factor dominates all other risks. adding the ability to short could facilitate a more balanced distribution of risk. Given the similar volatilities and low cross correlation among factors, the more balanced distribution of risk can be expected to reduce the tracking error of the strategy and incase infomation ratio
97
an efficient, well-constructed portfolio should have:
1. risk exposures that align with investor expectations
| 2. low idiosyncratic (unexplained) risk relative to total risk
98
approach to portfolio construction
systematic vs. discretionary
| top-down vs. bottom up
99
Simple price momentum may expose investors to
extreme tail risk when market sentiment shifts to a different sector of the market. When a portfolio buys past winners and shorts past losers, the resulting portfolio may take large, unintended sector bets.
100
A sector-neutral price momentum strategy achieves stock selection
without taking sector bets, typically resulting in lower downside risk.
101
Both market-cap and price weighted indexes will overweight overvalued securities and underweight undervalued securities because both use price in the weighting scheme.
Equal weighting does not use price in the weighting scheme
102
Backtesting
a quantitative strategy is used to identify the correlation between the current period's factor scores and next period's stock returns. Assuming a linear relationship between factor exposures and subsequent stock returns, the higher the Pearson IC, the higher the predictive power of the factor.
103
Spearman rank IC
measures the correlation between the ranked factor scores and ranked forward stock returns.
Because the Pearson IC is sensitive to outliers, analysts prefer to use the more robust
104
A passive factor-based strategy
is typically transparent in relation to factor selection, weighting, and rebalancing, allowing other investors to replicate the strategy.
105
A factor rotation strategy involves
changing a portfolio's exposure to specific risk factors as market conditions evolve.
The exposure to a specific risk factor is an active bet that can be implemented using a passive factor-based portfolio.
106
A stock sell discipline is used to set
(1) target prices to take profits and
| (2) stop-loss trigger points to exit unsuccessful positions.
107
Statistical arbitrage strategies
use statistical and technical analysis to exploit pricing anomalies.
These strategies rely on extensive use of data and are typically implemented in a systematic, rules-based way.
108
use statistical and technical analysis to exploit pricing anomalies. These strategies rely on extensive use of data and are typically implemented in a systematic, rules-based way.
The general record for equities as an inflation hedge is mixed because the correlation between the real returns on equity and inflation varies over time and by country.
109
Growth at a reasonable price (GARP).
lowest PEG
110
absolute risk vs. active risk for inclusion of cash
reduce absolute risk because cash is risk free
| increase active risk as there's zero allocation in the inde.
111
sector rotator
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fewer securities
high cash allocation
high concentration
high absolute and active risk
Lower market source risk, consistent with higher security concentration
```
Higher sectors and style risk, consistent with sector bets
Source of risk: unexplained higher
