Overview of PM Flashcards
(18 cards)
Diversification Ratio
Simple measure of the value of diversification is calculated as the ratio of the SD of the equally weighted portfolio to the SD of the randomly selected security.
Portfolios affect
Risk more than return. Although portfolio diversification generally does reduce risk, it does not necessarily provide the same level of risk reduction during times of severe market turmoil as it does when the economy and markets are operating ‘normally’. If mkt fail totally then diversification is a false promise
modern portfolio theory (MPT).
Investors should not only hold portfolios but should also focus on how individual securities in the portfolios are related to one another
Steps in managing & establishing IP
Planning step (Understand client’s needs & prepare IPS), Execution step (Asset allocation (has highest impact on portfolio performance), Security analysis & Portfolio construction), Feedback step (Portfolio monitoring and rebalancing, Performance measurement and reporting)
Investment Policy Statement
It is a written planning document that describes the client’s investment objectives and the constraints that apply to the client’s portfolio. It may state a benchmark—such as a particular rate of return or the performance of a particular market index—that can be used in the feedback stage to assess the performance of the investments and whether objectives have been met. The IPS should be reviewed and updated regularly (for example, either every three years or when a major change in a client’s objectives, constraints, or circumstances occurs).
Institutional investors
Defined benefit pension plans, endowments
and foundations, banks, insurance companies, investment companies, and sovereign wealth funds.
Defined benefit pension plans
Company-sponsored plans that offer employees a predefined benefit on retirement. The future benefit is defined because the DB plan requires the plan sponsor to specify the obligation stated in terms of the retirement income benefits owed to participants. Generally, employers are responsible for the contributions made to a DB plan and bear the risk associated with adequately funding the benefits offered to employees. The plan may have an indefinitely long time horizon if new plan members are being admitted or a finite time horizon if the plan has been closed to new members. In some cases, the plan managers attempt to match the fund’s assets to its liabilities by, for example, investing in bonds that will produce cash flows corresponding to expected future pension payments. DC plans typically have lower costs/risk to the company.
Endowments & Foundations
Endowments are funds of non-profit institutions that help the institutions provide designated services. In contrast, foundations are grant-making entities. Both mostly focus on AI. Have longest time horizon compared to others because they have perpetual life
Insurance Companies
Can be life Insurers or Property and Casualty Insurers. Risk tolerance is low unlike DB plan & endowment and foundation. Low income needs. Liquidity need is high for banks & insurance but low for endowment & foundation
Asset manager
Referred as buy side firm who uses the service of sell side firm (sell security & provide investment research & recommendation to clients)
Robo advisers
Lower fee, with low barrier to entry
No Load fund vs Load fund
There is no fee for investing in the fund or for redemption but there is an annual fee based on a percentage of the fund’s net asset value. Vs Funds in which, in addition to the annual fee, a percentage fee is charged to invest in the fund and/or for redemptions from the fund. In addition, load funds are usually sold through retail brokers who receive part of the upfront fee. Overall, the number and importance of load funds has declined over time.
Money Market Funds
Invest in short-term money market instruments such as treasury bills, certificates of deposit, and commercial paper. They aim to provide security of principal, high levels of liquidity, and returns in line with money market rates. Many funds operate on a constant net asset value (CNAV) basis where the share price is maintained at $1 (or local currency equivalent). Others operate on a variable net asset value (VNAV) basis where the unit price can vary. Taxable money market funds invest in high-quality, short-term corporate debt and federal government debt. Tax-free money market funds invest in short-term state and local government debt. Money market funds have been a substitute for bank savings accounts since the early 1980s, they are not insured in the same way as bank deposits.
Bond MF
Underlying Bonds have maturity of up to 30 years. Global - Domestic and non-domestic government, corporate and securitized debt. High yield - Below IG corporate debt. Corporate - Corporate det
Separately Managed Account
Managed account, wrap account, individually managed account
ETF vs MF
ETF are investment funds that trade on exchanges (similar to individual stocks) and are generally structured as open-end funds. Because they are traded on exchanges, ETFs
can be transacted (and are priced) intraday. That is, ETF investors buy the shares from
other investors just as if they were buying or selling shares of stock. ETF investors can also short shares or purchase the shares on margin. In contrast, mutual funds typically can be purchased or sold only once a day, and short sales or purchasing shares on margin is not allowed. Mutual fund investors buy the fund shares directly from the fund, and all investments are settled at the NAV. In practice, the market price of the ETF is likely to be close to the NAV of the underlying investments. Dividends on ETFs are paid out to the shareholders whereas NF usually reinvest the dividends. Finally, the minimum required investment in ETFs is usually smaller than that of MFs. ETF don’t have capital gain distribution. Purchasing MF doesn’t result in brokerage cost but ETF require brokerage cost
Few large investment
Buyout funds. VC consist of many small investment in companies
DBP with a large number of retirees
High need for income
