Managing Equity Portfolios Flashcards

(34 cards)

1
Q

What is Fundamental indexing

A

each stock’s index weighting is determined by four fundamental measures — not by its expected future size, as reflected in market capitalization

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2
Q

four fundamental measures of Fundamental Indexing

A
  • Trailing five-year cash flow (cash flow)
  • Trailing five-year sales (sales)
  • Trailing five-year gross dividends (dividends)
  • Book value (book)
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3
Q

drawback of cash flow metric

A

leads to over- or underexposure to highly cyclical companies.

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4
Q

Book Value Metric - drawback

A

over or underexposure to companies with aggressive or conservative accounting practices.

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5
Q

What is Risk Budgeting?

A

a process that limits the deviations of a portfolio’s return from a benchmark - used to create enhanced index portfolio.

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6
Q

What is Enhanced indexing?

A

Index-like performance with some excess return net of costs

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7
Q

4 steps of risk budgeting process

A
  1. Determine benchmark.
  2. Determine maximum acceptable tracking error.
  3. Identify tactical asset allocation or specific return opportunities
  4. Build a portfolio that deviates from the benchmark using the return opportunities identified in step three
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8
Q

Purpose of step 2 in risk budgeting process (determine maximum acceptable tracking error)

A

sets a maximum for how large of an unexpected return “surprise” the portfolio could experience.

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9
Q

Final purpose of risk budgeting

A

Maximize Portfolio’s expected excess returns without exceeding the tracking error limit determined in step two

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10
Q

What is the selection dimension? (Active Manager)

A

identify underpriced securities

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11
Q

What is the timing dimension (Active Manager)

A

anticipate general market movements

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12
Q

sustainable growth rate equals…

A

Return on equity multiplied by the retention rate.

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13
Q

How are enhanced active equity portfolios constructed?

A

by selling short undesirable smaller stocks and reinvesting the short sale proceeds into desirable long positions.

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14
Q

two strategies to use in market-neutral investing:

A

absolute return and alpha portability

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15
Q

what kind of strategy is long-short?

A

Absolute

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16
Q

long-short equity strategy, there are two primary sources of return.

A
  • Return from the long position greater than short position

* T-Bill Component

17
Q

long-only active investment managers try to build returns from two sources:

A
  • exposure to systematic/market risk (beta)

* exposure to unsystematic / active risk (alpha).

18
Q

A portable alpha strategy consists of three components

A

The beta portfolio
The alpha portfolio
The cash portfolio

19
Q

three approaches to constructing an index fund

A
  • replicating an index
  • tracking an index
  • fundamental indexing
20
Q

With this approach, a portfolio manager constructs a subset of the benchmark that faithfully mimics an index

A

Index tracking

21
Q

portfolio management styles fall into two categories

A

Active and Passsive

22
Q

How does replicating an index work?

A

manager holds each stock in the fund’s portfolio in exact proportion to its weighting within the index.

23
Q

Preferred methodology of constructing an index?

A

Index tracking

24
Q

value fund’s objectives are (2)

A

income and capital preservation

25
difference between market-neutral management and more traditional active management (2)
• Market-neutral management eliminates the market’s effect. • More aggressive in its stock shorting, amplifying the approach by using leverage.
26
Where do proceeds of T-Bills position come from in a long short portfolio?
The short position, where the manager receives proceeds from the sale
27
Long short strategy return calculation
long - short + Tbill
28
What is portable alpha strategy?
alpha portfolio is made beta neutral by using derivatives and added to a beta portfolio
29
What is the purpose of portable alpha?
To enable a manager to budget risk and increase alpha without changing asset allocation mix.
30
alpha portfolio should be three things:
* unrelated to its underlying market * independent of its market direction * absolute in nature (to generate positive returns).
31
Difference between a managed account and a stock loan account when selling short
* in margin account, must have cash reserves on hand. | * In stock loan account, long positions serve as collateral
32
One way managers can use stock index futures ( + ex: )
managers dont have to sell their position and buy a position in another index. they can use futures instead. ex: sell TSX futures and Buy SP500 Futures
33
example of how equity swap is used
* Portfolio manager holds position in Treasury bill * Wants to earn return of TSX without selling position * Enter into equity swap, where he gets return from TSX over certain period and agrees to pay T-Bill rate to counterparty
34
Four industry trends driving growth in ETFs:
* Growth in fee-based business * Growth in advisors as portfolio managers * Demand for transparency * Broad choices and ongoing innovation in ETFs